Delaware | | | | 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 codecode) 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 | RNET | | NASDAQ Global Select Market |
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 every Interactive Data File required to be submitted 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 such files). Yes .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 ☐ | | | | | | 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, 2019,April 30, 2020, there were outstanding 19,970,30820,455,615 shares of the registrant’s Common Stock.
TABLE OF CONTENTS
Table of Contents 2
GlossaryGlossary
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 (minus) 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 expense, 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 Incomeloss can be found in Part 1, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | AI | | Artificial Intelligence | AIApps | | Artificial IntelligenceApplications | ASC | | Apps | | Software Applications | | | ASC | | Accounting Standards Codification | ASU | | ASU | | Accounting Standards Update | AVI | | Auto-Comm | | Automation Communications Engineering Corp., acquired in 2018, provides additional Systems Integration solutions | | | AVI | | Adaptive Video Intelligence | B2B | | Business to Business | BOP | | Blow-Out Preventer | CIEB | | BGAN | | Broadband Global Access Networks | | | CIEB | | Costs and Estimated Earnings in Excess of Billings on uncompleted contracts | Credit Agreement | | Third Amendment and Joinder to the Third Amended and Restated Credit Agreement dated as of February 21, 2020 among RigNet, Inc. as Borrower, the Subsidiaries of RigNet, Inc. party thereto as Guarantors, Bank of America, N.A. as Administrative Agent, Swingline Lender and L/C Issuer, BBVA Compass, as Syndication Agent, the Lenders party hereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Sole Lead Arranger and Sole Bookrunner, as amended. | Cyphre®Consolidated Leverage Ratio | | The ratio, as of any given date, of Consolidated Funded Indebtedness to Consolidated EBITDA for the most recently completed Measurement Period (as each such capitalized term is defined in the Credit Agreement) | COVID-19 | | Coronavirus | Cyphre® | | Cyphre Security Solutions, LLC, acquired in 2017, provides cybersecurity solutions with advanced enterprise data protection | ECS | | DTS | | Data Technology Solutions, acquired in 2017, increases solutions offerings in managed communications, IT, and disaster relief | | | ECS | | Enhanced Cyber Security | EPC | | 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 | | The United States Securities Exchange Act of 1934, as amended | FASB | | FASB | | Financial Accounting Standards Board | FCC | | FCC | | Federal Communications Commission | GAAP | | GAAP | | Generally Accepted Accounting Principles in the United States | GX | | GX | | Inmarsat plc’s Global Express satellite bandwidth service | GX Dispute | | Inmarsat, a satellite telecommunications company, filed arbitration with the International Centre for Dispute Resolution tribunal in October 2016 concerning 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. This arbitration and related developments are collectively referred to as the GX Dispute. | HTSGX Dispute Phase II | | High Throughput Satellite, providing greater bandwidth than traditional satellitesThe portion of the GX Dispute arbitration which was to address RigNet’s counterclaims against Inmarsat on a variety of subjects, as well as Inmarsat’s additional claims and for interest and attorneys’ fees. | Intelie | | Intelie | | Intelie soluções em Informática SA, acquired in 2018, provides machine learning and real-time predictive analytics | IoT | | Internet-of-Things | LIBOR | | London Interbank Offered Rate |
3
| | | IoTLTE | | Internet-of-ThingsA 4G and 5G technology, Long Term Evolution | MCS | | 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 | NASDAQ | | MPLS | | Multiprotocol Label Switching | | | NASDAQ | | NASDAQ Global Select Market, where RigNet’s common shares are listed for trading |
| | | Nessco | | Nessco | | Nessco Group Holdings LTD, acquired in 2012, provides Systems Integration solutions | NOC | | NOC | | Network Operations Center | OPEC | | NPT | | Non-Productive Time | | | OPEC | | Organization of Petroleum Exporting Countries | PLC | | Programmable Logic Controller | OTTSaaS | | 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 | | SAB | | Staff Accounting Bulletin | SCADA | | 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 | | SEC | | The United States Securities and Exchange Commission | SI | | Systems Integration | SITECNOR | | 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 of 2017 |
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PART I – FINANCIALFINANCIAL INFORMATION
Item 1.Condensed Consolidated Financial Statements RIGNET, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) | | | | | | | | | | | September 30, 2019 | | | December 31, 2018 | | | | (in thousands, except share amounts) | | ASSETS | | Current assets: | | | | | | | | | Cash and cash equivalents | | $ | 14,267 | | | $ | 21,711 | | Restricted cash | | | 39 | | | | 41 | | Accounts receivable, net | | | 61,895 | | | | 67,450 | | Costs and estimated earnings in excess of billings on uncompleted contracts (CIEB) | | | 11,589 | | | | 7,138 | | Prepaid expenses and other current assets | | | 6,795 | | | | 6,767 | | | | | | | | | | | Total current assets | | | 94,585 | | | | 103,107 | | Property, plant and equipment, net | | | 60,283 | | | | 63,585 | | Restricted cash | | | 1,522 | | | | 1,544 | | Goodwill | | | 45,484 | | | | 46,631 | | Intangibles, net | | | 30,083 | | | | 33,733 | | Right-of-use lease asset | | | 3,891 | | | | — | | Deferred tax and other assets | | | 7,312 | | | | 10,325 | | | | | | | | | | | TOTAL ASSETS | | $ | 243,160 | | | $ | 258,925 | | | | | | | | | | | LIABILITIES AND EQUITY | | Current liabilities: | | | | | | | | | Accounts payable | | $ | 26,624 | | | $ | 20,568 | | Accrued expenses | | | 16,810 | | | | 16,374 | | Current maturities of long-term debt | | | 10,795 | | | | 4,942 | | Income taxes payable | | | 1,789 | | | | 2,431 | | GX dispute accrual | | | 750 | | | | 50,765 | | Deferred revenue and other current liabilities | | | 10,897 | | | | 5,863 | | | | | | | | | | | Total current liabilities | | | 67,665 | | | | 100,943 | | Long-term debt | | | 103,641 | | | | 72,085 | | Deferred revenue | | | 180 | | | | 318 | | Deferred tax liability | | | 2,889 | | | | 652 | | Right-of-use lease liability - long-term portion | | | 3,576 | | | | — | | Other liabilities | | | 21,702 | | | | 28,943 | | | | | | | | | | | Total liabilities | | | 199,653 | | | | 202,941 | | | | | | | | | | | 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, 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 | | | 183,081 | | | | 172,946 | | Accumulated deficit | | | (115,150 | ) | | | (96,517 | ) | Accumulated other comprehensive loss | | | (21,831 | ) | | | (19,254 | ) | | | | | | | | | | Total stockholders’ equity | | | 43,438 | | | | 55,924 | | Non-redeemable,non-controlling interest | | | 69 | | | | 60 | | | | | | | | | | | Total equity | | | 43,507 | | | | 55,984 | | | | | | | | | | | TOTAL LIABILITIES AND EQUITY | | $ | 243,160 | | | $ | 258,925 | | | | | | | | | | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
| | March 31, | | | December 31, | | | | | 2020 | | | | 2019 | | | | (in thousands, except share amounts) | | ASSETS | | Current assets: | | | | | | | | | Cash and cash equivalents | | $ | 13,614 | | | $ | 12,941 | | Restricted cash | | | 40 | | | | 42 | | Accounts receivable, net | | | 63,529 | | | | 67,059 | | Costs and estimated earnings in excess of billings on uncompleted contracts (CIEB) | | | 15,848 | | | | 13,275 | | Prepaid expenses and other current assets | | | 6,046 | | | | 6,500 | | Total current assets | | | 99,077 | | | | 99,817 | | Property, plant and equipment, net | | | 57,297 | | | | 60,118 | | Restricted cash | | | 1,523 | | | | 1,522 | | Goodwill | | | 20,464 | | | | 46,792 | | Intangibles, net | | | 26,871 | | | | 30,145 | | Right-of-use lease asset | | | 6,660 | | | | 6,829 | | Deferred tax and other assets | | | 5,702 | | | | 5,757 | | TOTAL ASSETS | | $ | 217,594 | | | $ | 250,980 | | LIABILITIES AND EQUITY | | Current liabilities: | | | | | | | | | Accounts payable | | $ | 23,252 | | | $ | 28,517 | | Accrued expenses | | | 17,635 | | | | 16,660 | | Current maturities of long-term debt | | | 8,747 | | | | 10,793 | | Income taxes payable | | | 2,420 | | | | 2,649 | | GX dispute accrual | | | 750 | | | | 750 | | Deferred revenue and other current liabilities | | | 11,966 | | | | 11,173 | | Total current liabilities | | | 64,770 | | | | 70,542 | | Long-term debt | | | 105,087 | | | | 96,934 | | Deferred revenue | | | 853 | | | | 855 | | Deferred tax liability | | | 2,034 | | | | 2,672 | | Right-of-use lease liability - long-term portion | | | 6,166 | | | | 6,329 | | Other liabilities | | | 22,614 | | | | 26,771 | | Total liabilities | | | 201,524 | | | | 204,103 | | 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 March 31, 2020 and December 31, 2019 | | | - | | | | - | | Common stock - $0.001 par value; 190,000,000 shares authorized; 20,454,705 and 19,979,284 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | | | 20 | | | | 20 | | Treasury stock - 432,432 and 203,756 shares at March 31, 2020 and December 31, 2019, respectively, at cost | | | (3,271 | ) | | | (2,693 | ) | Additional paid-in capital | | | 188,425 | | | | 184,571 | | Accumulated deficit | | | (142,514 | ) | | | (115,673 | ) | Accumulated other comprehensive loss | | | (26,659 | ) | | | (19,502 | ) | Total stockholders' equity | | | 16,001 | | | | 46,723 | | Non-redeemable, non-controlling interest | | | 69 | | | | 154 | | Total equity | | | 16,070 | | | | 46,877 | | TOTAL LIABILITIES AND EQUITY | | $ | 217,594 | | | $ | 250,980 | |
RIGNET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
| | | | | | | | | | | | | | | | | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | | (in thousands, except per share amounts) | | Revenue | | $ | 60,993 | | | $ | 64,770 | | | $ | 178,835 | | | $ | 178,610 | | | | | | | | | | | | | | | | | | | Expenses: | | | | | | | | | | | | | | | | | Cost of revenue (excluding depreciation and amortization) | | | 35,662 | | | | 40,734 | | | | 108,637 | | | | 110,661 | | Depreciation and amortization | | | 7,172 | | | | 8,413 | | | | 23,763 | | | | 24,756 | | Change in fair value ofearn-out/contingent consideration | | | — | | | | (750 | ) | | | 1,284 | | | | 2,050 | | Selling and marketing | | | 2,784 | | | | 2,728 | | | | 9,529 | | | | 9,866 | | General and administrative | | | 12,377 | | | | 14,666 | | | | 43,305 | | | | 41,098 | | | | | | | | | | | | | | | | | | | Total expenses | | | 57,995 | | | | 65,791 | | | | 186,518 | | | | 188,431 | | | | | | | | | | | | | | | | | | | Operating income (loss) | | | 2,998 | | | | (1,021 | ) | | | (7,683 | ) | | | (9,821 | ) | Other income (expense): | | | | | | | | | | | | | | | | | Interest expense | | | (1,784 | ) | | | (807 | ) | | | (4,291 | ) | | | (2,773 | ) | Other expense, net | | | (486 | ) | | | (658 | ) | | | (507 | ) | | | (40 | ) | | | | | | | | | | | | | | | | | | Income (loss) before income taxes | | | 728 | | | | (2,486 | ) | | | (12,481 | ) | | | (12,634 | ) | Income tax benefit (expense) | | | (998 | ) | | | (312 | ) | | | (5,868 | ) | | | 11 | | | | | | | | | | | | | | | | | | | Net loss | | | (270 | ) | | | (2,798 | ) | | | (18,349 | ) | | | (12,623 | ) | Less: Net income attributable tonon-redeemable,non-controlling interest | | | 224 | | | | 49 | | | | 284 | | | | 109 | | | | | | | | | | | | | | | | | | | Net loss attributable to RigNet, Inc. stockholders | | $ | (494 | ) | | $ | (2,847 | ) | | $ | (18,633 | ) | | $ | (12,732 | ) | | | | | | | | | | | | | | | | | | COMPREHENSIVE LOSS | | | | | | | | | | | | | | | | | Net loss | | $ | (270 | ) | | $ | (2,798 | ) | | $ | (18,349 | ) | | $ | (12,623 | ) | Foreign currency translation | | | (2,913 | ) | | | (3,897 | ) | | | (2,577 | ) | | | (4,489 | ) | | | | | | | | | | | | | | | | | | Comprehensive loss | | | (3,183 | ) | | | (6,695 | ) | | | (20,926 | ) | | | (17,112 | ) | Less: Comprehensive income attributable tonon-controlling interest | | | 224 | | | | 49 | | | | 284 | | | | 109 | | | | | | | | | | | | | | | | | | | Comprehensive loss attributable to RigNet, Inc. stockholders | | $ | (3,407 | ) | | $ | (6,744 | ) | | $ | (21,210 | ) | | $ | (17,221 | ) | | | | | | | | | | | | | | | | | | LOSS PER SHARE - BASIC AND DILUTED | | | | | | | | | | | | | | | | | Net loss attributable to RigNet, Inc. common stockholders | | $ | (494 | ) | | $ | (2,847 | ) | | $ | (18,633 | ) | | $ | (12,732 | ) | | | | | | | | | | | | | | | | | | Net loss per share attributable to RigNet, Inc. common stockholders, basic | | $ | (0.02 | ) | | $ | (0.15 | ) | | $ | (0.94 | ) | | $ | (0.69 | ) | | | | | | | | | | | | | | | | | | Net loss per share attributable to RigNet, Inc. common stockholders, diluted | | $ | (0.02 | ) | | $ | (0.15 | ) | | $ | (0.94 | ) | | $ | (0.69 | ) | | | | | | | | | | | | | | | | | | Weighted average shares outstanding, basic | | | 19,970 | | | | 18,905 | | | | 19,777 | | | | 18,566 | | | | | | | | | | | | | | | | | | | Weighted average shares outstanding, diluted | | | 19,970 | | | | 18,905 | | | | 19,777 | | | | 18,566 | | | | | | | | | | | | | | | | | | |
