Company Quick10K Filing
Quick10K
Rignet
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$9.76 20 $192
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-08-05 Earnings, Exhibits
8-K 2019-06-23 Other Events, Exhibits
8-K 2019-06-07 Enter Agreement, Exhibits
8-K 2019-05-06 Earnings, Exhibits
8-K 2019-04-29 Shareholder Vote
8-K 2019-04-29 Enter Agreement, Exhibits
8-K 2019-04-02 Regulation FD, Exhibits
8-K 2019-03-14 Earnings, Exhibits
8-K 2019-02-13 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-01-07 Officers, Exhibits
8-K 2018-12-06 Regulation FD, Exhibits
8-K 2018-11-29 Other Events, Exhibits
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-09-04 Regulation FD, Exhibits
8-K 2018-08-20 Enter Agreement, Officers, Exhibits
8-K 2018-05-03 Officers, Shareholder Vote, Exhibits
8-K 2018-03-26 M&A, Regulation FD, Exhibits
8-K 2018-03-15 Regulation FD, Exhibits
8-K 2018-02-26 Officers
8-K 2018-01-17 Enter Agreement, Regulation FD, Exhibits
8-K 2018-01-10 Officers, Exhibits
HIG Talcott Resolution Life Insurance 18,980
CHK Chesapeake Energy 4,380
ULH Universal Logistics Holdings 661
FPH Five Point Holdings 619
AQ Aquantia 462
JRSH Jerash 79
DIGAF Digatrade Financial 0
WDNT Worldnet of Nevada 0
FKYS First Keystone 0
EACO Eaco 0
RNET 2019-06-30
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
Note 2 - Business Combinations
Note 3 - Business and Credit Concentrations
Note 4 - Goodwill and Intangibles
Note 5 - Restricted Cash
Note 6 - Long-Term Debt
Note 7 - Fair Value Disclosures
Note 8 - Income Taxes
Note 9 - Stock-Based Compensation
Note 10 - Earnings (Loss) per Share
Note 11 - Commitments and Contingencies
Note 12 - Segment Information
Note 13 - Related Party
Note 14 - Restructuring Costs - Cost Reduction Plans
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.3 d777514dex103.htm
EX-31.1 d777514dex311.htm
EX-31.2 d777514dex312.htm
EX-32.1 d777514dex321.htm
EX-32.2 d777514dex322.htm

Rignet Earnings 2019-06-30

RNET 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d777514d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2019

or

 

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

For the transition period from                      to                     

Commission file number 001-35003

 

 

RigNet, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   76-0677208

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

15115 Park Row Blvd, Suite 300

Houston, Texas

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

(281) 674-0100

Registrant’s telephone number, including area code

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, $0.001 par value per share   RNET   NASDAQ

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-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  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-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 Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     ☐   Accelerated filer     ☒     
Non-accelerated filer     ☐   Smaller reporting company     ☒    Emerging growth company     ☐

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

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

At July 31, 2019, there were outstanding 19,968,783 shares of the registrant’s Common Stock.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
   PART I – FINANCIAL INFORMATION   
Glossary         3  
Item 1   

Condensed Consolidated Financial Statements  (Unaudited)

     5  
Item 2   

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

     24  
Item 3   

Quantitative and Qualitative Disclosures about Market Risk

     33  
Item 4   

Controls and Procedures

     34  
   PART II – OTHER INFORMATION   
Item 1   

Legal Proceedings

     35  
Item 1A   

Risk Factors

     35  
Item 2   

Unregistered Sales of Equity Securities and Use of Proceeds

     35  
Item 3   

Defaults Upon Senior Securities

     35  
Item 4   

Mine Safety Disclosures

     35  
Item 5   

Other Information

     35  
Item 6   

Exhibits

     35  

 

2


Table of Contents

Glossary

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    A non-GAAP measure. Net income (loss) plus interest expense, income tax expense (benefit), depreciation and amortization, impairment of goodwill, intangibles, property, plant and equipment, foreign exchange impact of intercompany financing activities, (gain) loss on sales of property, plant and equipment, net of retirements, change in fair value of earn-outs and contingent consideration, stock-based compensation, acquisition costs, executive departure costs, restructuring charges, the GX dispute, the GX dispute Phase II costs and non-recurring items. A reconciliation of Adjusted EBITDA to Net Income can be found in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
AI    Artificial Intelligence
Apps    Software Applications
ASC    Accounting Standards Codification
ASU    Accounting Standards Update
Auto-Comm    Automation Communications Engineering Corp., acquired in 2018, provides additional Systems Integration solutions
AVI    Adaptive Video Intelligence
BOP    Blow-out preventer
BGAN    Broadband Global Access Networks
CIEB    Costs and estimated earnings in excess of billings on uncompleted contracts
Cyphre®    Cyphre Security Solutions, acquired in 2017, provides cybersecurity solutions with advanced enterprise data protection
DTS    Data Technology Solutions, acquired in 2017, increases solutions offerings in managed communications, IT, and disaster relief
ECS    Enhanced Cyber Security
EDS    Emergency disconnect sequence
EPC    Engineering, Procurement and Construction
ESS    Energy Satellite Services, acquired in 2017, increases solutions offerings in SCADA and IoT
Exchange Act    United States Securities Exchange Act of 1934, as Amended
FASB    Financial Accounting Standards Board
FCC    Federal Communications Commission
GAAP    Generally Accepted Accounting Principles in the United States
GX    Inmarsat plc’s Global Express satellite bandwidth service
HTS    High Throughput Satellite, providing greater bandwidth than traditional satellites
Intelie    Intelie soluções em Informática SA, acquired in 2018, provides machine learning and real-time predictive analytics
IoT    Internet-of-Things
IP    Internet Protocol
KPI    Key performance indicators
LIBOR    London Interbank Offered Rate
LoRA    Long Range Access
LOS    Line-of-Sight microwave transmission
MCS    Managed Communications Services
MPLS    Multiprotocol Label Switching
NASDAQ    NASDAQ Global Select Market, where RigNet’s common shares are listed for trading

 

3


Table of Contents
Nessco    Nessco Group Holdings LTD, acquired in 2012, provides Systems Integration solutions
NOC    Network Operations Center
NPT    Non-productive time
OPEC    Organization of Petroleum Exporting Countries
OTT    Software, IoT and other advanced solutions delivered Over-the-Top of the network layer
PUC    Public Utility Commission
ROP    Rate of penetration
SaaS    Software as a Service
SAB    Staff Accounting Bulletin
SAFCON    Safety Controls, Inc., acquired in 2018, provides additional safety, security, and maintenance service solutions for the oil and gas industry
Satellite bandwidth – Ka band    Bandwidth typically operating in a frequency range of 27 – 40 gigahertz
Satellite bandwidth – Ku band    Bandwidth typically operating in a frequency range of 12 – 18 gigahertz
Satellite bandwidth – C band    Bandwidth typically operating in a frequency range of 4 – 8 gigahertz
Satellite bandwidth – L band    Bandwidth typically operating in a frequency range of 1 – 2 gigahertz
SCADA    Supervisory Control and Data Acquisition
SEC    United States Securities and Exchange Commission
SI    Systems Integration
SOC    Security Operations Center
TECNOR    Orgtec S.A.P.I. de C.V., d.b.a. TECNOR, acquired in March 2016, increases solutions offerings in Mexico
The Tax Act    The Tax Cuts and Jobs Act
VMS    Video Management System
VSAT    Very Small Aperture Terminal satellite receivers
WiMax    Worldwide Interoperability for Microwave Access wireless broadband communication standard

 

4


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

RIGNET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     June 30,
2019
    December 31,
2018
 
     (in thousands, except share amounts)  
ASSETS

 

Current assets:

    

Cash and cash equivalents

   $ 10,879     $ 21,711  

Restricted cash

     41       41  

Accounts receivable, net

     67,863       67,450  

Costs and estimated earnings in excess of billings on uncompleted contracts (CIEB)

     8,739       7,138  

Prepaid expenses and other current assets

     7,197       6,767  
  

 

 

   

 

 

 

Total current assets

     94,719       103,107  

Property, plant and equipment, net

     63,247       63,585  

Restricted cash

     1,522       1,544  

Goodwill

     46,670       46,631  

Intangibles, net

     29,522       33,733  

Right-of-use lease asset

     3,899       —    

Deferred tax and other assets

     4,794       10,325  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 244,373     $ 258,925  
  

 

 

   

 

 

 
LIABILITIES AND EQUITY

 

Current liabilities:

    

Accounts payable

   $ 27,916     $ 20,568  

Accrued expenses

     15,802       16,374  

Current maturities of long-term debt

     10,783       4,942  

Income taxes payable

     1,369       2,431  

GX dispute accrual

     5,000       50,765  

Deferred revenue and other current liabilities

     10,079       5,863  
  

 

 

   

 

 

 

