ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included in "Item 8. Financial Statements and Supplementary Data." This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including without limitation those described in Cautionary Statement Regarding Forward-Looking Statements and “Item 1A. Risk Factors” or in other parts of this Annual Report on Form 10-K.
Discussions of matters pertaining to the year ended December 31, 2018 and year-to-year comparisons between the years ended December 31, 2019 and 2018 are not included in this Form 10-K, but can be found under Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 that was filed on March 2, 2020.
Management Overview
We were incorporated in Delaware on November 4, 2011. 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 24 marketed AC powered (“AC”) rigs plus five additional AC rigs that require significant upgrades in order to meet our AC pad-optimal specifications that we do not plan to market absent a material improvement in market conditions. Our first rig began drilling in May 2012.
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.
Significant Developments
COVID-19 Pandemic and Market Conditions Update
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (“COVID-19”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The continued spread of the COVID-19 virus and the responses taken to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and shutdowns, has caused significant declines in global demand for crude oil. This reduction in demand has occurred concurrent with the initiation of a crude oil price war between members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (collectively, the “OPEC+” group). Even with the production cuts announced by the OPEC+ group and others on April 9, 2020, and the cessation to the crude oil price war, crude oil inventories have continued to rise and to test storage capacity and logistics networks. These factors led to a collapse in oil prices, with the WTI price for May delivery closing at negative $37.63 per barrel on April 20, 2020. This resulted in an unprecedented decline in the U.S. land rig count reaching an all-time low of 231 on August 14, 2020. Our operating rig count experienced a similar collapse, bottoming at three operating rigs during the third quarter of 2020. Although oil prices have recently recovered with the WTI price reaching $60.07 on February 16, 2021 supported by production cuts by OPEC, the U.S. land rig count remains very low and has only modestly improved, reaching 381 rigs on February 19, 2021. The long-term effects on production and demand are unknown at this time. Currently, there is considerable uncertainty regarding measures to contain the virus and what potential future measures may be put in place, as well as uncertainty on how long OPEC+ will continue to maintain current production cuts, therefore we cannot predict when worldwide supply and demand for oil will stabilize.
In response to these adverse market conditions and uncertainty, our customers reduced planned capital expenditures and drilling activity. As a result, demand for our services rapidly declined in the first half of 2020 and into the beginning of the third quarter of 2020. During the first quarter of 2020, our operating rig count reached a peak of 22 rigs and temporarily reached a low of three rigs during the third quarter of 2020. During the third quarter, oil and natural gas prices began to stabilize, and demand for our products began to modestly improve from their historic lows, which allowed us to reactivate additional rigs during the back half of 2020. As of December 31, 2020, we had eleven contracted rigs. However, due to the lack of visibility and confidence towards customer intentions and the unknown future impacts of COVID-19 and changes to OPEC production cuts on economic conditions and oil and gas demand and drilling activity, we cannot assure you that we will be able to maintain this operating rig count or that our operating rig count will continue to improve in the future. Two contracts that expired at the end of 2020 had higher dayrates than prevailing spot rates. As a result, although our operating rig count has been increasing, these rigs are being contracted at prevailing market rates that remain depressed, therefore, we expect to see our average revenue per day decline as compared to our legacy contracts.
Due to these rapidly declining market conditions, we took the following actions at the end of the first quarter of 2020 in order to reduce our cost structure:
•Salary or compensation reductions for substantially all our employees, including members of executive management;
•Suspension of all cash-based incentive compensation, including all members of executive management;
•Reduced the number of executive management positions by two;
•Reduced the number of directors from seven to five, which became effective following director elections at our 2020 Annual Meeting of Stockholders;
•Reduced annual compensation reductions for our directors; and
•Reduced headcount for non-field-based personnel by approximately 40%.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. We deferred $0.8 million of employer social security payments during the year ended December 31, 2020.
The CARES Act did not have a material impact on our income taxes. Management will continue to monitor future developments and interpretations for any further impacts on our financial condition, results of operations, or liquidity.
