UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM10-Q

 

 

(Mark One)

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

For the quarterly period ended JuneSeptember 30, 2017

or

 

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

For the transition period from                    to                    

Commission file number001-35003

 

 

RigNet, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 76-0677208

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

15115 Park Row Blvd, Suite 300

Houston, Texas

 77084-4947
(Address of principal executive offices) (Zip Code)

(281) 674-0100

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    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 RegulationS-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer 
Non-accelerated filer ☐  (Do not check if a smaller reporting company)  Smaller reporting company 
   Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐    No  ☒

At JulyOctober 31, 2017, there were outstanding 18,225,24118,225,194 shares of the registrant’s Common Stock.

 

 

 


TABLE OF CONTENTS

 

  Page 
PART I – FINANCIAL INFORMATION  

Item 1

 Condensed Consolidated Financial Statements (Unaudited)   3 

Item 2

 Management’s Discussion and Analysis of Financial Condition and Results of Operations   2122 

Item 3

 Quantitative and Qualitative Disclosures about Market Risk   34 

Item 4

 Controls and Procedures   35 
PART II – OTHER INFORMATION  

Item 1

 Legal Proceedings   36 

Item 1A

 Risk Factors   36 

Item 2

 Unregistered Sales of Equity Securities and Use of Proceeds   36 

Item 3

 Defaults Upon Senior Securities   36 

Item 4

 Mine Safety Disclosures   36 

Item 5

 Other Information   36 

Item 6

 Exhibits   36 

PART I – FINANCIAL INFORMATION

Item 1.Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

  June 30, December 31, 
  2017 2016   September 30,
2017
 December 31,
2016
 
  (in thousands, except share amounts)   (in thousands, except share amounts) 
ASSETS      

Current assets:

      

Cash and cash equivalents

  $42,699  $57,152   $32,900  $57,152 

Restricted cash

   41  139    43  139 

Accounts receivable, net

   47,019  48,672    49,216  48,672 

Costs and estimated earnings in excess of billings on uncompleted contracts

   3,376  2,382    1,773  2,382 

Prepaid expenses and other current assets

   9,312  10,379    6,743  10,379 
  

 

  

 

   

 

  

 

 

Total current assets

   102,447   118,724    90,675   118,724 

Property, plant and equipment, net

   57,475  59,757    62,895  59,757 

Restricted cash

   1,500  1,514    1,500  1,514 

Goodwill

   27,300  21,998    37,122  21,998 

Intangibles, net

   20,944  16,028    32,341  16,028 

Deferred tax and other assets

   13,039  12,951    13,315  12,951 
  

 

  

 

   

 

  

 

 

TOTAL ASSETS

  $222,705  $230,972   $237,848  $230,972 
  

 

  

 

   

 

  

 

 
LIABILITIES AND EQUITY      

Current liabilities:

      

Accounts payable

  $10,878  $9,057   $12,195  $9,057 

Accrued expenses

   12,928  12,835    15,592  12,835 

Current maturities of long-term debt

   8,546  8,478    8,545  8,478 

Income taxes payable

   197  877    240  877 

Deferred revenue and other current liabilities

   8,375  3,625    9,340  3,625 
  

 

  

 

   

 

  

 

 

Total current liabilities

   40,924   34,872    45,912   34,872 

Long-term debt

   38,570  52,990    51,455  52,990 

Deferred revenue

   231  254    263  254 

Deferred tax liability

   655  256    301  256 

Other liabilities

   28,274  30,022    27,365  30,022 
  

 

  

 

   

 

  

 

 

Total liabilities

   108,654   118,394    125,296   118,394 
  

 

  

 

   

 

  

 

 

Commitments and contingencies (Note 11)

      

Equity:

      

Stockholders’ equity

      

Preferred stock - $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at June 30, 2017 or December 31, 2016

   —     —   

Common stock - $0.001 par value; 191,000,000 shares authorized; 18,225,241 and 17,932,598 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

   18  18 

Treasury stock - 5,516 and no shares at June 30, 2017 and December 31, 2016, respectively, at cost

   (116  —   

Preferred stock - $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at September 30, 2017 or December 31, 2016

   —     —   

Common stock - $0.001 par value; 191,000,000 shares authorized; 18,225,194 and 17,932,598 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

   18  18 

Treasury stock - 5,516 and no shares at September 30, 2017 and December 31, 2016, respectively, at cost

   (116  —   

Additional paid-in capital

   153,951  147,906    154,959  147,906 

Accumulated deficit

   (23,825 (17,550   (28,057 (17,550

Accumulated other comprehensive loss

   (16,205 (17,971   (14,468 (17,971
  

 

  

 

   

 

  

 

 

Total stockholders’ equity

   113,823   112,403    112,336   112,403 

Non-redeemable, non-controlling interest

   228  175 

Non-redeemable,non-controlling interest

   216  175 
  

 

  

 

   

 

  

 

 

Total equity

   114,051   112,578    112,552   112,578 
  

 

  

 

   

 

  

 

 

TOTAL LIABILITIES AND EQUITY

  $222,705  $230,972   $237,848  $230,972 
  

 

  

 

   

 

  

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

RIGNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

  Three Months Ended June 30, Six Months Ended June 30,   Three Months Ended September 30,   Nine Months Ended September 30, 
  2017 2016 2017 2016   2017   2016   2017   2016 
  (in thousands, except per share amounts)   (in thousands, except per share amounts) 

Revenue

  $49,162  $54,911  $97,234  $117,252   $50,844   $50,612   $148,078   $167,864 
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Expenses:

             

Cost of revenue (excluding depreciation and amortization)

   33,038  33,276  62,913  69,552    32,385    29,860    95,298    99,412 

Depreciation and amortization

   7,552  9,013  14,868  17,256    7,999    8,305    22,867    25,561 

Impairment of intangible assets

   —    397   —    397    —      —      —      397 

Selling and marketing

   2,132  1,943  3,568  3,835    2,400    1,724    5,968    5,559 

General and administrative

   9,878  13,576  20,390  28,917    11,011    10,476    31,401    39,393 
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total expenses

   52,600   58,205   101,739   119,957    53,795    50,365    155,534    170,322 
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Operating loss

   (3,438  (3,294  (4,505  (2,705

Operating income (loss)

   (2,951   247    (7,456   (2,458

Other income (expense):

             

Interest expense

   (613 (643 (1,232 (1,311   (689   (729   (1,921   (2,040

Other income (expense), net

   (260 315  (147 29    209    (426   62    (397
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Loss before income taxes

   (4,311 (3,622 (5,884 (3,987   (3,431   (908   (9,315   (4,895

Income tax benefit (expense)

   101  (1,234 (313 (2,136

Income tax expense

   (762   (540   (1,075   (2,676
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Net loss

   (4,210  (4,856  (6,197  (6,123   (4,193   (1,448   (10,390   (7,571

Less: Net income (loss) attributable to non-redeemable, non-controlling interest

   39  (105 78  (39

Less: Net income attributable tonon-redeemable,non-controlling interest

   39    210    117    171 
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Net loss attributable to RigNet, Inc. stockholders

  $(4,249 $(4,751 $(6,275 $(6,084  $(4,232  $(1,658  $(10,507  $(7,742
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

COMPREHENSIVE LOSS

             

Net loss

  $(4,210 $(4,856 $(6,197 $(6,123  $(4,193  $(1,448  $(10,390  $(7,571

Foreign currency translation

   905  (2,133 1,766  (1,591   1,737    (363   3,503    (1,954
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Comprehensive loss

   (3,305  (6,989  (4,431  (7,714   (2,456   (1,811   (6,887   (9,525

Less: Comprehensive income (loss) attributable to non-controlling interest

   39  (105 78  (39   39    210    117    171��
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Comprehensive loss attributable to RigNet, Inc. stockholders

  $(3,344 $(6,884 $(4,509 $(7,675  $(2,495  $(2,021  $(7,004  $(9,696
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

LOSS PER SHARE - BASIC AND DILUTED

     

LOSS PER SHARE – BASIC AND DILUTED

        

Net loss attributable to RigNet, Inc. common stockholders

  $(4,249 $(4,751 $(6,275 $(6,084  $(4,232  $(1,658  $(10,507  $(7,742
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Net loss per share attributable to RigNet, Inc. common stockholders, basic

  $(0.24 $(0.27 $(0.35 $(0.35  $(0.23  $(0.09  $(0.58  $(0.44
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Net loss per share attributable to RigNet, Inc. common stockholders, diluted

  $(0.24 $(0.27 $(0.35 $(0.35  $(0.23  $(0.09  $(0.58  $(0.44
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Weighted average shares outstanding, basic

   17,985  17,634  17,929  17,624    18,086    17,782    17,982    17,677 
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Weighted average shares outstanding, diluted

   17,985  17,634  17,929  17,624    18,086    17,782    17,982    17,677 
  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

RIGNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  Six Months Ended June 30,   Nine Months Ended September 30, 
  2017 2016   2017   2016 
  (in thousands)   (in thousands) 

Cash flows from operating activities:

       

Net loss

  $(6,197 $(6,123  $(10,390  $(7,571

Adjustments to reconcile net loss to net cash provided by operations:

       

Depreciation and amortization

   14,868  17,256    22,867    25,561 

Impairment of intangible assets

   —    397    —      397 

Stock-based compensation

   1,942  1,842    2,949    2,708 

Amortization of deferred financing costs

   151  85    192    132 

Deferred taxes

   74  (1,627   (271   (1,461

Change in fair value of earn-out/contingent consideration

   (846  —      (846   (1,279

Accretion of discount of contingent consideration payable for acquisitions

   272  234    417    378 

(Gain) loss on sales of property, plant and equipment, net of retirements

   50  (150   55    (164

Changes in operating assets and liabilities, net of effect of acquisition:

       

Accounts receivable

   1,777  13,676    (122   10,498 

Costs and estimated earnings in excess of billings on uncompleted contracts

   (894 4,670    716    4,078 

Prepaid expenses and other assets

   909  (2,727   3,714    (4,927

Accounts payable

   (24 (2,777   1,697    (475

Accrued expenses

   (1,034 (5,952   1,733    (5,741

Deferred revenue

   5,325  (1,161

Deferred revenue and other assets

   6,212    67 

Other liabilities

   (7,090 797    (8,035   553 
  

 

  

 

   

 

   

 

 

Net cash provided by operating activities

   9,283   18,440    20,888    22,754 
  

 

  

 

   

 

   

 

 

Cash flows from investing activities:

       

Acquisition of Cyphre Security Solutions and Orgtec S.A.P.I. de C.V., d.b.a. Tecnor, respectively

   (4,900 (4,841

Acquisitions

   (32,205   (4,841

Capital expenditures

   (6,522 (9,430   (13,186   (11,152

Proceeds from sales of property, plant and equipment

   247  183    274    205 

Increase (decrease) in restricted cash

   112  (1,255   110    (1,098
  

 

  

 

   

 

   

 

 

Net cash used in investing activities

   (11,063  (15,343   (45,007   (16,886
  

 

  

 

   

 

   

 

 

Cash flows from financing activities:

       

Proceeds from issuance of common stock

   683  644    684    1,606 

Subsidiary distributions to non-controlling interest

   (25 (123   (76   (197

Proceeds from borrowings

   15,000    —   

Repayments of long-term debt

   (14,503 (4,280   (16,660   (9,420

Payment of financing fees

   —    (100   —      (100
  

 

  

 

   

 

   

 

 

Net cash used in financing activities

   (13,845  (3,859   (1,052   (8,111
  

 

  

 

   

 

   

 

 

Net decrease in cash and cash equivalents

   (15,625  (762

Net change in cash and cash equivalents

   (25,171   (2,243
  

 

  

 

   

 

   

 

 

Cash and cash equivalents:

       

Balance, January 1,

   57,152  60,468    57,152    60,468 

Changes in foreign currency translation

   1,172  (250   919    (986
  

 

  

 

   

 

   

 

 

Balance, June 30,

  $42,699  $59,456 

Balance, September 30,

  $32,900   $57,239 
  

 

  

 

   

 

   

 

 

Supplemental disclosures:

       

Income taxes paid

  $1,103  $4,910   $1,515   $5,890 

Interest paid

  $873  $991   $1,362   $1,527 

Property, plant and equipment acquired under capital leases

  $—     $335 

Non-cash investing - capital expenditures accrued

  $3,595  $969   $2,785   $653 

Non-cash investing - tenant improvement allowance

  $1,728  $—     $1,728   $—   

Non-cash investing - contingent consideration for acquisitions

  $3,798  $6,425   $3,798   $5,553 

Non-cash investing and financing - stock for Cyphre Security Solutions

  $3,304  $—     $3,304   $—   

Liabilities assumed in acquisitions

  $100  $2,408   $674   $2,408 

The accompanying notes are an integral part of the condensed consolidated financial statements.

RIGNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

     Additional
Paid-In
Capital
  Accumulated
Deficit
  Accumulated
Other
Comprehensive
Loss
  Total
Stockholders’
Equity
  Non-Redeemable,
Non-Controlling
Interest
  Total
Equity
 
 Common
Stock
 Treasury Stock Additional
Paid-In
 Accumulated Accumulated
Other
Comprehensive
 Total
Stockholders’
 Non-Redeemable,
Non-Controlling
    Common Stock Treasury Stock 
 Shares Amount Shares Amount Capital Deficit Loss Equity Interest Total Equity  Shares Amount Shares Amount 
 (in thousands)  (in thousands) 

Balance, January 1, 2016

  17,758  $18   —    $—    $143,012  $(6,043 $(13,836 $123,151  $162  $123,313   17,758  $18   —    $—    $143,012  $(6,043 $(13,836 $123,151  $162  $123,313 

Issuance of common stock upon the exercise of stock options

 81   —     —     —    644   —     —    644   —    644  213   —     —     —    1,606   —     —     1,606   —     1,606 

Restricted common stock cancellations

 (33  —     —     —     —     —     —     —     —     —    (44  —     —     —     —     —     —     —     —     —   

Stock-based compensation

  —     —     —     —    1,842   —     —    1,842   —    1,842   —     —     —     —    2,708   —     —     2,708   —     2,708 

Foreign currency translation

  —     —     —     —     —     —    (1,591 (1,591  —    (1,591  —     —     —     —     —     —    (1,954  (1,954  —     (1,954

Non-controlling owner distributions

  —     —     —     —     —     —     —     —    (123 (123  —     —     —     —     —     —     —     —    (197  (197

Net income (loss)

  —     —     —     —     —    (6,084  —    (6,084 (39 (6,123  —     —     —     —     —    (7,742  —     (7,742 171   (7,571
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance, June 30, 2016

  17,806  $18   —    $—    $145,498  $(12,127 $(15,427 $117,962  $—    $117,962 

Balance, September 30, 2016

  17,927  $18   —    $—    $147,326  $(13,785 $(15,790 $117,769  $136  $117,905 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance, January 1, 2017

  17,933  $18   —    $—    $147,906  $(17,550 $(17,971 $112,403  $175  $112,578   17,933  $18   —    $—    $147,906  $(17,550 $(17,971 $112,403  $175  $112,578 

Issuance of common stock upon the exercise of stock options

 57   —     —     —    799   —     —    799   —    799  58   —     —     —    800   —     —     800   —     800 

Issuance of common stock upon the vesting of Restricted Stock Units, net of share cancellations

 49   —     —     —     —     —     —     —     —     —    48   —     —     —     —     —     —     —     —     —   

Issuance of common stock upon the acquisition of Cyphre

 192   —     —     —    3,304   —     —    3,304   —    3,304  192   —     —     —    3,304   —     —     3,304   —     3,304 

Stock witheld to cover employee taxes on stock-based compensation

 (6  —    6  (116  —     —     —    (116  —    (116 (6  —    6  (116  —     —     —     (116  —     (116

Stock-based compensation

  —     —     —     —    1,942   —     —    1,942   —    1,942   —     —     —     —    2,949   —     —     2,949   —     2,949 

Foreign currency translation

  —     —     —     —     —     —    1,766  1,766   —    1,766   —     —     —     —     —     —    3,503   3,503   —     3,503 

Non-controlling owner distributions

  —     —     —     —     —     —     —     —    (25 (25  —     —     —     —     —     —     —     —    (76  (76

Net income (loss)

  —     —     —     —     —    (6,275  —    (6,275 78  (6,197  —     —     —     —     —    (10,507  —     (10,507 117   (10,390
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Balance, June 30, 2017

  18,225  $18   6  $(116 $153,951  $(23,825 $(16,205 $113,823  $228  $114,051 

Balance, September 30, 2017

  18,225  $18   6  $(116 $154,959  $(28,057 $(14,468 $112,336  $216  $112,552 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Basis of Presentation

The interim unaudited condensed consolidated financial statements of RigNet, Inc. (the Company or RigNet) include all adjustments which, in the opinion of management, are necessary for a fair presentation of the Company’s financial position and results of operations. All such adjustments are of a normal recurring nature. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and Rule10-01 of RegulationS-X. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying footnotes. Estimates and assumptions about future events and their effects cannot be perceived with certainty. Estimates may change as new events occur, as more experience is acquired, as additional information becomes available and as the Company’s operating environment changes. Actual results could differ from estimates. These interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2016 included in the Company’s Annual Report on Form10-K filed with the Securities and Exchange Commission on March 6, 2017.

Significant Accounting Policies

Please refer to RigNet’s Annual Report on Form10-K for fiscal year 2016 for information regarding the Company’s accounting policies.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards UpdateNo. 2014-09 (ASU2014-09), Revenue from Contracts with Customers (Topic 606). The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards UpdateNo. 2015-14 (ASU2015-14), Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. In March 2016, the FASB issued Accounting Standards UpdateNo. 2016-08 (ASU2016-08), Revenue from Contracts with Customers: Principal versus Agent Considerations. The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April and May of 2016, the FASB issued Accounting Standards UpdateNo. 2016-10 (ASU2016-10) and Accounting Standards UpdateNo. 2016-12 (ASU2016-12), Revenue from Contracts with Customers (Topic 606), respectively, that provide scope amendments, performance obligations clarification and practical expedients. These ASUs allow for the use of either the full or modified retrospective transition method and are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company will adopt this ASU on January 1, 2018. The Company’s evaluation of this ASU included a detailed review of representative contracts from each segment and comparing historical accounting policies and practices to the new standard. The Company does not expect the adoption of this ASU to have a material impact on its condensed consolidated financial statements.

In February 2016, the FASB issued Accounting Standards UpdateNo. 2016-02 (ASU2016-02), Leases. This ASU is effective for annual reporting periods beginning after December 15, 2018. This ASU introduces a new lessee model that generally brings leases on the balance sheet. The Company is currently in the process of evaluating the impact the adoption of this ASU will have on the Company’s condensed consolidated financial statements.

In March 2016, the FASB issued Accounting Standards UpdateNo. 2016-09 (ASU2016-09), Share Based Compensation. The new ASU simplifies several aspects of share based compensation including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company adopted ASU2016-09 in the second quarter of 2016 and has applied the guidance as of January 1, 2016. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

In August 2016, the FASB issued Accounting Standards UpdateNo. 2016-15 (ASU2016-15), Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The new ASU reduces diversity of practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics, including the treatment of contingent consideration payments made after a business combination. The ASU is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently in the process of evaluating the impact the adoption of this ASU will have on the Company’s condensed consolidated financial statements.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In November 2016, the FASB issued Accounting Standards UpdateNo. 2016-18 (ASU2016-18), which includes restricted cash in the cash and cash equivalents balance in the statement of cash flows. The ASU is effective for annual and interim reporting periods beginning after December 15, 2017. The Company is currently in the process of evaluating the impact the adoption of this ASU will have on the Company’s consolidated financial statements.

Note 2 – Business Combinations

Energy Satellite Services

On July 28, 2017, RigNet acquired substantially all the assets of Energy Satellite Services (ESS). ESS is a supplier of wireless communications services via satellite networks primarily to the midstream sector of the oil and gas industry. The assets acquired enhance RigNet’s product offering, add to the Company’s existing midstream Supervisory Control and Data Acquisition (SCADA) customer portfolio, and strengthen the Company’s US land andInternet-of-Things (IoT) market position. The Company has paid approximately $22.2 million in cash for the ESS assets. ESS is based in Texas.

ForThe assets and liabilities of ESS have been recorded at their estimated fair values at the six months ended June 30, 2017, RigNet incurred $0.2date of acquisition. The excess of the purchase price over the estimated fair values of the underlying net tangible and identifiable intangible assets and liabilities has been recorded as goodwill.

The goodwill of $8.6 million arising from the acquisition consists largely of acquisition-related costs, which are reportedgrowth prospects, synergies and other benefits that the Company believes will result from combining the operations of the Company and ESS, as general and administrative expensewell as other intangible assets that do not qualify for separate recognition, such as assembled workforce in place at the date of acquisition. The goodwill recognized is expected to be deductible for income tax purposes. The acquisition of ESS, including goodwill, is included in the Company’s Condensed Consolidated Statements of Comprehensive Loss. Additional costs related to this acquisition will be incurred and recorded as expense during the remainder of 2017.

Due to the limited time since the acquisition date, the initial purchase accounting for the business combination is incomplete at this time. As a result, the Company is unable to provide amounts recognizedcondensed consolidated financial statements as of the acquisition date for major classes of assets and liabilities acquired and resulting from the transaction, including any intangible assets or goodwill. The Company is also unable to provide supplemental pro forma revenue and earnings of the combined entity. This information will be includedreflected in the Company’s Quarterly Report on Form 10-Q for the threeApplications and nine months ended September 30, 2017.Internet-of-Things segment.

   Weighted Average
Estimated Useful
Life (Years)
   Fair Market Values 
       (in thousands) 

Accounts Receivable

      $168 

Property and equipment

       1,000 

Covenant Not to Compete

   5    3,040   

Customer Relationships

   7    9,870   
    

 

 

   

Total identifiable intangible assets

       12,910 

Goodwill

       8,613 

Accounts Payable

       (491
      

 

 

 

Total purchase price

      $22,200 
      

 

 

 

Data Technology Solutions Acquisition

On July 24, 2017, RigNet acquired substantially all the assets of Data Technology Solutions (DTS). DTS provides comprehensive communications and IT services to the onshore, offshore, and maritime industries, as well as disaster relief solutions to global corporate clients. The Company has paid approximately $5.2$5.1 million in cash for the DTS assets. DTS is based in Louisiana.

ForThe assets and liabilities of DTS have been recorded at their estimated fair values at the six months ended June 30, 2017, RigNet incurred $0.1date of acquisition. The excess of the purchase price over the estimated fair values of the underlying net tangible and identifiable intangible assets and liabilities has been recorded as goodwill.

The goodwill of $0.6 million arising from the acquisition consists largely of acquisition-related costs, which are reportedgrowth prospects, synergies and other benefits that the Company believes will result from combining the operations of the Company and DTS, as general and administrative expensewell as other intangible assets that do not qualify for separate recognition, such as assembled workforce in place at the date of acquisition. The goodwill recognized is expected to be deductible for income tax purposes. The acquisition of DTS, including goodwill, is included in the Company’s Condensed Consolidated Statements of Comprehensive Loss. Additional costs related to this acquisition will be incurred and recorded as expense during the remainder of 2017.

Due to the limited time since the acquisition date, the initial purchase accounting for the business combination is incomplete at this time. As a result, the Company is unable to provide amounts recognizedcondensed consolidated financial statements as of the acquisition date for major classes of assets and liabilities acquired and resulting from the transaction, including any intangible assets or goodwill. The Company is also unable to provide supplemental pro forma revenue and earnings of the combined entity. This information will be includedreflected in the Company’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017.Managed Services segment.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   Weighted Average
Estimated Useful
Life (Years)
   Fair Market Values 
       (in thousands) 

Property and equipment

      $4,553 

Goodwill

       635 

Accounts Payable

       (83
      

 

 

 

Total purchase price

      $5,105 
      

 

 

 

Cyphre Security Solutions

On May 18, 2017, RigNet completed its acquisition of Cyphre Security Solutions (Cyphre) for an estimated aggregate purchase price of $12.0 million. Of this aggregate purchase price, RigNet paid $4.9 million in cash in May 2017, $3.3 million in stock and expects to pay $3.8 million of contingent consideration for intellectual property, estimated as of the date of acquisition. The initial estimate of the contingent consideration for intellectual property is preliminary and remains subject to change based on certain post-closing contractual options under the acquisition agreement. Cyphre is a cybersecurity company that provides advanced enterprise data protection leveraging BlackTIE® hardware-based encryption featuring low latency protection for files at rest and in transit for both public and private cloud. Cyphre is based in Texas.

The contingent consideration for Cyphre is measured at fair value, based on level 3 inputs, with any change to fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss in each reporting period. As of JuneSeptember 30, 2017, the fair value of the contingent consideration was $3.8$3.9 million. During the three and sixnine months ended JuneSeptember 30, 2017, RigNet recognized accreted interest expense on the Cyphre contingent consideration of $0.1 million with corresponding increases to other liabilities.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The assets and liabilities of Cyphre have been recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair values of the underlying net tangible and identifiable intangible assets and liabilities has been recorded as goodwill.

The goodwill of $4.6 million arising from the acquisition consists largely of growth prospects, synergies and other benefits that the Company believes will result from combining the operations of the Company and Cyphre, as well as other intangible assets that do not qualify for separate recognition, such as assembled workforce in place at the date of acquisition. The goodwill recognized is expected to be deductible for income tax purposes. The acquisition of Cyphre, including goodwill, is included in the Company’s condensed consolidated financial statements as of the acquisition date and is reflected in the Managed ServicesApplications andInternet-of-Things segment.

 

  Weighted Average
Estimated Useful
Life (Years)
   Fair Market Values   Weighted Average
Estimated Useful
Life (Years)
   Fair Market Values 
      (in thousands)       (in thousands) 

Property and equipment

      $18       $18 

Trade Name

   7    1,590      7    1,590   

Technology

   7    5,571      7    5,571   

Customer Relationships

   7    332      7    332   
    

 

       

 

   

Total identifiable intangible assets

       7,493        7,493 

Goodwill

       4,591        4,591 

Accrued Expenses

       (100       (100
      

 

       

 

 

Total purchase price

      $12,002 (a)       $12,002 (a) 
      

 

       

 

 

 

(a)Includes a $3.8 million in contingent consideration estimated as of the date of acquisition.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Actual and Pro Forma Impact of the 2017 Acquisitions

The 2017 acquisitions of ESS, DTS and Cyphre contributed $2.4 million of revenue for the three and nine months ended September 30, 2017. The 2017 acquisitions contributed $0.6 million and $0.3 million to net income for the three and nine months ended September 30, 2017, respectively.

The following table represents supplemental pro forma information as if the 2017 acquisitions had occurred on January 1, 2016.

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2017   2016   2017   2016 
   (in thousands, except per share amounts) 

Revenue

  $52,150   $54,722   $158,085   $180,602 

Expenses

   55,993    54,552    165,484    183,575 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $(3,843  $170   $(7,399  $(2,973
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to RigNet, Inc. common stockholders

  $(3,882  $(40  $(7,516  $(3,144
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to RigNet, Inc. common stockholders:

        

Basic

  $(0.21  $(0.00  $(0.42  $(0.18
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $(0.21  $(0.00  $(0.42  $(0.18
  

 

 

   

 

 

   

 

 

   

 

 

 

For the sixthree and nine months ended JuneSeptember 30, 2017, RigNet incurred $0.4$0.8 million and $2.7 million, respectively, of acquisition-related costs, which are reported as general and administrative expense in the Company’s Condensed Consolidated Statements of Comprehensive Loss.

Actual Additional costs related to these acquisitions will be incurred and Pro Forma Impactrecorded as expense during the remainder of the Cyphre Acquisition

Cyphre’s revenue and net loss were zero and $0.3 million, respectively, for the three and six months ended June 30, 2017.

The Pro forma impact of the Cyphre acquisition was immaterial.

TECNOR

On February 4, 2016, RigNet completed its acquisition of Orgtec S.A.P.I. de C.V., d.b.a. TECNOR (TECNOR) for an estimated aggregate purchase price of $11.4 million. Of this aggregate purchase price, RigNet paid $4.8 million in cash in February 2016, paid $0.1 million for final net working capital and expected to pay a $6.5 million contingent considerationearn-out, estimated as of the date of acquisition. The initial estimate of theearn-out payable was preliminary and remains subject to change based on the achievement of certain post-closing performance targets under the acquisition agreement. The maximumearn-out is $21.3 million. TECNOR provides telecommunications solutions for remote sites on land, sea and air, including a wide array of equipment, voice and data services, satellite coverage and bandwidth options in Mexico. These services are provided to industrial, commercial and private users in diverse activity segments including mission critical military and government applications, oil and gas operations, commercial fishing and leisure. TECNOR is based in Monterrey, Mexico.