Total current liabilities

     70,949       100,943  

Long-term debt

     100,274       72,085  

Deferred revenue

     250       318  

Deferred tax liability

     678       652  

Right-of-use lease liability – long-term portion

     4,842       —    

Other liabilities

     22,048       28,943  
  

 

 

   

 

 

 

Total liabilities

     199,041       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 June 30, 2019 or December 31, 2018

     —         —    

Common stock – $0.001 par value; 190,000,000 shares authorized; 19,968,783 and 19,464,847 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

     20       19  

Treasury stock – 200,980 and 91,567 shares at June 30, 2019 and December 31, 2018, respectively, at cost

     (2,676     (1,270

Additional paid-in capital

     181,577       172,946  

Accumulated deficit

     (114,656     (96,517

Accumulated other comprehensive loss

     (18,918     (19,254
  

 

 

   

 

 

 

Total stockholders’ equity

     45,347       55,924  

Non-redeemable, non-controlling interest

     (15     60  
  

 

 

   

 

 

 

Total equity

     45,332       55,984  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 244,373     $ 258,925  
  

 

 

   

 

 

 

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

 

5


Table of Contents

RIGNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
         2019             2018             2019             2018      
     (in thousands, except per share amounts)  

Revenue

   $ 60,332     $ 60,007     $ 117,842     $ 113,840  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Cost of revenue (excluding depreciation and amortization)

     36,519       36,246       72,975       69,927  

Depreciation and amortization

     7,679       8,356       16,591       16,343  

Change in fair value of earn-out/contingent consideration

     1,284       2,778       1,284       2,800  

Selling and marketing

     2,952       4,189       6,745       7,138  

General and administrative

     14,458       12,768       30,928       26,432  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     62,892       64,337       128,523       122,640  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (2,560     (4,330     (10,681     (8,800

Other income (expense):

        

Interest expense

     (1,269     (1,007     (2,507     (1,966

Other income (expense), net

     (93     112       (21     618  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (3,922     (5,225     (13,209     (10,148

Income tax benefit (expense)

     (2,204     926       (4,870     323  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (6,126     (4,299     (18,079     (9,825

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

     30       30       60       60  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to RigNet, Inc. stockholders

   $ (6,156   $ (4,329   $ (18,139   $ (9,885
  

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE LOSS

        

Net loss

   $ (6,126   $ (4,299   $ (18,079   $ (9,825

Foreign currency translation

     178       (2,192     336       (592
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (5,948     (6,491     (17,743     (10,417

Less: Comprehensive income attributable to non-controlling interest

     30       30       60       60  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to RigNet, Inc. stockholders

   $ (5,978   $ (6,521   $ (17,803   $ (10,477
  

 

 

   

 

 

   

 

 

   

 

 

 

LOSS PER SHARE – BASIC AND DILUTED

        

Net loss attributable to RigNet, Inc. common stockholders

   $ (6,156   $ (4,329   $ (18,139   $ (9,885
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.32   $ (0.23   $ (0.95   $ (0.54
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.32   $ (0.23   $ (0.95   $ (0.54
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, basic

     19,082       18,639       19,016       18,394  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, diluted

     19,082       18,639       19,016       18,394  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

6


Table of Contents

RIGNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended June 30,  
     2019     2018  
     (in thousands)  

Cash flows from operating activities:

    

Net loss

   $ (18,079   $ (9,825

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

    

Depreciation and amortization

     16,591       16,343  

Stock-based compensation

     5,628       3,282  

Amortization of deferred financing costs

     153       102  

Deferred taxes

     4,838       66  

Change in fair value of earn-out/contingent consideration

     1,284       2,800  

Accretion of discount of contingent consideration payable for acquisitions

     183       287  

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

     11       (32

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

    

Accounts receivable, net

     (488     (12,458

Costs and estimated earnings in excess of billings on uncompleted contracts (CIEB)

     (1,644     (430

Prepaid expenses and other assets

     (6     (2,157

Accounts payable

     7,564       4,140  

Accrued expenses

     (1,574     (2,948

GX Dispute payment

     (45,000      

Deferred revenue

     1,334       4,134  

Other liabilities

     (2,052     (1,975
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (31,257     1,329  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions (net of cash acquired)

     —         (5,082

Capital expenditures

     (11,868     (12,701

Proceeds from sales of property, plant and equipment

     112       170  
  

 

 

   

 

 

 

Net cash used in investing activities

     (11,756     (17,613
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common stock upon the exercise of stock options and the vesting of restricted stock

     4       57  

Stock withheld to cover employee taxes on stock-based compensation

     (1,406     (1,130

Subsidiary distributions to non-controlling interest

     (135     (66

Proceeds from borrowings

     40,000       2,500  

Repayments of long-term debt

     (6,083     (2,572

Payment of financing fees

     (486     —    
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     31,894       (1,211
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (11,119     (17,495
  

 

 

   

 

 

 

Cash and cash equivalents including restricted cash:

 

Balance, January 1,

     23,296       36,141  

Changes in foreign currency translation

     265       1,308  
  

 

 

   

 

 

 

Balance, June 30,

   $ 12,442     $ 19,954  
  

 

 

   

 

 

 

Supplemental disclosures:

 

Income taxes paid

   $ 3,371     $ 2,262  

Interest paid

   $ 2,075     $ 1,419  

Property, plant and equipment acquired under capital leases

   $ 446     $ —    

Non-cash investing – capital expenditures accrued

   $ 1,917     $ 2,180  

Non-cash investing and financing – issuance of common stock for the Intelie earn-out

   $ 3,000     $ —    

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  
     June 30,
2019
    June 30,
2018
 

Cash and cash equivalents

   $ 10,879     $ 18,366  

Restricted cash – current portion

     41       42  

Restricted cash – long-term portion

     1,522       1,546  
  

 

 

   

 

 

 

Cash and cash equivalents including restricted cash

   $ 12,442     $ 19,954  
  

 

 

   

 

 

 

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

 

7


Table of Contents

RIGNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

 

   

 

Common Stock

   

 

Treasury Stock

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

Balance, March 31, 2018

    19,104     $ 19       80     $ (1,096   $ 165,625     $ (39,620   $ (13,206   $ 111,722     $ 42     $ 111,764  

Issuance of common stock upon the exercise of stock options

    7       —         —         —         45       —         —         45       —         45  

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

    (10     —         —         —         —         —         —         —         —      

Issuance of common stock upon the acquisition of Intelie

    259       —         —         —         4,096       —         —         4,096       —         4,096  

Stock withheld to cover employee taxes on stock-based compensation

    —         —         10       (150     —         —         —         (150 )      —         (150 ) 

Stock-based compensation

    —         —         —         —         837       —         —         837       —         837  

Cumulative effect adjustment from implementation of ASU 2016-16

    —         —         —         —         —         —         —         —         —      

Foreign currency translation

    —         —         —         —         —         —         (2,192     (2,192 )      —         (2,192 ) 

Non-controlling owner distributions

    —         —         —         —         —         —         —         —         —      

Net income (loss)

    —         —         —         —         —         (4,329     —         (4,329 )      30       (4,299 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2018

    19,360     $ 19       90     $ (1,246   $ 170,603     $ (43,949   $ (15,398   $ 110,029     $ 72     $ 110,101  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2019

    19,711     $ 20       198     $ (2,677   $ 177,404     $ (108,500   $ (19,096   $ 47,151     $ (45   $ 47,106  

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

    49       —         —         —         —         —         —         —         —      

Issuance of common stock upon the Intelie earn-out

    208       —         —         —         3,000       —         —         3,000       —         3,000  

Stock withheld to cover employee taxes on stock-based compensation

    —         —         3       1       —         —         —         1       —         1  

Stock-based compensation

    —         —         —         —         1,170       —         —         1,170       —         1,170  

Foreign currency translation

    —         —         —         —         —         —         178       178       —         178  

Non-controlling owner distributions

    —         —         —         —         —         —         —         —         —      

Net income (loss)

    —         —         —         —         —         (6,156     —         (6,156 )      30       (6,126 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2019

    19,969     $ 20       201     $ (2,676   $ 181,577     $ (114,656   $ (18,918   $ 45,347     $ (15   $ 45,332  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

Common Stock

   

 

Treasury Stock

    Additional
Paid-In
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Equity
    Non-Redeemable,
Non-Controlling
Interest
    Total
Equity
 
    Shares     Amount     Shares     Amount  
    (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

    8       —         —         —         57       —         —         57       —         57  

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

    —         —         —         —         3,282       —         —         3,282       —         3,282  

Cumulative effect adjustment from implementation of ASU 2016-16

    —         —         —         —         —         (338     —         (338 )      —         (338 ) 

Foreign currency translation

    —         —         —         —         —         —         (592     (592 )      —         (592 ) 

Non-controlling owner distributions

    —         —         —         —         —         —         —         —         (66     (66 ) 

Net income (loss)

    —         —         —         —         —         (9,885     —         (9,885 )      60       (9,825 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2018

    19,360     $ 19       90     $ (1,246   $ 170,603     $ (43,949   $ (15,398   $ 110,029     $ 72     $ 110,101  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    295       1       —         —         —         —         —         1       —         1  

Issuance of common stock for the Intelie earn-out

    208       —         —         —         3,000       —         —         3,000       —         3,000  

Stock withheld to cover employee taxes on stock-based compensation

    —         —         109       (1,406     —         —         —         (1,406 )      —         (1,406 ) 

Stock-based compensation

    —         —         —         —         5,628       —         —         5,628       —         5,628  

Foreign currency translation

    —         —         —         —         —         —         336       336       —         336  

Non-controlling owner distributions

    —         —         —         —         —         —         —         —         (135     (135 ) 

Net income (loss)

    —         —         —         —         —         (18,139     —         (18,139 )      60       (18,079 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2019

    19,969     $ 20       201     $ (2,676   $ 181,577     $ (114,656   $ (18,918   $ 45,347     $ (15   $ 45,332  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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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 Rule 10-01 of Regulation S-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, 2018 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2019.