We cannot predict the length of time that the market disruptions resulting from the COVID-19 pandemic will continue; or when, or if, oil and gas prices and demand for our contract drilling services will decline, continue to improve or return to pre-COVID-19 levels. The extent to which our operating and financial results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus. As a result, our business, operating results and financial conditions are subject to various risks, many of which are aggravated as a result of the declining market conditions and significant uncertainty caused by the COVID-19 pandemic.
PPP Loan
On April 27, 2020, we entered into an unsecured loan in the aggregate principal amount of $10.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”), sponsored by the Small Business Administration (the “SBA”) as guarantor of loans under the PPP. The PPP is part of the CARES Act, and it provides for loans to qualifying businesses in a maximum amount equal to the lesser of $10.0 million and 2.5 times the average monthly payroll expenses of the qualifying business. The proceeds of the loan may only be used for payroll costs, rent, utilities, mortgage interests, and interest on other pre-existing indebtedness (the “permissible purposes”).
The application for these funds required us to, in good faith, certify that current economic uncertainty made the loan request necessary to support our ongoing operations. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The PPP Loan is subject to any new guidance and new requirements released by the Department of the Treasury who has indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (SBA) audit to further ensure PPP loans are limited to eligible borrowers in need. On October 7, 2020, the SBA released guidance clarifying the deferral period for PPP loan payments. The Paycheck Protection Flexibility Act of 2020 extended the deferral period for loan payments to either (1) the date that SBA remits the borrower's loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, ten months after the end of the
borrower's loan forgiveness covered period. We intend to apply for forgiveness and we believe our first payment related to any unforgiven portion would be due during the fourth quarter of 2021, with a loan maturity date of April 27, 2022.
Common Stock Purchase Agreement
On November 11, 2020, we entered into a Common Stock Purchase Agreement (the “Commitment Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with Tumim Stone Capital LLC (“Tumim”). Pursuant to the Commitment Purchase Agreement, the Company has the right to sell to Tumim up to $5,000,000 (the “Total Commitment”) in shares of its common stock, par value $0.01 per share (the “Shares”) (subject to certain conditions and limitations) from time to time during the term of the Commitment Purchase Agreement. Sales of common stock pursuant to the Commitment Purchase Agreement, and the timing of any sales, are solely at our option and we are under no obligation to sell securities pursuant to this arrangement. Shares may be sold by the Company pursuant to this arrangement over a period of up to 24 months, commencing on December 1, 2020.
Under the applicable rules of the New York Stock Exchange (“NYSE”), in no event may we issue more than 1,234,546 shares of our common stock, which represents 19.99% of the shares of our common stock outstanding immediately prior to the execution of the Commitment Purchase Agreement (the “Exchange Cap”), to Tumim under the Commitment Purchase Agreement, unless (i) we obtain stockholder approval to issue shares of our common stock in excess of the Exchange Cap or (ii) the price of all applicable sales of our common stock to Tumim under the Commitment Purchase Agreement equals or exceeds the lower of (A) the official closing price on the NYSE immediately preceding the delivery by us of an applicable purchase notice under the Commitment Purchase Agreement and (B) the average of the closing prices of our common stock on the NYSE for the five business days immediately preceding the delivery by us of an applicable purchase notice under the Commitment Purchase Agreement, in each case plus $0.128, such that the transactions contemplated by the Commitment Purchase Agreement are exempt from the Exchange Cap limitation under applicable NYSE rules. In any event, the Commitment Purchase Agreement specifically provides that we may not issue or sell any shares of our common stock under the Commitment Purchase Agreement if such issuance or sale would breach any applicable rules or regulations of the NYSE. The Company has also limited the aggregate number of shares of common stock reserved for issuance under the Commitment Purchase Agreement to 1,500,000 shares without subsequent board approval.
In all instances, we may not sell shares of our common stock to Tumim under the Commitment Purchase Agreement if it would result in Tumim beneficially owning more than 4.99% of the common stock (the “Beneficial Ownership Cap”).
