Notes to Consolidated Financial Statements
(Unaudited)
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1.
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Nature of Operations and Recent Events
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Except as expressly stated or the context otherwise requires, the terms “we,” “us,” “our,” “ICD,” and the “Company” 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
three
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 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
1,930
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 rig count never recovered to its 2014 highs, only reaching
1,083
rigs the week ended December 28, 2018. Similarly, although pricing for our drilling services improved during this period, pricing never reached the 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 over
$60.00
in late March 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.
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2.
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Interim Financial Information
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These unaudited consolidated financial statements include the accounts of ICD and its subsidiary, and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These financial statements should be read along with our audited financial statements for the year ended
December 31, 2018
, included in our Annual Report on Form 10-K for the year ended
December 31, 2018
. In management’s opinion, these financial statements contain all adjustments necessary to fairly present our financial position, results of operations, cash flows and changes in stockholders’ equity for all periods presented.
As we had no items of other comprehensive income in any period presented, no other components of comprehensive income is presented.
Interim results for the
three
months ended
March 31, 2019
may not be indicative of results that will be realized for the full year ending
December 31, 2019
.
Leases
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 are 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.
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 adopted ASU No. 2016-02 and its related amendments (collectively known as ASC 842) effective on January 1, 2019, using the effective date method.
See Note 3 “Leases” for the required disclosures related to the impact of adopting this standard and a discussion of our policies related to leases.
Segment and Geographical Information
Our operations consist of
one
reportable segment because all of our drilling operations are located in the United States and have similar economic characteristics. 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. Further, the allocation of capital resources is employed on a project-by-project basis across our entire asset base to maximize profitability without regard to individual geographic areas.
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 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.
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 do not believe this new guidance will have a material impact on our consolidated financial statements.
Effective January 1, 2019, we adopted
ASC 842. The most significant changes of the new standard are (1) lessees recognize a lease liability and a right-of-use (“ROU”) asset for all leases, including operating leases, with an initial term greater than 12 months on their balance sheets and (2) lessees and lessors disclose additional key information about their leasing transactions.
We have elected to implement ASC 842 using the effective date method which
recognizes and measures all leases that exist at the effective date, January 1, 2019, using a modified retrospective transition approach. There was no cumulative-effect adjustment required to be recorded in connection with the adoption of the new standard and the reported amount of lease expense and cash flows are substantially unchanged under ASC 842. Comparative periods are presented in accordance with ASC 840 and do not include any retrospective adjustments.
As a Lessor
Our daywork drilling contracts, under which the vast majority of our revenues are derived, contain both a lease component and a service component.
ASU 2018-11 amended ASC 842 to, among other things, provide lessors with a practical expedient to not separate non-lease components from lease components and, instead, to account for those components as a single amount, if the non-lease components otherwise would be accounted for under Topic 606 and both of the following are met:
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1)
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The timing and pattern of transfer of non-lease components and lease components are the same.
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2)
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The lease component, if accounted for separately, would be classified as an operating lease.
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If the non-lease component is the predominant component of the combined amount, an entity is required to account for the combined amount in accordance with Topic 606. Otherwise, the entity must account for the combined amount as an operating lease in accordance with Topic 842.
Revenues from our daywork drilling contracts meet both of the criteria above and we have determined both quantitatively and qualitatively that the service component of our daywork drilling contracts is the predominant component. Accordingly, we combine the lease and service components of our daywork drilling contracts and account for the combined amount under Topic 606. See Note 5 - Revenue from Contracts with Customers.
We have multi-year operating and financing leases for corporate office space, field location facilities, land, vehicles and various other equipment used in our operations. We also have a significant number of rentals related to our drilling operations that are day-to-day or month-to-month arrangements. Our multi-year leases have remaining lease terms of greater than one year to 5 years.
As a Lessee
As a practical expedient, a lessee may elect not to apply the recognition requirements in ASC 842 to short-term leases. Instead a lessee may recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. We have elected to utilize this practical expedient.
