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 September 30, 20172019
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.001 par value per share | RNET | NASDAQ |
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 | ☐ | 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 October 31, 2017,2019, there were outstanding 18,225,19419,970,308 shares of the registrant’s Common Stock.
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PART I – FINANCIAL INFORMATION | ||||||
3 | ||||||
Item 1 | Condensed Consolidated Financial Statements (Unaudited) | |||||
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
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 |
The table below sets forth a number of terms commonly used in our current and periodic reports filed with the Securities and Exchange Commission and is provided as a reference for the readers of our filings.
Adjusted EBITDA | Anon-GAAP measure. Net loss plus interest expense, income tax expense (benefit), depreciation and amortization, impairment of goodwill, intangibles, property, plant and equipment, foreign exchange impact of intercompany financing activities, (gain) loss on sales of property, plant and equipment, net of retirements, change in fair value of earn-outs and contingent consideration, stock-based compensation, acquisition costs, executive departure costs, restructuring charges, the GX Dispute, the GX Dispute Phase II costs andnon-recurring items. A reconciliation of Adjusted EBITDA to Net Income can be found in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
AI | Artificial Intelligence | |
Apps | Software Applications | |
ASC | Accounting Standards Codification | |
ASU | Accounting Standards Update | |
Auto-Comm | Automation Communications Engineering Corp., acquired in 2018, provides additional Systems Integration solutions | |
AVI | Adaptive Video Intelligence | |
BOP | Blow-Out Preventer | |
BGAN | Broadband Global Access Networks | |
CIEB | Costs and Estimated Earnings in Excess of Billings on uncompleted contracts | |
Cyphre® | Cyphre Security Solutions, acquired in 2017, provides cybersecurity solutions with advanced enterprise data protection | |
DTS | Data Technology Solutions, acquired in 2017, increases solutions offerings in managed communications, IT, and disaster relief | |
ECS | Enhanced Cyber Security | |
EDS | Emergency Disconnect Sequence | |
EPC | Engineering, Procurement and Construction | |
ESS | Energy Satellite Services, acquired in 2017, increases solutions offerings in SCADA and IoT | |
Exchange Act | United States Securities Exchange Act of 1934, as amended | |
FASB | Financial Accounting Standards Board | |
FCC | Federal Communications Commission | |
GAAP | Generally Accepted Accounting Principles in the United States | |
GX | Inmarsat plc’s Global Express satellite bandwidth service | |
HTS | High Throughput Satellite, providing greater bandwidth than traditional satellites | |
Intelie | Intelie soluções em Informática SA, acquired in 2018, provides machine learning and real-time predictive analytics | |
IoT | Internet-of-Things | |
IP | Internet Protocol | |
KPI | Key Performance Indicators | |
LIBOR | London Interbank Offered Rate | |
LoRA | Long Range Access | |
LOS | Line-of-Sight microwave transmission | |
MCS | Managed Communications Services | |
MPLS | Multiprotocol Label Switching | |
NASDAQ | NASDAQ Global Select Market, where RigNet’s common shares are listed for trading |
Nessco | Nessco Group Holdings LTD, acquired in 2012, provides Systems Integration solutions | |
NOC | Network Operations Center | |
NPT | Non-Productive Time | |
OPEC | Organization of Petroleum Exporting Countries | |
OTT | Software, IoT and other advanced solutions deliveredOver-the-Top of the network layer | |
PUC | Public Utility Commission | |
ROP | Rate Of Penetration | |
SaaS | Software as a Service | |
SAB | Staff Accounting Bulletin | |
SAFCON | Safety Controls, Inc., acquired in 2018, provides additional safety, security, and maintenance service solutions for the oil and gas industry | |
Satellite bandwidth – Ka band | Bandwidth typically operating in a frequency range of 27 – 40 gigahertz | |
Satellite bandwidth – Ku band | Bandwidth typically operating in a frequency range of 12 – 18 gigahertz | |
Satellite bandwidth – C band | Bandwidth typically operating in a frequency range of 4 – 8 gigahertz | |
Satellite bandwidth – L band | Bandwidth typically operating in a frequency range of 1 – 2 gigahertz | |
SCADA | Supervisory Control and Data Acquisition | |
SEC | United States Securities and Exchange Commission | |
SI | Systems Integration | |
SOC | Security Operations Center | |
TECNOR | Orgtec S.A.P.I. de C.V., d.b.a. TECNOR, acquired in March 2016, increases solutions offerings in Mexico | |
The Tax Act | The Tax Cuts and Jobs Act | |
VMS | Video Management System | |
VSAT | Very Small Aperture Terminal satellite receivers | |
WiMax | Worldwide Interoperability for Microwave Access wireless broadband communication standard |
PART I – FINANCIAL INFORMATION
Item 1.Condensed Consolidated Financial Statements
RIGNET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2017 | December 31, 2016 | September 30, 2019 | December 31, 2018 | |||||||||||||
(in thousands, except share amounts) | (in thousands, except share amounts) | |||||||||||||||
ASSETS | ASSETS |
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Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 32,900 | $ | 57,152 | $ | 14,267 | $ | 21,711 | ||||||||
Restricted cash | 43 | 139 | 39 | 41 | ||||||||||||
Accounts receivable, net | 49,216 | 48,672 | 61,895 | 67,450 | ||||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 1,773 | 2,382 | ||||||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts (CIEB) | 11,589 | 7,138 | ||||||||||||||
Prepaid expenses and other current assets | 6,743 | 10,379 | 6,795 | 6,767 | ||||||||||||
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Total current assets | 90,675 | 118,724 | 94,585 | 103,107 | ||||||||||||
Property, plant and equipment, net | 62,895 | 59,757 | 60,283 | 63,585 | ||||||||||||
Restricted cash | 1,500 | 1,514 | 1,522 | 1,544 | ||||||||||||
Goodwill | 37,122 | 21,998 | 45,484 | 46,631 | ||||||||||||
Intangibles, net | 32,341 | 16,028 | 30,083 | 33,733 | ||||||||||||
Right-of-use lease asset | 3,891 | — | ||||||||||||||
Deferred tax and other assets | 13,315 | 12,951 | 7,312 | 10,325 | ||||||||||||
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TOTAL ASSETS | $ | 237,848 | $ | 230,972 | $ | 243,160 | $ | 258,925 | ||||||||
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LIABILITIES AND EQUITY | LIABILITIES AND EQUITY |
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Current liabilities: | ||||||||||||||||
Accounts payable | $ | 12,195 | $ | 9,057 | $ | 26,624 | $ | 20,568 | ||||||||
Accrued expenses | 15,592 | 12,835 | 16,810 | 16,374 | ||||||||||||
Current maturities of long-term debt | 8,545 | 8,478 | 10,795 | 4,942 | ||||||||||||
Income taxes payable | 240 | 877 | 1,789 | 2,431 | ||||||||||||
GX dispute accrual | 750 | 50,765 | ||||||||||||||
Deferred revenue and other current liabilities | 9,340 | 3,625 | 10,897 | 5,863 | ||||||||||||
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Total current liabilities | 45,912 | 34,872 | 67,665 | 100,943 | ||||||||||||
Long-term debt | 51,455 | 52,990 | 103,641 | 72,085 | ||||||||||||
Deferred revenue | 263 | 254 | 180 | 318 | ||||||||||||
Deferred tax liability | 301 | 256 | 2,889 | 652 | ||||||||||||
Right-of-use lease liability - long-term portion | 3,576 | — | ||||||||||||||
Other liabilities | 27,365 | 30,022 | 21,702 | 28,943 | ||||||||||||
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Total liabilities | 125,296 | 118,394 | 199,653 | 202,941 | ||||||||||||
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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 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 | ) | — | |||||||||||||
Preferred stock - $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at September 30, 2019 or December 31, 2018 | — | — | ||||||||||||||
Common stock - $0.001 par value; 190,000,000 shares authorized; 19,970,308 and 19,464,847 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 20 | 19 | ||||||||||||||
Treasury stock - 201,622 and 91,567 shares at September 30, 2019 and December 31, 2018, respectively, at cost | (2,682 | ) | (1,270 | ) | ||||||||||||
Additionalpaid-in capital | 154,959 | 147,906 | 183,081 | 172,946 | ||||||||||||
Accumulated deficit | (28,057 | ) | (17,550 | ) | (115,150 | ) | (96,517 | ) | ||||||||
Accumulated other comprehensive loss | (14,468 | ) | (17,971 | ) | (21,831 | ) | (19,254 | ) | ||||||||
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Total stockholders’ equity | 112,336 | 112,403 | 43,438 | 55,924 | ||||||||||||
Non-redeemable,non-controlling interest | 216 | 175 | 69 | 60 | ||||||||||||
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Total equity | 112,552 | 112,578 | 43,507 | 55,984 | ||||||||||||
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TOTAL LIABILITIES AND EQUITY | $ | 237,848 | $ | 230,972 | $ | 243,160 | $ | 258,925 | ||||||||
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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 September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
(in thousands, except per share amounts) | (in thousands, except per share amounts) | |||||||||||||||||||||||||||||||
Revenue | $ | 50,844 | $ | 50,612 | $ | 148,078 | $ | 167,864 | $ | 60,993 | $ | 64,770 | $ | 178,835 | $ | 178,610 | ||||||||||||||||
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Expenses: | ||||||||||||||||||||||||||||||||
Cost of revenue (excluding depreciation and amortization) | 32,385 | 29,860 | 95,298 | 99,412 | 35,662 | 40,734 | 108,637 | 110,661 | ||||||||||||||||||||||||
Depreciation and amortization | 7,999 | 8,305 | 22,867 | 25,561 | 7,172 | 8,413 | 23,763 | 24,756 | ||||||||||||||||||||||||
Impairment of intangible assets | — | — | — | 397 | ||||||||||||||||||||||||||||
Change in fair value ofearn-out/contingent consideration | — | (750 | ) | 1,284 | 2,050 | |||||||||||||||||||||||||||
Selling and marketing | 2,400 | 1,724 | 5,968 | 5,559 | 2,784 | 2,728 | 9,529 | 9,866 | ||||||||||||||||||||||||
General and administrative | 11,011 | 10,476 | 31,401 | 39,393 | 12,377 | 14,666 | 43,305 | 41,098 | ||||||||||||||||||||||||
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Total expenses | 53,795 | 50,365 | 155,534 | 170,322 | 57,995 | 65,791 | 186,518 | 188,431 | ||||||||||||||||||||||||
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Operating income (loss) | (2,951 | ) | 247 | (7,456 | ) | (2,458 | ) | 2,998 | (1,021 | ) | (7,683 | ) | (9,821 | ) | ||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||||||||||
Interest expense | (689 | ) | (729 | ) | (1,921 | ) | (2,040 | ) | (1,784 | ) | (807 | ) | (4,291 | ) | (2,773 | ) | ||||||||||||||||
Other income (expense), net | 209 | (426 | ) | 62 | (397 | ) | ||||||||||||||||||||||||||
Other expense, net | (486 | ) | (658 | ) | (507 | ) | (40 | ) | ||||||||||||||||||||||||
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Loss before income taxes | (3,431 | ) | (908 | ) | (9,315 | ) | (4,895 | ) | ||||||||||||||||||||||||
Income tax expense | (762 | ) | (540 | ) | (1,075 | ) | (2,676 | ) | ||||||||||||||||||||||||
Income (loss) before income taxes | 728 | (2,486 | ) | (12,481 | ) | (12,634 | ) | |||||||||||||||||||||||||
Income tax benefit (expense) | (998 | ) | (312 | ) | (5,868 | ) | 11 | |||||||||||||||||||||||||
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Net loss | (4,193 | ) | (1,448 | ) | (10,390 | ) | (7,571 | ) | (270 | ) | (2,798 | ) | (18,349 | ) | (12,623 | ) | ||||||||||||||||
Less: Net income attributable tonon-redeemable,non-controlling interest | 39 | 210 | 117 | 171 | 224 | 49 | 284 | 109 | ||||||||||||||||||||||||
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Net loss attributable to RigNet, Inc. stockholders | $ | (4,232 | ) | $ | (1,658 | ) | $ | (10,507 | ) | $ | (7,742 | ) | $ | (494 | ) | $ | (2,847 | ) | $ | (18,633 | ) | $ | (12,732 | ) | ||||||||
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COMPREHENSIVE LOSS | ||||||||||||||||||||||||||||||||
Net loss | $ | (4,193 | ) | $ | (1,448 | ) | $ | (10,390 | ) | $ | (7,571 | ) | $ | (270 | ) | $ | (2,798 | ) | $ | (18,349 | ) | $ | (12,623 | ) | ||||||||
Foreign currency translation | 1,737 | (363 | ) | 3,503 | (1,954 | ) | (2,913 | ) | (3,897 | ) | (2,577 | ) | (4,489 | ) | ||||||||||||||||||
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Comprehensive loss | (2,456 | ) | (1,811 | ) | (6,887 | ) | (9,525 | ) | (3,183 | ) | (6,695 | ) | (20,926 | ) | (17,112 | ) | ||||||||||||||||
Less: Comprehensive income (loss) attributable tonon-controlling interest | 39 | 210 | 117 | 171 | �� | |||||||||||||||||||||||||||
Less: Comprehensive income attributable tonon-controlling interest | 224 | 49 | 284 | 109 | ||||||||||||||||||||||||||||
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Comprehensive loss attributable to RigNet, Inc. stockholders | $ | (2,495 | ) | $ | (2,021 | ) | $ | (7,004 | ) | $ | (9,696 | ) | $ | (3,407 | ) | $ | (6,744 | ) | $ | (21,210 | ) | $ | (17,221 | ) | ||||||||
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LOSS PER SHARE – BASIC AND DILUTED | ||||||||||||||||||||||||||||||||
LOSS PER SHARE - BASIC AND DILUTED | ||||||||||||||||||||||||||||||||
Net loss attributable to RigNet, Inc. common stockholders | $ | (4,232 | ) | $ | (1,658 | ) | $ | (10,507 | ) | $ | (7,742 | ) | $ | (494 | ) | $ | (2,847 | ) | $ | (18,633 | ) | $ | (12,732 | ) | ||||||||
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Net loss per share attributable to RigNet, Inc. common stockholders, basic | $ | (0.23 | ) | $ | (0.09 | ) | $ | (0.58 | ) | $ | (0.44 | ) | $ | (0.02 | ) | $ | (0.15 | ) | $ | (0.94 | ) | $ | (0.69 | ) | ||||||||
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Net loss per share attributable to RigNet, Inc. common stockholders, diluted | $ | (0.23 | ) | $ | (0.09 | ) | $ | (0.58 | ) | $ | (0.44 | ) | $ | (0.02 | ) | $ | (0.15 | ) | $ | (0.94 | ) | $ | (0.69 | ) | ||||||||
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Weighted average shares outstanding, basic | 18,086 | 17,782 | 17,982 | 17,677 | 19,970 | 18,905 | 19,777 | 18,566 | ||||||||||||||||||||||||
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Weighted average shares outstanding, diluted | 18,086 | 17,782 | 17,982 | 17,677 | 19,970 | 18,905 | 19,777 | 18,566 | ||||||||||||||||||||||||
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The accompanying notes are an integral part of the condensed consolidated financial statements.
RIGNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (10,390 | ) | $ | (7,571 | ) | $ | (18,349 | ) | $ | (12,623 | ) | ||||
Adjustments to reconcile net loss to net cash provided by operations: | ||||||||||||||||
Depreciation and amortization | 22,867 | 25,561 | 23,763 | 24,756 | ||||||||||||
Impairment of intangible assets | — | 397 | ||||||||||||||
Stock-based compensation | 2,949 | 2,708 | 7,132 | 4,368 | ||||||||||||
Amortization of deferred financing costs | 192 | 132 | 252 | 141 | ||||||||||||
Deferred taxes | (271 | ) | (1,461 | ) | 4,902 | (117 | ) | |||||||||
Change in fair value ofearn-out/contingent consideration | (846 | ) | (1,279 | ) | 1,284 | 2,050 | ||||||||||
Accretion of discount of contingent consideration payable for acquisitions | 417 | 378 | 262 | 368 | ||||||||||||
(Gain) loss on sales of property, plant and equipment, net of retirements | 55 | (164 | ) | 19 | 34 | |||||||||||
Changes in operating assets and liabilities, net of effect of acquisition: | ||||||||||||||||
Accounts receivable | (122 | ) | 10,498 | |||||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 716 | 4,078 | ||||||||||||||
Accounts receivable, net | 4,995 | (15,428 | ) | |||||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts (CIEB) | (4,536 | ) | (1,095 | ) | ||||||||||||
Prepaid expenses and other assets | 3,714 | (4,927 | ) | 128 | (1,634 | ) | ||||||||||
Right-of-use lease asset | 1,214 | — | ||||||||||||||
Accounts payable | 1,697 | (475 | ) | 5,355 | 3,986 | |||||||||||
Accrued expenses | 1,733 | (5,741 | ) | 36 | (1,584 | ) | ||||||||||
Deferred revenue and other assets | 6,212 | 67 | ||||||||||||||
GX Dispute payment | (50,000 | ) | — | |||||||||||||
Deferred revenue | 1,635 | 1,512 | ||||||||||||||
Right-of-use lease liability | (1,593 | ) | — | |||||||||||||
Other liabilities | (8,035 | ) | 553 | (2,444 | ) | (1,807 | ) | |||||||||
Payout of TECNOR contingent consideration - inception to date change in fair value portion | — | (1,575 | ) | |||||||||||||
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Net cash provided by operating activities | 20,888 | 22,754 | ||||||||||||||
Net cash provided by (used in) operating activities | (25,945 | ) | 1,352 | |||||||||||||
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Cash flows from investing activities: | ||||||||||||||||
Acquisitions | (32,205 | ) | (4,841 | ) | ||||||||||||
Acquisitions (net of cash acquired) | — | (5,405 | ) | |||||||||||||
Capital expenditures | (13,186 | ) | (11,152 | ) | (16,776 | ) | (18,791 | ) | ||||||||
Proceeds from sales of property, plant and equipment | 274 | 205 | 300 | 685 | ||||||||||||
Increase (decrease) in restricted cash | 110 | (1,098 | ) | |||||||||||||
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Net cash used in investing activities | (45,007 | ) | (16,886 | ) | (16,476 | ) | (23,511 | ) | ||||||||
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Cash flows from financing activities: | ||||||||||||||||
Proceeds from issuance of common stock | 684 | 1,606 | ||||||||||||||
Issuance of common stock upon the exercise of stock options and the vesting of restricted stock | 4 | 967 | ||||||||||||||
Stock withheld to cover employee taxes on stock-based compensation | (1,412 | ) | (1,130 | ) | ||||||||||||
Subsidiary distributions tonon-controlling interest | (76 | ) | (197 | ) | (275 | ) | (157 | ) | ||||||||
Payout of TECNOR contingent consideration - fair value on acquisition date portion | — | (6,425 | ) | |||||||||||||
Proceeds from borrowings | 15,000 | — | 48,500 | 16,750 | ||||||||||||
Repayments of long-term debt | (16,660 | ) | (9,420 | ) | (11,413 | ) | (3,848 | ) | ||||||||
Payment of financing fees | — | (100 | ) | (486 | ) | — | ||||||||||
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Net cash used in financing activities | (1,052 | ) | (8,111 | ) | ||||||||||||
Net cash provided by financing activities | 34,918 | 6,157 | ||||||||||||||
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Net change in cash and cash equivalents | (25,171 | ) | (2,243 | ) | (7,503 | ) | (16,002 | ) | ||||||||
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Cash and cash equivalents: | ||||||||||||||||
Cash and cash equivalents including restricted cash: | ||||||||||||||||
Balance, January 1, | 57,152 | 60,468 | 23,296 | 36,141 | ||||||||||||
Changes in foreign currency translation | 919 | (986 | ) | 35 | 2,175 | |||||||||||
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Balance, September 30, | $ | 32,900 | $ | 57,239 | $ | 15,828 | $ | 22,314 | ||||||||
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Supplemental disclosures: | ||||||||||||||||
Income taxes paid | $ | 1,515 | $ | 5,890 | $ | 3,881 | $ | 2,989 | ||||||||
Interest paid | $ | 1,362 | $ | 1,527 | 3,645 | 2,284 | ||||||||||
Property, plant and equipment acquired under capital leases | $ | — | $ | 335 | ||||||||||||
Property, plant and equipment acquired under finance leases | 556 | — | ||||||||||||||
Non-cash investing - capital expenditures accrued | $ | 2,785 | $ | 653 | 2,873 | 2,612 | ||||||||||
Non-cash investing - tenant improvement allowance | $ | 1,728 | $ | — | ||||||||||||
Non-cash investing and financing - issuance of common stock for the Intelieearn-out | 3,000 | — | ||||||||||||||
Right-of-use operating lease | 539 | — | ||||||||||||||
Non-cash investing - contingent consideration for acquisitions | $ | 3,798 | $ | 5,553 | — | 7,600 | ||||||||||
Non-cash investing and financing - stock for Cyphre Security Solutions | $ | 3,304 | $ | — | ||||||||||||
Non-cash investing and financing - stock for acquisitions | — | 11,436 | ||||||||||||||
Liabilities assumed in acquisitions | $ | 674 | $ | 2,408 | — | 5,513 | ||||||||||
September 30, 2019 | September 30, 2018 | |||||||||||||||
Cash and cash equivalents | $ | 14,267 | $ | 20,726 | ||||||||||||
Restricted cash - current portion | 39 | 42 | ||||||||||||||
Restricted cash - long-term portion | 1,522 | 1,546 | ||||||||||||||
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Cash and cash equivalents including restricted cash | $ | 15,828 | $ | 22,314 | ||||||||||||
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The accompanying notes are an integral part of the condensed consolidated financial statements.
RIGNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
Common Stock | Treasury Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | Non-Redeemable, Non-Controlling | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Equity | Interest | Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(dollars and shares in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 30, 2018 | 19,360 | $ | 19 | 90 | $ | (1,246 | ) | $ | 170,603 | $ | (43,949 | ) | $ | (15,398 | ) | $ | 110,029 | $ | 72 | $ | 110,101 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the exercise of stock options | 51 | — | — | — | 910 | — | — | 910 | — | 910 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the vesting of Restricted Stock Units, net of share cancellations | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the acquisition of Intelie | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock withheld to cover employee taxes on stock-based compensation | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 1,086 | — | — | 1,086 | — | 1,086 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative effect adjustment from implementation of ASU2016-16 | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | — | (3,897 | ) | (3,897 | ) | — | (3,897 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-controlling owner distributions | — | — | — | — | — | — | — | — | (91 | ) | (91 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | (2,847 | ) | — | (2,847 | ) | 49 | (2,798 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, September 30, 2018 | 19,411 | $ | 19 | 90 | $ | (1,246 | ) | $ | 172,599 | $ | (46,796 | ) | $ | (19,295 | ) | $ | 105,281 | $ | 30 | $ | 105,311 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, June 30, 2019 | 19,969 | $ | 20 | 201 | $ | (2,676 | ) | $ | 181,577 | $ | (114,656 | ) | $ | (18,918 | ) | $ | 45,347 | $ | (15 | ) | $ | 45,332 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the exercise of stock options | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the vesting of Restricted Stock Units, net of share cancellations | 1 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the Intelieearn-out | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock withheld to cover employee taxes on stock-based compensation | — | — | 1 | (6 | ) | — | — | — | (6 | ) | — | (6 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 1,504 | — | — | 1,504 | — | 1,504 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | — | (2,913 | ) | (2,913 | ) | — | (2,913 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-controlling owner distributions | — | — | — | — | — | — | — | — | (140 | ) | (140 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | (494 | ) | — | (494 | ) | 224 | (270 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, September 30, 2019 | 19,970 | $ | 20 | 202 | $ | (2,682 | ) | $ | 183,081 | $ | (115,150 | ) | $ | (21,831 | ) | $ | 43,438 | $ | 69 | $ | 43,507 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | Non-Redeemable, Non-Controlling Interest | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Common Stock | Treasury Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ | Non-Redeemable, Non-Controlling | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Equity | Interest | Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | (dollars and shares in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2016 | 17,758 | $ | 18 | — | $ | — | $ | 143,012 | $ | (6,043 | ) | $ | (13,836 | ) | $ | 123,151 | $ | 162 | $ | 123,313 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2018 | 18,233 | $ | 18 | 6 | $ | (116 | ) | $ | 155,829 | $ | (33,726 | ) | $ | (14,806 | ) | $ | 107,199 | $ | 78 | 107,277 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the exercise of stock options | 213 | — | — | — | 1,606 | — | — | 1,606 | — | 1,606 | 59 | — | — | — | 967 | — | — | 967 | — | 967 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restricted common stock cancellations | (44 | ) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the vesting of Restricted Stock Units, net of share cancellations | 330 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for acquisitions | 789 | 1 | — | — | 11,435 | — | — | 11,436 | — | 11,436 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock withheld to cover employee taxes on stock-based compensation | — | — | 84 | (1,130 | ) | — | — | — | (1,130 | ) | — | (1,130 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 4,368 | — | — | 4,368 | — | 4,368 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative effect adjustment from implementation of ASU2016-16 | — | — | — | — | — | (338 | ) | — | (338 | ) | — | (338 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | — | (4,489 | ) | (4,489 | ) | — | (4,489 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-controlling owner distributions | — | — | — | — | — | — | — | — | (157 | ) | (157 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | (12,732 | ) | — | (12,732 | ) | 109 | (12,623 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, September 30, 2018 | 19,411 | $ | 19 | 90 | $ | (1,246 | ) | $ | 172,599 | $ | (46,796 | ) | $ | (19,295 | ) | $ | 105,281 | $ | 30 | $ | 105,311 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, January 1, 2019 | 19,465 | $ | 19 | 92 | $ | (1,270 | ) | $ | 172,946 | $ | (96,517 | ) | $ | (19,254 | ) | $ | 55,924 | $ | 60 | $ | 55,984 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the exercise of stock options | 1 | — | — | — | 3 | — | — | 3 | — | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the vesting of Restricted Stock Units, net of share cancellations | 296 | 1 | — | — | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock for the Intelieearn-out | 208 | — | — | — | 3,000 | — | — | 3,000 | — | 3,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock withheld to cover employee taxes on stock-based compensation | — | — | 110 | (1,412 | ) | — | — | — | (1,412 | ) | — | (1,412 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,708 | — | — | 2,708 | — | 2,708 | — | — | — | — | 7,132 | — | — | 7,132 | — | 7,132 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | — | (1,954 | ) | (1,954 | ) | — | (1,954 | ) | — | — | — | — | — | — | (2,577 | ) | (2,577 | ) | — | (2,577 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-controlling owner distributions | — | — | — | — | — | — | — | — | (197 | ) | (197 | ) | — | — | — | — | — | — | — | — | (275 | ) | (275 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | (7,742 | ) | — | (7,742 | ) | 171 | (7,571 | ) | — | — | — | — | — | (18,633 | ) | — | (18,633 | ) | 284 | (18,349 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, September 30, 2016 | 17,927 | $ | 18 | — | $ | — | $ | 147,326 | $ | (13,785 | ) | $ | (15,790 | ) | $ | 117,769 | $ | 136 | $ | 117,905 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, September 30, 2019 | 19,970 | $ | 20 | 202 | $ | (2,682 | ) | $ | 183,081 | $ | (115,150 | ) | $ | (21,831 | ) | $ | 43,438 | $ | 69 | $ | 43,507 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, January 1, 2017 | 17,933 | $ | 18 | — | $ | — | $ | 147,906 | $ | (17,550 | ) | $ | (17,971 | ) | $ | 112,403 | $ | 175 | $ | 112,578 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the exercise of stock options | 58 | — | — | — | 800 | — | — | 800 | — | 800 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the vesting of Restricted Stock Units, net of share cancellations | 48 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock upon the acquisition of Cyphre | 192 | — | — | — | 3,304 | — | — | 3,304 | — | 3,304 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock witheld to cover employee taxes on stock-based compensation | (6 | ) | — | 6 | (116 | ) | — | — | — | (116 | ) | — | (116 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,949 | — | — | 2,949 | — | 2,949 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation | — | — | — | — | — | — | 3,503 | 3,503 | — | 3,503 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-controlling owner distributions | — | — | — | — | — | — | — | — | (76 | ) | (76 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | (10,507 | ) | — | (10,507 | ) | 117 | (10,390 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Balance, September 30, 2017 | 18,225 | $ | 18 | 6 | $ | (116 | ) | $ | 154,959 | $ | (28,057 | ) | $ | (14,468 | ) | $ | 112,336 | $ | 216 | $ | 112,552 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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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, 20162018 included in the Company’s Annual Report on Form10-K filed with the Securities and Exchange Commission on March 6, 2017.15, 2019.
Significant Accounting Policies
PleaseIn addition to the accounting policies described below, please refer to RigNet’s Annual Report on Form10-K for fiscal year 20162018 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 Recognition – Revenue from Contracts with Customers (Topic 606). The core principle of this amendment
Revenue is that an entity should recognize revenuerecognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entityCompany expects to be entitled in exchange for those goods or services. In August 2015,
Revenue Recognition – Managed Communications Services (MCS) and Applications andInternet-of-Things (Apps & IoT)
MCS and Apps & IoT customers are primarily served under fixed-price contracts, either on a monthly or day rate basis or for equipment sales and consulting services. Contracts are generally in the FASB issuedform of Master Service Agreements, or MSAs, with specific services being provided under individual service orders. Offshore contracts generally have a term of up to three years with renewal options. Land-based contracts 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 permit early termination 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).
