rnet-10k_20191231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

 

For the fiscal year ended December 31, 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)

 

Registrant’s telephone number, including area code: (281) 674-0100

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

RNET

NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

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 Act). Yes No

As of June 30, 2019, which was the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock, $0.001 par value per share (the “Common Stock”) held by non-affiliates of the registrant on such date was approximately $147.7 million. At March 9, 2020, there were outstanding 19,979,284 shares of the registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for its 2020 Annual Meeting of Stockholders to be filed with the Commission within 120 days of December 31, 2019 are incorporated herein by reference in Part III of this Annual Report.

 

 

 


 

Table of Contents

 

 

 

Page

 

 

 

 

PART I

 

 

 

 

 

Glossary

3

Item 1

Business

5

Item 1A

Risk Factors

19

Item 1B

Unresolved Staff Comments

30

Item 2

Properties

30

Item 3

Legal Proceedings

30

Item 4

Mine Safety Disclosures

30

 

 

 

 

PART II

 

 

 

 

Item 5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

31

Item 6

Selected Financial Data

32

Item 7

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

36

Item 7A

Quantitative and Qualitative Disclosures about Market Risk

49

Item 8

Financial Statements and Supplementary Data

49

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

49

Item 9A

Controls and Procedures

49

Item 9B

Other Information

52

 

 

 

 

PART III

 

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance

53

Item 11

Executive Compensation

53

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

53

Item 13

Certain Relationships and Related Transactions, and Director Independence

53

Item 14

Principal Accounting Fees and Services

53

 

 

 

 

PART IV

 

 

 

 

Item 15

Exhibits, Financial Statement Schedules

54

Item 16

Form 10-K Summary

57

 

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Glossary

 

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 and non-recurring items. A reconciliation of Net Income to Adjusted EBITDA can be found in Item 6.  Selected Financial Data.

AI

 

Artificial Intelligence

Apps

 

Applications

ASC

 

Accounting Standards Codification

ASU

 

Accounting Standards Update

Auto-Comm

 

Automation Communications Engineering Corp., acquired in 2018, provides additional Systems Integration solutions

AVI

 

Advanced Video Intelligence

B2B

 

Business to Business

BOP

 

Blow-Out Preventer

BGAN

 

Broadband Global Access Networks

CIEB

 

Costs and estimated earnings in excess of billings on uncompleted contracts

Credit Agreement

 

Third Amended and Restated Credit Agreement dated as of November 6, 2017 among RigNet, Inc. as Borrower, the Subsidiaries of RigNet party thereto as Guarantors, Bank of America, N.A. as Administrative Agent, Swingline Lender and L/C Issuer, BBVA Compass, as Syndication Agent, the Lenders party hereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated as Sole Lead Arranger and Sole Bookrunner, as amended.

Cyphre®

 

Acquired in 2017, provides cybersecurity solutions with advanced enterprise data protection

DTS

 

Acquired in 2017, increases solutions offerings in managed communications, IT, and disaster relief

ECS

 

Enhanced Cybersecurity Services

EDS

 

Emergency Disconnect Sequence

EPC

 

Engineering, Procurement and Construction

ESS

 

Acquired in 2017, increases solutions offerings in SCADA and IoT

Exchange Act

 

The United States Securities Exchange Act of 1934, as Amended

FASB

 

Financial Accounting Standards Board

FCC

 

Federal Communications Commission

FPSO

 

Floating Production Storage and Offloading vessel

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

IIoT

 

Industrial Internet-of-Things

IP

 

Internet Protocol

KPI

 

Key Performance Indicators

LIBOR

 

London Interbank Offered Rate

LNG

 

Liquified Natural Gas

LoRA

 

Long Range Access

LOS

 

Line-of-Sight microwave transmission

LTE

 

A 4G and 5G technology, Long Term Evolution

MCS

 

Managed Communications Services

MPLS

 

Multiprotocol Label Switching

NASDAQ

 

NASDAQ Global Select Market, where RigNet’s common shares are listed for trading

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Nessco

 

Nessco Group Holdings Ltd., acquired in 2012, primarily 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

PLC

 

Programmable Logic Controller

PUC

 

Public Utility Commission

QOS

 

Quality of Service

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 oil and gas

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

USF

 

Universal Service Fund

U.S. GAAP

 

Generally Accepted Accounting Principles in the United States

VMS

 

Video Management System

VSAT

 

Very Small Aperture Terminal satellite receivers

WiMax

 

Worldwide Interoperability for Microwave Access wireless broadband communication standard


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PART I

Item 1. Business

For convenience in this Annual Report on Form 10-K, “RigNet”, the “Company”, “we”, “us”, and “our” refer to RigNet, Inc. and its subsidiaries taken as a whole, unless otherwise noted.

Overview

We are a global technology company that provides customized data and communications services. 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: cybersecurity 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.

We deliver advanced software and communications infrastructure that allow our customers to realize the business benefits of digital transformation. With world-class, ultra-secure solutions spanning global IP connectivity, bandwidth-optimized Over-The-Top (OTT) applications, Industrial Internet of Things (IIoT) big data enablement, and industry-leading machine learning analytics, we support the full evolution of digital enablement, empowering businesses to respond faster to high priority issues, mitigate the risk of operational disruption, and maximize their overall financial performance.

Historically, our primary focus has been on customers in the upstream exploration and production segment of the energy industry, including offshore drilling rigs and production facilities.  In recent years, we have increased our service offerings across the energy value chain to provide solutions to midstream and downstream customers where systems integration and IoT solutions are key elements.  In addition, we have created channel partners around the world, creating opportunities to sell our industry-leading security, IoT, and machine-learning solutions outside of our traditional energy-focused markets.

Our business operations are divided into the following 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. In addition, our MCS segment sells communications equipment and associated installation and maintenance services. Our services are generally contracted with terms that typically range from one month to five years and are billed as monthly recurring or usage-based fees.

 

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 a real-time machine learning and AI data platform (Intelie Pipes™ and Intelie LIVE®), Cyphre® Encryption, Enhanced Cybersecurity Services (ECS), edge computing solution services that assist customers with collecting and standardizing the complex data produced by edge devices (LIVE-IT™), applications for safety and workforce productivity such as weather monitoring primarily in the North Sea (MetOcean™), and certain other value-added services such as Advanced 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. We generate revenue through software licenses, subscription fees, equipment sales, customization and commissioning services, and recurring network and usage-based fees.

 

Systems Integration (SI). Our Systems Integration segment provides design and implementation services for customer telecommunications systems. Solutions are delivered based on the customer’s specifications, adhering to international industry standards and best practices. Project services may include consulting, design, engineering, project management, procurement, testing, installation, commissioning, and maintenance. Additionally, SI provides complete monitoring and maintenance for fire and gas detection systems and PLC/automation control systems. Projects are bid on a fixed-cost or time and materials basis with revenue recognized on a percentage of completion basis.

 

Corporate. Corporate costs and eliminations primarily represent unallocated executive and support activities, including back-office software development, interest expense, income taxes, and eliminations.

For financial information about our reportable segments, see Note 12 ─ “Segment Information” in our consolidated financial statements included in this Annual Report on Form 10-K.

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Managed Communications Services (MCS)

As of December 31, 2019, MCS represented 67.9% of our total revenues. We were the primary provider of remote communications and collaborative services to approximately 500 customers reaching over 1,300 remote sites located in approximately 50 countries on six continents.  For the year ended December 31, 2019, our revenue generated from countries outside of the U.S. represented 69.0% of MCS revenue. Key aspects of our services include: 

 

a secure end-to-end global network to ensure greater network availability, enhanced network cybersecurity and higher Quality of Service (QoS) control to optimize latency-sensitive business applications;

 

a multi-tenant network designed to accommodate multiple customer groups resident at a site, including drilling contractors, exploration and production operators and oilfield service providers;

 

a comprehensive bundle of network optimization value-added services, such as wide-area network acceleration, policy-based content filtering and firewall Wi-Fi hotspot access management, to maximize public-private sharing of assets for multiple tenants and customer groups at one site; 

 

proactive network monitoring and management through Network Operations Centers (NOC) that actively manage network availability and serve as in-bound call centers for troubleshooting, 24 hours per day, 365 days per year; and

 

maintenance and support through geographically deployed engineering and service support teams as well as warehoused spare equipment inventories.

Global MCS Site Counts

We report the number of sites serviced by MCS on a regular basis and currently define sites based on four categories which include Offshore Drilling Rigs, Offshore Production sites, Maritime, and Other sites, which includes U.S. onshore drilling and production sites, completion sites, man-camps, remote offices, and supply bases, as well as offshore-related supply bases, shore offices, tender rigs, and platform rigs. The MCS site count does not include IoT sites. As of December 31, 2019, we provided MCS to a total of 1,340 U.S. and non-U.S. sites, a 1.3% increase from 1,323 sites served as of December 31, 2018.  Site counts fluctuate with industry conditions and are influenced by oil prices, customer capital spending, and other factors.  When we provide services for multiple customers at one location, for example, to the drilling contractor, exploration and production operator, and other service companies, we count this as one site.  The table below provides site count data as of December 31 of the respective year.  

 

 

We procure bandwidth from independent commercial satellite-services operators and terrestrial wireless and landline providers to meet the needs of our customers for end-to-end IP-based communications.  This allows RigNet

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to provide hybrid network solutions, which greatly improves network up-time by using multiple and diverse sources of bandwidth. We generally own the network infrastructure and communications equipment we install at remote sites as well as equipment co-located in third-party teleport facilities and data centers, all of which we procure through various equipment providers.  By owning the network infrastructure and communications equipment on the customer premises, we are better able to select the optimal equipment for each customer solution as well as ensure the quality of our services.

Applications & Internet-of-Things (Apps & IoT)

Apps & IoT is our fastest growing segment, and is leading our value delivery for our customers’ digital transformation efforts.  In addition to already having grown to 14.6% of 2019 revenue compared to 10.8% and. 7.6% of 2018 and 2017 revenue, respectively, the value proposition from Apps & IoT is allowing us to gain share in the MCS market for energy.

The energy sector has embraced “Digital Transformation”, a term that encompasses using technology to significantly reduce human operational process time and increase operating margins.  Digital transformation typically uses a combination of Industrial IoT (Internet of Things) combined with powerful Artificial Intelligence (AI) backed predictive analytics to monitor and optimize processes in real-time.

Through our Apps & IoT segment, we deliver a combination of turn-key network solutions, value-added services that simplify the management of multiple communications needs, and digital accelerators that collect, secure and analyze operational intelligence data, allowing our customers to increase margins and focus on core operations. Apps & IoT revenue generated from countries outside of the U.S. represented 32.5% of Apps & IoT revenue. We sell our Apps & IoT services not only via direct sales, but also through a series of channel partners around the world, which enables us to target customers in industry verticals where we have not established a focused salesforce. In some cases, non-energy customers have sought us out because of our unique capabilities.

Apps & IoT services delivered over-the-top of the network layer include:

 

The Intelie LIVE and Intelie Planning platforms which provide AI backed advanced real-time predictive analytics and machine learning;

 

Software as a Service (SaaS) applications to enhance remote operations efficiency, safety or crew welfare including weather monitoring primarily in the North Sea (MetOcean) and Advanced Video Intelligence (AVI), including video analytics and a Video Management System (VMS);

 

An increasingly wide range of Enhanced Cybersecurity Services (ECS) monitoring and protection services including a Security Operations Center (SOC), Cyphre encryption, AI-backed intrusion detection, Conditional Access, and security ratings;

 

Machine-to-machine IoT networks such as: Supervisory Control and Data Acquisition (SCADA), Broadband Global Access networks (BGAN), and custom Long-Range Access (LoRA); and

 

LIVE-IT, which is a service introduced in 2019 that allows us to manage our customer’s devices and data at the edge.

