RIGNET, INC. 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
OnDecember 21, 2020 , we announced that our Board of Directors unanimously approved the Company's entry into a definitive agreement whereby Viasat will acquire the Company in an all-stock transaction representing an enterprise value of$222 million , including the Company's net debt as ofSeptember 30, 2020 , based on the closing price of Viasat common stock onDecember 18, 2020 . Under the terms of the agreement, the Company's stockholders will receive a fixed exchange ratio of 0.1845 shares of Viasat stock for each share of the Company's common stock owned by the stockholders. Based on the parties' volume weighted average prices ("VWAPs") for the 20 trading days ending onDecember 18, 2020 , the transaction represents a 17.9% premium for the Company's stockholders. Upon closing, the Company's stockholders are expected to own approximately 5.7% of Viasat's outstanding common stock. The all-stock transaction is intended to be tax-free to the Company stockholders. The transaction, which is expected to close by mid-calendar year 2021, is subject to customary closing conditions and regulatory approvals, including the approval ofRigNet's stockholders. 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 SaaS
offerings such as a real-time machine learning and AI data platform
(Intelie Pipes and Intelie LIVE), Cyphre Encryption, ECS, applications for
safety and workforce productivity such as weather monitoring primarily in
the
AVI. This segment also includes the private machine-to-machine IoT data
networks including SCADA provided primarily for pipelines.
• Systems Integration (SI). Our SI 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.
Corporate and eliminations primarily represents unallocated executive and support activities, including back-office software development, interest expense, income taxes, eliminations, the GX dispute and change in fair value of earn-out/contingent consideration.
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Customers in our MCS and Apps & IoT segments are primarily served under
fixed-price contracts, either on a monthly, usage 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). SI
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 SI 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
As of
As of
Known Trends and Uncertainties
Operating Matters
Uncertainties in the oil and gas industry may continue to impact our profitability. The fundamentals of the oil and gas industry we serve expect to remain challenged at least into the first half of 2021 particularly offshore. In 2020, our customers and we were adversely impacted by the COVID-19 pandemic. Our customers have had certain of their work-sites for large projects closed and are operating certain sites with only essential employees. 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 layoffs as a result. Furthermore, in the first half of 2020, the Saudi state oil producer, Saudi Aramco, andRussia , along with the broader OPEC+ group, initially 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 toU.S. oil producers in recent years. Following the OPEC+ actions on price and in conjunction with significantly reduced demand as a result of the COVID-19 pandemic, Brent crude prices which were$67.77 as ofDecember 31, 2019 , fell to$9.12 as ofApril 21, 2020 , and rose to$51.22 per barrel as ofDecember 31, 2020 . There is no guarantee that OPEC+ will continue the current production cuts and an increase in oil supply could have an adverse effect on our industry. The oil and gas environment continues to be challenged with operators focusing on projects with shorter pay-back periods that generally require less capital investment and lower costs from service providers and drilling contractors. We generally anticipate that oil and gas demand will begin to recover as the impact of COVID-19 eases and that the oil and gas industry will begin to recover in 2021. However, we cannot anticipate when the impact of the COVID-19 on the global economic conditions will ease substantially. We expect that customers will begin to move forward on major projects and drilling campaigns and that the importance of digital transformation in the oil and gas industry will continue to accelerate. Generally, a prolonged lower oil price environment decreases exploration and development drilling investment, utilization of drilling rigs and the activity of the global oil and gas industry that we serve. In addition, uncertainties that could impact our profitability include service responsiveness to remote locations, communication network complexities, political and economic instability in certain regions, cyber-attacks, export restrictions, licenses and other trade barriers. These uncertainties may result in the delay of service initiation, which 35 -------------------------------------------------------------------------------- may negatively impact our results of operations. Additional uncertainties that could impact our operating cash flows include the availability and cost of satellite bandwidth, timing of collecting our receivables, and our ability to increase our contracted services through sales and marketing efforts while leveraging the contracted satellite and other communication service costs.
Sales Tax Audit
We are undergoing a routine sales tax audit from a state where we have operations. The audit can cover up to a four-year period. We are in the early stages of the audit and do not have any estimates of further exposure, if any, for the tax years under review.
The Company closed a prior year sales tax audit from a state where we have operations. The assessment had no material impact to the Company's Consolidated Financial Statements
Critical Accounting Policies Certain of our accounting policies require judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, observance of trends in the industry, information provided by our customers, and information available from other outside sources, as appropriate. Future results may differ from these judgments under different assumptions or conditions. Our accounting policies that require management to apply significant judgment include:
Revenue Recognition - Revenue from Contracts with Customers
Revenue is recognized to depict the transfer of promised goods or services in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.