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, | | | | 2019 | | | 2018 | | | | (in thousands) | | Cash flows from operating activities: | | | | | | | | | Net loss | | $ | (18,349 | ) | | $ | (12,623 | ) | Adjustments to reconcile net loss to net cash provided by operations: | | | | | | | | | Depreciation and amortization | | | 23,763 | | | | 24,756 | | Stock-based compensation | | | 7,132 | | | | 4,368 | | Amortization of deferred financing costs | | | 252 | | | | 141 | | Deferred taxes | | | 4,902 | | | | (117 | ) | Change in fair value ofearn-out/contingent consideration | | | 1,284 | | | | 2,050 | | Accretion of discount of contingent consideration payable for acquisitions | | | 262 | | | | 368 | | (Gain) loss on sales of property, plant and equipment, net of retirements | | | 19 | | | | 34 | | Changes in operating assets and liabilities, net of effect of acquisition: | | | | | | | | | 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 | | | 128 | | | | (1,634 | ) | Right-of-use lease asset | | | 1,214 | | | | — | | Accounts payable | | | 5,355 | | | | 3,986 | | Accrued expenses | | | 36 | | | | (1,584 | ) | GX Dispute payment | | | (50,000 | ) | | | — | | Deferred revenue | | | 1,635 | | | | 1,512 | | Right-of-use lease liability | | | (1,593 | ) | | | — | | Other liabilities | | | (2,444 | ) | | | (1,807 | ) | Payout of TECNOR contingent consideration - inception to date change in fair value portion | | | — | | | | (1,575 | ) | | | | | | | | | | Net cash provided by (used in) operating activities | | | (25,945 | ) | | | 1,352 | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Acquisitions (net of cash acquired) | | | — | | | | (5,405 | ) | Capital expenditures | | | (16,776 | ) | | | (18,791 | ) | Proceeds from sales of property, plant and equipment | | | 300 | | | | 685 | | | | | | | | | | | Net cash used in investing activities | | | (16,476 | ) | | | (23,511 | ) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | 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 | | | (275 | ) | | | (157 | ) | Payout of TECNOR contingent consideration - fair value on acquisition date portion | | | — | | | | (6,425 | ) | Proceeds from borrowings | | | 48,500 | | | | 16,750 | | Repayments of long-term debt | | | (11,413 | ) | | | (3,848 | ) | Payment of financing fees | | | (486 | ) | | | — | | | | | | | | | | | Net cash provided by financing activities | | | 34,918 | | | | 6,157 | | | | | | | | | | | Net change in cash and cash equivalents | | | (7,503 | ) | | | (16,002 | ) | | | | | | | | | | Cash and cash equivalents including restricted cash: | | | | | | | | | Balance, January 1, | | | 23,296 | | | | 36,141 | | Changes in foreign currency translation | | | 35 | | | | 2,175 | | | | | | | | | | | Balance, September 30, | | $ | 15,828 | | | $ | 22,314 | | | | | | | | | | | Supplemental disclosures: | | | | | | | | | Income taxes paid | | $ | 3,881 | | | $ | 2,989 | | Interest paid | | | 3,645 | | | | 2,284 | | Property, plant and equipment acquired under finance leases | | | 556 | | | | — | | Non-cash investing - capital expenditures accrued | | | 2,873 | | | | 2,612 | | 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 | | | — | | | | 7,600 | | Non-cash investing and financing - stock for acquisitions | | | — | | | | 11,436 | | Liabilities assumed in acquisitions | | | — | | | | 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 | | | | | | | | | | | Cash and cash equivalents including restricted cash | | $ | 15,828 | | | $ | 22,314 | | | | | | | | | | |
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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, September 30, 2018 | | | 19,411 | | | $ | 19 | | | | 90 | | | $ | (1,246 | ) | | $ | 172,599 | | | $ | (46,796 | ) | | $ | (19,295 | ) | | $ | 105,281 | | | $ | 30 | | | $ | 105,311 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, September 30, 2019 | | | 19,970 | | | $ | 20 | | | | 202 | | | $ | (2,682 | ) | | $ | 183,081 | | | $ | (115,150 | ) | | $ | (21,831 | ) | | $ | 43,438 | | | $ | 69 | | | $ | 43,507 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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, 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 | | | 59 | | | | — | | | | — | | | | — | | | | 967 | | | | — | | | | — | | | | 967 | | | | — | | | | 967 | | 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 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, September 30, 2018 | | | 19,411 | | | $ | 19 | | | | 90 | | | $ | (1,246 | ) | | $ | 172,599 | | | $ | (46,796 | ) | | $ | (19,295 | ) | | $ | 105,281 | | | $ | 30 | | | $ | 105,311 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | — | | | | — | | | | — | | | | — | | | | 7,132 | | | | — | | | | — | | | | 7,132 | | | | — | | | | 7,132 | | Foreign currency translation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,577 | ) | | | (2,577 | ) | | | — | | | | (2,577 | ) | Non-controlling owner distributions | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (275 | ) | | | (275 | ) | Net income (loss) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (18,633 | ) | | | — | | | | (18,633 | ) | | | 284 | | | | (18,349 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, September 30, 2019 | | | 19,970 | | | $ | 20 | | | | 202 | | | $ | (2,682 | ) | | $ | 183,081 | | | $ | (115,150 | ) | | $ | (21,831 | ) | | $ | 43,438 | | | $ | 69 | | | $ | 43,507 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the condensed consolidated financial statements. 5
RIGNET, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) | | Three Months Ended March 31, | | | | 2020 | | | 2019 | | | | (in thousands, except per share amounts) | | | | | | | | | | | Revenue | | $ | 58,761 | | | $ | 57,510 | | Expenses: | | | | | | | | | Cost of revenue (excluding depreciation and amortization) | | | 37,950 | | | | 36,456 | | Depreciation and amortization | | | 6,931 | | | | 8,912 | | Impairment of goodwill | | | 23,141 | | | | - | | Selling and marketing | | | 2,812 | | | | 3,793 | | General and administrative | | | 13,829 | | | | 16,470 | | Total expenses | | | 84,663 | | | | 65,631 | | Operating loss | | | (25,902 | ) | | | (8,121 | ) | Other income (expense): | | | | | | | | | Interest expense | | | (1,528 | ) | | | (1,238 | ) | Other income (expense), net | | | (321 | ) | | | 72 | | Loss before income taxes | | | (27,751 | ) | | | (9,287 | ) | Income tax benefit (expense) | | | 980 | | | | (2,666 | ) | Net loss | | | (26,771 | ) | | | (11,953 | ) | Less: Net loss attributable to non-redeemable, non-controlling interest | | | 70 | | | | 30 | | Net loss attributable to RigNet, Inc. stockholders | | $ | (26,841 | ) | | $ | (11,983 | ) | COMPREHENSIVE LOSS | | | | | | | | | Net loss | | $ | (26,771 | ) | | $ | (11,953 | ) | Foreign currency translation | | | (7,157 | ) | | | 158 | | Comprehensive loss | | | (33,928 | ) | | | (11,795 | ) | Less: Comprehensive income attributable to non-controlling interest | | | 70 | | | | 30 | | Comprehensive loss attributable to RigNet, Inc. stockholders | | $ | (33,998 | ) | | $ | (11,825 | ) | LOSS PER SHARE - BASIC AND DILUTED | | | | | | | | | Net loss attributable to RigNet, Inc. common stockholders | | $ | (26,841 | ) | | $ | (11,983 | ) | Net loss per share attributable to RigNet, Inc. common stockholders, basic | | $ | (1.34 | ) | | $ | (0.63 | ) | Net loss per share attributable to RigNet, Inc. common stockholders, diluted | | $ | (1.34 | ) | | $ | (0.63 | ) | Weighted average shares outstanding, basic | | | 20,081 | | | | 18,949 | | Weighted average shares outstanding, diluted | | | 20,081 | | | | 18,949 | |
The accompanying notes are an integral part of the condensed consolidated financial statements. 6
RIGNET, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) | | Three Months Ended March 31, | | | | 2020 | | | 2019 | | | | (in thousands) | | Cash flows from operating activities: | | | | | | | | | Net loss | | $ | (26,771 | ) | | $ | (11,953 | ) | Adjustments to reconcile net loss to net cash provided by operations: | | | | | | | | | Depreciation and amortization | | | 6,931 | | | | 8,912 | | Impairment of goodwill | | | 23,141 | | | | - | | Stock-based compensation | | | 3,854 | | | | 4,458 | | Amortization of deferred financing costs | | | 93 | | | | 61 | | Deferred taxes | | | (626 | ) | | | 2,469 | | Accretion of discount of contingent consideration payable for acquisitions | | | 134 | | | | 94 | | (Gain) loss on sales of property, plant and equipment, net of retirements | | | 30 | | | | (7 | ) | Changes in operating assets and liabilities, net of effect of acquisition: | | | | | | | | | Accounts receivable, net | | | 2,490 | | | | (6,777 | ) | Costs and estimated earnings in excess of billings on uncompleted contracts (CIEB) | | | (3,000 | ) | | | 1,439 | | Prepaid expenses and other assets | | | 213 | | | | 85 | | Right-of-use lease asset | | | 169 | | | | - | | Accounts payable | | | (2,689 | ) | | | 4,058 | | Accrued expenses | | | 1,147 | | | | (38 | ) | Deferred revenue | | | 861 | | | | 3,074 | | Right-of-use lease liability | | | (231 | ) | | | - | | Other liabilities | | | (2,195 | ) | | | (1,227 | ) | Net cash provided by operating activities | | | 3,551 | | | | 4,648 | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Capital expenditures | | | (5,337 | ) | | | (4,814 | ) | Proceeds from sales of property, plant and equipment | | | - | | | | 66 | | Net cash used in investing activities | | | (5,337 | ) | | | (4,748 | ) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Issuance of common stock upon the exercise of stock options and the vesting of restricted stock | | | - | | | | 1 | | Stock withheld to cover employee taxes on stock-based compensation | | | (578 | ) | | | (1,407 | ) | Subsidiary distributions to non-controlling interest | | | (155 | ) | | | (135 | ) | Proceeds from borrowings | | | 3,750 | | | | - | | Repayments of long-term debt | | | (41 | ) | | | (1,295 | ) | Payment of financing fees | | | (485 | ) | | | (250 | ) | Net cash provided by (used in) financing activities | | | 2,491 | | | | (3,086 | ) | Net change in cash and cash equivalents | | | 705 | | | | (3,186 | ) | | | | | | | | | | Cash and cash equivalents including restricted cash: | | | | | | | | | Balance, January 1, | | | 14,505 | | | | 23,296 | | Changes in foreign currency translation | | | (33 | ) | | | 91 | | Balance, March 31, | | $ | 15,177 | | | $ | 20,201 | | | | | | | | | | | Supplemental disclosures: | | | | | | | | | Income taxes paid | | $ | 1,081 | | | $ | 737 | | Interest paid | | | 1,245 | | | | 1,019 | | Non-cash investing - capital expenditures accrued | | | 868 | | | | 4,398 | | Right-of-use operating lease entered into | | | 121 | | | | - | |
| | March 31, | | | March 31, | | | | | 2020 | | | | 2019 | | Cash and cash equivalents | | $ | 13,614 | | | $ | 18,660 | | Restricted cash - current portion | | | 40 | | | | 42 | | Restricted cash - long-term portion | | | 1,523 | | | | 1,499 | | Cash and cash equivalents including restricted cash | | $ | 15,177 | | | $ | 20,201 | |
The accompanying notes are an integral part of the condensed consolidated financial statements. 7
RIGNET, INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) | | Common Stock | | | | | | | Treasury Stock | | | | | | | Additional | | | | | | | Accumulated Other | | | Total | | | Non-Redeemable, | | | | | | | | Shares | | | Amount | | | Shares | | | Amount | | | Paid-In Capital | | | Accumulated Deficit | | | Comprehensive Loss | | | Stockholders' Equity | | | Non-Controlling Interest | | | Total Equity | | | | (dollars and shares in thousands) | | 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 vesting of Restricted Stock Units, net of share cancellations | | | 246 | | | | 1 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1 | | | | - | | | | 1 | | Stock withheld to cover employee taxes on stock-based compensation | | | - | | | | - | | | | 106 | | | | (1,407 | ) | | | - | | | | - | | | | - | | | | (1,407 | ) | | | - | | | | (1,407 | ) | Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 4,458 | | | | - | | | | - | | | | 4,458 | | | | - | | | | 4,458 | | Foreign currency translation | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 158 | | | | 158 | | | | - | | | | 158 | | Non-controlling owner distributions | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (135 | ) | | | (135 | ) | Net income (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (11,983 | ) | | | - | | | | (11,983 | ) | | | 30 | | | | (11,953 | ) | Balance, March 31, 2019 | | | 19,711 | | | $ | 20 | | | | 198 | | | $ | (2,677 | ) | | $ | 177,404 | | | $ | (108,500 | ) | | $ | (19,096 | ) | | $ | 47,151 | | | $ | (45 | ) | | $ | 47,106 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, January 1, 2020 | | | 19,979 | | | $ | 20 | | | | 204 | | | $ | (2,693 | ) | | $ | 184,571 | | | $ | (115,673 | ) | | $ | (19,502 | ) | | $ | 46,723 | | | $ | 154 | | | $ | 46,877 | | Issuance of common stock upon the vesting of Restricted Stock Units, net of share cancellations | | | 475 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | Stock withheld to cover employee taxes on stock-based compensation | | | - | | | | - | | | | 228 | | | | (578 | ) | | | - | | | | - | | | | - | | | | (578 | ) | | | - | | | | (578 | ) | Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | 3,854 | | | | - | | | | - | | | | 3,854 | | | | - | | | | 3,854 | | Foreign currency translation | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (7,157 | ) | | | (7,157 | ) | | | - | | | | (7,157 | ) | Non-controlling owner distributions | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (155 | ) | | | (155 | ) | Net income (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (26,841 | ) | | | - | | | | (26,841 | ) | | | 70 | | | | (26,771 | ) | Balance, March 31, 2020 | | | 20,454 | | | $ | 20 | | | $ | 432 | | | $ | (3,271 | ) | | $ | 188,425 | | | $ | (142,514 | ) | | $ | (26,659 | ) | | $ | 16,001 | | | $ | 69 | | | $ | 16,070 | |
The accompanying notes are an integral part of the condensed consolidated financial statements. 8
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, 20182019 included in the Company’s Annual Report on Form10-K filed with the Securities and Exchange Commission on March 15, 2019.11, 2020. Significant Accounting Policies In addition to the accounting policies described below, please refer to RigNet’s Annual Report on Form10-K for the fiscal year 20182019 for information regarding the Company’s accounting policies. Revenue Recognition – Revenue from Contracts with Customers Revenue is recognized to depict the transfer of promised goods or services in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. 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, usage or day rate basis or for equipment sales and consulting services. 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 threefive 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). With certain customers, our contracts require that the contract backlog on stack rigs be transferred to other units, preserving the total contract value. 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, usage 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). 9