Intelie, our real-time machine learning platform, delivers value to the energy sector and has applications that improve performance and operational safety, enhance well control, and reduce non-productive time (NPT).   Examples of Intelie applications follow.

 

Industry-proven algorithms transform heterogenous sensor data into key performance indicators (KPIs) to reduce NPT, such as connection time for drill pipe or slip-to-slip time. Another set of models can monitor and advise how to improve the drilling rate of penetration (ROP), the speed at which a drill bit drills through a formation.

 

Intelie improves safety performance using algorithms that verify whether operational policies are being followed, including pressure testing and emergency disconnect sequence (EDS) checks.  We can also corroborate that the correct personnel are on board, enhancing a customers’ ability to track personnel and respond during an emergency. 

 

Intelie machine learning assists customers with optimizing well-cleaning procedures, the process of bringing up the cuttings that the drill bit generates while drilling. As an example of how this delivers value, the faster the ROP, the more drilling cuttings are generated, which in turn can slow down the ROP as the bit gets stuck on its cuttings.

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Essential equipment such as blow-out preventers (BOPs), top drives, and pumps send data to Intelie which models and monitors equipment condition, enabling more predictive and preventative maintenance.

Intelie has delivered significant results,  helping drilling contractors and operators generate time and cost savings in their upstream operations. Examples include reducing NPT by more than 20%. Intelie has also contributed as much as $3.0 million in software savings for a customer by eliminating extra software by consolidating functionality. For one customer, the Intelie platform processed over 300,000 measurements per second at its peak, synthesizing and displaying actionable results to the end-user. Intelie has recently signed a contract to implement Intelie LIVE to support BP’s Remote Collaboration Center and has also been used in oil production and pipeline monitoring use cases. The increased linkage between IoT solutions and Intelie allows us to not only provide communications but also to be directly involved in driving valuable business outcomes for our customers.

RigNet’s IoT network supports almost 11,000 different sites, predominantly in the U.S.  A key element of our network, devices using the L-band satellite network, grew substantially during 2019 to include over 6,200 active L-Band enabled IoT sites at the end of December 2019, consuming approximately 80 gigabytes per month of IoT traffic, or roughly 12.9 megabytes per month per site.  

We believe the Apps and IoT segment is an important element of our long-term growth.

System Integration (SI)

Due to our deep knowledge of the energy sector’s needs and a wide range of expertise around critical communications in challenging environments, our clients also turn to us to build large network projects, both offshore and onshore. Solutions are delivered based on the customer’s specifications, adhering to international industry standards and best practices. Project services may include consulting, design, engineering, project management, procurement, testing, installation, commissioning, and maintenance. Additionally, SI provides complete monitoring and maintenance for fire and gas detection systems and PLC/automation control systems. Projects are bid on a fixed-cost or time and materials basis with revenue recognized on a percentage of completion basis.  As of December 31, 2019, Systems Integration represented 17.6% of our total revenues and revenue generated from countries outside of the U.S. represented 26.9% of SI revenue.

RigNet typically operates as a subcontractor on SI projects, working with other major Engineering, Procurement, and Construction (EPC) companies to deliver the project scope to the end customer.  The business is both competitive and cyclical.  The typical project length for our SI projects is anywhere from less than one year to approximately three years. Project backlog declined in 2019, meaning that we added $15.7 million in backlog in 2019, but we recognized more revenue and project descoping than we added. Project backlog, or the amount of revenue secured subject to firm contract awards that will be recognized over the life of each project, as of December 31 for the respective years is provided in the table below.

 

 

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Putting the parts back together

RigNet’s three revenue-generating operating segments can each stand alone as separate services, but many of our global customers are seeing the value in how these products stack together.  This has the potential to create what we have termed a synergistic “Flywheel Effect,” illustrated in the graphic below.   Customers who are embracing digital transformation are trying to unlock the operational technology potential of Industrial IoT.  We believe this will create a proliferation of connected sensors, forming a large neural-network of data, wrapped in cybersecurity for protection and interpreted through SaaS-based machine learning platforms.  Customers will be able to accelerate their time to value by working with a set of services that are already vertically integrated and optimized to work under the most extreme of operating conditions.  This can lower their execution risk for complex systems integrations and reduce upfront capital risk as a fully-managed SaaS service.  For RigNet, the effect creates new streams of revenue, while at the same time stimulates pull-through bandwidth demand for our core network services illustrated in figure 4 below.

 

 

 

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Customer Needs

The technology and remote telecommunications industries are highly dynamic and increasingly evolving with customer needs.  We serve customers with customized communications, applications and cybersecurity solutions that connect to remote locations via networks, driving demand for reliable, managed communications services in a variety of environmental conditions.  For several decades, our core customer base has primarily been off-shore and remote land oil and gas drilling contractors, exploration and production operators, and oilfield service companies.  As part of our growth strategy, we seek to expand to other adjacent markets that share substantially similar technical requirements; these include: global enterprise, midstream pipelines, maritime, engineering and construction, disaster recovery services, banking and government verticals.

The customers we serve depend on maximum reliability, quality and continuity of products and services.  Our customers also are generally geographically dispersed and/or have remote operations. These customers are particularly motivated to use secure and highly reliable communications networks because they may require:

 

real-time data collection and transfer methods for safe and efficient operational coordination;

 

the ability to maintain safety standards and optimize performance;

 

data and network security designed to defend up to and against state-level actors’ threats;

 

access to key decision makers to enable customers to maximize safety, operational results and financial performance; and

 

access to the internet to allow rig crews and other employees in remote areas to keep in communication with their friends and family and for entertainment during their off-time.

Our Customers, Their Industry, and Its Impact on RigNet

In 2019, almost all of RigNet’s revenue was derived from customers with some connection to the oil and gas industry.  These included our traditional customers in the Upstream segment (drilling contractors, large integrated and independent oil and gas operating companies, and other oilfield service and maritime support companies, etc.), as well as customers in the Midstream segment (pipelines, LNG plants, etc.) and large Engineering, Procurement, and Construction companies working in the Downstream segment.  Although no single customer accounted for 10.0% or more of revenue in 2019, our top 5 customers accounted for 25.9% of our total revenue for 2019.

The oil and gas industry is both cyclical and competitive.  Our customers’ business plans and activities are significantly impacted by changes in, among other factors, oil and gas prices, global supply and demand for these commodities, geopolitical events, weather, and specific industry sub-segment dynamics (e.g., an oversupply of offshore drilling rigs).  Commodity prices are volatile and it is not unusual for our customers to experience rapid increases or declines which can have both short- and long-term impacts on their spending patterns.

In response to continued low oil and gas prices, the industry reduced both capital and operating expenses significantly, negatively impacting RigNet’s business. Recovery for the industry has been challenging.  However, 2018 and 2019 saw improved utilization levels for offshore drilling rigs, driven by offshore production declines. The industry we support has a proven resilient need for our advanced software and communications solutions to realize their digital transformation. Additionally, we saw more major construction projects approved for commencement.  While we expect conditions for the industry to continue to improve gradually, our long-term growth strategy does not rely solely on significant increases in global offshore drilling activity.

Customer Contracts

In order to streamline the addition of new projects and solidify our position in the market, we have signed master service agreements with most customers. Generally, we prefer to sign long-term contracts with our customers to increase our confidence in our projected financial performance.  Nevertheless, the nature of the oil and gas industry requires us to be flexible to ensure we meet the needs of our customers.  The specific services being provided are defined under individual service orders that generally have a term of one to five years for offshore customers with renewal options. These contracts have provisions for early termination or reduced payments for warm or cold stacking of assets, with compensation paid to us based on an agreed formula. Land-based contracts are generally shorter term or terminable on short notice without penalty. Service orders are executed under the contracts for individual remote sites or groups of sites, and generally may be terminated early on short notice without penalty in the event of force majeure, breach of the agreement or cold stacking of a drilling rig.

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Our Strategy

RigNet’s basic strategy remains unchanged: accelerate digital transformation for our customers by leveraging our core MCS business and introducing new, value-added service solutions.  The strategy is composed of three elements:  

 

expand the scale and scope of our services within our primary industry vertical, energy;

 

expand into adjacent industry verticals; and

 

acquire new capabilities and/or scale our business through selective mergers, acquisitions, or in-house development;

As of December 31, 2019, our merger and acquisition activity has been paused as a result of our current debt load and our equity price. We expect to re-engage in M&A activity at the appropriate time. At this time, we believe that we have largely acquired the necessary capability set and that future merger and acquisition activity may be driven by our belief that networks benefit from scale.

Expand the scale and scope of our services

Our market presence and proven quality of service offer significant organic growth opportunities in energy segments adjacent to upstream where we are well-positioned to deliver remote communications solutions.

In the MCS segment, we seek to leverage our current strong market position in drilling rigs, production facilities, and support vessels to grow additional share.  Because of established relationships with our customers, reliable and robust service offerings, and high-quality customer service, we believe that we are well-positioned to capture new build rigs that our customers add to their fleets as well as stacked rigs that are reactivated.  We also seek to organically gain market share against our competitors. We are continuously working with our suppliers to ensure that we have the newest and most cost-effective solutions for our customers. We continue to grow our network as well.  In 2019, we invested in our Gulf of Mexico communications infrastructure, which we believe is the largest over-water microwave-based network in the world. This upgrade, in a partnership with T-Mobile, added 4G LTE services and 5G capabilities to the pre-existing network to provide both enhanced fixed and mobile services to our customers. This LTE network supports a coverage area of more than 60,000 square miles. Furthermore, as the onshore unconventional drilling and production industry has continued to grow, we have expanded our services to include not only onshore drilling rigs, but other onshore oilfield service providers.  

We also intend to expand our Apps & IoT market share on a stand-alone basis and by bundling our new capabilities, including machine learning and cybersecurity, with our MCS offerings for both existing and new customers.  Our acquisition of Intelie in 2018 enabled us to offer new solutions to help customers across the value chain continue to focus on improving their operational and financial performance.  Through Cyphre, we assist our customers in protecting their mission-critical data both onshore and offshore.  Furthermore, we continue to develop additional applications via our internal development team, including AVI, CrewConnect™, and other solutions which deliver increased value to our customers.  We have also continued to grow our presence in the IoT market, particularly in energy’s midstream segment, where our robust, bandwidth-optimized applications enable customers to safely, reliably, and efficiently monitor and manage their remote sites and networks.

We continue to seek to expand our Systems Integration market share by pursuing new Systems Integration customers and bids for projects globally to address the growing demand for the buildout of large capital projects. We expect to continue to target traditional upstream and downstream opportunities, such as new fixed production platforms or onshore operating shorebases, as well as expanding our opportunity set to include new FPSOs and midstream projects, such as remote LNG liquefaction facilities.  Additionally, our Apps & IoT capabilities are opening opportunities to introduce our machine learning and other solutions to our customers on these projects. In 2019, our SI business pulled-through Intelie development work for a workforce tracking project.  We are looking at ways to enhance the pull-through business our SI business generates for our other segments.

Expand into adjacent industry verticals

We believe revenue diversity is desirable in terms of product offerings as well as industry exposure.  We also believe that networks benefit from scale regardless of which end markets we serve with our managed communications product.  As such, we will continue to look for and review opportunities in other remote communications market adjacencies that offer significant opportunities for growth and where we are well positioned to take advantage of these opportunities such as aviation, government, and mining.  

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Acquire New Capabilities

In 2017, we began to build new capabilities that would be complimentary both to our core MCS business and our improving SI business while enabling us to deliver secure, mission-critical solutions to enable our customers to enjoy the benefits of their digital transformation efforts.  The graphic below illustrates our significant strategic acquisitions beginning in 2017, their timing, and our rationale for the transaction in terms of whether the acquired company added a capability, expanded our reach to more customers, or both.

