Iridium Communications Inc.
Iridium Communications Inc. (Form: 10-Q, Received: 08/01/2013 07:01:38)

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

  

 

 

FORM 10-Q

  

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2013

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-33963

  

 

 

Iridium Communications Inc.

(Exact name of registrant as specified in its charter)

  

 

 

DELAWARE 26-1344998
(State of incorporation) (I.R.S. Employer Identification No.)
   
1750 Tysons Boulevard, Suite 1400, McLean, Virginia 22102
(Address of principal executive offices) (Zip code)

 

703-287-7400

(Registrant’s telephone number, including area code)

  

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

 

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of July 29, 2013 was 76,630,031.

  

 

 

 

 
 

 

IRIDIUM COMMUNICATIONS INC.

 

TABLE OF CONTENTS

 

ITEM

No.  

 

PAGE

     
Part I. Financial Information  
   
1. Financial Statements  
     
  Condensed Consolidated Balance Sheets 3
  Condensed Consolidated Statements of Operations and Comprehensive Income 4
  Condensed Consolidated Statements of Cash Flows 5
  Notes to Condensed Consolidated Financial Statements 6
     
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
     
3. Quantitative and Qualitative Disclosures About Market Risk 24
     
4. Controls and Procedures 25
     
Part II. Other Information  
   
1. Legal Proceedings 25
     
1A. Risk Factors 25
     
2. Unregistered Sales of Equity Securities and Use of Proceeds 27
     
3. Defaults Upon Senior Securities 27
     
4. Mine Safety Disclosures 27
     
5. Other Information 27
     
6. Exhibits 27
     
  Signatures 28
2
 

 

 

PART I.

 

Iridium Communications Inc.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

    June 30, 2013     December 31, 2012  
    (Unaudited)        
Assets                
Current assets:                
Cash and cash equivalents   $ 196,848     $ 254,418  
Marketable securities     78,841       -  
Accounts receivable, net     55,091       56,135  
Inventory     28,914       26,335  
Deferred tax assets, net     9,741       21,160  
Income tax receivable     1,300       4,302  
Prepaid expenses and other current assets     5,285       4,816  
Total current assets     376,020       367,166  
Property and equipment, net     1,345,535       1,210,693  
Restricted cash     67,726       54,233  
Other assets     8,445       2,912  
Intangible assets, net     63,977       70,502  
Deferred financing costs     125,836       123,796  
Goodwill     87,039       87,039  
Total assets   $ 2,074,578     $ 1,916,341  
                 
Liabilities and stockholders' equity                
Current liabilities:                
Accounts payable   $ 14,871     $ 13,834  
Accrued expenses and other current liabilities     35,482       26,704  
Interest payable     6,602       5,359  
Deferred revenue     44,171       42,755  
Total current liabilities     101,126       88,652  
Accrued satellite operations and maintenance expense, net of current portion     17,058       17,727  
Credit facility     853,552       751,787  
Deferred tax liabilities, net     174,633       167,821  
Other long-term liabilities     20,601       13,796  
Total liabilities     1,166,970       1,039,783  
                 
Commitments and contingencies                
                 
Stockholders' equity                
Series A Preferred Stock, $0.0001 par value, 1,000 shares authorized, issued and outstanding     -       -  
Common stock, $0.001 par value, 300,000 shares authorized, 76,630 and 76,461 shares issued and outstanding, respectively     77       76  
Additional paid-in capital     798,277       793,511  
Retained earnings     110,157       83,328  
Accumulated other comprehensive loss, net of taxes     (903 )     (357 )
Total stockholders' equity     907,608       876,558  
Total liabilities and stockholders' equity   $ 2,074,578     $ 1,916,341  
                 

 

See notes to unaudited condensed consolidated financial statements

 

3
 

 

Iridium Communications Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income

(In thousands, except per share amounts)

(Unaudited)

  

    Three Months Ended June 30,     Six Months Ended June 30,  
    2013     2012     2013     2012  
                         
Revenue:                                
Services   $ 71,401     $ 68,485     $ 140,188     $ 135,333  
Subscriber equipment     19,815       23,914       37,146       45,454  
Engineering and support services     3,468       4,922       6,539       10,008  
Total revenue     94,684       97,321       183,873       190,795  
                                 
Operating expenses:                                
Cost of services (exclusive of depreciation                                
 and amortization)     14,206       15,988       28,682       33,991  
Cost of subscriber equipment     12,893       13,292       24,013       26,634  
Research and development     1,741       3,429       3,400       9,118  
Selling, general and administrative     18,399       17,970       36,764       36,118  
Depreciation and amortization     18,597       18,368       36,828       42,572  
Total operating expenses     65,836       69,047       129,687       148,433  
                                 
Operating income     28,848       28,274       54,186       42,362  
                                 
Other income (expense):                                
Interest income, net     641       121       1,278       189  
Undrawn credit facility fees     (2,020 )     (2,582 )     (4,116 )     (5,361 )
Other income (expense), net     (869 )     (31 )     (2,265 )     61  
Total other expense     (2,248 )     (2,492 )     (5,103 )     (5,111 )
Income before income taxes     26,600       25,782       49,083       37,251  
Provision for income taxes     (11,187 )     (8,119 )     (18,736 )     (7,170 )
Net income     15,413       17,663       30,347       30,081  
Series A Preferred Stock dividends     1,750       -       3,500       -  
Net income attributable to common stockholders   $ 13,663     $ 17,663     $ 26,847     $ 30,081  
                                 
Weighted average shares outstanding - basic     76,900       73,430       76,834       73,414  
Weighted average shares outstanding - diluted     87,530       76,061       87,477       75,738  
Net income attributable to common stockholders per share - basic   $ 0.18     $ 0.24     $ 0.35     $ 0.41  
Net income attributable to common stockholders per share - diluted   $ 0.18     $ 0.23     $ 0.35     $ 0.40  
                                 
Comprehensive income:                                
Net income   $ 15,413     $ 17,663     $ 30,347     $ 30,081  
Foreign currency translation adjustments     (188 )     (117 )     (261 )     (85 )
Unrealized loss on marketable securities     (271 )     -       (285 )     -  
Comprehensive income   $ 14,954     $ 17,546     $ 29,801     $ 29,996  

 

See notes to unaudited condensed consolidated financial statements

 

4
 

 

Iridium Communications Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

    Six Months Ended June 30,  
    2013     2012  
             
Cash flows from operating activities:                
Net cash provided by operating activities   $ 100,262     $ 89,389  
                 
Cash flows from investing activities:                
Capital expenditures     (151,688 )     (186,704 )
Purchases of marketable securities     (91,393 )     -  
Sales and maturities of marketable securities     11,993       -  
Investment in equity method affiliate     (5,000 )     -  
Net cash used in investing activities     (236,088 )     (186,704 )
                 
Cash flows from financing activities:                
Borrowings under credit facility     101,765       150,855  
Payment of deferred financing fees     (6,540 )     (9,778 )
Change in restricted cash - Credit Facility     (13,494 )     (13,510 )
Proceeds from exercise of stock options and warrants     25       44  
Payment of Series A Preferred Stock dividends     (3,500 )     -  
Net cash provided by financing activities     78,256       127,611  
                 
Net (decrease) increase in cash and cash equivalents     (57,570 )     30,296  
Cash and cash equivalents, beginning of period     254,418       136,366  
Cash and cash equivalents, end of period   $ 196,848     $ 166,662  
                 
Supplemental cash flow information:                
Interest paid   $ 5,096     $ 2,907  
Income taxes paid (refunded)   $ (2,927 )   $ 254  
                 
Supplemental disclosure of non-cash investing activities:                
Property and equipment received but not paid for yet   $ 10,646     $ 26,724  
Interest capitalized but not paid   $ 6,602     $ 5,471  
Capitalized amortization of deferred financing costs   $ 4,500     $ -  
Capitalized paid-in-kind interest   $ 11,667     $ 6,677  
Stock-based compensation capitalized   $ 657     $ 311  

 

See notes to unaudited condensed consolidated financial statements

 

5
 

 

Iridium Communications Inc.

Notes to Condensed Consolidated Financial Statements

 

1. Basis of Presentation and Principles of Consolidation

 

Iridium Communications Inc. (the “Company”) has prepared its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The accompanying condensed consolidated financial statements include the accounts of (i) the Company, (ii) its wholly owned subsidiaries, and (iii) all less than wholly owned subsidiaries that the Company controls. All material intercompany transactions and balances have been eliminated.

 

In the opinion of management, the condensed consolidated financial statements reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of its results of operations and cash flows for the interim periods covered, and of the financial position of the Company at the date of the interim condensed consolidated balance sheet. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the U.S. Securities and Exchange Commission (“SEC”). While the Company believes that the disclosures are adequate to make the information not misleading, these interim condensed consolidated financial statements should be read in conjunction with the 2012 annual consolidated financial statements and notes included in its Form 10-K filed with the SEC on March 5, 2013.

 

2. Significant Accounting Policies

 

Property and Equipment

 

Property and equipment is carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated useful lives:

 

Satellites estimated useful life
Ground system 5-7 years
Equipment 3-5 years
Internally developed software and purchased software 3-7 years
Building 39 years
Building improvements estimated useful life
Leasehold improvements shorter of useful life or remaining lease term

  

The estimated useful lives of the Company’s satellites are the remaining period of expected use for each satellite. Satellites are depreciated on a straight-line basis through the earlier of the estimated remaining useful life or the date they are expected to be replaced by Iridium NEXT satellites. Based on the current launch schedule, the Company expects Iridium NEXT satellites to begin deployment in early 2015, with the final launch expected to occur by mid-2017.

 

Repairs and maintenance costs are expensed as incurred.

 

Warranty Expense

 

The Company provides the first end-user purchaser of its subscriber equipment a warranty for one to five years from the date of purchase by such first end-user, depending on the product. The Company maintains a warranty reserve based on historical experience of warranty costs and expected occurrences of warranty claims on equipment. Costs associated with warranties, including equipment replacements, repairs, freight, and program administration, are recorded as cost of subscriber equipment in the accompanying condensed consolidated statements of operations and comprehensive income. Due to an increase in the warranty provision related to projected higher future warranty claims and a higher cost per claim for the Iridium Pilot ® terminals, the Company recorded an additional $1.9 million to the warranty provision during the three months ended June 30, 2013. Changes in the warranty reserve during the six months ended June 30, 2013 were as follows:

 

6
 

 

    Six Months Ended  
    June 30, 2013  
    (in thousands)  
Balance at beginning of the period   $ 4,050  
Provision     5,079  
Utilization     (3,363 )
Balance at end of the period   $ 5,766  

 

Fair Value Measurements

 

The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made by management of the Company. The instruments identified as subject to fair value measurements on a recurring basis are cash and cash equivalents, marketable securities, prepaid expenses, deposits and other current assets, accounts receivable, accounts payable, accrued expenses and other current liabilities. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. The fair value hierarchy consists of the following tiers:

 

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;

 

Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

As of June 30, 2013 and December 31, 2012, the carrying values of short-term financial instruments (primarily cash and cash equivalents, prepaid expenses, deposits and other current assets, accounts receivable, accounts payable, accrued expenses and other current liabilities and other obligations) approximate their fair values because of their short-term nature. The fair value of the Company’s investments in money market funds, commercial paper and short-term U.S. agency securities with original maturities of less than ninety days approximates their face value; such instruments are classified as Level 1 and are included in cash and cash equivalents on the condensed consolidated balance sheet.

 

The fair value of the Company’s investments in fixed-income debt securities and commercial paper with original maturities of greater than ninety days are obtained using similar investments traded on active securities exchanges and are classified as Level 2.

