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 own and operate a premium fleet comprised of modern, technologically advanced drilling rigs.
Our rig fleet includes 29 marketed AC powered (“AC”) rigs and a number of additional rigs requiring conversions or upgrades in order to meet our AC pad-optimal specifications.
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, the Haynesville Shale and the Eagle Ford Shale; however, our rigs have previously operated in 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 1,083 rigs the week ending December 28, 2018, and declining to 790 rigs working the week ended February 14, 2020. 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 recovered to the $50.00 to $60.00 range as of the end of the fourth quarter 2019, most of our exploration and production ("E&P") customers have decreased planned capital expenditure budgets for 2020 with the goal of operating within their cash flows. 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.
Reverse Stock Split
Following approval by our stockholders on February 6, 2020, our Board of Directors has approved a 1-for-20 reverse stock split of our common stock. The reverse split will be effective at 5:00 p.m. Eastern Time on March 11, 2020 and our common stock will begin trading on a split-adjusted basis on the New York Stock Exchange as of the market open on March 12, 2020. The reverse stock split reduces the number of shares of common stock issued and outstanding from approximately 77,523,973 and 76,241,045 shares, respectively, to approximately 3,876,199 and 3,812,052 shares (unaudited), respectively, and reduces the number of authorized shares of our common stock from 200,000,000 shares to 50,000,000 shares (unaudited). We will account for this reverse stock split retroactively once it becomes effective.
Share and per share amounts presented in the accompanying consolidated financial statements have not been adjusted for the reverse stock split. Pro forma share and per share data, giving retroactive effect to the reverse stock split, are as follows (rounded to the nearest cent):
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Year Ended December 31,
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2019
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2018
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|
2017
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(in thousands, except per share amounts)
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(Unaudited)
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|
Loss per share:
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|
|
|
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|
Basic and diluted - as reported
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$
|
(0.81
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)
|
|
$
|
(0.42
|
)
|
|
$
|
(0.64
|
)
|
|
Basic and diluted - pro forma (post-reverse stock split)
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$
|
(16.11
|
)
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|
$
|
(8.40
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)
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|
$
|
(12.87
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)
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Weighted-average number of common shares outstanding:
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|
|
|
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Basic and diluted - as reported
|
75,471
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|
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47,580
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|
|
37,762
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Basic and diluted - pro forma (post-reverse stock split)
|
3,774
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|
|
2,379
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|
|
1,888
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|
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. See Note 4 - Sidewinder Merger 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 9 - Long-term Debt.
Asset Impairments
In the first and second quarters of 2019, we recorded $2.0 million and $1.1 million, respectively, of asset impairment expense in conjunction with the sale of miscellaneous drilling equipment at auctions in April and August of 2019.
In the second quarter of 2019, in light of the softening demand for contract drilling services, we recorded an impairment charge of $4.4 million relating to certain components on our SCR rigs and various other equipment. Management determined that these rigs could not be competitively marketed in the current environment as SCR rigs and therefore the rigs will be marketed in the future as AC rigs after conversion to AC pad-optimal status. The three SCR rigs were removed from our marketed fleet until their conversions to AC pad-optimal specifications are complete. The first conversion was completed during the fourth quarter of 2019. Due to the high volume of idle SCR drilling equipment on the market at the time, management did not believe that the SCR drilling equipment could be sold for a material amount in the current market environment, and therefore took the impairment charge at June 30, 2019.
We performed a goodwill impairment test during the third quarter of 2019 and recorded an impairment charge of $2.3 million, which represented the impairment of 100% of our previously recorded goodwill. The impairment was primarily the
result of the downturn in industry conditions since the consummation of the Sidewinder Merger in the fourth quarter of 2018 and the subsequent related decline in the price of our common stock as of September 30, 2019.
During the fourth quarter of 2019, we recorded impairments totaling $25.9 million relating primarily to our decision to remove two rigs from our marketed, or to-be-marketed fleet, as well as a plan to sell or otherwise dispose of rigs and related component equipment, much of which was acquired in connection with the Sidewinder Merger.
