Notes to Consolidated Financial Statements
1. Nature of Operations and Recent Developments
Except as expressly stated or the context otherwise requires, the terms “we,” “us,” “our,” the “Company” and “ICD” refer to Independence Contract Drilling, Inc. and its subsidiary.
We provide land-based contract drilling services for oil and natural gas producers targeting unconventional resource plays in the United States. We construct, own and operate a premium fleet comprised of modern, technologically advanced drilling rigs. Our fleet currently includes
32
marketed ShaleDriller
®
rigs that are specifically engineered and designed to optimize the development of our customers’ most technically demanding oil and gas properties, and
two
idle ShaleDriller rigs that will enter our marketed fleet when planned upgrades are completed.
Our marketed
32
rig fleet includes
29
AC powered (“AC”) rigs and
two
1500-HP ultra-modern SCR rigs. Our
two
idle rigs that currently are not included in our marketed fleet include
one
non-walking 1500-HP AC rig and
one
1500-HP SCR that will be converted to AC pad-optimal status prior to entering our fleet. We expect both of these rigs to enter our marketed fleet following their upgrade over the next
twelve
to
18 months
based upon market conditions and customer requirements.
We currently focus our operations on unconventional resource plays located in geographic regions that we can efficiently support from our Houston, Texas and Midland, Texas facilities in order to maximize economies of scale. Currently, our rigs are operating in the Permian Basin and the Haynesville Shale; however, our rigs have previously operated in the Eagle Ford Shale and the Mid-Continent and Eaglebine regions as well.
Our business depends on the level of exploration and production activity by oil and natural gas companies operating in the United States, and in particular, the regions where we actively market our contract drilling services. The oil and natural gas exploration and production industry is historically cyclical and characterized by significant changes in the levels of exploration and development activities. Oil and natural gas prices and market expectations of potential changes in those prices significantly affect the levels of those activities. Worldwide political, regulatory, economic, and military events, as well as natural disasters have contributed to oil and natural gas price volatility historically, and are likely to continue to do so in the future. Any prolonged reduction in the overall level of exploration and development activities in the United States and the regions where we market our contract drilling services, whether resulting from changes in oil and natural gas prices or otherwise, could materially and adversely affect our business.
Oil and Natural Gas Prices and Drilling Activity
Oil prices declined from a high of
$107.95
per barrel in the second quarter of 2014, to a low of
$26.19
per barrel in the first quarter of 2016 (West Texas Intermediate - Cushing, Oklahoma (“WTI”) spot price as reported by the United States Energy Information Administration (the “EIA”). Similarly, natural gas prices (as measured at Henry Hub) declined from an average of
$4.37
per MMBtu in 2014 to
$2.52
per MMBtu in 2016. As a result, our industry experienced an exceptional downturn, with the U.S. land rig count falling from a high of
1930
rigs in 2014 to a low of
404
rigs in 2016. In addition to overall rig count decline, pricing for our contract drilling services also substantially declined during this period of time. Although crude oil prices recovered in 2017 and 2018, reaching a high of
$77.41
per barrel in the second quarter of 2018, the U.S. land count never recovered to its 2014 highs, only reaching
1083
rigs the week ending December 28, 2018. Similarly, although pricing improved during this period, pricing never reached rates experienced in 2014.
During the fourth quarter of 2018, oil prices began to decline, reaching a low of
$44.48
. Although oil prices have recently recovered to the mid fifties in February 2019, most of our E&P customers have decreased planned capital expenditure budgets with the goal of operating within their cash flows, which they expect to be lower in 2019 unless commodity prices substantially improve. These changes have resulted in softening demand for contract drilling services. Although we believe market conditions for our services have stabilized, we believe this stabilization is predicated on oil prices remaining above a
$50
per barrel or higher range. If oil prices were to fall below these levels for any sustainable period, demand and pricing for our contract drilling services could decline and have a material adverse affect on our operations and financial condition.
Sidewinder Merger
On July 18, 2018, ICD, Patriot Saratoga Merger Sub, LLC, a wholly owned subsidiary of ICD (“Merger Sub”), Sidewinder Drilling, LLC (“Sidewinder”) and MSD Credit Opportunity Master Fund, L.P., as Members’ Representative, entered into a definitive merger agreement (the “Merger Agreement”) pursuant to which Merger Sub merged with and into Sidewinder (the “Merger”), with Sidewinder surviving the Merger and becoming a wholly owned subsidiary of the ICD. The Merger transaction was completed on October 1, 2018. Pursuant to the terms of the Merger Agreement, Sidewinder Series A members received
36,752,657
shares of ICD common stock in exchange for
100%
of the outstanding Series A Common Units of Sidewinder (the “Series A Common Units”). The Merger was accounted for using the acquisition method of accounting with ICD identified as the accounting acquirer. The Series C Units of Sidewinder were canceled pursuant to the Merger Agreement. See Note 3 to our financial statements for further discussion of the Sidewinder Merger.
In order to finance (i) a portion of the consideration of the Merger and to pay fees, commissions, severance and other expenses and costs related thereto, (ii) the repayment of a fixed amount of outstanding Sidewinder’s first lien notes of (
$58.5 million
), (iii) the repayment of any Sidewinder debt under its revolving credit agreement, (iv) the repayment of our debt under our revolving credit agreement and (v) other transaction expenses, ICD incurred indebtedness of
$130.0 million
pursuant to the two new Credit Facilities discussed in Note 8 Long-term Debt.
Change in Plan of Sale of Assets
During the second quarter of 2017, our management committed to a plan to sell our former corporate headquarters and rig assembly yard complex located at 11601 North Galayda Street, Houston, Texas (the "Galayda Facility"). This plan of sale was subsequently affected by Hurricane Harvey, which caused substantial water-related damage to the Galayda Facility in August 2017, as well as our entry into a definitive merger agreement with Sidewinder Drilling in July 2018. The following summarizes material financial statement impacts of this plan of sale and associated changes as result of these matters:
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•
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In connection with our initial decision to sell the Galayda Facility, at June 30, 2017, we reclassified an aggregate
$4.0 million
of land, buildings and equipment from property, plant and equipment to assets held for sale on our consolidated balance sheet and recognized a
$0.5 million
asset impairment charge representing the difference between the carrying value and the fair value, less the costs to sell the related property.
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•
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As a result of water-related damage caused by Hurricane Harvey, in the third quarter of 2017, we recorded an additional impairment on this group of assets totaling
$0.6 million
.
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•
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Following an evaluation of the Galayda Facility and our operating plans following Hurricane Harvey, during the first quarter of 2018, management changed its plan to sell all of the Galayda Facility assets and decided to improve and utilize a portion of the land and buildings on the property. Based on this decision, which was previously considered unlikely, certain land and buildings at the Galayda Facility were reclassified to assets held and used as of March 31, 2018. Accordingly, we reduced assets held for sale by
$2.7 million
and increased property, plant and equipment by
$2.9 million
on our March 31, 2018 consolidated balance sheet and recognized
insurance recoveries, net of impairments
of approximately
$208 thousand
in our consolidated statement of operations for the three months ended March 31, 2018.
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•
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During the third quarter of 2018, as a result of the pending merger with Sidewinder, management decided to again enter into a plan to sell the entire Galayda Facility and entered into an agreement with a third-party buyer to sell the Galayda Facility in “as-is” condition for
$3.1 million
. As a result, the
$2.6 million
of property, plant and equipment, representing the portion of the Galayda Facility that was classified as held and used, was reclassified as held for sale on our September 30, 2018 consolidated balance sheet and we recognized an impairment charge of
$650 thousand
representing the difference between the carrying value of the property and the fair value of the property, less costs to sell.
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•
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During the fourth quarter of 2018, we recorded
insurance recoveries, net of impairments
of
$0.6 million
on the Galayda Facility water damage incurred during Hurricane Harvey after receiving a proof of loss letter from our insurance carrier, offset by an increased impairment of
$0.2 million
related to increased estimated costs to sell the Galayda Facility.
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2. Summary of Significant Accounting Policies
Basis of Presentation
These audited consolidated financial statements include all the accounts of ICD and its subsidiary. All significant intercompany accounts and transactions have been eliminated. Except for the subsidiary, we have no controlling financial interests in any other entity which would require consolidation. These audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). As we had no items of other comprehensive income in any period presented, no other comprehensive income is presented.
Cash and Cash Equivalents
We consider short-term, highly liquid investments that have an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable is comprised primarily of amounts due from our customers for contract drilling services. Accounts receivable are reduced to reflect estimated realizable values by an allowance for doubtful accounts based on historical collection experience and specific review of current individual accounts. Receivables are written off when they are deemed to be uncollectible. Allowance for doubtful accounts was
zero
as of December 31, 2018 and was
$8
thousand as of December 31, 2017.