 

 

 

Cyphre was our first acquisition in 2017.  As digital transformation efforts continue to touch every part of our customers’ businesses from offshore high-pressure blowout preventers to onshore operations planning, data security has become critical and Cyphre expanded our cybersecurity capabilities with advanced enterprise data protection by leveraging hardware-based encryption.

We acquired two additional companies in 2017, ESS and DTS.  ESS expanded our product offering, added to our existing midstream SCADA customer portfolio, and strengthened our IoT market position. DTS enhanced our comprehensive communications and IT services to the onshore, offshore, and maritime industries, as well as disaster relief solutions to global corporate clients.  

In 2018, we completed the acquisition of Intelie.  Intelie is a real-time, predictive analytics company that combines operational expertise with a machine learning approach. Intelie facilitates innovation via Intelie Pipes, a distributed query language with a complex event processor to aggregate and normalize real-time data from a myriad of data sources.  The Intelie platform 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.

Finally, in 2018, we completed the separate, but related, acquisitions of Auto-Comm and SAFCON.  Auto-Comm provided a broad range of communications services to the oil and gas industry for both onshore and offshore remote locations. Auto-Comm brought 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 we have established over the years.

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We believe that the capabilities acquired through this set of acquisitions have enabled us to provide a unique set of solutions to our customers that will help them to realize the benefits of their digital transformation efforts and provide us with a differentiating competitive advantage

Competitive Strengths

As a global technology company that provides customized communications services, applications, real-time machine learning, and cybersecurity solutions, our competitive strengths include:

 

mission-critical services delivered by a trusted provider with global operations;

 

leading-edge technology with proven track record in-market;

 

high-quality customer support with full-time monitoring and regional service centers;

 

scalable systems using standardized equipment that leverage our global infrastructure;

 

customized Systems Integration solutions provided by expert telecoms systems engineers;

 

flexible, provider-neutral technology platforms;

 

long-term relationships with leading companies in the oil and gas, maritime, pipeline and engineering and construction industries; and

 

ability to design and implement a broad range of communication solutions using a range of frequencies and modes of communication.

Mission-critical services delivered by a trusted provider with global operations:  Our longstanding relationships with customers provide us with an in-depth understanding of the mission-critical needs of our customers that enables us to tailor our services to their requirements.  Our global presence allows us to serve our clients around the world, except where government restrictions may apply. Our global terrestrial network also allows us to provide quality of service to prioritize various forms of data traffic for a more effective way to prioritize network traffic.  Our ability to offer our customers global coverage sets us apart from regional competitors and allows us to match the breadth of our customers’ global operations and speed of deployment. The addition of Cyphre allows us to offer state-of-the-art encryption and network security services for the data communications necessary to safely and efficiently manage remote operations.  In addition, our OTT offerings allow us to leverage our network to provide additional offerings for safety, business productivity improvement, and crew comfort.

Leading-edge technology with proven track record in-market: Our Intelie machine learning and real-time predictive analytics including Intelie Pipes and Intelie LIVE are optimized for remote locations in high-latency, high-packet loss environments. We also deliver Advanced Video Intelligence (AVI) and a wide range of Enhanced Cybersecurity Services (ECS), including a Security Operations Center (SOC), Cyphre encryption, AI-backed intrusion detection, conditional access, and security ratings. We also leverage third party relationships and technologies and have a proven track record of delivering technology in high latency remote locations that others lack.

High-quality customer support with full-time monitoring and regional service centers: Our global end-to-end owned and operated network allows us to provide high-quality customer care by enabling us to fully monitor our network.  We can easily and rapidly identify and resolve any network problems that our customers may experience. As of December 31, 2019, we had 29 service operations centers and warehouses to support and service our customers’ remote sites. We maintain field technicians as well as adequate spare parts and equipment in these service operations centers. Our Global Customer Care (GCC) team staffs our Network Operations Center (NOC) and Security Operations Center (SOC) 24 hours per day, 365 days per year and provides engineering, service delivery, and change management to customers globally. We provide non-stop, end-to-end monitoring and technical support for every customer. This proactive network monitoring allows us to detect problems instantly and keep our services running at optimum efficiency. Fully managed technology is a key reason why we can support solutions that deliver high performance and new technologies that improve productivity.

Scalable systems using standardized equipment that leverages our global infrastructure: We have built our global satellite and terrestrial network with a sufficient amount of flexibility to support our growth.  Our knowledge and capabilities can be applied to remote sites located anywhere in the world.  We generally install standardized equipment at each remote site, which allows us to provide support and maintenance services for our equipment in a cost-efficient manner.  Not all of the components of equipment that we install at each site are the same, but the components that vary are limited in number and tend to be the same for sites located in the same geography.  As of December 31, 2019, we contracted capacity from 55 satellites that are co-located at 21 teleports and 27 datacenters

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worldwide in order to provide our end-to-end solutions.  By leasing rather than owning our satellite capacity and backhaul and owning the on-site equipment at each site, we are able to both minimize the capital investment required by the base network infrastructure and maintain the flexibility to install high-quality equipment at each site tailored to its locale and environmental conditions. We do own and manage the IP layer end-to-end.  The standardized nature of our equipment minimizes execution risk, lowers maintenance and inventory carrying costs, and enables ease of service support.  In addition, we are able to remain current with technology upgrades due to our back-end flexibility. Our product and service portfolio offers best-in-class technology platforms using the optimal suite of communications and networking capabilities for customers.  

Customized Systems Integration solutions provided by expert telecoms systems engineers: We provide global customized Systems Integration solutions.  As the demand for additional telecommunications products and telecoms systems increases with each new technological advance, the need for well-designed, efficient and reliable network infrastructures becomes increasingly vital to customers. Our solutions are custom-designed, built and tested by expert engineers based on the customer’s specifications and requirements, as well as international industry standards and best practices.  For those customers requiring reliable remote communications services, maintenance and support services and customized solutions for their network infrastructures, RigNet provides a one-stop-shop to satisfy these demands.

Flexible, provider-neutral technology platform:  Because we procure communications connections and network equipment from third parties, we are able to customize the best solution for our customers’ needs and reduce our required fixed capital investments.  We aim to preserve the flexibility to select particular service providers and equipment so that we may access multiple providers and avoid downtime if any of our initial providers were to experience any problems.  By procuring bandwidth from a variety of communications providers instead of owning our own satellites, we are able to minimize capital investment requirements and can expand our geographic coverage in response to customers’ needs with much greater flexibility.

Long-term relationships with leading companies in the oil and gas, maritime, pipeline, and engineering and construction industries:  We have established relationships with some of the largest companies in the oil and gas, maritime, pipeline and engineering and construction industries.  Some of our key customers are the leading drilling contractors around the world, with combined fleets of hundreds of rigs, as well as leading oil and gas, oilfield service, maritime, pipeline and engineering and construction companies.  In most cases, these customers have high standards of service that favor strategic providers such as RigNet and work in partnership with us to serve their remote operations.

The ability to design and implement a broad range of communication solutions using a range of frequencies and modes of communication: We have the ability to design and implement a broad range of communication solutions using a range of frequencies and modes of communication. These modes of communication include wireless satellite Ku, Ka, C and L frequency bands, wireless WiMAX and Line-of-Sight (LOS) microwave, 3G and 4G LTE services, and 5G-capabilities.  This range of communications solutions allows us to offer competitive and reliable communications solutions in a broad range of remote geographic locations where our customers operate. This helps us meet our customers’ requirements for choosing their provider(s) based on network availability while factoring in price.

Environmental, Social and Corporate Governance (ESG)

We believe that the digital transformation solutions that we deliver will lead to a safer and more sustainable energy industry. With our highly reliable network and real-time machine learning solutions, our customers can optimize the efficiency of their own operations and monitor and respond to high priority issues faster and with better information. Some of the solutions we have developed to enhance safety and sustainability include:

 

Advanced Video Intelligence, which assists customers with real-time risk detection;

 

Machine learning applications for a) well planning and optimization of drilling operations leading to increased safety and efficiency and less demand on resources and b) fuel optimization for international shipping;

 

Workforce safety solutions including workforce tracking, which enables our customers to know where all employees are at safety-sensitive sites, and man-down technology, which enables customers to detect when an employee has fallen or become injured allowing for a speedier emergency response; and

 

Solutions that enable customers to detect and respond to faulty valves in environmentally sensitive areas.

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Finally, we are committed to practicing good corporate governance. We believe that a strong, diverse board and management, following good governance practices and engaging in robust discussion and debate will deliver better results to all of our stakeholders, including shareholders, customers, suppliers, employees, and the communities in which we work. We encourage investors to visit the Corporate Responsibility section of our website. The information found on our website is not incorporated into this Annual Report on Form 10-K.

Suppliers

Although we have preferred suppliers of technology, telecommunications, and networking equipment, nearly all technology utilized in our solutions is available from more than one supplier.

In addition, we do not rely on one satellite provider for our entire satellite bandwidth needs except for certain instances in which only one satellite bandwidth provider is available in an operating location, which is typically due to licensing restrictions or where only one satellite provider can offer a particular bandwidth. This approach generally allows us the flexibility to use the satellite provider that offers the best service for specific areas and to change providers if one provider experiences any problems.

Competition

The technology and remote telecommunications industry is highly competitive.  We expect competition in the markets that we serve to persist, intensify and change.  We face varying degrees of competition from a wide variety of companies, including potential new entrants from providers to adjacent vertical markets and from forward integration by some of our suppliers deeper in the industry value chain.

Our primary global competitor in MCS is Speedcast International Ltd.  Both Panasonic, through its ITC Global subsidiary, and Tampnet have expanded their presence as active providers of communications services to the oil and gas, mining and maritime markets.  We also compete with regional competitors in the countries in which we operate.  Specifically, in our U.S. onshore operations, we face competition from: wireless network providers, drilling instrumentation providers, living quarters companies, and other pure-play providers like us.

With the downturn in the oil and gas industry, price-based competition has become more important.  However, our customers require high quality and availability of the service as well as a provider with the ability to restore service quickly when there is an outage.  Breadth of service offerings are also important to our oil and gas customers. Our customers depend on maximum availability, quality and continuity of products and services.

While we experience competition in our markets, we believe that our Apps & IoT offerings are a key differentiator that strategically aligns with our customers’ need to achieve digital transformation and business synergy goals.  However, as our serviceable market has seen significant expansion due to our organic and inorganic growth in Apps & IoT, so has our competitor list.  Our competitors now include IBM, Microsoft, Google, Kongsberg Gruppen and other smaller pure-play providers, as well as large, established oilfield technology providers like Schlumberger and Haliburton. Additionally, in the SI space, we compete primarily with ABB Ltd., Speedcast, and other construction contractors.

Our customers choose the accelerated speed and value created by a vertically aligned stack. We believe that we are unique in our vertical offering of Apps & IoT solutions over-the-top of our MCS offering.

Employees

As of December 31, 2019, we had approximately 625 full-time employees consisting of 296 in North America, 149 in Latin America, 105 employees in Europe/Africa and 75 employees in the Middle East and the Asia Pacific.

Geographic Information

See Note 12 — “Segment Information,” in our consolidated financial statements included in this Annual Report on Form 10-K for more information regarding revenues and assets attributable to our domestic and international operations.

Other Information

Corporate Structure and History

We were incorporated in Delaware on July 6, 2004. Our predecessor began operations in 2000 as RigNet, Inc., a Texas corporation. In July 2004, our predecessor merged into us. The communications services we provide to the

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offshore drilling and production industry were established in 2001 by our predecessor, who launched initial operations in the Asia Pacific region. Through companies recently acquired, our experience dates back more than 40 years. We have since evolved into one of the leading global providers of remote communications services.