Revenue Recognition - MCS and Apps & IoT
MCS and Apps & IoT customers are primarily served under fixed-price contracts, either on a monthly, usage or day rate basis or for equipment sales and consulting services. Our contracts are generally in the form ofMaster 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). Performance Obligations Satisfied Over Time-The delivery of service represents the single performance obligation under MCS and Apps & IoT contracts. Revenue for contracts is generally recognized over time as service is transferred to the customer and we expect to be entitled to the agreed monthly, day rate or usage rate in exchange for those services. Performance Obligations Satisfied at a Point in Time-The delivery of equipment represents the single performance obligation under equipment sale contracts. Revenue for equipment sales is generally recognized upon delivery of equipment to customers.
Revenue Recognition - Systems Integration
Revenues related to long-term, fixed-price SI contracts for customized network solutions are recognized based on the percentage of completion for the contract. At any point,RigNet has numerous contracts in progress, all of which are at various stages of completion. Accounting for revenues and profits on long-term contracts requires estimates of total estimated contract costs and estimates of progress toward completion to determine the extent of revenue and profit recognition. Progress towards completion on fixed-price contracts is measured based on the ratio of costs incurred to total estimated contract costs (the cost-to-cost method). These estimates may be revised as additional information becomes available or as specific project circumstances change. Performance Obligations Satisfied Over Time - The delivery of a SI solution represents the single performance obligation under SI contracts. Progress towards completion on fixed-price contracts is measured based on the ratio of costs incurred to total estimated contract costs (the cost-to-cost method). These estimates may be revised as additional information becomes available or as specific project circumstances change. 36 -------------------------------------------------------------------------------- We review all material contracts on a monthly basis and revise the estimates as appropriate for developments such as providing services, purchasing third-party materials and equipment at costs differing from those previously estimated, and incurring or expecting to incur schedule issues. Changes in estimated final contract revenues and costs can either increase or decrease the final estimated contract profit or loss. Profits are recorded in the period in which a change in estimate is recognized, based on progress achieved through the period of change. Anticipated losses on contracts are recorded in full in the period in which they become evident. Revenue recognized in excess of amounts billed is classified as a current asset under Costs and estimated earnings in excess of billings on uncompleted contracts (CIEB). Variable Consideration - SI - We record revenue on contracts relating to certain probable claims and unapproved change orders by including in revenue an amount less than or equal to the amount of costs incurred to date relating to these probable claims and unapproved change orders, thus recognizing no profit until such time as claims are finalized or change orders are approved. The amount of unapproved change orders and claim revenues is included in our Consolidated Balance Sheets as part of CIEB. No material unapproved change orders or claims revenue was included in CIEB as ofDecember 31, 2020 and 2019. As new facts become known, an adjustment to the estimated recovery is made and reflected in the current period. SI contracts are billed in accordance with the terms of the contract which are typically either based on milestones or specified time intervals. As ofDecember 31, 2020 and 2019, the amount of CIEB related to Systems Integration projects was$12.0 million and$13.3 million , respectively. Under long-term contracts, amounts recorded in CIEB may not be realized or paid, respectively, within a one-year period. As ofDecember 31, 2020 and 2019,$1.0 million and$1.0 million , respectively, of amounts billed to customers in excess of revenue recognized to date are classified as a current liability, under deferred revenue. Additionally, as ofDecember 31, 2020 and 2019, there were$3.6 million and$2.6 million of retention included in Accounts Receivable.
Accounts Receivable
Trade accounts receivable are recognized as customers are billed in accordance with customer contracts. We report an allowance for doubtful accounts for probable credit losses existing in accounts receivable. Management determines the allowance which is adjusted based on historical experience, current economic conditions, and reasonable assumptions. Individual receivables and balances which have been outstanding greater than 120 days are reviewed individually. Account balances, when determined to be uncollectible, are charged against the allowance.