 

3. Cash and Cash Equivalents, Restricted Cash and Marketable Securities

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of ninety days or less to be cash equivalents. The cash and cash equivalents balance as of December 31, 2012 consisted of cash deposited in institutional money market funds and regular interest bearing and non-interest bearing depository accounts. In 2013, the Company made investments in commercial paper and government-issued debt securities with original maturities within ninety days of purchase. These investments, along with cash deposited in institutional money market funds, regular interest bearing and non-interest bearing depository accounts, are classified as cash and cash equivalents as of June 30, 2013 on the condensed consolidated balance sheet. The following table summarizes the Company’s cash and cash equivalents as of June 30, 2013 and December 31, 2012:

 

7
 

 

    June 30,     December 31,     Recurring Fair
    2013     2012     Value Measurement
    (in thousands)      
Cash and cash equivalents:                    
Cash   $ 95,975     $ 166,326      
Money market funds     88,277       88,092     Level 1
Commercial paper     8,596       -     Level 2
Government-issued debt securities     4,000       -     Level 2
Total Cash and cash equivalents   $ 196,848     $ 254,418      

 

Restricted Cash

 

The Company is required to maintain a minimum cash reserve for debt service related to its $1.8 billion loan facility (the “Credit Facility”). As of June 30, 2013 and December 31, 2012, the Company’s restricted cash balance, which includes a minimum cash reserve for debt service related to the Credit Facility and the interest earned on these amounts, was $67.7 million and $54.2 million, respectively.

 

Marketable Securities

 

Marketable securities as of June 30, 2013 consisted of corporate and foreign fixed-income debt securities and commercial paper with an original maturity in excess of ninety days. These investments are classified as available-for-sale as of June 30, 2013 and are included in current assets on the condensed consolidated balance sheet. All investments are carried at fair value. Unrealized gains and losses, net of taxes, are reported as a component of other comprehensive income or loss. The specific identification method is used to determine the cost basis of the marketable securities sold. There were no realized gains on the sale of marketable securities for the three or six months ended June 30, 2013. The Company regularly monitors and evaluates the fair value of its investments to identify other-than-temporary declines in value. The Company determined that no other-than-temporary declines in value existed at June 30, 2013. The Company did not have any marketable securities at December 31, 2012. The following table summarizes the Company’s marketable securities as of June 30, 2013:

 

    June 30,     Recurring Fair
    2013     Value Measurement
    (in thousands)      
Marketable securities:            
Fixed-income debt securities   $ 60,489      Level 2
Commercial paper     18,352      Level 2
Total Marketable securities   $ 78,841      

 

As of June 30, 2013, all investments in fixed income securities with original maturities in excess of three months are included in marketable securities on the condensed consolidated balance sheet. The following table presents the contractual maturities of the fixed income debt securities and commercial paper held as of June 30, 2013

 

    Amortized     Gross Unrealized     Estimated  
    Cost     Loss     Fair Value  
    (in thousands)  
Fixed-income debt securities:                        
Mature within one year   $ 12,676     $ (8 )   $ 12,668  
Mature after one year and within three years     48,098       (277 )     47,821  
Commercial paper:                        
Mature within one year     18,352       -       18,352  
Total   $ 79,126     $ (285 )   $ 78,841  

 

8
 

 

4. Commitments and Contingencies

 

Commitments

 

Thales

 

In June 2010, the Company executed a primarily fixed-price full-scale development contract (the “FSD”) with Thales Alenia Space France (“Thales”) for the design and build of satellites for Iridium NEXT, the Company’s next-generation satellite constellation. The total price under the FSD is $2.2 billion, and the Company expects payment obligations under the FSD to extend into the third quarter of 2017. As of June 30, 2013, the Company had made aggregate payments of $902.1 million to Thales, which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet.

 

SpaceX

 

In March 2010, the Company entered into an agreement with Space Exploration Technologies Corp. (“SpaceX”) to secure SpaceX as the primary launch services provider for Iridium NEXT (the “SpaceX Agreement”). In August 2012, the Company entered into an amendment to the SpaceX Agreement (the “SpaceX Amendment”). The SpaceX Amendment reduced the number of contracted launches and increased the number of satellites to be carried on each launch vehicle. The maximum price under the SpaceX Amendment is $453.1 million. As of June 30, 2013, the Company had made aggregate payments of $65.1 million to SpaceX, which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet.

 

Kosmotras

 

In June 2011, the Company entered into an agreement with International Space Company Kosmotras (“Kosmotras”) as a supplemental launch service provider for Iridium NEXT (the “Kosmotras Agreement”). The Kosmotras Agreement provides for the purchase of up to six launches with options to purchase additional launches. Each launch can carry two satellites. In June 2013, the Company exercised an option for one launch to carry the first two Iridium NEXT satellites; if the Company does not exercise any additional options, the total cost under the contract including this single launch will be $51.8 million. Prior to December 31, 2013, the Company may exercise its remaining option to purchase up to five additional launches. If all six launches are purchased, the Company will pay Kosmotras a total of $184.3 million. As of June 30, 2013, the Company had made aggregate payments of $11.2 million to Kosmotras, which were capitalized as construction in progress within property and equipment, net in the accompanying condensed consolidated balance sheet. The remaining amounts owed under the contract will be paid through 2015 or 2016, depending on the number of launches purchased and the launch schedule.

 

Operating Leases

 

The Company leases land, office space, and office and computer equipment under noncancelable operating lease agreements. In the first quarter of 2013, the Company renewed the lease term for its technical support center (the “TSC”) located in Chandler, Arizona. The lease for the TSC was extended from 2014 to 2024. Future minimum lease payments, by year and in the aggregate, under the noncancelable operating lease starting in 2014 for the TSC are as follows:

 

    Operating  
Year ending December 31,   Lease  
    (In thousands)  
2014   $ 359  
2015     730  
2016     755  
2017     779  
2018     804  
Thereafter     4,621  
Total   $ 8,048  

 

9
 

 

Credit Facility

 

In October 2010, the Company entered into the Credit Facility with a syndicate of bank lenders (the “Lenders”). The Credit Facility was subsequently amended in August 2012. The Company had borrowed an aggregate total of $853.6 million as of June 30, 2013. The unused portion of the Credit Facility as of June 30, 2013 was $946.4 million. Pursuant to the Credit Facility, the Company maintains a minimum cash reserve for repayment. As of June 30, 2013, the minimum required cash reserve balance was $67.5 million. This amount is included in restricted cash in the accompanying condensed consolidated balance sheet. This minimum cash reserve requirement will increase over the term of the Credit Facility and will be $189.0 million at the beginning of the repayment period, which is expected to begin in 2017.

 

Interest costs incurred under the Credit Facility were $9.3 million and $18.0 million for the three and six months ended June 30, 2013, respectively. All interest costs incurred related to the Credit Facility have been capitalized during the construction period of the Iridium NEXT assets. The Company pays interest on each semi-annual due date through a combination of a cash payment and a deemed additional loan. The $9.3 million in interest incurred during the three months ended June 30, 2013 consisted of $2.8 million payable in cash and $6.5 million payable by deemed loans. The $18.0 million in interest incurred during the six months ended June 30, 2013 consisted of $5.5 million payable in cash of which $3.5 million was paid during the period and $2.0 million was accrued at period-end, and $12.5 million payable by deemed loans, of which $7.9 million was paid during the period and $4.6 million was accrued at period-end. Total interest payable associated with the Credit Facility was $6.6 million and is included in interest payable in the accompanying condensed consolidated balance sheet as of June 30, 2013.

 

The Company also pays a commitment fee of 0.80% per year, in semi-annual installments, on any undrawn portion of the Credit Facility. The total commitment fee payable on the undrawn portion of the Credit Facility was $2.0 million and is included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance sheet as of June 30, 2013.

 

Contingencies

 

From time to time, in the normal course of business, the Company is party to various pending claims and lawsuits. The Company is not aware of any such actions that it would expect to have a material adverse impact on its business, financial results or financial condition.

 

5. Stock-Based Compensation

 

The Company accounts for stock-based compensation at fair value. The fair value of stock options is determined at the grant date using the Black-Scholes option pricing model. The fair value of restricted stock units (“RSUs”) is equal to the closing price of the underlying common stock on the grant date. The fair value of an award that is ultimately expected to vest is recognized on a straight-line basis over the requisite service or performance period and is classified in the condensed consolidated statements of operations and comprehensive income in a manner consistent with the classification of the recipient’s compensation. Stock-based awards to non-employee consultants are expensed at their fair value as services are provided according to the terms of their agreements and are classified in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income.

 

During 2012, the Company’s stockholders approved a stock incentive plan (the “2012 Stock Incentive Plan”) to provide stock-based awards, including nonqualified stock options, incentive stock options, restricted stock and other equity securities, as incentives and rewards for employees, consultants and non-employee directors. As of June 30, 2013, 13,416,019 shares of common stock were authorized for issuance as awards under the 2012 Stock Incentive Plan.

 

Members of the Company’s board of directors elected to receive a portion of their 2013 annual compensation in the form of equity awards, in an aggregate amount of approximately 68,000 stock options and 112,000 RSUs. These stock options and RSUs were granted in January 2013 and vest through the end of 2013, with 25% vesting on the last day of each calendar quarter. The estimated aggregate grant-date fair value of the stock options was $0.2 million. The estimated aggregate grant-date fair value of the RSUs was $0.8 million.

 

During the three months ended June 30, 2013, the Company granted approximately 12,000 stock options to its employees. During the six months ended June 30, 2013, the Company granted approximately 1,134,000 stock options, 523,000 service-based RSUs, and 228,000 performance-based RSUs to its employees. Employee stock options and service-based RSUs generally vest over a four-year service period with 25% vesting on the first anniversary of the grant date and the remainder vesting ratably on a quarterly basis thereafter. The performance-based RSUs were awarded to the Company’s executives. Vesting of the performance-based RSUs is dependent upon the Company’s achievement of defined performance goals over a two-year measurement period. The number of performance-based RSUs that will ultimately vest may range from 0% to 150% of the original grant based on the level of achievement of the performance goals. If the Company achieves the performance goals, 50% of the RSU awards will vest at the end of two years and the remaining 50% will vest at the end of the third year. The Company records stock-based compensation expense related to performance-based RSUs when it is considered probable that the performance conditions will be met. The estimated aggregate grant-date fair value of the stock options granted to employees during the three months ended June 30, 2013 was less than $0.1 million. The estimated aggregate grant-date fair values of the stock options, service-based RSUs, and performance-based RSUs granted to employees during the six months ended June 30, 2013 were $2.9 million, $3.2 million, and $1.4 million, respectively.

 

10
 

 

During the three months ended June 30, 2013, the Company granted 45,000 stock options to non-employee consultants. The consultant options vest over a two-year period with ratable quarterly vesting. Expense related to stock options granted to non-employees is recognized over the vesting period of the award, which is the period during which services are rendered. At each vest date, the value of these options is re-measured. The aggregate estimated grant-date fair value of the consultant stock options was approximately $0.1 million.

 

6. Equity Instruments

 

$7.00 Warrants

 

In connection with the Company’s initial public offering in February 2008, the Company sold 40.0 million units at a price of $10.00 per unit. Each unit consisted of one share of common stock and one common stock purchase warrant (a “$7.00 Warrant”). Each $7.00 Warrant entitled the holder to purchase from the Company one share of common stock at a price of $7.00 per share.

 

During 2012, the Company issued 1.3 million shares of common stock resulting from the exercise of 1.3 million $7.00 Warrants. The Company received proceeds of $9.1 million as a result of these warrant exercises.

 

During 2012, the Company entered into privately negotiated warrant exchange agreements with the largest holder of the outstanding $7.00 Warrants. Pursuant to these agreements, the Company issued 562,370 new shares of its common stock in exchange for 3,374,220 of the $7.00 Warrants (equivalent to approximately 0.1667 common shares for every $7.00 Warrant tendered), representing approximately 27% of the outstanding $7.00 Warrants.

 

In addition, during 2012, the Company initiated and completed a tender offer to exchange outstanding $7.00 Warrants for shares of its own common stock (the “2012 Tender Offer”). The Company offered holders of its $7.00 Warrants one share of common stock for every six of the $7.00 Warrants tendered (equivalent to approximately 0.1667 common shares for every $7.00 Warrant tendered). As a result of the 2012 Tender Offer, the Company issued an aggregate of 1,386,941 shares of its common stock in exchange for an aggregate of 8,321,433 of the $7.00 Warrants.

 

On February 14, 2013, the remaining 655,499 outstanding and unexercised $7.00 Warrants expired in accordance with their terms.