Principal Executive Offices

Our corporate headquarters is located at 15115 Park Row Blvd, Suite 300, Houston, Texas.  Our main telephone number is +1 (281) 674-0100.

Company Website and Available Information

The Company’s internet website is www.rig.net.  The information found on our website is not incorporated into this Annual Report on Form 10-K. The Company makes available free of charge on its website Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act). This information can also be found on the SEC website at www.sec.gov.

In addition, in the “Governance” section of the Investors page on our web site, we make available our code of ethics and business conduct, our corporate governance guidelines, the charters for our audit, compensation, and corporate governance and nominating committees and various other corporate governance policies and documents.

Additionally, in the “Corporate Responsibility link on our main website contains important information about our Environmental, Social and Governance (ESG) initiatives including relevant information on policies, safety performance, and employee statistics, as well as our commitment to following good corporate governance practices.

Smaller Reporting Company Status

In June 2018, the SEC issued Release 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, which changed the definition of a smaller reporting company in Rule 12b-2 of the Exchange Act. Under this release, the new thresholds for qualifying are (1) public float of less than $250 million or (2) annual revenue of less than $100 million and a public float of less than $700 million (including no public float). Under the amended rule, RigNet now qualifies as a smaller reporting company. A smaller reporting company may choose to comply with scaled or non-scaled financial and non-financial disclosure requirements on an item-by-item basis. The Company may determine to provide scaled disclosures of financial or non-financial information in future quarterly reports, annual reports and/or proxy statements if it remains a smaller reporting company under SEC rules.

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, as amended, that are subject to a number of risks and uncertainties, many of which are beyond the Company’s control.  These statements may include statements about:

 

new regulations, delays in drilling permits or other changes in the 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 or advances in technology (including satellite capacity) 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 plans regarding and ability to pursue, consummate and integrate merger and acquisition opportunities successfully;

 

the amount and timing of contingent consideration payments arising from our acquisitions;

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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; and

 

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

Forward-looking statements may be found in Item 1. “Business;” Item 1A. “Risk Factors;” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other items within this Annual Report on Form 10-K.  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 and 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 Annual Report on Form 10-K, are forward-looking statements.  

The forward-looking statements contained in this Annual Report on Form 10-K are largely based on Company expectations, which reflect estimates and assumptions made by 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 Annual Report on Form 10-K 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. Risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements include, without limitation:

 

the effect of economic conditions in the oil and gas industry, including fluctuations in commodity prices and the level of oil and gas exploration, development and production;

 

the outcome of legal proceedings in which the Company is a party;

 

changes in the demand for our services and solutions;

 

the availability of labor at reasonable prices and/or rates of labor cost inflation;

 

changes in laws and regulations in the telecommunications, technology or oil and gas industries;

 

our ability to renew, extend or retain our contracts or to obtain new contracts with significant customers;

 

our lack of long-term, committed-volume purchase contracts with our customers;

 

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

 

the concentration of our customer base as well as our dependence on a limited number of key customers;

 

our ability to protect our intellectual property and the cost of doing so;

 

our ability to extend our presence into other verticals and complementary remote communication segments;

 

our ability to increase secondary and tertiary customer penetration at remote sites;

 

the risk that we fail to fully realize the potential benefits of or have difficulty in integrating the companies we acquire or have already acquired;

 

our ability to develop and market additional products and services;

 

the possibility that we or our third-party providers may violate the complex regulatory schemes, including anti-corruption laws, in foreign countries in which we operate;

 

the impact on our business, or the business of our customers, as a result of credit rating downgrades and fluctuating interest rates;

 

changes in currency exchange rates;

 

our ability to comply with the financial covenants in our credit agreement and the consequences of failing to comply with such financial covenants;

 

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

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

 

the effect of changes in political conditions in the U.S. and other countries in which we operate;

 

the possibility that we, or our third-party providers, may experience equipment failures, natural disasters, cyber-attacks or terrorist attacks;

 

the possibility that we experience failures in compliance with applicable consumer-protection and data privacy laws and regulations;

 

the possibility that we are unable to operate in certain foreign countries due to export control laws; and

 

other risks and uncertainties described under “Item 1A. Risk Factors” and other sections in this Annual Report on Form 10-K and as included in our other filings with the U.S. Securities and Exchange Commission.

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.

Government Regulation

The following is a summary of the regulatory environment in which we currently operate and does not describe all present or proposed international, federal, state and local legislation and regulations affecting the communications industry, some of which may change the way the industry operates as a result of administrative or judicial proceedings or legislative initiatives.  We cannot predict the outcome of any of these matters or the impact on our business.

The telecommunications industry is highly regulated. Most of the services we provide in our MCS segment require licenses or approvals from regulatory authorities in various countries. In the United States, we are subject to the regulatory authority of the Federal Communications Commission (FCC). Regulation of the telecommunications industry continues to change rapidly. Our U.S. services are currently provided on a private carrier basis, rather than a common carrier basis, and are therefore subject to lighter regulation under the U.S. Communications Act of 1934, as amended (the Act), and the regulations of the FCC. If the FCC determines that the services of RigNet or its subsidiaries constitute common carrier offerings subject to common carrier regulations, we may be subject to significant costs to ensure compliance with the applicable provisions of those laws and regulations. We may be subject to enforcement actions including, but not limited to, fines, cease and desist orders, or other penalties if we fail to comply with all applicable requirements.

For our U.S. business, we maintain licenses with rights to the electromagnetic spectrum, including fixed microwave licenses, very small aperture terminal (VSAT) earth station licenses, various private and commercial mobile radio service licenses, and various wireless licenses.  Failure to maintain appropriate licenses could subject RigNet to fines imposed by the FCC. 

The FCC constantly reviews spectrum policy to ensure it is in alignment with national communications strategy.  One such example is the Facilitate America’s Superiority in 5G Technology (FAST), whereby the FCC aims to propel the United States into global 5G leadership.  As part of such strategies, the FCC may decide to reallocate spectrum or introduce spectrum sharing among various services.  If the FCC introduces spectrum sharing in the frequency bands where RigNet has existing licenses, the new services could cause harmful interference to RigNet’s network and thus degrade its quality.  RigNet may not be able to migrate to other frequency bands without incurring significant equipment and logistics costs.

As a non-dominant international and domestic communications carrier, among other requirements, RigNet must pay various fees including contribution of a percentage of its revenues from telecommunications services to the FCC’s Universal Service Fund (USF) and other federal program funds to subsidize certain user segments, file various reports, and comply with rules that protect customer information and the processing of emergency calls. RigNet is also subject to the Communications Assistance for Law Enforcement Act (CALEA) and associated FCC regulations that require telecommunications service providers to configure their networks to facilitate electronic surveillance by law enforcement authorities.

Like the FCC, the state public utility commissions (PUCs) impose various regulatory fees, universal service requirements, reporting and prior approval requirements for transfer or assignments. The FCC and state PUCs have jurisdiction to hear complaints regarding the compliance or non-compliance with these and other carrier requirements of the Act and the FCC’s rules, and similar state laws and regulations.  

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If the FCC or any state PUC determines that RigNet has not complied with federal and/or state regulatory requirements, we may be subject to enforcement actions including, but not limited to, fines, cease and desist orders, license revocation, or other penalties.

Several proceedings pending before the FCC have the potential to significantly alter our USF contribution obligations. The FCC is considering: (1) changing the basis upon which USF contributions are determined from a revenue percentage measurement, as well as increasing the breadth of the USF contribution base to include certain services now exempt from contribution; (2) the classification of MPLS; and (3) the classification of various IP-enabled services. Adoption of these proposals could have a material adverse effect on our costs of providing service. We are unable to predict the timing or outcome of these proceedings. We cannot predict the application and impact of changes to the federal or state USF contribution requirements on the communications industry generally and on certain of our business activities in particular.

We must generally register to provide our telecommunications services in each country in which we do business. The foreign laws and regulations governing these services are often complex and subject to change with short or no notice. At times, the rigs or vessels on which our equipment is located and to which our services are provided will need to operate in a new location on short notice, and we must quickly make regulatory provisions to provide our services in such countries. Failure to comply with any of the laws and regulations to which we are subject may result in various sanctions, including fines, loss of authorizations and denial of applications for new authorizations or for renewal of existing authorizations.

We must comply with export control laws and regulations, trade and economic sanction laws and regulations of the United States and other countries with respect to the export of telecommunications equipment and services. State and local regulations additionally apply to certain aspects of our business. We are also subject to various anti-corruption laws, including the Foreign Corrupt Practices Act, that prohibit the offering or giving anything of value to government officials for the purpose of obtaining or retaining business or for gaining an unfair advantage.

Item 1A.  Risk Factors

 

Factors that could materially affect our business, financial position, operating results or liquidity and the trading price of our common stock are described below.  This information should be considered carefully, together with other information in this report and other reports and materials we file with the SEC.

 

A large portion of our business fluctuates with the level of global oil and natural gas exploration, development and production, as a large portion of our customers are energy-related.

 

Demand for our remote communication services and collaborative applications depends on our customers’ willingness to make operating and capital expenditures to explore, develop and produce oil and natural gas. Our business will suffer if these expenditures decline. Our customers’ willingness to explore, develop and produce oil and natural gas depends largely upon prevailing market conditions that are influenced by numerous factors over which we have no control, including:

 

 

the supply, demand and price expectations for oil and natural gas;

 

capital expenditure levels of producers of oil and natural gas and drilling contractors;

 

the addressable market and utilization rate for drilling rigs and oilfield services;

 

the ability of the Organization of Petroleum Exporting Countries (OPEC) or non-OPEC countries to influence and maintain production levels and pricing;

 

the worldwide political, regulatory and economic environment;

 

natural disasters, acts of war or terrorism, pandemics, or other “acts of God” affecting significant oil-importing countries, including the recent worldwide outbreak of coronavirus and its effect on travel, commerce and industry;

 

the degree to which alternative energy sources displace oil and natural gas; and

 

advances in exploration, development and production technology.

 

Oil and gas prices are volatile, and the oil and gas business is cyclical. When prices are perceived as being too low to generate acceptable returns, companies reduce expenditures for exploration and production.  Oil prices declined

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significantly in the last quarter of 2018 and remained depressed throughout 2019. At the start of 2020, oil prices decreased further largely as a result of anticipated declines in demand from the coronavirus outbreak. Subsequently, in March 2020, the Saudi state producer, Aramco, reduced crude pricing in response to a split and price war with Russia. Following the Saudi reduction in pricing, Brent crude spot prices declined steeply to a mid-30 dollar per barrel range. As a result, we have seen a material decline in the demand for our products and services and significant pressure on the prices we can charge.  Furthermore, our customers have experienced declines in their cash flows which has led to delays in payment, or nonpayment, for our products and services.  Commodity price declines and increased volatility have particularly affected our customers’ budgets for offshore capital investments and expenditures, which has had a material and adverse effect on our addressable market.  

 

Furthermore, the coronavirus has increased the volatility of oil and gas prices and has caused delays, supply chain disruptions and travel restrictions that have impacted the oil and gas industry and certain projects in the Asia Pacific region.

 

These conditions have had and may continue to have, a material adverse effect on our financial condition, results of operations and cash flows.

 

Continued growth in satellite capacity has adversely affected our MCS segment revenues.

 

New digital applications are driving demand growth for bandwidth in our core MCS segment.  However, we also continue to see growth in available satellite capacity and expect that growth to continue over the intermediate-term. While we have experienced bandwidth price declines from our satellite suppliers, due to competition for our oil and gas customers and declining capital investment by our customers, we have passed much of our realized savings onto our customers.  While our site count has increased in the MCS segment, our revenue has continued to decline.  If satellite capacity growth continues to outstrip demand growth or is expected to continue, we may be forced to reduce our prices in the MCS segment further, which could have a material adverse effect on our financial condition, results of operations and cash flows.