We have elected the package of practical expedients permitted in ASC 842. Accordingly, we accounted for our existing capital leases as finance leases under the new guidance, without reassessing whether the contracts contained a lease under ASC 842, whether classification of the capital lease would be different in accordance with ASC 842 and without reassessing any initial costs associated with the lease. As a result, we recognized on January 1, 2019 a lease liability at the carrying amount of the capital lease obligation on December 31, 2018, of
$1.2 million
and a ROU asset at the carrying amount of the capital lease asset of
$1.3 million
. Additionally, we accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contract contains a lease under ASC 842 or (b) whether classification of the operating lease would be different in accordance with ASC 842. As a result, we recognized on January 1, 2019 a lease liability of
$1.7 million
, which represents the present value of the remaining lease payments discounted using our incremental borrowing rate of
8.17%
, and a ROU asset of
$0.9 million
, which represents the lease liability of
$1.7 million
plus any prepaid lease payments, and less any unamortized lease incentives, totaling
$0.8 million
.
On January 1, 2019, the vehicle leases assumed in the Sidewinder merger were amended to be consistent with our existing vehicle leases, which resulted in a change in the classification from operating leases to finance leases. On the amendment date, we recorded
$0.4 million
in finance lease obligations and right of use assets.
The components of lease expense were as follows:
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(in thousands)
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Three Months Ended March 31, 2019
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Operating lease expense
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|
$
|
125
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|
Short-term lease expense
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1,193
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|
Variable lease expense
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86
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|
|
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|
Finance lease cost:
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|
Amortization of right-of-use assets
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$
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265
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|
Interest expense on lease liabilities
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|
32
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|
Total finance lease expense
|
|
297
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|
Total lease expenses
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|
$
|
1,701
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|
Supplemental cash flow information related to leases is as follows:
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(in thousands)
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|
Three Months Ended March 31, 2019
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Cash paid for amounts included in measurement of lease liabilities:
|
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|
Operating cash flows from operating leases
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$
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103
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|
Operating cash flows from finance leases
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|
$
|
32
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|
Financing cash flows from finance leases
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|
$
|
216
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|
|
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Right-of-use assets obtained or recorded in exchange for lease obligations:
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Operating leases
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|
$
|
955
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|
Finance leases
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|
$
|
520
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|
Supplemental balance sheet information related to leases is as follows:
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|
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(in thousands)
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|
March 31, 2019
|
Operating leases:
|
|
|
Operating lease right-of-use assets
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$
|
865
|
|
|
|
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Accrued liabilities
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|
$
|
480
|
|
Other long-term liabilities
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|
1,196
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|
Total operating lease liabilities
|
|
$
|
1,676
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|
|
|
|
Finance leases:
|
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|
Property and equipment
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|
$
|
2,523
|
|
Accumulated depreciation
|
|
(971
|
)
|
Property and equipment, net
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|
$
|
1,552
|
|
|
|
|
Current portion of long-term debt
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|
$
|
905
|
|
Long-term debt
|
|
679
|
|
Total finance lease liabilities
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|
$
|
1,584
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|
|
|
|
Weighted-average remaining lease term
|
|
|
Operating leases
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|
4.3 years
|
|
Finance leases
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|
1.6 years
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|
|
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|
Weighted-average discount rate
|
|
|
Operating leases
|
|
8.17
|
%
|
Finance leases
|
|
6.64
|
%
|
Maturities of lease liabilities at March 31, 2019 were as follows:
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|
|
|
|
|
|
|
|
(in thousands)
|
|
Operating Leases
|
|
Finance Leases
|
Cash payments in future twelve month periods:
|
|
|
|
|
Year 1
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|
$
|
594
|
|
|
$
|
759
|
|
Year 2
|
|
351
|
|
|
365
|
|
Year 3
|
|
353
|
|
|
84
|
|
Year 4
|
|
363
|
|
|
—
|
|
Year 5
|
|
326
|
|
|
—
|
|
Thereafter
|
|
—
|
|
|
—
|
|
Total cash lease payment
|
|
1,987
|
|
|
1,208
|
|
Add: expected residual value
|
|
—
|
|
|
479
|
|
Less: imputed interest
|
|
(311
|
)
|
|
(103
|
)
|
Total lease liabilities
|
|
$
|
1,676
|
|
|
$
|
1,584
|
|
As of December 31, 2018, future total obligations on our noncancellable capital and operating leases were
$3.7 million
in the aggregate, which consisted of the following:
$1.4 million
in 2019,
$1.0 million
in 2020,
$0.5 million
in 2021 and
$0.8 million
thereafter.