Performance Obligations Satisfied Over Time— The delivery of service represents the single performance obligation under MCS and Apps & IoT contracts. Revenue for contracts is generally recognized over time as service is transferred to the customer and the Company expects to be entitled to the agreed monthly or day rate in exchange for those services.
Performance Obligations Satisfied at a Point in Time— The delivery of equipment represents the single performance obligation under equipment sale contracts. Revenue for equipment sales is generally recognized upon delivery of equipment to customers.
Revenue Recognition – Systems Integration
Revenues related to long-term, fixed-price Systems Integration contracts for customized network solutions are recognized based on the percentage of completion for the contract. At any point, RigNet has numerous contracts in progress, all of which are at various stages of completion. Accounting for revenues and profits on long-term contracts requires estimates of total estimated contract costs and estimates of progress toward completion to determine the extent of revenue and profit recognition.
Performance Obligations Satisfied Over Time— The delivery of a Systems Integration solution represents the single performance obligation under Systems Integration contracts. Progress towards completion on fixed-price contracts is measured based on the ratio of costs incurred to total estimated contract costs (thecost-to-cost method). These estimates may be revised as additional information becomes available or as specific project circumstances change.
The Company reviews all material contracts on a monthly basis and revises the estimates as appropriate for developments such as providing services, purchasing third-party materials and equipment at costs differing from those previously estimated, and incurring or expecting to incur schedule issues. Changes in estimated final contract revenues and costs can either increase or decrease the final estimated contract profit or loss. Profits are recorded in the period in which a change in estimate is recognized, based on progress achieved through the period of change. Anticipated losses on contracts are recorded in full in the period in which they become evident. Revenue recognized in excess of amounts billed is classified as a current asset under Costs and estimated earnings in excess of billings on uncompleted contracts (CIEB).
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Systems Integration contracts are billed in accordance with the terms of the contract which are typically either based on milestones or specified time intervals. As of September 30, 2019 and December 31, 2018, the amount of CIEB related to Systems Integration projects was $11.6 million and $7.1 million, respectively. Under long-term contracts, amounts recorded in CIEB may not be realized or paid within aone-year period. As of September 30, 2019 and December 31, 2018, $1.2 million and none, respectively, of amounts billed to customers in excess of revenue recognized to date were classified as a current liability, under deferred revenue and other current liabilities.
Variable Consideration – Systems Integration - The Company records revenue on contracts relating to certain probable claims and unapproved change orders by including in revenue an amount less than or equal to the amount of costs incurred to date relating to these probable claims and unapproved change orders, thus recognizing no profit until such time as claims are finalized or change orders are approved. The amount of unapproved change orders and claim revenues is included in the Company’s Consolidated Balance Sheets as part of CIEB. No material unapproved change orders or claims revenue were included in CIEB as of September 30, 2019 and December 31, 2018. As new facts become known, an adjustment to the estimated recovery is made and reflected in the current period.
Backlog - As of September 30, 2019, we have backlog for our percentage of completion projects of $35.9 million, which will be recognized over the remaining contract term for each contract. Percentage of completion contract terms are typically one to three years.
Leases
Effective with adoption of Accounting Standards UpdateNo. 2015-142016-02 (ASU2015-14)2016-02), Revenue from Contracts with Customers (Topic 606): DeferralLeases (the new lease standard) on January 1, 2019, we determine if an arrangement is a lease at inception. Operating leases right of use assets and liabilities are included in right to use lease asset, deferred revenue and other current liabilities, and right to use lease liability – long-term portion on our condensed consolidated balance sheets. Finance leases are included in property, plant and equipment; current maturities of long-term debt; and long-term debt on our condensed consolidated balance sheets.
Operating lease right to use assets and liabilities are recognized based on the present value of the Effective Date. future minimum lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Recently Issued Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards UpdateASUNo. 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 to the balance sheet. The Company adopted this ASU as of the first quarter 2019, and it requiredright-of-use liabilities on the consolidated balance sheet of $6.5 million as of March 31, 2019, of which $5.8 million were long-term and $0.7 million were current, with no related impact on the Company’s Condensed Consolidated Statement of Equity or Comprehensive Loss. The Company elected the package of practical expedients permitted under the transition guidance within the new standard which, among other things, allows companies to carry forward their historical lease classification and to not record leases with an initial term of less than 12 months. The Company has used the optional transition method permitted under Accounting Standards UpdateNo. 2018-11 (ASU2018-11). Accordingly, prior year amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical accounting. The Company’s credit agreement excludes the impact of ASU2016-02.
In June 2016, the FASB issued Accounting Standards UpdateNo. 2016-13 (ASU2016-13), which measures credit losses on most financial assets and certain other instruments that are not measured at fair value through net income. The update amends the impairment model to utilize a current expected credit loss (CECL) methodology in place of the incurred loss methodology for financial instruments, including trade receivables. The amendment requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. Companies will apply this standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The new standard is effective for interim and annual reporting periods beginning after December 15, 2019. The Company is evaluating the potential impact of this guidance on its consolidated financial statements and will adopt the guidance effective January 1, 2020.
In June 2018, the FASB issued Accounting Standards UpdateNo. 2018-07 (ASU2018-07), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU is effective for annual and interim reporting periods beginning after December 15, 2018. The adoption of this ASU did not have any material impact on the Company’s condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In August 2018, the FASB issued ASUNo. 2018-13 (ASU2018-13), which eliminates disclosures, modifies existing disclosures and adds new Fair Value disclosure requirements to Topic 820 for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for annual and interim reporting periods beginning after December 15, 2019. 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,August 2018, the FASB issued Accounting Standards UpdateASUNo. 2016-092018-15 (ASU2016-09)2018-15), 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 classificationwhich provides guidance on the statement of cash flows. This ASUimplementation costs incurred in a cloud computing arrangement that 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.service contract. The ASU is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted.2019. 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 ServicesAuto-Comm and SAFCON
On July 28, 2017,April 18, 2018, RigNet acquired substantially allcompleted the assetsseparate acquisitions of Energy Satellite Services (ESS). ESS isAutomation Communications Engineering Corp. (Auto-Comm) and Safety Controls, Inc. (SAFCON) for an aggregate purchase price of $6.7 million. Of this aggregate purchase price RigNet paid $2.2 million in cash and $4.1 million in stock in April 2018. In September 2018, the Company paid $0.3 million in cash for a supplierworking capital adjustment.
Auto-Comm provides a broad range of wireless communications services, via satellite networks primarilyfor both onshore and offshore remote locations, to the midstream sector of the oil and gas industry. The assets acquired enhance RigNet’s Supervisory ControlAuto-Comm brings over 30 years of systems integration experience in engineering and Data Acquisition (SCADA) customer portfolio,design, installation, testing, and strengthenmaintenance. SAFCON offers a diverse set of safety, security, and maintenance services to the Company’s US landoil andInternet-of-Things (IoT) market position. The Company paid $22.2 million in cash for gas industry. Auto-Comm and SAFCON have developed strong relationships with major energy companies that complement the ESS assets. ESS isrelationships that RigNet has established over the years. Auto-Comm and SAFCON are based in Texas.Louisiana.
The assets and liabilities of ESSAuto-Comm and SAFCON 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 $8.6$1.4 million arising from the acquisitionacquisitions consists largely of growth prospects, synergies and other benefits that the Company believes will result from combining the operations of the Company, Auto-Comm and ESS,SAFCON, 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 deductiblenondeductible for income tax purposes. The acquisitionacquisitions of ESS,Auto-Comm and SAFCON, including goodwill, isare included in the Company’s condensed consolidated financial statements as of the acquisition date and isare primarily reflected in the Applications andInternet-of-ThingsSystems Integration 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 | ||||||||||
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Total identifiable intangible assets | 12,910 | |||||||||||
Goodwill | 8,613 | |||||||||||
Accounts Payable | (491 | ) | ||||||||||
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Total purchase price | $ | 22,200 | ||||||||||
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Current assets Property and equipment Trade name Customer relationships Total identifiable intangible assets Goodwill Current liabilities Deferred tax liability Total purchase price Data Technology Solutions Weighted Average
Estimated Useful
Life (Years) Fair Market Values (in thousands) $ 4,947 132 7 $ 540 7 980 1,520 1,387 (1,006 ) (319 ) $ 6,661
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 paid $5.1 million in cash for the DTS assets. DTS is based in Louisiana.
The assets and liabilities of DTS 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 $0.6 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 DTS, 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 DTS, 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) | ||||||||||||
Property and equipment | $ | 4,553 | ||||||||||
Goodwill | 635 | |||||||||||
Accounts Payable | (83 | ) | ||||||||||
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Total purchase price | $ | 5,105 | ||||||||||
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Cyphre Security SolutionsIntelie
On May 18, 2017,March 23, 2018, RigNet completed its acquisition of Cyphre Security Solutions (Cyphre)IntelieTM Soluções Em Informática S.A (Intelie), for an estimated aggregate purchase price of $12.0$18.1 million. Of this aggregate purchase price, RigNet paid $4.9R$10.6 million (BRL) (or approximately $3.2 million) in cash, in May 2017, $3.3$7.3 million in stock and expects to pay $3.8$7.6 million worth of contingent consideration for intellectual property, estimatedRigNet stock 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 September 30, 2017, the fair value of the contingent consideration was $3.9 million. During the three and nine months ended September 30, 2017, RigNet recognized accreted interest expense on the Cyphre contingent consideration of $0.1 million with corresponding increases to other liabilities.
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 Applications andInternet-of-Things segment.
Weighted Average Estimated Useful Life (Years) | Fair Market Values | |||||||||||
(in thousands) | ||||||||||||
Property and equipment | $ | 18 | ||||||||||
Trade Name | 7 | 1,590 | ||||||||||
Technology | 7 | 5,571 | ||||||||||
Customer Relationships | 7 | 332 | ||||||||||
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Total identifiable intangible assets | 7,493 | |||||||||||
Goodwill | 4,591 | |||||||||||
Accrued Expenses | (100 | ) | ||||||||||
|
| |||||||||||
Total purchase price | $ | 12,002 | (a) | |||||||||
|
|
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 | ||||||||||||
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Net loss | $ | (3,843 | ) | $ | 170 | $ | (7,399 | ) | $ | (2,973 | ) | |||||
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Net loss attributable to RigNet, Inc. common stockholders | $ | (3,882 | ) | $ | (40 | ) | $ | (7,516 | ) | $ | (3,144 | ) | ||||
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Net loss per share attributable to RigNet, Inc. common stockholders: | ||||||||||||||||
Basic | $ | (0.21 | ) | $ | (0.00 | ) | $ | (0.42 | ) | $ | (0.18 | ) | ||||
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Diluted | $ | (0.21 | ) | $ | (0.00 | ) | $ | (0.42 | ) | $ | (0.18 | ) | ||||
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For the three and nine months ended September 30, 2017, RigNet incurred $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. Additional costs related to these acquisitions will be incurred and recorded as expense during the remainder of 2017.
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$17.0 million payable in stock. Intelie is a real-time, predictive analytics company that combines an operational understanding with a machine learning approach. Intelie facilitates innovation via Intelie PipesTM, a distributed query language with a complex event processor to aggregate and air,normalize real-time data from a myriad of data sources. This technology enables the Intelie LIVETM platform to solve data integration, data quality, data governance and monitoring problems. Intelie LIVE is an operational intelligence platform that empowers clients to make timely, data-driven decisions in mission-critical real-time operations, including a wide array of equipment, voicedrilling, 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. TECNORlonger-term, data-intensive projects, such as well planning. Intelie LIVE has broad applicability across many industry verticals. Intelie is based in Monterrey, Mexico.Brazil.
The assets and liabilities of TECNORIntelie 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 TECNORIntelie is measured at fair value in each reporting period, based on level 3 inputs, with any change to fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss in each reporting period.Loss. As of September 30, 2017,2019, the fair value of theearn-out was $5.2 million. There was a $0.8$7.9 million reductionwith $4.4 million in fair value to the TECNORearn-out fordeferred revenue and other current liabilities and $3.5 million in other long-term liabilities. During the nine months ended September 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 nine months ended September 30, 2017,2019, RigNet recognized accreted interest expense on the TECNORIntelieearn-out liability of $0.1$0.2 million and $0.4 million, respectively, with corresponding increases to other current liabilities. ThePortions of theearn-out isare payable in 2018.RigNet stock on the first, second and third anniversary of the closing of the acquisition based on certain post-closing performance targets under the acquisition agreement. On April 29, 2019, the agreement was amended to clarify the calculation of certain contingent consideration, but did not change the amount or form of consideration that could be paid pursuant to the purchase agreement. In May 2019, the Company issued 208,356 shares of its common stock, with an aggregate value of $3.0 million, as payment for the portion of theearn-out earned as of the first anniversary of the closing of the acquisition.
The goodwill of $6.5$10.7 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,Intelie, 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,Intelie, including goodwill, is included in the Company’s condensed consolidated financial statements as of the acquisition date and is reflected in the Managed ServicesApps & IoT 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 | ||||||||||
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Total identifiable intangible assets | 2,576 | |||||||||||
Goodwill | 6,465 | |||||||||||
Accounts Payable | (1,914 | ) | ||||||||||
Accrued Expenses | (494 | ) | ||||||||||
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Total purchase price | $ | 11,394 | (a) | |||||||||
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Weighted Average Estimated Useful Life (Years) | Fair Market Values | |||||||||||
(in thousands) | ||||||||||||
Current assets | $ | 589 | ||||||||||
Property and equipment | 73 | |||||||||||
Trade name | 7 | $ | 2,300 | |||||||||
Technology | 7 | 8,400 | ||||||||||
Customer relationships | 7 | 320 | ||||||||||
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Total identifiable intangible assets | 11,020 | |||||||||||
Goodwill | 10,744 | |||||||||||
Current liabilities | (460 | ) | ||||||||||
Deferred tax liability | (3,825 | ) | ||||||||||
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Total purchase price | $ | 18,141 | (a) | |||||||||
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(a) | Includes |
For the nine months ended September 30, 2016, RigNet incurred $0.2 million of acquisition-related costs, which are reported as general and administrative expense in the Company’s Condensed Consolidated Statements of Comprehensive Loss.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Actual and Pro Forma Impact of the TECNOR Acquisition2018 Acquisitions
TECNOR’sThe 2018 acquisitions of Auto-Comm, SAFCON and Intelie contributed revenue and net loss were $2.0income of $7.0 million and $0.7$0.8 million, respectively, for the three months ended September 30, 2016. TECNOR’s2018. The 2018 acquisitions of Auto-Comm, SAFCON and Intelie contributed revenue and net loss were $7.1income of $13.2 million and $0.1$1.6 million, respectively, for the nine months ended September 30, 2016.2018.