Property, Plant and Equipment
Property, plant and equipment consists of (i) telecommunication and computer equipment, (ii) furniture and other office equipment, (iii) leasehold improvements, (iv) building and (v) land. All property, plant and equipment, excluding land, is depreciated and stated at acquisition cost net of accumulated depreciation. Depreciation is calculated using the straight-line method over the expected useful lives of the respective assets, which range from one to ten years. We assess the value of property, plant and equipment for impairment when we determine that events and circumstances indicate that the recorded carrying value may not be recoverable. An impairment is determined by comparing estimated future net undiscounted cash flows to the carrying value at the time of the assessment. No impairment to property, plant and equipment was recorded in the years endedDecember 31, 2020 , 2019 or 2018. Any future downturn in our business could adversely impact the key assumptions in our impairment test. While we believe that there appears to be no indication of current or future impairment, historical operating results may not be indicative of future operating results and events and circumstances may occur causing a triggering event in a period as short as three months.
Intangibles
Intangibles consist of customer relationships, covenants-not-to-compete, brand name, licenses, developed technology and backlog acquired as part of our acquisitions. Intangibles also include internal-use software. Intangibles have useful lives ranging from 5.0 to 20.0 years and are amortized on a straight-line basis. We assess the value of intangibles for impairment when we determine that events and circumstances indicate that the recorded carrying value may not be recoverable. An impairment is determined by comparing estimated future net undiscounted cash flows to the carrying value at the time of the assessment. InSeptember 2020 , we identified a triggering event in the Apps & IoT segment associated with Cyphre as a result of market conditions, which resulted in a reduction in our cash flow projections during a revision of our internal forecast. We performed a recoverability analysis and determined the carrying value of the intangible assets acquired with the Cyphre acquisition, which included trade name, customer relationship and developed technology, was in excess of their recoverable value and we recognized an impairment of$3.8 million . 37 --------------------------------------------------------------------------------
No impairment to intangibles was recorded in the years ended
Any future downturn in our business could adversely impact the key assumptions in our impairment test. While we believe that there appears to be no indication of current or future impairment, historical operating results may not be indicative of future operating results and events and circumstances may occur causing a triggering event in a period as short as three months.
Goodwill resulted from prior acquisitions as the consideration paid for the acquired businesses exceeded the fair value of acquired identifiable net tangible and intangible assets.Goodwill is reviewed for impairment at least annually, as ofJuly 31 , with additional evaluations being performed when events or circumstances indicate that the carrying value of these assets may not be recoverable. The goodwill impairment test is used to identify potential impairment by comparing the fair value of each reporting unit to the book value of the reporting unit, including goodwill. Fair value of the reporting unit is determined using a combination of the reporting unit's expected present value of future cash flows and a market approach. The present value of future cash flows is estimated using our most recent forecast and our weighted average cost of capital. The market approach uses a market multiple on the reporting unit's cash generated from operations. Significant estimates for each reporting unit included in our impairment analysis are cash flow forecasts, our weighted average cost of capital, projected income tax rates and market multiples. Changes in these estimates could affect the estimated fair value of our reporting units and result in an impairment of goodwill in a future period. If the fair value of a reporting unit is less than its book value, goodwill of the reporting unit is considered to be impaired. If the book value of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any impairment in the value of goodwill is charged to earnings in the period such impairment is determined. The combination of the COVID-19 pandemic and unprecedented oil and gas prices during the first quarter of 2020 impacted our internal forecast. As a result, we performed an interim goodwill impairment test during the first quarter of 2020 and determined that two of our reporting units had carrying values in excess of their fair value which resulted in a goodwill impairment charge of$23.1 million . The charge fully impaired goodwill previously reported in MCS of$21.8 million and Systems Integration of$1.4 million . Apps & IoT had$20.5 million of goodwill as ofDecember 31, 2020 , and fair value exceeded carrying value by over 100% as of theJuly 31, 2020 annual impairment test. Any future downturn in our business could adversely impact the key assumptions in our impairment test. While we believe that there appears to be no indication of current or future impairment, historical operating results may not be indicative of future operating results and events and circumstances may occur causing a triggering event in a period as short as three months.
We recorded no goodwill impairments in the years ending
Taxes Current income taxes are determined based on the tax laws and rates in effect in the jurisdictions and countries that we operate in and revenue is earned. Deferred income taxes reflect the tax effect of net operating losses, foreign tax credits and the tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates. Valuation allowances are established when management determines that it is more likely than not that some portion or the entire deferred tax asset will not be realized. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty. In the normal course of business, we prepare and file tax returns based on interpretation of tax laws and regulations, which are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. We evaluate our tax positions and recognize only tax benefits for financial purposes that, more likely than not, will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position.
We have elected to include income tax related interest and penalties as a component of income tax expense.