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 the 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, 2019March 31, 2020, and December 31, 2018,2019, the amount of CIEB related to Systems Integration projects was $11.6$15.8 million and $7.1$13.3 million, respectively. Under long-term contracts, amounts recorded in CIEB may not be realized or paid within aone-year period. As of September 30, 2019March 31, 2020 and December 31, 2018, $1.22019, $1.3 million and none,$1.0 million, 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 Condensed Consolidated Balance Sheets as part of CIEB. No material unapproved change orders or claims revenue were included in CIEB as of September 30, 2019March 31, 2020, and December 31, 2018.2019. 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,March 31, 2020, we have a backlog for our percentage of completion projects of $35.9$22.4 million, which will be recognized over the remaining contract term for each contract. PercentageThe percentage of completion contract terms are typically one to three years. As of December 31, 2019, we had a backlog for our percentage of completion projects of $26.2 million. Leases Effective with adoption of Accounting Standards Update No. 2016-02 (ASU2016-02), Leases (the new lease standard) on January 1, 2019, we determine if an arrangement is a lease at inception. Operating leases right of useright-of-use assets and liabilities are included in right to useright-to-use lease asset, deferred revenue and other current liabilities, and right to useright-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 useright-to-use assets and liabilities are recognized based on the present value of the 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 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 10
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Company is evaluating the potential impact of this guidance on its consolidated financial statements and will adoptadopted the guidance effective January 1, 2020. In June 2018,2020, and 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 ASUguidance did not have anya 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 inadopted the process of evaluatingguidance effective January 1, 2020, and the guidance did not have a material impact the adoption of this ASU will have on the Company’s condensed consolidated financial statements. In August 2018, the FASB issued ASUNo. 2018-15 (ASU2018-15), which provides guidance on implementation costs incurred in a cloud computing arrangement that is a service contract. The ASU is effective for annual and interim reporting periods beginning after December 15, 2019. The Company isadopted the guidance effective January 1, 2020, and the guidance did not have a material impact on the Company’s condensed consolidated financial statements. In December 2019, the FASB issued Accounting Standards Update No. 2019-12 (ASU 2019-12), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU removes certain exceptions for investments, intraperiod allocations and interim tax calculations and adds guidance to reduce complexity in accounting for income taxes. We will be required to adopt the amended guidance in annual and interim periods beginning after December 15, 2020, with early adoption permitted. The various amendments in Update 2019-12 are applied on a retrospective basis, modified retrospective basis and prospective basis, depending on the amendment. We are in the process of evaluating the impact this amendment will have on our consolidated financial statements. In March 2020, the FASB issued Accounting Standards Update No. 2020-04 (ASU 2020-04), Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease potential burden in accounting or recognizing the effects of the LIBOR or another reference rate reform on financing rate. The amendments are effective as of March 12, 2020 through December 31, 2022. We are currently in the process of evaluating the impact the adoption of this ASU will havetransition from LIBOR to alternative reference rates, but we do not expect a material impact on the Company’s condensedour consolidated financial statements. Note 2 – Business Combinations
Auto-Comm and SAFCON
On April 18, 2018, RigNet completed the separate acquisitions of Automation 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 working capital adjustment.
Auto-Comm provides a broad range of communications services, for both onshore and offshore remote locations, to the oil and gas industry. Auto-Comm brings over 30 years of systems integration experience in engineering and design, installation, testing, and maintenance. SAFCON offers a diverse set of safety, security, and maintenance services to the oil and gas industry. Auto-Comm and SAFCON have developed strong relationships with major energy companies that complement the relationships that RigNet has established over the years. Auto-Comm and SAFCON are based in Louisiana.
The assets and liabilities of Auto-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 $1.4 million arising from the acquisitions 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 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 nondeductible for income tax purposes. The acquisitions of Auto-Comm and SAFCON, including goodwill, are included in the Company’s condensed consolidated financial statements as of the acquisition date and are primarily reflected in the Systems Integration segment.
| | | | | | | | | | | | | | | Weighted Average Estimated Useful Life (Years) | | | Fair Market Values | | | | | | | (in thousands) | | Current assets | | | | | | | | | | $ | 4,947 | | Property and equipment | | | | | | | | | | | 132 | | Trade name | | | 7 | | | $ | 540 | | | | | | Customer relationships | | | 7 | | | | 980 | | | | | | | | | | | | | | | | | | | Total identifiable intangible assets | | | | | | | | | | | 1,520 | | Goodwill | | | | | | | | | | | 1,387 | | Current liabilities | | | | | | | | | | | (1,006 | ) | Deferred tax liability | | | | | | | | | | | (319 | ) | | | | | | | | | | | | | | Total purchase price | | | | | | | | | | $ | 6,661 | | | | | | | | | | | | | | |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Intelie
On March 23, 2018, RigNet completed its acquisition of IntelieTM Soluções Em Informática S.A (Intelie), for an estimated aggregate purchase price of $18.1 million. Of this aggregate purchase price, RigNet paid R$10.6 million (BRL) (or approximately $3.2 million) in cash, $7.3 million in stock and expects to pay $7.6 million worth of RigNet stock as 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 $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 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 drilling, and longer-term, data-intensive projects, such as well planning. Intelie LIVE has broad applicability across many industry verticals. Intelie is based in Brazil.
The assets and liabilities of Intelie 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 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 nine months ended September 30, 2019, RigNet recognized accreted interest expense on the Intelieearn-out of $0.2 million with corresponding increases to other liabilities. Portions of theearn-out are payable in 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 $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 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 Intelie, including goodwill, is included in the Company’s condensed consolidated financial statements as of the acquisition date and is reflected in the Apps & IoT segment.
| | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | Total identifiable intangible assets | | | | | | | | | | | 11,020 | | Goodwill | | | | | | | | | | | 10,744 | | Current liabilities | | | | | | | | | | | (460 | ) | Deferred tax liability | | | | | | | | | | | (3,825 | ) | | | | | | | | | | | | | | Total purchase price | | | | | | | | | | $ | 18,141 | (a) | | | | | | | | | | | | | |
(a) | Includes $7.6 million in contingent considerationearn-out estimated as of the date of acquisition.
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Actual and Pro Forma Impact of the 2018 Acquisitions
The 2018 acquisitions of Auto-Comm, SAFCON and Intelie contributed revenue and net income of $7.0 million and $0.8 million, respectively, for the three months ended September 30, 2018. The 2018 acquisitions of Auto-Comm, SAFCON and Intelie contributed revenue and net income of $13.2 million and $1.6 million, respectively, for the nine months ended September 30, 2018.
The following table represents supplemental pro forma information as if the 2018 acquisitions of Auto-Comm, SAFCON and Intelie had occurred on January 1, 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 | | | | | | | | | | | Net loss | | $ | (2,798 | ) | | $ | (12,094 | ) | | | | | | | | | | Net loss attributable to RigNet, Inc. common stockholders | | $ | (2,847 | ) | | $ | (12,203 | ) | | | | | | | | | | Net loss per share attributable to RigNet, Inc. common stockholders: | | | | | | | | | Basic | | $ | (0.15 | ) | | $ | (0.66 | ) | | | | | | | | | | Diluted | | $ | (0.15 | ) | | $ | (0.66 | ) | | | | | | | | | |
The Company incurred acquisition-related costs of $0.1 million and $0.9 million in 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.
Note 32 – 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 65 – Long-Term Debt). The Company presently does not use financial instruments to hedge interest rate risk, but evaluates this on a regular basis and may utilize financial instruments in the future if deemed necessary. Foreign Currency Risk The Company has exposure to foreign currency risk, as a portion of the Company’s activities are conducted in currencies other than U.S. dollars. Currently, the Norwegian Kroner, the British Pound Sterling and the Brazilian 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 income (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 being concentrated in the oil and gas, maritime, pipeline, engineering and construction industries.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 11
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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. The company determined ASU 2016-13 did not have a material impact on allowance for doubtful accounts. Although no onesingle customer comprised over 10% of our revenue for the ninethree months ended September 30, 2019,March 31, 2020, our top 5 customers generated 24.7%26.7% of the Company’s revenue for the ninethree months ended September 30, 2019.March 31, 2020. 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 20192020 or 2018.2019. 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 65 – Long-Term Debt). Note 43 – 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. The oil and gas industry experienced an unprecedented disruption during the first quarter of 2020 as a result of a combination of factors, including the coronavirus (“COVID-19”) pandemic and disagreements between the Organization of Petroleum Exporting Countries (OPEC) in March 2020 regarding reduction on production of oil. These market conditions have significantly impacted the Company’s internal forecast. As a result, the Company acquired $1.4 millionperformed an interim goodwill impairment test. The Company used the income approach to estimate the fair value of goodwillits reporting units, but also considered the market approach to validate the results. The income approach estimates the fair value by discounting each reporting unit’s estimated future cash flows using the Company’s discount rate. Some of the significant assumptions inherent in the Systems Integration segment fromincome approach include the Auto-Commestimated future net annual cash flows for each reporting unit and SAFCON acquisitions completed on April 18, 2018 (see Note 2 – Business Combinations). the discount rate. The Company acquired $10.7 million of goodwillselected the assumptions used in the Apps & IoT segment from the Intelie acquisition completed on March 23, 2018 (see Note 2 – Business Combinations). discounted cash flow projections using historical information with supplemental data by current and anticipated market conditions and estimated growth rates. The Company's estimates are based upon assumptions believed to be reasonable. The Company performs its annual impairment test asdetermined that the carrying amount in two of July 31stof each year. In connection with the July 31, 2019 impairment test, the most recent annual test performed prior to September 30, 2019, the fair values of the Company’sour reporting units werewas 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% aswhich results in a goodwill impairment charge of the July 31, 2019 annual$23.1 million. The charge fully impairs goodwill previously reported in MCS of $21.8 million and Systems Integration of $1.4 million. The impairment test.test for Apps & IoT had $22.2resulted in no impairment related to the goodwill balance of $20.5 million of goodwill as of September 30, 2019, and fair value exceeded carrying value by 155.7% as ofMarch 31, 2020. The Company's estimates are based upon assumptions believed to be reasonable. However, given 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 ofinherent uncertainty in determining the July 31, 2019 annual impairment test.assumptions underlying a discounted cash flow analysis, particularly in the current volatile market, actual results may differ from those used in the Company's valuations. Any future downturn in our business could adversely impact the key assumptions in our impairment test. While we believe that 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, 2019.