Inventories
Inventory is stated at lower of cost or net realizable value and consists primarily of supplies held for use in our drilling operations. Cost is determined on an average cost basis.
Property, Plant and Equipment, net
Property, plant and equipment, including renewals and betterments, are stated at cost less accumulated depreciation. All property, plant and equipment are depreciated using the straight-line method based on the estimated useful lives of the assets. The cost of maintenance and repairs are expensed as incurred. Major overhauls and upgrades are capitalized and depreciated over their remaining useful life.
Depreciation of property, plant and equipment is recorded based on the estimated useful lives of the assets as follows:
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Estimated
Useful Life
|
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Buildings
|
20
|
-
|
39 years
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Drilling rigs and related equipment
|
3
|
-
|
20 years
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Machinery, equipment and other
|
3
|
-
|
7 years
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Vehicles
|
2
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-
|
5 years
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We own an approximate
14.4
acre rig assembly yard complex located at 11601 North Galayda Street, Houston, Texas 77086. During the third quarter of 2018, as a result of the pending merger with Sidewinder Drilling LLC, management decided to enter into a plan to sell the entire Galayda Facility and entered into an agreement with a third-party buyer to sell the Galayda Facility in “as-is” condition. As of December 31, 2018, the property is classified as held for sale.
Our operations are managed from field locations that we own or lease, that contain office, shop and yard space to support day-to-day operations, including repair and maintenance of equipment, as well as storage of equipment, materials and supplies. We currently have six such field locations.
Additionally, we lease office space for our corporate headquarters in northwest Houston located at 20475 State Highway 249, Suite 300, Houston, Texas 77070. Leases are evaluated at inception or at any subsequent material modification to determine if the lease should be classified as a capital or operating lease.
We review our assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets that are held and used is measured by comparison of the estimated future undiscounted cash flows associated with the asset to the carrying amount of the asset. If the carrying value of such assets is less than the estimated undiscounted cash flow, an impairment charge is recorded in the amount by which the carrying amount of the assets exceeds their estimated fair value.
Construction in progress represents the costs incurred for drilling rigs and rig upgrades under construction at the end of the period. This includes third party costs relating to the purchase of rig components as well as labor, material and other identifiable direct and indirect costs associated with the construction of the rig.
Capitalized Interest
We capitalize interest costs related to rig construction projects. Interest costs are capitalized during the construction period based on the weighted-average interest rate of the related debt. Capitalized interest amounted to
$0.2 million
,
$0.1 million
and
$0.1 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Financial Instruments and Fair value
Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
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Level 1
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Unadjusted quoted market prices for identical assets or liabilities in an active market;
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Level 2
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Quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets; and
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Level 3
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Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date
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This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The carrying value of certain of our assets and liabilities, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities approximates their fair value due to the short-term nature of such instruments.
The fair value of our long-term debt is determined by Level 3 measurements based on quoted market prices and terms for similar instruments, where available, and on the amount of future cash flows associated with the debt, discounted using our current borrowing rate for comparable debt instruments (the Income Method). Based on our evaluation of the risk free rate, the market yield and credit spreads on comparable company publicly traded debt issues, we used an annualized discount rate, including a credit valuation allowance, of
10.1%
. The fair value of our capital lease obligations is determined using Level 3 measurements using our current incremental borrowing rate. The estimated fair value of our long-term debt totaled
$134.9 million
and
$50.6 million
as of December 31,
2018
and
2017
, respectively, compared to a carrying amount of
$133.2 million
and
$49.3 million
as of December 31,
2018
and
2017
, respectively. The following table summarizes the carrying value and fair value of our long-term debt as of December 31,
2018
and
2017
.
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December 31, 2018
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December 31, 2017
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(in thousands)
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Carrying Value
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Fair Value
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Carrying Value
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Fair Value
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Term Loan Facility
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$
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130,000
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$
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131,893
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$
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—
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$
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—
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ABL Credit Facility
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2,566
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|
2,258
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|
|
—
|
|
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—
|
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CIT Credit Facility
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—
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|
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—
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|
|
48,541
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|
|
49,871
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Long-term capital leases
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648
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759
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737
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747
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133,214
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$
|
134,910
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49,278
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$
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50,618
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Less: Term Loan Facility deferred financing costs
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(3,202
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)
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—
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$
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130,012
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$
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49,278
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The fair value of our assets held for sale is determined using Level 3 measurements. Fair value measurements are applied with respect to our non-financial assets and liabilities measured on a nonrecurring basis, which would consist of measurements primarily of long-lived assets. There were
no
transfers between levels of the hierarchy for the years ended December 31,
2018
and
2017
.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in connection with the Sidewinder Merger. Goodwill is not amortized, but rather tested and assessed for impairment annually in the third quarter of each year, or more frequently if certain events or changes in circumstance indicate that the carrying amount may exceed fair value. We initially begin with a qualitative assessment of whether it is “more likely than not” that the fair value of one of our reporting units is less than its carrying value. If the carrying amount exceeds the fair value, an impairment charge will be recognized in an amount equal to the excess; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit.
Intangible Liabilities
Intangible liabilities were recorded in connection with the Sidewinder Merger for drilling contracts in place at the closing date of the transaction that had unfavorable contract terms as compared to current market terms for comparable drilling rigs. The various factors considered in the determination are (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig at the transaction closing date. The intangible liabilities were computed based on the present value of the differences in cash inflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated current market day rate using a risk-adjusted discount rate. The intangible liabilities are amortized to operating revenues over the remaining underlying contract terms. The remaining terms of these contracts as of December 31, 2018 range from
0
to
7
months, with a weighted-average term of approximately
3
months.
The following table summarizes the components of intangible liabilities, net:
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December 31,
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(in thousands)
|
2018
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2017
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Intangible liabilities
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$
|
3,123
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|
|
$
|
—
|
|
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Accumulated amortization
|
(2,044
|
)
|
|
—
|
|
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Intangible liabilities, net
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$
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1,079
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$
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—
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The intangible liabilities, net are classified in our consolidated balance sheet under the caption accrued liabilities.
Revenue and Cost Recognition
We earn contract drilling revenues pursuant to drilling contracts entered into with our customers. We perform drilling services on a “daywork” basis, under which we charge a specified rate per day, or “dayrate.” The dayrate associated with each of our contracts is a negotiated price determined by the capabilities of the rig, location, depth and complexity of the wells to be drilled, operating conditions, duration of the contract and market conditions. The term of land drilling contracts may be for a defined number of wells or for a fixed time period. We generally receive lump-sum payments for the mobilization of rigs and other drilling equipment at the commencement of a new drilling contract. Revenue and costs associated with the initial mobilization are deferred and recognized ratably over the term of the related drilling contract once the rig spuds. Costs incurred to relocate rigs and other equipment to an area in which a contract has not been secured are expensed as incurred. Our contracts provide for early termination fees in the event our customers choose to cancel the contract prior to the specified contract term. We record a contract liability for such fees received up front, and recognize them ratably as contract drilling revenue over the initial term of the related drilling contract or until such time that all performance obligations are satisfied. While under contract, our rigs generally earn a reduced rate while the rig is moving between wells or drilling locations, or on standby waiting for the customer. Reimbursements for the purchase of supplies, equipment, trucking and other services that are provided at the request of our customers are recorded as revenue when incurred. The related costs are recorded as operating expenses when incurred. Revenue is presented net of any sales tax charged to the customer that we are required to remit to local or state governmental taxing authorities.
Our operating costs include all expenses associated with operating and maintaining our drilling rigs. Operating costs include all “rig level” expenses such as labor and related payroll costs, repair and maintenance expenses, supplies, workers' compensation and other insurance, ad valorem taxes and equipment rental costs. Also included in our operating costs are certain costs that are not incurred at the rig level. These costs include expenses directly associated with our operations management team as well as our safety and maintenance personnel who are not directly assigned to our rigs but are responsible for the oversight and support of our operations and safety and maintenance programs across our fleet.
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). We adopted ASU 2014-09 and its related amendments (collectively known as ASC 606) effective on January 1, 2018 using the modified retrospective method. While ASC 606 requires additional disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, its adoption did not have a material impact on the measurement or recognition of our revenues. The amount of demobilization revenue that we collect, if any, is dependent upon the specific contract terms, which generally include provisions for reduced (or no) payment for demobilization when, among other things, the contract is renewed or extended, or when the rig is contracted with another client prior to the termination of the current contract. Since revenues associated with demobilization activity are typically variable, at each period end, they are estimated at the most likely amount, and constrained when the likelihood of a significant reversal is probable.
See Note 4 "Revenue from Contracts with Customers" for the required disclosures related to the impact of adopting this standard and a discussion of our policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.