38
--------------------------------------------------------------------------------New Accounting Pronouncements
No standard implemented during 2020 or 2019 had a material effect on our financial position, cash flow or results of operations. See our audited consolidated financial statements and the notes thereto included in this Annual Report on Form 10-K for more details regarding our implementation and assessment of new accounting standards.
Results of Operations
The following table sets forth selected financial and operating data for the
periods indicated.
Percentage Change
Year Ended December 31, 2019 to 2018 to
2020 2019 2018 2020 2019
(in thousands, except percentages)
Revenue $ 207,921 $ 242,931 $ 238,854 (14.4 )% 1.7 %
Expenses:
Cost of revenue (excluding
depreciation and amortization) 130,330 149,753 146,603 (13.0 )% 2.1 %
Depreciation and amortization 26,534 31,129 33,154 (14.8 )% (6.1 )%
Impairment of goodwill and
intangible assets 26,977 - - * *
Change in fair value of
earn-out/contingent consideration 4,048 2,499 3,543 62.0 % 29.5 %
Gain on sales of property, plant
and
equipment, net of retirements - (4,240 ) - * *
GX dispute - - 50,612 * *
Selling and marketing 9,631 12,230 12,844 (21.3 )% (4.8 )%
General and administrative 43,810 53,630 53,193 (18.3 )% 0.8 %
Total expenses 241,330 245,001 299,949 (1.5 )% (18.3 )%
Operating loss (33,409 ) (2,070 ) (61,095 ) 1,514.0 % (96.6 )%
Other expense, net (5,555 ) (5,971 ) (3,965 ) (7.0 )% 50.6 %
Loss before income taxes (38,964 ) (8,041 ) (65,060 ) 384.6 % (87.6 )%
Income tax (expense) benefit (6,564 ) (10,745 ) 2,746 (38.9 )% (491.3 )%
Net loss (45,528 ) (18,786 ) (62,314 ) 142.4 % (69.9 )%
Less: Net income attributable to
non-controlling
interests 280 370 139 (24.3 )% 166.2 %
Net loss attributable to RigNet,
Inc.
stockholders $ (45,808 ) $ (19,156 ) $ (62,453 ) 139.1 % (69.3 )%
Other Non-GAAP Data:
Adjusted EBITDA (1) $ 33,272 $ 41,100 $ 34,793 (19.0 )% 18.1 %
(1) See Non-GAAP Financial Measures for a reconciliation of our net loss to Adjusted EBITDA
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The following represents selected financial operating results for our segments:
Year Ended December 31, Percentage Change
2019 to 2018 to
2020 2019 2018 2020 2019
(in thousands, except percentages)
Managed Communications Services:
Revenue $ 135,754 $ 164,857 $ 171,574 (17.7 )% (3.9 )%
Cost of revenue (excluding
depreciation and
amortization) 86,825 100,394 105,101 (13.5 )% (4.5 )%
Depreciation and amortization 18,707 21,403 22,759 (12.6 )% (6.0 )%
Impairment of goodwill 21,755 - - * *
Selling, general and administrative 10,310 13,288 16,448
(22.4 )% (19.2 )%
Managed Communications Services
operating (106.2 )% 9.2 %
income (loss) $ (1,843 ) $ 29,772 $ 27,266
Applications and
Internet-of-Things:
Revenue $ 34,458 $ 35,368 $ 25,713 (2.6 )% 37.5 %
Cost of revenue (excluding
depreciation and
amortization) 14,520 17,239 13,386 (15.8 )% 28.8 %
Depreciation and amortization 4,544 4,892 4,570 (7.1 )% 7.0 %
Impairment of intangible assets 3,836 - - * *
Selling, general and administrative 5,955 4,551 1,961
30.9 % 132.1 %
Applications and Internet-of-Things
operating (35.5 )% 49.9 %
income $ 5,603 $ 8,686 $ 5,796
Systems Integration:
Revenue $ 37,709 $ 42,706 $ 41,567 (11.7 )% 2.7 %
Cost of revenue (excluding
depreciation and
amortization) 28,985 32,120 28,116 (9.8 )% 14.2 %
Depreciation and amortization 638 1,627 2,511 (60.8 )% (35.2 )%
Impairment of goodwill 1,386 - - * *
Selling, general and administrative 1,500 2,530 1,698
(40.7 )% 49.0 %
Systems Integration operating (19.1 )% (30.4 )%
income $ 5,200 $ 6,429 $ 9,242 Years Ended