The assets and liabilities of TECNOR have been recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the estimated fair values of the underlying net tangible and identifiable intangible assets and liabilities has been recorded as goodwill.

Theearn-out for TECNOR is measured at fair value, based on level 3 inputs, with any change to fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss in each reporting period. As of JuneSeptember 30, 2017, the fair value of theearn-out was $5.1$5.2 million. There was a $0.8 million reduction in fair value to the TECNORearn-out for the three and sixnine months ended JuneSeptember 30, 2017 recorded as a reduction of other current liabilities and a decrease to general and administrative expense in the Corporate segment. The change in fair value was due to a forecast of TECNOR’s future achievement of the post-closing performance targets. During the three and sixnine months ended JuneSeptember 30, 2017, RigNet recognized accreted interest expense on the TECNORearn-out liability of $0.1 million and $0.2$0.4 million, respectively, with corresponding increases to other current liabilities. Theearn-out is payable in 2018.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The goodwill of $6.5 million arising from the acquisition consists largely of growth prospects, synergies and other benefits that the Company believes will result from combining the operations of the Company and TECNOR, as well as other intangible assets that do not qualify for separate recognition, such as assembled workforce in place at the date of acquisition. None of the goodwill recognized is expected to be deductible for income tax purposes. The acquisition of TECNOR, including goodwill, is included in the Company’s condensed consolidated financial statements as of the acquisition date and is reflected in the Managed Services segment.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   Weighted Average
Estimated Useful
Life (Years)
   Fair Market Values 
   (in thousands) 

Accounts Receivable

      $2,672 

Other assets

       1,280 

Property and equipment

       809 

Backlog

   2    366   

Customer Relationships

   7    2,210   
    

 

 

   

Total identifiable intangible assets

       2,576 

Goodwill

       6,465 

Accounts Payable

       (1,914

Accrued Expenses

       (494
      

 

 

 

Total purchase price

      $11,394 (a) 
      

 

 

 

   Weighted Average
Estimated Useful
Life (Years)
   Fair Market Values 
       (in thousands) 

Accounts Receivable

      $2,672 

Other assets

       1,280 

Property and equipment

       809 

Backlog

   2    366   

Customer Relationships

   7    2,210   
    

 

 

   

Total identifiable intangible assets

       2,576 

Goodwill

       6,465 

Accounts Payable

       (1,914

Accrued Expenses

       (494
      

 

 

 

Total purchase price

      $11,394 (a) 
      

 

 

 

 

(a)Includes a $6.5 million contingent considerationearn-out, estimated as of the date of acquisition.

For the three and sixnine months ended JuneSeptember 30, 2016, RigNet incurred $0.1 million and $0.2 million respectively, of acquisition-related costs, which are reported as general and administrative expense in the Company’s Condensed Consolidated Statements of Comprehensive Loss.

Actual and Pro Forma Impact of the TECNOR Acquisition

TECNOR’s revenue and net incomeloss were $3.0$2.0 million and $0.2$0.7 million, respectively, for the three months ended JuneSeptember 30, 2016. TECNOR’s revenue and net incomeloss were $5.1$7.1 million and $0.6$0.1 million, respectively, for the sixnine months ended JuneSeptember 30, 2016.

The following table represents supplemental pro forma information as if the TECNOR acquisition had occurred on January 1, 2016. Pro forma adjustments include:

 

Adjusting interest expense to remove interest on a debt instrument previously held by TECNOR; and

 

Removing nonrecurring transaction costs incurred in 2016 prior to acquisition.

   

Nine Months Ended

September 30,

 
   2016 
   

(in thousands, except per

share amounts)

 

Revenue

  $168,899 

Expenses

   176,267 
  

 

 

 

Net loss

  $(7,368
  

 

 

 

Net loss attributable to RigNet, Inc. common stockholders

  $(7,539
  

 

 

 

Net loss per share attributable to RigNet, Inc. common stockholders:

  

Basic

  $(0.43
  

 

 

 

Diluted

  $(0.43
  

 

 

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   Six Months Ended
June 30,
 
   2016 
   (in thousands) 

Revenue

  $118,287 

Expenses

   124,207 
  

 

 

 

Net loss

  $(5,920
  

 

 

 

Net loss attributable to
RigNet, Inc. common stockholders

  $(5,881
  

 

 

 

Net loss per share attributable to
RigNet, Inc. common stockholders:

  

Basic

  $(0.33
  

 

 

 

Diluted

  $(0.33
  

 

 

 

Note 3 – Business and Credit Concentrations

The Company is exposed to various business and credit risks including interest rate, foreign currency, credit and liquidity risks.

Interest Rate Risk

The Company has significant interest-bearing liabilities at variable interest rates which generally price monthly. The Company’s variable borrowing rates are tied to LIBOR resulting in interest rate risk (see Note 6 – Long-Term Debt). The Company presently does not use financial instruments to hedge interest rate risk, but evaluates this on a regular basis and may utilize financial instruments in the future if deemed necessary.

Foreign Currency Risk

The Company has exposure to foreign currency risk, as a portion of the Company’s activities are conducted in currencies other than U.S. dollars. Currently, the Norwegian kroner and the British pound sterling are the currencies that could materially impact the Company’s financial position and results of operations. The Company presently does not hedge these risks, but evaluates financial risk on a regular basis and may utilize financial instruments in the future if deemed necessary. Foreign currency translations are reported as accumulated other comprehensive loss in the Company’s condensed consolidated financial statements.

Credit Risk

Credit risk, with respect to accounts receivable, is due to the limited number of customers concentrated in the oil and gas industry. The Company mitigates the risk of financial loss from defaults through defined collection terms in each contract or service agreement and periodic evaluations of the collectability of accounts receivable. The Company provides an allowance for doubtful accounts which is adjusted when the Company becomes aware of a specific customer’s inability to meet its financial obligations or as a result of changes in the overall aging of accounts receivable.

Liquidity Risk

The Company maintains cash and cash equivalent balances with major financial institutions which, at times, exceed federally insured limits. The Company monitors the financial condition of the financial institutions and has not experienced losses associated with these accounts during 2017 or 2016. Liquidity risk is managed by continuously monitoring forecasted and actual cash flows and by matching the maturity profiles of financial assets and liabilities (see Note 6 – Long-Term Debt).

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4 – Goodwill and Intangibles

Goodwill

Goodwill resulted from prior acquisitions as the consideration paid for the acquired businesses exceeded the fair value of acquired identifiable net tangible and intangible assets. Goodwill is reviewed for impairment at least annually with additional evaluations being performed when events or circumstances indicate that the carrying value of these assets may not be recoverable.

Due to the change in segments (see Note 12 – Segment Information) and reporting units during the third quarter of 2017, the Companyre-allocated goodwill to each reporting unit based on relative fair value.

The Company acquired $8.6 million of goodwill in the ESS acquisition completed on July 28, 2017 (see Note 2 – Business Combinations).

The Company acquired $0.6 million of goodwill in the DTS acquisition completed on July 24, 2017 (see Note 2 – Business Combinations).

The Company acquired $4.6 million of goodwill in the Cyphre acquisition completed on May 18, 2017 (see Note 2 – Business Combinations).

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company acquired $6.5 million of goodwill in the TECNOR acquisition completed on February 4, 2016 (see Note 2 – Business Combinations).

The Company performs its annual impairment test on July 31stof each year, with the most recent annual test being performed as of July 31, 2016.2017. The July 20162017 annual test resulted in no impairment as the fair value of each reporting unit exceeded the carrying value plus goodwill of that reporting unit. No impairment indicators have been identified in any reporting unit as of JuneSeptember 30, 2017 and December 31, 2016.

As of JuneSeptember 30, 2017 and December 31, 2016, goodwill was $27.3$37.1 million and $22.0 million, respectively. Goodwill increases or decreases in value due to the effect of foreign currency translation, and increases with acquisitions.

Intangibles

Intangibles consist of customer relationships,non-competes, brand name, technology, backlog and licenses acquired as part of the Company’s acquisitions. Intangibles also includeinternal-use software. The Company’s intangibles have useful lives ranging from 1.7 to 7.0 years and are amortized on a straight-line basis. Impairment testing is performed when events or circumstances indicate that the carrying value of the assets may not be recoverable.

In June 2016, the Company identified a triggering event for a license in Kazakhstan associated with a decline in cash flow projections. In June 2016, the Company conducted an intangibles impairment test and as a result of such test, recognized a $0.4 million impairment of licenses in the Corporate segment, which was the full amount of the Company’s intangibles within Kazakhstan.

No impairment indicators have been identified in any reporting unit as of JuneSeptember 30, 2017.

As of JuneSeptember 30, 2017 and December 31, 2016, intangibles were $20.9$32.3 million and $16.0 million, respectively. During the three months ended JuneSeptember 30, 2017 and 2016, the Company recognized amortization expense of $1.5$1.9 million and $1.3 million, respectively. During the sixnine months ended JuneSeptember 30, 2017 and 2016, the Company recognized amortization expense of $2.8$4.7 million and $2.6$3.9 million, respectively.

The following table sets forth expected amortization expense of intangibles for the remainder of 2017 and the following years (in thousands):

 

2017

   2,630    1,833 

2018

   4,984    7,047 

2019

   3,974    5,988 

2020

   3,065    5,021 

2021

   2,772    4,679 

Thereafter

   3,519    7,773 
  

 

   

 

 
  $20,944   $32,341 
  

 

   

 

 

Note 5 – Restricted Cash

As of JuneSeptember 30, 2017, the Company had restricted cash of $0.1 million and $1.5 million, in current and long-term assets, respectively. As of December 31, 2016, the Company had restricted cash of $0.1 million and $1.5 million, in current and long-term assets, respectively. The restricted cash in long-term assets was primarily used to collateralize a performance bond in the Managed

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Services segment (see Note 6 – Long-Term Debt). The restricted cash in current assets as of December 31, 2016 was an escrowed portion of the purchase price for the acquisition of TECNOR.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 6 – Long-Term Debt

As of JuneSeptember 30, 2017 and December 31, 2016, the following credit facilities and long-term debt arrangements with financial institutions were in place:

 

  June 30,   December 31,   September 30,   December 31, 
  2017   2016   2017   2016 
  (in thousands)   (in thousands) 

Term loan, net of unamortized deferred financing costs

  $29,859   $34,053   $27,757   $34,053 

Revolving loan

   17,000    27,000    32,000    27,000 

Capital lease

   257    415    243    415 
  

 

   

 

   

 

   

 

 
   47,116    61,468    60,000    61,468 

Less: Current maturities of long-term debt

   (8,412   (8,399   (8,418   (8,399

Current maturities of capital lease

   (134   (79   (127   (79
  

 

   

 

   

 

   

 

 
  $38,570   $52,990   $51,455   $52,990 
  

 

   

 

   

 

   

 

 

Term Loan

TheAs of September 30, 2017, the Company has a term loan (Term Loan) issued under the second amended and restated credit agreement with four participating financial institutions (credit agreement). On October 3, 2013, the Company amended its Term Loan, which increased the principal balance to $60.0 million from $54.6 million and extended the maturity of the loan from July 2017 to October 2018.

The amended Term Loan bears an interest rate of LIBOR plus a margin ranging from 1.5% to 2.5% based on a ratio of funded debt to Consolidated EBITDA, anon-GAAP financial measure as defined in the credit agreement. Interest is payable monthly along with quarterly principal installments of $2.1 million, with the balance due October 2018. The weighted average interest rate for the three months ended JuneSeptember 30, 2017 and 2016 was 3.2% and 2.5%, respectively. The weighted average interest rate for the nine months ended September 30, 2017 and 2016 was 3.1% and 2.4%, respectively. The weighted average interest rate for the six months ended June 30, 2017 and 2016 was 3.1% and 2.3%, respectively, with an interest rate of 3.2% at JuneSeptember 30, 2017.

The Term Loan is secured by substantially all the assets of the Company. As of JuneSeptember 30, 2017, the Term Loan had an outstanding principal balance of $30.0$27.9 million.

Revolving Loans

UnderAs of September 30, 2017, under the credit agreement, the Company maintains a $75.0 million revolving credit facility, which includes a $15 million sublimit for the issuance of standby letters of credit. As of JuneSeptember 30, 2017, $17.0$32.0 million in draws remain outstanding on the revolving credit facility. The revolving credit facility matures in October 2018 with any outstanding borrowings then payable. As of JuneSeptember 30, 2017, there were $6.3 million in standby letters of credit issued.

The revolving loan bears an interest rate of LIBOR plus a margin ranging from 1.5% to 2.5% based on a ratio of funded debt to Consolidated EBITDA, anon-GAAP financial measure as defined in the credit agreement. The weighted average interest rate for the three months ended JuneSeptember 30, 2017 and 2016 was 3.1%3.2% and 2.3%2.5%, respectively. The weighted average interest rate for the sixnine months ended JuneSeptember 30, 2017 and 2016 was 3.1% and 2.3%2.4%, respectively, with an interest rate of 3.2% at JuneSeptember 30, 2017.

Performance Bonds

On September 14, 2012, NesscoInvsat Limited, a subsidiary of RigNet, secured a performance bond facility with a lender in the amount of £4.0 million, or $5.2$5.4 million. This facility has a maturity date of October 3, 2018. As of JuneSeptember 30, 2017, the amount available under this facility was £2.0£2.1 million or $2.6$2.9 million. As of JuneSeptember 30, 2017, there were $5.6 million in standby letters of credit issued to collateralize this performance bond facility.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In June 2016, the Company secured a performance bond facility with a lender in the amount of $1.5 million for its Managed Services segment. This facility has a maturity date of June 2021. The Company maintains restricted cash on a dollar for dollar basis to secure this facility.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Covenants and Restrictions

The Company’s credit agreement contains certain covenants and restrictions, including restricting the payment of cash dividends and maintaining certain financial covenants such as a ratio of funded debt to Consolidated EBITDA, anon-GAAP financial measure as defined in the credit agreement, of less than or equal to 2.5 to 1.0 and a fixed charge coverage ratio of not less than 1.25 to 1.0 as of JuneSeptember 30, 2017. If any default occurs related to these covenants, the unpaid principal and any accrued interest shall be declared immediately due and payable. As of JuneSeptember 30, 2017, and December 31, 2016, the Company believes it was in compliance with all covenants in the credit agreement.

In February 2016, the Company amended its credit agreement with the most significant changes being the definition of Consolidated EBITDA, the calculation of the fixed charge coverage ratio and the timing associated with delivery of financial statements and compliance certificates to the administrative agent.