Assets Held for Sale
During the fourth quarter of 2019, in conjunction with our plan to sell certain non-pad optimal rigs or partial rigs and related equipment acquired in the Sidewinder Merger we impaired the related assets to fair value less estimated cost to sell and recorded $5.9 million of assets held for sale on our consolidated balance sheet as of December 31, 2019. Assets held for sale as of December 31, 2019 also included the remaining $2.8 million of unsold mechanical rigs belonging to Sidewinder unitholders as part of the Sidewinder Merger agreement (see Note 4 - Sidewinder Merger).
Assets held for sale as of December 31, 2018 included $15.5 million associated with the mechanical rigs belonging to Sidewinder unitholders as part of the Sidewinder Merger agreement, $3.0 million of real property for sale, all of which was sold during 2019, and $1.2 million of various other drilling equipment that was further impaired to zero as part of the asset impairment recorded in the second quarter of 2019.
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 $0.5 million as of December 31, 2019 and was zero as of December 31, 2018.
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
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20
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-
|
39 years
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|
Drilling rigs and related equipment
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3
|
-
|
20 years
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|
Machinery, equipment and other
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3
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-
|
7 years
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|
Vehicles
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2
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-
|
5 years
|
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 five 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 finance 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. For further discussion, see Asset Impairments in Note 1 -Nature of Operations and Recent Developments.
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 $0.3 million, $0.2 million and $0.1 million for the years ended December 31, 2019, 2018 and 2017, 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 7.4%. The following table summarizes the carrying value and fair value of our long-term debt as of December 31, 2019 and 2018.
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December 31, 2019
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|
December 31, 2018
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(in thousands)
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Carrying Value
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|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
Term Loan Facility
|
$
|
130,000
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|
|
$
|
138,567
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|
|
$
|
130,000
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|
|
$
|
131,893
|
|
|
Revolving Credit Facility
|
—
|
|
|
—
|
|
|
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 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, 2019 and 2018.
Goodwill
Goodwill was recorded by the Company in connection with the Sidewinder Merger on October 1, 2018 and represented the excess of the purchase price over the fair value of the assets acquired, net of liabilities assumed. 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 elected to early adopt ASU No. 2017-04, Intangibles - Goodwill and Other. Pursuant to the new guidance, an entity performs its goodwill impairment test by comparing the fair value of the relevant reporting unit with its book value 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.
We performed an impairment test during the quarter ended September 30, 2019 and recorded an impairment charge, which represents the impairment of 100% of our previously recorded goodwill. The impairment was primarily the result of the downturn in industry conditions since the consummation of the Sidewinder Merger in the fourth quarter of 2018 and the subsequent related decline in the price of our common stock as of September 30, 2019.
Intangible Liabilities
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 were amortized to operating revenues over the remaining underlying contract terms. $1.1 million of intangible revenue was recognized in 2019 as a result of this amortization and the intangible liabilities were fully amortized.
The following table summarizes the components of intangible liabilities, net:
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|
|
December 31,
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(in thousands)
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2019
|
|
2018
|
|
Intangible liabilities
|
$
|
3,123
|
|
|
$
|
3,123
|
|
|
Accumulated amortization
|
(3,123
|
)
|
|
(2,044
|
)
|
|
Intangible liabilities, net
|
$
|
—
|
|
|
$
|
1,079
|
|
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.
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 impact of adopting this standard and a discussion of our policies related to leases.
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.
Recent Accounting Pronouncements
We adopted ASU No. 2014-09 and its related amendments (collectively known as ASC 606) effective on January 1, 2018. See Note 5 - Revenue from Contracts with Customers for the required disclosures related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.
We adopted ASU No. 2016-02 and its related amendments (collectively known as ASC 842) effective on January 1, 2019. See Note 3 - Leases for the impact of adopting this standard and a discussion of our policies related to leases.