Stock-Based Compensation
We record compensation expense over the requisite service period for all stock-based compensation based on the grant date fair value of the award. The expense is included in selling, general and administrative expense in our statements of operations or capitalized in connection with rig construction activity.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, we record deferred income taxes based upon differences between the financial reporting basis and tax basis of assets and liabilities, and use enacted tax rates and laws that we expect will be in effect when we realize those assets or settle those liabilities. We review deferred tax assets for a valuation allowance based upon management’s estimates of whether it is more likely than not that a portion of the deferred tax asset will be fully realized in a future period.
We recognize the financial statement benefit of a tax position only after determining that the relevant taxing authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
Our policy is to include interest and penalties related to the unrecognized tax benefits within the income tax expense (benefit) line item in our statements of operations.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses recognized during the reporting period. Actual results could differ from these estimates. Significant estimates made by management include depreciation of property, plant and equipment, impairment of property, plant and equipment, the collectibility of accounts receivable and the fair value of the assets acquired and liabilities assumed in connection with the Sidewinder Merger.
Other Matters
We have not elected to avail ourselves of the extended transition period available to emerging growth companies ("EGCs") as provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards, therefore, we will be subject to new or revised accounting standards at the same time as other public companies that are not EGCs.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases, to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. Under the new guidance, lessees will be required to recognize (with the exception of leases with terms of 12 months or less) at the commencement date, a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The provisions of this standard also apply to situations where companies are the lessor and therefore it could impact the accounting and related disclosures for our drilling contracts.
In July 2018, the FASB issued ASU No. 2018-11, Leases: Targeted Improvements, which provides an option to apply the guidance prospectively, and provides a practical expedient allowing lessors to combine the lease and non-lease components of revenues where the revenue recognition pattern is the same and where the lease component, when accounted for separately, would be considered an operating lease. The practical expedient also allows a lessor to account for the combined lease and non-lease components under ASC Topic 606, Revenue from Contracts with Customers, when the non-lease component is the predominant element of the combined components. We are in the process of evaluating the provisions of ASU No. 2018-11, specifically as they relate to our drilling contracts, but will elect the practical expedient for combining the lease and non-lease components of revenue. We are still evaluating which component is predominant.
We will adopt the new lease guidance effective January 1, 2019 and will elect the optional transition method whereby the initial application of the standard begins on the date of adoption and comparative periods are not restated. We will also elect the transition practical expedient package available in the ASU whereby we will not reassess (i) whether any of our expired or existing contracts are, or contain a lease, (ii) the classification for any expired or existing leases and (iii) initial direct costs for any existing leases.
As a lessee, we cannot yet fully quantify the impact of adoption as we are still analyzing all the acquired leases associated with the Sidewinder Merger that was completed during the fourth quarter of 2018. We do, however, expect our assets and liabilities to increase as a result of recognizing the right-of-use assets and lease liabilities. We are currently in the process of reviewing all relevant Sidewinder contracts and completing the implementation of a lease accounting system to manage our leases and converting our existing lease data to the new system.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other, which simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under this new standard, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognize an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact this new guidance will have on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as additional guidance on the measurement of credit losses on financial instruments. The new guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. In addition, the guidance amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The new guidance is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after December 15, 2018. We are in the initial stages of evaluating the impact this guidance will have on our accounts receivable.
3. Sidewinder Merger
We completed the Sidewinder Merger on October 1, 2018, through an exchange of
100%
of Sidewinder's outstanding voting interests for
36,752,657
shares of ICD common stock. The Sidewinder Merger was accounted for using the acquisition method of accounting with ICD identified as the accounting acquirer.
Sidewinder owns
15
AC drilling rigs and
four
modern 1500-HP SCR rigs, each marketed or operating in the Permian or Haynesville plays. Sidewinder also owns
four
smaller 1000-HP SCR rigs and
one
smaller 1000-HP AC rig, which ICD will use for spare equipment and does not intend to market following the Sidewinder Merger. The transaction combined two pad-
optimal drilling fleets focused in the Permian basin, Haynesville region and other basins in Texas and its contiguous states, and more than doubled the size of our pad-optimal fleet to
32
rigs, following upgrades to
five
Sidewinder rigs.
In addition, Sidewinder owns
11
mechanical rigs and related equipment (the "Mechanical Rigs") located in the Utica and Marcellus plays. As these rigs are not consistent with ICD’s core strategy or geographic focus, ICD has agreed that these rigs can be disposed of, with the Sidewinder unitholders receiving the net proceeds. Thus, in addition to the shares of ICD common stock issued at the closing of the transaction, the Sidewinder Series A Members are entitled to receive such member’s share of any Mechanical Rig Net Sales (as defined by the Merger Agreement), payable in accordance with the Merger Agreement to the extent such proceeds were not either used to repay certain Sidewinder indebtedness or paid as a dividend to the Sidewinder members prior to the closing of the Sidewinder Merger. As a result of this arrangement, we recorded
$15.9 million
, representing the fair value of the Mechanical Rigs less costs to sell, as assets held for sale, with an offsetting liability in contingent consideration at the closing of the transaction.
Consideration Transferred
The fair value of the consideration transferred to effect the acquisition of Sidewinder was as follows:
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(in thousands, except share price)
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Equity consideration:
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Number of shares of ICD common stock issued
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36,753
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ICD common share price on October 1, 2018
|
$
|
4.71
|
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Equity consideration
|
$
|
173,105
|
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Other consideration:
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Sidewinder indebtedness assumed and repaid by ICD
|
$
|
58,512
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Consideration transferred
|
$
|
231,617
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|
Preliminary Allocation of Consideration Transferred to Assets Acquired and Liabilities Assumed
The following amounts represents the preliminary estimates of the fair value of assets acquired and liabilities assumed in connection with the Sidewinder Merger transaction. Certain elements of the preliminary purchase price allocation are based on actuarial or other management estimates that may be refined over time. We do not expect the final amounts to differ materially from current estimates. We expect to finalize the allocation of purchase price to the assets acquired and liabilities assumed during 2019.
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Cash
|
$
|
10,743
|
|
|
Other current assets
|
23,496
|
|
|
Assets held for sale
|
16,427
|
|
|
Property, plant and equipment
|
215,284
|
|
|
Other long-term assets
|
343
|
|
|
Total assets acquired
|
266,293
|
|
|
Accounts payable and accrued liabilities
|
(17,278
|
)
|
|
Unfavorable contract liabilities
|
(3,123
|
)
|
|
Contingent consideration
|
(15,902
|
)
|
|
Net assets acquired
|
229,990
|
|
|
Goodwill
|
1,627
|
|
|
Total consideration transferred
|
$
|
231,617
|
|
Supplemental Pro Forma Financial Information
Sidewinder's results of operations have been included in ICD’s consolidated financial statements for the period subsequent to the closing of the acquisition on October 1, 2018. Sidewinder contributed revenues of approximately
$32.1 million
and operating income of approximately
$3.3 million
for the period from October 1, 2018 through December 31, 2018.
The following supplemental pro forma results of operations assume that Sidewinder had been acquired on January 1, 2017. The supplemental pro forma financial information was prepared based on the historical financial information of
Sidewinder and ICD and has been adjusted to give effect to pro forma adjustments that are both directly attributable to the transaction and factually supportable. The pro forma amounts reflect certain adjustments to revenues, depreciation and amortization and interest expense. It also excludes the results of operations for the
11
mechanical rigs that are part of the combined business after following the Sidewinder Merger transaction. The pro forma results for the year ended December 31, 2018 reflect adjustments to exclude the merger related costs incurred by Sidewinder and ICD totaling
$15.3 million
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(Unaudited)
|
|
(in thousands, except per share amounts)
|
2018
|
|
2017
|
|
Revenue
|
$
|
228,036
|
|
|
$
|
184,697
|
|
|
Net loss
|
$
|
(17,498
|
)
|
|
$
|
(46,134
|
)
|
|
Loss per share
|
$
|
(0.23
|
)
|
|
$
|
(0.62
|
)
|
4. Revenue from Contracts with Customers
Effective January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaborative arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when it transfers control of the promised goods or services to its customer, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. If control transfers to the customer over time, an entity selects a method to measure progress that is consistent with the objective of depicting its performance.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under the agreement, the following steps must be performed at contract inception: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.
Drilling Services
Our revenues are principally derived from contract drilling services and the activities in our drilling contracts, for which revenues may be earned, include: (i) providing a drilling rig and the crews and supplies necessary to operate the rig; (ii) mobilizing and demobilizing the rig to and from the initial and final drill site, respectively; (iii) certain reimbursable activities; (iv) performing rig modification activities required for the contract; and (v) early termination revenues. We account for these integrated services provided under our drilling contracts as a single performance obligation, satisfied over time, that is comprised of a series of distinct time increments. Consideration for activities that are not distinct within the context of our contracts, and that do not correspond to a distinct time increment within the contract term, are allocated across the single performance obligation and recognized ratably in proportion to the actual services performed over the initial term of the contract. If taxes are required to be collected from customers relating to our drilling services, they are excluded from revenue.