 

$11.50 Warrants

 

On September 29, 2009, in connection with the acquisition of Iridium Holdings LLC, holders of approximately 14.4 million $7.00 Warrants exchanged their existing warrants for new warrants to purchase the Company’s common stock at an exercise price of $11.50 per share (the “$11.50 Warrants”).

 

The Company may redeem each of the $11.50 Warrants at a price of $0.01 upon 30 days prior notice, provided that the warrants are exercisable and the registration statement covering the common stock issuable upon exercise of the warrants remains effective and available, and provided further that such redemption can only be made if the closing price of the common stock is at least $18.00 per share for any 20 trading days within a 30-trading-day period ending on the third day prior to the date on which notice of redemption is given. If the registration statement is not still effective at the time of exercise, the holders of the $11.50 Warrants will not be entitled to exercise the warrants, and in no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle any such warrant exercise. Consequently, the $11.50 Warrants may expire unexercised and unredeemed. The number of shares of the Company’s common stock issuable upon the exercise of each $11.50 Warrant is subject to adjustment from time to time upon the occurrence of specified events. As of June 30, 2013, 277,021 of the $11.50 Warrants remained outstanding. Any remaining outstanding $11.50 Warrants will expire in February 2015.

 

Series A Cumulative Convertible Perpetual Preferred Stock

 

The Company is authorized to issue 2.0 million shares of preferred stock with a par value of $0.0001 per share. In the fourth quarter of 2012, the Company issued 1.0 million shares of its 7.00% Series A Cumulative Convertible Perpetual Preferred Stock (the “Series A Preferred Stock”) in a private offering. The Company received proceeds of $96.5 million from the sale of the Series A Preferred Stock, net of the aggregate $3.5 million in initial purchaser discount and additional offering costs. The Company intends to use the net proceeds of the private offering to partially fund the construction and deployment of Iridium NEXT and for other general corporate purposes. The remaining 1.0 million authorized shares of preferred stock remain undesignated and unissued as of June 30, 2013.

 

11
 

 

Holders of Series A Preferred Stock are entitled to receive cumulative cash dividends at a rate of 7.00% per annum of the $100 liquidation preference per share (equivalent to an annual rate of $7.00 per share). Dividends are payable quarterly in arrears on each March 15, June 15, September 15 and December 15. The Series A Preferred Stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. The Series A Preferred Stock ranks senior to the Company’s common stock with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding-up. Holders of Series A Preferred Stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in other specified circumstances. Holders of Series A Preferred Stock may convert some or all of their outstanding Series A Preferred Stock initially at a conversion rate of 10.6022 shares of common stock per $100 liquidation preference, which is equivalent to an initial conversion price of approximately $9.43 per share of common stock (subject to adjustment in certain events).

 

In 2012, the Company paid $1.4 million in cash dividends to its holders of Series A Preferred Stock. In March 2013 and June 2013, the Company paid cash dividends of $1.75 million to holders of the Series A Preferred Stock. As of June 30, 2013, holders of the Series A Preferred Stock have accrued $0.3 million in cash dividends, which is included within accrued expenses and other current liabilities on the consolidated balance sheet.

 

On or after October 3, 2017, the Company may, at its option, convert some or all of the Series A Preferred Stock into the number of shares of common stock that are issuable at the then-applicable conversion rate, subject to specified conditions. On or prior to October 3, 2017, the holders of Series A Preferred Stock will have a special right to convert some or all of the Series A Preferred Stock into shares of common stock in the event of fundamental changes described in the Certificate of Designations for the Series A Preferred Stock, subject to specified conditions and limitations. In certain circumstances, the Company may also elect to settle conversions in cash as a result of these fundamental changes.

 

7. Net Income Per Share

 

The computations of basic and diluted net income per share are set forth as follows:

 

    Three Months Ended June 30,  
    2013     2012  
    (in thousands, except per share data)  
Numerator:                
Net income attributable to common stockholders   $ 13,663     $ 17,663  
Net income allocated to participating securities     (16 )     (17 )
Numerator for basic net income per share     13,647       17,646  
Dividends on Series A Preferred Stock     1,750       -  
Numerator for diluted net income per share   $ 15,397     $ 17,646  
                 
Denominator:                
Denominator for basic net income per share - weighted                
average outstanding common shares     76,900       73,430  
Dilutive effect of warrants     -       2,602  
Dilutive effect of stock options     -       6  
Dilutive effect of contingently issuable shares     28       23  
Dilutive effect of Series A Preferred Stock     10,602       -  
Denominator for diluted net income per share     87,530       76,061  
                 
Net income attributable to common stockholders per share - basic   $ 0.18     $ 0.24  
Net income attributable to common stockholders per share - diluted   $ 0.18     $ 0.23  

 

12
 

 

    Six Months Ended June 30,  
    2013     2012  
    (in thousands, except per share data)  
Numerator:                
Net income attributable to common stockholders   $ 26,847     $ 30,081  
Net income allocated to participating securities     (37 )     (35 )
Numerator for basic net income per share     26,810       30,046  
Dividends on Series A Preferred Stock     3,500       -  
Numerator for diluted net income per share   $ 30,310     $ 30,046  
                 
Denominator:                
Denominator for basic net income per share - weighted                
average outstanding common shares     76,834       73,414  
Dilutive effect of warrants     -       2,281  
Dilutive effect of stock options     -       6  
Dilutive effect of contingently issuable shares     41       37  
Dilutive effect of Series A Preferred Stock     10,602       -  
Denominator for diluted net income per share     87,477       75,738  
                 
Net income attributable to common stockholders per share - basic   $ 0.35     $ 0.41  
Net income attributable to common stockholders per share - diluted   $ 0.35     $ 0.40  

 

For the three months ended June 30, 2013, warrants to purchase 0.3 million shares of common stock and options to purchase 5.1 million shares of common stock were not included in the computation of diluted net income per share as the effect would be anti-dilutive. Additionally, for the three months ended June 30, 2013, 1.0 million unvested RSUs were excluded from the computation of basic and diluted net income per share.

 

For the six months ended June 30, 2013, warrants to purchase 0.4 million shares of common stock and options to purchase 5.2 million shares of common stock were not included in the computation of diluted net income per share as the effect would be anti-dilutive. Additionally, for the six months ended June 30, 2013, 0.9 million unvested RSUs were excluded from the computation of basic and diluted net income per share.

 

For the three and six months ended June 30, 2012, warrants to purchase 0.3 million shares of common stock and options to purchase 2.1 million shares of common stock were not included in the computation of diluted net income per share as the effect would be anti-dilutive.

 

13
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

You should read the following discussion along with our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed on March 5, 2013 with the Securities and Exchange Commission, or the SEC, as well as our condensed consolidated financial statements included in this Form 10-Q.

 

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingencies, goals, targets or future development or otherwise are not statements of historical fact. Without limiting the foregoing, the words “believe,” “anticipate,” “plan,” “expect,” “intend” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our current expectations and projections about future events, and they are subject to risks and uncertainties, known and unknown, that could cause actual results and developments to differ materially from those expressed or implied in such statements. The important factors discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed on March 5, 2013, and in this Quarterly Report, could cause actual results to differ materially from those indicated by forward-looking statements made herein. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Overview of Our Business

 

We are engaged primarily in providing mobile voice and data communications services using a constellation of orbiting satellites. We are the second largest provider of satellite-based mobile voice and data communications services based on revenue, and the only commercial provider of communications services offering 100% global coverage. Our satellite network provides communications services to regions of the world where wireless or wireline networks do not exist or are impaired, including extremely remote or rural land areas, airways, open oceans, the polar regions and regions where the telecommunications infrastructure has been affected by political conflicts or natural disasters.

 

We provide voice and data communications services to businesses, the U.S. and foreign governments, non-governmental organizations and commercial end-users. We provide these services using our constellation of in-orbit satellites and related ground infrastructure, including a primary commercial gateway. We utilize an interlinked, mesh architecture to route traffic across the satellite constellation using radio frequency crosslinks. This unique architecture minimizes the need for ground facilities to support the constellation, which facilitates the global reach of our services and allows us to offer services in countries and regions where we have no physical presence.

 

We sell our products and services to commercial end-users through a wholesale distribution network, encompassing more than 75 service providers, more than 180 value-added resellers, or VARs, and 55 value-added manufacturers, who either sell directly to the end-user or indirectly through other service providers, VARs or dealers. These distributors often integrate our products and services with other complementary hardware and software and have developed a broad suite of applications for our products and services targeting specific vertical markets.

 

At June 30, 2013, we had approximately 647,000 billable subscribers worldwide, an increase of 12% from approximately 576,000 billable subscribers at June 30, 2012. We have a diverse customer base, with end-users in the following lines of business: land-based handset; machine-to-machine, or M2M; maritime; aviation; and government.

 

We recognize revenue from both the sale of equipment and the provision of services. We expect a higher proportion of our future revenue will be derived from service revenue than in the past. Revenues from providing voice and data service historically have generated higher gross margins than sales of subscriber equipment.

 

We are currently devoting a substantial part of our resources to develop Iridium NEXT, our next-generation satellite constellation, and on hardware and software upgrades to our ground infrastructure in preparation for Iridium NEXT, the development of new product and service offerings, upgrades to our current services, and upgrades to our information technology systems. We estimate the aggregate costs associated with the design, build and launch of Iridium NEXT and related infrastructure upgrades through 2017 to be approximately $3 billion. Our funding plan for these costs includes the funds available under our $1.8 billion loan facility, or the Credit Facility, together with internally generated cash flows, including cash flows from hosted payloads, and cash on hand. As discussed below in “Liquidity and Capital Resources,” we are currently in compliance with all of our financial covenants as of June 30, 2013, although we expect to need modifications to our Credit Facility for some financial covenants with measurement dates beyond the next twelve months. As of July 31, 2013, we had borrowed a total of $853.6 million under the Credit Facility. For more information about our sources of funding, refer to “Liquidity and Capital Resources” below.

 

14
 

 

Recent Developments

 

U.S. Government Contract Extensions

 

We provide maintenance services for the U.S. Department of Defense, or DoD, gateway pursuant to our Gateway Maintenance and Support Services, or GMSS, contract managed by the DoD’s Defense Information Systems Agency, or DISA. We entered into the GMSS contract in April 2008. The GMSS contract provides for a one-year base term and up to four additional one-year options exercisable at the election of the U.S. government. The U.S. government exercised all of the options and exercised its ability under federal acquisition regulations to extend the agreement for up to six months. As a result, the GMSS contract is currently scheduled to expire on September 30, 2013. We are negotiating a contract renewal with DISA to continue providing GMSS services. The U.S. government may terminate the GMSS contract, in whole or in part, at any time.

 

We provide Iridium airtime and airtime support to U.S. government and other authorized customers pursuant to our Enhanced Mobile Satellite Services, or EMSS, contract managed by DISA. The EMSS contract allows authorized customers to purchase Iridium airtime services, provided through DoD’s dedicated gateway, under a set of rate schedules tailored for each of our services, including a fixed monthly per-user fee for voice and circuit-switched data, a fixed monthly per-user fee for paging services, a tiered pricing plan, based on usage per device, for short-burst data services, and a fixed monthly per-user fee for Netted Iridium usage plus a monthly fee for each active user-defined net. The U.S. government is not required to guarantee a minimum number of users under this agreement. While we sell airtime directly to the U.S. government for resale to end users, our hardware products are sold to U.S. government customers through our network of distributors, which typically integrate them with other products and technologies. The EMSS contract, entered into in April 2008, provides for a one-year base term and up to four additional one-year options exercisable at the election of the U.S. government. The U.S. government has exercised all of the options and exercised its ability under federal acquisition regulations to extend the agreement for six months. As a result of the election for extension, the EMSS contract is currently scheduled to expire on September 30, 2013. We are negotiating a contract renewal with DISA to provide EMSS services. The U.S. government may terminate the EMSS contract, in whole or in part, at any time.

 

Material Trends and Uncertainties

 

Our industry and customer base has historically grown as a result of:

 

demand for remote and reliable mobile communications services;

 

increased demand for communications services by the DoD, disaster and relief agencies, and emergency first responders;

 

a broad and expanding wholesale distribution network with access to diverse and geographically dispersed niche markets;

 

a growing number of new products and services and related applications;

 

improved data transmission speeds for mobile satellite service offerings;

 

regulatory mandates requiring the use of mobile satellite services;

 

a general reduction in prices of mobile satellite services and subscriber equipment; and

 

geographic market expansion through the receipt of licenses to sell our services in additional countries.