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 was originally effective for all 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. In November 2019, the FASB issued ASU No. 2019-10, which grants smaller reporting companies additional time to implement this standard on current expected credit losses (CECL) to interim and annual periods beginning after December 15, 2022. As a smaller reporting company, we will defer adoption of ASU No. 2016-13 until January 2023. We are currently evaluating the impact this guidance will have on our accounts receivable.
3. Leases
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 No. 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)
|
The timing and pattern of transfer of non-lease components and lease components are the same.
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|
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|
2)
|
The lease component, if accounted for separately, would be classified as an operating lease.
|
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.
As a Lessee
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 five years.
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, recorded as current portion of long-term debt and long-term debt on our consolidated balance sheets, at the carrying amount of the capital lease obligation on December 31, 2018, of $1.2 million and a ROU asset, recorded in plant, property and equipment on our consolidated balance sheets, 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, recorded in accrued liabilities and other long-term liabilities on our consolidated balance sheets, 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, recorded in other long-term assets on our consolidated balance sheets, 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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|
|
|
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|
(in thousands)
|
|
Year Ended December 31, 2019
|
|
Operating lease expense
|
|
$
|
524
|
|
|
Short-term lease expense
|
|
4,755
|
|
|
Variable lease expense
|
|
569
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
1,163
|
|
|
Interest expense on lease liabilities
|
|
206
|
|
|
Total finance lease expense
|
|
1,369
|
|
|
Total lease expenses
|
|
$
|
7,217
|
|
Supplemental cash flow information related to leases is as follows:
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|
|
|
|
|
|
|
|
(in thousands)
|
|
Year Ended December 31, 2019
|
|
Cash paid for amounts included in measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
509
|
|
|
Operating cash flows from finance leases
|
|
$
|
193
|
|
|
Financing cash flows from finance leases
|
|
$
|
2,980
|
|
|
|
|
|
|
Right-of-use assets obtained or recorded in exchange for lease obligations:
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|
|
|
Operating leases
|
|
$
|
1,427
|
|
|
Finance leases
|
|
$
|
13,143
|
|
Supplemental balance sheet information related to leases is as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2019
|
|
Operating leases:
|
|
|
|
Other long-term assets, net
|
|
$
|
1,033
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
475
|
|
|
Other long-term liabilities
|
|
1,250
|
|
|
Total operating lease liabilities
|
|
$
|
1,725
|
|
|
|
|
|
|
Finance leases:
|
|
|
|
Property, plant and equipment
|
|
$
|
14,375
|
|
|
Accumulated depreciation
|
|
(1,425
|
)
|
|
Property, plant and equipment, net
|
|
$
|
12,950
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
3,685
|
|
|
Long-term debt
|
|
7,472
|
|
|
Total finance lease liabilities
|
|
$
|
11,157
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
|
Operating leases
|
|
3.6 years
|
|
|
Finance leases
|
|
2.7 years
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
Operating leases
|
|
8.07
|
%
|
|
Finance leases
|
|
7.64
|
%
|
Maturities of lease liabilities at December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Operating Leases
|
|
Finance Leases
|
|
2020
|
$
|
594
|
|
|
$
|
4,221
|
|
|
2021
|
550
|
|
|
3,663
|
|
|
2022
|
428
|
|
|
3,504
|
|
|
2023
|
370
|
|
|
164
|
|
|
2024
|
47
|
|
|
—
|
|
|
Thereafter
|
—
|
|
|
—
|
|
|
Total cash lease payment
|
1,989
|
|
|
11,552
|
|
|
Add: expected residual value
|
—
|
|
|
915
|
|
|
Less: imputed interest
|
(264
|
)
|
|
(1,310
|
)
|
|
Total lease liabilities
|
$
|
1,725
|
|
|
$
|
11,157
|
|
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.
