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MarketScreener Homepage  >  Equities  >  Nasdaq  >  RigNet, Inc.    RNET

RIGNET, INC.

(RNET)
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RIGNET : Management's Discussion And Analysis Of Financial Condition And Results Of Operations (form 10-Q)

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05/11/2020 | 05:50pm EDT

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 included elsewhere herein, and with our Annual Report on Form 10-K for the year ended December 31, 2019 (our "Annual Report"). The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" in Item 1A of our Annual Report and elsewhere in this Quarterly Report on Form 10-Q. See "Forward-Looking Statements" below.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to a number of risks and uncertainties, many of which are beyond the Company's control. Forward-Looking statements may include statements about:

  • the effects of the COVID-19 pandemic and reduced demand for oil and gas;


       •   expected forgiveness of any loan obtained by the Company pursuant to
           the Paycheck Protection Program of the United States Small Business
           Administration;


       •   the level of drilling and production activity and the number of
           offshore drilling, FPSOs and other vessels that are removed from
           service, either temporarily or permanently;


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


  • demand for our services and solutions;


  • the advantages of our services compared to others;


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


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


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


       •   our cash and liquidity needs and expectations regarding cash flow from
           operations, capital expenditures, covenant compliance and borrowing
           availability under our Revolving Credit Facility;


  • our expectations regarding the deductibility of goodwill for tax purposes;


       •   our business and corporate development strategy, including statements
           concerning our ability to pursue, consummate and integrate merger and
           acquisition opportunities successfully;


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


       •   our ability to manage and grow our business and execute our business
           strategy, including developing and marketing additional Apps & IoT
           solutions, expanding our market share, increasing secondary and
           tertiary customer penetration at remote sites, enhancing systems
           integration and extending our presence into complementary remote
           communication segments through organic growth and strategic
           acquisitions;


  • our ability to develop and market additional products and services;


  • our cost reduction, restructuring activities and related expenses;


  • the buildout and upgrade of our Gulf of Mexico microwave network; and


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


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In some cases, forward-looking statements can be identified by terminology such as "may," "could," "should," "would," "expect," "plan," "project," "intend," "will," "anticipate," "believe," "estimate," "predict," "potential," "pursue," "target," "continue," the negative of such terms or other comparable terminology that convey uncertainty of future events or outcomes. All of these types of statements, other than statements of historical fact included in this Quarterly Report on Form 10-Q, are forward-looking statements.

The forward-looking statements contained in this Quarterly Report on Form 10-Q are largely based on Company expectations, which reflect estimates and assumptions made by Company management. These estimates and assumptions reflect management's best judgment based on currently known market conditions and other factors. Although the Company believes such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties beyond its control. In addition, management's assumptions may prove to be inaccurate. The Company cautions that the forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance, and it cannot assure any reader that such statements will be realized or the forward-looking statements or events will occur. Future results may differ materially from those anticipated or implied in forward-looking statements due to factors listed in the "Risk Factors" section of our Annual Report and elsewhere in this Quarterly Report on Form 10-Q. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual future results, performance or achievements may vary materially from any projected future results, performance or achievements expressed or implied by these forward-looking statements. Additionally, the COVID-19 pandemic has had and continues to have a material adverse impact on the world economy and the oil and gas industry, the results of which may exacerbate any or all of the risk factors described in our Annual Report or herein. As both the spread of the virus as well as government and industry reactions thereto are occurring at a rapid pace, the ultimate effect of the virus on our business, financial condition and results of operations remains uncertain. The forward-looking statements speak only as of the date made, and other than as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Our Operations

We are a leading provider of ultra-secure, intelligent networking solutions and specialized applications. Customers use our private networks to manage information flows and execute mission-critical operations primarily in remote areas where conventional telecommunications infrastructure is either unreliable or unavailable. We provide our clients what is often the sole means of communications for their remote operations. On top of and vertically integrated into these networks we provide services ranging from fully-managed voice, data, and video to more advanced services including: cyber security threat detection and prevention; applications to improve crew welfare, safety or workforce productivity; and a real-time AI-backed data analytics platform to enhance customer decision making and business performance.