Significant Accounting Policies

In addition to the accounting policies described below, please refer to RigNet’s Annual Report on Form 10-K for fiscal year 2018 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 and Internet-of-Things (Apps & IoT)

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

Performance Obligations Satisfied Over Time – The delivery of service represents the single performance obligation under MCS and Apps & IoT contracts. Revenue for contracts is generally recognized over time as service is transferred to the customer and the Company expects to be entitled to the agreed monthly or day rate in exchange for those services.

Performance Obligations Satisfied at a Point in Time – The delivery of equipment represents the single performance obligation under equipment sale contracts. Revenue for equipment sales is generally recognized upon delivery of equipment to customers.

Revenue Recognition – Systems Integration

Revenues related to long-term, fixed-price Systems Integration contracts for customized network solutions are recognized based on the percentage of completion for the contract. At any point, RigNet has numerous contracts in progress, all of which are at various stages of completion. Accounting for revenues and profits on long-term contracts requires estimates of total estimated contract costs and estimates of progress toward completion to determine the extent of revenue and profit recognition.

Performance Obligations Satisfied Over Time – The delivery of a Systems Integration solution represents the single performance obligation under Systems Integration contracts. Progress towards completion on fixed-price contracts is measured based on the ratio of costs incurred to total estimated contract costs (the cost-to-cost method). These estimates may be revised as additional information becomes available or as specific project circumstances change.

The Company reviews all material contracts on a monthly basis and revises the estimates as appropriate for developments such as providing services, purchasing third-party materials and equipment at costs differing from those previously estimated, and incurring or expecting to incur schedule issues. Changes in estimated final contract revenues and costs can either increase or decrease the final estimated contract profit or loss. Profits are recorded in the period in which a change in estimate is recognized, based on progress achieved through the period of change. Anticipated losses on contracts are recorded in full in the period in which they become evident. Revenue recognized in excess of amounts billed is classified as a current asset under Costs and estimated earnings in excess of billings on uncompleted contracts (CIEB).

 

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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 June 30, 2019 and December 31, 2018, the amount of CIEB related to Systems Integration projects was $8.7 million and $7.1 million, respectively. Under long-term contracts, amounts recorded in CIEB may not be realized or paid within a one-year period. As of June 30, 2019 and December 31, 2018, $1.4 million and none, respectively, of amounts billed to customers in excess of revenue recognized to date were classified as a current liability, under deferred revenue.

Variable Consideration – Systems Integration - The Company records revenue on contracts relating to certain probable claims and unapproved change orders by including in revenue an amount less than or equal to the amount of costs incurred to date relating to these probable claims and unapproved change orders, thus recognizing no profit until such time as claims are finalized or change orders are approved. The amount of unapproved change orders and claim revenues is included in the Company’s Consolidated Balance Sheets as part of CIEB. No material unapproved change orders or claims revenue were included in CIEB as of June 30, 2019 and December 31, 2018. As new facts become known, an adjustment to the estimated recovery is made and reflected in the current period.

Backlog—As of June 30, 2019, we have backlog for our percentage of completion projects of $37.1 million, which will be recognized over the remaining contract term for each contract. Percentage of completion contract terms are typically one to three years.

Leases

Effective with adoption of Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (the new lease standard) on January 1, 2019, we determine if an arrangement is a lease at inception. Operating leases right of use assets and liabilities are included in right to use lease asset, deferred revenue and other current liabilities, and right to use lease liability – long-term portion on our condensed consolidated balance sheets. Finance leases are included in property, plant and equipment; current maturities of long-term debt; and long-term debt on our condensed consolidated balance sheets.

Operating lease right to use assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Recently Issued Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), 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 required right-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 Update No. 2018-11 (ASU 2018-11). Accordingly, prior year amounts have not been adjusted and continue to be reflected in accordance with Company’s historical accounting. The Company’s credit agreement excludes the impact of ASU 2016-02.

In June 2018, the FASB issued Accounting Standards Update No. 2018-07 (ASU 2018-07), which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The ASU is effective for annual and interim reporting periods beginning after December 15, 2018. The adoption of this ASU did not have any material impact on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13 (ASU 2018-13), which eliminates disclosures, modifies existing disclosures and adds new Fair Value disclosure requirements to Topic 820 for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for annual and interim reporting periods beginning after December 15, 2019. The Company is currently in the process of evaluating the impact the adoption of this ASU will have on the Company’s condensed consolidated financial statements.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In August 2018, the FASB issued ASU No. 2018-15 (ASU 2018-15), 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 is currently in the process of evaluating the impact the adoption of this ASU will have on the Company’s condensed 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
             

 

 

 

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 consideration earn-out, estimated as of the date of acquisition. The initial estimate of the earn-out payable was preliminary and remains subject to change based on the achievement of certain post-closing performance targets under the acquisition agreement. The maximum earn-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

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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.

The earn-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 June 30, 2019, the fair value of the earn-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 six months ended June 30, 2019, RigNet recognized accreted interest expense on the Intelie earn-out of $0.1 million with corresponding increases to other liabilities. Portions of the earn-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 the earn-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 consideration earn-out estimated as of the date of acquisition.

    Actual and Pro Forma Impact of the 2018 Acquisitions

The 2018 acquisitions of Auto-Comm, SAFCON and Intelie contributed revenue and net income of $6.1 million and $0.8 million, respectively, for the three months ended June 30, 2018. The 2018 acquisitions of Auto-Comm, SAFCON and Intelie contributed revenue and net income of $6.2 million and $0.8 million, respectively, for the six months ended June 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.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

     Three Months
Ended June 30,
     Six Months Ended
June 30,
 
     2018      2018  
     (in thousands, except per share amounts)  

Revenue

   $ 60,547      $ 118,297  

Expenses

     64,784        127,593  
  

 

 

    

 

 

 

Net loss

   $ (4,237    $ (9,296
  

 

 

    

 

 

 

Net loss attributable to RigNet, Inc. common stockholders

   $ (4,267    $ (9,356
  

 

 

    

 

 

 

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

     

Basic

   $ (0.23    $ (0.51)  
  

 

 

    

 

 

 

Diluted

   $ (0.23    $ (0.51
  

 

 

    

 

 

 

The Company incurred acquisition-related costs of $0.1 million and $0.3 million in the three months ended June 30, 2019 and 2018, respectively, and $0.4 million and $1.1 million in the six months ended June 30, 2019 and 2018, respectively, reported in general and administrative costs.

Note 3 – Business and Credit Concentrations

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

Interest Rate Risk

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

Foreign Currency Risk

The Company has exposure to foreign currency risk, as a portion of the Company’s activities are conducted in currencies other than U.S. dollars. Currently, the Norwegian Kroner, 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.

Credit and Customer Concentration Risk

Credit risk, with respect to accounts receivable, is due to the limited number of customers concentrated in the oil and gas, maritime, pipeline, engineering and construction industries. The Company mitigates the risk of financial loss from defaults through defined collection terms in each contract or service agreement and periodic evaluations of the collectability of accounts receivable. The Company provides an allowance for doubtful accounts which is adjusted when the Company becomes aware of a specific customer’s inability to meet its financial obligations or as a result of changes in the overall aging of accounts receivable. Although no one customer comprised over 10% of our revenue for the six months ended June 30, 2019, our top 5 customers generated 24.2% of the Company’s revenue for the six months ended June 30, 2019.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 2019 or 2018. Liquidity risk is managed by continuously monitoring forecasted and actual cash flows and by matching the maturity profiles of financial assets and liabilities (see Note 6 – Long-Term Debt).

Note 4 – Goodwill and Intangibles

Goodwill

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

The Company acquired $1.4 million of goodwill in the Systems Integration segment from the Auto-Comm and SAFCON acquisitions completed on April 18, 2018 (see Note 2 – Business Combinations).

The Company acquired $10.7 million of goodwill in the Apps & IoT segment from the Intelie acquisition completed on March 23, 2018 (see Note 2 – Business Combinations).