 

If we fail to timely collect receivables, our business and financial results may be harmed.

 

Some of our customers in the oil and gas industry have been through bankruptcy proceedings or other restructurings.  In addition, as the global oil and gas industry has continued to experience reduced activity, many of our customers have unilaterally extended their payment practices.  We actively manage our credit exposures and accounts receivable collections, but restructuring or insolvency proceedings by our largest customers, or continued lengthening of payment cycles could significantly and materially harm our business, financial condition and results of operations.

 

Our industry is characterized by rapid technological change, and if we fail to keep pace with these changes or if access to telecommunications in remote locations becomes easier or less expensive, our business, financial condition and results of operations may be harmed.

 

Recently some remote communications providers are offering the use of LTE and high-throughput satellite (HTS) service, instead of or in addition to the conventional Ku-band and C-band satellite space segments used today.  Our business may be harmed if our competitors are more successful than us in introducing LTE and or HTS services to meet customer needs.  

 

If alternative telecommunications services to remote locations become more readily accessible or less expensive, our business will suffer.  New disruptive technologies could make our VSAT-based networks or other services obsolete or less competitive than they are today, requiring us to reduce the prices that we are able to charge for our services or causing us to undergo expensive transitions to new technologies.  We may not be able to successfully respond to new technological developments and challenges or identify and respond to new market opportunities, services or solutions offered by competitors.  In addition, our efforts to respond to technological innovations and competition may require significant capital investments and resources. Furthermore, if we invest either organically or through acquisition in new technology and any such technology is not successful, our business, financial conditions and results of operations may be harmed.

 

Our business model has historically required significant capital expenditures to win new business.  To the extent we are unsuccessful in shifting some of those capital expenditures to our customers or suppliers, our business, financial condition and results of operations may be harmed.

 

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Historically we have purchased much of the equipment to provide new services to our customers and recovered the cost of that equipment through service charges over the life of the contract.  This business model requires large capital expenditures at the start of new customer contracts.  We are attempting to shift some of the upfront capital expenditures to our customers and/or suppliers through new contractual arrangements with them.  However, we may be unsuccessful in shifting those required capital investments to our customers and/or suppliers.  To the extent we are unable to finance growth capital or to change our business model, our business, financial condition and results of operations may be harmed. Furthermore, future new technologies could be capital intensive and may require capital expenditures in order for us to remain competitive.

 

Failure to obtain and retain skilled personnel could impede our business and growth strategy.

 

Our operations depend on a highly qualified executive, sales, technical, development, service and management team. Competition for personnel talent in the artificial intelligence, machine learning, engineering and cybersecurity industry is intense, and these roles are critical to our operation. Additionally, at our 2020 annual meeting of stockholders we are seeking approval to add additional shares to our 2019 Omnibus Incentive Plan.  If stockholders fail to approve this amendment, we will not have sufficient shares available for future inducement and retention awards.  If we are unable make future awards, our ability to attract and retain qualified personnel will be materially affected. Failure to attract, recruit, retain and develop qualified personnel could have a material adverse effect on our business, financial condition and results of operations.

 

In the event that our cybersecurity measures fail or are otherwise inadequate, our systems or reputation may be damaged which could harm our business, financial conditions and results of operations. Further, failure to comply with data privacy requirements applicable to us could result in costly regulatory enforcement actions and the imposition of significant penalties.

 

We rely heavily on information systems to run our business and our customers rely on our networks and security measures in running their businesses.  Given that our customers own and operate critical infrastructure, the nature of cybersecurity threats are advanced and persistent.  There can be no assurance that the systems we have designed to prevent or limit the effects of cyber incidents or attacks will be sufficient to prevent or detect such attacks.  If such incidents or attacks do occur, they could have a material impact on our systems including degradation of service, service disruption, excessive call volume to call centers and damage to our facilities, equipment and data. In addition, we could be adversely affected by the theft or loss of confidential customer data or intellectual property. With the acquisition of Cyphre, we now market our cybersecurity services as an expertise.  A successful cyberattack against us or one of our cybersecurity customers may create negative publicity resulting in reputation or brand damage with customers.  We may be required to expend significant resources to protect against these events or to alleviate problems, including reputational harm, customer loss and litigation, caused by these events or the failure or inadequacy of our security systems, which could have a material adverse effect on our business, financial condition and results of operations.

 

Further, the regulatory framework for privacy issues worldwide is complex and evolving, and we believe it is likely to remain uncertain for the foreseeable future. Many federal, state and foreign government entities and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information. In the United States, these include rules and regulations promulgated under the authority of the Federal Trade Commission and state breach notification laws. Internationally, certain of the jurisdictions in which we operate have established their own data security and privacy legal framework with which we must comply. For example, the European Union has issued the General Data Protection Regulation (GDPR), which applies to anyone doing business in Europe. In general, GDPR sets a higher bar for privacy compliance, including new data subject rights, new mandatory security breach notification requirements, requirements to conduct data protection impact assessments and extensive record-keeping requirements. Failure to comply with GDPR can have significant consequences, including substantial fines and reputational damage. We continue to analyze the GDPR in respect of its burden and applicability to our global business operations. We may fail to comply with any of these requirements, and compliance with these requirements may increase our compliance burden and costs.

 

We have made and may in the future make selective acquisitions.  We may not be able to identify suitable acquisition candidates or consummate acquisitions on acceptable terms, or we may be unable to successfully integrate acquisitions, or such acquisitions may underperform, which could disrupt our operations and adversely impact our business and operating results.

 

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Although we presently do not have any acquisitions under consideration as of this filing, acquisitions have been a critical part of our strategy in the past and maybe in the future.  Acquisitions involve certain known and unknown risks that could cause our actual growth or operating results to differ from our expectations.  For example:

 

 

we may not be able to identify suitable acquisition candidates or to consummate acquisitions on acceptable terms;

 

we may pursue international acquisitions, which inherently pose more risks than domestic acquisitions;

 

we compete with others to acquire complementary products, technologies and businesses, which may result in decreased availability of, or increased price for, suitable acquisition candidates;

 

we may not be able to obtain the necessary financing, on favorable terms or at all, to finance any or all of our potential acquisitions;

 

we may ultimately fail to consummate an acquisition even if we announce that we plan to acquire technology, product or business; and

 

acquired technologies, products or businesses may not perform as we expect, and we may fail to realize anticipated revenues and profits.

In addition, our acquisition strategy may divert management’s attention away from our existing business, resulting in the loss of key customers or employees, and expose us to unanticipated problems or legal liabilities, including responsibility as a successor for undisclosed or contingent liabilities of acquired businesses or assets.

 

If we fail to conduct due diligence on our potential targets effectively, we may not identify problems at target companies or fail to recognize incompatibilities or other obstacles to successful integration.  Our inability to successfully integrate future acquisitions could impede us from realizing all of the benefits of those acquisitions and could severely weaken our business operations.  The integration process may disrupt and, if new technologies, products or businesses are not implemented effectively, may preclude the realization of the full benefits expected by us and could harm our results of operations.  In addition, the overall integration of new technologies, products or businesses may result in unanticipated problems, expenses, liabilities and competitive responses.  The difficulties in integrating acquisitions include, among other things:

 

 

maintaining employee morale and retaining key employees;

 

integrating the cultures of both companies;

 

integrating IT systems, internal control environments, accounting and back-office functions;

 

preserving important strategic customer relationships;

 

consolidating corporate and administrative infrastructures and eliminating duplicative operations; and

 

coordinating and integrating geographically separate organizations.

 

In addition, even if we integrate successfully the operations of an acquisition, we may not realize the full benefits of the acquisition, including the synergies or growth opportunities we expect.  These benefits may not be achieved within the anticipated time frame, or at all.

 

Further, acquisitions may cause us to:

 

 

issue common stock that would dilute our current stockholders’ ownership percentage;

 

use a substantial portion of our cash resources;

 

increase our interest expense, leverage and debt service requirements if we incur additional debt or contingent consideration to pay for an acquisition;

 

assume liabilities for which we do not have indemnification from the former owners, or we have disputed or uncollectible indemnification from the former owners;

 

record goodwill and non-amortizable intangible assets that are subject to impairment testing and potential impairment charges;

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experience volatility in earnings due to changes in contingent consideration related to acquisition earn-out liability estimates;

 

incur amortization expenses related to certain intangible assets;

 

lose existing or potential contracts as a result of conflict of interest issues;

 

become subject to adverse tax consequences or deferred compensation charges;

 

incur large and immediate write-offs; or

 

become subject to litigation.

Furthermore, our acquisitions may not yield the value anticipated at the time of the acquisition, or may underperform.

 

Attempts to enter new verticals may not be successful.

 

As part of our growth strategy, we attempt to enter new verticals, and offer new and innovative products and services. We have and intend to enter new verticals and launch new products both organically and through selective mergers and acquisitions. Our attempts to enter new verticals and launch new products and services may not be successful, costing us money and diverting management time and attention.

 

Our customers may terminate many of our contracts on short notice without penalty, which could harm our business, financial condition and results of operations.

 

Customers may switch service providers without incurring significant expense relative to the annual cost of the service. Our contracts generally provide that in the event of prolonged loss of service or for other good reasons, our customers may terminate service without penalty. In addition, some of our contracts may be terminated by our customers for no reason and upon short notice. Terms of contracts typically vary with a range from short-term call out work to five years.  Work orders placed under such agreements may have shorter terms than the relevant customer agreement. As a result, we may not be able to retain our customers through the end of the terms specified in the contracts, resulting in harm to our business, financial condition and results of operations.

 

Our updated credit agreement requires us to maintain certain financial covenant ratios. These ratios may limit our capacity to finance our growth strategy and operations. Furthermore, if we fail to comply with the covenants contained in our credit facility, including as a result of events beyond our control, technical or other default could result, which could materially and adversely affect our operating results and our financial condition.

 

Our 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 3.25 to 1.00 as of December 31, 2019. The consolidated leverage ratio then decreases to 3.00 to 1.00 for three quarters as of June 30, 2020, 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.

 

If we approach our covenant limits, we will be limited in our ability to finance capital and operating expenditures and any acquisitions we may pursue in the future. Should this happen we would pursue additional financing, through either debt and / or equity offerings. We may incur financing and legal fees attempting to amend our current Credit Agreement, or in pursuing other debt and or equity financing. If additional capital is needed, we may not be able to obtain debt or equity financing on terms acceptable to us, if at all.

 

Our growth strategy may require substantial capital expenditures.  We may be unable to obtain required capital or financing on satisfactory terms.

 

To support our growth strategy, we expect to continue to make substantial capital expenditures and may in the future make select acquisitions.  Many of our customers now demand newer HTS services, requiring significant capital expenditures to upgrade equipment.  We expect to fund capital expenditures and acquisitions, if any, with cash generated by operations and borrowings under our revolving credit facility or capital markets transactions; however, our financing needs may require us to alter or increase our capitalization substantially through the issuance of debt or

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equity securities. The issuance of additional indebtedness would require that a portion of our cash flow from operations be used for the payment of interest and principal on our indebtedness, thereby reducing our ability to use cash flow from operations to fund working capital, capital expenditures and acquisitions. Furthermore, raising equity capital would generally dilute existing stockholders. If additional capital is needed, we may not be able to obtain debt or equity financing on terms acceptable to us, if at all.  

 

Our strategy of moving up the technology stack entails entering new business lines that could fail to attract or retain users or generate revenue.