The following table represents supplemental pro forma information as if the TECNOR acquisition2018 acquisitions of Auto-Comm, SAFCON and Intelie had occurred on January 1, 2016. Pro forma adjustments include:2018.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
2018 | 2018 | |||||||
(in thousands, except per share amounts) | ||||||||
Revenue | $ | 64,770 | $ | 183,067 | ||||
Expenses | 67,568 | 195,161 | ||||||
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Net loss | $ | (2,798 | ) | $ | (12,094 | ) | ||
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Net loss attributable to RigNet, Inc. common stockholders | $ | (2,847 | ) | $ | (12,203 | ) | ||
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Net loss per share attributable to RigNet, Inc. common stockholders: | ||||||||
Basic | $ | (0.15 | ) | $ | (0.66 | ) | ||
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Diluted | $ | (0.15 | ) | $ | (0.66 | ) | ||
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The Company incurred acquisition-related costs of $0.1 million and
the three months ended September 30, 2019 and 2018, respectively, and $0.5 million and $2.1 million in the nine months ended September 30, 2019 and 2018, respectively, reported in general and administrative costs.
Nine Months Ended September 30, | ||||
2016 | ||||
(in thousands, except per share amounts) | ||||
Revenue | $ | 168,899 | ||
Expenses | 176,267 | |||
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| |||
Net loss | $ | (7,368 | ) | |
|
| |||
Net loss attributable to RigNet, Inc. common stockholders | $ | (7,539 | ) | |
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| |||
Net loss per share attributable to RigNet, Inc. common stockholders: | ||||
Basic | $ | (0.43 | ) | |
|
| |||
Diluted | $ | (0.43 | ) | |
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 kronerKroner, the British Pound Sterling and the British pound sterlingBrazilian Real 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 lossincome (loss) in the Company’s condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Credit and Customer Concentration Risk
Credit risk, with respect to accounts receivable, is due to the limited number of customers concentrated in the oil and gas, industry.maritime, pipeline, engineering and construction industries. 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. Although no one customer comprised over 10% of our revenue for the nine months ended September 30, 2019, our top 5 customers generated 24.7% of the Company’s revenue for the nine months ended September 30, 2019.
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 20172019 or 2016.2018. 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).
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$1.4 million of goodwill in the ESS acquisitionSystems Integration segment from the Auto-Comm and SAFCON acquisitions completed on July 28, 2017April 18, 2018 (see Note 2 – Business Combinations).
The Company acquired $0.6$10.7 million of goodwill in the DTSApps & IoT segment from the Intelie 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, 2016March 23, 2018 (see Note 2 – Business Combinations).
The Company performs its annual impairment test onas of July 31stof each year,year. In connection with the July 31, 2019 impairment test, the most recent annual test being performed prior to September 30, 2019, the fair values of the Company’s reporting units were in excess of their carrying values and no impairment was noted.
MCS had $21.9 million of goodwill as of September 30, 2019, and fair value exceeded carrying value by 16.1% as of the July 31, 2017. The July 20172019 annual test resulted in no impairment test. Apps & IoT had $22.2 million of goodwill as theof September 30, 2019, and fair value of each reporting unit exceeded the carrying value plusby 155.7% as of the July 31, 2019 annual impairment test. Systems Integration had $1.4 million of goodwill as of September 30, 2019, and fair value exceeded carrying value by 29.2% as of the July 31, 2019 annual impairment test. Any future downturn in our business could adversely impact the key assumptions in our impairment test. While we believe that reporting unit. there appears to be no indication of current or future impairment, historical operating results may not be indicative of future operating results and events and circumstances may occur causing a triggering event in a period as short as three months.
No impairment indicators have been identified in any reporting unit as of September 30, 2017 and December 31, 2016.2019.
As of September 30, 20172019 and December 31, 2016,2018, goodwill was $37.1$45.5 million and $22.0$46.6 million, respectively. Goodwill increases or decreases in value due to the effect of foreign currency translation, and increases with acquisitions.acquisitions, and decreases in the event an impairment is recognized.
Intangibles
Intangibles consist of customer relationships,non-competes,covenants-not-to-compete, brand name, licenses, technology backlog and licensesbacklog acquired as part of the Company’s acquisitions. Intangibles also includeinternal-use software. The Company’s intangibles have useful lives ranging from 1.75.0 to 7.020.0 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 September 30, 2017.2019.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 20172019 and December 31, 2016,2018, intangibles were $32.3$30.1 million and $16.0$33.7 million, respectively. During the three months ended September 30, 20172019 and 2016,2018, the Company recognized amortization expense of $1.9$2.0 million and $1.3$2.6 million, respectively. During the nine months ended September 30, 20172019 and 2016,2018, the Company recognized amortization expense of $4.7$6.9 million and $3.9$7.2 million, respectively.
The following table sets forth expected amortization expense of intangibles for the remainder of 20172019 and the following years (in thousands):
2017 | 1,833 | |||||||
2018 | 7,047 | |||||||
2019 | 5,988 | 1,651 | ||||||
2020 | 5,021 | 6,544 | ||||||
2021 | 4,679 | 6,137 | ||||||
2022 | 5,857 | |||||||
2023 | 5,213 | |||||||
Thereafter | 7,773 | 4,681 | ||||||
|
| |||||||
$ | 32,341 | $ | 30,083 | |||||
|
|
Note 5 – Restricted Cash
As of September 30, 2017,2019, the Company had restricted cash of $0.1 million and $1.5 million, in current and long-term assets, respectively. As of December 31, 2016,2018, 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 ServicesMCS 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 September 30, 20172019 and December 31, 2016,2018, the following credit facilities and long-term debt arrangements with financial institutions were in place:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
(in thousands) | ||||||||
Term loan, net of unamortized deferred financing costs | $ | 27,757 | $ | 34,053 | ||||
Revolving loan | 32,000 | 27,000 | ||||||
Capital lease | 243 | 415 | ||||||
|
|
|
| |||||
60,000 | 61,468 | |||||||
Less: Current maturities of long-term debt | (8,418 | ) | (8,399 | ) | ||||
Current maturities of capital lease | (127 | ) | (79 | ) | ||||
|
|
|
| |||||
$ | 51,455 | $ | 52,990 | |||||
|
|
|
|
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(in thousands) | ||||||||
Term Loan | $ | 6,250 | $ | 10,000 | ||||
Term-Out Loan | 27,000 | — | ||||||
Revolving credit facility (RCF) | 81,150 | 67,150 | ||||||
Unamortized deferred financing costs | (548 | ) | (315 | ) | ||||
Finance lease | 584 | 192 | ||||||
|
|
|
| |||||
114,436 | 77,027 | |||||||
Less: Current maturities of long-term debt | (10,629 | ) | (4,831 | ) | ||||
Current maturities of finance lease | (166 | ) | (111 | ) | ||||
|
|
|
| |||||
$ | 103,641 | $ | 72,085 | |||||
|
|
|
|
Term LoanCredit Agreement
AsThe Company and certain of September 30, 2017, the Company hasits subsidiaries are party to a term loan (Term Loan) issued under the secondthird amended and restated credit agreement, dated as of November 6, 2017, with four participating financial institutions (credit agreement)(as amended from time to time, the Credit Agreement), which provides for a $15.0 million term loan (Term Loan), a $30.0 millionterm-out facility(Term-Out Loan) and an $85.0 million revolving credit facility (RCF). The RCF andTerm-Out Loan mature on April 6, 2021. The Term Loan matures on December 31, 2020.
On October 3, 2013,February 13, 2019, the Company amended itsentered into the first amendment to Credit Agreement to refinance $30.0 million of outstanding draws under the existing $85.0 million RCF with the new $30.0 millionTerm-Out Loan.
The Credit Agreement required a $45.0 million reserve (Specified Reserve) under the RCF that was released and made available for borrowing for payment of the GX Dispute settlement. The RCF contains asub-limit of up to $25.0 million for commercial and stand- by letters of credit and performance bonds issued by the parties under the Credit Agreement. The facilities under the Credit Agreement are secured by substantially all the assets of the Company.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Under the Credit Agreement, the Term Loan, which increasedTerm-Out Loan and 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 anRCF bear interest at a rate of LIBOR plus a margin ranging from 1.5%1.75% to 2.5%3.00% based on a consolidated leverage ratio of funded debt to Consolidated EBITDA, anon-GAAP financial measure as defined in the credit agreement.Credit Agreement. Interest on the Term Loan,Term-Out Loan and RCF is payable monthly along with quarterly principalmonthly. Principal installments of $2.1$1.25 million withand $1.5 million under the balanceTerm Loan andTerm-Out Loan, respectively, are due October 2018.quarterly. The weighted average interest rate for the three months ended September 30, 20172019 and 2016 was 3.2%2018 were 5.3% and 2.5%4.9%, respectively. The weighted average interest rate for the nine months ended September 30, 20172019 and 2016 was 3.1%2018 were 5.3% and 2.4%4.7%, respectively, with an interest rate of 3.2%5.0% at September 30, 2017.2019.
Term Loan
As of September 30, 2019, the Term Loan had an outstanding principal balance of $6.3 million, excluding the impact of unamortized deferred financing costs.
Term-Out Loan
As of September 30, 2019, theTerm-Out Loan had an outstanding principal balance of $27.0 million.
RCF
As of September 30, 2019, $81.2 million in draws remain outstanding under the RCF. During the nine months ended September 30, 2019, the Company borrowed $43.0 million under the RCF in connection with the $45.0 million of GX Dispute settlement payments.
Covenants and Restrictions
The Term LoanCompany’s Credit Agreement contains certain covenants and restrictions, including restricting the payment of cash dividends under default, and maintaining certain financial covenants such as a consolidated fixed charge coverage ratio of not less than 1.25 to 1.00. Additionally, the Credit Agreement requires a consolidated leverage ratio, as defined in the Credit Agreement, of less than or equal to 2.75 to 1.00. The consolidated leverage ratio increased to 3.25 to 1.00 for the four quarters starting in the 2nd quarter of 2019. The consolidated leverage ratio then decreases to 3.00 to 1.00 for three quarters, and then decreases to 2.75 to 1.00 for all remaining quarters. If any default occurs related to these covenants that is not cured or waived, the unpaid principal and any accrued interest can be declared immediately due and payable. The facilities under the Credit Agreement are secured by substantially all the assets of the Company.
In April 2019, the Company determined that in periods beginning at least as early as March 31, 2014, it had incurred and not appropriately included certain surety bonds or other similar instruments in its consolidated leverage ratio calculation as defined by the Credit Agreement. As a result, on May 6, 2019, the Company entered into a Consent and Waiver (Consent) to the Credit Agreement with the financial institutions party thereto under which the Company is permitted to exclude certain incurred surety bonds and other similar instruments from the calculation of Consolidated Funded Indebtedness (as defined in the credit agreement). In addition, the Consent waived all specified violations for all prior periods.
On June 7, 2019, the Company entered into a second amendment to the Credit Agreement (Second Amendment), which (i) permits the Company to exclude up to $5.0 million in legal and related costs for the GX Dispute (see Note 11 – Commitments and Contingencies) from the calculation of Consolidated EBITDA (as defined under the Credit Agreement), (ii) permits the Company to exclude from the calculation of Consolidated Funded Indebtedness up to $30.0 million of undrawn surety bonds and (iii) revises the threshold of proceeds from asset dispositions above which the Company must prepay on the Term Out Loan to $5.0 million. Consolidated EBITDA and Consolidated Funded Indebtedness arenon-GAAP metrics defined in the Credit Agreement.
We believe we have accurately calculated and reported our required debt covenant calculations for the September 30, 2017,2019 reporting period and are in compliance with the Term Loan had an outstanding principal balance of $27.9 million.required covenant ratios.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revolving LoansPerformance Bonds, Surety Bonds and Other Similar Instruments
As of September 30, 2017,2019, there were $6.3 million of performance bonds, surety bonds and similar instruments outstanding of which $1.7 million is issued by the parties 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.Credit Agreement. As of September 30, 2017, $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 September 30, 2017,2019, there were $6.3$0.1 million inoutstanding 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 September 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, with an interest rate of 3.2% at September 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 $5.4 million. This facility has a maturity date of October 3, 2018. As of September 30, 2017, the amount available under this facility was £2.1 million or $2.9 million. As of September 30, 2017, there were $5.6 million in standby letters of credit issued to collateralize this performance bond facility.bank guarantees.
In June 2016, the Company secured a performance bond facility with a lender in the amount of $1.5 million for its Managed ServicesMCS 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 September 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 September 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 20172019 and the following years (in thousands):
2017 | 2,154 | |||
2018 | 57,770 | |||
2019 | 76 | |||
|
| |||
Total debt, including current maturities | $ | 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.
2019 | 2,791 | |||
2020 | 10,814 | |||
2021 | 100,676 | |||
2022 | 116 | |||
2023 | 39 | |||
|
| |||
Total debt, including current maturities | $ | 114,436 | ||
|
|
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.
Theearn-out for Intelie is measured at fair value in each reporting period, based on level 3 inputs, with any change to fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss. As of September 30, 2019, the fair value of theearn-out was $7.9 million with $4.4 million in deferred revenue and other current liabilities and $3.5 million in other long-term liabilities. During the three and nine months ended September 30, 2019, RigNet recognized accreted interest expense on the Intelieearn-out of $0.1 million, and $0.2 million, respectively, with corresponding increases to other liabilities. During the three and nine months ended September 30, 2018, RigNet recognized accreted interest expense on the Intelieearn-out of $0.1 million, and $0.1 million, respectively. During the three and nine months ended September 30, 2019, RigNet recognized an increase in the fair value of theearn-out of none and $1.3 million, respectively. Theearn-out is payable in RigNet stock in portions on the first, second and third anniversary of the March 23, 2018 closing of the acquisition based on certain post-closing performance targets under the acquisition agreement. In May 2019, the Company issued 208,356 shares of its common stock, with an aggregate value of $3.0 million, as payment for the portion of theearn-out earned as of the first anniversary of the closing of the acquisition.
The contingent consideration for Cyphre, a cybersecurity company acquired in May 2017, is measured at fair value in each reporting period, based on level 3 inputs, with any change to fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss. As of September 30, 2019, the fair value of the contingent consideration was $3.5 million, of which $0.3 million is in other current liabilities and $3.2 million is in other long-term liabilities. During the three and nine months ended September 30, 2019, RigNet recognized accreted interest expense on the Cyphre contingent consideration of $0.1 million, and $0.1 million, respectively, with corresponding increases to other liabilities. During the three and nine months ended September 30, 2018, RigNet recognized accreted interest expense on the Cyphre contingent consideration of $0.1 million, and $0.1 million, respectively.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Theearn-out for Orgtec S.A.P.I. de C.V., d.b.a. TECNOR (TECNOR), acquired in February 2016, was 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 September 30, 2017, theThe fair value of the contingent considerationearn-out of $8.0 million was $3.9 million.paid in July 2018. During the three and nine months ended September 30, 2017, RigNet recognized accreted interest expense on the Cyphre contingent consideration of $0.1 million with corresponding increases to other liabilities.