We completed the merger with Sidewinder Drilling LLC on October 1, 2018, through an exchange of
100%
of Sidewinder’s outstanding voting interests for
36,752,657
shares of ICD common stock, which were valued at
$173.1 million
at the time of closing. We also assumed
$58.5 million
of Sidewinder indebtedness in the transaction.
During the three months ended March 31, 2019, we recorded
$1.1 million
of merger-related expenses comprised primarily of severance,
professional fees
and various other integration related expenses.
Certain 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 then current market terms for comparable drilling rigs. The intangible liabilities are amortized to operating revenues over the remaining underlying contract terms. During the three months ended March 31, 2019,
$1.0 million
of intangible revenue was recognized as a result of this amortization. The remaining balance will be fully amortized by July 2019.
The following table summarizes the components of intangible liabilities, net:
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|
|
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|
(in thousands)
|
March 31, 2019
|
|
December 31, 2018
|
Intangible liabilities
|
$
|
3,123
|
|
|
$
|
3,123
|
|
Accumulated amortization
|
(3,077
|
)
|
|
(2,044
|
)
|
Intangible liabilities, net
|
$
|
46
|
|
|
$
|
1,079
|
|
5.
Revenue from Contracts with Customers
The following table summarizes revenues from our contracts disaggregated by revenue generating activity contained therein for the
three
months ended
March 31, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2019
|
|
2018
|
Dayrate drilling
|
$
|
56,451
|
|
|
$
|
23,777
|
|
Mobilization
|
1,260
|
|
|
459
|
|
Reimbursables
|
1,604
|
|
|
1,231
|
|
Capital modification
|
10
|
|
|
160
|
|
Intangible
|
1,033
|
|
|
—
|
|
Total revenue
|
$
|
60,358
|
|
|
$
|
25,627
|
|
The following table provides information about receivables, contract assets and contract liabilities related to contracts with customers:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2019
|
|
December 31, 2018
|
Receivables, which are included in “Accounts receivable, net”
|
$
|
41,782
|
|
|
$
|
41,987
|
|
Contract assets
|
$
|
—
|
|
|
$
|
—
|
|
Contract liabilities
|
$
|
(1,121
|
)
|
|
$
|
(1,374
|
)
|
Significant changes in contract assets and contract liabilities balances during the period are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
(in thousands)
|
Contract Assets
|
|
Contract Liabilities
|
Revenue recognized that was included in contract liabilities at beginning of period
|
$
|
—
|
|
|
$
|
732
|
|
Increase in contract liabilities due to cash received, excluding amounts recognized as revenue
|
$
|
—
|
|
|
$
|
(479
|
)
|
Transferred to receivables from contract assets at beginning of period
|
$
|
—
|
|
|
$
|
—
|
|
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
March 31, 2019
. The estimated revenue does not include amounts of variable consideration that are constrained.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
(in thousands)
|
2019
|
|
2020
|
|
2021
|
|
Total
|
Revenue
|
$
|
1,121
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,121
|
|
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
$1.0 million
and
$1.1 million
on our consolidated balance sheets at
March 31, 2019
and December 31, 2018, respectively. During the quarter ended March 31, 2019, contract costs increased by
$0.5 million
and we amortized
$0.7 million
of contract costs.