The proceeds under the Commitment Purchase Agreement will depend on the frequency and prices at which the Company sells shares of its stock to Tumim. We determined that the right to sell additional shares represents a freestanding put option under ASC 815 Derivatives and Hedging, but has a fair value of zero, and therefore no additional accounting was required. Transaction costs of $0.5 million, incurred in connection with entering into the Purchase Agreement were expensed as selling, general and administrative expense.
Third Amendment to Term Loan Credit Agreement
On June 4, 2020, we entered into a Third Amendment, dated as of June 4, 2020 (the “Third Amendment”), to the Credit Agreement, dated as of October 1, 2018 (the “Term Credit Loan Agreement”), to permit us, at our option, subject to required prior notice and a maximum available liquidity condition (including availability under our revolving credit agreement and available cash), to elect to pay accrued and unpaid interest, solely during one three-consecutive-month period immediately following such notice, in kind (the “PIK Amount”). In connection with the amendments, we agreed to pay an additional amount equal to 0.75% of the aggregate principal amount of the loans under the Term Loan Credit Agreement plus all PIK Amounts, if any, that are added to such principal amount being repaid or prepaid on either the maturity date or upon the occurrence of an acceleration of obligations under the Term Loan Credit Agreement.
ATM Offering
On June 5, 2020, we entered into an equity distribution agreement (the “Agreement”) with Piper Sandler & Co. (the “Agent”), through its Simmons Energy division. Pursuant to the Agreement, we were able to offer and sell through the Agent shares of our common stock, par value $0.01 per share, having an aggregate offering price of up to $11,000,000 (the “Shares”). We began offering shares under this program during the second quarter of 2020 and completed this offering process during the third quarter of 2020, raising an aggregate $11 million of gross proceeds and issuing an aggregate of 2.4 million shares at an average gross offering price of $4.66 per share. We have used and plan to continue using the net proceeds from the sales pursuant to the Agreement, after deducting the sales agent’s commissions and our offering expenses, for general corporate purposes, which may include, among other things, repayment of indebtedness and capital expenditures.
The Agreement contained customary representations, warranties and agreements by the Company, indemnification obligations of the Company and the Agent, including for liabilities under the Securities Act, other obligations of the parties and termination provisions. Under the terms of the Agreement, we paid the Agent a commission equal to 3% of the gross sales price of the Shares sold.
Reverse Stock Split
Following approval by our stockholders on February 6, 2020, our Board of Directors approved a 1-for-20 reverse stock split of our common stock. The reverse stock split reduced the number of shares of common stock issued and outstanding from 77,523,973 and 76,241,045 shares, respectively, to 3,876,196 and 3,812,050 shares, respectively, and reduced the number of authorized shares of our common stock from 200,000,000 shares to 50,000,000 shares.
Sidewinder Merger Effects and Merger Consideration Amendment
We completed the merger with Sidewinder Drilling LLC on October 1, 2018. During the year ended December 31, 2019 and 2018, we recorded $2.7 million and $13.6 million, respectively, of merger-related expenses comprised primarily of severance, professional fees and various other integration related expenses. There were no merger expenses recorded during the year ended December 31, 2020.
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. During the year ended December 31, 2019 and 2018, $1.1 million and $2.0 million, respectively, of intangible revenue was recognized as a result of this amortization. The intangible liabilities were fully amortized in the second quarter of 2019.
In addition, at the time of consummation of the Sidewinder Merger, Sidewinder owned various mechanical rig assets and related equipment (the "Mechanical Rigs") located principally in the Utica and Marcellus plays. As these assets were not consistent with ICD’s core strategy or geographic focus, ICD agreed that these assets could be disposed of, with the Sidewinder unitholders receiving the net proceeds. As a result of this arrangement, on the merger date, we recorded the fair value of the Mechanical Rigs less costs to sell, as assets held for sale, with a related liability in contingent consideration. Subsequently, these assets were sold at auction for substantially less than the appraised fair values on the merger date. As a result, in the second quarter of 2020, the contingent consideration liability was reduced by the appraised fair values on the merger date and the proceeds were recorded as merger consideration payable to an affiliate on our consolidated balance sheets.