Dayrate Drilling Revenue.
Our drilling contracts provide that revenue is earned based on a specified rate per day for the activity performed. The majority of revenue earned under daywork contracts is variable, and depends on a rate scale associated with drilling conditions and level of service provided for each fractional-hour time increment over the contract term. Such rates generally include the full operating rate, moving rate, standby rate, and force majeure rate and determination of the rate per time increment is made based on the actual circumstances as they occur. Other variable consideration under these contracts could include reduced revenue related to downtime, delays or moving caps.
Mobilization/Demobilization Revenue.
We may receive fees (on either a fixed lump-sum or variable dayrate basis) for the mobilization and demobilization of our rigs. These activities are not considered to be distinct within the context of the contract and therefore, the associated revenue is allocated to the overall performance obligation and recognized ratably over the initial term of the related drilling contract. We record a contract liability for mobilization fees received, which is amortized ratably to revenue as services are rendered over the initial term of the related drilling contract. Demobilization fee revenue expected to be received upon contract completion is estimated as part of the overall transaction price at contract inception and recognized in earnings ratably over the initial term of the contract with an offset to an accretive contract asset.
In our contracts, there is generally significant uncertainty as to the amount of demobilization fee revenue that may ultimately be collected due to contractual provisions which stipulate that certain conditions be present at contract completion
for such revenue to be received. For example, the amount collectible may be reduced to zero if the rig has been contracted with a new customer upon contract completion. Accordingly, the estimate for such revenue may be constrained depending on the facts and circumstances pertaining to the specific contract. We assess the likelihood of receiving such revenue based on past experience and knowledge of the market conditions.
Reimbursable Revenue.
We receive reimbursements from our customers for the purchase of supplies, equipment and other services provided at their request in accordance with a drilling contract or other agreement. Such reimbursable revenue is variable and subject to uncertainty, as the amounts received and timing thereof is highly dependent on factors outside of our influence. Accordingly, reimbursable revenue is fully constrained and not included in the total transaction price until the uncertainty is resolved, which typically occurs when the related costs are incurred on behalf of a customer. We are generally considered a principal in such transactions and record the associated revenue at the gross amount billed to the customer.
Capital Modification Revenue.
From time to time, we may receive fees (on either a fixed lump-sum or variable dayrate basis) from our customers for capital improvements to our rigs to meet their requirements. Such revenue is allocated to the overall performance obligation and recognized ratably over the initial term of the related drilling contract, as these activities are not considered to be distinct within the context of our contracts. We record a contract liability for such fees received up front, and recognize them ratably as contract drilling revenue over the initial term of the related drilling contract.
Early Termination Revenue.
Our contracts provide for early termination fees in the event our customers choose to cancel the contract prior to the specified contract term. We record a contract liability for such fees received up front, and recognize them ratably as contract drilling revenue over the initial term of the related drilling contract or until such time that all performance obligations are satisfied.
Intangible Revenue.
Intangible liabilities were recorded in connection with the Sidewinder Merger for drilling contracts in place at the closing date of the transaction that had unfavorable contract terms as compared to current market terms for comparable drilling rigs. The various factors considered in the determination are (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig at the transaction closing date. The intangible liabilities were computed based on the present value of the differences in cash inflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated current market day rate using a risk adjusted discount rate. The intangible liabilities are amortized to operating revenues over the remaining underlying contract terms.
Disaggregation of Revenue
The following table summarizes revenues from our contracts disaggregated by revenue generating activity contained therein for the years ended December 31, 2018, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Dayrate drilling
|
$
|
133,278
|
|
|
$
|
84,834
|
|
|
$
|
60,383
|
|
|
Mobilization
|
2,100
|
|
|
2,235
|
|
|
2,228
|
|
|
Reimbursables
|
4,970
|
|
|
2,828
|
|
|
1,990
|
|
|
Capital modification
|
216
|
|
|
91
|
|
|
5,433
|
|
|
Intangible
|
2,044
|
|
|
—
|
|
|
—
|
|
|
Other
|
1
|
|
|
19
|
|
|
28
|
|
|
Total revenue
|
$
|
142,609
|
|
|
$
|
90,007
|
|
|
$
|
70,062
|
|
Contract Balances
Accounts receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules. Payment terms on invoiced amounts are typically 30 days. Contract asset balances could consist of demobilization fee revenue that we expect to receive that is recognized ratably throughout the contract term, but invoiced upon completion of the demobilization activities. Once the demobilization fee revenue is invoiced the corresponding contract asset is transferred to accounts receivable. Contract liabilities include payments received for mobilization fees as well as upgrade activities, which are allocated to the overall performance obligation and recognized ratably over the initial term of the contract.
The following table provides information about receivables, contract assets and contract liabilities related to contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2018
|
|
December 31, 2017
|
|
Receivables, which are included in "Accounts receivable, net"
|
$
|
41,988
|
|
|
$
|
18,028
|
|
|
Contract assets
|
$
|
—
|
|
|
$
|
—
|
|
|
Contract liabilities
|
$
|
(1,374
|
)
|
|
$
|
(836
|
)
|
Significant changes in contract assets and contract liabilities balances during 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
(in thousands)
|
Contract Assets
|
|
Contract Liabilities
|
|
Revenue recognized that was included in contract liabilities at beginning of period
|
$
|
—
|
|
|
$
|
763
|
|
|
Increase in contract liabilities due to cash received, excluding amounts recognized as revenue
|
$
|
—
|
|
|
$
|
(1,301
|
)
|
|
Transferred to receivables from contract assets at beginning of period
|
$
|
—
|
|
|
$
|
—
|
|
Transaction Price Allocated to the Remaining Performance Obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2018. The estimated revenue does not include amounts of variable consideration that are constrained.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
(in thousands)
|
2019
|
|
2020
|
|
2021
|
|
Total
|
|
Revenue
|
$
|
(1,374
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1,374
|
)
|
The amounts presented in the table above consist only of fixed consideration related to fees for rig mobilizations and demobilizations, if applicable, which are allocated to the drilling services performance obligation as such performance obligation is satisfied. We have elected the exemption from disclosure of remaining performance obligations for variable consideration. Therefore, dayrate revenue to be earned on a rate scale associated with drilling conditions and level of service provided for each fractional-hour time increment over the contract term and other variable consideration such as penalties and reimbursable revenues, have been excluded from the disclosure.
Contract Costs
We capitalize costs incurred to fulfill our contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy our performance obligations under the contract and (iii) are expected to be recovered through revenue generated under the contract. These costs, which principally relate to rig mobilization costs at the commencement of a new contract, are deferred as a current or noncurrent asset (depending on the length of the contract term), and amortized ratably to contract drilling expense as services are rendered over the initial term of the related drilling contract. Such contract costs, recorded as “Prepaid expenses and other current assets”, amounted to
$1.1 million
and
$0.8 million
on our consolidated balance sheets at December 31, 2018 and December 31, 2017, respectively. During the year ended December 31, 2018, contract costs increased by
$1.7 million
and we amortized
$1.4 million
of contract costs.
Costs incurred for the demobilization of rigs at contract completion are recognized as incurred during the demobilization process. Costs incurred for rig modifications or upgrades required for a contract, which are considered to be capital improvements, are capitalized as drilling and other property and equipment and depreciated over the estimated useful life of the improvement.
Impact of ASC 606 on Consolidated Financial Statement Line Items
The timing of our revenue recognition under ASC 606 is similar to revenue recognition under the previous guidance, except for the recognition of demobilization fee revenue, which we earn infrequently. Such revenue, which was recognized upon completion of a contract under the previous guidance, will now be estimated at contract inception and recognized as contract drilling revenue as the drilling services performance obligation is satisfied, subject to constraint, with an offset to a contract asset. As we had no existing contracts as of January 1, 2018, where we expect to receive a demobilization fee from our customers, there was no cumulative effect of a change in accounting principle required to adjust our January 1, 2018 retained earnings.
5. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
2018
|
|
2017
|
|
Rig components and supplies
|
$
|
2,693
|
|
|
$
|
2,710
|
|
We determined that
no
reserve for obsolescence was needed at December 31,
2018
or
2017
.
No
inventory obsolescence expense was recognized during the years ended December 31,
2018
,
2017
and
2016
.