 

A key element of our growth strategy is to move up the technology stack, that is to leverage our existing network to provide application layer solutions to our network customers.  In 2017, we began reporting a new segment, Apps & IoT, to capture results from these new OTT services, such as SCADA, MetOcean, BlackTIE, CyphreLink and Advanced Video Intelligence.  In addition, in 2018, we acquired Intelie which provides us a real-time machine-to-machine learning offering, Intelie LIVE.  We continue to expect to invest in new lines of business, new products and other new initiatives to generate revenue.  Our customers may not adopt some of our new offerings.  These offerings may present new and difficult technology challenges, and we may be subject to claims if customers of these offerings experience service disruptions or failures or other quality issues.  In addition, profitability, if any, in our newer activities may be lower than in our older activities, and we may not be successful enough in these newer activities to recoup our investments in them.  Furthermore, efforts at establishing new lines of business could divert management attention from our core MCS network and Systems Integration businesses.  If any of this were to occur, it could damage our reputation, limit our growth and negatively affect our operating results.

 

We rely on third parties, particularly satellite owners, to provide products and services for the operation of our business.  Failures by third-party providers have caused, and in the future could cause, service interruptions, harm our business and reputation and result in loss of customers and revenue.

 

A significant part of our operations and growth depends on third-party providers delivering reliable communications connections, networks, equipment, maintenance, repair and satellite transponder capacity, subjecting our business, reputation and customer revenue to risks beyond our control, such as:

 

 

telecommunications, satellite manufacturing, equipment or control system errors, faults or failures;

 

saturation of communication connection points, networks and third-party facilities;

 

in-orbit risks for satellites including malfunctions, commonly referred to as anomalies, and collisions with meteoroids, decommissioned spacecraft or other space debris;

 

lack of communication service alternatives, including failure of satellite providers to timely replace aging satellites with more modern technology and updated capacities;

 

human error;

 

natural disasters;

 

power loss;

 

labor strikes or work stoppages;

 

unauthorized access or security risks; and

 

sabotage or other intentional acts of vandalism, terrorism or war.

 

Our results in 2019, 2018 and 2017 were negatively impacted by certain satellite outages and interruptions by certain of our providers.  These incidents caused RigNet to lose forecasted revenues and to experience increased costs as we had to make alternative arrangements for our customers.  We cannot assure you that we will not suffer future satellite outages or that any potential future outage will not have a material impact on our business, results of operations or financial condition.  Under most of our contracts with satellite service providers, our satellite service providers do not indemnify us for such loss or damage to our business resulting from certain risks, including satellite failures. If any potential claims result in liabilities, we could be required to pay damages or other penalties.

 

If we lose the right to use or upgrade any products or services provided by a third-party, our customers could experience delays or be unable to access our own services until we can obtain and integrate equivalent technology. There might not always be commercially reasonable hardware or software alternatives to the third-party infrastructure,

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products and services that we currently license for our operations. Any such alternatives could be more difficult or costly to replace than the third-party infrastructure, products and services we currently use, and integration of the alternatives into our operations could require significant work and substantial time and resources. Any delays or failures associated with our operations may injure our reputation with customers and potential customers and result in an adverse effect on our business, results of operations and financial condition.

 

Failure of our Line-of-Site network or loss of platform access could materially impact our results of operations.

 

Our microwave network is a Line-of-Site (LOS) system that operates by relaying microwave communications from one microwave site to another that must be within visible sight. Furthermore, our LTE network is built on the existing infrastructure of our microwave network. We secure access to our customers’ offshore platforms to house our LOS, microwave and LTE network, but the agreements are subject to termination for various reasons, including decommissioning of the platform.  When a microwave site on a microwave relay is rendered inoperable subsequent dependent sites can also be rendered inoperable. As such the risk of a LOS, microwave or LTE site being rendered inoperable by weather, technical failure, loss of access to an operator’s platform space or other means will likely negatively affect other dependent microwave sites. We do not insure for loss of a LOS, microwave or LTE site or business interruption caused by the loss of such a site as we believe the cost of such insurance outweighs the risk of potential loss, so the loss of a LOS, microwave or LTE site or any business interruption could require us to spend significant capital to restore network service and / or harm our business, financial condition and results of operations.

 

We are subject to anti-corruption and export control laws that have stringent compliance standards.

 

We are subject to a number of applicable export control laws and regulations of the United States as well as comparable laws of other countries. We cannot provide services to or in certain countries subject to United States trade sanctions administered by the Office of Foreign Asset Control of the United States Department of the Treasury or the United States Department of Commerce unless we first obtain the necessary authorizations. If our customers move their sites into countries subject to certain sanctions, we may not be able to serve them, in which case, our revenues will be adversely impacted, and we may incur additional costs. In addition, we are subject to the Foreign Corrupt Practices Act and other anti-corruption laws that, generally, prohibit bribes or unreasonable gifts to governments or officials. Violations of these laws or regulations could result in significant additional sanctions including fines, more onerous compliance requirements, and more extensive debarments from export privileges or loss of authorizations needed to conduct aspects of our international business. In certain countries, we engage third-party agents or intermediaries to act on our behalf in dealings with government officials, such as customs agents, and if these third-party agents or intermediaries violate applicable laws, their actions may result in penalties or sanctions being assessed against us.

 

Many of our potential customers are resistant to new solutions and technologies, which may limit our growth.

 

Although there is a strong focus on technology development within the oil and gas industry, some of the companies in the upstream oil and gas industry are relatively conservative and risk-averse with respect to adopting new solutions and technologies in the area of remote communications.  As a result of the sustained downturn in oil and gas prices, many of our customers focus on price rather than the value new technologies bring them, further slowing the uptake of new solutions and technologies.  Some drilling contractors, oil and gas companies and oilfield service providers may choose not to adopt new solutions and technology, such as our OTT offerings, which may limit our growth potential.  

 

Systems Integration projects are heavily dependent on cost, productivity, schedule and performance management.

 

We account for Systems Integration contracts using accounting rules for construction-type contracts.  Factors that may affect future project costs and margins include the price and availability of labor, equipment and materials, productivity, as well as the time necessary to obtain approvals and permits. If we make inaccurate estimates, or if we find errors or ambiguities as to contract specifications or if circumstances change due to, among other things, unanticipated technical problems, changes in local labor conditions, weather delays, changes in the costs of equipment and materials, or our suppliers’ or subcontractors’ inability to perform, or changes in foreign exchange rates, then cost overruns may occur. We may be required to pay liquidated damages upon our failure to meet schedule or performance requirements of our contracts. In accordance with the accounting guidance, we would record a cumulative adjustment to reduce the margin previously recorded on the related project in the period a change in estimate is needed. If the contract is significant, or we encounter issues that impact multiple contracts, cost overruns could have a material adverse effect on our business, financial condition and results of operations.

 

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 The uncertainty of our contract award timing can also present difficulties in matching workforce size with contract needs. In some cases, we maintain and bear the cost of a ready workforce that is larger than necessary under existing contracts in anticipation of future workforce needs for expected contract awards. If an expected contract award is delayed or not received, we may incur additional costs resulting from reductions in staff or redundancy of facilities which could have a material adverse effect on our business, financial condition and results of operations.

 

Furthermore, Systems Integration contracts can require performance bonds, surety bonds and similar instruments. Any inability to secure required performance bonds, surety bonds and similar instruments, could limit business. Although we have not previously had performance bonds, surety bonds and similar instruments called, should such instruments be called in the future, it could have a material adverse effect on our business, financial condition and results of operations.

 

A significant portion of our revenue is derived from a relatively small number of customers and the loss of any of these customers would materially harm our business, financial condition and results of operations.

 

Although we continue to diversify our customer base, we still receive a significant portion of our revenue from a relatively small number of large customers, among them being Royal Dutch Shell Plc, Valaris Plc, John Wood Group Plc,  BP Plc, Baker Hughes Company, Seadrill Ltd., Bechtel Corporation, Halliburton Company, McDermott International, Chevron Corporation and Veripos Inc.. Although none of these customers represents more than 10% of our annual revenue, should one or more of these customers terminate or significantly reduce their business with us and we were not able to replace such revenue, our business, financial condition and results of operations would be materially harmed.  As our top customers are concentrated in energy, should there be any adverse impact on the energy business that caused our customers to reduce demand for our services our financial condition and results of operations would be materially harmed.

 

We may not be able to compete successfully against current and future competitors.

 

We expect both product and pricing competition to persist and intensify.  Increased competition could cause reduced revenue, price reductions, reduced profits and loss of market share.  Our industry is characterized by competitive pressures to provide enhanced functionality for the same or lower price with each new generation of technology.  Our primary global competitor is Speedcast International Ltd. Panasonic, through its ITC Global subsidiary, and Tampnet Inc. have begun to expand their presence as active providers of communications services to the oil and gas, mining and maritime markets.  We also compete with regional competitors in the countries in which we operate. In addition, in certain markets outside of the U.S., we face competition from local competitors that provide their services at a lower price due to lower overhead costs, including lower costs of complying with applicable government regulations and their willingness to provide services for a lower profit margin. Furthermore, in the Apps and IoT space we compete with IBM, Microsoft, Google, Kongsberg Gruppen and other smaller pure-play companies, as well as large, established oilfield technology providers like Schlumberger and Haliburton. Additionally, in the SI space, we compete primarily with Speedcast and ABB Ltd and other construction contractors. Strong competition and significant investments by competitors to develop new and better solutions may make it difficult for us to maintain our customer base, force us to reduce our prices or increase our costs to develop new solutions.

 

Furthermore, competition may emerge from companies that we have not previously perceived as competitors or consolidation of our industry may cause existing competitors to become bigger and stronger with more resources, market awareness and market share.  For example, we have experienced customer projects where we have bid directly against some of our satellite bandwidth providers, either acting alone or in conjunction with one of our direct competitors. Competition with our satellite bandwidth providers, either alone or in restrictive arrangements with our suppliers or competitors may materially and adversely affect the availability and pricing of our products and services.

 

As we expand into new markets, we may experience increased competition from some of our competitors that have prior experience or other business in these markets or geographic regions.  In addition, some of our customers may decide to insource some of the MCS solutions that we provide, in particular our terrestrial communication services (e.g., Line-of-Site (LOS) or Worldwide Interoperability for Microwave Access (WiMAX)), which do not require the same level of maintenance and support as our other services.  Our success will depend on our ability to adapt to these competitive forces, to adapt to technological advances, to develop more advanced services and solutions more rapidly and less expensively than our competitors, to continue to develop and deepen our global sales and business development network, and to educate potential customers about the benefits of using our solutions rather than our competitors’ services or in-sourced solutions.  Our failure to successfully respond to these competitive challenges could harm our business, financial condition and results of operations.

 

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Our international operations are subject to additional or different risks than our United States operations, which may harm our business and financial results.

 

We operate in many countries around the world, including countries in Asia, the Middle East, Africa, Latin America and Europe and intend to continue to expand the number of countries in which we operate.  However, because operations in some countries may be temporary, the total number of countries in which we operate fluctuates. There are many risks inherent in conducting business internationally that are in addition to or different than those affecting our United States operations, including:

 

 

foreign laws and regulations that may be vague or arbitrary, lack traditional concepts of due process, and be subject to unexpected changes or interpretations, resulting in difficulty enforcing contracts or timely collection of receivables;

 

tariffs, import and export restrictions and other trade barriers;

 

difficulty in staffing and managing geographically dispersed operations and culturally diverse work forces in countries with varying employment laws and practices including restrictions on terminating employees;

 

increased travel, infrastructure and legal compliance costs associated with multiple international locations;

 

differing technology standards;

 

currency exchange rate fluctuation and currency controls;

 

potential political and economic instability, which may include military conflict, nationalization or expropriation;

 

potentially adverse tax consequences;

 

difficulties and expense of maintaining international sales distribution channels; and

 

difficulties in maintaining and protecting our intellectual property.