 

Nonetheless, we face a number of challenges and uncertainties in operating our business, including:

 

our ability to develop Iridium NEXT and related ground infrastructure, and to develop products and services for Iridium NEXT;

 

our ability to access the Credit Facility to meet our future capital requirements for the design, build and launch of the Iridium NEXT satellites, including our ability to negotiate modifications to the Credit Facility with our lenders and, if required by our lenders, to obtain additional external debt or equity financing;

 

our ability to obtain sufficient internally generated cash flows, including cash flows from hosted payloads, to fund a portion of the costs associated with Iridium NEXT and support ongoing business;

 

Aireon LLC’s ability to successfully fund, develop and market its space-based automatic dependent surveillance-broadcast, or ADS-B, global aviation monitoring service to be carried as a hosted payload on the Iridium NEXT system;

 

our ability to maintain the health, capacity, control and level of service of our existing satellite network until and during the transition to Iridium NEXT;

 

changes in general economic, business and industry conditions;

 

our reliance on a single primary commercial gateway and a primary satellite network operations center;

 

15
 

 

competition from other mobile satellite service providers and, to a lesser extent, from the expansion of terrestrial-based cellular phone systems and related pricing pressures;

 

changes in demand from U.S. government customers, particularly the DoD;

 

our ability to successfully negotiate new contracts with the DoD as our current contracts are scheduled to expire in September 2013;

 

market acceptance of our products;

 

regulatory requirements in existing and new geographic markets;

 

rapid and significant technological changes in the telecommunications industry;

 

reliance on our wholesale distribution network to market and sell our products, services and applications effectively;

 

reliance on single-source suppliers for some of the components required in the manufacture of our end-user subscriber equipment and our ability to purchase parts that are periodically subject to shortages resulting from surges in demand, natural disasters or other events; and

 

reliance on a few significant customers for a substantial portion of our revenue, where the loss or decline in business with any of these customers may negatively impact our revenue and collectability of related accounts receivable.

 

Critical Accounting Policies and Estimates

 

Long-Lived Assets

 

We assess the recoverability of long-lived assets when indicators of impairment exist. We assess the possibility of impairment by comparing the carrying amounts of the assets to the estimated undiscounted future cash flows expected to be generated by those assets. If we determine that an asset is impaired, we estimate the impairment loss by determining the excess of the asset’s carrying amount over its estimated fair value. Estimated fair value is based on market prices, when available, or various other valuation techniques. These techniques often include estimates and assumptions with respect to future cash flows and incremental borrowing rates. If actual results are not consistent with our estimates and assumptions, we may be exposed to impairment losses that could be material to our results of operations.

 

Property and Equipment

 

Property and equipment are stated at cost, less accumulated depreciation and amortization. Property, equipment and intangible assets with finite lives are depreciated or amortized over their estimated useful lives. We apply judgment in determining the useful lives based on factors such as engineering data, our long-term strategy for using the assets, contractual terms related to the assets, laws and regulations that could impact the useful lives of the assets and other economic factors. In evaluating the useful lives of our satellites, we assess the current estimated operational life of the satellites, including the potential impact of environmental factors on the satellites, ongoing operational enhancements and software upgrades. Additionally, we review engineering data relating to the operation and performance of our satellite network.

 

We depreciate our satellites over the shorter of their potential operational life or the period of their expected use. The appropriateness of the useful lives is evaluated on a quarterly basis. Satellites are depreciated on a straight-line basis through the earlier of the estimated remaining useful life or the date they are expected to be replaced by Iridium NEXT satellites, which defines the period of their expected use, because we expect this will occur before the end of their operational lives. Based on the current launch schedule, we expect Iridium NEXT satellites to begin deployment in early 2015, with the final launch expected to occur by mid-2017. If actual operational results are not consistent with our estimates and assumptions, we may experience changes in depreciation and amortization expense that could be material to our results of operations. In the event there are changes to the launch schedule of Iridium NEXT satellites, the period of intended use for our current satellites could be impacted, also resulting in changes to depreciation and amortization expense that could be material to our results of operations.

 

Assets under construction primarily consist of costs incurred associated with the design, development and launch of the Iridium NEXT satellites, upgrades to our current infrastructure and ground systems and the internal software development costs. Once these assets are placed in service, they will then be depreciated using the straight-line method over their respective estimated useful lives. We capitalize interest on our Credit Facility during the construction period of Iridium NEXT. Capitalized interest is added to the cost of our next-generation satellites.

 

16
 

   

Comparison of Our Results of Operations for the Three Months Ended June 30, 2013 and 2012

 

    Three Months Ended June 30,              
          % of Total           % of Total     Change  
($ in thousands)   2013     Revenue     2012     Revenue     Dollars     Percent  
Revenue:                                                
Services   $ 71,401       75 %   $ 68,485       70 %   $ 2,916       4 %
Subscriber equipment     19,815       21 %     23,914       25 %     (4,099 )     (17 )%
Engineering and support services     3,468       4 %     4,922       5 %     (1,454 )     (30 )%
Total revenue     94,684       100 %     97,321       100 %     (2,637 )     (3 )%
                                                 
Operating expenses:                                                
Cost of services (exclusive of depreciation  and amortization)     14,206       15 %     15,988       16 %     (1,782 )     (11 )%
Cost of subscriber equipment     12,893       14 %     13,292       14 %     (399 )     (3 )%
Research and development     1,741       2 %     3,429       4 %     (1,688 )     (49 )%
Selling, general and administrative     18,399       19 %     17,970       18 %     429       2 %
Depreciation and amortization     18,597       20 %     18,368       19 %     229       1 %
Total operating expenses     65,836       70 %     69,047       71 %     (3,211 )     (5 )%
                                                 
Operating income     28,848       30 %     28,274       29 %     574       2 %
                                                 
Other income (expense):                                                
Interest income, net     641       1 %     121       0 %     520       430 %
Undrawn credit facility fees     (2,020 )     (2 )%     (2,582 )     (3 )%     562       (22 )%
Other expense, net     (869 )     (1 )%     (31 )     0 %     (838 )     2,703 %
Total other expense     (2,248 )     (2 )%     (2,492 )     (3 )%     244       (10 )%
Income before income taxes     26,600       28 %     25,782       26 %     818       3 %
Provision for income taxes     (11,187 )     (12 )%     (8,119 )     (8 )%     (3,068 )     38 %
Net income   $ 15,413       16 %   $ 17,663       18 %   $ (2,250 )     (13 )%

 

Revenue

 

Total revenue decreased 3% to $94.7 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The decrease was primarily due to a decrease in equipment unit sales for the Iridium 9555 handset and a decrease in revenue from government-sponsored engineering and support contracts. These declines were partially offset by an increase in service revenue due to a 12% year-over-year increase in billable subscribers.

 

17
 

 

Service Revenue

 

    Three Months Ended June 30, 2013     Three Months Ended June 30, 2012     Change  
    (Revenue in millions and subscribers in thousands)  
          Billable                 Billable                 Billable        
    Revenue     Subscribers (1)     ARPU (2)     Revenue     Subscribers (1)     ARPU (2)     Revenue     Subscribers     ARPU  
Commercial voice and data   $ 44.7       343     $ 44     $ 42.7       326     $ 45     $ 2.0       17     $ (1 )
Commercial M2M data     12.3       253       17       10.2       202       18       2.1       51       (1 )
Total Commercial     57.0       596               52.9       528               4.1       68          
Government voice and data     13.4       33       134       14.9       36       138       (1.5 )     (3 )     (4 )
Government M2M data     1.0       18       18       0.7       12       19       0.3       6       (1 )
Total Government     14.4       51               15.6       48               (1.2 )     3          
Total Service Revenue   $ 71.4       647             $ 68.5       576             $ 2.9       71          

 

(1) Billable subscriber numbers shown are at the end of the respective period.
(2) Average monthly revenue per unit, or ARPU, is calculated by dividing revenue in the respective period by the average of the number of billable subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period.

 

Service revenue increased 4% for the three months ended June 30, 2013, compared to the prior year period, primarily due to growth in billable subscribers partially offset by decreases in ARPU for voice and M2M data services.

 

Commercial voice and data revenue increased principally due to an increase in billable subscribers and an increase in access fee revenue resulting from targeted price increases. These increases were partially offset by a decrease in commercial voice ARPU due to a decline in average minutes of use per subscriber. For the remainder of 2013, growth in commercial voice and data revenue may be negatively affected by reductions in non-U.S. defense spending and deployed troop levels and recently addressed product issues related to our Iridium OpenPort ® service. Commercial M2M data revenue growth was driven principally by an increase in the billable subscriber base. We anticipate continued growth in billable commercial subscribers for the remainder of 2013.

 

Government voice and data revenue decreased principally due to a reduction in billable subscribers and a decrease in ARPU. Government voice and data ARPU decreased due to a higher proportion of billable subscribers on lower priced plans for Netted Iridium ® , a service that provides beyond-line-of-sight, push-to-talk tactical radio service for user-defined groups. The increase in government M2M data revenue was driven primarily by billable subscriber growth. Our current agreement with the U.S. government is scheduled to expire at the end of September 2013. Future government voice and M2M data revenues are dependent upon our ability to favorably negotiate a new agreement with the U.S. government.

 

Subscriber Equipment Revenue

 

Subscriber equipment revenue decreased 17% for the three months ended June 30, 2013 compared to the prior year period. The decrease in subscriber equipment revenue was primarily due to lower unit sales of the Iridium 9555 satellite handset. Future subscriber equipment sales to the U.S. government through non-government distributors may be negatively affected by reductions in U.S. defense spending and deployed troop levels.

 

Engineering and Support Service Revenue

 

Engineering and support service revenue decreased 30% for the three months ended June 30, 2013 compared to the prior year period due to a reduced scope of work for government-sponsored contracts. The related cost of service impact of this scope reduction on government-sponsored contracts is discussed below within our cost of services discussion. We anticipate an increase in the scope of work for government contracts during the remainder of 2013, resulting in overall growth in engineering and support service revenue compared to 2012.

 

Operating Expenses

 

Cost of Services (exclusive of depreciation and amortization)

 

Cost of services (exclusive of depreciation and amortization) includes the cost of network engineering and operations staff, including contractors, software maintenance, product support services and cost of services for government and commercial engineering and support service revenue.

 

18
 

 

Cost of services (exclusive of depreciation and amortization) decreased 11% for the three months ended June 30, 2013 from the prior year period primarily due to a decline in scope of work for government-sponsored contracts.

 

Cost of Subscriber Equipment

 

Cost of subscriber equipment includes the direct costs of equipment sold, which consist of manufacturing costs, allocation of overhead, and warranty costs.

 

Cost of subscriber equipment decreased 3% for the three months ended June 30, 2013 compared to the prior year period. During the three months ended June 30, 2013, we recorded a $1.9 million increase in the warranty provision related to projected higher future warranty claims and a higher cost per claim on our Iridium Pilot ® terminals. Net of this increase in expense, the comparative decline in cost of subscriber equipment from the prior year period is primarily the result of decreased unit sales and is proportionate to the decline in subscriber equipment revenue discussed above.

 

Research and Development

 

Research and development expenses decreased by 49% to $1.7 million for the three months ended June 30, 2013 from $3.4 million for the prior year period primarily due to decreases in research and development associated with new subscriber equipment products and Iridium NEXT projects.

 

Other Income (Expense)

 

Interest Income, Net

 

Interest income, net, increased to $0.6 million for the three months ended June 30, 2013 from $0.1 million for the prior year period primarily due to an increase in interest income earned on marketable securities. We began investing in marketable securities during the first quarter of 2013; therefore, no interest income on marketable securities was earned during the second quarter of 2012.

 

Undrawn Credit Facility Fees

 

Commitment fees on the undrawn portion of the Credit Facility were $2.0 million for the three months ended June 30, 2013 compared to $2.6 million for the prior year period. The decrease of the commitment fee on the undrawn portion is directly proportionate to the increase in the amounts borrowed under the Credit Facility as we finance the development of Iridium NEXT.