Rent expense was $5.1 million, and $3.9 million for the years ended December 31, 2018 and 2017, respectively.
4. Sidewinder Merger
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. The results of Sidewinder’s operations have been included in our consolidated financial statements since the acquisition date. The assets acquired and liabilities assumed were recorded at fair market value as determined by third party appraisals and other estimates. A summary of the assets acquired and liabilities assumed is as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Cash
|
$
|
10,743
|
|
|
Other current assets
|
23,317
|
|
|
Assets held for sale
|
17,557
|
|
|
Property, plant and equipment
|
214,064
|
|
|
Other long-term assets
|
343
|
|
|
Total assets acquired
|
266,024
|
|
|
Accounts payable and accrued liabilities
|
(16,534
|
)
|
|
Unfavorable contract liabilities
|
(3,123
|
)
|
|
Contingent consideration
|
(17,032
|
)
|
|
Net assets acquired
|
229,335
|
|
|
Goodwill
|
2,282
|
|
|
Total consideration transferred
|
$
|
231,617
|
|
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
|
)
|
5. 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, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
|
Dayrate drilling
|
$
|
184,374
|
|
|
$
|
133,278
|
|
|
$
|
84,834
|
|
|
Mobilization
|
5,365
|
|
|
2,100
|
|
|
2,235
|
|
|
Reimbursables
|
11,237
|
|
|
4,970
|
|
|
2,828
|
|
|
Early termination
|
1,405
|
|
|
—
|
|
|
—
|
|
|
Capital modification
|
115
|
|
|
216
|
|
|
91
|
|
|
Intangible
|
1,079
|
|
|
2,044
|
|
|
—
|
|
|
Other
|
27
|
|
|
1
|
|
|
19
|
|
|
Total revenue
|
$
|
203,602
|
|
|
$
|
142,609
|
|
|
$
|
90,007
|
|
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 and contract liabilities related to contracts with customers as of December 31, 2019 and 2018, respectively. We had no contract assets in either year.
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
|
Receivables, which are included in "Accounts receivable, net"
|
$
|
35,378
|
|
|
$
|
41,987
|
|
|
Contract liabilities
|
$
|
(311
|
)
|
|
$
|
(1,374
|
)
|
Significant changes in the contract liabilities balance during the years ended December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
(in thousands)
|
Contract Liabilities
|
|
Contract Liabilities
|
|
Revenue recognized that was included in contract liabilities at beginning of period
|
$
|
1,374
|
|
|
$
|
763
|
|
|
Increase in contract liabilities due to cash received, excluding amounts recognized as revenue
|
$
|
(311
|
)
|
|
$
|
(1,301
|
)
|
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, 2019. The estimated revenue does not include amounts of variable consideration that are constrained.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
(in thousands)
|
2020
|
|
2021
|
|
2022
|
|
Total
|
|
Revenue
|
$
|
(311
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(311
|
)
|
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 $0.1 million and $1.1 million on our consolidated balance sheets at December 31, 2019 and December 31, 2018, respectively. During the year ended December 31, 2019, contract costs increased by $2.3 million and we amortized $3.3 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.
6. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Rig components and supplies
|
$
|
2,325
|
|
|
$
|
2,693
|
|
We determined that no reserve for obsolescence was needed at December 31, 2019 or 2018. No inventory obsolescence expense was recognized during the years ended December 31, 2019, 2018 and 2017.