 

The authorities in the countries where we operate may introduce additional regulations for the oil and gas and communications industries. New rules and regulations may be enacted, or existing rules and regulations may be applied or interpreted in a manner which could limit our ability to provide our services. Recently, some of our foreign telecommunications regulators have adopted new interpretations of existing regulations when we have renewed our licenses, causing increased costs in certain jurisdictions.  Future amendments to current laws and regulations governing operations and activities in the oil and gas industry and telecommunications industry could harm our operations and financial results. Compliance with and changes in tax laws or adverse positions taken by taxing authorities could be costly and could affect our operating results.

 

Compliance related tax issues could also limit our ability to do business in certain countries. Changes in tax laws or tax rates, the resolution of tax assessments or audits by various taxing authorities, disagreements with taxing authorities over our tax positions and the ability to fully utilize our tax loss carry-forwards and tax credits could have a significant financial impact on our future operations and the way we conduct, or if we conduct, business in the affected countries.

 

Our intellectual property rights are valuable, and any failure or inability to sufficiently protect them could harm our business and our operating results.

 

We own, and maintain certain intellectual property assets, including patents, patent applications, copyrights and trademarks, trade secrets, and rights to certain domain names, which we believe are collectively among our most valuable assets. We seek to protect our intellectual property assets through the laws of the U.S. and other countries of the world, and through contractual provisions. However, the efforts we have taken to protect our intellectual property assets and proprietary rights might not be sufficient or effective at stopping unauthorized use of those rights. If we are unable to protect our proprietary rights from unauthorized use, the value of our intellectual property assets may be reduced.

 

Internal restructuring activities may negatively impact the Company.

 

Reductions in resources may adversely affect or delay various sales, marketing, product development and operational activities, which could have a material adverse effect on our financial results. Additionally, restructuring activities could have negative effects on our internal control over financial reporting and employee morale.

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Information technology infrastructure and systems are critical to supporting our operations, accounting and internal controls; any potential failure of our information technology infrastructure or systems could adversely affect our business, financial conditions and results of operations.

 

We continue to update and enhance our information systems. If a problem occurs that impairs or compromises this infrastructure, systems upgrades and/or new systems implementations; the resulting disruption could impede our ability to perform accounting, invoice, process orders, generate management reports or otherwise carry on business in the normal course. Any such events could cause us to lose customers and/or revenue and could require us to incur significant expenses to remediate. Additionally, any such events could adversely harm our legal, accounting and compliance capabilities including but not limited to: our ability to (i) timely file reports with the SEC; (ii) maintain effectiveness of internal control; (iii) timely file financial statements required by certain statutes; (iv) timely file compliance reports with our lenders under our credit agreement; and (v) timely file income taxes with the IRS, foreign taxing authorities, and local taxing authorities.

 

Severe weather in the Gulf of Mexico or other areas where we operate could harm our business, financial condition and results of operations.

 

Certain areas in and near the Gulf of Mexico and other areas in which our clients operate experience unfavorable weather conditions, including hurricanes and other extreme weather conditions, on a relatively frequent basis. A major storm or threat of a major storm in these areas may harm our business. Our clients’ drilling rigs, production platforms and other vessels in these areas are susceptible to damage and/or total loss by these storms, which may cause them to no longer need our communication services. Our equipment on these rigs, platforms or vessels could be damaged causing us to have service interruptions and lose business or incur significant costs for the replacement of such equipment. Even the threat of a very large storm will sometimes cause our clients to limit activities in an area and thus harm our business.  Changing weather conditions could impair satellite connectivity, cause more sites to be shut down and generally cause activities to be limited so that our business may be harmed. This risk is more pronounced for LOS microwave service, as there is a likely loss of service for multiple subsequent microwave sites in the network relay.

 

Changes in the regulatory framework under which we operate could adversely affect our business prospects or results of operations.

 

Our U.S. services are provided on a private carrier basis. As such, these services are subject to light or no regulation by the FCC and state PUCs. If the FCC or one or more PUCs or any other telecommunications regulator determine that these services or the services of our subsidiaries or affiliates constitute common carrier offerings or change the regulations applicable to private carriers, we may be subject to significant costs to ensure compliance with the applicable provisions of those laws and regulations. We may be subject to enforcement actions including, but not limited to, fines, cease and desist orders, or other penalties if we fail to comply with those requirements.

 

Our international operations are also regulated by various non-U.S. governments and international bodies. These regulatory regimes frequently require that we maintain licenses for our operations and conduct our operations in accordance with prescribed standards and requirements. The adoption of new laws or regulations, changes to the existing regulatory framework, new interpretations of the laws that apply to our operations, or the loss of, or a material limitation on, any of our material licenses could materially harm our business, results of operations and financial condition. Recently, some of our foreign telecommunications regulators have adopted new interpretations of existing regulations when we have renewed our licenses, causing increased costs in certain jurisdictions.

 

The FCC is considering reallocating 6 GHZ technology to allow unlicensed use of this spectrum.  Much of our Gulf of Mexico backbone network traffic is carried over 6 GHZ spectrum which we own.  Unlicensed use of this spectrum could interfere with our client’s safety critical communications and degrade our overall network performance.  Any such interference or degradation of performance could have a material adverse effect on our business, financial condition and results of operations.

 

If we infringe, or if third parties assert that we infringe, third-party intellectual property rights we could incur significant costs and incur significant harm to our business.

 

Third parties may assert infringement or other intellectual property claims against us, which could result in substantial damages if it is ultimately determined that our services infringe a third-party’s proprietary rights. Even if claims are without merit, defending a lawsuit takes significant time, may be expensive and may divert management’s attention from our other business concerns.

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Many of our contracts are governed by the laws of countries that may make them difficult or expensive to interpret or enforce.

 

Many of our contracts are governed by the laws of countries other than the U.S., which may create both legal and practical difficulties in case of a dispute or conflict.  We operate in regions where the ability to protect contractual and other legal rights may be limited.  In addition, having to pursue arbitration or litigation in some countries may be more difficult or expensive than pursuing litigation in the United States.

 

Some of our stockholders could exert control over the Company.

 

As of February 28, 2020, funds associated with Kohlberg Kravis Roberts & Co. L.P., or KKR, owned in the aggregate shares representing approximately 25.0% of our outstanding voting power and have a seat on our board of directors. Additionally, as of February 28, 2020, funds associated with FMR, LLC, owned in the aggregate shares representing approximately 14.8% of our outstanding voting power, and funds associated with Arrowmark Colorado Holding, LLC, owned in the aggregate shares representing approximately 14.2% of our outstanding voting power. As a result, any of these stockholders could potentially exert significant influence over all matters presented to our stockholders for approval, including election or removal of our directors and change of control transactions. The interests of these stockholders may not always coincide with the interests of the other holders of our common stock.

 

We are subject to fluctuations in currency exchange rates and limitations on the expatriation or conversion of currencies, which may result in significant financial charges, increased costs of operations or decreased demand for our services and solutions.

 

During the year ended December 31, 2019, 9.4% of our revenues were earned in non-U.S. currencies, while a significant portion of our capital and operating expenditures and all of our outstanding debt, was priced in U.S. dollars.  In addition, we report our results of operations in U.S. dollars. Accordingly, fluctuations in exchange rates relative to the U.S. dollar could have a material effect on our reported earnings or the value of our assets. In the future, a greater portion of our revenues may be earned in non-U.S. currencies, increasing this risk of fluctuations in exchange rates.

 

Any depreciation of local currencies in the countries in which we conduct business may result in increased costs to us for imported equipment and may, at the same time, decrease demand for our services and solutions in the affected markets. If our operating companies distribute dividends in local currencies in the future, the amount of cash we receive will also be affected by fluctuations in exchange rates. In addition, some of the countries in which we have operations do or may restrict the expatriation or conversion of currency making such cash unavailable for financing of our global operations and capital investments.

 

Furthermore, a majority of our cash balances are held outside of the United States.  Repatriating cash to the United States can require paying taxes in one or more countries making the cash available to us less than that reported in our financial statements.

 

The average daily trading volume of our common stock is low, which can cause price volatility unrelated to our actual operations and performance.

 

The average daily trading volume of our common stock in 2019 was approximately 49 thousand shares. Due to the low trading volume, our common stock may be subject to more market volatility than other more liquid stocks, without regard to our performance. Stock price volatility and sustained decreases in our share price could subject our stockholders to losses and subject us to takeover bids or lead to action by NASDAQ. The trading price of our common stock has been, and may continue to be, subject to fluctuations in price in response to various factors, some of which are beyond our control, including, but not limited to:

 

 

quarterly announcements and variations in our results of operations or those of our competitors, either alone or in comparison to analysts’ expectations or prior Company estimates, including announcements of site counts, rates of churn, loss of a material customer, and operating margins that would result in downward pressure on our stock price;

 

the cost and availability or perceived availability of additional capital and market perceptions relating to our access to this capital;

 

announcements by us or our competitors of acquisitions, new products or technologies;

29


 

 

recommendations by securities analysts or changes in their estimates concerning us;

 

changes in the valuation of our deferred tax assets;

 

any significant change in our board of directors or management; and

 

perceptions of general market conditions in the technology and communications and oil and gas industries, the U.S. economy and global market conditions.

 

In addition, we have little research analyst coverage which could lead to less independent analysis for stockholders.

 

We are a smaller reporting company and, as such, our common stock may be less attractive to investors.

 

We are a smaller reporting company, (i.e. a company with less than $250 million of public float) and we are eligible to take advantage of certain exemptions from various reporting requirements applicable to other public companies. We cannot predict if investors will find our common stock less attractive as a result of our smaller reporting company status. If some investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

Item 1B.  Unresolved Staff Comments

Not applicable.

Item 2.  Properties

Facilities

We lease 28,808 square feet of headquarters office space located in Houston, Texas. The term of this lease runs through June 2025. We also own a custom built, approximately 26,000 square foot facility in Aberdeen, Scotland and a 55,000 square foot facility in Lafayette, Louisiana.

We have other offices under lease in Denver, Colorado; Stavanger, Norway; Doha, Qatar and Singapore, and additional leased offices, warehouses and service centers in the United States, Brazil, Mexico, Nigeria, Malaysia, Australia, United Arab Emirates and Saudi Arabia. We believe our facilities are adequate for our current needs and for the foreseeable future.

Item 3.  Legal Proceedings

In June 2019, the Company announced that it reached a settlement with Inmarsat plc that concludes the GX Dispute. Pursuant to the settlement the Company paid $45.0 million in June 2019 and paid $5.0 million in July 2019 and will pay $0.8 million in the third quarter of 2020. The Company has an accrued liability of $0.8 million as of December 31, 2019.

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 no insurance coverage and those that may involve the filing of liens against the Company or its assets.

Item 4.  Mine Safety Disclosures

Not applicable.

30


 

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

RigNet’s common stock, $0.001 par value, is traded on the NASDAQ Global Select Market (NASDAQ), under the ticker symbol RNET. There were approximately 105 holders of record of RigNet’s common stock as of February 28, 2020.

Dividends

We have not paid any cash dividends on our common stock and do not intend to do so in the foreseeable future. Further, our term loan agreement restricts our ability to pay cash dividends. We currently intend to retain all available funds and any future earnings to support the operation and to finance the growth and development of our business.