 

Other Income (Expense), Net

 

Other expense, net, was $0.9 million for the three months ended June 30, 2013 compared to less than $0.1 million for the prior year period. This change resulted from our share of the loss from our equity method investment in Aireon LLC, or Aireon. Following NAV CANADA’s purchase of Aireon Series A preferred membership interests in the fourth quarter of 2012, Aireon is accounted for as an equity method investment within our financial statements, and our investment is included within other assets on the consolidated balance sheet. Prior to NAV CANADA’s investment, we consolidated Aireon’s results with our results as a wholly owned subsidiary. As our equity investment in Aireon did not commence until the fourth quarter of 2012, there were no similar amounts during the three months ended June 30, 2012.

 

Provision for Income Taxes

 

For the three months ended June 30, 2013, our income tax provision was $11.2 million compared to $8.1 million for the prior year period. Our effective tax rate was 42.1% for the three months ended June 30, 2013 compared to 31.5% for the prior year period. The change in the income tax provision and rate is primarily related to the change in the Company’s realizability of state net operating loss carryforwards compared to the prior year period and the current period reduction in the benefit of the Arizona law changes compared to the prior year period. As our current estimates change in future periods, the impact on the deferred tax assets and liabilities may change correspondingly. 

   

Net Income

 

Net income was $15.4 million for the three months ended June 30, 2013, a decrease of 13%, or $2.3 million, from the prior year period. This decrease in net income was driven by a $3.1 million increase in the provision for income taxes, primarily related to the change in the Company’s realizability of state net operating loss carryforwards compared to the prior year period and the current period reduction in the benefit of the Arizona law changes compared to the prior year period. This decrease was partially offset by a $1.7 million decrease in research and development expenses associated with new subscriber equipment products and Iridium NEXT projects.

 

19
 

 

Comparison of Our Results of Operations for the Six Months Ended June 30, 2013 and 2012

 

    Six Months Ended June 30,              
          % of Total           % of Total     Change  
($ in thousands)   2013     Revenue     2012     Revenue     Dollars     Percent  
Revenue:                                                
Services   $ 140,188       76 %   $ 135,333       71 %   $ 4,855       4 %
Subscriber equipment     37,146       20 %     45,454       24 %     (8,308 )     (18 )%
Engineering and support services     6,539       4 %     10,008       5 %     (3,469 )     (35 )%
Total revenue     183,873       100 %     190,795       100 %     (6,922 )     (4 )%
                                                 
Operating expenses:                                                
Cost of services (exclusive of depreciation  and amortization)     28,682       16 %     33,991       18 %     (5,309 )     (16 )%
Cost of subscriber equipment     24,013       13 %     26,634       14 %     (2,621 )     (10 )%
Research and development     3,400       2 %     9,118       5 %     (5,718 )     (63 )%
Selling, general and administrative     36,764       20 %     36,118       19 %     646       2 %
Depreciation and amortization     36,828       20 %     42,572       22 %     (5,744 )     (13 )%
Total operating expenses     129,687       71 %     148,433       78 %     (18,746 )     (13 )%
                                                 
Operating income     54,186       29 %     42,362       22 %     11,824       28 %
                                                 
Other income (expense):                                                
Interest income, net     1,278       1 %     189       0 %     1,089       576 %
Undrawn credit facility fees     (4,116 )     (2 )%     (5,361 )     (3 )%     1,245       (23 )%
Other income (expense), net     (2,265 )     (2 )%     61       0 %     (2,326 )     (3,813 )%
Total other expense     (5,103 )     (3 )%     (5,111 )     (3 )%     8       0 %
Income before income taxes     49,083       27 %     37,251       20 %     11,832       32 %
Provision for income taxes     (18,736 )     (10 )%     (7,170 )     (4 )%     (11,566 )     161 %
Net income   $ 30,347       17 %   $ 30,081       16 %   $ 266       1 %

  

Revenue

 

Total revenue decreased 4% to $183.9 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The decrease was primarily due to a decrease in equipment unit sales for the Iridium 9555 handset and a decrease in revenue from government-sponsored engineering and support contracts. These decreases in revenue were partially offset by an increase in service revenue due to a 12% year-over-year increase in billable subscribers.

 

Service Revenue

 

    Six Months Ended June 30, 2013     Six Months Ended June 30, 2012     Change  
    (Revenue in millions and subscribers in thousands)  
          Billable                 Billable                 Billable        
    Revenue     Subscribers (1)     ARPU (2)     Revenue     Subscribers (1)     ARPU (2)     Revenue     Subscribers     ARPU  
Commercial voice and data   $ 87.1       343     $ 43     $ 84.6       326     $ 45     $ 2.5       17     $ (2 )
Commercial M2M data     23.6       253       16       19.4       202       17       4.2       51       (1 )
Total Commercial     110.7       596               104.0       528               6.7       68          
Government voice and data     27.7       33       135       30.0       36       137       (2.3 )     (3 )     (2 )
Government M2M data     1.8       18       18       1.3       12       19       0.5       6       (1 )
Total Government     29.5       51               31.3       48               (1.8 )     3          
Total Service Revenue   $ 140.2       647             $ 135.3       576             $ 4.9       71          

 

(1) Billable subscriber numbers shown are at the end of the respective period.
(2) Average monthly revenue per unit, or ARPU, is calculated by dividing revenue in the respective period by the average of the number of billable subscribers at the beginning of the period and the number of billable subscribers at the end of the period and then dividing the result by the number of months in the period.

 

20
 

 

Service revenue increased 4% for the six months ended June 30, 2013 compared to the prior year period, primarily due to growth in billable subscribers, partially offset by decreases in ARPU for voice and M2M data services.

 

Commercial voice and data revenue increased principally due to an increase in billable subscribers and an increase in access fee revenue resulting from targeted price increases. These increases were partially offset by a decrease in commercial voice ARPU due to a decline in average minutes of use per subscriber. Commercial M2M data revenue growth was driven principally by an increase in the billable subscriber base.

 

Government voice and data revenue decreased principally due to a reduction in billable subscribers and a decrease in ARPU. Government voice and data ARPU decreased due to a higher proportion of billable subscribers on lower priced plans for Netted Iridium. The increase in government M2M data revenue was driven primarily by billable subscriber growth.

 

Subscriber Equipment Revenue

 

Subscriber equipment revenue decreased 18% for the six months ended June 30, 2013 compared to the prior year period. The decrease in subscriber equipment revenue was primarily due to lower unit sales of the Iridium 9555 satellite handset.

 

Engineering and Support Service Revenue

 

Engineering and support service revenue decreased 35% for the six months ended June 30, 2013 compared to the prior year period due to a reduced scope of work for government-sponsored contracts. There was also a related cost of service impact of this scope reduction on government-sponsored contracts.

 

Operating Expenses

 

Cost of Services (exclusive of depreciation and amortization)

 

Cost of services (exclusive of depreciation and amortization) decreased 16% for the six months ended June 30, 2013 from the prior year period due to a decline in scope of work for government-sponsored contracts.

 

Cost of Subscriber Equipment

 

Cost of subscriber equipment decreased 10% for the six months ended June 30, 2013 compared to the prior year period. During the three months ended June 30, 2013, we recorded a $1.9 million increase in the warranty provision related to projected higher future warranty claims and a higher cost per claim on our Iridium Pilot terminals. Net of this increase in expense, the comparative decline in cost of subscriber equipment from the prior year period is primarily the result of decreased unit sales and is proportionate to the decline in subscriber equipment revenue discussed above.

 

Research and Development

 

Research and development expenses decreased by 63% to $3.4 million for the six months ended June 30, 2013 from $9.1 million for the prior year period primarily due to decreases in research and development associated with new subscriber equipment products and Iridium NEXT projects.

 

Depreciation and Amortization

 

Depreciation and amortization expense decreased 13% for the six months ended June 30, 2013 from the prior year period. During the second quarter of 2012, we updated our analysis of the current satellite constellation’s health and the remaining useful life. Based on the results of this analysis, we estimate that our current constellation of satellites will be operational for longer than previously expected. As a result, the estimated useful life of the current constellation was extended and is consistent with the expected deployment of Iridium NEXT. This change in estimated useful life resulted in a decrease in depreciation expense for the six months ended June 30, 2013 when compared to the prior year period.

 

21
 

 

Other Income (Expense)

 

Interest Income, Net

 

Interest income, net, increased to $1.3 million for the six months ended June 30, 2013 from $0.2 million for the prior year period primarily due to an increase in interest income earned on marketable securities. We began investing in marketable securities during the first quarter of 2013; therefore, no similar interest income was earned during 2012.

 

Undrawn Credit Facility Fees

 

Commitment fees on the undrawn portion of the Credit Facility were $4.1 million for the six months ended June 30, 2013 compared to $5.4 million for the prior year period. The decrease of the commitment fee on the undrawn portion is directly proportionate to the increase in the amounts borrowed under the Credit Facility as we finance the development of Iridium NEXT.

 

Other Income (Expense), Net

 

Other expense, net, was $2.3 million for the six months ended June 30, 2013 compared to other income, net, of less than $0.1 million for the prior year period. This change resulted from our share of the loss from our equity method investment in Aireon. Following NAV CANADA’s purchase of Aireon Series A preferred membership interests in the fourth quarter of 2012, Aireon is accounted for as an equity method investment within our financial statements, and our investment is included within other assets on the consolidated balance sheet. Prior to NAV CANADA’s investment, we consolidated Aireon’s results with our results as a wholly owned subsidiary. As our equity investment in Aireon did not commence until the fourth quarter of 2012, there were no similar amounts during the six months ended June 30, 2012.

 

Provision for Income Taxes

 

For the six months ended June 30, 2013, our income tax provision was $18.7 million compared to $7.2 million for the prior year period. Our effective tax rate was 38.2% for the six months ended June 30, 2013 compared to 19.2% for the prior year period. The change in the income tax provision and rate is primarily related to the increase in our income before income taxes compared to the prior year period combined with the change in the Company’s realizability of state net operating loss carryforwards and the current period reduction in the benefit of the Arizona law changes compared to the prior year period. As our current estimates change in future periods, the impact on the deferred tax assets and liabilities may change correspondingly.

 

Net Income

 

Net income was $30.3 million for the six months ended June 30, 2013, an increase of 1%, or $0.3 million, from the prior year period. This increase in net income was driven by a $5.7 million decline in depreciation and amortization expense primarily resulting from the change in the estimated useful lives of our satellites in the second quarter of 2012. Also contributing to the increase in net income was a $5.7 million decrease in research and development compared to the prior period due to decreases in research and development associated with new subscriber equipment products and Iridium NEXT projects. These year-over-year benefits to net income were partially offset by an $11.6 million increase in the provision for income taxes, which primarily related to the increase in our income before income taxes compared to the prior year period combined with the change in the Company’s realizability of state net operating loss carryforwards and the current period reduction in the benefit of the Arizona law changes compared to the prior year period.

 

Liquidity and Capital Resources

 

As of June 30, 2013, our total cash and cash equivalents balance was $196.8 million and our marketable securities balance was $78.8 million. Our principal sources of liquidity are existing cash, cash equivalents and marketable securities, internally generated cash flows, and the Credit Facility. Our principal liquidity requirements are to meet capital expenditure needs, principally the design, build and launch of Iridium NEXT, as well as for working capital, international expansion, and research and development expenses.

 

We expect to fund $1.8 billion of the costs of Iridium NEXT with the Credit Facility. While we were in compliance with all our financial covenants as of June 30, 2013 and believe that our liquidity sources will provide sufficient funds for us to meet our liquidity requirements for at least the next twelve months, we expect to need modifications to our Credit Facility for some financial covenants with measurement dates beyond the next twelve months. We expect to fund the remainder of the costs of Iridium NEXT from cash on hand, internally generated cash flows, including potential cash flows from hosted payloads on our Iridium NEXT satellites, and, if needed or required by our lenders, with additional external debt or equity financing.