The Company performs its annual impairment test as of July 31st of each year. In connection with the July 31, 2018 impairment test, the most recent annual test performed prior to June 30, 2019, the fair values of the Company’s reporting units were in excess of their carrying values and no impairment was noted.

MCS had $22.4 million of goodwill as of June 30, 2019, and fair value exceeded carrying value by 34.7% as of the July 31, 2018 annual impairment test. Apps & IoT had $22.9 million of goodwill as of June 30, 2019, and fair value exceeded carrying value by 48.1% as of the July 31, 2018 annual impairment test. Systems Integration had $1.4 million of goodwill as of June 30, 2019, and fair value exceeded carrying value by 126.5% as of the July 31, 2018 annual impairment test. 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 June 30, 2019.

As of June 30, 2019 and December 31, 2018, goodwill was $46.7 million and $46.6 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, covenants-not-to-compete, brand name, licenses, technology and backlog acquired as part of the Company’s acquisitions. Intangibles also include 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.

No impairment indicators have been identified in any reporting unit as of June 30, 2019.

As of June 30, 2019 and December 31, 2018, intangibles were $29.5 million and $33.7 million, respectively. During the three months ended June 30, 2019 and 2018, the Company recognized amortization expense of $2.4 million and $2.5 million, respectively. During the six months ended June 30, 2019 and 2018, the Company recognized amortization expense of $4.9 million and $4.6 million, respectively.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table sets forth expected amortization expense of intangibles for the remainder of 2019 and the following years (in thousands):

 

2019

     3,059  

2020

     6,160  

2021

     5,752  

2022

     5,472  

2023

     4,828  

Thereafter

     4,251  
  

 

 

 
   $ 29,522  
  

 

 

 

Note 5 – Restricted Cash

As of June 30, 2019 and December 31, 2018, the Company had restricted cash of $0.1 million and $1.5 million, in current and long-term assets, respectively. The restricted cash in long-term assets was primarily used to collateralize a performance bond in the MCS segment (see Note 6 – Long-Term Debt).

Note 6 – Long-Term Debt

As of June 30, 2019 and December 31, 2018, the following credit facilities and long-term debt arrangements with financial institutions were in place:

 

     June 30,      December 31,  
     2019      2018  
     (in thousands)  

Term Loan

   $ 7,500      $ 10,000  

Term-Out Loan

     28,500        —    

Revolving credit facility (RCF)

     75,150        67,150  

Unamortized deferred financing costs

     (647      (315

Finance lease

     554        192  
  

 

 

    

 

 

 
     111,057        77,027  

Less: Current maturities of long-term debt

     (10,619      (4,831

Current maturities of finance lease

     (164      (111
  

 

 

    

 

 

 
   $ 100,274      $ 72,085  
  

 

 

    

 

 

 

Credit Agreement

The Company and certain of its subsidiaries are party to a third amended and restated credit agreement, dated as of November 6, 2017, with four participating financial institutions (as amended from time to time, the Credit Agreement), which provides for a $15.0 million term loan (Term Loan), a $30.0 million term-out facility (Term-Out Loan) and an $85.0 million revolving credit facility (RCF). The RCF and Term-Out Loan mature on April 6, 2021. The Term Loan matures on December 31, 2020.

On February 13, 2019, the Company entered into the first amendment to Credit Agreement to refinance $30.0 million of outstanding draws under the existing $85.0 million RCF with the new $30.0 million Term-Out Loan.

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 are non-GAAP metrics defined in the Credit Agreement.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 monetary damages from the GX dispute. The RCF contains a sub-limit of up to $25.0 million for commercial and stand-by letters of credit and performance bonds issued by the parties under the Credit Agreement. The facilities under the credit agreement are secured by substantially all the assets of the Company.

Under the Credit Agreement, the Term Loan, Term-Out Loan and the RCF bear interest at a rate of LIBOR plus a margin ranging from 1.75% to 3.00% based on a consolidated leverage ratio defined in the Credit Agreement. Interest on the Term Loan, Term-Out Loan and RCF is payable monthly. Principal installments of $1.25 million and $1.5 million under the Term Loan and Term-Out Loan, respectively, are due quarterly. The weighted average interest rate for the three months ended June 30, 2019 and 2018 were 5.3% and 4.8%, respectively. The weighted average interest rate for the six months ended June 30, 2019 and 2018 were 5.3% and 4.5%, respectively, with an interest rate of 5.2% at June 30, 2019.

Term Loan

As of June 30, 2019, the Term Loan had an outstanding principal balance of $7.5 million, excluding the impact of unamortized deferred financing costs.

Term-Out Loan

As of June 30, 2019, the Term-Out Loan had an outstanding principal balance of $28.5 million.

RCF

As of June 30, 2019, $75.2 million in draws remain outstanding under the RCF. During the quarter ended June 30, 2019, the Company borrowed $40 million under the RCF in connection with the initial payment of the GX Dispute settlement.

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, of less than or equal to 2.75 to 1.00. The consolidated leverage ratio increases to 3.25 to 1.00 for four quarters starting in the 2nd quarter of 2019. The consolidated leverage ratio then decreases to 3.00 to 1.00 for three quarters, and then decreases to 2.75 to 1.00 for all remaining quarters. If any default occurs related to these covenants that is not cured or waived, the unpaid principal and any accrued interest can be declared immediately due and payable. The facilities under the Credit Agreement are secured by substantially all the assets of the Company.

In April 2019, the Company determined that in periods beginning at least as early as March 31, 2014, it had incurred and not appropriately included certain surety bonds or other similar instruments in its consolidated leverage ratio calculation as defined by the Credit Agreement. As a result, on May 6, 2019, the Company entered into a Consent and Waiver (Consent) to the Credit Agreement with the financial institutions party thereto under which the Company is permitted to exclude certain incurred surety bonds and other similar instruments from the calculation of Consolidated Funded Indebtedness (as defined in the credit agreement) for the period ended June 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 third amended and restated credit agreement (Credit Agreement), which 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, permits the Company to exclude from the calculation of Consolidated Funded Indebtedness up to $30.0 million of undrawn surety bonds and 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 are non-GAAP metrics defined in the Credit Agreement.

We believe we have accurately calculated and reported our required debt covenant calculations for the June 30, 2019 reporting period and are in compliance with the required covenant ratios.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Performance Bonds, Surety Bonds and Other Similar Instruments

As of June 30, 2019, there were $30.4 million of performance bonds, surety bonds and similar instruments outstanding of which $1.6 million is issued by the parties under the Credit Agreement. As of June 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 2019 and the following years (in thousands):

 

2019

     5,411  

2020

     10,814  

2021

     94,677  

2022

     116  

2023

     39  
  

 

 

 

Total debt, including current maturities

   $ 111,057  
  

 

 

 

Note 7 – Fair Value Disclosures

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

 

   

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

 

   

Restricted Cash — Reported amounts approximate fair value.

 

   

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

 

   

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

 

   

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

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

The earn-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 June 30, 2019, the fair value of the earn-out was $7.9 million with $4.4 million in deferred revenue and other current liabilities and $3.5 million in other long-term liabilities . During the three and six months ended June 30, 2019, RigNet recognized accreted interest expense on the Intelie earn-out of $0.1 million, and $0.1 million, respectively, with corresponding increases to other liabilities. During the three and six months ended June 30, 2018, RigNet recognized accreted interest expense on the Intelie earn-out of $0.1 million, and $0.1 million, respectively. During the three and six months ended June 30, 2019, RigNet recognized an increase in the fair value of the earn-out of $1.3 million and $1.3 million, respectively. During the three and six months ended June 30, 2018, RigNet recognized an increase in the fair value of the earn-out of $2.8 million and $2.8 million, respectively. The earn-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 the earn-out earned as of the first anniversary of the closing of the acquisition.

The contingent consideration for Cyphre, a cybersecurity company acquired in May 2017, is measured at fair value in each reporting period, based on level 3 inputs, with any change to fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss. As of June 30, 2019, the fair value of the contingent consideration was $3.5 million, of which $0.3 million is in other current liabilities and $3.2 million is in other long-term liabilities. During the three and six months ended June 30, 2019, RigNet recognized

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 six months ended June 30, 2018, RigNet recognized accreted interest expense on the Cyphre contingent consideration of $0.1 million, and $0.1 million, respectively.

The earn-out for Orgtec S.A.P.I. de C.V., d.b.a. TECNOR (TECNOR), acquired in February 2016, was measured at fair value, based on level 3 inputs, with any change to fair value recorded in the Condensed Consolidated Statements of Comprehensive Loss in each reporting period. The fair value of the earn-out of $8.0 million was paid in July 2018. During the three and six months ended June 30, 2018, RigNet recognized accreted interest expense on the TECNOR earn-out liability of $0.1 million with corresponding increases to other liabilities.