Stockholder Return Performance Presentation

The following graph compares the change in the cumulative total stockholder return on our common stock during the period from December 31, 2014 through December 31, 2019, with the cumulative total return on the NASDAQ Composite Index, the PHLX Oil Service Sector Index and the NASDAQ Telecommunications Index. The Oil Service Sector Index is a price-weighted index composed of the common stocks of 15 companies that provide oil drilling and production services, oilfield equipment, support services, and geophysical/reservoir services. The Telecommunications Index tracks NASDAQ listed telecommunications and telecommunications equipment companies. The comparison assumes that $100 was invested on December 31, 2014 in our common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any.

Comparison of Cumulative Total Return

 

 

 

12/31/2014

 

 

12/31/2015

 

 

12/31/2016

 

 

12/31/2017

 

 

12/31/2018

 

 

12/31/2019

 

RigNet, Inc. (1)

 

100

 

 

 

50

 

 

 

56

 

 

 

36

 

 

 

31

 

 

 

16

 

NASDAQ

 

100

 

 

 

106

 

 

 

114

 

 

 

146

 

 

 

140

 

 

 

189

 

Oil Service Sector

 

100

 

 

 

75

 

 

 

87

 

 

 

71

 

 

 

38

 

 

 

37

 

NASDAQ

   Telecommunications

 

100

 

 

 

93

 

 

 

106

 

 

 

125

 

 

 

129

 

 

 

143

 

 

(1)

Based on the last reported sale price of the Company's stock as reported by NASDAQ on the disclosed date or nearest date prior to the disclosed date.

31


 

Investors are cautioned against drawing any conclusions from the data contained in the graph as past results are not necessarily indicative of future performance.

Notwithstanding anything to the contrary set forth in any of the Company’s previous or future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate this Annual Report on Form 10-K or future filings with the SEC, in whole or in part, the preceding performance information shall not be deemed to be “soliciting material” or to be “filed” with the SEC or incorporated by reference into any filing except to the extent this performance presentation is specifically incorporated by reference therein.

Item 6.  Selected Financial Data

The following table sets forth our selected consolidated financial data for the periods indicated. Data was derived from RigNet, Inc.’s audited consolidated financial statements. The data set forth should be read together with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with Item 8. “Financial Statements and Supplementary Data.”  Our historical results for any prior period are not necessarily indicative of the results to be expected in the future.


32


 

 

We have never declared or paid any cash dividends on our common stock.

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands, except per share amounts)

 

Consolidated Statements of Comprehensive

   Income (Loss) Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

242,931

 

 

$

238,854

 

 

$

204,892

 

 

$

220,623

 

 

$

271,260

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue (excluding depreciation and amortization)

 

 

149,753

 

 

 

146,603

 

 

 

131,166

 

 

 

129,759

 

 

 

163,238

 

Depreciation and amortization

 

 

31,129

 

 

 

33,154

 

 

 

30,845

 

 

 

33,556

 

 

 

32,471

 

Impairment of intangibles

 

 

-

 

 

 

-

 

 

 

-

 

 

 

397

 

 

 

14,262

 

Change in fair value of earn-out/contingent consideration

 

 

2,499

 

 

 

3,543

 

 

 

(320

)

 

 

(1,279

)

 

 

-

 

Gain on sales of property, plant and

   equipment, net of retirements

 

 

(4,240

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

GX dispute

 

 

-

 

 

 

50,612

 

 

 

-

 

 

 

-

 

 

 

-

 

Selling and marketing

 

 

12,230

 

 

 

12,844

 

 

 

8,347

 

 

 

7,172

 

 

 

9,449

 

General and administrative

 

 

53,630

 

 

 

53,193

 

 

 

44,842

 

 

 

53,469

 

 

 

63,192

 

Total expenses

 

 

245,001

 

 

 

299,949

 

 

 

214,880

 

 

 

223,074

 

 

 

282,612

 

Operating income (loss)

 

 

(2,070

)

 

 

(61,095

)

 

 

(9,988

)

 

 

(2,451

)

 

 

(11,352

)

Interest expense

 

 

(5,958

)

 

 

(3,969

)

 

 

(2,870

)

 

 

(2,708

)

 

 

(2,054

)

Other income (expense), net

 

 

(13

)

 

 

4

 

 

 

133

 

 

 

(313

)

 

 

(845

)

Loss before income taxes

 

 

(8,041

)

 

 

(65,060

)

 

 

(12,725

)

 

 

(5,472

)

 

 

(14,251

)

Income tax (expense) benefit

 

 

(10,745

)

 

 

2,746

 

 

 

(3,472

)

 

 

(5,825

)

 

 

(2,409

)

Net loss

 

 

(18,786

)

 

 

(62,314

)

 

 

(16,197

)

 

 

(11,297

)

 

 

(16,660

)

Less: Net loss (income) attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-redeemable, non-controlling interest

 

 

370

 

 

 

139

 

 

 

(21

)

 

 

210

 

 

 

314

 

Net loss attributable to RigNet, Inc.

   stockholders

 

$

(19,156

)

 

$

(62,453

)

 

$

(16,176

)

 

$

(11,507

)

 

$

(16,974

)

Net loss per share attributable to RigNet

   , Inc. common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.97

)

 

$

(3.34

)

 

$

(0.90

)

 

$

(0.65

)

 

$

(0.97

)

Diluted

 

$

(0.97

)

 

$

(3.34

)

 

$

(0.90

)

 

$

(0.65

)

 

$

(0.97

)

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,832

 

 

 

18,713

 

 

 

18,009

 

 

 

17,768

 

 

 

17,534

 

Diluted

 

 

19,832

 

 

 

18,713

 

 

 

18,009

 

 

 

17,768

 

 

 

17,534

 

Other Non-GAAP Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

41,100

 

 

$

34,793

 

 

$

29,669

 

 

$

37,181

 

 

$

46,907

 

 

The 2018 acquisitions of Auto-Comm, SAFCON and Intelie contributed revenue and net income of $17.7 million and $2.2 million, respectively, for the year ended December 31, 2018. The 2017 acquisitions of ESS, DTS and Cyphre

33


 

contributed $5.1 million of revenue for the year ended December 31, 2017. The 2017 acquisitions contributed $1.4 million to net income for the year ended December 31, 2017.

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Consolidated Balance Sheets Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,941

 

 

$

21,711

 

 

$

34,598

 

 

$

57,152

 

 

$

60,468

 

Restricted cash - current

 

 

42

 

 

 

41

 

 

 

43

 

 

 

139

 

 

 

543

 

Restricted cash - long-term

 

 

1,522

 

 

 

1,544

 

 

 

1,500

 

 

 

1,514

 

 

 

-

 

Total assets

 

 

250,980

 

 

 

258,925

 

 

 

230,094

 

 

 

230,972

 

 

 

258,116

 

Current maturities of long-term debt

 

 

10,793

 

 

 

4,942

 

 

 

4,941

 

 

 

8,478

 

 

 

8,421

 

Long-term debt

 

 

96,934

 

 

 

72,085

 

 

 

53,173

 

 

 

52,990

 

 

 

69,238

 

Long-term deferred revenue

 

 

855

 

 

 

318

 

 

 

546

 

 

 

254

 

 

 

359

 

 

Non-GAAP Financial Measures

We refer to Adjusted EBITDA in this Annual Report on Form 10-K and from time to time in other filings that we make with the SEC. Adjusted EBITDA is a financial measure that is not calculated in accordance with GAAP and should not be considered as an alternative to net income (loss), operating income (loss), basic or diluted earnings (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.

We define Adjusted EBITDA as net income (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, stock-based compensation, restructuring charges, change in fair value of earn-outs and contingent consideration, executive departure costs, acquisition costs, the GX dispute 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 investor’s and analyst’s analyses include Adjusted EBITDA;

 

by comparing our Adjusted EBITDA in different periods, 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 our 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;

34


 

 

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

 

Adjusted EBITDA does not reflect interest expense or principal payments on debt;

 

Adjusted EBITDA does not reflect cash requirements for income taxes;

 

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

 

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

 

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

 

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, which may require settlement in cash in the future;

 

Adjusted EBITDA does not reflect executive departure costs;

 

Adjusted EBITDA does not reflect restructuring charges;

 

Adjusted EBITDA does not reflect the GX dispute;

 

Adjusted EBITDA does not reflect the GX Dispute Phase II costs; and

 

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.

The following table presents a reconciliation of net loss to Adjusted EBITDA for each of the periods presented. Net loss is the most comparable GAAP measure to Adjusted EBITDA.

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands)

 

Reconciliation of Net Loss to Adjusted

   EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(18,786

)

 

$

(62,314

)

 

$

(16,197

)

 

$

(11,297

)

 

$

(16,660

)

Interest expense

 

 

5,958

 

 

 

3,969

 

 

 

2,870

 

 

 

2,708

 

 

 

2,054

 

Depreciation and amortization

 

 

31,129

 

 

 

33,154

 

 

 

30,845

 

 

 

33,556

 

 

 

32,471

 

Impairment of goodwill, intangibles and

   property, plant and equipment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

397

 

 

 

14,262

 

(Gain) loss on sales of property, plant and

   equipment, net of retirements

 

 

(4,240

)

 

 

331

 

 

 

55

 

 

 

(153

)

 

 

(41

)

Stock-based compensation

 

 

8,621

 

 

 

4,712

 

 

 

3,703

 

 

 

3,389

 

 

 

3,660

 

Restructuring costs

 

 

731

 

 

 

842

 

 

 

767

 

 

 

1,911

 

 

 

7,410

 

Change in fair value of earn-out/contingent

   consideration

 

 

2,499

 

 

 

3,543

 

 

 

(320

)

 

 

(1,279

)

 

 

-

 

Executive departure costs

 

 

-

 

 

 

406

 

 

 

1,192

 

 

 

1,884

 

 

 

1,000

 

Acquisition costs

 

 

497

 

 

 

2,284

 

 

 

3,282

 

 

 

240

 

 

 

342

 

GX dispute

 

 

-

 

 

 

50,612

 

 

 

-

 

 

 

-

 

 

 

-

 

GX dispute Phase II costs

 

 

3,946

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Income tax expense (benefit)

 

 

10,745

 

 

 

(2,746

)

 

 

3,472

 

 

 

5,825

 

 

 

2,409

 

Adjusted EBITDA (non-GAAP measure)

 

$

41,100

 

 

$

34,793

 

 

$

29,669

 

 

$

37,181

 

 

$

46,907

 

 

35


 

Item 7.  Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

General

The following discussion should be read together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements about our business and operations. Our future results may differ materially from those we currently anticipate as a result of the factors we describe under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Executive Overview

We deliver advanced software and communications infrastructure that allow our customers to realize the business benefits of digital transformation. With world-class, ultra-secure solutions spanning global IP connectivity, bandwidth-optimized OTT applications, IIoT big data enablement, and industry-leading machine learning analytics, we support the full evolution of digital enablement, empowering businesses to respond faster to high priority issues, mitigate the risk of operational disruption, and maximize their overall financial performance.

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 with what is often the sole means of communication 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 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 a real-time machine learning and AI data platform (Intelie Pipes and Intelie LIVE), Cyphre Encryption, Enhanced Cybersecurity Services (ECS), edge computing solution services that assist customers with collecting and standardizing the complex data produced by edge devices (LIVE-IT), applications for safety and workforce productivity such as weather monitoring primarily in the North Sea (MetOcean), and certain other value-added services such as Advanced Video Intelligence (AVI). This segment also includes the private machine-to-machine IoT data networks including Supervisory Control and Data Acquisition (SCADA) provided primarily for pipelines.

 

Systems Integration. Our Systems Integration segment provides design and implementation services for customer telecommunications systems. Solutions are delivered based on the customer’s specifications, adhering to international industry standards and best practices. Project services may include consulting, design, engineering, project management, procurement, testing, installation, commissioning and maintenance. Additionally, Systems Integration provides complete monitoring and maintenance for fire and gas detection systems and