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6.
|
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:
|
|
Level 1
|
Unadjusted quoted market prices for identical assets or liabilities in an active market;
|
|
|
Level 2
|
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 or liabilities; and
|
|
|
Level 3
|
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.
|
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
6.9%
. The following table summarizes the carrying value and fair value of our long-term debt as of
March 31, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
(in thousands)
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Term Loan Facility
|
$
|
130,000
|
|
|
$
|
145,773
|
|
|
$
|
130,000
|
|
|
$
|
131,893
|
|
ABL Credit Facility
|
4,969
|
|
|
4,896
|
|
|
2,566
|
|
|
2,258
|
|
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 non-recurring basis, which would consist of measurements primarily of long-lived assets.
All of our inventory as of
March 31, 2019
and
December 31, 2018
consisted of supplies held for use in our drilling operations.
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2019
|
|
December 31, 2018
|
Accrued salaries and other compensation
|
$
|
8,008
|
|
|
$
|
12,379
|
|
Insurance
|
4,674
|
|
|
5,464
|
|
Deferred revenues (contract liabilities)
|
1,121
|
|
|
1,374
|
|
Property taxes and other
|
2,570
|
|
|
3,829
|
|
Intangible liability
|
47
|
|
|
1,079
|
|
Interest
|
3,352
|
|
|
3,318
|
|
Operating lease liability - current
|
480
|
|
|
—
|
|
Other
|
843
|
|
|
1,776
|
|
|
$
|
21,095
|
|
|
$
|
29,219
|
|
Our long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(in thousands)
|
|
2019
|
|
2018
|
Term Loan Facility due October 1, 2023
|
|
$
|
130,000
|
|
|
$
|
130,000
|
|
ABL Credit Facility due October 1, 2023
|
|
4,969
|
|
|
2,566
|
|
Finance and capital lease obligations
|
|
1,584
|
|
|
1,235
|
|
|
|
136,553
|
|
|
133,801
|
|
Less: current portion
|
|
(905
|
)
|
|
(587
|
)
|
Less: Term Loan Facility deferred financing costs
|
|
(3,038
|
)
|
|
(3,202
|
)
|
Long-term debt
|
|
$
|
132,610
|
|
|
$
|
130,012
|
|
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.
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.
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, L.P. "MSD Partners") is the lender of our
$130.0 million
Term Loan Facility. MSD Partners, together with its affiliate, MSD Capital, L.P. (“MSD Capital”) own approximately
30%
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
March 31, 2019
.
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. As of
March 31, 2019
, the weighted-average interest rate on our borrowings was
10.16%
. At
March 31, 2019
, the borrowing base under our ABL Credit Facility was
$31.0 million
, and we had
$23.4 million
of availability remaining of our
$40.0 million
commitment on that date.
|
|
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 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
March 31, 2019
, 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:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2019
|
|
2018
|
Compensation cost recognized:
|
|
|
|
Stock options
|
$
|
—
|
|
|
$
|
—
|
|
Restricted stock and restricted stock units
|
387
|
|
|
644
|
|
Total stock-based compensation
|
$
|
387
|
|
|
$
|
644
|
|
No
stock-based compensation was capitalized in connection with rig construction activity during the
three
months ended
March 31, 2019
or
2018
.
Stock Options
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.
There were
no
stock options granted during the
three
months ended
March 31, 2019
or
2018
.
A summary of stock option activity and related information for the
three
months ended
March 31, 2019
is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
Outstanding at January 1, 2019
|
669,213
|
|
|
$
|
12.74
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
Forfeited/expired
|
—
|
|
|
—
|
|
Outstanding at March 31, 2019
|
669,213
|
|
|
$
|
12.74
|
|
Exercisable at March 31, 2019
|
669,213
|
|
|
$
|
12.74
|
|
The number of options vested at
March 31, 2019
was
669,213
with a weighted average remaining contractual life of
3.0 years
and a weighted average exercise price of
$12.74
per share. There were no unvested options or unrecognized compensation cost related to outstanding stock options at
March 31, 2019
.