Note 8 – Income Taxes

The Company’s effective income tax rate was (56.2%) and (36.9%) for the three and six months ended June 30, 2019, respectively. The Company’s effective income tax rate was 17.7% and 3.2% for the three and six months ended June 30, 2018, respectively. The Company’s effective tax rate is affected by factors including changes in valuation allowances, fluctuations in income across jurisdictions with varying tax rates, and changes in income tax reserves, including related penalties and interest.

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

The Company received an IRS notice informing us of an audit of the Company’s 2016 income tax return. It is unclear if the audit and the appeals process, if necessary, will be completed within the next twelve months. The Company is in the early stages of the audit and is unable to quantify any potential settlement or outcome of the audit at this time.

The Company received a notice informing us of an audit of the Company’s 2016-2017 income tax returns in Singapore. It is unclear if the audit and the appeals process, if necessary, will be completed within the next twelve months. The Company is in the early stages of the audit and is unable to quantify any potential settlement or outcome of the audit at this time.

The Company believes that it is reasonably possible that a decrease of up to $2.6 million in unrecognized tax benefits, including related interest and penalties, may be necessary within the coming year due to lapse in statute of limitations.

Note 9 – Stock-Based Compensation

During the six months ended June 30, 2019, the Company granted a total of 592,663 stock-based awards to certain officers and employees of the Company under the 2010 Omnibus Incentive Plan (2010 Plan). Of these, the Company granted the following stock-based awards associated with the long term incentive plan (LTIP): (i) 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) 22,189 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 2018 short term incentive plan to certain officers and employees that vested immediately.

During the six months ended June 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.

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 six months ended June 30, 2019, were as follows:

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

     Six Months
Ended June 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 six months ended June 30, 2019 was $7.94 per option.

During the six months ended June 30, 2019, 22,712 RSUs and 4,377 stock options were forfeited.

Stock-based compensation expense related to the Company’s stock-based compensation plans for the three and six months ended June 30, 2019 was $1.2 million and $5.6 million, respectively. Stock-based compensation expense related to the Company’s stock-based compensation plans for the three and six months ended June 30, 2018 was $0.8 million and $3.3 million, respectively. As of June 30, 2019, there was $5.5 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 1.9 years.

Note 10 – Earnings (loss) per Share

Basic earnings (loss) per share (EPS) are computed by dividing net loss attributable to RigNet common stockholders by the weighted average number of basic shares outstanding 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, 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 six months ended June 30, 2019, there were approximately 348,197 and 489,747 potentially issuable shares excluded from the Company’s calculation of diluted EPS that were excluded because the Company incurred a loss in the period and to include them would have been anti-dilutive.

For the three and six months ended June 30, 2018, there were approximately 580,410 and 636,460 potentially issuable shares excluded from the Company’s calculation of diluted EPS that were excluded because the Company incurred a loss in the period and to include them would have been anti-dilutive.

Note 11 – Commitments and Contingencies

Global Xpress (GX) Dispute

Inmarsat plc (Inmarsat), a satellite telecommunications company, filed arbitration with the International Centre for Dispute Resolution tribunal (the panel) 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.

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 $5.8 million as of June 30, 2019.

The Company incurred GX dispute Phase II costs of $2.2 million and $4.4 million for the three and six months ended June 30, 2019, respectively. The Company incurred legal expenses of $0.8 million and $1.4 million in connection with the GX dispute for the three and six months ended June 30, 2018, respectively.

 

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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 ASU 2018-11. Accordingly, prior year amounts have not been adjusted and continue to be reflected in accordance with Company’s historical accounting.

The Company’s leasing activities primarily consist of leases of real-estate including office space under lease agreements expiring on various dates through 2025. For the three months and six months ended June 30, 2019, the Company recognized expense under operating leases, which approximates cash paid and includes short-term leases, of $0.7 million and $1.4 million, respectively. For the three months and six months ended June 30, 2018, the Company recognized expense under operating leases, which approximates cash paid and includes short-term leases, of $0.7 million and $1.4 million, respectively.

As of June 30, 2019, future undiscounted minimum lease obligation maturities for the remainder of 2019 and future years were as follows (in thousands):

 

2019

   $ 939  

2020

     1,387  

2021

     896  

2022

     817  

2023

     802  

Thereafter

     1,269  
  

 

 

 

Total lease payments

   $ 6,110  
  

 

 

 

Less present value discount

     (503
  

 

 

 

Amounts recognized in Balance Sheet

   $ 5,607  
  

 

 

 

Amounts recognized in Balance Sheet

  

Deferred revenue and other current liabilities

     765  

Right-of-use lease liability – long-term portion

     4,842  
  

 

 

 

Total right to use lease liability

   $ 5,607  
  

 

 

 

Operating lease right-of-use assets for leases were $3.9 million as of June 30, 2019.

The right-of-use assets and liabilities for leases were discounted at a weighted-average discount rate of 5.3%. The weighted-average remaining lease term as of June 30, 2019 was 4.8 years.

As of December 31, 2018, future undiscounted minimum lease obligation maturities for 2019 and future years were as follows (in thousands):

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 June 30, 2019, the Company had the following commercial commitments related to satellite and network services for the remainder of 2019 and the future years thereafter (in thousands):

 

2019

     7,540  

2020

     7,614  

2021

     1,088  

2022

     169  
  

 

 

 
   $ 16,411  
  

 

 

 

Note 12 – Segment Information

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

 

   

Applications and 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 cybersecurity, applications for safety and workforce productivity such as weather monitoring primarily in the North Sea (MetOcean), a real-time machine learning and AI data platform (Intelie Pipes and Intelie LIVE) 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.

Corporate and Eliminations primarily represents unallocated executive and support activities, interest expense, income taxes and eliminations.

The Company’s business segment information as of and for the three months ended June 30, 2019 and 2018, is presented below.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

     Three Months Ended June 30, 2019  
     Managed
Communication
Services
     Applications and
Internet-of-Things
     Systems
Integration
     Corporate
and
Eliminations
    Consolidated
Total
 
     (in thousands)  

Revenue

   $ 41,205      $ 8,005      $ 11,122      $ —       $ 60,332  

Cost of revenue (excluding depreciation and amortization)

     25,019        4,387        7,113        —         36,519  

Depreciation and amortization

     5,059        1,226        639        755       7,679  

Change in fair value of earn-out/contingent consideration

     —          —          —          1,284       1,284  

Selling, general and administrative

     3,346        835        570        12,659       17,410  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss)

   $ 7,781      $ 1,557      $ 2,800      $ (14,698   $ (2,560
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Capital expenditures

     3,689        403        —          481       4,573  

 

     Three Months Ended June 30, 2018  
     Managed
Communication
Services
     Applications and
Internet-of-Things
     Systems
Integration
     Corporate
and
Eliminations
    Consolidated
Total
 
     (in thousands)  

Revenue

   $ 41,712      $ 6,576      $ 11,719      $ —       $ 60,007  

Cost of revenue (excluding depreciation and amortization)

     25,307        3,165        7,774        —         36,246  

Depreciation and amortization

     5,645        836        665        1,210       8,356  

Change in fair value of earn-out/contingent consideration

     —          —          —          2,778       2,778  

Selling, general and administrative

     5,023        430        557        10,947       16,957  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss)

   $ 5,737      $ 2,145      $ 2,723      $ (14,935   $ (4,330
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Capital expenditures

     6,462        134        —          —         6,596  

 

     Six Months Ended June 30, 2019  
     Managed
Communications
Services
     Applications and
Internet-of-Things
     Systems
Integration
     Corporate
and
Eliminations
    Consolidated
Total
 
     (in thousands)  

Revenue

   $ 83,538      $ 16,020      $ 18,284      $ —       $ 117,842  

Cost of revenue (excluding depreciation and amortization)

     52,004        8,884        12,087        —         72,975  

Depreciation and amortization

     11,323        2,457        1,301        1,510       16,591  

Change in fair value of earn-out/contingent consideration

     —          —          —          1,284       1,284  

Selling, general and administrative

     7,143        1,400        1,694        27,436       37,673  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss)

   $ 13,068      $ 3,279      $ 3,202      $ (30,230   $ (10,681
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

     159,874        45,281        24,747        14,471       244,373  

Capital expenditures

     10,325        836        —          501       11,662  

 

     Six Months Ended June 30, 2018  
     Managed
Communications
Services
     Applications and
Internet-of-Things
     Systems
Integration
     Corporate
and
Eliminations
    Consolidated
Total
 
     (in thousands)  

Revenue

   $ 83,762      $ 11,912      $ 18,166      $ —       $ 113,840  

Cost of revenue (excluding depreciation and amortization)

     51,052        6,250        12,625        —         69,927  

Depreciation and amortization

     11,371        1,683        1,317        1,972       16,343  

Change in fair value of earn-out/contingent consideration

     —          —          —          2,800       2,800  

Selling, general and administrative

     9,238        784        880        22,668       33,570  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss)

   $ 12,101      $ 3,195      $ 3,344      $ (27,440   $ (8,800
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

     146,592        48,922        25,880        31,459       252,853  

Capital expenditures

     12,296        268        —          645       13,209  

 

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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 six months ended June 30, 2019 and 2018. Revenue is based on the location where services are provided or goods are sold. Due to the mobile nature of RigNet’s customer base and the services provided, the Company works closely with its customers to ensure rig or vessel moves are monitored to ensure location of service information is properly reflected.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019      2018  
     (in thousands)  

Domestic

   $ 28,881      $ 16,006      $ 53,508      $ 33,634  

International

     31,451        44,001        64,334        80,206  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 60,332      $ 60,007      $ 117,842      $ 113,840  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30, 2019 and December 31, 2018.