Revenue. Revenue decreased by$35.0 million , or 14.4%, to$207.9 million for the year endedDecember 31, 2020 from$242.9 million for the year endedDecember 31, 2019 . Revenue for the MCS segment decreased$29.1 million , or 17.7% due to a decrease in site counts as a result of the deteriorating conditions in the oil and gas industry that we serve as well as from the effect of the COVID-19 pandemic and non-recurring service installation revenue related to the expansion of the LTE network in theGulf of Mexico that occurred in the prior year. Revenue for the Systems Integration segment decreased$5.0 million , or 11.7%, due primarily to timing of certain projects. Revenue for the Apps & IoT segment decreased$0.9 million , or 2.6%, despite an increase in Intelie's revenue of 32%, due to lower equipment sales and bandwidth usage in our IoT business. Cost of Revenue (excluding depreciation and amortization). Cost of revenue (excluding depreciation and amortization) decreased by$19.4 million , or 13.0%, to$130.3 million for the year endedDecember 31, 2020 from$149.8 million for the year endedDecember 31, 2019 . Cost of revenue (excluding depreciation and amortization) decreased in the MCS segment by$13.6 million and was directly related to the decrease in revenue which was a result of stacking rigs and decreased site counts. Cost of revenue (excluding depreciation and amortization) decreased in the Systems Integration segment by$3.1 million due to the timing of certain projects. Cost of revenue (excluding depreciation and amortization) decreased in the Apps & IoT segment by$2.7 million due to the decrease in equipment re-sales and bandwidth in IoT compared to the prior year. Depreciation and Amortization. Depreciation and amortization expenses decreased by$4.6 million to$26.5 million for the year endedDecember 31, 2020 from$31.1 million for the year endedDecember 31, 2019 . The decrease is primarily attributable to the intangibles from theJuly 2012 acquisition of Nessco being fully amortized coupled with lower capital expenditures compared to the prior year. Impairment ofGoodwill and Intangible Assets. The combination of the COVID-19 pandemic and unprecedented low oil and gas prices during the first quarter of 2020 impacted our internal forecast. As a result, we 40 -------------------------------------------------------------------------------- performed an interim goodwill impairment test during the first quarter of 2020 and determined that two of our reporting units had carrying values in excess of their fair value which resulted in a goodwill impairment charge of$23.1 million . The charge fully impaired goodwill previously reported in MCS of$21.8 million and Systems Integration of$1.4 million . InSeptember 2020 , we identified a triggering event in the Apps & IoT segment associated with Cyphre as a result of market conditions, which resulted in a reduction in our cash flow projections during a revision of our internal forecast. We performed a recoverability analysis and determined the carrying value of the intangible assets acquired with the Cyphre acquisition, which included trade name, customer relationship and developed technology, was in excess of their recoverable value and we recognized an impairment of$3.8 million . Gain on sales of property, plant and equipment, net of retirements. During the year endedDecember 31, 2019 , the Company recognized a gain of$4.2 million on the sale of certain assets. Selling and Marketing. Selling and marketing expenses decreased by$2.6 million to$9.6 million for the year endedDecember 31, 2020 from$12.2 million for the year endedDecember 31, 2019 . This decrease was due to the reductions in travel, contract labor and trade shows in response to the COVID-19 pandemic. General and Administrative. General and administrative expenses decreased by$9.8 million to$43.8 million for the year endedDecember 31, 2020 from$53.6 million for the year endedDecember 31, 2019 . General and administrative costs decreased due to reduced stock based-compensation, non-recurring legal cost attributable to the settlement of the GX Dispute during 2019, reduced travel and reduced professional fees in response to the COVID-19 pandemic. Income Tax Expense. Our effective income tax rate was (16.8%) and (133.6%) for the years endedDecember 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. See Note 13 - "Income Taxes," to our consolidated financial statements included in this Annual Report on Form 10-K for more information regarding the items comprising our effective tax rates.