On June 4, 2020, we entered into a letter agreement (the “Merger Consideration Amendment”) with MSD Credit Opportunity Master Fund, L.P. to allow for the deferral of payment of the Mechanical Rig net proceeds of $2.9 million, to the earlier of (i) June 30, 2022 and (ii) a change of control transaction (as defined therein) (such applicable date, the “Payment Date”), and requires us to pay an additional amount in connection with such deferred payment equal to interest accrued on the amount of Mechanical Rig net proceeds during the period between May 1, 2020 and the Payment Date, which interest shall accrue at a rate of 15% per annum, compounded quarterly, during the period beginning on May 1, 2020 and ending on December 31, 2020 and at a rate of 25% per annum, compounded quarterly, during any period following December 31, 2020. The Mechanical Rig net proceeds were previously payable in the second quarter of 2020.
Asset Impairment
As a result of the rapidly deteriorating market conditions described in "COVID-19 Pandemic and Market Conditions Update," we concluded that a triggering event occurred as of March 31, 2020 and, accordingly, an interim asset impairment test was performed. As a result, we recognized impairment of $3.3 million associated with the decline in the market value of our assets held for sale based upon the market approach method and $13.3 million related to the remaining assets on rigs removed from our marketed fleet, as well as certain other component equipment and inventory; all of which was deemed to be unsaleable and of zero value based upon the current macroeconomic conditions and uncertainties surrounding COVID-19.
In the fourth quarter of 2020, due to the highly competitive market and in an effort to minimize capital spending, management drafted and approved a plan to upgrade our existing fleet by utilizing the primary components needed to complete the upgrades from five of our existing rigs and these five rigs were removed from our marketed fleet. We recorded an impairment charge of $21.9 million related to the remaining assets on these non-marketed rigs. Additionally, we recorded a $2.4 million asset impairment based upon the market approach method on certain capital spare parts, all of which were deemed to be incompatible with our upgraded fleet. Due to the uncertainty around the COVID-19 pandemic and current market conditions, we may have to make further impairment charges in future periods relating to, among other things, fixed assets and inventory.
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 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 then current environment as SCR rigs and we removed them from our marketed fleet. 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 then current market environment, and therefore took the impairment charge.
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 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
As a result of the rapidly deteriorating market conditions described in "COVID-19 Pandemic and Market Conditions Update", we recognized impairment of $3.3 million as of March 31, 2020 associated with the decline in the market value of our assets held for sale. Throughout 2020, we sold $2.6 million of assets held for sale and received cash proceeds of $1.3 million, resulting in $1.3 million of loss on sale of assets. Additionally during 2020, assets held for sale were reduced by $2.8 million related to the remaining fair value of mechanical rigs acquired in the Sidewinder Merger which was recorded as a reduction in the related contingent consideration liability on our consolidated balance sheets.
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. 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.
Our Revenues
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. If a contract is terminated prior to the specified contract term, early termination payments received from the customer are only recognized as revenues when all contractual obligations, such as mitigation requirements, 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
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.
Our operating costs also include costs and expenses associated with construction activities at our Galayda yard location to the extent that construction activities cease or are not continuous. During 2020, our operating costs also included approximately $0.6 million of costs associated with the decommissioning of rigs and $1.4 million of costs associated with the reactivation of idle rigs. Reactivation costs include costs associated with recommissioning the rig, the hiring and training of new crews and the purchase of supplies and other consumables required for the operation of the rigs.
How We Evaluate our Operations
We regularly use a number of financial and operational measures to analyze and evaluate the performance of our business and compensate our employees, including the following:
•Safety Performance. Maintaining a strong safety record is a critical component of our business strategy. We measure safety by tracking the total recordable incident rate for our operations. In addition, we closely monitor and measure compliance with our safety policies and procedures, including "near miss" reports and job safety analysis compliance. We believe our Risk-Based HSE management system provides the required control, yet needed flexibility, to conduct all activities safely, efficiently and appropriately.