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

       •   Managed 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 Adaptive Video Intelligence (AVI). This
           segment also includes the private machine-to-machine IoT data networks
           including Supervisory Control and Data Acquisition (SCADA) provided
           primarily for pipelines.


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


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

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

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

Recent Developments

The COVID-19 pandemic combined with an oversupply in the oil markets has caused RigNet's common stock to decline from $6.60 on December 31, 2019, to $1.18 on May 1, 2020. Under the rules of NASDAQ, if our common stock falls below $1 for 30 business days, NASDAQ can notify us of its intent to delist our stock. If we are notified of delisting, our stock must trade above $1 in any ten-day periods during the 180-day period commencing with the notice of delisting. Failure to achieve compliance could result in our stock being delisted. If our common stock was to be delisted for any reason, it could negatively impact RigNet by, among other things, reducing the liquidity and market price of our common stock, reducing the number of investors willing to hold or acquire our common stock and limiting our ability to issue securities to obtain financing in the future.

On February 21, 2020, we entered into the Third Amendment to the Third Amended and Restated Credit Agreement (Credit Agreement), with the same four financial institutions that were part of the previous credit agreement. The Credit Agreement provides for a $16.0 million Term Loan, a $100.0 million RCF and a $30.0 million accordion feature. The Term Loan matures on March 31, 2022 with principal installments of $2.0 million due quarterly beginning June 30, 2020. The RCF and accordion, if exercised, mature on August 31, 2022. The Consolidated Leverage Ratio is set at 3.25 times through third quarter 2020, thereafter stepping down to 3.0 times through second quarter 2021, thereafter stepping down to 2.75 times through the maturity of the revolving facility. The Credit Agreement bears interest at a rate of LIBOR plus a margin ranging from 1.75% to 3.25% based on the Consolidated Leverage Ratio.

As of March 31, 2020, we have a backlog for our percentage of completion projects of $22.4 million.

In May 2020, we entered into a loan agreement (PPP Loan) with Bank of America, N.A., as lender, pursuant to the Paycheck Protection Program (PPP) of the U.S. Small Business Administration (SBA) established under the Coronavirus Aid, Relief, and Economic Security Act. Under the PPP Loan, we borrowed $6.8 million which we expect to be eligible for forgiveness pursuant to the applicable regulations of the PPP. Currently, the regulations provide for loan forgiveness to the extent that (i) the proceeds are used in the eight week period after funding of the loan, (ii) at least 75% of the forgiven amount is used for eligible payroll costs and (iii) the remaining proceeds are used for interest on mortgages, rents, or utilities, and interest on other debt obligations incurred before February 15, 2020.


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The amount eligible for forgiveness may be reduced if, among other things, we reduce our full-time headcount or we reduce salaries and wages beyond certain limits. While we expects all $6.8 million will be used in accordance with the regulations for forgiveness, not all costs are within our control and these regulations are subject to change as a result of administrative or judicial proceedings or legislative initiatives including additional regulations that are anticipated to be released by the SBA.

Any amounts not forgiven must be repaid in two years and accrue interest at a rate of 1.0% per year. No interest or principal payments are due for six months, at which time interest and principal payments will be made on any unforgiven balance under terms established by Bank of America, N.A. at that time. The SBA has publicly stated that it intends to review all loans in excess of $2.0 million when loan forgiveness is requested. The SBA has not provided any further details of this review and we cannot be assure the results of any such review.

Known Trends and Uncertainties

Operating Matters

Starting in the first quarter of 2020, we and our customers were adversely impacted by the COVID-19 pandemic. We and our customers have had to close certain offices and have certain employees work from home. Our customers have had certain of their work sites for large projects closed and are operating certain sites with only essential employees. Global economic activity and the oil and gas industry declined substantially in the first quarter of 2020. Travel to and from remote locations has been restricted and in some cases, suspended. The global oil industry we serve has experienced reduced demand and furloughs as a result. Furthermore, in March 2020, the Saudi state oil producer, Saudi Aramco and Russia, along with the broader OPEC+ group, failed to reach an agreement to continue production cuts and collectively launched a price war with the goal of attempting to recapture market share that OPEC+ had lost to U.S. share oil producers in recent years. Following the OPEC+ actions on price and in conjunction with significantly reduced demand as result of COVID-19 pandemic, Brent crude prices have fallen to the $14.85 per barrel as of March 31, 2020. WTI prices went below zero on April 20, 2020 as a result of US based storage facilities reaching capacity.