Years Ended
Revenue. Revenue increased by$4.1 million , or 1.7%, to$242.9 million for the year endedDecember 31, 2019 from$238.9 million for the year endedDecember 31, 2018 , driven by growth in the Apps & IoT segment. Revenue for the Apps & IoT segment grew$9.7 million , or 37.5%, due to our focus on the growth of the application layer, including Intelie. Revenue for the Systems Integration segment increased$1.1 million , or 2.7%, due primarily to productivity on certain large projects. Revenue for the MCS segment decreased$6.7 million , or 3.9% largely due to the loss of drilling contractor Noble Corporation plc as a customer at the end of 2017, with decommissioning occurring throughout 2018. Cost of Revenue (excluding depreciation and amortization). Cost of revenue (excluding depreciation and amortization) increased by$3.2 million , or 2.1%, to$149.8 million for the year endedDecember 31, 2019 from$146.6 million for the year endedDecember 31, 2018 . Cost of revenue (excluding depreciation and amortization) increased in the Systems Integration segment by$4.0 million . Cost of revenue (excluding depreciation and amortization) increased in the Apps & IoT segment by$3.9 million as we continue our strategy to grow our application layer and IoT space, including Intelie. Cost of revenue (excluding depreciation and amortization) decreased in the MCS segment by$4.7 million from cost reductions. Depreciation and Amortization. Depreciation and amortization expenses decreased by$2.0 million to$31.1 million for the year endedDecember 31, 2019 from$33.2 million for the year endedDecember 31, 2018 . The decrease is primarily attributable to the intangibles from theJuly 2012 acquisition of Nessco being fully amortized coupled with lower capital expenditures. Gain on sales of property, plant and equipment, net of retirements. During the year endedDecember 31, 2019 , the Company recognized a gain of$4.2 million on the sale of certain assets. Selling and Marketing. Selling and marketing expenses decreased by$0.6 million to$12.2 million for the year endedDecember 31, 2019 from$12.8 million for the year endedDecember 31, 2018 . This decrease was due to cost reductions and reduced personnel costs, offset partially as we re-allocated resources to our Apps & IoT segment. General and Administrative. General and administrative expenses increased by$0.4 million to$53.6 million for the year endedDecember 31, 2019 from$53.2 million for the year endedDecember 31, 2018 . General and administrative costs increased primarily due to increased stock-based compensation and increased GX Dispute legal expenses, partially offset by reduced personnel costs. 41 -------------------------------------------------------------------------------- Income Tax Expense. Our effective income tax rate was (133.6%) and 4.2% for the years endedDecember 31, 2019 and 2018, respectively. Our effective tax rate is affected by factors including changes in valuation allowances, fluctuations in income across jurisdictions with varying tax rates, and changes in income tax reserves, including related penalties and interest. See Note 13 - "Income Taxes," to our consolidated financial statements included in this Annual Report on Form 10-K for more information regarding the items comprising our effective tax rates.
Liquidity and Capital Resources
AtDecember 31, 2020 , we had working capital, including cash and restricted cash, of$14.8 million . See Note 1 - "Business and Summary of Significant Accounting Policies," to our consolidated financial statements included in this Annual Report on Form 10-K for more information regarding the item comprising our restricted cash.
Over the past three years, annual capital expenditures have ranged from
After settlement of intercompany payables and notes atDecember 31, 2020 , there is no cash in foreign subsidiaries available for repatriation to our domestic parent. No deferred tax liability has been recognized as ofDecember 31, 2020 for those earnings that are not considered permanently reinvested. During the next twelve months, we expect our principal sources of liquidity to be cash flows from operating activities, cash and cash equivalents, borrowing availability under our Credit Agreement and additional financing activities we may pursue, which may include debt or equity offerings. In forecasting our cash flows we have considered factors including contracted and expected services for customers, and contracted and available satellite bandwidth. Year Ended December 31, 2020 2019 2018 (in thousands) Consolidated Statements of Cash Flows Data: Cash, cash equivalents and restricted cash, January 1,$ 14,505 $ 23,296 $ 36,141 GX Dispute payment (750 ) (50,000 ) -
Remaining net cash provided by operating
activities 33,398 29,716
7,673
Net cash provided by (used in) operating activities 32,648 (20,284 )
7,673
Net cash used in investing activities (13,026 ) (16,543 ) (34,198 ) Net cash provided by (used in) financing activities (19,373 ) 28,098
11,855
Changes in foreign currency translation (1,220 ) (62 )
1,825
Cash, cash equivalents and restricted cash, December 31,$ 13,534 $ 14,505 $ 23,296 Currently, the Norwegian Kroner, the British Pound Sterling and the Brazilian Real are the foreign currencies that could materially impact our liquidity. We presently do not hedge these risks, but evaluate financial risks on a regular basis and may utilize financial instruments in place in the future if deemed necessary. During the years endedDecember 31, 2020 , 2019 and 2018, 88.2%, 90.6% and 91.6% of our revenue was denominated inU.S. dollars, respectively.