7. Property, Plant and Equipment
Major classes of property, plant, and equipment, which include finance and capital lease assets, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Land
|
$
|
487
|
|
|
$
|
487
|
|
|
Buildings
|
3,408
|
|
|
3,317
|
|
|
Drilling rigs and related equipment
|
568,675
|
|
|
594,871
|
|
|
Machinery, equipment and other
|
1,396
|
|
|
693
|
|
|
Finance and capital leases, respectively
|
14,375
|
|
|
2,027
|
|
|
Vehicles
|
355
|
|
|
533
|
|
|
Construction in progress
|
22,260
|
|
|
7,736
|
|
|
Total
|
$
|
610,956
|
|
|
$
|
609,664
|
|
|
Less: Accumulated depreciation
|
(153,426
|
)
|
|
(113,467
|
)
|
|
Total Property, plant and equipment, net
|
$
|
457,530
|
|
|
$
|
496,197
|
|
Repairs and maintenance expense included in operating costs in our statements of operations totaled $27.2 million, $19.7 million and $14.3 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Depreciation expense was $45.4 million, $30.9 million and $25.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
As of December 31, 2019, property, plant and equipment in our consolidated balance sheets included $14.4 million of vehicles and miscellaneous drilling equipment under finance leases, net of $1.4 million of accumulated amortization. As of December 31, 2018, property, plant and equipment in our consolidated balance sheets included $2.0 million of vehicles under capital leases, net of $0.7 million of accumulated amortization.
8. Supplemental Consolidated Balance Sheet and Cash Flow Information
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
Accrued salaries and other compensation(1)
|
$
|
3,500
|
|
|
$
|
12,379
|
|
|
Insurance(2)
|
2,861
|
|
|
5,464
|
|
|
Deferred revenue
|
701
|
|
|
1,374
|
|
|
Property taxes and other
|
4,716
|
|
|
3,829
|
|
|
Intangible liability
|
—
|
|
|
1,079
|
|
|
Interest
|
3,244
|
|
|
3,318
|
|
|
Operating lease liability - current
|
475
|
|
|
—
|
|
|
Other
|
871
|
|
|
1,776
|
|
|
|
$
|
16,368
|
|
|
$
|
29,219
|
|
|
|
|
|
(1)
|
Accrued salaries and other compensation was lower as of December 31, 2019, primarily attributable to higher incentive compensation accruals and accrued severance related to the Sidewinder Merger as of December 31, 2018, including $3.5 million which was paid to our former Chief Executive Officer.
|
|
|
|
|
(2)
|
Accrued insurance was lower as of December 31, 2019, primarily attributable to the Sidewinder Merger in 2018, in part, as Sidewinder was self-insured for worker’s compensation and general liability insurance prior to the close of the transaction in October 2018.
|
Supplemental consolidated cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
Cash paid during the year for interest
|
$
|
13,974
|
|
|
$
|
3,202
|
|
|
$
|
2,680
|
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
Change in property, plant and equipment purchases in accounts payable
|
$
|
1,607
|
|
|
$
|
1,175
|
|
|
$
|
(882
|
)
|
|
Additions to property, plant & equipment through finance and capital leases
|
$
|
13,143
|
|
|
$
|
601
|
|
|
$
|
1,102
|
|
|
Transfer of assets from held and used to held for sale
|
$
|
(18,506
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Transfer from inventory to fixed assets
|
$
|
(406
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Extinguishment of finance lease obligations from sale of assets classified as finance leases
|
$
|
(249
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Additions to property, plant and equipment through tenant allowance on leasehold improvement
|
$
|
—
|
|
|
$
|
694
|
|
|
$
|
—
|
|
|
Sidewinder Merger consideration
|
$
|
—
|
|
|
$
|
231,617
|
|
|
$
|
—
|
|
9. Long-term Debt
Our Long-term Debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in thousands)
|
|
2019
|
|
2018
|
|
Term Loan Facility due October 1, 2023
|
|
$
|
130,000
|
|
|
$
|
130,000
|
|
|
ABL Credit Facility due October 1, 2023
|
|
—
|
|
|
2,566
|
|
|
Finance and capital lease obligations, respectively
|
|
11,157
|
|
|
1,235
|
|
|
|
|
141,157
|
|
|
133,801
|
|
|
Less: current portion
|
|
(3,685
|
)
|
|
(587
|
)
|
|
Less: Term Loan Facility deferred financing costs
|
|
(2,531
|
)
|
|
(3,202
|
)
|
|
Long-term debt
|
|
$
|
134,941
|
|
|
$
|
130,012
|
|
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.