6. Property, Plant and Equipment
Major classes of property, plant, and equipment, which include capital lease assets, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
2018
|
|
2017
|
|
Land
|
$
|
487
|
|
|
$
|
—
|
|
|
Buildings
|
3,317
|
|
|
—
|
|
|
Drilling rigs and related equipment
|
594,871
|
|
|
332,338
|
|
|
Machinery, equipment and other
|
693
|
|
|
2,064
|
|
|
Capital leases
|
2,027
|
|
|
1,786
|
|
|
Vehicles
|
533
|
|
|
555
|
|
|
Construction in progress
|
7,736
|
|
|
20,706
|
|
|
Total
|
$
|
609,664
|
|
|
$
|
357,449
|
|
|
Less: Accumulated depreciation
|
(113,467
|
)
|
|
(85,061
|
)
|
|
Total Property, plant and equipment, net
|
$
|
496,197
|
|
|
$
|
272,388
|
|
Repairs and maintenance expense included in operating costs in our statements of operations totaled
$19.7 million
,
$14.3 million
and
$7.7 million
for the years ended December 31,
2018
,
2017
and
2016
, respectively.
Depreciation expense was
$30.9 million
,
$25.8 million
and
$23.8 million
for the years ended December 31,
2018
,
2017
and
2016
, respectively.
As of December 31,
2018
, property, plant and equipment in our consolidated balance sheets included
$2.0 million
of vehicles under capital lease, net of
$0.7 million
of accumulated amortization. As of December 31,
2017
, property, plant and equipment in our consolidated balance sheets included
$1.8 million
of vehicles under capital lease, net of
$0.5 million
of accumulated amortization.
During the second quarter of 2017, our management committed to a plan to sell our former corporate headquarters and rig assembly yard complex located at 11601 North Galayda Street, Houston, Texas (the "Galayda Facility"). This plan of sale was subsequently affected by Hurricane Harvey, which caused substantial water-related damage to the Galayda Facility in August 2017, as well as our entry into a definitive merger agreement with Sidewinder Drilling in July 2018. See "Change in Plan of Sale of Assets" in Significant Developments in this Management's Discussion and Analysis.
During 2017 and 2016, we recorded an additional
$0.8 million
and
$1.8 million
, respectively, loss on disposal associated with the upgrade of the mud systems on our rigs to high pressure status.
7. Supplemental Consolidated Balance Sheet and Cash Flow Information
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
2018
|
|
2017
|
|
Accrued salaries and other compensation
(1)
|
$
|
12,379
|
|
|
$
|
2,442
|
|
|
Insurance
(2)
|
5,464
|
|
|
711
|
|
|
Deferred revenue
|
1,374
|
|
|
762
|
|
|
Property taxes and other
|
3,829
|
|
|
2,693
|
|
|
Intangible liability
|
1,079
|
|
|
—
|
|
|
Interest
(3)
|
3,318
|
|
|
95
|
|
|
Other
|
1,776
|
|
|
266
|
|
|
|
$
|
29,219
|
|
|
$
|
6,969
|
|
|
|
|
|
(1)
|
The increase is primarily attributable to the Sidewinder Merger, increased incentive compensation accruals, and accrued severance related to the Sidewinder Merger, including
$3.5 million
to be paid to our former Chief Executive Officer.
|
|
|
|
|
(2)
|
The increase is primarily attributable to the Sidewinder Merger, in part, as Sidewinder was self-insured for worker’s compensation and general liability insurance prior to the close of the transaction.
|
|
|
|
|
(3)
|
The increase is attributable to the Sidewinder Merger and is related to accrued interest on the new
$130.0 million
Term Loan Facility.
|
Other long-term liabilities as of December 31, 2018 included
$15.7 million
of contingent consideration acquired in the Sidewinder Merger. See Note 3 to our consolidated financial statements for further discussion of the Sidewinder Merger.
Supplemental consolidated cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
Cash paid during the year for interest
|
$
|
3,202
|
|
|
$
|
2,680
|
|
|
$
|
2,198
|
|
|
Cash paid (received) during the year for income taxes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(133
|
)
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
Change in property, plant and equipment purchases in accounts payable
|
$
|
1,175
|
|
|
$
|
(882
|
)
|
|
$
|
1,670
|
|
|
Additions to property, plant & equipment through capital leases
|
$
|
601
|
|
|
$
|
1,102
|
|
|
$
|
1,293
|
|
|
Additions to property, plant and equipment through tenant allowance on leasehold improvement
|
$
|
694
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Sidewinder Merger consideration
|
$
|
231,617
|
|
|
$
|
—
|
|
|
$
|
—
|
|
8. Long-term Debt
Our Long-term Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
2017
|
|
Term Loan Facility due October 1, 2023
|
|
$
|
130,000
|
|
|
$
|
—
|
|
|
ABL Credit Facility due October 1, 2023
|
|
2,566
|
|
|
—
|
|
|
CIT Credit Facility due November 5, 2020
|
|
—
|
|
|
48,541
|
|
|
Capital lease obligations
|
|
1,235
|
|
|
1,270
|
|
|
|
|
133,801
|
|
|
49,811
|
|
|
Less: current portion
|
|
(587
|
)
|
|
(533
|
)
|
|
Less: Term Loan Facility deferred financing costs
|
|
(3,202
|
)
|
|
—
|
|
|
Long-term debt
|
|
$
|
130,012
|
|
|
$
|
49,278
|
|
New Credit Facilities
In conjunction with the closing of the Sidewinder Merger on October 1, 2018, we entered into a term loan Credit Agreement (the “Term Loan Credit Agreement”) for an initial term loan in an aggregate principal amount of
$130.0 million
, (the “Term Loan Facility”) and (b) a delayed draw term loan facility in an aggregate principal amount of up to
$15.0 million
(the “DDTL Facility”, and together with the Term Loan Facility, the “Term Facilities”). The Term Facilities have a maturity date of October 1, 2023, at which time all outstanding principal under the Term Facilities and other obligations become due and payable in full. Proceeds from the Term Loan Facility were used to repay our existing debt and the Sidewinder debt assumed in the Sidewinder Merger, as well as certain transaction costs.
At our election, interest under the Term Loan Facility is determined by reference at our option to either (i) a “base rate” equal to the higher of (a) the federal funds effective rate plus
0.05%
, (b) the London Interbank Offered Rate with an interest period of one month (“LIBOR”), plus
1.0%
, and (c) the rate of interest as publicly quoted from time to time by the Wall Street Journal as the “prime rate” in the United States; plus an applicable margin of
6.5%
, or (ii) a “LIBOR rate” equal to LIBOR with an interest period of one month, plus an applicable margin of
7.5%
.
The Term Loan Credit Agreement contains financial covenants, including a liquidity covenant of
$10.0 million
and a springing fixed charge coverage ratio covenant of
1.00
to 1.00 that is tested when availability under the ABL Credit Facility (defined below) and the DDTL Facility is below
$5.0 million
at any time that a DDTL Facility loan is outstanding. The Term Loan Credit Agreement also contains other customary affirmative and negative covenants, including limitations on indebtedness, liens, fundamental changes, asset dispositions, restricted payments, investments and transactions with affiliates. The Term Loan Credit Agreement also provides for customary events of default, including breaches of material covenants, defaults under the ABL Credit Facility or other material agreements for indebtedness, and a change of control (as defined).
The obligations under the Term Loan Credit Agreement are secured by a first priority lien on collateral (the “Term Priority Collateral”) other than accounts receivable, deposit accounts and other related collateral pledged as first priority collateral (“Priority Collateral”) under the ABL Credit Facility (defined below) and a second priority lien on such Priority
Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. MSD PCOF Partners IV, LLC (an affiliate of MSD Partners) is the lender of our
$130.0 million
Term Loan Facility. MSD Partners own approximately
31%
of the outstanding shares of the Company’s common stock.
Additionally, in connection with the closing of the Sidewinder Merger on October 1, 2018, we entered into a
$40.0 million
revolving Credit Agreement (the “ABL Credit Facility”), including availability for letters of credit in an aggregate amount at any time outstanding not to exceed
$7.5 million
. Availability under the ABL Credit Facility is subject to a borrowing base calculated based on
85%
of the net amount of our eligible accounts receivable, minus reserves. The ABL Credit Facility has a maturity date of the earlier of October 1, 2023 or the maturity date of the Term Loan Credit Agreement.
At our election, interest under the ABL Credit Facility is determined by reference at our option to either (i) a “base rate” equal to the higher of (a) the federal funds effective rate plus
0.05%
, (b) LIBOR with an interest period of one month, plus
1.0%
, and (c) the prime rate of Wells Fargo, plus in each case, an applicable base rate margin ranging from
1.0%
to
1.5%
based on quarterly availability, or (ii) a revolving loan rate equal to LIBOR for the applicable interest period plus an applicable LIBOR margin ranging from
2.0%
to
2.5%
based on quarterly availability. We also pay, on a quarterly basis, a commitment fee of
0.375%
(or
0.25%
at any time when revolver usage is greater than
50%
of the maximum credit) per annum on the unused portion of the ABL Credit Facility commitment.