As of September 30, 2019March 31, 2020, and December 31, 2018,2019, goodwill was $45.5$20.5 million and $46.6$46.8 million, respectively. Goodwill increases or decreases in value due to the effect of foreign currency translation, increases with acquisitions, and decreases in the event an impairment is recognized. Intangibles Intangibles consist of customer relationships, brand name, backlog, developed technology, covenants-not-to-compete brand name, licenses, technology and backloglicenses acquired as part of the Company’s acquisitions. Intangibles also include internal-use software.internal-use software. The Company’s intangibles have useful lives ranging from 5.0 to 20.0 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. NoBased on the indicators discussed above, the Company reviewed certain finite intangible and other long-lived assets for impairment indicators have been identified as of September 30, 2019.
March 31, 2020. The Company performed a recoverability analysis and determined that12
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS the recoverable value was in excess of its carrying value, therefore no impairment was recognized as of March 31, 2020. As of September 30, 2019March 31, 2020, and December 31, 2018,2019, intangibles were $30.1$26.9 million and $33.7$30.1 million, respectively. During the three months ended September 30,March 31, 2020 and 2019, and 2018, the Company recognized amortization expense of $2.0$2.1 million and $2.6 million, respectively. During the nine months ended September 30, 2019 and 2018, the Company recognized amortization expense of $6.9 million and $7.2$2.5 million, respectively. The following table sets forth expected amortization expense of intangibles for the remainder of 20192020 and the following years (in thousands): | 2019 | | | 1,651 | | | 2020 | | | 6,544 | | | | 4,839 | | 2021 | | | 6,137 | | | | 6,190 | | 2022 | | | 5,857 | | | | 5,783 | | 2023 | | | 5,213 | | | | 5,152 | | 2024 | | | | 3,657 | | Thereafter | | | 4,681 | | | | 1,250 | | | | | | | $ | 26,871 | | | | $ | 30,083 | | | | | | | |
Note 54 – Restricted Cash As of September 30, 2019, March 31, 2020, the Company had restricted cash of $0.1 million and $1.5 million in current and long-term assets, respectively. As of December 31, 2018,2019, 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 MCS segment (see(see Note 65 – Long-Term Debt). Note 65 – Long-Term Debt As of September 30, 2019March 31, 2020, and December 31, 2018,2019, the following credit facilities and long-term debt arrangements with financial institutions were in place: | | | September 30, | | | December 31, | | | March 31, | | | December 31, | | | | 2019 | | | 2018 | | | | 2020 | | | | 2019 | | | | (in thousands) | | | (in thousands) | | Term Loan | | $ | 6,250 | | | $ | 10,000 | | | $ | 16,000 | | | $ | 5,000 | | Term-Out Loan | | | 27,000 | | | | — | | | | - | | | | 25,500 | | Revolving credit facility (RCF) | | | 81,150 | | | | 67,150 | | | | 95,400 | | | | 77,150 | | Vendor Finance Arrangement | | | | 2,790 | | | | - | | Unamortized deferred financing costs | | | (548 | ) | | | (315 | ) | | | (857 | ) | | | (466 | ) | Finance lease | | | 584 | | | | 192 | | | | 501 | | | | 543 | | | | | | | | | | | 113,834 | | | | 107,727 | | | | | 114,436 | | | | 77,027 | | | Less: Current maturities of long-term debt | | | (10,629 | ) | | | (4,831 | ) | | | (7,627 | ) | | | (10,627 | ) | Current maturities of Vendor Finance Arrangement | | | | (954 | ) | | | - | | Current maturities of finance lease | | | (166 | ) | | | (111 | ) | | | (166 | ) | | | (166 | ) | | | | | | | | | $ | 105,087 | | | $ | 96,934 | | | | $ | 103,641 | | | $ | 72,085 | | | | | | | | | | |
Credit Agreement The Company and certain of its subsidiaries are party to a third amendedthe Third Amendment to the Third Amended and restated credit agreement,Restated Credit Agreement, dated as of November 6, 2017,February 21, 2020, with four participating financial institutions (as amended from time to time, the Credit Agreement), which provides for a $15.0$16.0 million term loan (Term Loan), a $30.0 millionterm-out facility(Term-Out Loan) and an $85.0$100.0 million revolving credit facility (RCF). The RCF andTerm-Out Loan mature on April 6, 2021. a $30.0 million accordion feature. The Term Loan matures on DecemberMarch 31, 2020. On February 13, 2019, the Company entered into the first amendment to Credit Agreement to refinance $30.02022 with principal installments of $2.0 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.due quarterly beginning June 30, 2020. 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 theaccordion, if exercised, mature on August 31, 2022.
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,Term-Outbears Loan and the RCF bear interest at a rate of LIBOR plus a margin ranging from 1.75% to 3.00%3.25%, determined based on the Company’s Consolidated Leverage Ratio. LIBOR is subject to cease to exist entirely after
13
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2021. The Credit Agreement addresses this situation with a consolidated leverage ratio definedLIBOR successor rate, being one or more Secured Overnight Financing Rates (SOFR) or another alternate benchmark rate. The Credit Agreement also addresses the situation in the Credit Agreement.which no LIBOR successor rate has been determined. Interest on the Term Loan,Term-Out Loan and RCFCredit Agreement is payable monthly. Principal installments of $1.25 million and $1.5 million under the Term Loan andTerm-Out Loan, respectively, are due quarterly. The weighted average interest rate for the three months ended September 30,March 31, 2020 and 2019 were 4.4% and 2018 were 5.3% and 4.9%, respectively. The weighted average interest rate for the nine months ended September 30, 2019 and 2018 were 5.3% and 4.7%5.2%, respectively, with an interest rate of 5.0%4.0% at September 30, 2019.March 31, 2020. Term Loan As of September 30, 2019,March 31, 2020, the outstanding principal amount of the Term Loan had an outstanding principal balance of $6.3was $16.0 million, excluding the impact of unamortized deferred financing costs. Term-Out LoanRCF
As of September 30, 2019,March 31, 2020, outstanding draws on theTerm-Out Loan had an outstanding principal balance of $27.0 million. RCF As of September 30, 2019, $81.2 were $95.4 million in draws remain outstanding under the RCF. During the nine months ended September 30, 2019,. In April 2020, the Company borrowed $43.0drew an additional $3.0 million underon the RCF in connection with the $45.0 million of GX Dispute settlement payments.for liquidity purposes.
Covenants and Restrictions The Company’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,Consolidated Leverage Ratio, of less than or equal to 2.75 to 1.00. The consolidated leverage ratio increased to 3.25 to 1.00 forthrough the four quarters starting in the 2ndthird quarter of 2019.2020. The consolidated leverage ratioConsolidated Leverage Ratio requirement then decreasessteps down to 3.00 to 1.00 for three quarters,through the second quarter of 2021 and then decreasessteps down to 2.75 to 1.00 for all remaining quarters. The Consolidated Fixed Charge Coverage ratio requirement is greater than or equal to 1.25 through the maturity of the Credit Agreement. 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, 2019March 31, 2020 reporting period and are in compliance with the required covenant ratios. As of March 31, 2020, the Consolidated Leverage Ratio was 3.00 and Consolidated Fixed Charge Coverage Ratio was 2.14.NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTSVendor Finance Agreement
As of March 31, 2020, the Company had a vendor financing agreement in place, with an outstanding balance of $2.8 million. The outstanding balance bears interest at a rate of 6% and has quarterly payments of $0.3 million of principal and interest through January 2023. Performance Bonds, Surety Bonds and Other Similar Instruments As of September 30, 2019,March 31, 2020, there were $6.3$8.5 million of performance bonds, surety bonds and similar instruments outstanding of which $1.7$2.1 million is issued by the parties under the Credit Agreement. As of September 30, 2019, there were $0.1 million outstanding standby letters of credit and bank guarantees. In June 2016, the Company secured a performance bond facility with a lender in the amount of $1.5 million for its MCS 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. 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 20192020 and the following years (in thousands): | 2019 | | | 2,791 | | | 2020 | | | 10,814 | | | | 6,531 | | 2021 | | | 100,676 | | | | 8,731 | | 2022 | | | 116 | | | | 98,263 | | 2023 | | | 39 | | | | 309 | | | | | | | Total debt, including current maturities | | $ | 114,436 | | | $ | 113,834 | | | | | | |
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 76 – 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). | • | | Cash and Cash Equivalents— Reported amounts approximate fair value based on quoted market prices (Level 1).
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Restricted Cash — Reported amounts approximate fair value. | • | | Restricted Cash— Reported amounts approximate fair value.
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Accounts Receivable — Reported amounts, net of the allowance for doubtful accounts, approximate fair value due to the short-term nature of these assets. | • | | Accounts Receivable— Reported amounts, net of the allowance for doubtful accounts, approximate fair value due to the short-term nature of these assets.
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Accounts Payable, Including Income Taxes Payable and Accrued Expenses — Reported amounts approximate fair value due to the short-term nature of these liabilities. | • | | Accounts Payable, Including Income Taxes Payable and Accrued Expenses— Reported amounts approximate fair value due to the short-term nature of these liabilities.
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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. | • | | 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.
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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 the fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss. As of September 30, 2019,March 31, 2020, the fair value of theearn-out was $7.9$9.7 million, with $4.4 million in deferred revenue and other current liabilities and $3.5$5.3 million in other long-term liabilities. As of December 31, 2019, the fair value of the earn-out was $9.7 million with $4.4 million in deferred revenue and other current liabilities and $5.3 million in other long-term liabilities. During the three and nine months ended September 30,March 31, 2020 and 2019, RigNet recognized accreted interest expense on the Intelieearn-out of $0.1 million, and $0.2$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 IntelieThe earn-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 the fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss. As of September 30, 2019,March 31, 2020, the fair value of the contingent consideration was $3.5$3.0 million of which $0.3 million is in other current liabilities and $3.2$2.7 million is in other long-term liabilities. As of December 31, 2019, the fair value of the contingent consideration was $3.1 million, of which $0.3 million is in other current liabilities and $2.7 million is in other long-term liabilities. During the three and nine months ended September 30,March 31, 2020 and 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,March 31, 2020 and 2019, RigNet recognized accreted interest expense on the Cyphre contingent considerationpaid cash 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), acquiredrespectively, 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. The fair value of theearn-out of $8.0 million was paid in July 2018. During the three and nine months ended September 30, 2018, RigNet recognized accreted interest expense on the TECNORearn-out liability of $0.1 millionrequired royalty payments, with corresponding increasesdecreases to other liabilities. 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 87 – Income Taxes The Company’s effective income tax rate was 137.1% and (47.0%)3.5% for the three and nine months ended September 30, 2019, respectively.March 31, 2020. The Company’s effective income tax rate was (12.6)% and 0.1%(28.7%) for the three and nine months ended September 30, 2018, respectively. March 31, 2019. 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. 15
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company believes that it is reasonably possible that a decrease of up to $2.8$3.9 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 98 – Stock-Based Compensation During the ninethree months ended September 30, 2019,March 31, 2020, the Company granted a total of 601,122599,990 stock-based awards to certain officers and employees of the Company under the 20102019 Omnibus Incentive Plan (2010(2019 Plan). Of these, the Company granted the following stock-based awards This stock grant was associated with the long term incentive plan (LTIP): (i) 190,588 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, (iii) 60,361 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 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-based targets. The fair value of RSUs 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, net of forfeitures. Additionally, the Company granted 232,753 unrestricted stock grants associated with payment of the Company’s 20182019 short term incentive plan to certain officers and employees that vested immediately.