 

     June 30,      December 31,  
     2019      2018  
     (in thousands)  

Domestic

   $ 77,420      $ 73,615  

International

     65,918        70,334  
  

 

 

    

 

 

 

Total

   $ 143,338      $ 143,949  
  

 

 

    

 

 

 

Note 13 – Related Party

The Company has a reseller arrangement with Darktrace, which is an artificial intelligence company in cybersecurity that is partially owned by Kohlberg Kravis Roberts & Co. L.P. (KKR). KKR is a significant stockholder of the Company. Under the arrangement, the Company will sell Darktrace’s cybersecurity audit services with the Company’s cybersecurity offerings. In the three and six months ended June 30, 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 quote from RigNet in the ordinary course of business. A customer specified Vissim AS by name as a provider for an SI project. Vissim AS is 24% owned by AVANT Venture Capital AS. AVANT Venture Capital is owned by and has as its chairman of its board one of our board members. In the three and six months ended June 30, 2019, the Company purchased $0.6 million from Vissim AS in the ordinary course of business.

Note 14 – Restructuring Costs – Cost Reduction Plans

During the six months ended June 30, 2019, the Company incurred a net pre-tax restructuring expense of $0.6 million reported as general and administrative expense in the Corporate segment associated with the reduction of 25 employees.

 

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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 June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 included elsewhere herein, and with our Annual Report on Form 10-K for the year ended December 31, 2018. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” in Item 1A of our Annual Report and elsewhere in this quarterly report. See “Forward-Looking Statements” below.

Forward-Looking Statements

This Quarterly Report on Form 10-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 oil and gas industry;

 

   

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

 

   

demand for our services and solutions;

 

   

the advantages of our services compared to others;

 

   

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

 

   

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

 

   

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

 

   

our cash and liquidity needs and expectations regarding cash flow from operations, capital expenditures and 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 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.

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 Form 10-Q, are forward-looking statements.

The forward-looking statements contained in this Quarterly Report on Form 10-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 Form 10-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

 

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implied in forward-looking statements due to factors listed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2018 and elsewhere in this Quarterly Report on Form 10-Q. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual future results, performance or achievements may vary materially from any projected future results, performance or achievements expressed or implied by these forward-looking statements. The forward-looking statements speak only as of the date made, and other than as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Our Operations

We are the 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-time AI-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:

 

   

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.

 

   

Applications and 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 cybersecurity, applications for safety and workforce productivity such as weather monitoring primarily in the North Sea (MetOcean), a real-time machine learning and AI data platform (Intelie Pipes and Intelie LIVE) 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.

Customers in our MCS and Apps & IoT segments are primarily served under fixed-price contracts, either on a monthly or day rate basis or for equipment sales. Our contracts are generally in the form of Master Service Agreements, or MSAs, with specific services being provided under individual service orders. Offshore contracts generally have a term of up to three years with renewal options. Land-based contracts are generally shorter term or terminable on short notice without a penalty. Service orders are executed under the MSA for individual remote sites or groups of sites, and generally permit early termination on short notice without penalty in the event of force majeure, breach of the MSA or cold stacking of a drilling rig (when a rig is taken out of service and is expected to be idle for a protracted period of time). Systems Integration customers are served primarily under fixed-price, long-term contracts.

Cost of revenue consists primarily of satellite charges, voice and data termination costs, network operations expenses, internet connectivity fees, equipment purchases for Systems Integration projects and direct service labor. Satellite charges consist of the costs associated with obtaining satellite bandwidth (the measure of capacity) used in the transmission of service to and from 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 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 party service providers.

 

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Recent Developments

On June 24, 2019, we announced that we reached a settlement with Inmarsat that concludes the GX dispute. Pursuant to the settlement we paid $45.0 million in June 2019 and paid $5.0 million in July 2019 and will pay $0.8 million in the third quarter of 2020.We have an accrued liability of $5.8 million as of June 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 2014 take-or-pay agreement to purchase up to $65.0 million, under certain conditions, of GX capacity from Inmarsat over several years. We incurred GX dispute Phase II costs of $2.2 million and $4.4 million for the three and six months ended June 30, 2019, respectively. We incurred legal expenses of $0.8 million and $1.4 million in connection with the GX dispute for the three and six months ended June 30, 2018, respectively.

On June 7, 2019, we entered into a second amendment to the third amended and restated credit agreement (Credit Agreement), which (i) permits us to exclude up to $5.0 million in legal and related costs for the GX Dispute from the calculation of Consolidated EBITDA, (ii) permits us 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 we must prepay on the Term Out Loan to $5.0 million. Consolidated EBITDA and Consolidated Funded Indebtedness are non-GAAP metrics defined in the Credit Agreement. On February 13, 2019, we entered into the first amendment to the Credit Agreement with four participating financial institutions. The Credit Agreement provides for a $15.0 million term loan facility (Term Loan), a $30.0 million term-out facility (Term-Out Loan) and an $85.0 million revolving credit facility (RCF). The RCF and Term-Out Loan mature on April 6, 2021. The Term Loan matures on December 31, 2020.

In the U.S. Gulf of Mexico, we have substantially completed the buildout of our 4G LTE and 5G-enabled network, where we are partnered with T-Mobile, and we are already carrying live traffic. Additionally, we purchased an office in Lafayette, Louisiana that will consolidate three separate legacy facilities. We expect to move into the new facility in the third quarter of 2019.

As of June 30, 2019, we have backlog for our percentage of completion projects of $37.1 million.

Known Trends and Uncertainties

Operating Matters

Uncertainties in the oil and gas industry may continue to impact our profitability. The fundamentals of the oil and gas industry we serve remain challenged into 2019, particularly offshore. Although oil prices and U.S. drilling rig counts increased in 2017 and the first three quarters of 2018 from their 2016 lows, the oil and gas environment continues to be challenged with operators focusing on projects with shorter pay-back periods that generally require less capital investment and lower costs from service providers and drilling contractors. The average price of Brent crude, a key indicator of activity for the oil and gas industry, was $66.07 per barrel for the six months ending June 30, 2019 compared to an average of $70.67 for the six months ending June 30, 2018. Brent crude spot prices increased in the first three quarters of 2018 and peaked at $86.07 on October 4, 2018. From the recent October 4, 2018 high, Brent crude oil prices decreased over 40.0% in the fourth quarter of 2018. In the first half of 2019, Brent crude oil prices recovered to the $70 per barrel range. Certain analysts are not presently predicting meaningful increases in offshore drilling rig utilization for the remainder of 2019, but are predicting more meaningful improvements in utilization and day rates in 2020 or 2021. As a result, we believe drilling contractors are cautiously optimistic about a gradual demand recovery. The offshore drilling contracting environment remains challenged, with major offshore drilling contractors having experienced significant pressure on day rates, which in turn has had a negative impact on the rates we are able to charge customers. Generally, a prolonged lower oil price environment decreases exploration and development drilling investment, utilization of drilling rigs and the activity of the global oil and gas industry that we serve.

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

Sales Tax Audit

We are undergoing a routine sales tax audit 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.