The ABL Credit Facility contains a springing fixed charge coverage ratio covenant of
1.00
to 1.00 that is tested when availability is less than
10%
of the maximum credit. The ABL Credit Facility also contains other customary affirmative and negative covenants, including limitations on indebtedness, liens, fundamental changes, asset dispositions, restricted payments, investments and transactions with affiliates. The ABL Credit Facility also provides for customary events of default, including breaches of material covenants, defaults under the Term Loan Agreement or other material agreements for indebtedness, and a change of control. We are in compliance with our covenants as of
December 31, 2018
.
The obligations under the ABL Credit Facility are secured by a first priority lien on Priority Collateral, which includes all accounts receivable and deposit accounts, and a second priority lien on the Term Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. On October 1, 2018, in connection with our entry into the ABL Credit Facility, we repaid all outstanding borrowings and obligations under our existing CIT Credit Facility (defined below), and terminated it. As of
December 31, 2018
, the weighted-average interest rate on our borrowings was
9.84%
. At December 31, 2018, the borrowing base under our ABL Credit Facility was
$32.8 million
, and we had
$27.7 million
of availability remaining of our
$40.0 million
commitment on that date.
The CIT Credit Facility
Our CIT Credit Facility (the “CIT Credit Facility”), which was repaid and terminated on October 1, 2018, had a maturity date of November 5, 2020 and provided for aggregate commitments of
$85.0 million
. We had
$67.9 million
in outstanding borrowings and
$17.1 million
of remaining availability under the CIT Credit Facility when it was repaid and terminated.
Borrowings under the CIT Credit Facility were subject to a borrowing base formula that allowed for borrowings of up to
85%
of eligible trade accounts receivable not more than
90
days outstanding, plus up to a certain percentage, the “advance rate”, of the appraised forced liquidation value of our eligible, completed and owned drilling rigs. The obligations under the CIT Credit Facility were secured by all of our assets and were unconditionally guaranteed by all of our direct and indirect subsidiaries. At our election, interest under the CIT Credit Facility was determined by reference, at our option, to either (i) the London Interbank Offered Rate (“LIBOR”), plus
4.5%
or (ii) a “base rate” equal to the higher of the prime rate published by JP Morgan Chase Bank or three-month LIBOR plus
1%
, plus in each case,
3.5%
, the federal funds effective rate plus
0.05%
. We also paid, on a quarterly basis, a commitment fee of
0.50%
per annum on the unused portion of the Credit Facility commitment.
9. Income Taxes
The components of the income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
91
|
|
|
287
|
|
|
203
|
|
|
|
$
|
91
|
|
|
$
|
287
|
|
|
$
|
203
|
|
|
Income tax expense
|
$
|
91
|
|
|
$
|
287
|
|
|
$
|
202
|
|
The following is a reconciliation of the income tax expense that was recorded compared to taxes provided at the United States statutory rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Income tax benefit at the statutory federal rate (21%, 35% and 35%)
|
$
|
(4,233
|
)
|
|
$
|
(8,404
|
)
|
|
$
|
(7,691
|
)
|
|
Effect of federal rate change to ending deferred tax assets and liabilities
|
—
|
|
|
7,994
|
|
|
—
|
|
|
Nondeductible expenses
|
(270
|
)
|
|
34
|
|
|
23
|
|
|
Valuation allowance
|
3,625
|
|
|
(1,377
|
)
|
|
7,063
|
|
|
State taxes, net of federal benefit
|
14
|
|
|
9
|
|
|
204
|
|
|
Stock-based compensation and other
|
955
|
|
|
2,031
|
|
|
603
|
|
|
Income tax expense
|
$
|
91
|
|
|
$
|
287
|
|
|
$
|
202
|
|
|
Effective tax rate
|
0.5
|
%
|
|
1.2
|
%
|
|
0.9
|
%
|
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
2018
|
|
2017
|
|
Deferred income tax assets
|
|
|
|
|
Merger related expenses
|
$
|
1,731
|
|
|
$
|
—
|
|
|
Bad debts
|
—
|
|
|
2
|
|
|
Stock-based compensation
|
809
|
|
|
1,344
|
|
|
Accrued liabilities and other
|
1,295
|
|
|
29
|
|
|
Deferred revenue
|
321
|
|
|
180
|
|
|
Net operating losses
|
34,682
|
|
|
29,274
|
|
|
Total net deferred tax assets
|
$
|
38,838
|
|
|
$
|
30,829
|
|
|
Deferred income tax liabilities
|
|
|
|
|
Prepaids
|
$
|
(1,027
|
)
|
|
$
|
(210
|
)
|
|
Property, plant and equipment
|
(22,525
|
)
|
|
(18,906
|
)
|
|
Intangible assets
|
(38
|
)
|
|
—
|
|
|
Total net deferred tax liabilities
|
$
|
(23,590
|
)
|
|
$
|
(19,116
|
)
|
|
Valuation allowance
|
$
|
(16,022
|
)
|
|
$
|
(12,396
|
)
|
|
Net deferred tax liability
|
$
|
(774
|
)
|
|
$
|
(683
|
)
|
As of
December 31, 2018
, we had a total of
$163.9 million
of net operating loss carryforwards, of which
$131.4 million
will begin to expire in 2031 and
$26.7 million
will be carried forward indefinitely.
On December 22, 2017, the United States enacted tax reform legislation commonly known as the Tax Cuts and Jobs Act (the “Act”), resulting in significant modifications to existing law. We have completed the accounting for the effects of the Act during 2018. Our consolidated financial statements for the year ended December 31, 2018, reflect the effects of the Act which includes a reduction in the corporate tax rate from 35% to 21%. Accordingly, our deferred tax assets and liabilities were revalued at the newly enacted rates expected to be effective in 2018 and forward. Since our federal deferred tax asset was fully offset by a valuation allowance, the overall net adjustment to our tax provision due to the reduction in the U.S. corporate income tax rate to 21% did not materially affect our financial statements.
Section 382 of the Internal Revenue Code (“Section 382”) imposes limitations on a corporation’s ability to utilize its NOLs if it experiences an ownership change. In general terms, an ownership change may result from transactions increasing the ownership percentage of certain shareholders in the stock of the corporation by more than 50 percentage points over a three year period. In the event of an ownership change, utilization of the NOLs would be subject to an annual limitation under Section 382. The Company believes it incurred an ownership change in April 2016 and in connection with the Sidewinder Merger. The Company is subject to an annual limitation on the usage of its NOL, however, the Company also believes that substantially all of the NOL that existed in April 2016, as well as at the time of the Sidewinder Merger, will be fully available to the Company over the life of the NOL carryforward period. Management will continue to monitor the potential impact of Section 382 with respect to its NOL carryforward.
Accounting for uncertainty in income taxes prescribes a recognition threshold and measurement methodology for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of December 31, 2018, we had
no
unrecognized tax benefits. We file income tax returns in the United States and in various state jurisdictions. With few exceptions, we are subject to United States federal, state and local income tax examinations by tax authorities for tax periods 2012 and forward. Our federal and state tax returns for 2012 and subsequent years remain subject to examination by tax authorities. Although we cannot predict the outcome of future tax examinations, we do not anticipate that the ultimate resolution of these examinations will have a material impact on our financial position, results of operations, or cash flows.
In assessing the realizability of the deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future income in periods in which the deferred tax assets can be utilized. In all years presented, we determined
that the deferred tax assets did not meet the more likely than not threshold of being utilized and thus recorded a valuation allowance. All of our deferred tax liability as of
December 31, 2018
relates to state taxes.
Estimated interest and penalties related to potential underpayment on any unrecognized tax benefits are classified as a component of tax expense in the consolidated statement of operations. We have not recorded any interest or penalties associated with unrecognized tax benefits.
10. Stock-Based Compensation
In March 2012, we adopted the 2012 Omnibus Long-Term Incentive Plan (the “2012 Plan”) providing for common stock-based awards to employees and to non-employee directors. The 2012 plan was subsequently amended in August 2014 and June 2016. The 2012 Plan, as amended, permits the granting of various types of awards, including stock options, restricted stock and restricted stock unit awards, and up to
4,754,000
shares were authorized for issuance. Restricted stock and restricted stock units may be granted for no consideration other than prior and future services. The purchase price per share for stock options may not be less than the market price of the underlying stock on the date of grant. Stock options expire
ten
years after the grant date. We have the right to satisfy option exercises from treasury shares and from authorized but unissued shares. As of
December 31, 2018
, approximately
164,999
shares were available for future awards.
In the first quarter of 2017, we adopted ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The FASB issued this accounting standard in an effort to simplify the accounting for employee share-based payments and improve the usefulness of the information provided to users of financial statements. Our policy is to account for forfeitures of share-based compensation awards as they occur.