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, 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 December 31, 2019, the weighted-average interest rate on our borrowings was 9.60%. At December 31, 2019, the borrowing base under our ABL Credit Facility was $25.5 million, and we had $25.1 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.
10. Income Taxes
The components of the income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
—
|
|
|
—
|
|
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
(122
|
)
|
|
91
|
|
|
287
|
|
|
Income tax (benefit) expense
|
$
|
(122
|
)
|
|
$
|
91
|
|
|
$
|
287
|
|
The effective tax rate (as a percentage of net loss before income taxes) is reconciled to the U.S. federal statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
|
Income tax benefit at the statutory federal rate (21%, 21% and 35%)
|
$
|
(12,791
|
)
|
|
$
|
(4,233
|
)
|
|
$
|
(8,404
|
)
|
|
Effect of federal rate change to ending deferred tax assets and liabilities
|
—
|
|
|
—
|
|
|
7,994
|
|
|
Nondeductible expenses
|
360
|
|
|
(270
|
)
|
|
34
|
|
|
Valuation allowance
|
12,626
|
|
|
3,625
|
|
|
(1,377
|
)
|
|
State taxes, net of federal benefit
|
(396
|
)
|
|
14
|
|
|
9
|
|
|
Stock-based compensation and other
|
79
|
|
|
955
|
|
|
2,031
|
|
|
Income tax (benefit) expense
|
$
|
(122
|
)
|
|
$
|
91
|
|
|
$
|
287
|
|
|
Effective tax rate
|
0.2
|
%
|
|
0.5
|
%
|
|
1.2
|
%
|
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)
|
2019
|
|
2018
|
|
Deferred income tax assets
|
|
|
|
|
Merger-related expenses
|
$
|
836
|
|
|
$
|
1,731
|
|
|
Bad debts
|
115
|
|
|
—
|
|
|
Stock-based compensation
|
1,136
|
|
|
809
|
|
|
Accrued liabilities and other
|
447
|
|
|
1,295
|
|
|
Deferred revenue
|
164
|
|
|
321
|
|
|
Interest limitation
|
555
|
|
|
—
|
|
|
Net operating losses
|
46,975
|
|
|
34,682
|
|
|
Total net deferred tax assets
|
$
|
50,228
|
|
|
$
|
38,838
|
|
|
Deferred income tax liabilities
|
|
|
|
|
Prepaids
|
$
|
(563
|
)
|
|
$
|
(1,027
|
)
|
|
Property, plant and equipment
|
(21,347
|
)
|
|
(22,525
|
)
|
|
Intangible assets
|
(124
|
)
|
|
(38
|
)
|
|
Total net deferred tax liabilities
|
$
|
(22,034
|
)
|
|
$
|
(23,590
|
)
|
|
Valuation allowance
|
$
|
(28,846
|
)
|
|
$
|
(16,022
|
)
|
|
Net deferred tax liability
|
$
|
(652
|
)
|
|
$
|
(774
|
)
|
As of December 31, 2019, we had a total of $221.1 million of net operating loss carryforwards, of which $131.4 million will begin to expire in 2031 and $89.9 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, 2019, 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. We believe we had an ownership change in April 2016 and in connection with the Sidewinder Merger. We are subject to an annual limitation on the usage of our NOL, however, we also believe 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 us over the life of the NOL carryforward period. Management will continue to monitor the potential impact of Section 382 with respect to our 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, 2019, 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, 2019 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.