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.
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 restricted stock awards is determined based on the estimated fair market value of our shares on the grant date. As of
March 31, 2019
, there was
$4.2 million
in unrecognized compensation cost related to unvested restricted stock awards. This cost is expected to recognized over a weighted-average period of
2.4
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 three months ended March 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
Outstanding at January 1, 2019
|
1,385,973
|
|
|
$
|
3.22
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding at March 31, 2019
|
1,385,973
|
|
|
$
|
3.22
|
|
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
March 31, 2019
, there was
$1.6 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
1.3
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 three months ended
March 31, 2019
is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
RSUs
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
Outstanding at January 1, 2019
|
409,607
|
|
|
$
|
4.79
|
|
Granted
|
—
|
|
|
—
|
|
Vested and converted
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding at March 31, 2019
|
409,607
|
|
|
$
|
4.79
|
|
|
|
11.
|
Stockholders’ Equity and Earnings (Loss) per Share
|
As of
March 31, 2019
, we had a total of
77,078,252
shares of common stock,
$0.01
par value, outstanding. We also had
520,554
shares held as treasury stock. Total authorized common stock is
200,000,000
shares.
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:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands, except per share data)
|
2019
|
|
2018
|
Net loss (numerator):
|
$
|
(2,373
|
)
|
|
$
|
(4,146
|
)
|
Loss per share:
|
|
|
|
Basic and diluted
|
$
|
(0.03
|
)
|
|
$
|
(0.11
|
)
|
Shares (denominator):
|
|
|
|
Weighted average common shares outstanding - basic
|
75,692
|
|
|
38,124
|
|
Weighted average common shares outstanding - diluted
|
75,692
|
|
|
38,124
|
|
For all periods presented, the computation of diluted loss per share excludes the effect of certain outstanding stock options and RSUs because their inclusion would be anti-dilutive. The number of options that were excluded from diluted loss per share were
669,213
and
682,950
during the
three
months ended
March 31, 2019
and
2018
, respectively. The number of RSUs, which are not participating securities, that were excluded from our basic and diluted loss per share because they are anti-dilutive, were
409,607
and
1,261,244
for the
three
months ended
March 31, 2019
and
2018
, respectively.
Our effective tax rate was
51.7%
for the
three
months ended
March 31, 2019
, and
1.2%
and for the
three
months ended
March 31, 2018
. Taxes in both periods relate to Louisiana state income tax and Texas margin tax. For federal income tax purposes, we have applied a valuation allowance against any potential deferred tax asset which would have ordinarily resulted.
|
|
13.
|
Commitments and Contingencies
|
Purchase Commitments
As of
March 31, 2019
, we had outstanding purchase commitments to a number of suppliers totaling
$14.4 million
, net of deposits previously made, related primarily to the construction of drilling rigs. All of these commitments relate to equipment currently scheduled for delivery in 2019.
Contingencies
We may be the subject of lawsuits and claims arising in the ordinary course of business from time to time. Management cannot predict the ultimate outcome of such lawsuits and claims. While lawsuits and claims are asserted for amounts that may be material should an unfavorable outcome be the result, management does not currently expect that the outcome of any of these known legal proceedings or claims will have a material adverse effect on our financial position or results of operations.
In conjunction with the closing of the Sidewinder Merger on October 1, 2018, we entered into the Term Loan Credit Agreement for an initial term loan in an aggregate principal amount of
$130.0 million
and a delayed draw term loan facility in an aggregate principal amount of up to
$15.0 million
. MSD PCOF Partners IV, LLC (an affiliate of MSD Partners) is the lender of our
$130.0 million
Term Loan Facility. MSD Partners, together with MSD Capital, own approximately
30%
of the outstanding shares of the Company’s common stock as of
March 31, 2019
.
We made interest payments on the Term Loan Facility totaling
$3.3 million
for the three months ended March 31, 2019.