During the ninethree months ended September 30, 2019, 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, 30,288March 31, 2020, 20,656 RSUs and 19,82618,340 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, 2019March 31, 2020, was $1.5$3.9 million and $7.1 million, respectively.reported as a general and administrative expense in the Corporate segment. Stock-based compensation expense related to the Company’s stock-based compensation plans for the three and nine months ended September 30, 2018March 31, 2019, was $1.1 million and $4.4 million, respectively.$4.5 million. As of September 30, 2019,March 31, 2020, there was $4.3$5.7 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 1.62.1 years. Note 109 – 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 during the period. Basic shares equal the total of the common shares outstanding, but excludes the dilutive effect of common shares that could potentially be issued due to the exercise of stock options or vesting of restricted stock, RSUs or PSUs. Diluted EPS is computed by dividing loss attributable to RigNet common stockholders by the weighted average number of diluted shares 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. 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 if included, 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, 2019,March 31, 2020, there were approximately 1,167,910 and 2,195,3043,551,575 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,March 31, 2019, there were approximately 932,048 and 620,6661,478,435 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 1110 – Commitments and Contingencies Global Xpress (GX) Dispute Inmarsat plc (Inmarsat), a satellite telecommunications company, filed arbitration with the International 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 GX capacity from Inmarsat over several years. In June 2019, the Company announced that it reached a settlement with Inmarsat that concludes the GX Dispute. Pursuant to the settlement the Company paid $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 2020. The Company had an accrued liability of $0.8 million as of September 30, 2019.March 31, 2020. The Company incurred credits of $(0.4) million and cost of $3.9 million in GX Dispute Phase II legal costs of $2.1 million for the three and nine months ended September 30, 2019, respectively. The Company incurred legal expenses of $0.7 million and $2.1 million in connection with the GX Dispute for the three and nine months ended September 30, 2018, respectively. March 31, 2019.16
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 Company is undergoing a routine sales tax audit from a state where the Company has operations. The audit can cover up to a four-year period. The Company is in the early stages of the audit, and does not have any estimates of further exposure, if any, for the 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 ended March 31, 2020, the Company recognized expense under operating leases, which approximates cash paid and nineincludes short-term leases, of $0.5 million. For the three months ended September 30,March 31, 2019, the Company recognized expense under operating leases, which approximates cash paid and includes short-term leases, of $0.6 million and $1.9 million, respectively. For the three months and nine months ended September 30, 2018, the Company recognized expense under operating leases, which approximates cash paid and includes short-term leases, of $0.7 million and $2.1 million, respectively.million. As of September 30, 2019,March 31, 2020, future undiscounted minimum lease obligation maturities for the remainder of 20192020 and future years were as follows (in thousands): | 2019 | | $ | 524 | | | 2020 | | | 1,664 | | | $ | 1,671 | | 2021 | | | 1,005 | | | | 1,480 | | 2022 | | | 844 | | | | 1,211 | | 2023 | | | 802 | | | | 1,195 | | 2024 | | | | 1,200 | | Thereafter | | | 1,269 | | | | 3,020 | | | | | | | Total lease payments | | $ | 6,108 | | | $ | 9,777 | | | | | | | Less present value discount | | | (570 | ) | | | (1,595 | ) | | | | | | Amounts recognized in Balance Sheet | | $ | 5,538 | | | $ | 8,182 | | | | | | | Amounts recognized in Balance Sheet | | | | | | | Deferred revenue and other current liabilities | | | 1,962 | | | | 2,016 | | Right-of-use lease liability - long-term portion | | | 3,576 | | | | 6,166 | | | | | | | Total right to use lease liability | | $ | 5,538 | | | | | | | | Total right-to-use lease liability | | | $ | 8,182 | |
Operating leaseright-of-use assets for leases were $3.9$6.7 million as of September 30, 2019.March 31, 2020. Theright-of-use assets and liabilities for leases were discounted at a weighted-average discount rate of 5.3%5.1%. The weighted-average remaining lease term as of September 30, 2019March 31, 2020 was 4.4 years. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS6.9 years
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, 2019,March 31, 2020, the Company had the following commercial commitments related to satellite and network services for the remainder of 20192020 and the future years thereafter (in thousands): | 2019 | | | 5,795 | | | 2020 | | | 16,474 | | | | 15,240 | | 2021 | | | 8,832 | | | | 10,790 | | 2022 | | | 3,932 | | | | 5,183 | | 2023 | | | | 108 | | | | | | | $ | 31,321 | | | | $ | 35,033 | | | | | | | |
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1211 – 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. During the fourth quarter of 2018, the Managed Services segment was renamed Managed Communications Services (MCS). RigNet considers its business to consist of the following segments: Managed Communications Services (MCS). The MCS segment provides remote communications, telephony and technology services for offshore and onshore drilling rigs and production facilities, support vessels, and other remote sites. | • | | Managed Communications Services (MCS).The MCS segment provides remote communications, telephony and technology services for offshore and onshore drilling rigs and production facilities, support vessels, and other remote sites.•
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| • | | Applications and Internet-Internet-of-Things (Apps & IoT).The Apps & IoT segment provides applications over-the-top of the network layer including Software as a Service (SaaS) offerings such as a real-time machine learning and AI data platform (Intelie Pipes and Intelie LIVE), Cyphre Encryption, Enhanced Cybersecurity Services (ECS), edge computing solution services that assist customers with collecting and standardizing the complex data produced by edge devices (LIVE-IT), applications for safety and workforce productivity such as weather monitoring primarily in the North Sea (MetOcean), and certain other value-added services such as Adaptive Video Intelligence (AVI). This segment also includes the private machine-to-machine IoT data networks including Supervisory Control and Data Acquisition (SCADA) provided primarily for pipelines. |
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. Additionally, Systems Integration provides complete monitoring and maintenance for fire and gas detection systems and PLC/automation control systems. | • | | 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.
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Corporate and Eliminations primarily represents unallocated executive and support activities, including back-office software development, interest expense, income taxes and eliminations.eliminations, the GX Dispute and change in fair value of earn-out/contingent consideration. The Company’s businessreportable segment information as of and for the three and nine months ended September 30,March 31, 2020 and 2019, and 2018, is presented below. | | Three Months Ended March 31, 2020 | | | | Managed Communications Services | | | Applications and Internet-of- Things | | | Systems Integration | | | Corporate and Eliminations | | | Consolidated Total | | | | (in thousands) | | Revenue | | $ | 39,896 | | | $ | 8,743 | | | $ | 10,122 | | | $ | - | | | $ | 58,761 | | | | | | | | | | | | | | | | | | | | | | | Cost of revenue (excluding depreciation and amortization) | | | 25,502 | | | | 4,561 | | | | 7,887 | | | | - | | | | 37,950 | | Depreciation and amortization | | | 4,659 | | | | 1,182 | | | | 164 | | | | 926 | | | | 6,931 | | Impairment of goodwill | | | 21,755 | | | | - | | | | 1,386 | | | | - | | | | 23,141 | | Selling, general and administrative | | | 2,807 | | | | 1,620 | | | | 404 | | | | 11,810 | | | | 16,641 | | Operating income (loss) | | $ | (14,827 | ) | | $ | 1,380 | | | $ | 281 | | | $ | (12,736 | ) | | $ | (25,902 | ) | Total assets | | | 131,569 | | | | 37,692 | | | | 25,187 | | | | 23,146 | | | | 217,594 | | Capital expenditures | | | 2,839 | | | | 514 | | | | - | | | | 344 | | | | 3,697 | |
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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 | | | | | | | | | | | | | | | | | | | | | | | Operating income (loss) | | $ | 9,559 | | | $ | 2,357 | | | $ | 1,639 | | | $ | (10,557 | ) | | $ | 2,998 | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | | Operating income (loss) | | $ | 7,593 | | | $ | 1,605 | | | $ | 2,252 | | | $ | (12,471 | ) | | $ | (1,021 | ) | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | | Operating income (loss) | | $ | 22,627 | | | $ | 5,636 | | | $ | 4,841 | | | $ | (40,787 | ) | | $ | (7,683 | ) | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | | Operating income (loss) | | $ | 19,694 | | | $ | 4,800 | | | $ | 5,596 | | | $ | (39,911 | ) | | $ | (9,821 | ) | | | | | | | | | | | | | | | | | | | | | | Total assets | | | 165,532 | | | | 47,694 | | | | 23,609 | | | | 14,403 | | | | 251,238 | | Capital expenditures | | | 18,709 | | | | 377 | | | | — | | | | 645 | | | | 19,731 | |
| | Three Months Ended March 31, 2019 | | | | Managed Communications Services | | | Applications and Internet-of- Things | | | Systems Integration | | | Corporate and Eliminations | | | Consolidated Total | | | | (in thousands) | | Revenue | | $ | 42,333 | | | $ | 8,015 | | | $ | 7,162 | | | $ | - | | | $ | 57,510 | | Cost of revenue (excluding depreciation and amortization) | | | 26,985 | | | | 4,497 | | | | 4,974 | | | | - | | | | 36,456 | | Depreciation and amortization | | | 6,264 | | | | 1,231 | | | | 662 | | | | 755 | | | | 8,912 | | Selling, general and administrative | | | 3,797 | | | | 565 | | | | 1,124 | | | | 14,777 | | | | 20,263 | | Operating income (loss) | | $ | 5,287 | | | $ | 1,722 | | | $ | 402 | | | $ | (15,532 | ) | | $ | (8,121 | ) | Total assets | | | 170,553 | | | | 46,086 | | | | 26,546 | | | | 18,034 | | | | 261,219 | | Capital expenditures | | | 6,636 | | | | 433 | | | | - | | | | 20 | | | | 7,089 | |
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, 2019March 31, 2020 and 2018.2019. 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 monitored to ensure the location of service information is properly reflected. | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended March 31, | | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | | (in thousands) | | | (in thousands) | Domestic | | $ | 27,360 | | | $ | 18,876 | | | $ | 80,868 | | | $ | 52,510 | | | $ | 23,275 | | | $ | 24,627 | | | International | | | 33,633 | | | | 45,894 | | | | 97,967 | | | | 126,100 | | | | 35,486 | | | | 32,883 | | | | | | | | | | | | | | | | | Total | | $ | 60,993 | | | $ | 64,770 | | | $ | 178,835 | | | $ | 178,610 | | | $ | 58,761 | | | $ | 57,510 | | | | | | | | | | | | | | | | |
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, 2019March 31, 2020 and December 31, 2018.2019. | | | September 30, | | | December 31, | | | March 31, | | | December 31, | | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | (in thousands) | | | (in thousands) | | Domestic | | $ | 76,575 | | | $ | 73,615 | | | $ | 69,794 | | | $ | 76,253 | | International | | | 63,166 | | | | 70,334 | | | | 41,498 | | | | 67,631 | | | | | | | | | | Total | | $ | 139,741 | | | $ | 143,949 | | | $ | 111,292 | | | $ | 143,884 | | | | | | | | | |
Note 1312 – 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 RobertsKKR & Co. L.P.CO. Inc. (KKR). KKR is a significant stockholder of the Company. Under the arrangement, the Company will sellsells Darktrace’s cybersecurity audit services with the Company’s cybersecurity offerings. In the three and nine months ended September 30, 2019,March 31, 2020, the Company purchased $0.1 million and $0.1 million, respectively, from Darktrace in the ordinary course of business. In the three months ended March 31, 2019, the Company purchased $0.1 million from Darktrace in the ordinary course of business. Vissim AS is now a vendor following a competitive request for a 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 itsthe chairman of its board one of our board members. In the three and nine months ended September 30,March 31, 2020 and 2019, the Company purchased $0.2$0.1 million and $0.8 million,none, respectively, from Vissim AS in the ordinary course of business. 19
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1413 – Restructuring Costs – Cost Reduction Plans During the ninethree months ended September 30,March 31, 2019, the Company incurred a netpre-tax restructuring expense of $0.7$0.6 million reported as general and administrative expense of which $0.2 million was incurred in the three months ended September 30, 2019 related to consolidating three separate legacy facilities into our new office in Lafayette, Louisiana and $0.5 million was incurred in the first quarter of 2019Corporate segment associated with the reduction of 25 employees.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 14 – Subsequent Event In May 2020, the Company entered into a loan agreement (PPP Loan) with Bank of America, N.A., as lender, pursuant to the Paycheck Protection Program (PPP) of the U.S. Small Business Administration (SBA) established under the Coronavirus Aid, Relief, and Economic Security Act. Under the PPP Loan, the Company borrowed $6.8 million which the Company expects to be eligible for forgiveness pursuant to the applicable regulations of the PPP. Currently, the regulations provide for loan forgiveness to the extent that (i) the proceeds are used in the eight week period after funding of the loan, (ii) at least 75% of the forgiven amount is used for eligible payroll costs and (iii) the remaining proceeds are used for interest on mortgages, rents, or utilities, and interest on other debt obligations incurred before February 15, 2020. The amount eligible for forgiveness may be reduced if, among other things, the Company reduces its full-time headcount or if the Company reduces salaries and wages beyond certain limits. While the Company expects all $6.8 million will be used in accordance with the regulations for forgiveness, not all costs are within the control of the Company and these regulations are subject to change as a result of administrative or judicial proceedings or legislative initiatives including additional regulations that are anticipated to be released by the SBA. Any amounts not forgiven must be repaid in two years and accrue interest at a rate of 1.0% per year. No interest or principal payments are due for six months, at which time interest and principal payments will be made on any unforgiven balance under terms established by Bank of America, N.A. at that time. The SBA has publicly stated that it intends to review all loans in excess of $2.0 million when loan forgiveness is requested. The SBA has not provided any further details of this review and the Company cannot assure the results of any such review. 21
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, 2019March 31, 2020 and for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 included elsewhere herein, and with our Annual Report on Form10-K for the year ended December 31, 2018.2019 (our “Annual Report”). The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” in Item 1A of our Annual Report and elsewhere in this quarterly report.Quarterly Report on Form 10-Q. 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. Forward-Looking statements may include statements about: new regulations, delays in drilling permits or other changes in the effects of the COVID-19 pandemic and reduced demand for oil and gas industry;gas;
expected forgiveness of any loan obtained by the Company pursuant to the Paycheck Protection Program of the United States Small Business Administration; the level of drilling and production activity and the number of offshore drilling, FPSOs and other vessels that are removed from service, either temporarily or permanently; 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, covenant compliance and 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 at remote sites, enhancing systems integration and extending our presence into complementary remote communication segments through organic growth and strategic 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 at remote sites, enhancing systems integration and extending our presence into complementary remote communication segments through organic growth and strategic acquisitions; |