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 September 30, 2017, the fair value of theearn-out was $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 nine months ended September 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 nine months ended September 30, 2017,2018, RigNet recognized accreted interest expense on the TECNORearn-out liability of $0.1 million and $0.4 million, respectively, with corresponding increases to other liabilities. (see Note 2 – Business Combinations).During the three months ended September 30, 2018, RigNet recognized a decrease in the fair value of theearn-out of $0.8 million. During the nine months ended September 30, 2018, RigNet recognized an increase in the fair value of theearn-out of $2.1 million.
Note 8 – Income Taxes
The Company’s effective income tax rate was (22.2%)137.1% and (11.5%(47.0%) for the three and nine months ended September 30, 2017,2019, respectively. The Company’s effective income tax rate was (59.5%)(12.6)% and (54.7%)0.1% for the three and nine months ended September 30, 2016,2018, 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 IRS finalized the audit of the Company’s 2016 income tax return. There were no assessments or material impact to the Company’s Consolidated Financial Statements.
The Company received a notice informing us of an audit of the Company’s 2016-2017 income tax returns in Singapore. It is unclear if the audit and the appeals process, if necessary, will be completed within the next twelve months. The Company is in the early stages of the audit and is unable to quantify any potential settlement or outcome of the audit at this time.
The Company believes that it is reasonably possible that a decrease of up to $3.2$2.8 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 nine months ended September 30, 2017,2019, the Company granted a total of 226,974 restricted stock units (RSUs)601,122 stock-based awards to certain directors, officers and employees of the Company under the 2010 Omnibus Incentive Plan (2010 Plan). Of these, the Company granted the following stock-based awards associated with the long term incentive plan (LTIP): (i) 125,852190,588 restricted stock units (RSUs) to certain officers and employees that generally vest over a three year period of continued employment, with 33% of the RSUs vesting on each of the first three anniversaries of the grant date, (ii) 30,648 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) 67,53660,361 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.targets and (iv) 86,772 RSUs to outside directors that vest in 2020. The ultimate number of PSUs issued is based on a multiple determined by certain performance basedperformance-based targets.
The fair value of restricted stock unitsRSUs and PSUs 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.award, net of forfeitures.
Additionally, the Company granted 232,753 unrestricted stock grants associated with payment of the Company’s 2018 short term incentive plan to certain officers and employees that vested immediately.
During the nine months ended September 30, 2017, 126,7882019, the Company also granted 28,923 options to purchase our common stock with an exercise price of $15.06 to certain officers and employees of the Company as part of the LTIP under the 2010 Plan. Options granted have a contractual term of seven years and vest over a three-year period of continued employment, with 33% of the options vesting on each of the first three anniversaries of the grant date.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each stock option award is estimated on the grant date using a Black-Scholes option valuation model, which uses certain assumptions as of the date of grant. The assumptions used for the stock option grants made during the nine months ended September 30, 2019, were as follows:
Nine Months Ended September 30, | ||||
2019 | ||||
Expected volatility | 49 | % | ||
Expected term (in years) | 7 | |||
Risk-free interest rate | 2.5 | % | ||
Dividend yield | — |
Based on these assumptions, the weighted average grant date fair value of stock options granted during the nine months ended September 30, 2019 was $7.94 per option.
During the nine months ended September 30, 2019, 30,288 RSUs and 28,44519,826 stock options were forfeited.
Stock-based compensation expense related to the Company’s stock-based compensation plans for the three and nine months ended September 30, 2017 and 20162019 was $1.0$1.5 million and $0.9$7.1 million, respectively. Stock-based compensation expense related to the Company’s stock-based compensation plans for the three and nine months ended September 30, 2017 and 20162018 was $2.9$1.1 million and $2.7$4.4 million, respectively. As of September 30, 2017,2019, there was $8.3$4.3 million of total unrecognized compensation cost related to unvested options, RSUs and restricted stock expected to vest. This cost is expected to be recognized over a remaining weighted-average period of 1.81.6 years.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 10 – Earnings (loss) per Share
Basic earnings (loss) per share (EPS) are computed by dividing net loss attributable to RigNet common stockholders by the weighted average number of basic shares outstanding.outstanding during the period. Basic shares equal the total of the common shares outstanding, weighted for the average days outstanding for the period. Basic shares excludebut excludes 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.RSUs or PSUs. Diluted EPS is computed by dividing loss attributable to RigNet common stockholders by the weighted average number of diluted shares outstanding.outstanding during the period. 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.any. 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.
For the three and nine months ended September 30, 2017,2019, there were approximately 723,2961,167,910 and 644,8582,195,304 potentially issuable shares excluded from the Company’s calculation of diluted EPS that were excluded because to include them would have been anti-dilutive.
For the three and nine months ended September 30, 2018, there were approximately 932,048 and 620,666 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 nine months ended September 30, 2016, there were approximately 1,919,696 and 1,228,397 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, andfiled arbitration with the Company areInternational Centre for Dispute Resolution tribunal (the panel) in a dispute relating toOctober 2016 concerning a January 2014take-or-pay agreement regarding theto 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 resolveyears.
In June 2019, the Company announced that it reached a settlement with Inmarsat that concludes the GX dispute through a contractually-stipulated arbitration process that began in October 2016. The parties dispute whether Inmarsat has met its contractual obligations with respectDispute. Pursuant to the service under the agreement. In July 2017, pursuant to its contractual rights under the agreement,settlement the Company delivered a noticepaid $45.0 million in June 2019 and paid $5.0 million in July 2019 and will pay $0.8 million in the third quarter of termination2020. The Company had an accrued liability of the agreement to Inmarsat.$0.8 million as of September 30, 2019.
The Company hasincurred credits of $(0.4) million and cost of $3.9 million in GX Dispute Phase II legal costs for the three and nine months ended September 30, 2019, respectively. The Company incurred legal expenses of $0.8$0.7 million and $2.1 million in connection with the GX disputeDispute for the three and 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 the GX dispute, the total costs to be incurred or the potential impact on personnel.2018, respectively.
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.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 companyCompany is undergoing a routine sales tax audit infrom a state where itthe Company has operations foroperations. The audit can cover up to a four-year period. The Company is in the period from Augustearly stages of 2011 to May of 2015. It is expected that the audit, and the appeals process, if necessary, will be completed within the next three months. The Company does not believe that the outcomehave any estimates 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 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 Form10-Kfurther exposure, if any, 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 nine months ended September 30, 2016.tax years under review.
Operating Leases
The Company adopted the new lease accounting standard effective with the first quarter of 2019 and has used the optional transition method permitted under ASU2018-11. Accordingly, prior year amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical accounting.
The Company’s leasing activities primarily consist of leases of real-estate including office space under lease agreements expiring on various dates through 2025. For the three months and nine months ended September 30, 2017 and 2016,2019, the Company recognized expense under operating leases, which approximates cash paid and includes short-term leases, of $0.9$0.6 million and $1.2$1.9 million, respectively. For the three months and nine months ended September 30, 2017 and 2016,2018, the Company recognized expense under operating leases, which approximates cash paid and includes short-term leases, of $2.9$0.7 million and $3.4$2.1 million, respectively.
As of September 30, 2017,2019, future undiscounted minimum lease obligationsobligation maturities for the remainder of 20172019 and future years were as follows (in thousands):
2017 | 794 | |||||||
2018 | 1,871 | |||||||
2019 | 1,316 | $ | 524 | |||||
2020 | 886 | 1,664 | ||||||
2021 | 468 | 1,005 | ||||||
2022 | 844 | |||||||
2023 | 802 | |||||||
Thereafter | 1,750 | 1,269 | ||||||
|
| |||||||
Total lease payments | $ | 6,108 | ||||||
$ | 7,085 |
| ||||||
Less present value discount | (570 | ) | ||||||
|
| |||||||
Amounts recognized in Balance Sheet | $ | 5,538 | ||||||
| ||||||||
Amounts recognized in Balance Sheet | ||||||||
Deferred revenue and other current liabilities | 1,962 | |||||||
Right-of-use lease liability - long-term portion | 3,576 | |||||||
| ||||||||
Total right to use lease liability | $ | 5,538 | ||||||
|
Operating leaseright-of-use assets for leases were $3.9 million as of September 30, 2019.
Theright-of-use assets and liabilities for leases were discounted at a weighted-average discount rate of 5.3%. The weighted-average remaining lease term as of September 30, 2019 was 4.4 years.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2018, future undiscounted minimum lease obligation maturities for 2019 and future years were as follows (in thousands):
2019 | 1,822 | |||
2020 | 1,115 | |||
2021 | 780 | |||
2022 | 692 | |||
2023 | 659 | |||
Thereafter | 1,044 | |||
|
| |||
$ | 6,112 | |||
|
|
Commercial Commitments
The Company enters into contracts for satellite bandwidth and other network services with certain providers.
As of September 30, 2017,2019, the Company had the following commercial commitments related to satellite and network services for the remainder of 20172019 and the future years thereafter (in thousands):
2017 | 4,501 | |||
2018 | 13,494 | |||
2019 | 5,920 | |||
2020 | 473 | |||
2021 | 455 | |||
|
| |||
$ | 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 “Global Express (GX) Dispute” above for details of the ongoing arbitration and the Company’s notice to terminate the contract with Inmarsat.
2019 | 5,795 | |||
2020 | 16,474 | |||
2021 | 8,832 | |||
2022 | 3,932 | |||
|
| |||
$ | 35,033 | |||
|
|
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 two reportable segments: Managed Services and Systems Integration (previously called SI&A). During the thirdfourth quarter of 2017, after the Company completed the ESS acquisition, the Company reorganized its
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
business and reportable segments. Applications andInternet-of-Things is now managed and presented as a separate segment, and was previously presented in2018, the Managed Services segment. All historical segment financial data included herein has been recast to conform to the current year presentation.was renamed Managed Communications Services (MCS).
RigNet considers its business to consist of the following segments:
• | Managed |
• | Applications and |
• | Systems Integration.The Systems Integration segment provides design and implementation services for customer telecommunications systems. Solutions are delivered based on the customer’s specifications, adhering to international industry standards and best practices. Project services may include consulting, design, engineering, project management, procurement, testing, installation, commissioning and maintenance. |
Corporate and eliminationsEliminations primarily represents unallocated corporate officeexecutive and support 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 nine months ended September 30, 20172019 and 2016,2018, is presented below.