Uncertainties in the oil and gas industry will continue to impact our profitability. The fundamentals of the oil and gas industry we serve are expected to remain challenged throughout 2020. Many oil and gas companies have already cut their capital expenditures budget significantly, reduced and/or furloughed their workforces, and delayed decisions on future projects or canceled them altogether. During 2020, we expect both onshore and offshore drilling activity to decline compared to both the previous year and the previous forecast. SI project decision-making is likely to slow and construction on existing projects maybe be suspended or delayed due to the impacts of COVID-19. Finally, while our Apps & IoT segment may also be impacted, we believe our products provide much-needed solutions that enable our customers to be more productive, efficient, safe, and financially competitive.

In response to this rapidly changing environment, RigNet has taken a proactive measure to reduce costs, including eliminating all travel that is not customer-facing, reducing professional fees, eliminating discretionary spending, and temporarily reducing compensation for our executives, our employees, and our board of directors. We are also working with both customers and suppliers to reduce our bandwidth costs as sites move from working to idle. However, our ability to significantly reduce our bandwidth commitments is limited given the nature of our contracts with those providers. Finally, RigNet has also sought to take advantage of certain government relief programs available in the various jurisdictions in which we work. We cannot guarantee whether our efforts to secure government relief will be successful or provide meaningful relief.

In addition, uncertainties that could impact our profitability include service responsiveness to remote locations, communication network complexities, political and economic instability in certain regions, cyber-attacks, export restrictions, licenses and other trade barriers. These uncertainties may result in the delay of service initiation, which may negatively impact our results of operations. Additional uncertainties that could impact our operating cash flows include the availability and cost of satellite bandwidth, timing of collecting our receivables, and our ability to increase our contracted services through sales and marketing efforts while leveraging the contracted satellite and other communication service costs. We believe these trends have made lenders more reluctant to provide financing to companies operating in and serving the oil and gas industry. We may be unable to access additional credit to fund ongoing operations.


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Sales Tax Audit

We are undergoing a routine sales tax audit from a state where we have operations. The audit can cover up to a four-year period. We are in the early stages of the audit and do not have any estimates of further exposure, if any, for the tax years under review.

Results of Operations


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



                                                               Three Months Ended
                                                                    March 31,
                                                               2020          2019
                                                                 (in thousands)
 Revenue                                                     $  58,761$  57,510
 Expenses:

Cost of revenue (excluding depreciation and amortization) 37,950 36,456

 Depreciation and amortization                                   6,931         8,912
 Impairment of goodwill                                         23,141             -
 Selling and marketing                                           2,812         3,793
 General and administrative                                     13,829        16,470
 Total expenses                                                 84,663        65,631
 Operating loss                                                (25,902 )      (8,121 )
 Other expense, net                                             (1,849 )      (1,166 )
 Loss before income taxes                                      (27,751 )      (9,287 )
 Income tax benefit (expense)                                      980        (2,666 )
 Net loss                                                      (26,771 )     (11,953 )
 Less: Net income attributable to non-controlling interest          70            30

Net loss attributable to RigNet, Inc. stockholders $ (26,841 )$ (11,983 )

 Other Non-GAAP Data:
 Adjusted EBITDA                                             $   8,351$   8,386




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The following represents selected financial operating results for our segments:



                                                               Three Months Ended
                                                                    March 31,
                                                                2020          2019
                                                                 (in thousands)

Managed Communications Services:

 Revenue                                                     $   39,896$ 42,333

Cost of revenue (excluding depreciation and amortization) 25,502 26,985

 Depreciation and amortization                                    4,659        6,264
 Impairment of goodwill                                          21,755            -
 Selling, general and administrative                              2,807        3,797

Managed Communication Services operating income (loss) $ (14,827 )$ 5,287

Applications and Internet-of-Things:

 Revenue                                                     $    8,743$  8,015

Cost of revenue (excluding depreciation and amortization) 4,561 4,497

 Depreciation and amortization                                    1,182        1,231
 Impairment of goodwill                                               -            -
 Selling, general and administrative                              1,620          565

Applications & Internet-of-Things operating income $ 1,380$ 1,722

Systems Integration:

 Revenue                                                     $   10,122$  7,162

Cost of revenue (excluding depreciation and amortization) 7,887 4,974

 Depreciation and amortization                                      164          662
 Impairment of goodwill                                           1,386            -
 Selling, general and administrative                                404        1,124

Systems Integration and Automation operating income $ 281$ 402

Three Months Ended March 31, 2020 and 2019

Revenue. Revenue increased by $1.3 million, or 2.2%, to $58.8 million for the three months ended March 31, 2020 from $57.5 million for the three months ended March 31, 2019. Revenue for the Apps & IoT segment increased $0.7 million, or 9.1%, due to our focus on the growth of the application layer and IoT space. Systems Integration revenue increased by $3.0 million, or 41.3%, due to the timing of certain projects. The increase was partially offset by a $2.4 million decrease in MCS segment revenue due to service and install which had substantial revenue in the prior year quarter from the expansion of the LTE network in the Gulf of Mexico.

Cost of Revenue (excluding depreciation and amortization). Cost of revenue (excluding depreciation and amortization) increased by $1.5 million, or 4.1%, to $38.0 million for the three months ended March 31, 2020 from $36.5 million for the three months ended March 31, 2019. This increase was due to progress on certain SI projects, partially offset by decreased activity in the MCS segment. Cost of revenue (excluding depreciation and amortization) decreased in the MCS segment by $1.5 million due to reduction in ongoing expenses. Cost of revenue (excluding depreciation and amortization) increased in the Systems Integration segment by $2.9 million due to the timing of System Integration projects. Cost of revenue (excluding depreciation and amortization) increased in the Apps & IoT segment by $0.1 million.

Depreciation and Amortization. Depreciation and amortization expense decreased by $2.0 million to $6.9 million for the three months ended March 31, 2020 from $8.9 million for the three months ended March 31, 2019. The decrease is primarily attributable to the intangibles from the July 2012 acquisition of Nessco being fully amortized coupled with lower capital expenditures.

Impairment of Goodwill. The combination of COVID-19 pandemic and unprecedent oil and gas prices impacted our internal forecast. As a result, we performed an interim goodwill impairment test and determined that two of our reporting units were in excess of their fair value which resulted in a goodwill impairment charge of $23.1 million. The charge fully impairs goodwill previously reported in MCS of $21.8 million and Systems Integration of $1.4 million.


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Selling and Marketing. Selling and marketing expenses decreased $1.0 million to $2.8 million for the three months ended March 31, 2020 from $3.8 million for the three months ended March 31, 2019.

General and Administrative. General and administrative expenses decreased by $2.6 million to $13.8 million for the three months ended March 31, 2020 from $16.5 million for the three months ended March 31, 2019. General and administrative costs decreased due to reduced stock based-compensation and legal cost attributable to settlement of the GX Dispute during 2019.

Income Tax Expense. Our effective income tax rates were 3.5% and (28.7%) for the three months ended March 31, 2020 and 2019, respectively. Our effective tax rate is affected by factors including changes in valuation allowances, fluctuations in income across jurisdictions with varying tax rates, and changes in income tax reserves, including related penalties and interest.

Liquidity and Capital Resources

At March 31, 2020, we had working capital, including cash and cash equivalents, of $34.3 million. In April 2020, the Company drew an additional $3.0 million on the RCF for liquidity purposes.

During the next twelve months, we expect our principal sources of liquidity to be cash flows from operating activities, the PPP Loan, cash and cash equivalents on hand. We believe we have sufficient liquidity and capital resources to meet our current operating requirements and any growth plans. We may elect to pursue expansion opportunities within the next year, which could require additional financing, either equity or debt, however, we acknowledge additional opportunity for borrowing will be limited. Additionally, during the COVID-19 pandemic and reduction of oil and gas activity, the company has cut spend including board, executive, and employee pay, professional fees, capital expenditures and other operating costs.

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

© Edgar Online, source Glimpses

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