our ability to develop and market additional products and services; our cost reduction, restructuring activities and related expenses; 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. |
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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 Report on Form10-K for the year ended December 31, 2018 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. Additionally, the COVID-19 pandemic has had and continues to have a material adverse impact on the world economy and the oil and gas industry, the results of which may exacerbate any or all of the risk factors described in our Annual Report or herein. As both the spread of the virus as well as government and industry reactions thereto are occurring at a rapid pace, the ultimate effect of the virus on our business, financial condition and results of operations remains uncertain. 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 thea leading provider of ultra-secure, intelligent networking solutions and 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. 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 real-timeAI-backed data analytics platform to enhance customer decision making and 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 report our operations through the following reportable segments:Our MCS segment provides remote communications, telephony and technology services for offshore and onshore drilling rigs and production facilities, support vessels, and other remote sites. | • | | Managed Communications Services (MCS).Our MCS segment provides remote communications, telephony and technology services for offshore and onshore drilling rigs and production facilities, support vessels, and other remote sites.•
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| • | | Applications and Internet-Internet-of-Things (Apps & IoT).Our Apps & IoT segment provides applications over-the-top of the network layer including Software as a Service (SaaS) offerings such as a real-time machine learning and AI data platform (Intelie Pipes and Intelie LIVE), Cyphre Encryption, Enhanced Cybersecurity Services (ECS), edge computing solution services that assist customers with collecting and standardizing the complex data produced by edge devices (LIVE-IT), applications for safety and workforce productivity such as weather monitoring primarily in the North Sea (MetOcean), and certain other value-added services such as Adaptive Video Intelligence (AVI). This segment also includes the private machine-to-machine IoT data networks including Supervisory Control and Data Acquisition (SCADA) provided primarily for pipelines. |
| • | | • | 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. Additionally, Systems Integration provides complete monitoring and maintenance for fire and gas detection systems and PLC/automation control systems. |
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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. 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 threefive 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 contracted 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 are 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 useinternal-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 an 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 partythird-party service providers. Recent Developments The COVID-19 pandemic combined with an oversupply in the oil markets has caused RigNet’s common stock to decline from $6.60 on December 31, 2019, to $1.18 on May 1, 2020. Under the rules of NASDAQ, if our common stock falls below $1 for 30 business days, NASDAQ can notify us of its intent to delist our stock. If we are notified of delisting, our stock must trade above $1 in any ten-day periods during the 180-day period commencing with the notice of delisting. Failure to achieve compliance could result in our stock being delisted. If our common stock was to be delisted for any reason, it could negatively impact RigNet by, among other things, reducing the liquidity and market price of our common stock, reducing the number of investors willing to hold or acquire our common stock and limiting our ability to issue securities to obtain financing in the future. On June 24, 2019,February 21, 2020, we announced that we reached a settlement with Inmarsat that concludesentered into the GX Dispute. PursuantThird Amendment to the settlement we paid $45.0Third Amended and Restated Credit Agreement (Credit Agreement), with the same four financial institutions that were part of the previous credit agreement. The Credit Agreement provides for a $16.0 million inTerm Loan, a $100.0 million RCF and a $30.0 million accordion feature. The Term Loan matures on March 31, 2022 with principal installments of $2.0 million due quarterly beginning June 201930, 2020. The RCF and paid $5.0 million in July 2019 and will pay $0.8 million in theaccordion, if exercised, mature on August 31, 2022. The Consolidated Leverage Ratio is set at 3.25 times through third quarter 2020, thereafter stepping down to 3.0 times through second quarter 2021, thereafter stepping down to 2.75 times through the maturity of 2020. We have an accrued liabilitythe revolving facility. The Credit Agreement bears interest at a rate of $0.8 million as of September 30, 2019. As previously disclosed, Inmarsat plc (Inmarsat),LIBOR plus a satellite telecommunications company, filed arbitration withmargin ranging from 1.75% to 3.25% based on the International 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 GX capacity from Inmarsat over several years. We incurred a credit of $0.4 million and cost of $3.9 million in GX Dispute Phase II costs for the three and nine months ended September 30, 2019, respectively. We incurred legal expenses of $0.7 million and $2.1 million in connection with the GX Dispute for the three and nine months ended September 30, 2018, respectively.Consolidated Leverage Ratio. As of September 30, 2019,March 31, 2020, we have a backlog for our percentage of completion projects of $35.9$22.4 million. In May 2020, we entered into a loan agreement (PPP Loan) with Bank of America, N.A., as lender, pursuant to the Paycheck Protection Program (PPP) of the U.S. Small Business Administration (SBA) established under the Coronavirus Aid, Relief, and Economic Security Act. Under the PPP Loan, we borrowed $6.8 million which we expect to be eligible for forgiveness pursuant to the applicable regulations of the PPP. Currently, the regulations provide for loan forgiveness to the extent that (i) the proceeds are used in the eight week period after funding of the loan, (ii) at least 75% of the forgiven amount is used for eligible payroll costs and (iii) the remaining proceeds are used for interest on mortgages, rents, or utilities, and interest on other debt obligations incurred before February 15, 2020. 24
The amount eligible for forgiveness may be reduced if, among other things, we reduce our full-time headcount or we reduce salaries and wages beyond certain limits. While we expects all $6.8 million will be used in accordance with the regulations for forgiveness, not all costs are within our control and these regulations are subject to change as a result of administrative or judicial proceedings or legislative initiatives including additional regulations that are anticipated to be released by the SBA. Any amounts not forgiven must be repaid in two years and accrue interest at a rate of 1.0% per year. No interest or principal payments are due for six months, at which time interest and principal payments will be made on any unforgiven balance under terms established by Bank of America, N.A. at that time. The SBA has publicly stated that it intends to review all loans in excess of $2.0 million when loan forgiveness is requested. The SBA has not provided any further details of this review and we cannot be assure the results of any such review. Known Trends and Uncertainties Operating Matters Starting in the first quarter of 2020, we and our customers were adversely impacted by the COVID-19 pandemic. We and our customers have had to close certain offices and have certain employees work from home. Our customers have had certain of their work sites for large projects closed and are operating certain sites with only essential employees. Global economic activity and the oil and gas industry declined substantially in the first quarter of 2020. Travel to and from remote locations has been restricted and in some cases, suspended. The global oil industry we serve has experienced reduced demand and furloughs as a result. Furthermore, in March 2020, the Saudi state oil producer, Saudi Aramco and Russia, along with the broader OPEC+ group, failed to reach an agreement to continue production cuts and collectively launched a price war with the goal of attempting to recapture market share that OPEC+ had lost to U.S. share oil producers in recent years. Following the OPEC+ actions on price and in conjunction with significantly reduced demand as result of COVID-19 pandemic, Brent crude prices have fallen to the $14.85 per barrel as of March 31, 2020. WTI prices went below zero on April 20, 2020 as a result of US based storage facilities reaching capacity. Uncertainties in the oil and gas industry maywill continue to impact our profitability. The fundamentals of the oil and gas industry we serve are expected to remain challenged into 2019, particularly offshore. Thethroughout 2020. Many oil and gas environment continuescompanies have already cut their capital expenditures budget significantly, reduced and/or furloughed their workforces, and delayed decisions on future projects or canceled them altogether. During 2020, we expect both onshore and offshore drilling activity to decline compared to both the previous year and the previous forecast. SI project decision-making is likely to slow and construction on existing projects maybe be suspended or delayed due to the impacts of COVID-19. Finally, while our Apps & IoT segment may also be impacted, we believe our products provide much-needed solutions that enable our customers to be challengedmore productive, efficient, safe, and financially competitive. In response to this rapidly changing environment, RigNet has taken a proactive measure to reduce costs, including eliminating all travel that is not customer-facing, reducing professional fees, eliminating discretionary spending, and temporarily reducing compensation for our executives, our employees, and our board of directors. We are also working with operators focusing on projectsboth customers and suppliers to reduce our bandwidth costs as sites move from working to idle. However, our ability to significantly reduce our bandwidth commitments is limited given the nature of our contracts with shorterpay-back periods that generally require less capital investment and lower costs from service providers and drilling contractors. The average pricethose providers. Finally, RigNet has also sought to take advantage 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 increasedcertain government relief programs available 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%various jurisdictions in the fourth quarter of 2018. In the first half of 2019, Brent crude oil prices recoveredwhich we work. We cannot guarantee whether our efforts 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 predictingsecure government relief will be successful or provide 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.relief. 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. We believe these trends have made lenders more reluctant to provide financing to companies operating in and serving the oil and gas industry. We may be unable to access additional credit to fund ongoing operations. 25
Sales Tax Audit We are undergoing a routine sales tax audit from a state where we have operations. The audit can cover up to a four-year period. We are in the early stages of the audit and do not have any estimates of further exposure, if any, for the tax years under review. 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 March 31, | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | (in thousands) | | | (in thousands) | | Revenue | | $ | 60,993 | | | $ | 64,770 | | | $ | 178,835 | | | $ | 178,610 | | | $ | 58,761 | | | $ | 57,510 | | | | | | | | | | | | | | | | Expenses: | | | | | | | | | | | | | | | | | Cost of revenue (excluding depreciation and amortization) | | | 35,662 | | | | 40,734 | | | | 108,637 | | | | 110,661 | | | | 37,950 | | | | 36,456 | | Depreciation and amortization | | | 7,172 | | | | 8,413 | | | | 23,763 | | | | 24,756 | | | | 6,931 | | | | 8,912 | | Change in fair value ofearn-out/contingent consideration | | | — | | | | (750 | ) | | | 1,284 | | | | 2,050 | | | Impairment of goodwill | | | | 23,141 | | | | - | | Selling and marketing | | | 2,784 | | | | 2,728 | | | | 9,529 | | | | 9,866 | | | | 2,812 | | | | 3,793 | | General and administrative | | | 12,377 | | | | 14,666 | | | | 43,305 | | | | 41,098 | | | | 13,829 | | | | 16,470 | | | �� | | | | | | | | | | | | | Total expenses | | | 57,995 | | | | 65,791 | | | | 186,518 | | | | 188,431 | | | | 84,663 | | | | 65,631 | | | | | | | | | | | | | | | | Operating income (loss) | | | 2,998 | | | | (1,021 | ) | | | (7,683 | ) | | | (9,821 | ) | | Operating loss | | | | (25,902 | ) | | | (8,121 | ) | Other expense, net | | | (2,270 | ) | | | (1,465 | ) | | | (4,798 | ) | | | (2,813 | ) | | | (1,849 | ) | | | (1,166 | ) | | | | | | | | | | | | | | | Income (loss) before income taxes | | | 728 | | | | (2,486 | ) | | | (12,481 | ) | | | (12,634 | ) | | Loss before income taxes | | | | (27,751 | ) | | | (9,287 | ) | Income tax benefit (expense) | | | (998 | ) | | | (312 | ) | | | (5,868 | ) | | | 11 | | | | 980 | | | | (2,666 | ) | | | | | | | | | | | | | | | Net loss | | | (270 | ) | | | (2,798 | ) | | | (18,349 | ) | | | (12,623 | ) | | | (26,771 | ) | | | (11,953 | ) | Less: Net income attributable tonon-controlling interest | | | 224 | | | | 49 | | | | 284 | | | | 109 | | | | 70 | | | | 30 | | | | | | | | | | | | | | | | Net loss attributable to RigNet, Inc. stockholders | | $ | (494 | ) | | $ | (2,847 | ) | | $ | (18,633 | ) | | $ | (12,732 | ) | | $ | (26,841 | ) | | $ | (11,983 | ) | | | | | | | | | | | | | | | OtherNon-GAAP Data: | | | | | | | | | | | | | | | | | Adjusted EBITDA | | $ | 11,010 | | | $ | 8,730 | | | $ | 29,171 | | | $ | 24,247 | | | $ | 8,351 | | | $ | 8,386 | |
26
The following represents selected financial operating results for our segments: | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended March 31, | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | (in thousands) | | | (in thousands) | | Managed Communications Services: | | | | | | | | | | | | | | | | | Revenue | | $ | 42,055 | | | $ | 44,943 | | | $ | 125,593 | | | $ | 128,705 | | | $ | 39,896 | | | $ | 42,333 | | Cost of revenue (excluding depreciation and amortization) | | | 24,156 | | | | 27,930 | | | | 76,160 | | | | 78,982 | | | | 25,502 | | | | 26,985 | | Depreciation and amortization | | | 5,037 | | | | 5,641 | | | | 16,360 | | | | 17,012 | | | | 4,659 | | | | 6,264 | | Impairment of goodwill | | | | 21,755 | | | | - | | Selling, general and administrative | | | 3,303 | | | | 3,779 | | | | 10,446 | | | | 13,017 | | | | 2,807 | | | | 3,797 | | | | | | | | | | | | | | | | Managed Communication Services operating income | | $ | 9,559 | | | $ | 7,593 | | | $ | 22,627 | | | $ | 19,694 | | | | | | | | | | | | | | | | | Managed Communication Services operating income (loss) | | | $ | (14,827 | ) | | $ | 5,287 | | Applications andInternet-of-Things: | | | | | | | | | | | | | | | | | Revenue | | $ | 9,265 | | | $ | 7,463 | | | $ | 25,285 | | | $ | 19,375 | | | $ | 8,743 | | | $ | 8,015 | | Cost of revenue (excluding depreciation and amortization) | | | 4,091 | | | | 3,677 | | | | 12,975 | | | | 9,927 | | | | 4,561 | | | | 4,497 | | Depreciation and amortization | | | 1,218 | | | | 1,661 | | | | 3,675 | | | | 3,344 | | | | 1,182 | | | | 1,231 | | Impairment of goodwill | | | | - | | | | - | | Selling, general and administrative | | | 1,599 | | | | 520 | | | | 2,999 | | | | 1,304 | | | | 1,620 | | | | 565 | | | | | | | | | | | | | | | | Applications &Internet-of-Things operating income | | $ | 2,357 | | | $ | 1,605 | | | $ | 5,636 | | | $ | 4,800 | | | $ | 1,380 | | | $ | 1,722 | | | | | | | | | | | | | | | | Systems Integration: | | | | | | | | | | | | | | | | | Revenue | | $ | 9,673 | | | $ | 12,364 | | | $ | 27,957 | | | $ | 30,530 | | | $ | 10,122 | | | $ | 7,162 | | Cost of revenue (excluding depreciation and amortization) | | | 7,415 | | | | 9,127 | | | | 19,502 | | | | 21,752 | | | | 7,887 | | | | 4,974 | | Depreciation and amortization | | | 155 | | | | 605 | | | | 1,456 | | | | 1,922 | | | | 164 | | | | 662 | | Impairment of goodwill | | | | 1,386 | | | | - | | Selling, general and administrative | | | 464 | | | | 380 | | | | 2,158 | | | | 1,260 | | | | 404 | | | | 1,124 | | | | | | | | | | | | | | | | Systems Integration and Automation operating income | | $ | 1,639 | | | $ | 2,252 | | | $ | 4,841 | | | $ | 5,596 | | | $ | 281 | | | $ | 402 | | | | | | | | | | | | | | | |
NOTE: Consolidated balances include the segments above along with corporate activities and intercompany eliminations.