Operating Activities
Net cash provided in operating activities was$32.6 million for the year endedDecember 31, 2020 compared to net cash used in operations of$20.3 million for the year endedDecember 31, 2019 . The increase in cash from operating activities of$52.9 million was primarily due to payment of$50.0 million towards the GX Dispute settlement prior year and the timing of paying our accounts payables, partially offset by the timing of collecting receivables.
Net cash used in operating activities was
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settlement, partially offset by the timing of collecting receivables. Excluding
the $50.0 million GX Dispute settlement payment, the remaining net cash provided
by operating activities was $29.7 million .
Our cash provided by operations is subject to many variables including the
volatility of the oil and gas industry and the demand for our services. Other
factors impacting operating cash flows include the availability and cost of
satellite bandwidth, as well as the timing of collecting our receivables. Our
future cash flow from operations will depend on our ability to increase our
contracted services through our sales and marketing efforts while leveraging our
contracted satellite and other communication service costs.
Investing Activities
Net cash used in investing activities was$13.0 million ,$16.5 million and$34.2 million in the years endedDecember 31, 2020 , 2019 and 2018, respectively. Of these amounts$13.1 million ,$22.4 million , and$30.1 million , respectively, were for capital expenditures, a decrease of$9.3 million and a decrease of$7.7 million for the years endedDecember 31, 2020 and 2019, respectively, compared to each of the respective prior periods. The decrease is due to a slowdown in activity as a result of the decrease in the oil and gas as well as COVID-19. We expect our 2021 capital expenditures to be focused on success-based growth. In the years endedDecember 31, 2020 , 2019 and 2018, there were$0.1 million ,$5.8 million , and$1.1 million , respectively, of proceeds from the sales of property, plant and equipment. Net cash used in investing activities was$16.5 million in the years endedDecember 31, 2019 . Of this amount$22.4 million were for capital expenditures, a decrease of$7.7 million for the year endedDecember 31, 2019 , compared to the year endedDecember 31, 2020 . Capital expenditures for the year endedDecember 31, 2019 included$2.8 million for the buildout of the LTE network in theGulf of Mexico with our partner T-Mobile and$2.4 million for the build-out of our new Lafayette office, which consolidates what was previously three facilities into one facility. Furthermore, the Company had$2.8 million of non-cash vendor financed capital expenditures, which in the first quarter of 2020 has become a debt obligation. In the year endedDecember 31, 2019 , there were$5.8 million of proceeds from the sales of property, plant and equipment.
Financing Activities
Net cash used in financing activities was
Cash used in financing activities for the year endedDecember 31, 2020 included borrowings on the RCF and Paycheck Protection Program Loan (PPP Loan) of$15.6 million and$6.3 million , respectively, offset by$39.5 million which includes principal and other voluntary prepayments on the credit facility as well as vendor finance payments on our long term debt,$1.0 million withheld to cover employee taxes on stock-based compensation and$0.5 million in financing fees related to the Credit Agreement.
Net cash provided by financing activities was
Cash provided by financing activities for the year endedDecember 31, 2019 included$49.5 million in proceeds from borrowings primarily related to the GX Dispute, partially offset by$19.2 million in principal payments on our long-term debt,$1.4 million withheld to cover employee taxes on stock-based compensation and$0.5 million in financing fees related to the consents, waiver and amendment to the Credit Agreement. Net cash provided by financing activities for the year endedDecember 31, 2018 included draws of$23.8 million on our revolving credit facility partially offset by$5.1 million in principal payments on our long-term debt. Additionally, we paid the$8.0 million TECNOR earnout inJuly 2018 , of which$6.4 million is recorded as cash used in financing activities and$1.6 million is recorded as cash used in operating activities. The Company received proceeds from the issuance of common stock upon the exercise of stock options of$1.0 million offset by$1.2 million for stock withheld to cover employee taxes on stock-based compensation Credit Agreement
The Credit Agreement provides for a
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The Credit Agreement bears interest at a rate of LIBOR plus a margin ranging
from 1.75% to 3.25% based on the Company's Consolidated Leverage Ratio. LIBOR is
scheduled to cease to exist entirely after 2021. The Credit Agreement addresses
this situation with a LIBOR successor rate, being one or more Secured Overnight
Financing Rates (SOFR) or another alternate benchmark rate. The Credit Agreement
also addresses the situation in which no LIBOR successor rate has been
determined. Interest on the Credit Agreement is payable monthly with principal
payments of $2.0 million due quarterly beginning June 30, 2020 .