11. Stock-Based Compensation
Prior to June 2019, we issued common stock-based awards to employees and non-employee directors under our 2012 Long-Term Incentive Plan adopted in March 2012 (the “2012 Plan”). In June 2019, we adopted the 2019 Omnibus Incentive Plan (the “2019 Plan”) providing for common stock-based awards to employees and non-employee directors. The 2019 Plan permits the granting of various types of awards, including stock options, restricted stock and restricted stock unit awards, and up to 5,500,000 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. In connection with the adoption of the 2019 Plan, no further awards will be made under the 2012 Plan. As of December 31, 2019, approximately 3,995,488 shares were available for future awards. 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)
|
2019
|
|
2018
|
|
2017
|
|
Compensation cost recognized:
|
|
|
|
|
|
|
Stock options
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Restricted stock and restricted stock units
|
1,871
|
|
|
4,829
|
|
|
3,565
|
|
|
Total stock-based compensation
|
$
|
1,871
|
|
|
$
|
4,829
|
|
|
$
|
3,565
|
|
Stock Options
Prior to 2016, we granted stock options that remain outstanding. No options were exercised or granted during the years ended December 31, 2019, 2018 or 2017. 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, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at January 1, 2019
|
669,213
|
|
|
$
|
12.74
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
Forfeited/expired
|
—
|
|
|
—
|
|
|
Outstanding at December 31, 2019
|
669,213
|
|
|
$
|
12.74
|
|
|
Exercisable at December 31, 2019
|
669,213
|
|
|
$
|
12.74
|
|
The number of options exercisable at December 31, 2019 was 669,213 with a weighted-average remaining contractual life of 2.3 years and a weighted-average exercise price of $12.74 per share.
As of December 31, 2019, there was no unrecognized compensation cost related to outstanding stock options. No options vested during the years ended December 31, 2019, 2018 and 2017.
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 and the 2019 plan.
Time-based Restricted Stock
Time-based restricted stock awards consist of grants of our common stock that vest 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, 2019, there was $3.2 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 2.0 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 year ended December 31, 2019, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
|
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 January 1, 2019
|
1,385,973
|
|
|
3.22
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Vested
|
—
|
|
|
—
|
|
|
Forfeited/expired
|
(129,573
|
)
|
|
3.22
|
|
|
Outstanding at December 31, 2019
|
1,256,400
|
|
|
$
|
3.22
|
|
(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.
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, 2019, there was $1.9 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 1.0 year.
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 year ended December 31, 2019, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
|
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 January 1, 2019
|
409,607
|
|
|
4.79
|
|
|
Granted
|
564,994
|
|
|
1.94
|
|
|
Vested and converted
|
(54,740
|
)
|
|
4.71
|
|
|
Forfeited/expired
|
(30,925
|
)
|
|
4.71
|
|
|
Outstanding at December 31, 2019
|
888,936
|
|
|
$
|
2.99
|
|
(1) Time-based restricted stock 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 return on invested capital ("ROIC") as measured against ROIC performance goals determined by the compensation committee of our Board of Directors, 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. As of December 31, 2019, unrecognized compensation cost related to unvested performance-based and market-based restricted stock unit awards totaled $0.3 million, which is expected to be recognized over a weighted-average period of 1.1 years.
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.
The assumptions used to value our TSR market-based restricted stock unit awards granted during the year ended December 31, 2019 were a risk-free interest rate of 1.86%, an expected volatility of 58.2% and an expected dividend yield of 0.0%. Based on the Monte Carlo simulation, these restricted stock unit awards were valued at $1.45.