Three Months Ended September 30,March 31, 2020 and 2019 and 2018 Revenue.Revenue decreasedincreased by $3.8$1.3 million, or 5.8%2.2%, to $61.0$58.8 million for the three months ended September 30, 2019March 31, 2020 from $64.8$57.5 million for the three months ended September 30, 2018.March 31, 2019. Revenue for the Apps & IoT segment increased $1.8$0.7 million, or 24.1%9.1%, due to our focus on the growth of the application layer and IoT space, whichspace. Systems Integration revenue increased by $3.0 million, or 41.3%, due to the timing of certain projects. The increase was partially offset by a $2.9$2.4 million decrease in MCS segment revenue due to service and a $2.7 million decreaseinstall which had substantial revenue in Systems Integration revenue.the prior year quarter from the expansion of the LTE network in the Gulf of Mexico. Cost of Revenue (excluding depreciation and amortization).Cost of revenue (excluding depreciation and amortization) decreasedincreased by $5.1$1.5 million, or 12.5%4.1%, to $35.7$38.0 million for the three months ended September 30, 2019March 31, 2020 from $40.7$36.5 million for the three months ended September 30, 2018.March 31, 2019. This decreaseincrease was due to cost reductions and lower variable costsprogress on lower revenues.certain SI projects, partially offset by decreased activity in the MCS segment. Cost of revenue (excluding depreciation and amortization) decreased in the MCS segment by $3.8 million.$1.5 million due to reduction in ongoing expenses. Cost of revenue (excluding depreciation and amortization) decreasedincreased in the Systems Integration segment by $1.7 million.$2.9 million due to the timing of System Integration projects. Cost of revenue (excluding depreciation and amortization) increased in the Apps & IoT segment by $0.4 million as we continue our strategy to grow our application layer and IoT space, including Intelie.$0.1 million. Depreciation and Amortization.Depreciation and amortization expense decreased by $1.2$2.0 million to $7.2$6.9 million for the three months ended September 30, 2019March 31, 2020 from $8.4$8.9 million for the three months ended September 30, 2018.March 31, 2019. The decrease is primarily attributable to the intangibles from the July 2012 acquisition of Nessco being fully amortized coupled with lower capital expenditures. Impairment of Goodwill. The combination of COVID-19 pandemic and unprecedent oil and gas prices impacted our internal forecast. As a result, we performed an interim goodwill impairment test and determined that two of our reporting units were in excess of their fair value which resulted in a goodwill impairment charge of $23.1 million. The charge fully impairs goodwill previously reported in MCS of $21.8 million and Systems Integration of $1.4 million. 27
Selling and Marketing.Selling and marketing expense increased $0.1expenses decreased $1.0 million to $2.8 million for the three months ended September 30, 2019March 31, 2020 from $2.7$3.8 million for the three months ended September 30, 2018. March 31, 2019.General and Administrative.General and administrative expenses decreased by $2.3$2.6 million to $12.4$13.8 million for the three months ended September 30, 2019March 31, 2020 from $14.7$16.5 million for the three months ended September 30, 2018.March 31, 2019. General and administrative costs decreased due to reduced stock based-compensation and legal cost attributable to settlement of the GX Dispute during the second quarter of 2019 and other cost reductions.2019. Income Tax Expense.Our effective income tax rates were 137.1% 3.5%and (12.6%(28.7%) for the three months ended September 30,March 31, 2020 and 2019, and 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, 2019 and 2018
Revenue.Revenue increased by $0.2 million, or 0.1%, to $178.8 million for the nine months ended September 30, 2019 from $178.6 million for the nine months ended September 30, 2018, driven by growth in the Apps & IoT segment. Revenue for the Apps & IoT segment increased $5.9 million, or 30.5%, due to our focus on growth of the application layer and IoT space. Revenue for the 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 $2.0 million, or 1.8%, to $108.6 million for the nine months ended September 30, 2019 from $110.7 million for the nine months ended September 30, 2018. Cost of revenue (excluding depreciation and amortization) decreased in the MCS segment by $2.8 million from cost reductions. Cost of revenue (excluding depreciation and amortization) decreased in the Systems Integration segment by $2.3 million. Cost of revenue (excluding depreciation and amortization) increased in the Apps & IoT segment by $3.0 million as we continue our strategy to grow our application layer and IoT space, including Intelie.
Depreciation and Amortization.Depreciation and amortization expense decreased by $1.0 million to $23.8 million for the nine months ended September 30, 2019 from $24.8 million for the nine months ended September 30, 2018. The decrease is primarily attributable to the intangibles from the July 2012 acquisition of Nessco being fully amortized coupled with lower capital expenditures.
Selling and Marketing.Selling and marketing expense decreased $0.3 million to $9.5 million for the nine months ended September 30, 2019 from $9.9 million for the nine months ended September 30, 2018.
General and Administrative.General and administrative expenses increased by $2.2 million to $43.3 million for the nine months ended September 30, 2019 from $41.1 million for the nine months ended September 30, 2018. General and administrative costs increased primarily due to increased stock-based compensation and increased GX Dispute legal expenses.
Income Tax Expense.Our effective income tax rates were (47.0%) and 0.1% for the nine months ended September 30, 2019 and 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, 2019,March 31, 2020, we had working capital, including cash and cash equivalents, of $26.9$34.3 million. BasedIn April 2020, the Company drew an additional $3.0 million on our current expectations, we believe ourthe RCF for 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 pay down outstanding debt.purposes.
During the next twelve months, we expect our principal sources of liquidity to be cash flows from operating activities, the PPP Loan, cash and cash equivalents on hand and availability under our Credit Agreement. While wehand. We believe we have sufficient liquidity and capital resources to meet our current operating requirements and ourany growth plans, weplans. We may elect to pursue expansion opportunities within the next year, which could require additional financing, either equity or debt, or equity.however, we acknowledge additional opportunity for borrowing will be limited. Additionally, during the COVID-19 pandemic and reduction of oil and gas activity, the company has cut spend including board, executive, and employee pay, professional fees, capital expenditures and other operating costs.
| | | | | | | | | | | Nine Months Ended September 30, | | | | 2019 | | | 2018 | | | | (in thousands) | | 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 | | | | | | | | | | | Net cash provided by (used in) operating activities | | | (25,945 | ) | | | 1,352 | | | | | | | | | | | 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 | | | | | | | | | | | Cash and cash equivalents including restricted cash, September 30, | | $ | 15,828 | | | $ | 22,314 | | | | | | | | | | |
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 Agreement and additional financing activities we may pursue, which may include debt or equity offerings. | | Three Months Ended March 31, | | | | 2020 | | | 2019 | | | | (in thousands) | | Condensed Consolidated Statements of Cash Flows Data: | | | | | | | | | Cash and cash equivalents including restricted cash, January 1, | | $ | 14,505 | | | $ | 23,296 | | Net cash provided by operating activities | | | 3,551 | | | | 4,648 | | Net cash used in investing activities | | | (5,337 | ) | | | (4,748 | ) | Net cash provided by (used in) financing activities | | | 2,491 | | | | (3,086 | ) | Changes in foreign currency translation | | | (33 | ) | | | 91 | | Cash and cash equivalents including restricted cash, March 31, | | $ | 15,177 | | | $ | 20,201 | |
Currently, the Norwegian Kroner, the British Pound Sterling and the Brazilian Real are the foreign currencies that could materially impact our liquidity. We presently do not hedge theseagainst foreign currency exchange risks, but evaluate financial risk on a regular basis and may utilize financial instruments in the future if deemed necessary. During the ninethree months ended September 30,March 31, 2020 and 2019, 93.0% and 2018, 91.9% and 91.4%91.8% of our revenue was denominated in U.S. dollars, respectively. Operating Activities Net cash used inprovided by operating activities was $25.9$3.6 million for the ninethree months ended September 30, 2019March 31, 2020 compared to net cash provided by operating activities of $1.4$4.6 million for the ninethree months ended September 30, 2018.March 31, 2019. The decrease in cash from operating activities of $27.3$1.1 million was primarily due to payment of $50.0 million towards the GX Dispute settlement, partially offset by the timing of collecting receivables and paying our accounts payable.payable partially offset due to the timing of receivables. Our cash provided by operations is subject to many variables including the volatility of the oil and gas industry, the demand for our services, the cost of satellite bandwidth and 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. 28
Investing Activities Net cash used in investing activities was $16.5$5.3 million and $23.5$4.7 million for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively. Net cash used in investing activities during the ninethree months ended September 30,March 31, 2020 and 2019 and 2018 included $16.8$5.3 million and $18.8$4.8 million of capital expenditures, respectively. Net cash used in investing activities during the nine months ended September 30, 2018 included $5.4 million for acquisitions. Financing Activities Net cash provided by financing activities was $34.9$2.5 million for the ninethree months ended September 30, 2019.March 31, 2020. Cash provided by financing activities for the ninethree months ended September 30, 2019March 31, 2020, included $48.5borrowings of $3.8 million in proceeds from borrowings, partially offset by $11.4$0.6 million withheld to cover employee taxes on stock-based compensation and $0.5 million in financing fees related to the Credit Agreement. Net cash used in financing activities was $3.1 million for the three months ended March 31, 2019. Cash used in financing activities for the three months ended March 31, 2019, included $1.3 million in principal payments on our long-term debt, $1.4 million withheld to cover employee taxes on stock-based compensation and $0.5$0.3 million in financing fees related to the consents, waiver and amendment to the Credit Agreement. Net cash provided by financing activities was $6.2 million for the nine months ended September 30, 2018. Cash provided by financing activities for the nine months ended September 30, 2018 included $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 The Credit Agreement provides for a $15.0$16.0 million Term Loan, a $30.0 millionTerm-Out Loan and an $85.0$100.0 million RCF which includesand a $25.0$30.0 million sublimit for the issuance of commercial and standby letters of credit and performance bonds issued by the parties under theaccordion feature. The Credit Agreement. Under the Credit Agreement the Term Loan, theTerm-Outbears Loan and the RCF bear interest at a rate of LIBOR plus a margin ranging from 1.75% to 3.00%,3.25% based on the Company’s Consolidated Leverage Ratio. LIBOR is subject to cease to exist entirely after 2021. The Credit Agreement addresses this situation with a consolidated leverage ratio definedLIBOR successor rate, being one or more Secured Overnight Financing Rates (SOFR) or another alternate benchmark rate. The Credit Agreement also addresses the situation in which no LIBOR successor rate has been determined. Interest on the Credit Agreement. InterestAgreement is payable monthly andwith principal installmentspayments of $1.25$2.0 million and $1.5 million under the Term Loan andTerm-Out Loan, respectively, are due quarterly.
quarterly beginning June 30, 2020. The weighted average interest rate for the three months ended September 30,March 31, 2020 and 2019 were 4.4% and 2018 were 5.3% and 4.9%, respectively. The weighted average interest rate for the nine months ended September 30, 2019 and 2018 were 5.3% and 4.7%5.2%, respectively, with an interest rate of 5.0%4.0% at September 30, 2019. March 31, 2020. As of September 30, 2019,March 31, 2020, the outstanding principal amounts were $6.3$16.0 million for the Term Loan $27.0 million for theTerm-Out Loan and, $81.2$95.4 million for the RCF.In April 2020, the Company drew an additional $3.0 million on the RCF for liquidity purposes. The Company’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,Consolidated Leverage Ratio, of less than or equal to 2.75 to 1.00. The consolidated leverage ratio increased to 3.25 to 1.00 forthrough the four quarters starting in the 2ndthird quarter of 2019.2020. The consolidated leverage ratioConsolidated Leverage Ratio requirement then decreasessteps down to 3.00 to 1.00 for three quarters,through the second quarter of 2021 and then decreasessteps down to 2.75 to 1.00 for all remaining quarters. The Consolidated Fixed Charge Coverage ratio requirement is greater than or equal to 1.25 through the maturity of the Credit Agreement. If any default occurs related to these covenants that wasare 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 our assets. In April 2019, we determined that in periods beginning at least as early as March 31, 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) toassets of 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.