 

22
 

 

The Credit Facility contains borrowing restrictions, including financial performance covenants and covenants relating to hosted payloads, and there can be no assurance that we will be able to continue to borrow funds under the Credit Facility. We expect to need modifications to the Credit Facility from our lenders for some financial covenants with measurement dates beyond the next twelve months, and there can be no assurance that the lenders will agree to such modifications. There can also be no assurance that our internally generated cash flows, including those from hosted payloads on our Iridium NEXT satellites, will meet our current expectations. If we do not generate sufficient cash flows, or if the cost of implementing Iridium NEXT or the other elements of our business plan is higher than anticipated, or if required by our lenders as a condition to the modifications we seek to our financial covenants, we will need further external funding. Our ability to obtain additional funding may be adversely affected by a number of factors, including global economic conditions, and we cannot assure you that we will be able to obtain such funding on reasonable terms, or at all. If we are not able to secure such funding in a timely manner, our ability to maintain our network, to design, build and launch Iridium NEXT and related ground infrastructure, products and services, and to pursue additional growth opportunities will be impaired, and we would likely need to delay some elements of our Iridium NEXT development. Our liquidity and our ability to fund our liquidity requirements are also dependent on our future financial performance, which is subject to general economic, financial, regulatory and other factors that are beyond our control.

 

Holders of Series A Preferred Stock are entitled to receive cumulative cash dividends at an annual rate of $7.00 per share. Dividends are payable quarterly in arrears on each March 15, June 15, September 15 and December 15. For each full quarter that the Series A Preferred Stock is outstanding, and assuming that no shares of Series A Preferred Stock have been converted into shares of our common stock, we would be required to pay cash dividends of $1.75 million. We expect that we would satisfy dividend requirements, if and when declared, from internally generated cash flows.

 

As of June 30, 2013, we had borrowed a total of $853.6 million under the Credit Facility. The unused portion of the Credit Facility as of June 30, 2013 was $946.4 million. Under the terms of the Credit Facility, we were required to maintain a minimum cash reserve for debt service of $67.5 million as of June 30, 2013, which is classified as restricted cash on the accompanying condensed consolidated balance sheet. This minimum cash reserve requirement will increase over the term of the Credit Facility to $189.0 million at the beginning of the repayment period, which is expected to be in 2017. In addition to the minimum debt service levels, we were required to meet the following financial covenants under the Credit Facility as of June 30, 2013:

 

· an available cash balance of at least $25 million;

 

· a debt-to-equity ratio, which is calculated as the ratio of total net debt to the aggregate of total net debt and total stockholders’ equity, of no more than 0.7 to 1;

 

· specified minimum consolidated operational earnings before interest, taxes, depreciation and amortization levels for rolling 12-month periods through June 30, 2017; and

 

· specified minimum cash flow requirements from customers who have hosted payloads on our satellites during rolling 12-month periods through June 30, 2017.

 

Our available cash balance, as defined by the Credit Facility, was $212.2 million as of June 30, 2013. Our debt-to-equity ratio was 0.42 to 1 as of June 30, 2013. We were also in compliance with the earnings and cash flow covenants set forth above as of June 30, 2013.

 

The covenants also place limitations on our ability and that of our subsidiaries to carry out mergers and acquisitions, dispose of assets, grant security interests, declare, make or pay dividends, enter into transactions with affiliates, fund payments under the full scale development contract, or FSD, with Thales Alenia Space France from our own resources, incur additional indebtedness, or make loans, guarantees or indemnities.

 

If we are not in compliance with the financial or other covenants under the Credit Facility, after an opportunity to cure such non-compliance, or we otherwise experience an event of default under the Credit Facility, the lenders may require repayment in full of all principal and interest outstanding under the Credit Facility. It is unlikely we would have adequate funds to repay such amounts prior to the scheduled maturity of the Credit Facility. If we fail to repay such amounts, the lenders may foreclose on the assets we have pledged under the Credit Facility, which include substantially all of our assets and those of our domestic subsidiaries.

 

We believe that our liquidity sources will provide sufficient funds for us to meet our liquidity requirements for at least the next 12 months.

 

23
 

 

 

Cash Flows

 

The following section highlights our cash flows for the six months ended June 30, 2013 and 2012:

 

    2013     2012     Change  
    (in thousands)  
Cash provided by operating activities   $ 100,262     $ 89,389     $ 10,873  
Cash used in investing activities   $ (236,088 )   $ (186,704 )   $ (49,384 )
Cash provided by financing activities   $ 78,256     $ 127,611     $ (49,355 )

 

 

Cash Flows from Operating Activities

 

Net cash provided by operating activities for the six months ended June 30, 2013 increased by $10.9 million from the prior year period. This improvement was primarily due to a $2.7 million decrease in working capital and a $5.7 million decrease in research and development expenses compared to the prior year period.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities for the six months ended June 30, 2013 increased by $49.4 million compared to the prior year period due to the net purchase of marketable securities for $79.4 million and our $5.0 million investment in an equity method affiliate in 2013. These uses of cash were partially offset by a $35.0 million decline in capital expenditures related to Iridium NEXT, including payments related to the purchase of equipment and software for our satellites, network and gateway operations.

 

Cash Flows from Financing Activities

 

Net cash provided by financing activities for the six months ended June 30, 2013 decreased by $49.4 million from the prior year period primarily due to a $49.1 million decrease in borrowings under the Credit Facility and the $3.5 million payment of dividends on our Series A Preferred Stock in 2013, for which there was no corresponding payment in 2012. This decrease was partially offset by a $3.2 million decrease in payment of deferred financing fees related to premiums paid on our Credit Facility drawdowns.

 

Off-Balance Sheet Arrangements

 

We do not currently have any off-balance sheet arrangements, as such term is defined in Item 303(a)(4)(ii) of the SEC’s Regulation S-K, that have or are reasonably likely to have a material current or future effect on our financial condition, results of operations, liquidity or capital resources.

 

Seasonality

 

Our results of operations have been subject to seasonal usage changes for commercial customers, and we expect that our results will be affected by similar seasonality effects in the future. March through October are typically the peak months for commercial voice services revenue and related subscriber equipment sales. U.S. government revenue and commercial M2M revenue have been less subject to seasonal usage changes.

 

Recent Accounting Developments

 

None.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Interest income earned on our cash, cash equivalents and marketable securities balances is subject to interest rate fluctuations. For the six months ended June 30, 2013, a one-half percentage point increase or decrease in interest rates would not have had a material effect on our interest income.

 

We entered into the Credit Facility in October 2010 and had borrowed $853.6 million under the Credit Facility as of June 30, 2013. A portion of the draws we make under the Credit Facility bear interest at a floating rate equal to the London Interbank Offered Rate, or LIBOR, plus 1.95% and will, accordingly, subject us to interest rate fluctuations in future periods. Had the currently outstanding borrowings under the Credit Facility been outstanding throughout the six months ended June 30, 2013, a one-half percentage point increase or decrease in the LIBOR would have changed our interest cost by less than $0.1 million.

 

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, accounts receivable and accounts payable. We maintain our cash, cash equivalents and marketable securities with financial institutions with high credit ratings and at times maintain the balance of our deposits in excess of federally insured (FDIC) limits. The majority of our cash is swept nightly into funds that invest in or are collateralized by U.S government-backed securities. During 2013, we invested in marketable securities consisting of fixed income and commercial paper debt instruments with fixed interest rates and maturity dates within three years of original purchase. Due to the credit quality and nature of these debt instruments, we do not believe there has been a significant change in our market risk exposure since December 31, 2012. Accounts receivable are due from both domestic and international customers. We perform credit evaluations of our customers’ financial condition and record reserves to provide for estimated credit losses. Accounts payable are owed to both domestic and international vendors.

 

24
 

   

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of the end of the period covered by this report. In evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.

 

Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

 

Changes in Internal Control Over Financial Reporting

 

During the quarter ended June 30, 2013, there were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.

 

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

Neither we nor any of our subsidiaries are currently subject to any material legal proceeding, nor, to our knowledge, is any material legal proceeding threatened against us or any of our subsidiaries.

 

ITEM 1A. RISK FACTORS.

 

Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. In addition to the other information set forth in this quarterly report on Form 10-Q, you should carefully consider the factors discussed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the Securities and Exchange Commission on March 5, 2013, as updated by the following risk factors:

 

We may need additional capital to design, build and launch Iridium NEXT and related ground infrastructure, products and services, and to pursue additional growth opportunities. If we fail to maintain access to sufficient capital, we will not be able to successfully implement our business plan.

 

Our business plan calls for the development of Iridium NEXT, the development of new product and service offerings, upgrades to our current services, hardware and software upgrades to maintain our ground infrastructure and upgrades to our business systems. We estimate the costs associated with the design, build and launch of Iridium NEXT and related ground infrastructure upgrades through 2017 to be approximately $3 billion. Our funding plan for these costs includes the funds available under the Credit Facility, together with internally generated cash flows, including cash flows from hosted payloads, and cash on hand.

 

25
 

 

 

We expect to need modifications to the Credit Facility for some financial covenants with measurement dates beyond the next twelve months, and there can be no assurance that the lenders will agree to such modifications, or they may require us to raise additional capital as a condition to such modifications, which may not be available on favorable terms, or at all. In addition, our ongoing ability to make draws under the Credit Facility will depend upon our satisfaction of those and other borrowing conditions from time to time, some of which will be outside of our control.

 

There can also be no assurance that our internally generated cash flows will meet our current expectations, or that we will not encounter increased costs. Among other factors leading to the uncertainty over our internally generated cash flows, Aireon may be unable to pay its hosting costs. If internally generated cash flows, including cash from hosted payload arrangements, are less than we expect, we might need to finance the remaining cost of Iridium NEXT by raising additional debt or equity financing. In addition, we may need additional capital to design and launch new products and services on Iridium NEXT. Such additional financing may not be available on favorable terms, or at all.

 

If we are unable to raise additional capital for one or more of these needs, our ability to maintain our network, design, build and launch Iridium NEXT and related ground infrastructure, develop new products and services and pursue additional growth opportunities will be impaired, which would significantly limit the development of our business and impair our ability to provide a commercially acceptable level of service. We expect to experience overall liquidity levels lower than our recent liquidity levels. Inadequate liquidity could compromise our ability to pursue our business plans and growth opportunities and make borrowings under the Credit Facility, delay the ultimate deployment of Iridium NEXT or otherwise impair our business and financial position.

 

If we fail to satisfy the ongoing borrowing conditions of the Credit Facility, or are unsuccessful in obtaining modifications to such conditions, we may be unable to fund Iridium NEXT.

 

We plan to use borrowings under the Credit Facility to partially fund the construction of our Iridium NEXT satellites, including borrowing to capitalize interest otherwise due under the Credit Facility. Our ability to continue to draw funds under the Credit Facility over time will depend on the satisfaction of borrowing conditions, including:

 

· compliance with the covenants under the Credit Facility, including financial covenants and covenants relating to hosted payloads;

 

· accuracy of the representations we make under the Credit Facility;

 

· compliance with the other terms of the Credit Facility, including the absence of events of default; and

 

· maintenance of our insurance policy with COFACE.

 

Some of these borrowing conditions may be outside of our control or otherwise difficult to satisfy, and we expect to need modifications to the Credit Facility for some financial covenants with measurement dates beyond the next twelve months. If we are unable to obtain such modifications, or if we do not continue to satisfy those and other borrowing conditions under the Credit Facility and cannot obtain a waiver from the lenders, we would need to find other sources of financing. We would have to seek the permission of the lenders under the Credit Facility in order to obtain many alternative sources of financing, and there can be no assurance that we would have access to other sources of financing on acceptable terms, or at all.

 

We are dependent on third parties to market and sell our products and services.

 

We rely on third-party distributors to market and sell our products and services to end users and to determine the prices end users pay. We also depend on our distributors to develop innovative and improved solutions and applications integrating our product and service offerings. As a result of these arrangements, we are dependent on the performance of our distributors to generate substantially all of our revenue. Our distributors operate independently of us, and we have limited control over their operations, which exposes us to significant risks. Distributors may not commit the necessary resources to market and sell our products and services and may also market and sell competitive products and services. In addition, our distributors may not comply with the laws and regulatory requirements in their local jurisdictions, which could limit their ability to market or sell our products and services. If our distributors develop faulty or poorly performing products using our technology or services, we may be subject to claims, and our reputation could be harmed. If current or future distributors do not perform adequately, or if we are unable to locate competent distributors in particular countries and secure their services on favorable terms, we may be unable to increase or maintain our revenue in these markets or enter new markets, we may not realize our expected growth, and our brand image and reputation could be hurt.