Three Months Ended September 30, 2017 | ||||||||||||||||||||
Managed Services | Applications and Internet-of- Things | Systems Integration | Corporate and Eliminations | Consolidated Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue | $ | 40,243 | $ | 4,985 | $ | 5,616 | $ | — | $ | 50,844 | ||||||||||
Cost of revenue (excluding depreciation and amortization) | 24,902 | 3,394 | 4,089 | — | 32,385 | |||||||||||||||
Depreciation and amortization | 5,263 | 835 | 615 | 1,286 | 7,999 | |||||||||||||||
Selling, general and administrative | 3,013 | 363 | 280 | 9,755 | 13,411 | |||||||||||||||
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Operating income (loss) | $ | 7,065 | $ | 393 | $ | 632 | $ | (11,041 | ) | $ | (2,951 | ) | ||||||||
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Capital expenditures | 5,655 | 198 | — | — | 5,853 | |||||||||||||||
Three Months Ended September 30, 2016 | ||||||||||||||||||||
Managed Services | Applications and Internet-of- Things | Systems Integration | Corporate and Eliminations | Consolidated Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue | $ | 45,653 | $ | 1,552 | $ | 3,407 | $ | — | $ | 50,612 | ||||||||||
Cost of revenue (excluding depreciation and amortization) | 26,253 | 696 | 2,911 | — | 29,860 | |||||||||||||||
Depreciation and amortization | 6,716 | — | 631 | 958 | 8,305 | |||||||||||||||
Selling, general and administrative | 5,235 | 67 | 499 | 6,399 | 12,200 | |||||||||||||||
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Operating income (loss) | $ | 7,449 | $ | 789 | $ | (634 | ) | $ | (7,357 | ) | $ | 247 | ||||||||
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Capital expenditures | 1,936 | — | — | — | 1,936 | |||||||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||||||||||
Managed Services | Applications and Internet-of- Things | Systems Integration | Corporate and Eliminations | Consolidated Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue | $ | 122,531 | $ | 9,846 | $ | 15,701 | $ | — | $ | 148,078 | ||||||||||
Cost of revenue (excluding depreciation and amortization) | 75,798 | 6,844 | 12,656 | — | 95,298 | |||||||||||||||
Depreciation and amortization | 17,509 | 849 | 1,813 | 2,696 | 22,867 | |||||||||||||||
Selling, general and administrative | 12,435 | 1,149 | 1,179 | 22,606 | 37,369 | |||||||||||||||
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Operating income (loss) | $ | 16,789 | $ | 1,004 | $ | 53 | $ | (25,302 | ) | $ | (7,456 | ) | ||||||||
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Total assets | 184,678 | 33,353 | 15,857 | 3,960 | 237,848 | |||||||||||||||
Capital expenditures | 13,081 | 198 | — | 645 | 13,924 | |||||||||||||||
Nine Months Ended September 30, 2016 | ||||||||||||||||||||
Managed Services | Applications and Internet-of- Things | Systems Integration | Corporate and Eliminations | Consolidated Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue | $ | 146,766 | $ | 5,079 | $ | 16,019 | $ | — | $ | 167,864 | ||||||||||
Cost of revenue (excluding depreciation and amortization) | 85,455 | 2,176 | 11,781 | — | 99,412 | |||||||||||||||
Depreciation and amortization | 20,032 | — | 2,127 | 3,402 | 25,561 | |||||||||||||||
Impairment of goodwill and intangible assets | — | — | — | 397 | 397 | |||||||||||||||
Selling, general and administrative | 20,631 | 201 | 2,141 | 21,979 | 44,952 | |||||||||||||||
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Operating income (loss) | $ | 20,648 | $ | 2,702 | $ | (30 | ) | $ | (25,778 | ) | $ | (2,458 | ) | |||||||
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Total assets | 213,739 | — | 26,139 | 4,800 | 244,678 | |||||||||||||||
Capital expenditures | 10,365 | — | — | 1,146 | 11,511 |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended September 30, 2019 | ||||||||||||||||||||
Managed Communication Services | Applications and Internet-of- Things | Systems Integration | Corporate and Eliminations | Consolidated Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue | $ | 42,055 | $ | 9,265 | $ | 9,673 | $ | — | $ | 60,993 | ||||||||||
Cost of revenue (excluding depreciation and amortization) | 24,156 | 4,091 | 7,415 | — | 35,662 | |||||||||||||||
Depreciation and amortization | 5,037 | 1,218 | 155 | 762 | 7,172 | |||||||||||||||
Change in fair value of earn-out/contingent consideration | — | — | — | — | — | |||||||||||||||
Selling, general and administrative | 3,303 | 1,599 | 464 | 9,795 | 15,161 | |||||||||||||||
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Operating income (loss) | $ | 9,559 | $ | 2,357 | $ | 1,639 | $ | (10,557 | ) | $ | 2,998 | |||||||||
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Capital expenditures | 4,818 | 720 | — | 326 | 5,864 | |||||||||||||||
Three Months Ended September 30, 2018 | ||||||||||||||||||||
Managed Communication Services | Applications and Internet-of- Things | Systems Integration | Corporate and Eliminations | Consolidated Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue | $ | 44,943 | $ | 7,463 | $ | 12,364 | $ | — | $ | 64,770 | ||||||||||
Cost of revenue (excluding depreciation and amortization) | 27,930 | 3,677 | 9,127 | — | 40,734 | |||||||||||||||
Depreciation and amortization | 5,641 | 1,661 | 605 | 506 | 8,413 | |||||||||||||||
Change in fair value of earn-out/contingent consideration | — | — | — | (750 | ) | (750 | ) | |||||||||||||
Selling, general and administrative | 3,779 | 520 | 380 | 12,715 | 17,394 | |||||||||||||||
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Operating income (loss) | $ | 7,593 | $ | 1,605 | $ | 2,252 | $ | (12,471 | ) | $ | (1,021 | ) | ||||||||
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Capital expenditures | 6,413 | 109 | — | — | 6,522 | |||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||
Managed Communications Services | Applications and Internet-of- Things | Systems Integration | Corporate and Eliminations | Consolidated Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue | $ | 125,593 | $ | 25,285 | $ | 27,957 | $ | — | $ | 178,835 | ||||||||||
Cost of revenue (excluding depreciation and amortization) | 76,160 | 12,975 | 19,502 | — | 108,637 | |||||||||||||||
Depreciation and amortization | 16,360 | 3,675 | 1,456 | 2,272 | 23,763 | |||||||||||||||
Change in fair value of earn-out/contingent consideration | — | — | — | 1,284 | 1,284 | |||||||||||||||
Selling, general and administrative | 10,446 | 2,999 | 2,158 | 37,231 | 52,834 | |||||||||||||||
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Operating income (loss) | $ | 22,627 | $ | 5,636 | $ | 4,841 | $ | (40,787 | ) | $ | (7,683 | ) | ||||||||
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Total assets | 154,268 | 42,886 | 26,782 | 19,224 | 243,160 | |||||||||||||||
Capital expenditures | 15,143 | 1,556 | — | 827 | 17,526 | |||||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||
Managed Communications Services | Applications and Internet-of- Things | Systems Integration | Corporate and Eliminations | Consolidated Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Revenue | $ | 128,705 | $ | 19,375 | $ | 30,530 | $ | — | $ | 178,610 | ||||||||||
Cost of revenue (excluding depreciation and amortization) | 78,982 | 9,927 | 21,752 | — | 110,661 | |||||||||||||||
Depreciation and amortization | 17,012 | 3,344 | 1,922 | 2,478 | 24,756 | |||||||||||||||
Change in fair value of earn-out/contingent consideration | — | — | — | 2,050 | 2,050 | |||||||||||||||
Selling, general and administrative | 13,017 | 1,304 | 1,260 | 35,383 | 50,964 | |||||||||||||||
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Operating income (loss) | $ | 19,694 | $ | 4,800 | $ | 5,596 | $ | (39,911 | ) | $ | (9,821 | ) | ||||||||
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Total assets | 165,532 | 47,694 | 23,609 | 14,403 | 251,238 | |||||||||||||||
Capital expenditures | 18,709 | 377 | — | 645 | 19,731 |
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 nine months ended September 30, 20172019 and 2016.2018. 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 September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Domestic | $ | 17,136 | $ | 11,555 | $ | 46,110 | $ | 43,783 | $ | 27,360 | $ | 18,876 | $ | 80,868 | $ | 52,510 | ||||||||||||||||
International | 33,708 | 39,057 | 101,968 | 124,081 | 33,633 | 45,894 | 97,967 | 126,100 | ||||||||||||||||||||||||
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Total | $ | 50,844 | $ | 50,612 | $ | 148,078 | $ | 167,864 | $ | 60,993 | $ | 64,770 | $ | 178,835 | $ | 178,610 | ||||||||||||||||
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The following table presents goodwill,right-of-use lease assets and long-lived assets, net of accumulated depreciation, for the Company’s domestic and international operations as of September 30, 20172019 and December 31, 2016.2018.
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Domestic | $ | 70,309 | $ | 27,682 | $ | 76,575 | $ | 73,615 | ||||||||
International | 62,049 | 70,101 | 63,166 | 70,334 | ||||||||||||
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Total | $ | 132,358 | $ | 97,783 | $ | 139,741 | $ | 143,949 | ||||||||
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Note 13 – Related Party Transactions
The Company has a reseller arrangement with Darktrace, which is an artificial intelligence company in cybersecurity that is partially owned by Kohlberg Kravis Roberts & Co. L.P. (KKR). KKR is a significant stockholder of the Company. Under the arrangement, the Company will sell Darktrace’s cybersecurity audit services with the Company’s cybersecurity offerings. In the three and nine months ended September 30, 2019, the Company purchased $0.1 million and $0.1 million, respectively, from Darktrace in the ordinary course of business.
Vissim AS is now a vendor following a competitive request for quote from RigNet in the ordinary course of business. A customer specified Vissim AS by name as a provider for an SI project. Vissim AS is 24% owned by AVANT Venture Capital AS. AVANT Venture Capital is owned by and has as its chairman of its board one of our board members. In the three and nine months ended September 30, 2019, the Company purchased $0.2 million and $0.8 million, respectively, from Vissim AS in the ordinary course of business.
Note 14 – Restructuring Costs – Cost Reduction Plans
During the three and nine months ended September 30, 2017,2019, the Company incurred a netpre-tax restructuring expense of $0.8$0.7 million reported as general and administrative expense, in the Corporate segment associated with the reduction of 31 employees.
Duringwhich $0.2 million was incurred in the three months ended September 30, 2016, the Company2019 related to consolidating three separate legacy facilities into our new office in Lafayette, Louisiana and $0.5 million was incurred a netpre-tax restructuring expense of $0.8 million reported as general and administrative expense in the Corporate segment consistingfirst quarter of $1.8 million of expense2019 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 not incurred.25 employees.
During the nine months ended September 30, 2016, the Company incurred netpre-tax restructuring expense of $1.3 million reported as general and administrative expense in the Corporate segment consisting of $2.7 million associated with the reduction of 115 employees partially offset by a net $1.4 million 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 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 September 30, 20172019 and for the three and nine months ended September 30, 20172019 and 20162018 included elsewhere herein, and with our annual reportAnnual Report on Form10-K for the year ended December 31, 2016.2018. 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 reportAnnual 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. TheseForward-Looking statements may include statements about:
new regulations, delays in drilling permits or other changes in the drillingoil and gas 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 and liquidity needs and expectations regarding cash flow from operations, capital expenditures and capital expenditures;borrowing availability under our Revolving Credit Facility;
our expectations regarding the deductibility of goodwill for tax purposes;
our business and corporate development strategy, including statements concerning our ability to pursue, consummate and integrate merger and acquisition opportunities successfully;
the amount and timing of contingent consideration payments arising from our acquisitions;
our ability to manage and grow our business and execute our business strategy, including developing and marketing additional Apps & IoT solutions, expanding our market share, increasing secondary and tertiary customer penetration of the U.S.at remote sites, enhancing systems integration and international onshore and offshore drilling rigs and expandingextending our businesspresence into complementary remote communication market adjacencies;segments through organic growth and strategic acquisitions;
the buildout and upgrade of our Gulf of Mexico microwave network; and
our financial performance, including our ability to expand Adjusted EBITDA through our operational leverage.
In some cases, forward-looking statements can be identified by terminology such as “may,” “could,” “should,” “would,” “expect,” “plan,” “project,” “intend,” “will,” “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 reportAnnual Report on Form10-K for the year ended December 31, 20162018 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 global technology company that provides customized communications services, applicationsthe leading provider of ultra-secure, intelligent networking solutions and cybersecurity solutions enhancing customer decision making and business performance. We provide solutions ranging from fully-managed voice and data networks to more advanced applications that include video conferencing, asset and weather monitoring, real-time data services and cybersecurity under a multi-service recurring revenue model.
specialized applications. Customers use our private networks to manage information flows and execute mission-critical operations primarily in remote areas where conventional telecommunications infrastructure is either unreliable or unavailable. We provide our clients what is often the sole means of communications for their remote operations.
Network service customers are primarily served under fixed-price contracts, either on On top of and vertically integrated into these networks we provide services ranging from fully-managed voice, data, and video to more advanced services including: cyber security threat detection and prevention; applications to improve crew welfare, safety or workforce productivity; and 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 onereal-timeAI-backed data analytics platform 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,enhance customer decision making 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).business performance.
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.
Managed Services was renamed Managed Communications Services (MCS). We previously operatedreport our business under twooperations through the following reportable segments: Managed Services and Systems Integration (previously called SI&A). During the third quarter of 2017, after we completed the ESS acquisition, we reorganized our business and reportable segments. Applications andInternet-of-Things is now managed and presented as a separate segment, and was previously presented in the Managed Services segment. All historical segment financial data included herein has been recast to conform to the current year presentation. We now operate three reportable segments, which are managed as distinct segments by our chief operating decision-maker.
• | Managed |
• | Applications and |
• | Systems Integration.Our Systems Integration segment provides design and implementation services for customer telecommunications systems. Solutions are delivered based on the customer’s specifications, adhering to international industry standards and best practices. Project services may include consulting, design, engineering, project management, procurement, testing, installation, commissioning and maintenance. |
Customers in our MCS and Apps & IoT segments 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. Offshore contracts generally have a term of up to three years with renewal options. Land-based contracts 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 permit early termination 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). Systems Integration customers are served primarily under fixed-price, long-term contracts.
Cost of revenue consists primarily of satellite charges, voice and data termination costs, network operations expenses, internet connectivity fees, equipment purchases for Systems 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 leasedcontracted satellites. Direct service labor consists of field technicians, our Network 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 isare 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 aan MCS 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,June 24, 2019, we entered into our third amendedannounced that we reached a settlement with Inmarsat that concludes the GX Dispute. Pursuant to the settlement we paid $45.0 million in June 2019 and restated credit agreement, which provides for a $15.0paid $5.0 million term loan facilityin July 2019 and an $85.0will pay $0.8 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.
Duringin the third quarter of 2017, we incurred restructuring expense2020. We have an accrued liability of $0.8 million associatedas of September 30, 2019. As previously disclosed, Inmarsat plc (Inmarsat), a satellite telecommunications company, filed arbitration with the reductionInternational Centre for Dispute Resolution tribunal (the panel) in October 2016 concerning a January 2014take-or-pay agreement to purchase up to $65.0 million, under certain conditions, of 31 employees.
On July 28, 2017, we acquired substantially all the assetsGX capacity from Inmarsat over several years. We incurred a credit of Energy Satellite Services (ESS). ESS is a supplier$0.4 million and cost 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 IoT market position. We paid $22.2$3.9 million in cashGX Dispute Phase II costs for the ESS assets. ESS is based in Texas.
On July 24, 2017, we acquired substantially all the assetsthree and nine months ended September 30, 2019, respectively. We incurred legal expenses of Data Technology Solutions (DTS). DTS provides comprehensive communications$0.7 million and IT services to the onshore, offshore, and maritime industries, as well as disaster relief solutions to global corporate clients. We paid $5.1$2.1 million in cashconnection with the GX Dispute for the DTS assets. DTS is based in Louisiana.three and nine months ended September 30, 2018, respectively.
In July 2017, we delivered a noticeAs of termination of an agreement with Inmarsat to acquire capacity from Inmarsat’s GX network. We will continue to offer other solutions to our customers asSeptember 30, 2019, we have in the past. We will continue to evaluate and make available the best service optionsbacklog for our customers’ telecommunication needs.
On May 18, 2017, we completed our acquisitionpercentage of Cyphre Security Solutions (Cyphre) for an estimated aggregate purchase pricecompletion projects of $12.0$35.9 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 in the oil and gas industry may continue to impact our profitability. The fundamentals of the oil and gas industry we serve remain challenged into 2017,2019, 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, theThe oil and gas environment continues to be challenged with operators focusing on projects with shorter term, land-based projectspay-back periods that generally require less capital investment.investment and lower costs from service providers and drilling contractors. The average price of Brent crude, a key indicator of activity for the oil and gas industry, was $64.65 per barrel for the nine months ending September 30, 2019 compared to an average of $72.17 for the nine months ending September 30, 2018. Brent crude spot prices increased in the first three quarters of 2018 and peaked at $86.07 on October 4, 2018. From the October 4, 2018 high, Brent crude oil prices decreased over 40.0% in the fourth quarter of 2018. In the first half of 2019, Brent crude oil prices recovered to the $70 per barrel range and have then declined in the second half of 2019 to the $60 per barrel range. Certain analysts are not presently predicting meaningful increases in offshore drilling rig utilization for the remainder of 2019, but are predicting more meaningful improvements in utilization and day rates in 2020 or 2021. As a result, we believe drilling contractors are cautiously optimistic about a gradual demand recovery. The offshore drilling contracting environment remains challenged, with major offshore drilling contractors having experienced significant pressure on day rates, which in turn has had a negative impact on the rates we are able to charge customers. 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:
3rd Quarter | 2nd Quarter | 1st Quarter | 4th Quarter | 3rd Quarter | ||||||||||||||||
2017 | 2017 | 2017 | 2016 | 2016 | ||||||||||||||||
Selected Operational Data: | ||||||||||||||||||||
Offshore drilling rigs (1) | 184 | 173 | 173 | 175 | 194 | |||||||||||||||
Offshore Production | 316 | 296 | 290 | 280 | 287 | |||||||||||||||
Maritime | 165 | 134 | 124 | 122 | 128 | |||||||||||||||
International Land | 132 | 112 | 104 | 104 | 101 | |||||||||||||||
Other sites (2) | 378 | 336 | 304 | 240 | 238 | |||||||||||||||
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Total | 1,175 | 1,051 | 995 | 921 | 948 | |||||||||||||||
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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 infrom a state where we have operations foroperations. The audit can cover up to a four-year period. We are in the period from Augustearly stages of 2011 to May of 2015. It is expected that the audit and the appeals process, if necessary, will be completed within the next three months. We do not believe that the outcomehave any estimates of the audit will result in a material impact to the consolidated financial statements.