 

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Results of Operations

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019      2018  
     (in thousands)  

Revenue

   $ 60,332      $ 60,007      $ 117,842      $ 113,840  
  

 

 

    

 

 

    

 

 

    

 

 

 

Expenses:

           

Cost of revenue (excluding depreciation and amortization)

     36,519        36,246        72,975        69,927  

Depreciation and amortization

     7,679        8,356        16,591        16,343  

Change in fair value of earn-out/contingent consideration

     1,284        2,778        1,284        2,800  

Selling and marketing

     2,952        4,189        6,745        7,138  

General and administrative

     14,458        12,768        30,928        26,432  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     62,892        64,337        128,523        122,640  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating loss

     (2,560      (4,330      (10,681      (8,800

Other expense, net

     (1,362      (895      (2,528      (1,348
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss before income taxes

     (3,922      (5,225      (13,209      (10,148

Income tax benefit (expense)

     (2,204      926        (4,870      323  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss

     (6,126      (4,299      (18,079      (9,825

Less: Net income attributable to non-controlling interest

     30        30        60        60  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss attributable to RigNet, Inc. stockholders

   $ (6,156    $ (4,329    $ (18,139    $ (9,885
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Non-GAAP Data:

           

Adjusted EBITDA

   $ 9,775      $ 8,098      $ 18,161      $ 15,517  

 

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The following represents selected financial operating results for our segments:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019      2018  
     (in thousands)  

Managed Communications Services:

           

Revenue

   $ 41,205      $ 41,712      $ 83,538      $ 83,762  

Cost of revenue (excluding depreciation and amortization)

     25,019        25,307        52,004        51,052  

Depreciation and amortization

     5,059        5,645        11,323        11,371  

Selling, general and administrative

     3,346        5,023        7,143        9,238  
  

 

 

    

 

 

    

 

 

    

 

 

 

Managed Communication Services operating income

   $ 7,781      $ 5,737      $ 13,068      $ 12,101  
  

 

 

    

 

 

    

 

 

    

 

 

 

Applications and Internet-of-Things:

           

Revenue

   $ 8,005      $ 6,576      $ 16,020      $ 11,912  

Cost of revenue (excluding depreciation and amortization)

     4,387        3,165        8,884        6,250  

Depreciation and amortization

     1,226        836        2,457        1,683  

Selling, general and administrative

     835        430        1,400        784  
  

 

 

    

 

 

    

 

 

    

 

 

 

Applications & Internet-of-Things operating income

   $ 1,557      $ 2,145      $ 3,279      $ 3,195  
  

 

 

    

 

 

    

 

 

    

 

 

 

Systems Integration:

           

Revenue

   $ 11,122      $ 11,719      $ 18,284      $ 18,166  

Cost of revenue (excluding depreciation and amortization)

     7,113        7,774        12,087        12,625  

Depreciation and amortization

     639        665        1,301        1,317  

Selling, general and administrative

     570        557        1,694        880  
  

 

 

    

 

 

    

 

 

    

 

 

 

Systems Integration and Automation operating income

   $ 2,800      $ 2,723      $ 3,202      $ 3,344  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Three Months Ended June 30, 2019 and 2018

Revenue. Revenue increased by $0.3 million, or 0.5%, to $60.3 million for the three months ended June 30, 2019 from $60.0 million for the three months ended June 30, 2018. Revenue for the Apps & IoT segment increased $1.4 million, or 21.7%, due to our focus on growth of the application layer and IoT space, which was partially offset by a decrease in Systems Integration revenue of $0.6 million and a decrease of $0.5 million in the MCS segment.

Cost of Revenue (excluding depreciation and amortization). Cost of revenue (excluding depreciation and amortization) increased by $0.3 million, or 0.8%, to $36.5 million for the three months ended June 30, 2019 from $36.2 million for the three months ended June 30, 2018. Cost of revenue (excluding depreciation and amortization) increased in the Apps & IoT segment by $1.2 million as we continue our strategy to grow our application layer and IoT space including Intelie. Cost of revenue (excluding depreciation and amortization) decreased in the MCS segment by $0.3 million. Cost of revenue (excluding depreciation and amortization) decreased in the Systems Integration segment by $0.7 million.

Depreciation and Amortization. Depreciation and amortization expense decreased by $0.7 million to $7.7 million for the three months ended June 30, 2019 from $8.4 million for the three months ended June 30, 2018. The decrease is primarily attributable to the intangibles from the July 2012 acquisition of Nessco being fully depreciated.

Selling and Marketing. Selling and marketing expense decreased $1.2 million to $3.0 million for the three months ended June 30, 2019 from $4.2 million for the three months ended June 30, 2018. This decrease was due to cost reductions.

 

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General and Administrative. General and administrative expenses increased by $1.7 million to $14.5 million for the three months ended June 30, 2019 from $12.8 million for the three months ended June 30, 2018. General and administrative costs increased primarily due to GX dispute legal costs and stock-based compensation.

Income Tax Expense. Our effective income tax rates were (56.2%) and 17.7% for the three months ended June 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.

Six Months Ended June 30, 2019 and 2018

Revenue. Revenue increased by $4.0 million, or 3.5%, to $117.8 million for the six months ended June 30, 2019 from $113.8 million for the six months ended June 30, 2018, driven by growth in the Apps & IoT segment including the 2018 acquisitions of Intelie along with the 2018 acquisitions of Auto-Comm and SAFCON, which is primarily in the Systems Integration Segment. Revenue for the Apps & IoT segment increased $4.1 million, or 34.5%, due to our focus on growth of the application layer and IoT space, including $1.8 million from the acquisition of Intelie and $0.7 million from the acquisition of Auto-Comm and SAFCON. Revenue for the Systems Integration segment increased $0.1 million, or 0.6%, which included $2.1 million from the acquisition of Auto-Comm and SAFCON.

Cost of Revenue (excluding depreciation and amortization). Cost of revenue (excluding depreciation and amortization) increased by $3.0 million, or 4.4%, to $73.0 million for the six months ended June 30, 2019 from $69.9 million for the six months ended June 30, 2018. Cost of revenue (excluding depreciation and amortization) increased in the Apps & IoT segment by $2.6 million as we continue our strategy to grow our application layer and IoT space including Intelie. Cost of revenue (excluding depreciation and amortization) increased in the MCS segment by $1.0 million as a result of our increased site count during the period. Cost of revenue (excluding depreciation and amortization) decreased in the Systems Integration segment by $0.5 million.

Depreciation and Amortization. Depreciation and amortization expense increased by $0.2 million to $16.6 million for the six months ended June 30, 2019 from $16.3 million for the six months ended June 30, 2018. The increase is primarily attributable to additions to property, plant and equipment and intangibles from acquisitions and capital expenditures.

Selling and Marketing. Selling and marketing expense decreased $0.4 million to $6.7 million for the six months ended June 30, 2019 from $7.1 million for the six months ended June 30, 2018. This decrease was due to cost reductions.

General and Administrative. General and administrative expenses increased by $4.5 million to $30.9 million for the six months ended June 30, 2019 from $26.4 million for the six months ended June 30, 2018. General and administrative costs increased primarily due to increased stock-based compensation, increased GX dispute legal costs, restructuring costs and expenses attributable to a full period of operations of the 2018 acquisitions of Intelie, Auto-Comm and SAFCON.

Income Tax Expense. Our effective income tax rates were (36.9%) and 3.2% for the six months ended June 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 June 30, 2019, we had working capital, including cash and cash equivalents, of $23.8 million.

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

During the next twelve months, we expect our principal sources of liquidity to be cash flows from operating activities, cash and cash equivalents on hand and availability under our Credit Agreement.

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

 

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Table of Contents
     Six Months Ended
June 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

     (45,000      —    

Remaining net cash provided by operating activities

     13,743        1,329  
  

 

 

    

 

 

 

Net cash provided by (used in) operating activities

     (31,257      1,329  
  

 

 

    

 

 

 

Net cash used in investing activities

     (11,756      (17,613

Net cash provided by (used in) financing activities

     31,894        (1,211

Changes in foreign currency translation

     265        1,308  
  

 

 

    

 

 

 

Cash and cash equivalents including restricted cash, June 30,

   $ 12,442      $ 19,954  
  

 

 

    

 

 

 

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.

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 these risks, but evaluate financial risk on a regular basis and may utilize financial instruments in the future if deemed necessary. During the six months ended June 30, 2019 and 2018, 91.4% and 91.5% of our revenue was denominated in U.S. dollars, respectively.

Operating Activities    

Net cash used in operating activities was $31.3 million for the six months ended June 30, 2019 compared to net cash provided by operating activities of $1.3 million for the six months ended June 30, 2018. The decrease in cash from operating activities of $32.6 million was primarily due to the payment of $45.0 million towards the GX dispute settlement, the timing of paying our accounts payable partially offset by the timing of collecting 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.

Investing Activities

Net cash used in investing activities was $11.8 million and $17.6 million for the six months ended June 30, 2019 and 2018, respectively.

Net cash used in investing activities during the six months ended June 30, 2019 and 2018 included $11.9 million and $12.7 million of capital expenditures, respectively. Net Cash used in investing activities during the six months ended June 30, 2018 included $5.1 million for acquisitions.

Financing Activities

Net cash provided by financing activities was $31.9 million for the six months ended June 30, 2019. Cash provided by financing activities for the six months ended June 30, 2019 included $40.0 million in proceeds from borrowings, partially offset by $6.1 million in principal payments on our long-term debt, $1.4 million withheld to cover employee taxes on stock-based compensation and $0.5 million in financing fees related to the consents, waiver and amendment to the Credit Agreement.

Net cash used in financing activities was $1.2 million for the six months ended June 30, 2018. Cash used in financing activities for the six months ended June 30, 2018 included $2.6 million in principal payments on our long-term debt and $1.1 million withheld to cover employee taxes on stock-based compensation.

 

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Credit Agreement

The Credit Agreement provides for a $15.0 million Term Loan, a $30.0 million Term-Out Loan and an $85.0 million RCF, which includes a $25.0 million sublimit for the issuance of commercial and standby letters of credit and performance bonds issued by the parties under the Credit Agreement.