In December 2016, the Company further amended its credit agreement with the most significant changes being voluntarily reducing the revolving credit facility from $125 million to $75 million and changing the definition of Consolidated EBITDA and certain other definitions contained in the credit agreement.

Debt Maturities

The following table sets forth the aggregate principal maturities of long-term debt, net of deferred financing cost amortization for the remainder of 2017 and the following years (in thousands):

 

2017

   4,269    2,154 

2018

   42,771    57,770 

2019

   76    76 
  

 

   

 

 

Total debt, including current maturities

  $47,116   $60,000 
  

 

   

 

 

New Credit Facilities

On November 6, 2017, the Company entered into its third amended and restated credit agreement with four participating financial institutions. The credit agreement provides for a $15.0 million term loan facility and an $85.0 million revolving credit facility and matures on November 6, 2020.

Under the credit agreement, both the term loan facility and the revolving credit facility bear interest at a rate of LIBOR plus a margin ranging from 1.75% to 2.75% based on a consolidated leverage ratio defined in the credit agreement. Interest is payable monthly and principal installments of $1.25 million under the term loan facility are due quarterly beginning March 31, 2018. The credit agreement incorporates two financial covenants, including a consolidated leverage ratio and a consolidated fixed charge coverage ratio. The revolving credit facility contains asub-limit of up to $25.0 million for commercial andstand-by letters of credit.

The facilities under the credit agreement are secured by substantially all the assets of the Company.

Note 7 – Fair Value Disclosures

The Company uses the following methods and assumptions to estimate the fair value of financial instruments:

 

  Cash and Cash Equivalents— Reported amounts approximate fair value based on quoted market prices (Level 1).

 

  Restricted Cash— Reported amounts approximate fair value.

 

  Accounts Receivable— Reported amounts, net of the allowance for doubtful accounts, approximate fair value due to the short-term nature of these assets.

 

  Accounts Payable, Including Income Taxes Payable and Accrued Expenses— Reported amounts approximate fair value due to the short-term nature of these liabilities.

 

  Long-Term Debt— The carrying amount of the Company’s floating-rate debt approximates fair value since the interest rates paid are based on short-term maturities and recent quoted rates from financial institutions. The estimated fair value of debt was calculated based upon observable (Level 2) inputs regarding interest rates available to the Company at the end of each respective period.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’snon-financial assets, such as goodwill, intangibles and property, plant and equipment, are measured at fair value, based on level 3 inputs, when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.

The contingent consideration for Cyphre is measured at fair value, based on level 3 inputs, with any change to fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss in each reporting period. As of JuneSeptember 30, 2017, the fair value of the contingent consideration was $3.8$3.9 million. During the three and sixnine months ended JuneSeptember 30, 2017, RigNet recognized accreted interest expense on the Cyphre contingent consideration of $0.1 million with corresponding increases to other liabilities.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Theearn-out for TECNOR is measured at fair value, based on level 3 inputs, with any change to fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss in each reporting period. As of JuneSeptember 30, 2017, the fair value of theearn-out was $5.1$5.2 million. As of December 31, 2016, the fair value of theearn-out was $5.7 million. There was a $0.8 million reduction in fair value to the TECNORearn-out for the three and sixnine months ended JuneSeptember 30, 2017 recorded as a reduction of other current liabilities and a decrease to general and administrative expense in the Corporate segment. The change in fair value was due to a forecast of TECNOR’s future achievement of the post-closing performance targets. During the three and sixnine months ended JuneSeptember 30, 2017, RigNet recognized accreted interest expense on the TECNORearn-out liability of $0.1 million and $0.2$0.4 million, respectively, with corresponding increases to other liabilities. (see Note 2 – Business Combinations).

Note 8 – Income Taxes

The Company’s effective income tax rate was 2.3%(22.2%) and (5.3%(11.5%) for the three and sixnine months ended JuneSeptember 30, 2017, respectively. The Company’s effective income tax rate was (34.1%(59.5%) and (53.6%(54.7%) for the three and sixnine months ended JuneSeptember 30, 2016, respectively. The Company’s effective tax rate is affected by factors including changes in valuation allowances, fluctuations in income across jurisdictions with varying tax rates, and changes in income tax reserves, including related penalties and interest.

The Company has computed the provision for taxes for the current and comparative periods using the actualyear-to-date effective tax rate. The Company’s financial projections for those periods did not provide the level of detail necessary to calculate a forecasted effective tax rate.

The Company believes that it is reasonably possible that a decrease of up to $3.1$3.2 million in unrecognized tax benefits, including related interest and penalties, may be necessary within the coming year due to lapse in statute of limitations.

Note 9 – Stock-Based Compensation

During the sixnine months ended JuneSeptember 30, 2017, the Company granted a total of 226,974 restricted stock units (RSUs) to certain directors, officers and employees of the Company under the 2010 Omnibus Incentive Plan (2010 Plan). Of these, the Company granted (i) 125,852 RSUs to certain officers and employees that generally vest over a four year period of continued employment, with 25% of the RSUs vesting on each of the first four anniversaries of the grant date, (ii) 33,586 RSUs issued to directors that vest in May 2018 and (iii) 67,536 performance share units (PSUs) to certain officers and employees that generally cliff vest on the third anniversary of the grant date and are subject to continued employment and certain performance based targets. The ultimate number of PSUs issued is based on a multiple determined by certain performance based targets.

The fair value of restricted stock units is determined based on the closing trading price of the Company’s common stock on the grant date of the award. Compensation expense is recognized on a straight-line basis over the requisite service period of the entire award.

During the sixnine months ended JuneSeptember 30, 2017, 63,293126,788 RSUs and 20,86328,445 stock options were forfeited.

Stock-based compensation expense related to the Company’s stock-based compensation plans for the sixthree months ended JuneSeptember 30, 2017 and 2016 was $1.9$1.0 million and $1.8$0.9 million, respectively. Stock-based compensation expense related to the Company’s stock-based compensation plans for the nine months ended September 30, 2017 and 2016 was $2.9 million and $2.7 million, respectively. As of JuneSeptember 30, 2017, there was $9.5$8.3 million of total unrecognized compensation cost related to unvested options and restricted stock expected to vest. This cost is expected to be recognized over a remaining weighted-average period of 2.11.8 years.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10 – Earnings (loss) per Share

Basic earnings (loss) per share (EPS) are computed by dividing loss attributable to RigNet common stockholders by the number of basic shares outstanding. Basic shares equal the total of the common shares outstanding, weighted for the average days outstanding for the period. Basic shares exclude the dilutive effect of common shares that could potentially be issued due to the exercise of stock options or vesting of restricted stock and RSUs. Diluted EPS is computed by dividing loss attributable to RigNet common stockholders by the number of diluted shares outstanding. Diluted shares equal the total of the basic shares outstanding and all potentially issuable shares, other than antidilutive shares, if any, weighted for the average days outstanding for the period. The Company uses the treasury stock method to determine the dilutive effect. In periods when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is reported, basic and dilutive loss per share are the same.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and sixnine months ended JuneSeptember 30, 2017, there were approximately 541,964723,296 and 575,214644,858 potentially issuable shares, respectively, excluded from the Company’s calculation of diluted EPS that were excluded because the Company incurred a loss in the period and to include them would have been anti-dilutive.

For the three and sixnine months ended JuneSeptember 30, 2016, there were approximately 1,591,5541,919,696 and 1,309,5651,228,397 potentially issuable shares, respectively, excluded from the Company’s calculation of diluted EPS that were excluded because the Company incurred a loss in the period and to include them would have been anti-dilutive.

Note 11 – Commitments and Contingencies

Global Xpress (GX) Dispute

Inmarsat plc (Inmarsat), a satellite telecommunications company, and the Company are in a dispute relating to a January 2014 agreement regarding the purchase by the Company of up to $65.0 million, under certain conditions, of GX capacity from Inmarsat over several years (GX dispute). The parties are attempting to resolve the GX dispute through a contractually stipulatedcontractually-stipulated arbitration process that began in October 2016. The parties dispute whether Inmarsat has met its contractual obligations with respect to the service under the agreement. In July 2017, pursuant to its contractual rights under the agreement, the Company delivered a notice of termination of the agreement to Inmarsat.

The Company has incurred legal expenses of $0.5$0.8 million in connection with the GX dispute for the sixnine months ended JuneSeptember 30, 2017. The Company may continue to incur significant legal fees, related expenses and management time in the future. The Company cannot predict the ultimate outcome of the GX dispute, the total costs to be incurred or the potential impact on personnel.

Based on the information available at this time and management’s understanding of the GX dispute, the Company does not deem the likelihood of a material loss related to this dispute to be probable, so it has not accrued any liability related to the dispute. At this stage of the arbitration, the range of possible loss is not reasonably estimable, but could range from zero to the maximum amount payable under the contract for the services plus expenses.

Other Litigation

The Company, in the ordinary course of business, is a claimant or a defendant in various legal proceedings, including proceedings as to which the Company has insurance coverage and those that may involve the filing of liens against the Company or its assets.

Sales Tax Audit

The company is undergoing a routine sales tax audit in a state where it has operations for the period from August of 2011 to May of 2015. It is expected that the audit and the appeals process, if necessary, will be completed within the next ninethree months. The Company does not believe that the outcome of the audit will result in a material impact to the consolidated financial statements.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Contractual Dispute Settlement

The Company’s Systems Integration and Automation (SI&A) business reached a settlement in the first quarter of 2016 related to a contract dispute associated with a percentage of completion project. The dispute related to the payment for work related to certain change orders. After the settlement, the Company recognized $2.3 million of gain in the first quarter of 2016. In the Company’s Annual Report on form Form10-K for the year ended December 31, 2016, the Company reported that it had received the certificate of final acceptance from the customer acknowledging completion of the project. The total loss incurred over the life of this project amounted to $11.2 million.

The Company incurred legal expenses of $0.2 million in connection with the dispute for the sixnine months ended JuneSeptember 30, 2016.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Operating Leases

The Company leases office space under lease agreements expiring on various dates through 2025. For the three months ended JuneSeptember 30, 2017 and 2016, the Company recognized expense under operating leases of $1.0$0.9 million and $1.0$1.2 million, respectively. For the sixnine months ended JuneSeptember 30, 2017 and 2016, the Company recognized expense under operating leases of $2.0$2.9 million and $2.1$3.4 million, respectively.

As of JuneSeptember 30, 2017, future minimum lease obligations for the remainder of 2017 and future years were as follows (in thousands):

 

2017

   1,618    794 

2018

   1,650    1,871 

2019

   1,009    1,316 

2020

   740    886 

2021

   468    468 

Thereafter

   1,750    1,750 
  

 

   

 

 
  $7,235   $7,085 
  

 

   

 

 

Commercial Commitments

The Company enters into contracts for satellite bandwidth and other network services with certain providers.

As of JuneSeptember 30, 2017, the Company had the following commercial commitments related to satellite and network services for the remainder of 2017 and the future years thereafter (in thousands):

 

2017

   5,561    4,501 

2018

   5,440    13,494 

2019

   2,152    5,920 

2020

   693    473 

2021

   676    455 
  

 

   

 

 
  $14,522   $24,843 
  

 

   

 

 

The Company is no longer reporting $65.0 million in the above table for capacity from Inmarsat’s GX network. Please see paragraph “GX“Global Express (GX) Dispute” above for details of the ongoing arbitration and the Company’s notice to terminate the contract with Inmarsat.

Note 12 – Segment Information

Segment information is prepared consistent with the components of the enterprise for which separate financial information is available and regularly evaluated by the chief operating decision-maker for the purpose of allocating resources and assessing performance.

The Company previously operated under threetwo reportable segments: Eastern Hemisphere, Western HemisphereManaged Services and Telecoms Systems Integration (TSI)(previously called SI&A). During the fourththird quarter of 20162017, after the Company completed the ESS acquisition, the Company reorganized its

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

business and reportable segments onsegments. Applications andInternet-of-Things is now managed and presented as a basis consistent with the revenue streams. The former TSIseparate segment, and was renamed the Systems Integration and Automation (SI&A) segment. The Managed Services segment consists of the remote communication services that were common between the former Eastern Hemisphere and Western Hemisphere segments as well as certain global Managed Services specific costs including the Network Operations Center (NOC) and engineering costs that in prior years were includedpreviously presented in the Corporate segment. The Company now operates Managed Services as one global segment. All historical segment financial data included herein has been recast to conform to the current year presentation.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RigNet considers its business to consist of twothe following segments:

 

  Managed ServicesServices..The Managed Services segment provides remote communications, telephony and technology services for offshore and onshore drilling rigs and production facilities, support vessels, midstream assets and other remote sites.

Applications andInternet-of-Things (Apps & IoT).The Apps & IoT segment provides applicationsover-the-top of the Managed Services segmentincluding Supervisory Control and Data Acquisition (SCADA) and Software as a Service (SaaS) offerings including BlackTIE® encryption, weather monitoring primarily operates out ofin the Company’s United States, United Kingdom, Norway, Qatar, UAE, Singapore, BrazilNorth Sea (METOCEAN) and Mexico based offices for customers globally.certain other value added services such as Adaptive Video Intelligence (AVI).

 

  Systems Integration and Automation (SI&A).Integration.The SI&ASystems Integration segment provides customized solutionsdesign and implementation services for customers’customer telecommunications systems. SI&A solutionsSolutions are delivered based on the customer’s specifications, in additionadhering to international industry standards and best practices. SI&A project elementsProject services may include consultancy services,consulting, design, engineering, project management, procurement, testing, installation, commissioning and maintenance services. The SI&A segment primarily operates out of the Company’s Aberdeen, Houston and Monterrey offices for customers globally.maintenance.

Corporate and eliminations primarily represents unallocated corporate office activities, interest expense, income taxes and eliminations.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company’s business segment information as of and for the three and sixnine months ended JuneSeptember 30, 2017 and 2016, is presented below.