Global 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-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 $0.8 million in connection with the GX disputefurther exposure, if any, for the nine months ended September 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.tax years under review.
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 September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
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Revenue | $ | 50,844 | $ | 50,612 | $ | 148,078 | $ | 167,864 | $ | 60,993 | $ | 64,770 | $ | 178,835 | $ | 178,610 | ||||||||||||||||
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Expenses: | ||||||||||||||||||||||||||||||||
Cost of revenue (excluding depreciation and amortization) | 32,385 | 29,860 | 95,298 | 99,412 | 35,662 | 40,734 | 108,637 | 110,661 | ||||||||||||||||||||||||
Depreciation and amortization | 7,999 | 8,305 | 22,867 | 25,561 | 7,172 | 8,413 | 23,763 | 24,756 | ||||||||||||||||||||||||
Impairment of intangible assets | — | — | — | 397 | ||||||||||||||||||||||||||||
Change in fair value ofearn-out/contingent consideration | — | (750 | ) | 1,284 | 2,050 | |||||||||||||||||||||||||||
Selling and marketing | 2,400 | 1,724 | 5,968 | 5,559 | 2,784 | 2,728 | 9,529 | 9,866 | ||||||||||||||||||||||||
General and administrative | 11,011 | 10,476 | 31,401 | 39,393 | 12,377 | 14,666 | 43,305 | 41,098 | ||||||||||||||||||||||||
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Total expenses | 53,795 | 50,365 | 155,534 | 170,322 | 57,995 | 65,791 | 186,518 | 188,431 | ||||||||||||||||||||||||
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Operating income (loss) | (2,951 | ) | 247 | (7,456 | ) | (2,458 | ) | 2,998 | (1,021 | ) | (7,683 | ) | (9,821 | ) | ||||||||||||||||||
Other expense, net | (480 | ) | (1,155 | ) | (1,859 | ) | (2,437 | ) | (2,270 | ) | (1,465 | ) | (4,798 | ) | (2,813 | ) | ||||||||||||||||
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Loss before income taxes | (3,431 | ) | (908 | ) | (9,315 | ) | (4,895 | ) | ||||||||||||||||||||||||
Income tax expense | (762 | ) | (540 | ) | (1,075 | ) | (2,676 | ) | ||||||||||||||||||||||||
Income (loss) before income taxes | 728 | (2,486 | ) | (12,481 | ) | (12,634 | ) | |||||||||||||||||||||||||
Income tax benefit (expense) | (998 | ) | (312 | ) | (5,868 | ) | 11 | |||||||||||||||||||||||||
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Net loss | (4,193 | ) | (1,448 | ) | (10,390 | ) | (7,571 | ) | (270 | ) | (2,798 | ) | (18,349 | ) | (12,623 | ) | ||||||||||||||||
Less: Net income attributable tonon-controlling interest | 39 | 210 | 117 | 171 | 224 | 49 | 284 | 109 | ||||||||||||||||||||||||
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Net loss attributable to RigNet, Inc. stockholders | $ | (4,232 | ) | $ | (1,658 | ) | $ | (10,507 | ) | $ | (7,742 | ) | $ | (494 | ) | $ | (2,847 | ) | $ | (18,633 | ) | $ | (12,732 | ) | ||||||||
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OtherNon-GAAP Data: | ||||||||||||||||||||||||||||||||
Unlevered Free Cash Flow | $ | 1,990 | $ | 6,598 | $ | 7,197 | $ | 16,313 | ||||||||||||||||||||||||
Adjusted EBITDA | $ | 7,843 | $ | 8,534 | $ | 21,121 | $ | 27,824 | $ | 11,010 | $ | 8,730 | $ | 29,171 | $ | 24,247 |
The following represents selected financial operating results for our segments:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
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Managed Services: | ||||||||||||||||||||||||||||||||
Managed Communications Services: | ||||||||||||||||||||||||||||||||
Revenue | $ | 40,243 | $ | 45,653 | $ | 122,531 | $ | 146,766 | $ | 42,055 | $ | 44,943 | $ | 125,593 | $ | 128,705 | ||||||||||||||||
Cost of revenue (excluding depreciation and amortization) | 24,902 | 26,253 | 75,798 | 85,455 | 24,156 | 27,930 | 76,160 | 78,982 | ||||||||||||||||||||||||
Depreciation and amortization | 5,263 | 6,716 | 17,509 | 20,032 | 5,037 | 5,641 | 16,360 | 17,012 | ||||||||||||||||||||||||
Selling, general and administrative | 3,013 | 5,235 | 12,435 | 20,631 | 3,303 | 3,779 | 10,446 | 13,017 | ||||||||||||||||||||||||
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Managed Services operating income | $ | 7,065 | $ | 7,449 | $ | 16,789 | $ | 20,648 | ||||||||||||||||||||||||
Managed Communication Services operating income | $ | 9,559 | $ | 7,593 | $ | 22,627 | $ | 19,694 | ||||||||||||||||||||||||
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Applications andInternet-of-Things: | Applications andInternet-of-Things: |
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Revenue | $ | 4,985 | $ | 1,552 | $ | 9,846 | $ | 5,079 | $ | 9,265 | $ | 7,463 | $ | 25,285 | $ | 19,375 | ||||||||||||||||
Cost of revenue (excluding depreciation and amortization) | 3,394 | 696 | 6,844 | 2,176 | 4,091 | 3,677 | 12,975 | 9,927 | ||||||||||||||||||||||||
Depreciation and amortization | 835 | — | 849 | — | 1,218 | 1,661 | 3,675 | 3,344 | ||||||||||||||||||||||||
Selling, general and administrative | 363 | 67 | 1,149 | 201 | 1,599 | 520 | 2,999 | 1,304 | ||||||||||||||||||||||||
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Applications &Internet-of-Things operating income | $ | 393 | $ | 789 | $ | 1,004 | $ | 2,702 | $ | 2,357 | $ | 1,605 | $ | 5,636 | $ | 4,800 | ||||||||||||||||
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Systems Integration: | ||||||||||||||||||||||||||||||||
Revenue | $ | 5,616 | $ | 3,407 | $ | 15,701 | $ | 16,019 | $ | 9,673 | $ | 12,364 | $ | 27,957 | $ | 30,530 | ||||||||||||||||
Cost of revenue (excluding depreciation and amortization) | 4,089 | 2,911 | 12,656 | 11,781 | 7,415 | 9,127 | 19,502 | 21,752 | ||||||||||||||||||||||||
Depreciation and amortization | 615 | 631 | 1,813 | 2,127 | 155 | 605 | 1,456 | 1,922 | ||||||||||||||||||||||||
Selling, general and administrative | 280 | 499 | 1,179 | 2,141 | 464 | 380 | 2,158 | 1,260 | ||||||||||||||||||||||||
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Systems Integration and Automation operating income (loss) | $ | 632 | $ | (634 | ) | $ | 53 | $ | (30 | ) | ||||||||||||||||||||||
Systems Integration and Automation operating income | $ | 1,639 | $ | 2,252 | $ | 4,841 | $ | 5,596 | ||||||||||||||||||||||||
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NOTE: Consolidated balances include the segments above along with corporate activities and intercompany eliminations.
Three Months Ended September 30, 20172019 and 20162018
Revenue.Revenue increaseddecreased by $0.2$3.8 million, or 0.5%5.8%, to $50.8$61.0 million for the three months ended September 30, 20172019 from $50.6$64.8 million for the three months ended September 30, 2016. This increase was driven by increased revenues in2018. Revenue for the Apps & IoT and Systems Integration segments, partially offset by lower revenue in the Managed Services segment. The Apps & IoT segment increased $3.4$1.8 million, or 221.2%24.1%, due to our growth strategy which focusesfocus on growth intoof the application layer and IoT space, including the acquisition of ESS, which contributed $1.3 million. Thewas offset by a $2.9 million decrease in MCS segment revenue and a $2.7 million decrease in Systems Integration segment increased $2.2 million, or 64.8%, due to the timing of Systems Integration projects. The Managed Services segment decreased $5.4 million, or 11.9%, 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.revenue.
Cost of Revenue (excluding depreciation and amortization).Cost of revenue (excluding depreciation and amortization) increaseddecreased by $2.5$5.1 million, or 8.5%12.5%, to $32.4$35.7 million for the three months ended September 30, 20172019 from $29.9$40.7 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 million2018. This decrease was due to the timing of Systems Integration projects.cost reductions and lower variable costs on lower revenues. Cost of revenue (excluding depreciation and amortization) decreased in the Managed ServicesMCS segment by $1.4$3.8 million. Cost of revenue (excluding depreciation and amortization) decreased in the Systems Integration segment by $1.7 million. Cost of revenue (excluding depreciation and amortization) increased in the Apps & IoT segment by $0.4 million primarily dueas we continue our strategy to reductions in ongoing expenses partially offset by the acquisition of DTS.grow our application layer and IoT space, including Intelie.
Depreciation and Amortization.Depreciation and amortization expense decreased by $0.3$1.2 million to $8.0$7.2 million for the three months ended September 30, 20172019 from $8.3$8.4 million for the three months ended September 30, 2016.2018. The decrease is primarily attributable to the intangibles from the July 2012 acquisition of Nessco being fully amortized coupled with lower levels of capital expenditures in recent years, partially offset by the recent acquisitions of Cyphre, DTS and ESS.expenditures.
Selling and Marketing.Selling and marketing expense increased $0.7$0.1 million to $2.4$2.8 million for the three months ended September 30, 20172019 from $1.7$2.7 million for the three months ended September 30, 2016. This increase was due to investing in our growth strategy.2018.
General and Administrative.General and administrative expenses increaseddecreased by $0.5$2.3 million to $11.0$12.4 million for the three months ended September 30, 20172019 from $10.5$14.7 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.2018. General and administrative costs decreased in the Managed Services and Systems Integration segments due to reductions in ongoing expenses partially offset byreduced legal cost attributable to settlement of the acquisitionGX Dispute during the second quarter of DTS.2019 and other cost reductions.
Income Tax Expense.Our effective income tax rate was (22.2%)rates were 137.1% and (59.5%(12.6%) for the three months ended September 30, 20172019 and 2016,2018, 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, 20172019 and 20162018
Revenue.Revenue decreasedincreased by $19.8$0.2 million, or 11.8%0.1%, to $148.1$178.8 million for the nine months ended September 30, 20172019 from $167.9$178.6 million for the nine months ended September 30, 2016. This decrease was2018, driven by lower revenues across the Managed Services and Systems Integration segments, partially offset by an increasegrowth 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 fromRevenue for 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 Systems Integration segment decreased $0.3 million, or 2.0%, due to the timing of Systems Integration projects. The Apps & IoT segment increased $4.8$5.9 million, or 93.9%30.5%, due to our growth strategy which focusesfocus on growth intoof the application layer and IoT space includingspace. Revenue for the acquisition of ESS, which contributed $1.3 million.Systems Integration segment decreased $2.6 million, or 8.4%. Revenue for the MCS segment decreased $3.1 million, or 2.4%.
Cost of Revenue (excluding depreciation and amortization).Cost of revenue (excluding depreciation and amortization) decreased by $4.1$2.0 million, or 4.1%1.8%, to $95.3$108.6 million for the nine months ended September 30, 20172019 from $99.4$110.7 million for the nine months ended September 30, 2016.2018. Cost of revenue (excluding depreciation and amortization) decreased in the Managed ServicesMCS segment by $9.7$2.8 million primarily due to reductions in ongoing expenses partially offset by the acquisition of DTS.from cost reductions. Cost of revenue increased(excluding depreciation and amortization) decreased in the Systems Integration segment by $0.9 million due to the timing of Systems Integration projects.$2.3 million. Cost of revenue (excluding depreciation and amortization) increased in the Apps & IoT segment by $4.7$3.0 million as we invest incontinue our strategy of expanding into theto grow our application layer andinternet-of-things IoT space, including the acquisition of ESS and Cyphre.Intelie.
Depreciation and Amortization.Depreciation and amortization expense decreased by $2.7$1.0 million to $22.9$23.8 million for the nine months ended September 30, 20172019 from $25.6$24.8 million for the nine months ended September 30, 2016.2018. The decrease is primarily attributable to the intangibles from the July 2012 acquisition of Nessco being fully amortized coupled with lower levels of capital expenditures in recent years.
expenditures.Impairment of Intangible Assets.We recognized $0.4 million in impairment for the nine months ended September 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 $0.4decreased $0.3 million to $6.0$9.5 million for the nine months ended September 30, 20172019 from $5.6$9.9 million for the nine months ended September 30, 2016. This increase was due to investing in our growth strategy.2018.
General and Administrative.General and administrative expenses decreasedincreased by $8.0$2.2 million to $31.4$43.3 million for the nine months ended September 30, 20172019 from $39.4$41.1 million for the nine months ended September 30, 2016. 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.2018. General and administrative costs increased in the Apps & IoT segmentprimarily due to the acquisition of Cyphreincreased stock-based compensation and ESS and related acquisition costs.increased GX Dispute legal expenses.
Income Tax Expense.Our effective income tax rate was (11.5%rates were (47.0%) and (54.7%)0.1% for the nine months ended September 30, 20172019 and 2016,2018, 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 September 30, 2017,2019, we had working capital, including cash and cash equivalents, of $44.8$26.9 million.
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.Credit Agreement.
While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and expansionour growth plans, we may elect to pursue additional expansion opportunities within the next year which could require additional financing, either debt or equity.
Nine Months Ended September 30, | ||||||||
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Condensed Consolidated Statements of Cash Flows Data: | ||||||||
Cash and cash equivalents including restricted cash, January 1, | $ | 23,296 | $ | 36,141 | ||||
GX Dispute payment | (50,000 | ) | — | |||||
Remaining net cash provided by operating activities | 24,055 | 1,352 | ||||||
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Net cash provided by (used in) operating activities | (25,945 | ) | 1,352 | |||||
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Net cash used in investing activities | (16,476 | ) | (23,511 | ) | ||||
Net cash provided by financing activities | 34,918 | 6,157 | ||||||
Changes in foreign currency translation | 35 | 2,175 | ||||||
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Cash and cash equivalents including restricted cash, September 30, | $ | 15,828 | $ | 22,314 | ||||
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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 facilityCredit Agreement and additional financing activities we may pursue, which may include debt or equity offerings.