A summary of compensation cost recognized for stock-based payment arrangements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
|
Compensation cost recognized:
|
|
|
|
|
|
|
Stock options
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
81
|
|
|
Restricted stock and restricted stock units
|
4,829
|
|
|
3,565
|
|
|
4,101
|
|
|
Total stock-based compensation
|
$
|
4,829
|
|
|
$
|
3,565
|
|
|
$
|
4,182
|
|
Stock Options
Prior to 2016, we granted stock options that remain outstanding.
No
options were exercised or granted during the years ended December 31,
2018
,
2017
or
2016
. It is our policy that in the future any shares issued upon option exercise will be issued initially from any available treasury shares or otherwise as newly issued shares.
We use the Black-Scholes option pricing model to estimate the fair value of stock options granted to employees and non-employee directors. The fair value of the options is amortized to compensation expense on a straight-line basis over the requisite service periods of the stock awards, which are generally the vesting periods.
The following summary reflects the stock option activity and related information for the year ended December 31,
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at January 1, 2018
|
682,950
|
|
|
$
|
12.74
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
Forfeited/expired
|
(13,737
|
)
|
|
12.74
|
|
|
Outstanding at December 31, 2018
|
669,213
|
|
|
$
|
12.74
|
|
|
Exercisable at December 31, 2018
|
669,213
|
|
|
$
|
12.74
|
|
The number of options exercisable at December 31,
2018
was
669,213
with a weighted-average remaining contractual life of
3.3 years
and a weighted-average exercise price of
$12.74
per share.
As of December 31,
2018
, there was
no
unrecognized compensation cost related to outstanding stock options. The fair value of options that vested during the years ended December 31,
2018
,
2017
and
2016
was
zero
,
zero
, and
$0.1 million
, respectively.
Time-Based Restricted Stock and Restricted Stock Units
We have granted time-based restricted stock and restricted stock units to key employees under the 2012 Plan. In 2018, this included grants of restricted stock and restricted stock units to four former executives of Sidewinder Drilling, LLC relating to their becoming officers of ICD following the Sidewinder Merger.
Time-based Restricted Stock
Time-based restricted stock awards consist of grants of our common stock that vest ratably over
three
to
five
years. We recognize compensation expense on a straight-line basis over the vesting period. The fair value of time-based restricted stock awards is determined based on the estimated fair market value of our shares on the grant date. As of December 31,
2018
, there was
$4.4 million
in unrecognized compensation cost related to unvested time-based restricted stock awards. This cost is expected to be recognized over a weighted-average period of
2.5
years
A summary of the status of our time-based restricted stock awards and of changes in our time-based restricted stock awards outstanding for the years ended December 31,
2018
, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
|
Outstanding at January 1, 2016
|
388,265
|
|
|
$
|
10.80
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Vested
|
(232,715
|
)
|
|
10.87
|
|
|
Forfeited/expired
|
(8,182
|
)
|
|
11.15
|
|
|
Outstanding at January 1, 2017
|
147,368
|
|
|
10.67
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Vested
|
(144,173
|
)
|
|
10.72
|
|
|
Forfeited/expired
|
(3,195
|
)
|
|
8.35
|
|
|
Outstanding at January 1, 2018
|
—
|
|
|
—
|
|
|
Granted – Former Sidewinder executives
(1)
|
646,646
|
|
|
3.22
|
|
|
Granted – Other
|
739,327
|
|
|
3.22
|
|
|
Vested
|
—
|
|
|
|
|
Forfeited/expired
|
—
|
|
|
|
|
Outstanding at December 31, 2018
|
1,385,973
|
|
|
$
|
3.22
|
|
|
|
|
|
(1)
|
Time-based restricted stock granted to former executives of Sidewinder Drilling, LLC relating to their becoming officers of ICD following the Sidewinder Merger.
|
Time-Based Restricted Stock Units
We have granted
three
-year time vested restricted stock unit awards where each unit represents the right to receive, at the end of a vesting period, one share of ICD common stock with no exercise price. The fair value of time-based restricted stock unit awards is determined based on the estimated fair market value of our shares on the grant date. As of
December 31, 2018
, there was
$1.8 million
of total unrecognized compensation cost related to unvested time-based restricted stock unit awards. This cost is expected to be recognized over a weighted-average period of
1.4 years
.
A summary of the status of our time-based restricted stock unit awards and of changes in our time-based restricted stock unit awards outstanding for the years ended December 31, 2018, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
|
Outstanding at January 1, 2016
|
123,628
|
|
|
$
|
11.00
|
|
|
Granted
|
747,500
|
|
|
4.00
|
|
|
Vested and converted
|
(19,768
|
)
|
|
6.28
|
|
|
Forfeited/expired
|
(135,911
|
)
|
|
4.60
|
|
|
Outstanding at January 1, 2017
|
715,449
|
|
|
5.03
|
|
|
Granted
|
489,862
|
|
|
5.77
|
|
|
Vested and converted
|
(270,143
|
)
|
|
6.05
|
|
|
Forfeited/expired
|
(146,172
|
)
|
|
5.51
|
|
|
Outstanding at January 1, 2018
|
788,996
|
|
|
5.05
|
|
|
Granted – Former Sidewinder executives
(1)
|
409,607
|
|
|
4.79
|
|
|
Granted – Other
|
414,521
|
|
|
4.46
|
|
|
Vested and converted
|
(1,020,423
|
)
|
|
4.91
|
|
|
Forfeited/expired
|
(183,094
|
)
|
|
4.50
|
|
|
Outstanding at December 31, 2018
|
409,607
|
|
|
$
|
4.79
|
|
|
|
|
|
(1)
|
Time-based restricted stock unit awards granted to former executives of Sidewinder Drilling, LLC relating to their becoming officers of ICD following the Sidewinder Merger.
|
Performance-Based and Market-Based Restricted Stock Units
We have granted
three
-year performance-based and market-based restricted stock unit awards, where each unit represents the right to receive, at the end of a vesting period, up to
two
shares of ICD common stock with no exercise price. Exercisability of the market-based restricted stock unit awards is based on our total shareholder return ("TSR") as measured against the TSR of a defined peer group and vesting of the performance-based restricted stock unit awards is based on our cumulative EBITDA, safety or uptime performance statistics, as defined in the restricted stock unit agreement, over a
three
-year period. We used a Monte Carlo simulation model to value the TSR market-based restricted stock unit awards. The fair value of the performance-based restricted stock unit awards is based on the market price of our common stock on the date of grant. During the restriction period, the performance-based and market-based restricted stock unit awards may not be transferred or encumbered, and the recipient does not receive dividend equivalents or have voting rights until the units vest. All performance-based restricted stock units that had not already been earned or vested in accordance with their terms, were forfeited and expired as a result of the consummation of the Sidewinder Merger. As of December 31, 2018, there was
no
unrecognized compensation cost related to unvested performance-based or market-based restricted stock unit awards.
The assumptions used to value our TSR market-based restricted stock unit awards granted during the year ended December 31, 2016 were a risk-free interest rate of
0.93%
, an expected volatility of
56.3%
and an expected dividend yield of
0.0%
. Based on the Monte Carlo simulation, these restricted stock unit awards were valued at
$4.15
.
The assumptions used to value our TSR market-based restricted stock unit awards granted during the year ended December 31, 2017 were a risk-free interest rate of
1.30%
, an expected volatility of
55.5%
and an expected dividend yield of
0.0%
. Based on the Monte Carlo simulation, these restricted stock unit awards were valued at
$5.62
.
The assumptions used to value our TSR market-based restricted stock unit awards granted during the year ended December 31, 2018 were a risk-free interest rate of
2.13%
, an expected volatility of
60.6%
and an expected dividend yield of
0.0%
. Based on the Monte Carlo simulation, these
restricted stock unit awards
were valued at
$5.23
.
A summary of the status of our performance-based and market-based restricted stock unit awards and of changes in our restricted stock unit awards outstanding for the years ended December 31,
2018
, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
|
Outstanding at January 1, 2016
|
339,785
|
|
|
$
|
13.69
|
|
|
Granted
|
66,670
|
|
|
4.15
|
|
|
Vested and converted
|
(46,677
|
)
|
|
13.98
|
|
|
Forfeited/expired
|
(44,569
|
)
|
|
10.60
|
|
|
Outstanding at January 1, 2017
|
315,209
|
|
|
12.07
|
|
|
Granted
|
166,769
|
|
|
5.71
|
|
|
Vested and converted
|
(80,752
|
)
|
|
16.48
|
|
|
Forfeited/expired
|
(196,903
|
)
|
|
11.84
|
|
|
Outstanding at January 1, 2018
|
204,323
|
|
|
5.35
|
|
|
Granted
|
226,520
|
|
|
4.72
|
|
|
Vested and converted
|
(162,938
|
)
|
|
5.04
|
|
|
Forfeited/expired
|
(267,905
|
)
|
|
5.00
|
|
|
Outstanding at December 31, 2018
|
—
|
|
|
$
|
—
|
|
11. Stockholders’ Equity and Loss per Share
As of December 31,
2018
, we had a total of
77,078,252
shares of common stock,
$0.01
par value, outstanding, including
1,385,973
shares of restricted stock. We also had
520,554
shares held as treasury stock. Total authorized common stock is
200,000,000
shares.