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 year ended December 31, 2019, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
|
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 January 1, 2019
|
—
|
|
|
—
|
|
|
Granted
|
469,759
|
|
|
1.69
|
|
|
Vested and converted
|
—
|
|
|
—
|
|
|
Forfeited/expired
|
—
|
|
|
—
|
|
|
Outstanding at December 31, 2019
|
469,759
|
|
|
$
|
1.69
|
|
12. Stockholders’ Equity and Loss per Share
As of December 31, 2019, we had a total of 76,241,045 shares of common stock, $0.01 par value, outstanding, including 1,256,400 shares of restricted stock. We also had 1,282,928 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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in thousands, except for per share data)
|
2019
|
|
2018
|
|
2017
|
|
Net loss (numerator)
|
$
|
(60,788
|
)
|
|
$
|
(19,993
|
)
|
|
$
|
(24,298
|
)
|
|
Loss per share:
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.81
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(0.64
|
)
|
|
Shares (denominator):
|
|
|
|
|
|
|
Weighted-average number of shares outstanding-basic
|
75,471
|
|
|
47,580
|
|
|
37,762
|
|
|
Net effect of dilutive stock options and restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
|
Weighted-average common shares outstanding-diluted
|
75,471
|
|
|
47,580
|
|
|
37,762
|
|
For all years presented, the computation of diluted loss per share excludes the effect of certain outstanding stock options 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, 669,213 and 682,950 during the years ended December 31, 2019, 2018 and 2017, respectively. RSUs, which are not participating securities and are excluded from our diluted loss per share because they are anti-dilutive were 888,936, 409,607 and 993,320 for the years ended December 31, 2019, 2018 and 2017, respectively.
13. 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.
14. Commitments and Contingencies
Purchase Commitments
As of December 31, 2019, we had outstanding purchase commitments to a number of suppliers totaling $3.5 million related primarily to rig equipment or components ordered but not received. We have paid deposits of $0.1 million related to these commitments.
Letters of Credit
As of December 31, 2019, we had outstanding letters of credit totaling $0.4 million as collateral for Sidewinder’s pre-acquisition insurance programs. As of December 31, 2019, no amounts had been drawn under these letters of credit.
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.
15. 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 2019, these customers included Diamondback Energy, Inc. (17%), GeoSouthern Energy Corporation (15%) and COG Operating, LLC, a subsidiary of Concho Resources, Inc. (14%). 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%).
As of December 31, 2019, Diamondback Energy, Inc. (21%) and GeoSouthern Energy Corporation (14%) accounted for 10% or more of our accounts receivable. As of December 31, 2018, COG Operating, LLC, a subsidiary of Concho Resources, Inc. (21%), Diamondback Energy, Inc. (14%), GeoSouthern Energy Corporation (14%) 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.
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, 2019, we had approximately $4.7 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.
16. Related Parties and Other Matters
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.
We made interest payments on the Term Loan Facility totaling $13.2 million during the twelve months ended December 31, 2019. Additionally, we have recorded merger consideration payable to an affiliate of $3.0 million related to proceeds received from the sale of specific assets earmarked in the Sidewinder Merger agreement as assets held for sale with the Sidewinder unitholders receiving the net proceeds. We are contractually obligated to make this payment to MSD, the unitholders’ representative, in April 2020.
17. Unaudited Quarterly Financial Data
A summary of our unaudited quarterly financial data is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
Quarter Ended
|
|
(in thousands, except for per share data)
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
Revenue
|
$
|
60,358
|
|
|
$
|
52,879
|
|
|
$
|
45,073
|
|
|
$
|
45,292
|
|
|
Operating loss
|
(1,152
|
)
|
|
(6,368
|
)
|
|
(6,755
|
)
|
|
(32,220
|
)
|
|
Income tax (benefit) expense
|
(2,540
|
)
|
|
2,898
|
|
|
232
|
|
|
(712
|
)
|
|
Net loss
|
(2,373
|
)
|
|
(12,858
|
)
|
|
(10,547
|
)
|
|
(35,010
|
)
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.03
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
124,003
|
|
|
Operating loss
|
(3,252
|
)
|
|
(2,396
|
)
|
|
(2,819
|
)
|
|
(11,415
|
)
|
|
Income tax (benefit) expense
|
(49
|
)
|
|
(21
|
)
|
|
(50
|
)
|
|
710
|
|
|
Net loss
|
(4,146
|
)
|
|
(3,313
|
)
|
|
(3,937
|
)
|
|
(23,833
|
)
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.11
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
(1)
|
Includes the operations of Sidewinder beginning on October 1, 2018.
|