 

  Three Months Ended June 30, 2017   Three Months Ended September 30, 2017 
  Managed
Services
   Systems
Integration and
Automation
   Corporate and
Eliminations
   Consolidated
Total
   Managed
Services
   Applications
and
Internet-of-

Things
   Systems
Integration
 Corporate and
Eliminations
 Consolidated
Total
 
  (in thousands)   (in thousands) 

Revenue

  $43,055   $6,107   $—     $49,162   $40,243   $4,985   $5,616  $—    $50,844 

Cost of revenue (excluding depreciation and amortization)

   27,544    5,494    —      33,038    24,902    3,394    4,089  —    32,385 

Depreciation and amortization

   6,229    611    712    7,552    5,263    835    615  1,286  7,999 

Selling, general and administrative

   5,272    422    6,316    12,010    3,013    363    280  9,755  13,411 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Operating income (loss)

  $4,010   $(420  $(7,028  $(3,438  $7,065   $393   $632  $(11,041 $(2,951
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Capital expenditures

   4,266    —      645    4,911    5,655    198    —     —    5,853 
  Three Months Ended June 30, 2016   Three Months Ended September 30, 2016 
  Managed
Services
   Systems
Integration and
Automation
   Corporate and
Eliminations
   Consolidated
Total
   Managed
Services
   Applications
and
Internet-of-

Things
   Systems
Integration
 Corporate and
Eliminations
 Consolidated
Total
 
  (in thousands)   (in thousands) 

Revenue

  $50,219   $4,692   $—     $54,911   $45,653   $1,552   $3,407  $—    $50,612 

Cost of revenue (excluding depreciation and amortization)

   29,682    3,594    —      33,276    26,253    696    2,911   —    29,860 

Depreciation and amortization

   7,585    9    1,419    9,013    6,716    —      631  958  8,305 

Impairment of goodwill and intangible assets

   —      —      397    397 

Selling, general and administrative

   7,635    721    7,163    15,519    5,235    67    499  6,399  12,200 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Operating income (loss)

  $5,317   $368   $(8,979  $(3,294  $7,449   $789   $(634 $(7,357 $247 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Capital expenditures

   4,020    —      650    4,670    1,936    —      —     —    1,936 
  Six Months Ended June 30, 2017   Nine Months Ended September 30, 2017 
  Managed
Services
   Systems
Integration and
Automation
   Corporate and
Eliminations
   Consolidated
Total
   Managed
Services
   Applications
and
Internet-of-

Things
   Systems
Integration
 Corporate and
Eliminations
 Consolidated
Total
 
  (in thousands)   (in thousands) 

Revenue

  $87,149   $10,085   $—     $97,234   $122,531   $9,846   $15,701  $—    $148,078 

Cost of revenue (excluding depreciation and amortization)

   54,346    8,567    —      62,913    75,798    6,844    12,656  —    95,298 

Depreciation and amortization

   12,260    1,198    1,410    14,868    17,509    849    1,813  2,696  22,867 

Selling, general and administrative

   10,237    892    12,829    23,958    12,435    1,149    1,179  22,606  37,369 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Operating income (loss)

  $10,306   $(572  $(14,239  $(4,505  $16,789   $1,004   $53  $(25,302 $(7,456
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total assets

   194,829    16,869    11,007    222,705    184,678    33,353    15,857  3,960  237,848 

Capital expenditures

   7,426    —      645    8,071    13,081    198    —    645  13,924 
  Six Months Ended June 30, 2016   Nine Months Ended September 30, 2016 
  Managed
Services
   Systems
Integration and
Automation
   Corporate and
Eliminations
   Consolidated
Total
   Managed
Services
   Applications
and
Internet-of-

Things
   Systems
Integration
 Corporate and
Eliminations
 Consolidated
Total
 
  (in thousands)   (in thousands) 

Revenue

  $104,640   $12,612   $—     $117,252   $146,766   $5,079   $16,019  $—    $167,864 

Cost of revenue (excluding depreciation and amortization)

   60,682    8,870    —      69,552    85,455    2,176    11,781   —    99,412 

Depreciation and amortization

   14,774    38    2,444    17,256    20,032    —      2,127  3,402  25,561 

Impairment of goodwill and intangible assets

   —      —      397    397    —      —      —    397  397 

Selling, general and administrative

   15,530    1,642    15,580    32,752    20,631    201    2,141  21,979  44,952 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Operating income (loss)

  $13,654   $2,062   $(18,421  $(2,705  $20,648   $2,702   $(30 $(25,778 $(2,458
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total assets

   216,073    29,539    3,209    248,821    213,739    —      26,139  4,800  244,678 

Capital expenditures

   8,429    —      1,146    9,575    10,365    —      —    1,146  11,511 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table presents revenue earned from the Company’s domestic and international operations for the three and sixnine months ended JuneSeptember 30, 2017 and 2016. Revenue is based on the location where services are provided or goods are sold. Due to the mobile nature of RigNet’s customer base and the services provided, the Company works closely with its customers to ensure rig or vessel moves are closely monitored to ensure location of service information is properly reflected.

 

  Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
  2017   2016   2017   2016   2017   2016   2017   2016 
  (in thousands)   (in thousands) 

Domestic

  $14,022   $16,261   $28,974   $32,228   $17,136   $11,555   $46,110   $43,783 

International

   35,140    38,650    68,260    85,024    33,708    39,057    101,968    124,081 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $49,162   $54,911   $97,234   $117,252   $50,844   $50,612   $148,078   $167,864 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

The following table presents goodwill and long-lived assets, net of accumulated depreciation, for the Company’s domestic and international operations as of JuneSeptember 30, 2017 and December 31, 2016.

 

  June 30,   December 31,   September 30,   December 31, 
  2017   2016   2017   2016 
  (in thousands)   (in thousands) 

Domestic

  $31,317   $27,682   $70,309   $27,682 

International

   74,402    70,101    62,049    70,101 
  

 

   

 

   

 

   

 

 

Total

  $105,719   $97,783   $132,358   $97,783 
  

 

   

 

   

 

   

 

 

Note 13 – Restructuring Costs – Cost Reduction Plans

During the three and nine months ended JuneSeptember 30, 2016,2017, the Company incurred a netpre-tax restructuring expense of $1.1$0.8 million in the corporate segment consisting of $0.7 million of termination costs associated with the reduction of 26 employees and $0.4 million of exit costs from the corporate office lease. The termination costs are reported as $0.5 million and $0.2 million in general and administrative expense and cost of revenue, respectively, in the Condensed Consolidated Statements of Comprehensive Income (Loss). The $0.4 million of exit costs from the lease for the corporate office are reported as general and administrative expense in the Condensed Consolidated StatementsCorporate segment associated with the reduction of Comprehensive Income (Loss).31 employees.

During the sixthree months ended JuneSeptember 30, 2016, the Company incurred a netpre-tax restructuring expense of $0.5$0.8 million reported as general and administrative expense in the Corporate segment consisting of $0.4$1.8 million of expense associated with the reduction of 73 employees partially offset by a net $1.0 million reversal of previously accrued restructuring charges for real estate exit costs fromnot incurred.

During the corporate office leasenine months ended September 30, 2016, the Company incurred netpre-tax restructuring expense of $1.3 million reported as general and $0.9administrative expense in the Corporate segment consisting of $2.7 million associated with the reduction of 42115 employees partially offset by a net reduction to restructuring charges of $0.8$1.4 million due to a reversal of previously accrued restructuring charges for employees that the Company did not release and real estate exit expense not incurred. The Company undertook restructuring plans in 2016 to reduce costs and improve the Company’s competitive position.

Note 14 – Executive Departure costs

Marty Jimmerson, the Company’s former CFO, served as Interim CEO and President from January 7, 2016 to May 31, 2016, to replace Mark Slaughter, the prior CEO and President. Mr. Jimmerson departed the Company on June 1, 2016. In connection with the departure of Mr. Slaughter, in the first quarter of 2016 the Company incurred apre-tax executive departure expense of $1.9 million in the Corporate segment. On May 31, 2016, Steven E. Pickett was named CEO and President of the Company.

Item 2.Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements as of JuneSeptember 30, 2017 and for the three and sixnine months ended JuneSeptember 30, 2017 and 2016 included elsewhere herein, and with our annual report on Form10-K for the year ended December 31, 2016. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” in Item 1A of our annual report and elsewhere in this quarterly report. See “Forward-Looking Statements” below.

Forward-Looking Statements

This Quarterly Report on Form10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to a number of risks and uncertainties, many of which are beyond the Company’s control. These statements may include statements about:

 

new regulations, delays in drilling permits or other changes in the drilling industry;

 

competition and competitive factors in the markets in which we operate;

 

demand for our services and solutions;

 

the advantages of our services compared to others;

 

changes in technology and customer preferences and our ability to adapt our product and services offerings;

 

our ability to develop and maintain positive relationships with our customers;

 

our ability to retain and hire necessary employees and appropriately staff our marketing, sales and distribution efforts;

 

our cash needs and expectations regarding cash flow from operations and capital expenditures;

 

our expectations regarding the deductibility of goodwill for tax purposes;

our ability to manage and grow our business and execute our business strategy, including expanding our penetration of the U.S. and international onshore and offshore drilling rigs and expanding our business into remote communication market adjacencies;

 

our strategy and acquisitions;

 

our ability to pursue, consummate and integrate merger and acquisition opportunities successfully;

 

the GX dispute

 

our resource reallocation activities and related expenses; and

 

our financial performance, including our ability to expand Adjusted EBITDA through our operational leverageleverage.

In some cases, forward-looking statements can be identified by terminology such as “may,” “could,” “should,” “would,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology that convey uncertainty of future events or outcomes. All of these types of statements, other than statements of historical fact included in this Quarterly Report on Form10-Q, are forward-looking statements.

The forward-looking statements contained in this Quarterly Report on Form10-Q are largely based on Company expectations, which reflect estimates and assumptions made by Company management. These estimates and assumptions reflect management’s best judgment based on currently known market conditions and other factors. Although the Company believes such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties beyond its control. In addition, management’s assumptions may prove to be inaccurate. The Company cautions that the forward-looking statements contained in this Quarterly Report on Form10-Q are not guarantees of future performance, and it cannot assure any reader that such statements will be realized or the forward-looking statements or events will occur. Future results may differ materially from those anticipated or implied in forward-looking statements due to factors listed in the “Risk Factors” section of our annual report on Form10-K for the year ended December 31, 2016 and elsewhere in this Quarterly Report on Form10-Q. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual future results, performance or achievements may vary materially from any projected future results, performance or achievements expressed or implied by these forward-looking statements.

The forward-looking statements speak only as of the date made, and other than as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Our Operations

We are a leading global specialized provider oftechnology company that provides customized systemscommunications services, applications and cybersecurity solutions serving customers with complex data networkingenhancing customer decision making and operational requirements.business performance. We provide solutions ranging from fully-managed voice and data networks to more advanced applications that include video conferencing, and monitoring, crew welfare, asset and weather monitoring, and real-time data services and cybersecurity under a multi-tenantmulti-service recurring revenue model. Our customers

Customers use our private extranetnetworks to manage information flows and execute mission-critical operations primarily in remote areas where conventional telecommunications infrastructure is either unavailableunreliable or unreliable.unavailable. We offerprovide our clients what is often the sole means of communications for their remote operations, including offshore and onshore drilling rigs, production facilities, oilfield service equipment, maritime vessels, midstream assets and regional support offices.operations.

Network service customers are primarily served under fixed-price contracts, either on a monthly or day rate basis or for equipment sales. Our contracts are generally in the form of Master Service Agreements, or MSAs, with specific services being provided under individual service orders that have a term of one to three years with renewal options, while land-based locations are generally shorter term or terminable on short notice without a penalty. Service orders are executed under the MSA for individual remote sites or groups of sites, and generally may be terminated early on short notice without penalty in the event of force majeure, breach of the MSA or cold stacking of a drilling rig (when a rig is taken out of service and is expected to be idle for a protracted period of time).

Segment information is prepared consistent with the components of the enterprise for which separate financial information is available and regularly evaluated by the chief operating decision-maker for the purpose of allocating resources and assessing performance.

We previously operated our business under threetwo reportable segments: Eastern Hemisphere, Western HemisphereManaged Services and Telecoms Systems Integration (TSI)(previously called SI&A). During the fourththird quarter of 2016,2017, after we completed the ESS acquisition, we reorganized our business and reportable segments onsegments. Applications andInternet-of-Things is now managed and presented as a basis consistent with the revenue streams. The former TSIseparate segment, and was renamed the Systems Integration and Automation (SI&A) segment. The Managed Services segment consists of the remote communication services that were common between the former Eastern Hemisphere and Western Hemisphere segments as well as certain global Managed Services specific costs including our Network Operations Center (NOC) and engineering costs that in prior years were includedpreviously presented in the Corporate segment. We now operate Managed Services as one global segment. All historical segment financial data included herein has been recast to conform to the current year presentation. We now operate twothree reportable segments, which are managed as distinct segments by our chief operating decision-maker.

 

  Managed ServicesServices..Our Managed Services segment provides remote communications, telephony and technology services for offshore and onshore drilling rigs and production facilities, support vessels, midstream assets and other remote sites.

Applications andInternet-of-Things (Apps & IoT).Our Apps & IoT segment provides applicationsover-the-top of the Managed Services segmentincluding Supervisory Control and Data Acquisition (SCADA) and Software as a Service (SaaS) offerings including BlackTIE® encryption, weather monitoring primarily operates out of our United States, United Kingdom, Norway, Qatar, UAE, Singapore, Brazilin the North Sea (METOCEAN) and Mexico based offices for customers globally.certain other value added services such as Adaptive Video Intelligence (AVI).

 

  Systems Integration and Automation (SI&A)Integration..Our SI&ASystems Integration segment provides customized solutionsdesign and implementation services for customer telecommunications systems. SI&A solutionsSolutions are delivered based on the customer’s specifications, in additionadhering to international industry standards and best practices. SI&A project elementsProject services may include consultancy services,consulting, design, engineering, project management, procurement, testing, installation, commissioning and maintenance services. Our SI&A segment primarily operates out of our Aberdeen, Houston and Monterrey offices for customers globally.maintenance.

Cost of revenue consists primarily of satellite charges, voice and data termination costs, network operations expenses, internet connectivity fees, equipment purchases for SI&ASystems Integration projects and direct service labor. Satellite charges consist of the costs associated with obtaining satellite bandwidth (the measure of capacity) used in the transmission of service to and from leased satellites. Direct service labor consists of field technicians, our NOCNetwork Operations Center (NOC) employees, and other employees who directly provide services to customers. Network operations expenses consist primarily of costs associated with the operation of our NOC, which is maintained 24 hours a day, seven days a week. Depreciation and amortization is recognized on all property, plant and equipment either installed at a customer’s site or held at our corporate and regional offices, as well as intangibles arising from acquisitions and internal use software. Selling and marketing expenses consist primarily of salaries and commissions, travel costs and marketing communications. General and administrative expenses consist of expenses associated with our management, finance, contract, support and administrative functions.

Profitability generally increases or decreases at a site as we add or lose customers and value-added services. Assumptions used in developing the rates for a site may not cover cost variances from inherent uncertainties or unforeseen obstacles, including both physical conditions and unexpected problems encountered with third party service providers.