On June 7, 2019, we entered into a second amendment to the third amended and restated credit agreement (Credit Agreement), which permits the us to exclude up to $5.0 million in legal and related costs for the GX Dispute from the calculation of Consolidated EBITDA, permits us to exclude from the calculation of Consolidated Funded Indebtedness up to $30 million of undrawn surety bonds and 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 are non-GAAP metrics defined in the Credit Agreement.

Under the Credit Agreement, the Term Loan, the Term-Out Loan and the RCF bear interest at a rate of LIBOR plus a margin ranging from 1.75% to 3.00%, based on a consolidated leverage ratio defined in the Credit Agreement. Interest is payable monthly and principal installments of $1.25 million and $1.5 million under the Term Loan and Term-Out Loan, respectively, are due quarterly.

The weighted average interest rate for the three months ended June 30, 2019 and 2018 were 5.3% and 4.8%, respectively. The weighted average interest rate for the six months ended June 30, 2019 and 2018 were 5.3% and 4.5%, respectively, with an interest rate of 5.2% at June 30, 2019. As of June 30, 2019, the outstanding principal amounts were $7.5 million for the Term Loan, $28.5 million for the Term-Out Loan and $75.2 million for the RCF.

The Credit Agreement contains certain covenants and restrictions, including restricting the payment of cash dividends under default, and maintaining certain financial covenants such as a consolidated fixed charge coverage ratio of not less than 1.25 to 1.00. Additionally, the Credit Agreement requires a consolidated leverage ratio, as defined in the Credit Agreement, of less than or equal to 2.75 to 1.00. The consolidated leverage ratio increases to 3.25 to 1.00 for four quarters starting in the 2nd quarter of 2019. The consolidated leverage ratio then decreases to 3.00 to 1.00 for three quarters, and then decreases to 2.75 to 1.00 for all remaining quarters. If any default occurs related to these covenants that was not cured or waived, the unpaid principal 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) to the credit agreement with the financial institutions party thereto under which we are permitted to exclude certain incurred surety bonds and other similar instruments from the calculation of Consolidated Funded Indebtedness, as defined in the credit agreement, for the period ended June 30, 2019. In addition, the Consent waived all specified violations for all prior periods. The Second Amendment amended the Credit Agreement to permit the Company to exclude from the calculation of Consolidated Funded Indebtedness up to $30.0 million of undrawn surety bonds, performance bonds and similar instruments.

We believe we have accurately calculated and reported our required debt covenant calculations for the June 30, 2019 reporting period and are in compliance with the required covenant ratios. We expect to remain in compliance with our required debt covenant calculations for the foreseeable future, however, in the event that there are changes in economic conditions we can limit or control our spending through reductions in discretionary capital or other types of controllable expenditures, monetization of assets, or any combination of these alternatives if needed to remain in compliance with such covenants.

Off-Balance Sheet Arrangements

We do not engage in any off-balance sheet arrangements.

Non-GAAP 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.

 

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We define Adjusted EBITDA as net loss plus interest expense; income tax expense (benefit); depreciation and amortization; impairment of goodwill, intangibles, property, plant and equipment; (gain) loss on sales of property, plant and equipment, net of retirements; change in fair value of earn-outs and contingent consideration; stock-based compensation; acquisition costs; executive departure costs; restructuring charges; the GX dispute; GX Dispute Phase II costs and non-recurring items.

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

 

   

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

 

   

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

 

   

Adjusted EBITDA is an integral component of Consolidated EBITDA, as defined and used in the financial covenant ratios in the Credit Agreement.

Our management uses Adjusted EBITDA:

 

   

To indicate profit contribution;

 

   

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

 

   

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

 

   

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

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

 

   

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

 

   

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

 

   

Adjusted EBITDA does not reflect interest expense;

 

   

Adjusted EBITDA does not reflect cash requirements for income taxes;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

Adjusted EBITDA does not reflect acquisition costs;

 

   

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

 

   

Adjusted EBITDA does not reflect executive departure costs;

 

   

Adjusted EBITDA does not reflect restructuring charges;

 

   

Adjusted EBITDA does not reflect the GX dispute;

 

   

Adjusted EBITDA does not reflect the GX dispute Phase II costs;

 

   

Although depreciation and amortization are non-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.

 

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The following table presents a reconciliation of our net loss to Adjusted EBITDA.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2018      2019      2018  
     (in thousands)                

Net loss

   $ (6,126    $ (4,299    $ (18,079    $ (9,825

Interest expense

     1,269        1,007        2,507        1,966  

Depreciation and amortization

     7,679        8,356        16,591        16,343  

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

     18        21        11        (32

Stock-based compensation

     1,170        837        5,628        3,282  

Restructuring

     —          —          573        —    

Change in fair value of earn-out/contingent consideration

     1,284        2,778        1,284        2,800  

Executive departure costs

     —          4        —          161  

Acquisition costs

     60        320        410        1,145  

GX dispute Phase II costs

     2,217        —          4,366        —    

Income tax expense (benefit)

     2,204        (926      4,870        (323
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA (non-GAAP measure)

   $ 9,775      $ 8,098      $ 18,161      $ 15,517  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $1.7 million to $9.8 million for the three months ended June 30, 2019, from $8.1 million for the three months ended June 30, 2018. Adjusted EBITDA increased by $2.6 million to $18.2 million for the six months ended June 30, 2019, from $15.5 million for the six months ended June 30, 2018.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Our objective in managing our exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in earnings and cash flows associated with foreign currency exchange rates. We presently do not hedge these risks, but evaluate financial risk on a regular basis and may utilize financial instruments in the future if deemed necessary. During the six months ended June 30, 2019 and 2018, 8.6% and 8.5%, respectively, of our revenues were earned in non-U.S. currencies. At June 30, 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 net loss attributable to us and our total stockholders’ equity based on our outstanding long-term debt at June 30, 2019 and December 31, 2018, assuming those liabilities were outstanding for the previous twelve months:

 

     June 30,      December 31,  
     2019      2018  
     (in thousands)  

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

  

1% Decrease/increase in rate

   $ 1,111      $ 770  

2% Decrease/increase in rate

   $ 2,221      $ 1,541  

3% Decrease/increase in rate

   $ 3,332      $ 2,311  

 

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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 June 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of June 30, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

Except for the remediation of the previously reported material weakness noted below, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the quarter ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management included in its assessment of internal control over financial reporting all consolidated entities.

Remediation of the Material Weakness

As disclosed in our Quarterly Report on Form 10-Q for the period ended March 31, 2019 and our amended Annual Report on Form 10-K for the year ended December 31, 2018, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2018 or March 31, 2019 due to a material weakness in internal control over financial reporting. Specifically, we did not properly design and operate adequate internal control over monitoring compliance with financial covenants stipulated by the Credit Agreement related to the reporting of surety bonds and other similar instruments.

During the quarter ended June 30, 2019, we undertook remediation measures to design new controls to monitor activities with respect to financial covenants stipulated by the Credit Agreement, and enhanced our internal controls related to our debt covenant calculation by:

 

   

requiring elevated approvals for any instrument which could impact our calculation of Consolidated Funded Indebtedness,

 

   

including additional certifications related to such instruments on our regional financial checklists and SOX sub-certifications, and

 

   

requiring applicable operations personnel to participate in our disclosure committee meetings.

We also believe we have accurately calculated and reported our required debt covenant calculations for the June 30, 2019 reporting period.

Accordingly, our management concluded the previously reported material weakness was remediated as of June 30, 2019.

 

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PART II – OTHER 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 $5.8 million as of June 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 2014 take-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 “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018.

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 Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

 

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INDEX TO EXHIBITS
    2.1    Share Purchase Agreement between RigNet, Inc. and the shareholders of Orgtec S.A.P.I. de C.V., d.b.a. TECNOR dated November  3, 2015 (filed as Exhibit 2.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 9, 2016, and incorporated herein by reference)
    2.2    Share Purchase and Sale Agreement 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 Form 8-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 Form 10-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 Form 10-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 Form 10-K filed with the SEC on March 6, 2018, and incorporated herein by reference)
  10.1    Consent and Waiver to Third Amended and Restated Credit Agreement dated as of May 6, 2019, among RigNet, Inc., as Borrower, certain subsidiaries of RigNet, Inc. party thereto as Guarantors, Bank of America, N.A., as Admirative Agent, Swingline Lender and L/C Issuer, and the lenders party thereto (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2019, and incorporated herein by reference)
  10.2    Second Amendment to Third Amended and Restated Credit Agreement, dated as of June  7, 2019, 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 June 13, 2019, and incorporated by reference)
  10.3+    RigNet, Inc. 2019 Omnibus Incentive Plan
  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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SIGNATURES

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

 

      RIGNET, INC.
Date: August 6, 2019     By:  

/s/    LEE M. AHLSTROM

      Lee M. Ahlstrom
     

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

 

37