 

26
 

 

In addition, we may lose distributors due to competition, consolidation, regulatory developments, business developments affecting our distributors or their customers, or for other reasons. In 2009, one of our largest competitors, Inmarsat, acquired our then largest distributor, Stratos Global Wireless, Inc. Inmarsat does not dedicate the same level of effort to distributing our products and services as did Stratos and may further reduce such efforts in the future. For example, Inmarsat has essentially stopped promoting sales of our handsets. Any future consolidation of our distributors would further increase our reliance on a few key distributors of our services and the amount of volume discounts that we may have to give such distributors. Our two largest distributors, Astrium and Inmarsat, each represented 10% of our revenue for the year ended December 31, 2012, and our ten largest distributors represented, in the aggregate, 48% of our revenue for the year ended December 31, 2012. The loss of any of these distributors, or a decrease in the level of effort expended by any of them to promote our products and services, could reduce the distribution of our products and services as well as the development of new products and applications.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

See the exhibit index.

 

27
 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  IRIDIUM COMMUNICATIONS INC.
     
  By: /s/ Thomas J. Fitzpatrick
    Thomas J. Fitzpatrick
   

Chief Financial Officer

(as duly authorized officer and as principal
financial officer of the registrant)

 

Date: August 1, 2013

 

28
 

 

EXHIBIT INDEX

 

Exhibit     Description  
     
     
10.1†   Amendment No. 1 to Amended and Restated Limited Liability Company Agreement of Aireon LLC, between Aireon LLC, Iridium Satellite LLC, NAV CANADA and NAV CANADA Satellite, Inc., dated as of June 27, 2013.
     
10.2†   Amendment No. 1 to Contract for Launch Services No. IS-11-032 between Iridium Satellite LLC and International Space Company Kosmotras, dated as of September 25, 2012 and effective as of June 13, 2013.
     
10.3†   Amendment No. 2 to Contract for Launch Services No. IS-11-032 between Iridium Satellite LLC and International Space Company Kosmotras, dated as of April 15, 2013.
     
10.4†   Amendment No. 3 to Contract for Launch Services No. IS-11-032 between Iridium Satellite LLC and International Space Company Kosmotras, dated as of June 13, 2013.
     
31.1   Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to section 302 of The Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to section 302 of The Sarbanes-Oxley Act of 2002.
     
32.1*   Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(b) and 15d-14(b) promulgated under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to section 906 of The Sarbanes-Oxley Act of 2002.
     
101**   The following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, filed with the Securities and Exchange Commission on August 1, 2013, formatted in XBRL (eXtensible Business Reporting Language):

(i) Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012;
(ii) Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2013 and 2012;
(iii) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012; and
(iv) Notes to Condensed Consolidated Financial Statements.

  

Confidential treatment has been requested for certain portions omitted from this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange Commission.

 

* These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

** Furnished electronically herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files included in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

  

29

 

EXECUTION VERSION

 

AMENDMENT NO. 1 TO

AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT

OF

AIREON LLC

A DELAWARE LIMITED LIABILITY COMPANY

 

This Amendment No. 1 to Amended and Restated Limited Liability Company Agreement (this “ Amendment ”) is dated as of June 27, 2013 and is entered into by NAV CANADA Satellite, Inc, a Delaware corporation, and Iridium Satellite LLC, a Delaware limited liability company (collectively, the “ Members ”), NAV CANADA, and Aireon LLC (the “ Company ”).

 

RECITALS

 

A.             The Members, NAV CANADA and the Company are party to that certain Amended and Restated Limited Liability Company Agreement, dated as of November 19, 2012, as amended (the “ Operating Agreement ”).

 

B.             The Members, NAV CANADA and the Company wish to amend the Company’s Operating Agreement as set forth herein.

 

AGREEMENT

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the parties hereto, the parties agree as follows:

 

1.            Amendments .

 

a.               The following definitions contained in Article 1 of the Operating Agreement are hereby amended and restated in their entirety and replaced with the following:

 

"“ Accrued Dividend ” means, (i) with respect to any Preferred Interest issued on the Effective Date or in connection with the Third NAV CANADA Tranche Financing, the Fourth NAV CANADA Tranche Financing, the Fifth NAV CANADA Tranche Financing or the exercise of the Contingent B Financing Option (if any), (A) prior to January 1, 2016, zero (0), and (B) on or after January 1, 2016, an amount that would have accrued if the total amount of Unreturned Capital attributable to such Preferred Interest had been accruing daily at the rate of five percent (5%) per annum, from (and including) the date of issuance of such Preferred Interest until (and including) the date on which such Preferred Interest is converted into Common Interest or redeemed with full payment of applicable Redemption Price by the Company, and (ii) with respect to any Preferred Interest issued in connection with the Second NAV CANADA Tranche Financing, (A) prior to January 1, 2016, zero (0), and (B) on or after January 1, 2016, an amount that would have accrued if the total amount of Unreturned Capital attributable to such Preferred Interest had been accruing daily at the rate of ten percent (10%) per annum, from (and including) the date of issuance of such Preferred Interest until (and including) the date on which such Preferred Interest is converted into Common Interest or redeemed with full payment of applicable Redemption Price by the Company."

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

 
 

 

““ Fifth NAV CANADA Tranche Financing Conditions ” means the following:

 

(i) [***];

 

(ii) [***];
   
(iii) [***];
   
(iv) [***]; and
   
(v) [***].”

 

"“ Second NAV CANADA Tranche Financing Conditions ” means the following:

 

(i) [***]:

 

(A) [***];

 

(B) [***]; and

 

(C) [***];

 

(ii) [***]; and

 

(iii) [***]."

 

"“ Third NAV CANADA Tranche Financing Conditions ” means the following:

 

(i) [***]:

 

(A) [***];

 

(B) [***];

 

(C) [***];

 

(D) [***];

 

(E) [***];

 

(F) [***]; and

 

(G) [***]; and

 

(ii) [***]."

 

b.              Section 3.6.4 of the Operating Agreement is hereby deleted in its entirety and replaced with the following:

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

 
 

 

3.6.4              Contingent Financing. Without limiting the rights of the Members or NAV CANADA under other provisions of this Agreement, each of the Members and NAV CANADA severally agrees to [***]. If [***], then NAV CANADA US Subsidiary shall[***] have an option, exercisable at its sole discretion, in whole or in part, by written notice delivered to the Company, at any time and from time to time (so long as NAV CANADA US Subsidiary has not prior to such time elected not to fund any NAV CANADA Financing in accordance with the terms of Section 3.6.3), to extend additional financing to the Company, at any time and from time to time (so long as NAV CANADA US Subsidiary has not prior to such time elected not to fund any NAV CANADA Financing in accordance with the terms of Section 3.6.3), in exchange for issuance by the Company of additional Preferred Interests in an aggregate amount not to exceed 19% of the Fully Diluted Company Interests, at a price equal to $[***] per basis point (i.e., one one-hundredth of one percent (.01%)) (for an aggregate amount of $[***] assuming full exercise of such option) (subject to any adjustment necessary for any Interest split, combination, reclassification or similar events) (“ Contingent Financing Option B ”; together with Contingent Financing Option A, collectively or individually, a “ Contingent Financing ”).” For purposes of this Section 3.6.4, [***]. Notwithstanding anything to the contrary in the foregoing, [***] if at any time and from time to time [***], the Company’s Board of Directors determines that it is in the best interest of the Company to obtain bridge financing (and NAV CANADA US Subsidiary has not prior to such time elected not to fund any NAV CANADA Financing in accordance with the terms of Section 3.6.3), then (i) the Company may obtain such bridge financing [***] (in such an event, the bridge financing described in this clause (i) of Section 3.6.4 shall be deemed included in Contingent Financing Option A for purposes of this Agreement), or (ii) if the Company is unable to obtain Contingent Financing Option A as described in the foregoing clause (i) of this Section 3.6.4, after the use of commercially reasonable efforts to obtain such Contingent Financing Option A, then NAV CANADA US Subsidiary shall have the option, exercisable at its sole discretion, to extend such additional financing to the Company, [***]in exchange for issuance by the Company of additional Preferred Interests, in an aggregate amount not to exceed 19% of the Fully Diluted Company Interests, at a price equal to $[***] per basis point (i.e., one one-hundredth of one percent (.01%)) (for an aggregate amount of $[***] assuming full exercise of such option) (subject to any adjustment necessary for any Interest split, combination, reclassification or similar events) (in such event the additional issuance to NAV CANADA US Subsidiary pursuant to this clause (ii) of Section 3.6.4 shall be deemed included in Contingent Financing Option B for purposes of this Agreement.

 

2.               Except as expressly provided herein, nothing in this Amendment shall be deemed to waive or modify any of the other provisions of the Operating Agreement. In the event of any conflict between the Operating Agreement, any previous amendment of the Operating Agreement, this Amendment and any subsequent amendment, the document later in time shall prevail.

 

3.               This Amendment shall be binding upon and shall inure to the benefit of the successors in interest of the parties hereto.

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

 
 

 

IN WITNESS WHEREOF, the undersigned has caused this Amendment to be executed as of the date first hereinabove set forth.

 

AIREON LLC

 

By: /s/ Donald L. Thoma  
Name:   Donald L. Thoma  
Title:   Chief Executive Officer  

 

NAV CANADA

 

By: /s/ John W. Crichton  
Name:   John W. Crichton  
Title:   President & CEO  

 

By: /s/ Neil R. Wilson  
Name:   Neil R. Wilson  
Title:   Executive Vice President, Administration & General Counsel

 

MEMBERS:

 

NAV CANADA Satellite, Inc. Iridium Satellite LLC

  

By: /s/ John W. Crichton   By: /s/ Thomas J. Fitzpatrick
Name:   John W. Crichton   Name:   Thomas J. Fitzpatrick
Title:   President   Title:   Chief Financial Officer

 

By: /s/ Neil R. Wilson  
Name:   Neil R. Wilson  
Title:   Vice President & Secretary  

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Signature Page to Amendment No. 1

 

 

 

AMENDMENT NO. 1

 

TO THE

 

CONTRACT FOR LAUNCH SERVICES

 

NO. IS-11-032

 

BETWEEN

 

IRIDIUM SATELLITE LLC

 

AND

 

INTERNATIONAL SPACE COMPANY KOSMOTRAS

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Execution Copy Iridium & International Space Company Kosmotras Proprietary Information

 

 
 

 

PREAMBLE

 

This Amendment No. 1 (the “ Amendment ”) to the Contract for Launch Services No. IS-11-032, signed on June 14, 2011 between Iridium Satellite LLC and International Space Company Kosmotras (the “Contract” ) is entered into on this 25 th day of September, 2012, by and between Iridium Satellite LLC, a limited liability company organized and existing under the laws of Delaware, having its office at 1750 Tysons Boulevard, Suite 1400, McLean, VA 22102 ( “Customer” ) and International Space Company Kosmotras, a Russian company, having its office at 7, Sergey Makeev St., bld. 2, Moscow 123100, Russian Federation ( “Contractor” ).

 

RECITALS

 

WHEREAS , Customer has exercised its option to convert one (1) Optional Launch to a Firm Launch with a Launch Date of [***];

 

WHEREAS , the Parties have agreed to adjust the date by which Customer must exercise the remaining five (5) Optional Launches; and

 

WHEREAS , the Parties now desire to amend Section 5 and Exhibit B of the Contract.

 

NOW, THEREFORE , in consideration of the foregoing, the agreements contained herein, the payments to be made by Customer to Contractor under the Contract and other good and valid consideration, the receipt and adequacy of which are hereby expressly acknowledged, and intending to be legally bound, the Parties agree as follows:

 

Article 1 : Capitalized terms used but not defined in this Amendment shall have the meanings ascribed thereto in the Contract.