Recent Developments

On November 6, 2017, we entered into our third amended and restated credit agreement, which provides for a $15.0 million term loan facility and an $85.0 million revolving credit facility that matures on November 6, 2020 with interest payable monthly at a rate of LIBOR plus a margin ranging from 1.75% to 2.75% based on a consolidated leverage ratio and principal payments of $1.25 million due quarterly beginning March 31, 2018.

During the third quarter of 2017, we incurred restructuring expense of $0.8 million associated with the reduction of 31 employees.

On July 28, 2017, we acquired substantially all the assets of Energy Satellite Services (ESS). ESS is a supplier of wireless communications services via satellite networks primarily to the midstream sector of the oil and gas industry. The assets acquired enhance our product offering, add to our existing midstream Supervisory Control and Data Acquisition (SCADA) customer portfolio, and strengthen our US land and Internet-of-Things (IoT)IoT market position. We have paid approximately $22.2 million in cash for the ESS assets. ESS is based in Texas.

On July 24, 2017, we acquired substantially all the assets of Data Technology Solutions (DTS). DTS provides comprehensive communications and IT services to the onshore, offshore, and maritime industries, as well as disaster relief solutions to global corporate clients. We have paid approximately $5.2$5.1 million in cash for the DTS assets. DTS is based in Louisiana.

As noted under paragraph GX Dispute below, inIn July 2017, we delivered a notice of termination of an agreement with Inmarsat to acquire capacity from Inmarsat’s GX network. As a result, the CompanyWe will continue to offer other solutions to itsour customers as it haswe have in the past. The CompanyWe will continue to evaluate and make available the best service options for itsour customers’ telecommunication needs.

On May 18, 2017, we completed our acquisition of Cyphre Security Solutions (Cyphre) for an estimated aggregate purchase price of $12.0 million. Of this aggregate purchase price, we paid $4.9 million in cash, $3.3 million in stock and expect to pay $3.8 million of contingent consideration for intellectual property, estimated as of the date of acquisition. The initial estimate of the contingent consideration for intellectual property is preliminary and remains subject to change based on certain post-closing contractual options under the acquisition agreement. Cyphre is a cybersecurity company that provides advanced enterprise data protection leveraging BlackTIE® hardware-based encryption featuring low latency protection for files at rest and in transit for both public and private cloud. Cyphre is based in Texas.

In January 2017, we signed and announced an eight-year lease for new headquarters space, comprised of 28,808 square feet located at 15115 Park Row Blvd, Suite 300, Houston, Texas. The term of this lease runs through June 2025.

Known Trends and Uncertainties

Operating Matters

Uncertainties and negative trends in the oil and gas industry may continue to impact our profitability. The fundamentals of the oil and gas industry we serve deteriorated throughout 2015 and 2016 and remain challenged into 2017, particularly offshore. Oil prices declined significantly throughout 2015 and into 2016 from the highs inmid-year 2014 due to lower-than-expected global oil demand growth, increased supply from U.S. unconventional sources and increased production from several international countries. Although oil prices and U.S. onshore drilling rig counts have increased since their 2016 lows, the oil and gas environment continues to be challenged with operators focusing on shorter term, land-based projects that generally require less capital investment. Generally, a prolonged lower oil price environment decreases exploration and development drilling investment, utilization of drilling rigs and the activity of the global oil and gas industry that we serve. Several global exploration and production companies reduced their capital spending budgets, including the cancellation or deferral of existing programs, and are expected to continue operating under reduced budgets in the current commodity price environment.

For the periods referenced below, we were billing on the following sites listed in the table below:

 

  2nd Quarter   1st Quarter   4th Quarter   3rd Quarter   2nd Quarter   3rd Quarter   2nd Quarter   1st Quarter   4th Quarter   3rd Quarter 
  2017   2017   2016   2016   2016   2017   2017   2017   2016   2016 

Selected Operational Data:

                    

Offshore drilling rigs (1)

   173    173    175    194    211    184    173    173    175    194 

Offshore Production

   296    290    280    287    287    316    296    290    280    287 

Maritime

   134    124    122    128    105    165    134    124    122    128 

International Land

   112    104    104    101    99    132    112    104    104    101 

Other sites (2)

   336    304    240    238    236    378    336    304    240    238 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   1,051    995    921    948    938    1,175    1,051    995    921    948 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(1)Includes jack up, semi-submersible and drillship rigs
(2)Includes U.S. onshore drilling and production sites, completion sites,man-camps, remote offices, and supply bases and offshore-related supply bases, shore offices, tender rigs and platform rigs

In addition, uncertainties that could impact our profitability include service responsiveness to remote locations, communication network complexities, political and economic instability in certain regions, cyber-attacks, export restrictions, licenses and other trade barriers. These uncertainties may result in the delay of service initiation, which may negatively impact our results of operations. Additional uncertainties that could impact our operating cash flows include the availability and cost of satellite bandwidth, timing of collecting our receivables, and our ability to increase our contracted services through sales and marketing efforts while leveraging the contracted satellite and other communication service costs.

Sales Tax Audit

We are undergoing a routine sales tax audit in a state where we have operations for the period from August of 2011 to May of 2015. It is expected that the audit and the appeals process, if necessary, will be completed within the next ninethree months. We do not believe that the outcome of the audit will result in a material impact to the consolidated financial statements.

GXGlobal Xpress (GX) Dispute

We are in a dispute with Inmarsat relating to a January 2014 take or pay agreement to purchase up to $65.0 million, under certain conditions, of GX capacity from Inmarsat over several years. We are attempting to resolve the dispute through a contractually stipulatedcontractually-stipulated arbitration process that began in October 2016. The parties dispute whether Inmarsat has met its contractual obligations with respect to the service under the agreement. In July 2017, pursuant to our contractual rights under the agreement, we delivered a notice of termination of the agreement to Inmarsat.

We have incurred legal expenses of $0.5$0.8 million in connection with the GX dispute for the sixnine months ended JuneSeptember 30, 2017. We may continue to incur significant legal fees, related expenses and management time in the future. We cannot predict the ultimate outcome of the GX dispute, the total costs to be incurred or the potential impact on personnel.

Based on the information available at this time and our understanding of the GX dispute, we do not deem the likelihood of a material loss related to this dispute to be probable, so we have not accrued any liability related to the dispute. At this stage of the arbitration, the range of possible loss is not reasonably estimable, but could range from zero to the maximum amount payable under the contract for the services plus expenses.

Results of Operations

The following table sets forth selected financial and operating data for the periods indicated.

 

  Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
  2017   2016   2017   2016   2017   2016   2017   2016 
  (in thousands)   (in thousands) 

Revenue

  $49,162   $54,911   $97,234   $117,252   $50,844   $50,612   $148,078   $167,864 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Expenses:

                

Cost of revenue (excluding depreciation and amortization)

   33,038    33,276    62,913    69,552    32,385    29,860    95,298    99,412 

Depreciation and amortization

   7,552    9,013    14,868    17,256    7,999    8,305    22,867    25,561 

Impairment of intangible assets

   —      397    —      397    —      —      —      397 

Selling and marketing

   2,132    1,943    3,568    3,835    2,400    1,724    5,968    5,559 

General and administrative

   9,878    13,576    20,390    28,917    11,011    10,476    31,401    39,393 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total expenses

   52,600    58,205    101,739    119,957    53,795    50,365    155,534    170,322 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Operating loss

   (3,438   (3,294   (4,505   (2,705

Operating income (loss)

   (2,951   247    (7,456   (2,458

Other expense, net

   (873   (328   (1,379   (1,282   (480   (1,155   (1,859   (2,437
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loss before income taxes

   (4,311   (3,622   (5,884   (3,987   (3,431   (908   (9,315   (4,895

Income tax benefit (expense)

   101    (1,234   (313   (2,136

Income tax expense

   (762   (540   (1,075   (2,676
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net loss

   (4,210   (4,856   (6,197   (6,123   (4,193   (1,448   (10,390   (7,571

Less: Net income attributable to non-controlling interest

   39    (105   78    (39   39    210    117    171 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Net loss attributable to RigNet, Inc. stockholders

  $(4,249  $(4,751  $(6,275  $(6,084  $(4,232  $(1,658  $(10,507  $(7,742
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Other Non-GAAP Data:

                

Unlevered Free Cash Flow

  $1,142   $3,954   $5,207   $9,715   $1,990   $6,598   $7,197   $16,313 

Adjusted EBITDA

  $6,053   $8,624   $13,278   $19,290   $7,843   $8,534   $21,121   $27,824 

The following represents selected financial operating results for our segments:

 

  Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
  2017   2016   2017   2016   2017   2016   2017   2016 
  (in thousands)   (in thousands) 

Managed Services:

                

Revenue

  $43,055   $50,219   $87,149   $104,640   $40,243   $45,653   $122,531   $146,766 

Cost of revenue (excluding depreciation and amortization)

   27,544    29,682    54,346    60,682    24,902    26,253    75,798    85,455 

Depreciation and amortization

   6,229    7,585    12,260    14,774    5,263    6,716    17,509    20,032 

Selling, general and administrative

   5,272    7,635    10,237    15,530    3,013    5,235    12,435    20,631 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Managed Services operating income

  $4,010   $5,317   $10,306   $13,654   $7,065   $7,449   $16,789   $20,648 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Systems Integration and Automation (SI&A):

        

Applications andInternet-of-Things:

Applications andInternet-of-Things:

 

      

Revenue

  $4,985   $1,552   $9,846   $5,079 

Cost of revenue (excluding depreciation and amortization)

   3,394    696    6,844    2,176 

Depreciation and amortization

   835    —      849    —   

Selling, general and administrative

   363    67    1,149    201 
  

 

   

 

   

 

   

 

 

Applications &Internet-of-Things operating income

  $393   $789   $1,004   $2,702 
  

 

   

 

   

 

   

 

 

Systems Integration:

        

Revenue

  $6,107   $4,692   $10,085   $12,612   $5,616   $3,407   $15,701   $16,019 

Cost of revenue (excluding depreciation and amortization)

   5,494    3,594    8,567    8,870    4,089    2,911    12,656    11,781 

Depreciation and amortization

   611    9    1,198    38    615    631    1,813    2,127 

Selling, general and administrative

   422    721    892    1,642    280    499    1,179    2,141 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Systems Integration and Automation operating income (loss)

  $(420  $368   $(572  $2,062   $632   $(634  $53   $(30
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

NOTE: Consolidated balances include the two segments above along with corporate activities and intercompany eliminations.

Three Months Ended JuneSeptember 30, 2017 and 2016

Revenue.Revenue decreasedincreased by $5.7$0.2 million, or 10.5%0.5%, to $49.2$50.8 million for the three months ended JuneSeptember 30, 2017 from $54.9$50.6 million for the three months ended JuneSeptember 30, 2016. This decreaseincrease was driven by increased revenues in the Apps & IoT and Systems Integration segments, partially offset by lower revenue in the Managed Services segment. The Apps & IoT segment partially offset by increased revenues in$3.4 million, or 221.2%, due to our growth strategy which focuses on growth into the SI&A segment.application layer and IoT space including the acquisition of ESS, which contributed $1.3 million. The Systems Integration segment increased $2.2 million, or 64.8%, due to the timing of Systems Integration projects. The Managed Services segment decreased $7.2$5.4 million, or 14.3%11.9%, primarily due to decreased offshore drilling sites served and decreasedrevenue-per-site from offshore drilling rigs.rigs partially offset by $1.1 million from the acquisition of DTS. The decrease of 3810 offshore drilling sites served was primarily due to offshore drilling rigs we previously served being cold-stacked or scrapped partially offset by new sales wins. The decreasedrevenue-per-site from offshore drilling rigs is primarily due to decreased multi-tenancy ratios from operators on offshore drilling rigs. As rigs that we serve increasingly hot-stack (when a rig is taken out of service but is ready to mobilize on short notice) due to the current economic environment, the opportunity to serve the operator and earn additional revenue is lost until the drilling rig is subsequently contracted for service. Revenue continues to be impacted by previously announced reductions in offshore drilling.

Cost of Revenue (excluding depreciation and amortization).Cost of revenue (excluding depreciation and amortization) increased by $2.5 million, or 8.5%, to $32.4 million for the three months ended September 30, 2017 from $29.9 million for the three months ended September 30, 2016. Cost of revenue increased in the Apps & IoT segment by $2.7 million as we invest in our strategy of expanding into the application layer and IoT space including the acquisition of ESS and Cyphre. Cost of revenue increased in the Systems Integration segment by $1.2 million due to the timing of Systems Integration projects. Cost of revenue (excluding depreciation and amortization) decreased in the Managed Services segment by $1.4 million primarily due to reductions in ongoing expenses partially offset by the acquisition of DTS.

Depreciation and Amortization.Depreciation and amortization expense decreased by $0.3 million to $8.0 million for the three months ended September 30, 2017 from $8.3 million for the three months ended September 30, 2016. The decrease is primarily attributable to lower levels of capital expenditures in recent years, partially offset by the recent acquisitions of Cyphre, DTS and ESS.

Selling and Marketing.Selling and marketing expense increased $0.7 million to $2.4 million for the three months ended September 30, 2017 from $1.7 million for the three months ended September 30, 2016. This increase was due to investing in our growth strategy.

General and Administrative.General and administrative expenses increased by $0.5 million to $11.0 million for the three months ended September 30, 2017 from $10.5 million for the three months ended September 30, 2016. General and administrative costs increased due to the acquisition of Cyphre and ESS and related acquisition costs in the Apps & IoT segment. General and administrative costs decreased in the Managed Services and Systems Integration segments due to reductions in ongoing expenses partially offset by the acquisition of DTS.

Income Tax Expense.Our effective income tax rate was (22.2%) and (59.5%) for the three months ended September 30, 2017 and 2016, respectively. Our effective tax rate is affected by factors including changes in valuation allowances, fluctuations in income across jurisdictions with varying tax rates, and changes in income tax reserves, including related penalties and interest.