Nine Months Ended September 30, | ||||||||
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Condensed Consolidated Statements of Cash Flows Data: | ||||||||
Cash and cash equivalents, January 1, | $ | 57,152 | $ | 60,468 | ||||
Net cash provided by operating activities | 20,888 | 22,754 | ||||||
Net cash used in investing activities | (45,007 | ) | (16,886 | ) | ||||
Net cash used in financing activities | (1,052 | ) | (8,111 | ) | ||||
Changes in foreign currency translation | 919 | (986 | ) | |||||
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Cash and cash equivalents, September 30, | $ | 32,900 | $ | 57,239 | ||||
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Currently, the Norwegian kronerKroner, the British Pound Sterling and the British pound sterlingBrazilian Real 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 nine months ended September 30, 20172019 and 2016, 90.2%2018, 91.9% and 84.6%91.4% of our revenue was denominated in U.S. dollars, respectively.
Operating Activities
Net cash provided byused in operating activities was $20.9$25.9 million for the nine months ended September 30, 20172019 compared to $22.8net cash provided by operating activities of $1.4 million for the nine months ended September 30, 2016.2018. The decrease in cash provided byfrom operating activities during 2017 of $1.9$27.3 million was primarily due to decreased operating activity.payment of $50.0 million towards the GX Dispute settlement, partially offset by the timing of collecting receivables and paying our accounts payable.
Our cash provided by operations is subject to many variables the most significant of which isincluding the volatility of the oil and gas industry, and, therefore, the demand for our services. Other factors impacting operating cash flows includeservices, the availability and cost of satellite bandwidth as well asand 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 $45.0$16.5 million and $16.9$23.5 million for the nine months ended September 30, 20172019 and 2016,2018, respectively.
Net Cash used in investing activities during the nine months ended September 30, 2017 included $32.2 million paid in connection with acquisitions consisting of $4.9 million for Cyphre, $5.1 million for DTS and $22.2 million for ESS. Net Cash used in investing activities during the nine months ended September 30, 2016 included $4.8 million paid for the acquisition of TECNOR. Net cash used in investing activities during the nine months ended September 30, 20172019 and 2016 includes2018 included $16.8 million and $18.8 million of capital expenditures, of $13.2respectively. Net cash used in investing activities during the nine months ended September 30, 2018 included $5.4 million and $11.2 million, respectively. We expect capital expenditures for 2017 to continue to be low due to continued reduced levels of global offshore oil and gas drilling activity.acquisitions.
Financing Activities
Net cash used inprovided by financing activities was $1.1 million and $8.1$34.9 million for the nine months ended September 30, 2017 and 2016, respectively.2019. Cash used inprovided by financing activities for the nine months ended September 30, 20172019 included $16.7$48.5 million in proceeds from borrowings, partially offset by $11.4 million in principal payments on our long-term debt, partially offset$1.4 million withheld to cover employee taxes on stock-based compensation and $0.5 million in financing fees related to the consents, waiver and amendment to the Credit Agreement.
Net cash provided by draws of $15.0financing activities was $6.2 million on our revolving credit facility.for the nine months ended September 30, 2018. Cash used inprovided by financing activities for the nine months ended September 30, 20162018 included $9.4$16.8 million in proceeds from borrowings and $3.8 million in principal payments on our long-term debt. Additionally, we paid the $8.0 million TECNOR earnout in July 2018, of which $6.4 million was in cash flows from financing activities and $1.6 million was in cash flows from operating activities.
Credit Agreement
As of September 30, 2017, the Company hasThe Credit Agreement provides for a $60.0$15.0 million term loan (Term Loan)Term Loan, a $30.0 millionTerm-Out Loan and a $75.0an $85.0 million Revolving Credit Facility (RCF),RCF, which includes a $15$25.0 million sublimit for the issuance of commercial and standby letters of credit.credit and performance bonds issued by the parties under the Credit Agreement.
TheUnder the Credit Agreement, the Term Loan, bears antheTerm-Out Loan and the RCF bear interest at a rate of LIBOR plus a margin ranging from 1.5%1.75% to 2.5%3.00%, based on a consolidated leverage ratio of funded debt to Consolidated EBITDA, anon-GAAP financial measure defined in the credit agreement.Credit Agreement. Interest is payable monthly along with quarterlyand principal installments of $2.1$1.25 million withand $1.5 million under the balanceTerm Loan andTerm-Out Loan, respectively, are due October 2018. quarterly.
The weighted average interest rate for the three months ended September 30, 20172019 and 2016 was 3.2%2018 were 5.3% and 2.5%4.9%, respectively. The weighted average interest rate for the nine months ended September 30, 20172019 and 2016 was 3.1%2018 were 5.3% and 2.4%4.7%, respectively, with an interest rate of 3.2%5.0% at September 30, 2017. The Term Loan is secured by substantially all the assets of the Company.2019. As of September 30, 2017,2019, the outstanding principal balance ofamounts were $6.3 million for the Term Loan, was $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 September 30, 2017, $32.0$27.0 million in draws on the facility remain outstanding. The weighted average interest rate for the three months ended September 30, 2017Term-Out Loan and 2016 was 3.2% and 2.5%, respectively. The weighted average interest rate$81.2 million for the nine months ended September 30, 2017 and 2016 was 3.1% and 2.4%, respectively, with an interest rate of 3.2% at September 30, 2017.
As of September 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 ratioThe Credit Agreement contains certain covenants 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 RCF 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 ourrestricting the payment of cash dividends. It also requires us to maintaindividends under default, and maintaining certain financial covenants such as a funded debt to Consolidated EBITDA ratio of less than or equal to 2.5 to 1.0 and aconsolidated fixed charge coverage ratio of not less than 1.25 to 1.0. At September 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 on1.00. Additionally, the Credit Agreement requires a consolidated leverage ratio, as defined in the Credit Agreement, of less than or equal to 2.75 to 1.00. The consolidated leverage ratio increased to 3.25 to 1.00 for the four quarters starting in the 2nd quarter of 2019. The consolidated leverage ratio then decreases to 3.00 to 1.00 for three quarters, and then decreases to 2.75 to 1.00 for all remaining quarters. If any default occurs related to these covenants that was not cured or waived, the unpaid principal payments of $1.25 millionand any accrued interest can be declared immediately due quarterlyand payable. The facilities under the Credit Agreement are secured by substantially all our assets.
In April 2019, we determined that in periods beginning at least as early as March 31, 2018.2014, we had incurred and not appropriately included certain surety bonds or other similar instruments in our consolidated leverage ratio calculation as defined by the credit agreement. As a result, on May 6, 2019, we entered into a Consent and Waiver (Consent) to the Credit Agreement with the financial institutions party thereto under which we are permitted to exclude certain incurred surety bonds and other similar instruments from the calculation of Consolidated Funded Indebtedness, as defined in the credit agreement, for the period ended September 30, 2019. In addition, the Consent waived all specified violations for all prior periods. On June 7, 2019, the Company entered into a second amendment to the Credit Agreement (Second Amendment), which (i) permits the Company to exclude up to $5.0 million in legal and related costs for the GX Dispute from the calculation of Consolidated EBITDA, (ii) permits the Company to exclude from the calculation of Consolidated Funded Indebtedness up to $30.0 million of undrawn surety bonds and (iii) revises the threshold of proceeds from asset dispositions above which the Company must prepay on the Term Out Loan to $5.0 million. Consolidated EBITDA and Consolidated Funded Indebtedness arenon-GAAP metrics defined in the Credit Agreement.
We believe we have accurately calculated and reported our required debt covenant calculations for the September 30, 2019 reporting period and are in compliance with the required covenant ratios. We expect to remain in compliance with our required debt covenant calculations for the foreseeable future, however, in the event that there are changes in economic conditions we can limit or control our spending through reductions in discretionary capital or other types of controllable expenditures, monetization of assets, or any combination of these alternatives if needed to remain in compliance with such covenants.
Off-Balance Sheet Arrangements
We do not engage in anyoff-balance sheet arrangements.
Non-GAAP MeasuresMeasure
Adjusted EBITDA and Unlevered Free Cash Flow should not be considered as alternativesan alternative to net loss, operating income (loss), basic or diluted earningsloss 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. Net loss is the most comparable GAAP measure to Adjusted EBITDA.
We define Adjusted EBITDA as net loss plus interest expense,expense; income tax expense (benefit); depreciation and amortization,amortization; impairment of goodwill, intangibles, property, plant and equipment, foreign exchange impact of intercompany financing activities,equipment; (gain) loss on retirementsales of property, plant and equipment, net of retirements; change in fair value of earn-outs and contingent consideration,consideration; stock-based compensation, merger andcompensation; acquisition costs,costs; executive departure costs,costs; restructuring chargescharges; the GX Dispute; GX Dispute Phase II costs 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.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 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 basedstock-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 and contingent consideration;
Adjusted EBITDA does not reflect executive departure costs;
Adjusted EBITDA does not reflect restructuring charges;
Adjusted EBITDA does not reflect the GX Dispute;
Adjusted EBITDA does not reflect the GX Dispute Phase II costs;
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:
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:
The following table presents a reconciliation of our net loss to Adjusted EBITDA and Unlevered Free Cash Flow.EBITDA.
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Net loss | $ | (4,193 | ) | $ | (1,448 | ) | $ | (10,390 | ) | $ | (7,571 | ) | $ | (270 | ) | $ | (2,798 | ) | $ | (18,349 | ) | $ | (12,623 | ) | ||||||||
Interest expense | 689 | 729 | 1,921 | 2,040 | 1,784 | 807 | 4,291 | 2,773 | ||||||||||||||||||||||||
Depreciation and amortization | 7,999 | 8,305 | 22,867 | 25,561 | 7,172 | 8,413 | 23,763 | 24,756 | ||||||||||||||||||||||||
Impairment of intangible assets | — | — | — | 397 | ||||||||||||||||||||||||||||
(Gain) loss on sales of property, plant and equipment, net of retirements | 5 | (14 | ) | 55 | (164 | ) | ||||||||||||||||||||||||||
Loss on sales of property, plant and equipment, net of retirements | 8 | 66 | 19 | 34 | ||||||||||||||||||||||||||||
Stock-based compensation | 1,007 | 866 | 2,949 | 2,708 | 1,504 | 1,086 | 7,132 | 4,368 | ||||||||||||||||||||||||
Restructuring | 767 | 835 | 767 | 1,332 | 158 | 664 | 731 | 664 | ||||||||||||||||||||||||
Change in fair value ofearn-out/contingent consideration | — | (1,279 | ) | (846 | ) | (1,279 | ) | — | (750 | ) | 1,284 | 2,050 | ||||||||||||||||||||
Executive departure costs | — | — | — | 1,884 | — | — | — | 161 | ||||||||||||||||||||||||
Acquisition costs | 807 | — | 2,723 | 240 | 76 | 930 | 486 | 2,075 | ||||||||||||||||||||||||
Income tax expense | 762 | 540 | 1,075 | 2,676 | ||||||||||||||||||||||||||||
GX dispute Phase II costs | (420 | ) | — | 3,946 | — | |||||||||||||||||||||||||||
Income tax expense (benefit) | 998 | 312 | 5,868 | (11 | ) | |||||||||||||||||||||||||||
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Adjusted EBITDA(non-GAAP measure) | $ | 7,843 | $ | 8,534 | $ | 21,121 | $ | 27,824 | $ | 11,010 | $ | 8,730 | $ | 29,171 | $ | 24,247 | ||||||||||||||||
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Adjusted EBITDA(non-GAAP measure) | $ | 7,843 | $ | 8,534 | $ | 21,121 | $ | 27,824 | ||||||||||||||||||||||||
Capital expenditures | 5,853 | 1,936 | 13,924 | 11,511 | ||||||||||||||||||||||||||||
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Unlevered Free Cash Flow(non-GAAP measure) | $ | 1,990 | $ | 6,598 | $ | 7,197 | $ | 16,313 | ||||||||||||||||||||||||
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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 assistassess purchasing synergies.
Adjusted EBITDA decreasedincreased by $0.7$2.3 million to $7.8$11.0 million for the three months ended September 30, 2017,2019, from $8.5$8.7 million for the three months ended September 30, 2016. The decrease resulted primarily from increased costs partially offset by increased revenue.2018. Adjusted EBITDA decreasedincreased by $6.7$4.9 million to $21.1$29.2 million for the nine months ended September 30, 2017,2019, from $27.8$24.2 million for the nine months ended September 30, 2016. The decrease resulted primarily from lower revenue partially offset by a reduction in ongoing operating expenses.2018.
Unlevered Free Cash Flow was $2.0 million in the three months ended September 30, 2017, a decrease of $4.6 million over the prior year quarter. Unlevered Free Cash Flow was $7.2 million in the nine months ended September 30, 2017, a decrease of $9.1 million over the prior year period. The decrease in Unlevered Free Cash Flow was due to decreased Adjusted EBITDA and increased capital expenditures.
Item 3.Quantitative and Qualitative 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 nine months ended September 30, 20172019 and 2016, 9.8%2018, 8.1% and 15.4%8.6%, respectively, of our revenues were earned innon-U.S. currencies. At September 30, 20172019 and 2016,2018, 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 onat September 30, 20172019 and December 31, 2016,2018, assuming those liabilities were outstanding for the previous twelve months:
September 30, | December 31, | September 30, | December 31, | |||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Effect on Net Income (Loss) and Equity - Increase/Decrease: | ||||||||||||||||
1% Decrease/increase in rate | $ | 600 | $ | 615 | $ | 1,144 | $ | 770 | ||||||||
2% Decrease/increase in rate | $ | 1,200 | $ | 1,229 | $ | 2,289 | $ | 1,541 | ||||||||
3% Decrease/increase in rate | $ | 1,800 | $ | 1,844 | $ | 3,433 | $ | 2,311 |
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.2019. 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’scompany’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 September 30, 2017,2019, 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 September 30, 20172019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management included in its assessment of internal control over financial reporting all consolidated entities.
In August 2017,June 2019, the Company filed litigationannounced that it reached a settlement with Inmarsat that concludes the GX Dispute. Pursuant to the settlement the Company paid $45.0 million in Harris County District CourtJune 2019 and arbitration against onepaid $5.0 million in July 2019 and will pay $0.8 million in the third quarter 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.2020. The Company has incurred legal expensean accrued liability of approximately $0.3$0.8 million in connection with this dispute for the nine months endedas of September 30, 2017. The Company may continue to incur significant legal fees, related expenses and management time2019.
As previously disclosed, Inmarsat plc (Inmarsat), a satellite telecommunications company, filed arbitration with the International Centre for Dispute Resolution tribunal (the panel) 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 toOctober 2016 concerning a January 2014 take or paytake-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-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 $0.8 million in connection with the GX 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 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.
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, 2016.2018.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
NoneNone.
Item 3.Defaults Upon Senior Securities
NoneNone.
Item 4.Mine Safety Disclosures
Not applicable.
NoneNot applicable.
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
+ | 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: November | By: | /s/ | ||||
Lee M. Ahlstrom | ||||||
Senior Vice President and Chief Financial Officer (Principal Financial |
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