 

Article 2 : Section 5.2.2 of the Contract is hereby modified by (i) deleting the date “[***]” immediately before the text “Customer shall provide Contractor” in the first line and (ii) inserting the date “[***]” in place thereof.         

 

Article 3 : Exhibit B of the Contract is deleted and replaced in its entirety with the Exhibit B attached hereto.

  

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Execution Copy Iridium & International Space Company Kosmotras Proprietary Information

 

2
 

 

Article 4 : The effective date of this Amendment shall be the date when all of the following conditions have been fulfilled, as confirmed in writing promptly upon occurrence:

 

(A) Signature of the Amendment by both Parties; and

 

(B) Receipt by the Customer of definitive evidence that the Government(s) of the Russian Federation, Ukraine and/or Kazakhstan, as required, have authorized the continuation of the Dnepr Launch Program.

 

Article 5 : This Amendment may be executed and delivered (including via facsimile or other electronic means) in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement.

 

Article 6 : All other provisions of the Contract not expressly referred to in this Amendment remain in full force and effect.

 

IN WITNESS WHEREOF , the Parties have executed this Amendment by their duly authorized officers as of the date set forth in the Preamble.

 

For Customer For Contractor

 

IRIDIUM SATELLITE LLC  

INTERNATIONAL SPACE COMPANY

KOSMOTRAS

     
Signature: /s/ S. Scott Smith   Signature: /s/ Vladimir A. Andreev
         
Name: S. Scott Smith   Name: Vladimir A. Andreev
         
Title:

Executive Vice President,

Satellite Development &

Operations

  Title:

Director General

 

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Execution Copy Iridium & International Space Company Kosmotras Proprietary Information

 

3
 

 

EXHIBIT B

 

LAUNCH SCHEDULE

 

Launch Mission   Start Date of Launch Slot   Launch Date
[***]   [***]   [***]
         
[***]   [***]   [***]
         
[***]   [***]   [***]
         
[***]   [***]   [***]
         
[***]   [***]   [***]
         
[***]   [***]   [***]

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Execution Copy Iridium & International Space Company Kosmotras Proprietary Information

 

4

 

AMENDMENT NO. 2

 

TO THE

 

CONTRACT FOR LAUNCH SERVICES

 

NO. IS-11-032

 

BETWEEN

 

IRIDIUM SATELLITE LLC

 

AND

 

INTERNATIONAL SPACE COMPANY KOSMOTRAS

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Iridium & International Space Company Kosmotras Proprietary Information

 

 
 

 

PREAMBLE

 

This Amendment No. 2 (the “ Amendment ”) to the Contract for Launch Services No. IS-11-032, signed on June 14, 2011 between Iridium Satellite LLC and International Space Company Kosmotras, as amended, (the “Contract” ) is entered into on this 15 th day of April, 2013, by and between Iridium Satellite LLC, a limited liability company organized and existing under the laws of Delaware, having its office at 1750 Tysons Boulevard, Suite 1400, McLean, VA 22102 ( “Customer” ) and International Space Company Kosmotras, a Russian company, having its office at 7, Sergey Makeev St., bld. 2, Moscow 123100, Russian Federation ( “Contractor” ).

 

RECITALS

 

WHERAS , the Parties have agreed to revise the Launch Date for the first (1 st ) Launch Service;

 

WHEREAS , the Parties have agreed to revise certain dates in Exhibit C;

 

WHEREAS , the Parties have agreed to adjust the date by which Customer must exercise the remaining five (5) Optional Launches; and

 

WHEREAS , the Parties now desire to amend Section 5, Section 6, Exhibit B and Exhibit C of the Contract.

 

NOW, THEREFORE , in consideration of the foregoing, the agreements contained herein, the payments to be made by Customer to Contractor under the Contract and other good and valid consideration, the receipt and adequacy of which are hereby expressly acknowledged, and intending to be legally bound, the Parties agree as follows:

 

Article 1 : Capitalized terms used but not defined in this Amendment shall have the meanings ascribed thereto in the Contract.

 

Article 2 : Section 5.2.2 of the Contract is hereby deleted and replaced in its entirety with the following:

 

“No later than [***], Customer shall provide Contractor a written notice confirming to Contractor that up to three (3) of the remaining five (5) Optional Launches will be converted to Firm Launches to be performed in accordance with the Launch Schedule set forth in Exhibit B or the corresponding Launch Dates subject to the provisions of Article 6.”

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Iridium & International Space Company Kosmotras Proprietary Information

 

2
 

 

Article 3 : The following Section 5.2 3 is hereby incorporated.

 

“No later than [***], Customer shall provide Contractor a written notice defining the number of remaining Optional Launches to be converted to Firm Launches to be performed in accordance with the Launch Schedule set forth in Exhibit B or the corresponding Launch Dates subject to the provisions of Article 6.”

 

Article 4 : Section 6.1.1(B) of the Contract is hereby modified by (i) deleting the date “[***]” immediately before the text “and up to [***] months” in the first line and (ii) inserting the date “[***]” in place thereof.

 

Article 5 : Exhibit B, Launch Schedule, is hereby modified by (i) deleting the Launch Date “[***]” for the [***] Launch Mission and (ii) inserting the Launch Date “[***]” in place thereof.

 

Article 6 : Table C.1 of Exhibit C is hereby modified by (i) deleting the Milestone Completion Date “[***]” for the [***] Milestone and (ii) inserting the Milestone Completion Date “[***]” in place thereof.

 

Article 7 : Contractor shall provide to Customer, by [***], the [***] and/or [***] . If Contractor does not provide such [***] and/or [***] to Customer by no later than [***], Contractor shall reduce the Contract Price by the amount of [***] United States Dollars (US$[***]); such reduction to be applied to the Milestone Payments set forth in Table C.1 of Exhibit C as follows:

 

i. The Milestone Payment of [***] United States Dollars (US$[***]) for the [***] Milestone shall be deleted in its entirety;
ii. The Milestone Payment of [***] United States Dollars (US$[***]) for the [***] Milestone shall be reduced to [***] United States Dollars (US$[***]); and
iii. The Milestone Payment of [***] United States Dollars (US$[***]) for the [***] Milestone set forth in shall be deleted in its entirety.

 

Article 8 : As documented in the protocol of the management meeting between the Parties dated July 24, 2012, the Parties agree that [***] until Contractor provides to Customer the [***] and/or [***].

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Iridium & International Space Company Kosmotras Proprietary Information

 

3
 

 

Article 9 : This Amendment may be executed and delivered (including via facsimile or other electronic means) in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement.

 

Article 10 : All other provisions of the Contract not expressly referred to in this Amendment remain in full force and effect.

 

IN WITNESS WHEREOF , the Parties have executed this Amendment by their duly authorized officers as of the date set forth in the Preamble.

 

For Customer For Contractor

 

IRIDIUM SATELLITE LLC  

INTERNATIONAL SPACE COMPANY

KOSMOTRAS

     
Signature: /s/ S. Scott Smith   Signature: /s/ Alexander V. Serkin
         
Name: S. Scott Smith   Name: Alexander V. Serkin
Title: Executive Vice President,   Title: Director General
  Technology Development
& Satellite Operations
     

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Iridium & International Space Company Kosmotras Proprietary Information

 

4

 

AMENDMENT NO. 3

 

TO THE

 

CONTRACT FOR LAUNCH SERVICES

 

NO. IS-11-032

 

BETWEEN

 

IRIDIUM SATELLITE LLC

 

AND

 

INTERNATIONAL SPACE COMPANY KOSMOTRAS

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Execution Copy Iridium & International Space Company Kosmotras Proprietary Information

   

 
 

 

PREAMBLE

 

This Amendment No. 3 (the “ Amendment ”) to the Contract for Launch Services No. IS-11-032, signed on June 14, 2011 between Iridium Satellite LLC and International Space Company Kosmotras, as amended (the “Contract” ) is entered into on this 13 th day of June, 2013, by and between Iridium Satellite LLC, a limited liability company organized and existing under the laws of Delaware, having its office at 1750 Tysons Boulevard, Suite 1400, McLean, VA 22102 ( “Customer” ) and International Space Company Kosmotras, a Russian company, having its office at 7, Sergey Makeev St., bld. 2, Moscow 123100, Russian Federation ( “Contractor” ).

 

RECITALS

 

WHEREAS , Customer and Contractor entered into Amendment No. 1 to the Contract in which Customer exercised its option to convert one (1) Optional Launch to a Firm Launch subject to certain conditions;

 

WHEREAS; Customer and Contractor entered into Amendment No. 2 to the Contract under which the Contract Price could have been adjusted if Contractor did not meet certain conditions;

 

WHEREAS , Customer confirms to Contractor that Customer’s exercise of its option to convert one (1) Optional Launch to a Firm Launch is effective;

 

WHEREAS , the Parties now desire to amend Amendment No. 2 to the Contract.

 

WHEREAS , Customer has agreed to make certain Milestone Payments to Contractor; and

 

NOW, THEREFORE , in consideration of the foregoing, the agreements contained herein, the payments to be made by Customer to Contractor under the Contract and other good and valid consideration, the receipt and adequacy of which are hereby expressly acknowledged, and intending to be legally bound, the Parties agree as follows:

 

Article 1 :     Capitalized terms used but not defined in this Amendment shall have the meanings ascribed thereto in the Contract.

 

Article 2 :      Article 7 of Amendment No. 2 to the Contract is hereby deleted and replaced in its entirety with the following:

 

“Contractor shall provide to Customer [***] (the “[***]”).”

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Execution Copy Iridium & International Space Company Kosmotras Proprietary Information

   

2
 

 

Article 3 :       Article 8 of Amendment No. 2 to the Contract is hereby deleted in its entirety.

 

Article 4 :     The Parties agree that Customer will make Non-Recurring Launch Service Milestone and Launch Service Milestone payments to Contractor as follows:

 

· Non-Recurring Launch Service Milestones
  o [***]   US$[***]
  o [***]   US$   [***]
· Launch Service Milestone Payment
         
  o [***]   US$[***]
  o [***]   US $ [***]
  Total     US$[***]

 

Payment of the remaining [***] amount to Contractor shall be contingent on Customer receiving [***] from Contractor.

 

Article 5 :      This Amendment may be executed and delivered (including via facsimile or other electronic means) in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement.

 

Article 6 :       All other provisions of the Contract not expressly referred to in this Amendment remain in full force and effect.

 

IN WITNESS WHEREOF , the Parties have executed this Amendment by their duly authorized officers as of the date set forth in the Preamble.

 

For Customer   For Contractor
     
IRIDIUM SATELLITE LLC  

INTERNATIONAL SPACE COMPANY

KOSMOTRAS

     
Signature: /s/ S. Scott Smith   Signature: /s/ Alexander V. Serkin
         
Name: S. Scott Smith   Name: Alexander V. Serkin
         
Title: Executive Vice President,   Title: Director General
  Satellite Development &
Operations
     

 

*** Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

 

Execution Copy Iridium & International Space Company Kosmotras Proprietary Information

 

3

 

Exhibit 31.1

 

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002

 

I, Matthew J. Desch, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Iridium Communications Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 1, 2013 /s/ Matthew J. Desch
  Matthew J. Desch
  Chief Executive Officer
  (principal executive officer)

 

 

 

 

Exhibit 31.2

 

 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002

 

I, Thomas J. Fitzpatrick, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Iridium Communications Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: August 1, 2013 /s/ Thomas J. Fitzpatrick
  Thomas J. Fitzpatrick
  Chief Financial Officer
  (principal financial officer)

 

 

 

 

Exhibit 32.1

CERTIFICATIONS OF

PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the Chief Executive Officer and the Chief Financial Officer of Iridium Communications Inc. (the “Company”) each hereby certifies that, to the best of his knowledge:

 

1. The Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, to which this Certification is attached as Exhibit 32.1 (the “Quarterly Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2. The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Quarterly Report and results of operations of the Company for the periods covered in the financial statements in the Quarterly Report.

 

Dated: August 1, 2013

 

/s/ Matthew J. Desch   /s/ Thomas J. Fitzpatrick
Matthew J. Desch   Thomas J. Fitzpatrick
Chief Executive Officer   Chief Financial Officer

 

This certification accompanies the Quarterly Report and shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.