Nine months Ended September 30, 2017 and 2016

Revenue.Revenue decreased by $19.8 million, or 11.8%, to $148.1 million for the nine months ended September 30, 2017 from $167.9 million for the nine months ended September 30, 2016. This decrease was driven by lower revenues across the Managed Services and Systems Integration segments, partially offset by an increase in the Apps & IoT segment. The Managed Services segment decreased $24.2 million, or 16.5%, primarily due to decreased offshore drilling sites served and decreasedrevenue-per-site from offshore drilling rigs partially offset by $1.1 million from the acquisition of DTS. The decrease of 10 offshore drilling sites served was primarily due to offshore drilling rigs we previously served being cold-stacked or scrapped partially offset by new sales wins. The decreasedrevenue-per-site from offshore drilling rigs is primarily due to decreased multi-tenancy ratios from operators on offshore drilling rigs. As rigs that we servehot-stack (when a rig is taken out of service but is ready to mobilize on short notice) due to the current economic environment, the opportunity to serve the operator and earn additional revenue is lost until the drilling rig is subsequently contracted for service. Revenue continues to be impacted by previously announced reductions in offshore drilling. The SI&ASystems Integration segment increased $1.4decreased $0.3 million, or 30.2%2.0%, due to the timing of SI&ASystems Integration projects. The Apps & IoT segment increased $4.8 million, or 93.9%, due to our growth strategy which focuses on growth into the application layer and IoT space including the acquisition of ESS, which contributed $1.3 million.

Cost of Revenue (excluding depreciation and amortization)..CostCost of revenue (excluding depreciation and amortization) decreased by $0.2$4.1 million, or 0.7%4.1%, to $33.0$95.3 million for the threenine months ended JuneSeptember 30, 2017 from $33.3$99.4 million for the threenine months ended JuneSeptember 30, 2016. Cost of revenue (excluding depreciation and amortization) decreased in the Managed Services segment by $2.1$9.7 million primarily due to reductions in ongoing expenses. This wasexpenses partially offset by an increase in costthe acquisition of DTS. Cost of revenue increased in the SI&ASystems Integration segment of $1.9by $0.9 million due to the timing of SI&ASystems Integration projects. Cost of revenue increased in the Apps & IoT segment by $4.7 million as we invest in our strategy of expanding into the application layer andinternet-of-things space including the acquisition of ESS and Cyphre.

Depreciation and Amortization.Depreciation and amortization expense decreased by $1.5$2.7 million to $7.6$22.9 million for the threenine months ended JuneSeptember 30, 2017 from $9.0$25.6 million for the threenine months ended JuneSeptember 30, 2016. The decrease is primarily attributable to lower levels of capital expenditures in recent years.

Impairment of Intangible Assets.We recognized $0.4 million in impairment for the threenine months ended JuneSeptember 30, 2016. In June 2016, we identified a triggering event for a license in Kazakhstan associated with a decline in cash flow projections. In June 2016, we conducted an intangibles impairment test and as a result of such test, recognized a $0.4 million impairment of licenses in the Corporate segment, which was the full amount of intangibles within Kazakhstan.

Selling and Marketing.Selling and marketing expense increased $0.2$0.4 million to $2.1$6.0 million for the threenine months ended JuneSeptember 30, 2017 from $1.9$5.6 million for the threenine months ended JuneSeptember 30, 2016. This increase was due to investing in our growth strategy.

General and Administrative.General and administrative expenses decreased by $3.7$8.0 million to $9.9$31.4 million for the threenine months ended JuneSeptember 30, 2017 from $13.6$39.4 million for the threenine months ended JuneSeptember 30, 2016. General and administrative costs decreased in boththe Managed Services and Systems Integration segments due to reductions in ongoing expenses.expenses partially offset by the acquisition of DTS. General and administrative costs increased in the Apps & IoT segment due to the acquisition of Cyphre and ESS and related acquisition costs.

Income Tax Expense.Our effective income tax rate was 2.3%(11.5%) and (34.1%(54.7%) for the threenine months ended June 30, 2017 and 2016, respectively. Our effective tax rate is affected by factors including changes in valuation allowances, fluctuations in income across jurisdictions with varying tax rates, and changes in income tax reserves, including related penalties and interest.

Six Months Ended June 30, 2017 and 2016

Revenue.Revenue decreased by $20.0 million, or 17.1%, to $97.2 million for the six months ended June 30, 2017 from $117.3 million for the six months ended June 30, 2016. This decrease was driven by lower revenues across both segments. The Managed Services segment decreased $17.5 million, or 16.7%, primarily due to decreased offshore sites served and decreased revenue-per-site from offshore drilling rigs. The decrease of 38 offshore drilling sites served was primarily due to offshore drilling rigs we previously served being cold-stacked or scrapped partially offset by new sales wins. The decreased revenue-per-site from offshore drilling rigs is primarily due to decreased multi-tenancy ratios from operators on offshore drilling rigs. As rigs that we serve increasingly hot-stack (when a rig is taken out of service but is ready to mobilize on short notice) due to the current economic environment, the opportunity to serve the operator and earn additional revenue is lost until the drilling rig is subsequently contracted for service. Revenue continues to be impacted by previously announced reductions in offshore drilling. The SI&A segment decreased $2.5 million, or 20.0%, due to the timing of SI&A projects.

Cost of Revenue (excluding depreciation and amortization).Cost of revenue (excluding depreciation and amortization) decreased by $6.6 million, or 9.5%, to $62.9 million for the six months ended June 30, 2017 from $69.6 million for the six months ended June 30, 2016. Cost of revenue (excluding depreciation and amortization) decreased in both segments primarily due to reductions in ongoing expenses.

Depreciation and Amortization.Depreciation and amortization expense decreased by $2.4 million to $14.9 million for the six months ended June 30, 2017 from $17.3 million for the six months ended June 30, 2016. The decrease is primarily attributable to lower levels of capital expenditures in recent years.

Impairment of Intangible Assets.We recognized $0.4 million in impairment for the six months ended June 30, 2016. In June 2016, we identified a triggering event for a license in Kazakhstan associated with a decline in cash flow projections. In June 2016, we conducted an intangibles impairment test and as a result of such test, recognized a $0.4 million impairment of licenses in the Corporate segment, which was the full amount of intangibles within Kazakhstan.

Selling and Marketing.Selling and marketing expense decreased $0.3 million to $3.6 million for the six months ended June 30, 2017 from $3.8 million for the six months ended June 30, 2016.

General and Administrative.General and administrative expenses decreased by $8.5 million to $20.4 million for the six months ended June 30, 2017 from $28.9 million for the six months ended June 30, 2016. General and administrative costs decreased in both segments due to reductions in ongoing expenses.

Income Tax Expense.Our effective income tax rate was (5.3%) and (53.6%) for the six months ended JuneSeptember 30, 2017 and 2016, respectively. Our effective tax rate is affected by factors including changes in valuation allowances, fluctuations in income across jurisdictions with varying tax rates, and changes in income tax reserves, including related penalties and interest.

Liquidity and Capital Resources

At JuneSeptember 30, 2017, we had working capital, including cash, of $61.5$44.8 million.

On July 28, 2017, concurrent with our acquiring substantially all the assets of ESS, we made a $15.0 million draw on the Revolving Credit Facility (RCF).

Based on our current expectations, we believe our liquidity and capital resources will be sufficient for the conduct of our business and operations for the foreseeable future. We may also use a portion of our available cash to finance growth through the acquisition of, or investment in, businesses, products, services or technologies complementary to our current business, through mergers, acquisitions, joint ventures or otherwise, or to pay down outstanding debt.

During the next twelve months, we expect our principal sources of liquidity to be cash flows from operating activities, cash and cash equivalents on hand and availability under our credit facility. In forecasting our cash flows we have considered factors including contracted services related to long-term deepwater drilling programs, U.S. land rig count trends, projected oil and natural gas prices, and contracted and available satellite bandwidth.

While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and expansion plans, we may elect to pursue additional expansion opportunities within the next year which could require additional financing, either debt or equity.

Beyond the next twelve months, we expect our principal sources of liquidity to be cash flows provided by operating activities, cash and cash equivalents on hand, availability under our credit facility and additional financing activities we may pursue, which may include debt or equity offerings.

 

  Six Months Ended
June 30,
   Nine Months Ended
September 30,
 
  2017   2016   2017   2016 
  (in thousands)   (in thousands) 

Condensed Consolidated Statements of Cash Flows Data:

        

Cash and cash equivalents, January 1,

  $57,152   $60,468   $57,152   $60,468 

Net cash provided by operating activities

   9,283    18,440    20,888    22,754 

Net cash used in investing activities

   (11,063   (15,343   (45,007   (16,886

Net cash used in financing activities

   (13,845   (3,859   (1,052   (8,111

Changes in foreign currency translation

   1,172    (250   919    (986
  

 

   

 

   

 

   

 

 

Cash and cash equivalents, June 30,

  $42,699   $59,456 

Cash and cash equivalents, September 30,

  $32,900   $57,239 
  

 

   

 

   

 

   

 

 

Currently, the Norwegian kroner and the British pound sterling are the foreign currencies that could materially impact our liquidity. We presently do not hedge these risks, but evaluate financial risk on a regular basis and may utilize financial instruments in the future if deemed necessary. During the sixnine months ended JuneSeptember 30, 2017 and 2016, 89.5%90.2% and 84.0%84.6% of our revenue was denominated in U.S. dollars, respectively.

Operating Activities

Net cash provided by operating activities was $9.3$20.9 million for the sixnine months ended JuneSeptember 30, 2017 compared to $18.4$22.8 million for the sixnine months ended JuneSeptember 30, 2016. The decrease in cash provided by operating activities during 2017 of $9.2$1.9 million was primarily due to decreased operating activity.

Our cash provided by operations is subject to many variables, the most significant of which is the volatility of the oil and gas industry and, therefore, the demand for our services. Other factors impacting operating cash flows include the availability and cost of satellite bandwidth, as well as the timing of collecting our receivables. Our future cash flow from operations will depend on our ability to increase our contracted services through our sales and marketing efforts while leveraging our contracted satellite and other communication service costs.

Investing Activities

Net cash used in investing activities was $11.1$45.0 million and $15.3$16.9 million for the sixnine months ended JuneSeptember 30, 2017 and 2016, respectively.

Net Cash used in investing activities during the sixnine months ended JuneSeptember 30, 2017 included $4.9$32.2 million paid in connection with the acquisitionacquisitions consisting of Cyphre.$4.9 million for Cyphre, $5.1 million for DTS and $22.2 million for ESS. Net Cash used in investing activities during the sixnine months ended JuneSeptember 30, 2016 included $4.8 million paid for the acquisition of TECNOR. Net cash used in investing activities during the sixnine months ended JuneSeptember 30, 2017 and 2016 includes capital expenditures of $6.5$13.2 million and $9.4$11.2 million, respectively. We expect capital expenditures for 2017 to continue to be lower than the previous yearlow due to continued lowreduced levels of global offshore oil and gas drilling activity.

Financing Activities

Net cash used in financing activities was $13.8$1.1 million and $3.9$8.1 million for the sixnine months ended JuneSeptember 30, 2017 and 2016, respectively. Cash used in financing activities for the sixnine months ended JuneSeptember 30, 2017 included $14.5$16.7 million in principal payments on our long-term debt consisting primarilypartially offset by draws of $4.3$15.0 million on the Term Loan and $10.0 million on the RCF.our revolving credit facility. Cash used in financing activities for the sixnine months ended JuneSeptember 30, 2016 included $4.3$9.4 million in principal payments on our long-term debt.

Credit Agreement

TheAs of September 30, 2017, the Company has a $60.0 million term loan (Term Loan) and a $75.0 million RCF,Revolving Credit Facility (RCF), which includes a $15 million sublimit for the issuance of standby letters of credit.

The Term Loan bears an interest rate of LIBOR plus a margin ranging from 1.5% to 2.5%, based on a ratio of funded debt to Consolidated EBITDA, anon-GAAP financial measure defined in the credit agreement. Interest is payable monthly along with quarterly principal installments of $2.1 million, with the balance due October 2018. The weighted average interest rate for the three months ended JuneSeptember 30, 2017 and 2016 was 3.2% and 2.5%, respectively. The weighted average interest rate for the nine months ended September 30, 2017 and 2016 was 3.1% and 2.4%, respectively. The weighted average interest rate for the six months ended June 30, 2017 and 2016 was 3.1% and 2.3%, respectively, with an interest rate of 3.2% at JuneSeptember 30, 2017. The Term Loan is secured by substantially all the assets of the Company. As of JuneSeptember 30, 2017, the outstanding principal balance of the Term Loan was $30.0$27.9 million.

The RCF matures in October 2018 with any outstanding borrowings then payable. Borrowings under the RCF carry an interest rate of LIBOR plus an applicable margin ranging from 1.5% to 2.5%, which varies as a function of the Company’s leverage ratio. As of JuneSeptember 30, 2017, $17.0$32.0 million in draws on the facility remain outstanding. The weighted average interest rate for the three months ended JuneSeptember 30, 2017 and 2016 was 3.1%3.2% and 2.3%2.5%, respectively. The weighted average interest rate for the sixnine months ended JuneSeptember 30, 2017 and 2016 was 3.1% and 2.3%2.4%, respectively, with an interest rate of 3.2% at JuneSeptember 30, 2017.

As of JuneSeptember 30, 2017, there were $6.3 million in standby letters of credit issued, which reduces our availability under the RCF.

In February 2016, we amended our credit agreement with the most significant changes being the definition of Consolidated EBITDA, the calculation of the fixed charge coverage ratio and the timing associated with delivery of financial statements and compliance certificates to the administrative agent.

In December 2016, we amended our credit agreement with the most significant changes being voluntarily reducing the revolving credit facilityRCF from $125 million to $75 million and changing the definition of Consolidated EBITDA and certain other definitions contained in the credit agreement.

Our credit agreement imposes certain restrictions including limitations on our ability to obtain additional debt financing and on our payment of cash dividends. It also requires us to maintain certain financial covenants such as a funded debt to Consolidated EBITDA ratio of less than or equal to 2.5 to 1.0 and a fixed charge coverage ratio of not less than 1.25 to 1.0. At JuneSeptember 30, 2017, we believe we were in compliance with all covenants.

On November 6, 2017, we entered into our third amended and restated credit agreement, which provides for a $15.0 million term loan facility and an $85.0 million revolving credit facility that matures on November 6, 2020 with interest payable monthly at a rate of LIBOR plus a margin ranging from 1.75% to 2.75% based on a consolidated leverage ratio and principal payments of $1.25 million due quarterly beginning March 31, 2018.

Off-Balance Sheet Arrangements

We do not engage in anyoff-balance sheet arrangements.

Non-GAAP Measures

Adjusted EBITDA and Unlevered Free Cash Flow should not be considered as alternatives to net loss, operating income (loss), basic or diluted earnings per share or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA and Unlevered Free Cash Flow may not be comparable to similarly titled measures of other companies because other companies may not calculate Adjusted EBITDA, Unlevered Free Cash Flow or similarly titled measures in the same manner as we do. We prepare Adjusted EBITDA and Unlevered Free Cash Flow to eliminate the impact of items that we do not consider indicative of our core operating performance. We encourage you to evaluate these adjustments and the reasons we consider them appropriate.