Company. We believe we have accurately calculated and reported our required debt covenant calculations for the September 30, 2019March 31, 2020 reporting period and are in compliance with the required covenant ratios. We expect to remainAs of March 31, 2020, the Consolidated Leverage Ratio was 3.00 and Consolidated Fixed Charge Coverage Ratio was 2.14. Vendor Finance Agreement As of March 31, 2020, the Company had a vendor financing agreement in complianceplace, 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 spendingan outstanding balance of $2.8 million. The outstanding balance bears interest at a rate of 6% and has quarterly payments of $0.3 million of principal and interest 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.January 2023. Off-Balance Sheet Arrangements We do not engage in anyoff-balance sheet arrangements. 29
Non-GAAP Measure Measure Adjusted EBITDA should not be considered as an alternative to net loss, operating income (loss), basic or diluted loss per share or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate Adjusted EBITDA or similarly titled measures in the same manner as we do. We prepare Adjusted EBITDA 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 (minus) 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; stock-based compensation expense; restructuring charges; change in fair value of earn-outs and contingent consideration; stock-based compensation; acquisition costs; executive departure costs; restructuring charges;acquisition costs; 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 investorinvestor’s and analyst’s presentationsanalyses 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. 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;expense or principal payments on debt; Adjusted EBITDA does not reflect cash requirements for income taxes; Adjusted EBITDA does not reflect impairment of goodwill, intangibles, property, plant and equipment; Adjusted EBITDA does not reflect the foreign exchange impact of intercompany financing activities; Adjusted EBITDA does not reflect (gain) loss on retirementsales of property, plant and equipment; Adjusted EBITDA does not reflect the stock-based compensation component of employee compensation; Adjusted EBITDA does not reflect acquisition costs; 30
Adjusted EBITDA does not reflect change in fair value of earn-outs and contingent consideration;
| • | Adjusted EBITDA does not reflect the change in fair value of earn-outs and contingent consideration, which may require settlement in cash in the future; |
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;
| • | 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. The following table presents a reconciliation of our net loss to Adjusted EBITDA. | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended March 31, | | | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | (in thousands) | | | | | | | | | (in thousands) | | Net loss | | $ | (270 | ) | | $ | (2,798 | ) | | $ | (18,349 | ) | | $ | (12,623 | ) | | $ | (26,771 | ) | | $ | (11,953 | ) | Interest expense | | | 1,784 | | | | 807 | | | | 4,291 | | | | 2,773 | | | | 1,528 | | | | 1,238 | | Depreciation and amortization | | | 7,172 | | | | 8,413 | | | | 23,763 | | | | 24,756 | | | | 6,931 | | | | 8,912 | | Loss on sales of property, plant and equipment, net of retirements | | | 8 | | | | 66 | | | | 19 | | | | 34 | | | Impairment of goodwill | | | | 23,141 | | | | - | | (Gain) loss on sales of property, plant and equipment, net of retirements | | | | 282 | | | | (7 | ) | Stock-based compensation | | | 1,504 | | | | 1,086 | | | | 7,132 | | | | 4,368 | | | | 3,854 | | | | 4,458 | | Restructuring | | | 158 | | | | 664 | | | | 731 | | | | 664 | | | | - | | | | 573 | | Change in fair value ofearn-out/contingent consideration | | | — | | | | (750 | ) | | | 1,284 | | | | 2,050 | | | Executive departure costs | | | — | | | | — | | | | — | | | | 161 | | | | 298 | | | | - | | Acquisition costs | | | 76 | | | | 930 | | | | 486 | | | | 2,075 | | | | 68 | | | | 350 | | GX dispute Phase II costs | | | (420 | ) | | | — | | | | 3,946 | | | | — | | | | - | | | | 2,149 | | Income tax expense (benefit) | | | 998 | | | | 312 | | | | 5,868 | | | | (11 | ) | | | (980 | ) | | | 2,666 | | | | | | | | | | | | | | | | Adjusted EBITDA(non-GAAP measure) | | $ | 11,010 | | | $ | 8,730 | | | $ | 29,171 | | | $ | 24,247 | | | $ | 8,351 | | | $ | 8,386 | | | | | | | | | | | | | | | |
We evaluate Adjusted EBITDA 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 assess purchasing synergies. Adjusted EBITDA increased by $2.3 million to $11.0was $8.4 million for the three months ended September 30, 2019, from $8.7March 31, 2020, and $8.4 million for the three months ended September 30, 2018. Adjusted EBITDA increased by $4.9 million to $29.2 million for the nine months ended September 30, 2019, from $24.2 million for the nine months ended September 30, 2018. March 31, 2019.31
Item 3.Quantitative and QualitativeQualitative Disclosures about Market Risk We are subject to a variety of risks, including foreign currency exchange rate fluctuations relating to foreign operations and certain purchases from foreign vendors. In the normal course of business, we assess these risks and have established policies and procedures to manage our exposure to fluctuations in foreign currency values. Our objective in managing our exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rates. We presently do not hedge these risks, but evaluate financial risk on a regular basis and may utilize financial instruments in the future if deemed necessary. During the ninethree months ended September 30,March 31, 2020 and 2019, 7.0% and 2018, 8.1% and 8.6%8.2%, respectively, of our revenues were earned innon-U.S. currencies. At September 30,March 31, 2020 and 2019, and 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 a net loss attributable to us and our total stockholders’ equity based on our outstanding long-term debt at September 30, 2019March 31, 2020 and December 31, 2018,2019, assuming those liabilities were outstanding for the previous twelve months: | | | September 30, | | | December 31, | | | | | 2019 | | | 2018 | | | March 31, | | | December 31, | | | | | (in thousands) | | | 2020 | | | 2019 | | Effect on Net Income (Loss) and Equity - Increase/Decrease: | | | | | | (in thousands) | | 1% Decrease/increase in rate | | $ | 1,144 | | | $ | 770 | | | $ | 1,138 | | | $ | 1,077 | | 2% Decrease/increase in rate | | $ | 2,289 | | | $ | 1,541 | | | $ | 2,277 | | | $ | 2,155 | | 3% Decrease/increase in rate | | $ | 3,433 | | | $ | 2,311 | | | $ | 3,415 | | | $ | 3,232 | |
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, 2019.March 31, 2020. The term “disclosure controls and procedures,” as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2019,March 31, 2020, 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, 2019March 31, 2020 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 of all consolidated entities. entities.32
PART II – OTHEROTHER INFORMATION Item 1.Legal Proceedings In June 2019, the Company announced that it reached a settlement with Inmarsat that concludes the GX Dispute. Pursuant to the settlement the Company paid $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 2020. The Company has an accrued liability of $0.8 million as of September 30, 2019.
As previously disclosed, Inmarsat plc (Inmarsat), a satellite telecommunications company, filed arbitration with the International 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 GX capacity from Inmarsat over several years.
The Company, in the ordinary course of business, is a claimant or a defendant in various other legal proceedings, including proceedings as to which the Company has insurance coverage and those that may involve the filing of liens against the Company or its assets. Item 1A.Risk Factors There have been no material changes from the risk factors disclosed in “PartReference is made to Part I, Item 1A. Risk“Risk Factors” ofincluded in our Annual Report on Form10-Kfor the year ended December 31, 2018.information concerning risk factors. In addition to the risk factor discussed below, the impact of the COVID-19 pandemic may also exacerbate other risks discussed in Item 1A. Risk Factors in our Annual Report, any of which could have a material adverse effect on us.
The COVID-19 pandemic has significantly reduced demand for our services, and has had, and may continue to have, a material adverse impact on our financial condition, results of operations and cash flows. The effects of the COVID-19 pandemic, including actions taken by businesses and governments, have resulted in a significant and swift reduction in international and U.S. economic activity. These effects have adversely affected the demand for oil and natural gas, as well as for our services. The collapse in demand for oil caused by this unprecedented global health and economic crisis, coupled with oil oversupply, has had and is reasonably likely to continue to have, a material adverse impact on the demand for our services. The decline in our customers’ demand for our services has had and is likely to continue to have, a material adverse impact on our financial condition, results of operations and cash flows. While the full impact of the COVID-19 outbreak is not yet known, we are closely monitoring the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. These effects have included and may continue to include adverse revenue, net income and Adjusted EBITDA effects.; disruptions to our operations; customer shutdowns of oil and gas exploration and production; employee impacts from illness, school closures and other community response measures; and temporary closures of our facilities and the facilities of our customers and suppliers. The extent to which our operating and financial results are affected by COVID-19 will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus. COVID-19 may also materially adversely affect our operating and financial results in a manner that is not currently known to us or that we do not currently consider to present significant risks to our operations. Recently, we have experienced increased cancellations of platform space agreements which are having a material adverse effect on our Gulf of Mexico infrastructure. We enter License of Platform Space (LOPS) agreements with operators of platforms in the Gulf of Mexico to place equipment necessary for our WiMax, microwave and LTE networks in the Gulf of Mexico. These agreements allow the operator to cancel the agreement with short notice periods if the operator intends to decommission or abandon the platform. The downturn in demand for oil and gas triggered by the COVID-19 outbreak has led to a high number of notifications of cancelations of our LOPS agreements. When a LOPS agreements is cancelled, we have to relocate equipment to another platform in order to maintain our network infrastructure. These moves increase our costs and may have a material adverse effect on our financial results. In addition, we cannot guarantee that alternative platform space is available for all required network moves resulting from cancellation of LOPS agreements. Failure to secure alternative space could result in gaps in our network coverage or degraded network performance and could have a material adverse effect on our financial condition, results of operations and cash flows.
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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3.Defaults Upon Senior Securities None. Item 4.Mine Safety Disclosures Not applicable. Item 5.Other Information Not applicable. Item 6.Exhibits The exhibits required to be filed with this Quarterly Report on Form10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference. 34
INDEX TO EXHIBITS 2.1 | | | 2.1 | | Share Purchase and Sale Agreement and Other Pacts between RigNet, Inc. and the shareholders of Intelie Solucoes Em Informatica S.A. dated January 15, 2018 (filed as Exhibit 2.1 to the Registrant’s Current Report on Form8-K filed with the SEC on January 17, 2018, and incorporated herein by reference) | | | | 3.1 | | Amended and Restated Certificate of Incorporation, as amended (filed as Exhibit 3.1 to the Registrant’s Quarterly Report on Form10-Q filed with the SEC on August 8, 2016, and incorporated herein by reference) | | | | 3.2 | | Amendment to Amended and Restated Certificate of Incorporation, effective May 18, 2016. (filed as Exhibit 3.2 to the Registrant’s Quarterly Report on Form10-Q filed with the SEC on August 8, 2016, and incorporated herein by reference) | | | | 3.3 | | Second Amended and Restated Bylaws of the Registrant, as amended (filed as Exhibit 3.3 to the Registrant’s Annual Report on Form10-K filed with the SEC on March 6, 2018, and incorporated herein by reference) | 10.1 | | Third Amendment and Joinder to Third Amended and Restated Credit Agreement, dated as of February 21, 2020, among RigNet, Inc., as Borrower, the Subsidiaries of RigNet, Inc. party thereto as Guarantors, Bank of America, N.A., as Administrative Agent, Swingline Lender and L/C Issuer, and the Lenders party thereto (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 24, 2020, and incorporated herein by reference) | 31.110.2 | | Promissory Note dated as of May 1, 2020, issued by RigNet, Inc. to Bank of America, N.A., in the initial principal amount of $6,787,492.00 | | | | 31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | 31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | 32.1 | | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | 32.2 | | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | 101.INS | | XBRL Instance Document | | | | 101.SCH | | XBRL Schema Document | | | | 101.CAL | | XBRL Calculation Linkbase Document | | | | 101.LAB | | XBRL Label Linkbase Document | | | | 101.PRE | | XBRL Presentation Linkbase Document | | | | 101.DEF | | XBRL Definition Linkbase Document |
+ | Indicates management contract or compensatory plan. |
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SIGNATURESSIGNATURES
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. | | | | | | | RIGNET, INC. | Date: May 11, 2020 | | | | Date: November 8, 2019 | | | | By: | | /s/ LEE M. AHLSTROM | | | | | | | Lee M. Ahlstrom | | | | | | |
| | Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
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