On April 26, 2016, we completed an underwritten public offering of
13,225,000
shares of common stock at a price to the public of
$3.50
per share. We received net proceeds of approximately
$42.9 million
, after deducting underwriting discounts and commissions and offering expenses.
Basic earnings (loss) per common share (“EPS”) are computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. A reconciliation of the numerators and denominators of the basic and diluted losses per share computations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands, except for per share data)
|
2018
|
|
2017
|
|
2016
|
|
Net loss (numerator)
|
$
|
(19,993
|
)
|
|
$
|
(24,298
|
)
|
|
$
|
(22,178
|
)
|
|
Loss per share:
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.42
|
)
|
|
$
|
(0.64
|
)
|
|
$
|
(0.67
|
)
|
|
Shares (denominator):
|
|
|
|
|
|
|
Weighted-average number of shares outstanding-basic
|
47,580
|
|
|
37,762
|
|
|
33,118
|
|
|
Net effect of dilutive stock options and restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted-average common shares outstanding-diluted
|
47,580
|
|
|
37,762
|
|
|
33,118
|
|
For all years presented, the computation of diluted loss per share excludes the effect of certain outstanding stock options, warrants and restricted stock units because their inclusion would be anti-dilutive. The number of options that were excluded from diluted loss per share were
669,213
,
682,950
and
935,720
during the years ended December 31,
2018
,
2017
and
2016
, respectively. RSUs, which are not participating securities and are excluded from our diluted loss per share because they are anti-dilutive were
409,607
,
993,320
and
1,030,658
for the years ended December 31,
2018
,
2017
and
2016
, respectively.
12. Segment and Geographical Information
We report
one
segment because all of our drilling operations are all located in the United States and have similar economic characteristics. We build rigs and engage in land contract drilling for oil and natural gas in the United States. Corporate management administers all properties as a whole rather than as discrete operating segments. Operational data is tracked by rig; however, financial performance is measured as a single enterprise and not on a rig-by-rig basis. Allocation of capital resources is employed on a project-by-project basis across our entire asset base to maximize profitability without regard to individual areas.
13. Commitments and Contingencies
Purchase Commitments
As of
December 31, 2018
, we had outstanding purchase commitments to a number of suppliers totaling
$16.3 million
related primarily to the construction of drilling rigs and rig upgrades. We have paid deposits of
$2.9 million
related to these commitments.
Letters of Credit
As of
December 31, 2018
, we had outstanding letters of credit totaling
$2.6 million
as collateral for Sidewinder’s pre-acquisition insurance programs. As of December 31, 2018,
no
amounts had been drawn under these letters of credit.
Lease Commitments
We lease certain land, equipment and vehicles under non-cancelable operating and capital leases. Future minimum lease payments under operating and capital lease commitments, with lease terms in excess of one year subsequent to December 31,
2018
, were as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
2019
|
$
|
1,431
|
|
|
2020
|
1,014
|
|
|
2021
|
537
|
|
|
2022
|
360
|
|
|
2023
|
370
|
|
|
Thereafter
|
31
|
|
|
|
$
|
3,743
|
|
Rent expense was
$5.1 million
,
$3.9 million
, and
$2.3 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Employment Agreements
We have entered into employment agreements with
two
key executives, with original terms of
three years
, that automatically extend a year prior to expiration, provided that neither party has provided a written notice of termination before that date. These agreements provide for aggregate minimum annual cash compensation of
$0.8 million
and aggregate cash severance payments totaling
$3.0 million
for termination by ICD without cause, or termination by the employee for good reason, both as defined in the agreements.
We also have entered into change of control agreements with
five
key executives, with original terms of
three
years that automatically extend a year prior to expiration, provided that neither party has provided a written notice of termination before that date. These agreements provide for aggregate cash severance payments totaling
$2.3 million
for termination by ICD without cause, or termination by the employee for good reason, both as defined in the agreements, if such termination occurs during the
three
-year period following a change of control, or up to
$2.0 million
irrespective of whether a change of control has occurred, if such termination occurs on or prior to September 30, 2021.
Contingencies
Our operations inherently expose us to various liabilities and exposures that could result in third party lawsuits, claims and other causes of action. While we insure against the risk of these proceedings to the extent deemed prudent by our management, we can offer no assurance that the type or value of this insurance will meet the liabilities that may arise from any
pending or future legal proceedings related to our business activities. There are no current legal proceedings that we expect will have a material adverse impact on our consolidated financial statements.
14. Concentration of Market and Credit Risk
We derive all our revenues from drilling services contracts with companies in the oil and natural gas exploration and production industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility in oil and natural gas prices. We have a number of customers that account for 10% or more of our revenues. For 2018, these customers included GeoSouthern Energy Corporation (
23%
) and COG Operating, LLC, a subsidiary of Concho Resources, Inc. (
22%
). For 2017, these customers included GeoSouthern Energy Corporation (
23%
), Devon Energy (
17%
), RSP Permian, LLC (
16%
) and Pioneer Natural Resources USA, Inc. (
11%
). For 2016, these customers included Parsley Energy, LP (
22%
), Silver Hill Energy Partners, LLC (
17%
), Pioneer Natural Resources USA, Inc. (
16%
) and Anadarko Petroleum Corporation (
11%
).
As of December 31, 2018, COG Operating, LLC, a subsidiary of Concho Resources, Inc. (
14%
), Diamondback Energy, Inc. (
14%
), GeoSouthern Energy Corporation (
12%
) and BP p.l.c (10%) accounted for 10% or more of our accounts receivable. As of December 31, 2017, GeoSouthern Energy Corporation (
25%
), Devon Energy (
20%
), RSP Permian, LLC (
19%
), BHP Billiton Petroleum (
15%
) and Pioneer Natural Resources USA, Inc. (
14%
) accounted for 10% or more of our accounts receivable. As of December 31, 2016, Parsley Energy, LP (
20%
), Pioneer Natural Resources USA, Inc. (
19%
), GEP Haynesville, LLC (
17%
), Energen Corporation (
16%
), Anadarko Petroleum Corporation (
14%
) and Silver Hill Energy Partners, LLC (
14%
) accounted for 10% or more of our accounts receivable.
We have concentrated credit risk for cash by maintaining deposits in major banks, which may at times exceed amounts covered by insurance provided by the United States Federal Deposit Insurance Corporation (“FDIC”). We monitor the financial health of the banks and have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk. As of December 31,
2018
, we had approximately
$11.7 million
in cash and cash equivalents in excess of FDIC limits. Our trade receivables are with a variety of E&P and other oilfield service companies. We perform ongoing credit evaluations of our customers, and we generally do not require collateral. We do occasionally require deposits from customers whose creditworthiness is in question prior to providing services to them.
15. Unaudited Quarterly Financial Data
A summary of our unaudited quarterly financial data is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
|
Quarter Ended
|
|
(in thousands, except for per share data)
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
(1)
|
|
Revenue
|
$
|
25,627
|
|
|
$
|
25,754
|
|
|
$
|
28,439
|
|
|
$
|
62,789
|
|
|
Operating loss
|
(3,252
|
)
|
|
(2,396
|
)
|
|
(2,819
|
)
|
|
(3,873
|
)
|
|
Income tax (benefit) expense
|
(49
|
)
|
|
(21
|
)
|
|
(50
|
)
|
|
211
|
|
|
Net loss
|
(4,146
|
)
|
|
(3,313
|
)
|
|
(3,937
|
)
|
|
(8,597
|
)
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.11
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
|
|
Quarter Ended
|
|
(in thousands, except for per share data)
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Revenue
|
$
|
20,236
|
|
|
$
|
21,285
|
|
|
$
|
23,445
|
|
|
$
|
25,041
|
|
|
Operating loss
|
(5,593
|
)
|
|
(5,584
|
)
|
|
(5,178
|
)
|
|
(4,673
|
)
|
|
Income tax expense
|
46
|
|
|
34
|
|
|
30
|
|
|
177
|
|
|
Net loss
|
(6,269
|
)
|
|
(6,304
|
)
|
|
(5,980
|
)
|
|
(5,745
|
)
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.17
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
(1)
|
Includes the operations of Sidewinder beginning on October 1, 2018.
|