The weighted average interest rate for the years ended December 31, 2020 and
2019 was 3.9% and 5.2%, respectively, with an interest rate of 3.1% at December
31, 2020 .
As of
The Company's Credit Agreement contains certain covenants and restrictions, including restricting the payment of cash dividends under default, and maintaining certain financial covenants such as a Consolidated Leverage Ratio, of less than or equal to 3.25 through the third quarter of 2020. The Consolidated Leverage Ratio requirement stepped down to 3.00 through the second quarter of 2021 and then steps down to 2.75 for all remaining quarters. The Consolidated Fixed Charge Coverage ratio requirement is greater than or equal to 1.25 through the maturity of the Credit Agreement. If any default occurs related to these covenants that are 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. OnSeptember 8, 2020 , we entered into a fourth amendment to the Credit Agreement (the Fourth Amendment), which permits us to exclude the PPP Loan from the calculation of Consolidated Funded Indebtedness for all periods prior to and includingMarch 31, 2021 . We believe we have accurately calculated and reported our required debt covenant calculations for the reporting period endedDecember 31, 2020 and are in compliance with the required covenant ratios. As ofDecember 31, 2020 , the Consolidated Leverage Ratio was 2.76 and the Consolidated Fixed Charge Coverage was 2.00. We expect to remain in compliance with our required debt covenant calculations for the foreseeable future. In the event that there are changes in economic conditions we can limit or control our spending through reductions in discretionary capital or other types of controllable expenditures, monetization of assets, or any combination of these alternatives if needed to remain in compliance with such covenants.
Vendor Finance Agreement
As ofDecember 31, 2020 , we had a vendor financing agreement (Vendor Finance Arrangement) in place, with an outstanding balance of$2.1 million . The outstanding balance bears interest at a rate of 6% and has quarterly payments of$0.3 million of principal and interest throughJanuary 2023 . Subsequently, inJanuary 2021 , we had paid off the Vendor Finance Arrangement.
Paycheck Protection Program Loan
In
We submitted a loan forgiveness application toBank of America onDecember 1, 2020 , which approved the application and forwarded it to the SBA for confirmation. The forgiveness 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. While we cannot determine the ultimate outcome, based on our assessments on the current rules in place, we believe it should qualify for full forgiveness. Any amounts not forgiven must be repaid in two years and will 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 byBank 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 assure the results of any such review.
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet arrangements.
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--------------------------------------------------------------------------------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 theSEC . 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 (minus) 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, merger and acquisition costs, the GX dispute; GX Dispute Phase II costs, COVID-19 Costs (defined below) 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 mayevaluate 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, asdefined 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;
• 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 mergers & acquisitions 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;
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• Adjusted EBITDA does not reflect executive departure costs; • Adjusted EBITDA does not reflect restructuring charges; • Adjusted EBITDA does not reflect the GX dispute; • Adjusted EBITDA does not reflect the GX Dispute Phase II costs;
• Adjusted EBITDA does not reflect the one-time costs directly related to
the COVID-19 pandemic such as costs associated with cleaning, testing,
quarantine of employees, and modifications to our
network (the COVD-19 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,
2020 2019 2018
(in thousands)
Net loss $ (45,528 ) $ (18,786 ) $ (62,314 )
Interest expense 5,299 5,958 3,969
Depreciation and amortization 26,534 31,129 33,154
Impairment of goodwill and intangible assets 26,977 -
-
(Gain) loss on sales of property, plant and
equipment, net of retirements 197 (4,240 ) 331 Stock-based compensation 5,738 8,621 4,712 Restructuring Costs 199 731 842
Change in fair value of earn-out/contingent
consideration 4,048 2,499
3,543
Executive departure costs 553 -
406
Mergers and Acquisitions costs 1,826 497 2,284 COVID-19 Costs 865 - - GX dispute - - 50,612 GX dispute Phase II costs - 3,946 - Income tax expense (benefit) 6,564 10,745 (2,746 ) Adjusted EBITDA (non-GAAP measure)$ 33,272 $ 41,100 $ 34,793
We evaluate Adjusted EBITDA generated from our operations to assess the potential recovery of historical capital expenditures, determine timing and investment levels for growth opportunities, extend commitments of satellite bandwidth cost, invest in new products and services, expand or open new offices and service centers, and assess purchasing synergies.
During the year ended
During the year ended
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