We define Adjusted EBITDA as net loss plus interest expense, income tax expense, depreciation and amortization, impairment of goodwill, intangibles, property, plant and equipment, foreign exchange impact of intercompany financing activities, (gain) loss on retirement of property, plant and equipment, change in fair value of earn-outs/earn-outs and contingent consideration, stock-based compensation, merger/merger and acquisition costs, executive departure costs, restructuring charges andnon-recurring items.

We believe Adjusted EBITDA is useful to investors in evaluating our operating performance for the following reasons:

 

Investors and securities analysts use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies, and we understand our investor and analyst’s presentations include Adjusted EBITDA;

 

By comparing our Adjusted EBITDA in different periods, our investors may evaluate our operating results without the additional variations caused by items that we do not consider indicative of our core operating performance and which are not necessarily comparable from year to year; and

 

��Adjusted EBITDA is an integral component of Consolidated EBITDA, as defined and used in the financial covenant ratios in the credit agreement.
Adjusted EBITDA is an integral component of Consolidated EBITDA, as defined and used in the financial covenant ratios in the credit agreement.

Our management uses Adjusted EBITDA:

 

To indicate profit contribution;

 

For planning purposes, including the preparation of our annual operating budget and as a key element of annual incentive programs;

 

To allocate resources to enhance the financial performance of our business; and

 

In communications with our Board of Directors concerning our financial performance.

Although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:

 

Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or other contractual commitments;

 

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

Adjusted EBITDA does not reflect interest expense;

 

Adjusted EBITDA does not reflect cash requirements for income taxes;

Adjusted EBITDA does not reflect impairment of goodwill, intangibles, property, plant and equipment;

 

Adjusted EBITDA does not reflect foreign exchange impact of intercompany financing activities;

 

Adjusted EBITDA does not reflect (gain) loss on retirement of property, plant and equipment;

 

Adjusted EBITDA does not reflect the stock based compensation component of employee compensation;

 

Adjusted EBITDA does not reflect acquisition costs;

 

Adjusted EBITDA does not reflect change in fair value of earn-outs/earn-outs and contingent consideration;

 

Adjusted EBITDA does not reflect executive departure costs;

 

Adjusted EBITDA does not reflect restructuring charges;

 

Although depreciation and amortization arenon-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for these replacements; and

 

Other companies in our industry may calculate Adjusted EBITDA or similarly titled measures differently than we do, limiting its usefulness as a comparative measure.

We define Unlevered Free Cash Flow as Adjusted EBITDA less capital expenditures. We believe Unlevered Free Cash Flow is useful to investors in evaluating our operating performance for the following reasons:

Investors and securities analysts use Unlevered Free Cash Flow as a supplemental measure to evaluate the overall operating performance of companies, and we understand our investor and analyst’s presentations include Unlevered Free Cash Flow; and

 

By comparing our Unlevered Free Cash Flow in different periods, our investors may evaluate our operating results without the additional variations caused by items that we do not consider indicative of our core operating performance and which are not necessarily comparable from year to year.

Although Unlevered Free Cash Flow is frequently used by investors and securities analysts in their evaluations of companies, Unlevered Free Cash Flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Some of these limitations are:

 

Unlevered Free Cash Flow does not reflect changes in, or cash requirements for, our working capital needs;

 

Unlevered Free Cash Flow does not reflect interest expense;

 

Unlevered Free Cash Flow does not reflect cash requirements for income taxes;

 

Unlevered Free Cash Flow does not reflect impairment of goodwill, intangibles, property, plant and equipment;

 

Unlevered Free Cash Flow does not reflect foreign exchange impact of intercompany financing activities;

 

Unlevered Free Cash Flow does not reflect (gain) loss on retirement of property, plant and equipment;

 

Unlevered Free Cash Flow does not reflect acquisition costs;

 

Unlevered Free Cash Flow does not reflect change in fair value of earn-outs/earn-outs and contingent consideration;

 

Unlevered Free Cash Flow does not reflect executive departure costs;

 

Unlevered Free Cash Flow does not reflect restructuring charges;

 

Unlevered Free Cash Flow does not reflect depreciation and amortization;

 

Unlevered Free Cash Flow does not reflect the stock based compensation component of employee compensation; and

 

Other companies in our industry may calculate Unlevered Free Cash Flow or similarly titled measures differently than we do, limiting its usefulness as a comparative measure.

The following table presents a reconciliation of our net loss to Adjusted EBITDA and Unlevered Free Cash Flow.

 

  Three Months Ended
June 30,
   Six Months Ended
June 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
  2017   2016   2017   2016   2017   2016   2017   2016 
  (in thousands)       (in thousands) 

Net loss

  $(4,210  $(4,856  $(6,197  $(6,123  $(4,193  $(1,448  $(10,390  $(7,571

Interest expense

   613    643    1,232    1,311    689    729    1,921    2,040 

Depreciation and amortization

   7,552    9,013    14,868    17,256    7,999    8,305    22,867    25,561 

Impairment of intangible assets

   —      397    —      397    —      —      —      397 

(Gain) loss on sales of property, plant and equipment, net of retirements

   13    (134   50    (150   5    (14   55    (164

Stock-based compensation

   1,116    1,128    1,942    1,842    1,007    866    2,949    2,708 

Restructuring

   —      1,129    —      497    767    835    767    1,332 

Change in fair value of earn-out/contingent consideration

   (846   —      (846   —      —      (1,279   (846   (1,279

Executive departure costs

   —      —      —      1,884    —      —      —      1,884 

Acquisition costs

   1,916    70    1,916    240    807    —      2,723    240 

Income tax expense (benefit)

   (101   1,234    313    2,136 

Income tax expense

   762    540    1,075    2,676 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Adjusted EBITDA (non-GAAP measure)

  $6,053   $8,624   $13,278   $19,290   $7,843   $8,534   $21,121   $27,824 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Adjusted EBITDA (non-GAAP measure)

  $6,053   $8,624   $13,278   $19,290   $7,843   $8,534   $21,121   $27,824 

Capital expenditures

   4,911    4,670    8,071    9,575    5,853    1,936    13,924    11,511 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Unlevered Free Cash Flow (non-GAAP measure)

  $1,142   $3,954   $5,207   $9,715   $1,990   $6,598   $7,197   $16,313 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

We evaluate Adjusted EBITDA and Unlevered Free Cash Flow generated from our operations to assess the potential recovery of historical capital expenditures, determine timing and investment levels for growth opportunities, extend commitments of satellite bandwidth cost, invest in new products and services, expand or open new offices and service centers, and assist purchasing synergies.

Adjusted EBITDA decreased by $2.6$0.7 million to $6.1$7.8 million for the three months ended JuneSeptember 30, 2017, from $8.6$8.5 million for the three months ended JuneSeptember 30, 2016. The decrease resulted primarily from increased costs partially offset by increased revenue. Adjusted EBITDA decreased by $6.0$6.7 million to $13.3$21.1 million for the sixnine months ended JuneSeptember 30, 2017, from $19.3$27.8 million for the sixnine months ended JuneSeptember 30, 2016. The decrease resulted primarily from lower revenue partially offset by a reduction in ongoing operating expenses.

Unlevered Free Cash Flow was $1.1$2.0 million in the three months ended JuneSeptember 30, 2017, a decrease of $2.8$4.6 million over the prior year quarter. The decrease in Unlevered Free Cash Flow over the prior year quarter was due to decreased Adjusted EBITDA. Unlevered Free Cash Flow was $5.2$7.2 million in the sixnine months ended JuneSeptember 30, 2017, a decrease of $4.5$9.1 million over the prior year period. The decrease in Unlevered Free Cash Flow over the prior year period was due to decreased Adjusted EBITDA partially offset by a decline inand increased capital expenditures.

Item 3.Quantitative and QualitativeQualitative Disclosures about Market Risk

We are subject to a variety of risks, including foreign currency exchange rate fluctuations relating to foreign operations and certain purchases from foreign vendors. In the normal course of business, we assess these risks and have established policies and procedures to manage our exposure to fluctuations in foreign currency values.

Our objective in managing our exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rates. We presently do not hedge these risks, but evaluate financial risk on a regular basis and may utilize financial instruments in the future if deemed necessary. During the sixnine months ended JuneSeptember 30, 2017 and 2016, 10.5%9.8% and 16.0%15.4%, respectively of our revenues were earned innon-U.S. currencies. At JuneSeptember 30, 2017 and 2016, we had no significant outstanding foreign exchange contracts.

Our results of operations and cash flows are subject to fluctuations due to changes in interest rates primarily from our variable interest rate long-term debt. We presently do not hedge these risks, but evaluate financial risk on a regular basis and may utilize financial instruments in the future if deemed necessary. The following analysis reflects the annual impacts of potential changes in our interest rate to net loss attributable to us and our total stockholders’ equity based on our outstanding long-term debt on JuneSeptember 30, 2017 and December 31, 2016, assuming those liabilities were outstanding for the previous twelve months:

 

  June 30,   December 31,   September 30,   December 31, 
  2017   2016   2017   2016 
  (in thousands)   (in thousands) 

Effect on Net Income (Loss) and Equity—Increase/Decrease:

    

Effect on Net Income (Loss) and Equity - Increase/Decrease:

    

1% Decrease/increase in rate

  $471   $615   $600   $615 

2% Decrease/increase in rate

  $942   $1,229   $1,200   $1,229 

3% Decrease/increase in rate

  $1,413   $1,844   $1,800   $1,844 

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of JuneSeptember 30, 2017. The term “disclosure controls and procedures,” as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of JuneSeptember 30, 2017, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule13a-15(d) of the Exchange Act that occurred during the quarter ended JuneSeptember 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.Legal Proceedings

In August 2017, the Company filed litigation in Harris County District Court and arbitration against one of its former Chief Executive Officers for, among other things, breach of fiduciary duty, misappropriation of trade secrets, unfair competition and breach of contract. The Company is seeking repayment of certain severance benefits and injunctive relief. The Company has incurred legal expense of approximately $0.3 million in connection with this dispute for the nine months ended September 30, 2017. The Company may continue to incur significant legal fees, related expenses and management time in the future. The Company cannot predict the ultimate outcome of this dispute, the total costs to be incurred or the potential impact on personnel.

Inmarsat and the Company are in a dispute relating to a January 2014 take or pay agreement to purchase up to $65.0 million, under certain conditions, of GX capacity from Inmarsat over several years. The parties are attempting to resolve the dispute through a contractually stipulatedcontractually-stipulated arbitration process with the International Centre for Dispute Resolution that began in October 2016. The parties dispute whether Inmarsat has met its contractual obligations with respect to the service under the agreement. In July 2017, pursuant to its contractual rights under the agreement, the Company delivered a notice of termination of the agreement to Inmarsat.

The Company has incurred legal expenses of $0.5$0.8 million in connection with the GX dispute for the sixnine months ended JuneSeptember 30, 2017. The Company may continue to incur significant legal fees, related expenses and management time in the future. The Company cannot predict the ultimate outcome of the GX dispute, the total costs to be incurred or the potential impact on personnel.

Based on the information available at this time and management’s understanding of the GX dispute, the Company does not deem the likelihood of a material loss related to this dispute to be probable, so it has not accrued any liability related to the dispute. At this stage of the arbitration, the range of possible loss is not reasonably estimable, but could range from zero to the maximum amount payable under the contract for the services plus expenses.

The Company, in the ordinary course of business, is a claimant or a defendant in various other legal proceedings, including proceedings as to which the Company has insurance coverage and those that may involve the filing of liens against the Company or its assets.

Item 1A.Risk Factors

There have been no material changes from the risk factors disclosed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form10-K for the year ended December 31, 2016.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

192,136 shares valued at $3.3 million were used in the May 18, 2017 acquisition of Cyphre Security Solutions (Cyphre), a private Texas based company. Cyphre is a cybersecurity company that provides advanced enterprise data protection leveraging BlackTIE® hardware-based encryption featuring low latency protection for files at rest and in transit for both public and private cloud.None

Item 3.Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None

Item 6.Exhibits

The exhibits required to be filed with this Quarterly Report on Form10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

INDEX TO EXHIBITS
    2.2  Share Purchase Agreement between RigNet, Inc. and the shareholders of Orgtec S.A.P.I. de C.V., d.b.a. TECNOR dated November  3, 2015 (filed as Exhibit 2.2 to the Registrant’s Quarterly Report on Form10-Q filed with the SEC on May 9, 2016, and incorporated herein by reference)
    3.1  Amended and Restated Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form10-Q filed with the SEC on August 8, 2016, and incorporated herein by reference)
    3.2  Amendment to Amended and Restated Certificate of Incorporation, effective May  18, 2016. (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form10-Q filed with the SEC on August 8, 2016, and incorporated herein by reference)
    3.3  Amended and Restated Bylaws of the Registrant, as amended (filed as Exhibit 3.3 to the Registrant’s Quarterly Report on Form10-Q filed with the SEC on August 8, 2016, and incorporated herein by reference)
    3.4  Amendment to the Amended and Restated Bylaws of RigNet, Inc., effective May  18, 2016 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form8-K filed with the SEC on May 24, 2016, and incorporated herein by reference)
10.1+  Consulting Services Agreement between the Registrant and William Sutton dated July  13, 2017 (filed as Exhibit 10.1+ to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 7, 2017, and incorporated herein by reference)
  10.2Third Amended and Restated Credit Agreement dated as of November 6, 2017 among RigNet, Inc. as Borrower, the Subsidiaries of RigNet party thereto as Guarantors, Bank of America, N.A. as Administrative Agent, Swingline Lender and L/C Issuer, Compass Bank, as Syndication Agent, the Lenders party thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Sole Lead Arranger and Sole Bookrunner.
31.1  Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2  Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1  Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2  Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS  XBRL Instance Document
101.SCH  XBRL Schema Document
101.CAL  XBRL Calculation Linkbase Document
101.DEFXBRL Definition Linkbase Document
101.LAB  XBRL Label Linkbase Document
101.PRE  XBRL Presentation Linkbase Document
101.DEF  XBRL Definition Linkbase Document

+Indicates management contract or compensatory plan.

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.

 

  RIGNET, INC.
Date: August 7,November 6, 2017 By: 

/s/ CHARLES E. SCHNEIDER

  Charles E. Schneider
  

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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