•Utilization. Rig utilization measures the total amount of time that our rigs are earning revenue under a contract during a particular period. We measure utilization by dividing the total number of Operating Days for a rig by the total number of days the rig is available for operation in the applicable calendar period. A rig is available for operation commencing on the earlier of the date it spuds its initial well following construction or when it has been completed and is actively marketed. “Operating Days” represent the total number of days a rig is earning revenue under a contract, beginning when the rig spuds its initial well under the contract and ending with the completion of the rig’s demobilization.
•Revenue Per Day. Revenue per day measures the amount of revenue that an operating rig earns on a daily basis during a particular period. We calculate revenue per day by dividing total contract drilling revenue earned during the applicable period by the number of Operating Days in the period. Revenues attributable to costs reimbursed by customers are excluded from this measure.
•Operating Cost Per Day. Operating cost per day measures the operating costs incurred on a daily basis during a particular period. We calculate operating cost per day by dividing total operating costs during the applicable period by the number of Operating Days in the period. Operating costs attributable to costs reimbursed by customers are excluded from this measure.
•Operating Efficiency and Uptime. Maintaining our rigs’ operational efficiency is a critical component of our business strategy. We measure our operating efficiency by tracking each drilling rig’s unscheduled downtime on a daily, monthly, quarterly and annual basis.
Results of Operations
The following summarizes our financial and operating data for the years ended December 31, 2020 and 2019:
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|
|
|
|
|
|
|
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|
|
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Year Ended
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(In thousands, except per share data)
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December 31,
2020
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December 31,
2019
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Revenues
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$
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83,418
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|
|
$
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203,602
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Costs and expenses
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|
|
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Operating costs
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65,367
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|
|
144,913
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Selling, general and administrative
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13,484
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|
|
16,051
|
|
Severance and merger-related expenses
|
1,076
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|
|
2,698
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|
Depreciation and amortization
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43,919
|
|
|
45,367
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|
Asset impairment, net
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41,007
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|
|
35,748
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Loss on disposition of assets, net
|
723
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|
|
4,943
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Other expense
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—
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|
|
377
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|
Total cost and expenses
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165,576
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|
|
250,097
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Operating loss
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(82,158)
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|
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(46,495)
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Interest expense
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(14,627)
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|
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(14,415)
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Loss before income taxes
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(96,785)
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|
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(60,910)
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Income tax benefit
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(147)
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|
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(122)
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Net loss
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$
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(96,638)
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|
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$
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(60,788)
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Other financial and operating data:
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Number of marketed rigs (end of year)(1)
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24
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29
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Rig operating days(2)
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3,739
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|
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8,985
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Average number of operating rigs(3)
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10.2
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|
|
24.6
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Rig utilization(4)
|
35
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%
|
|
83
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%
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Average revenue per operating day(5)
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$
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19,000
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|
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$
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20,628
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Average cost per operating day(6)
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$
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13,984
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$
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14,202
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Average rig margin per operating day
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$
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5,016
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$
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6,426
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Oil price per Bbl (7) (end of year)
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$
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48.35
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$
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61.14
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Natural gas price per Mcf (8) (end of year)
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$
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2.36
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|
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$
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2.09
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(1)Number of marketed rigs as of December 31, 2020 decreased by five rigs as compared to the number of marketed rigs as of December 31, 2019. Marketed rigs exclude idle rigs that will not be reactivated until upgrades or conversions are complete or market conditions substantially improve.
(2)Rig operating days represent the number of days our rigs are earning revenue under a contract during the period, including days that standby revenues are earned.
(3)Average number of operating rigs is calculated by dividing the total number of rig operating days in the period by the total number of calendar days in the period.
(4)Rig utilization is calculated as rig operating days divided by the total number of days our drilling rigs are available during the applicable period.
(5)Average revenue per operating day represents total contract drilling revenues earned during the period divided by rig operating days in the period. Excluded in calculating average revenue per operating day are revenues associated with the reimbursement of (i) out-of-pocket costs paid by customers of $9.0 million, and $15.8 million during the years ended December 31, 2020 and 2019, respectively, (ii) revenues associated with the amortization of intangible revenue acquired in the Sidewinder Merger of zero and $1.1 million during the years ended December 31, 2020 and 2019, respectively, and (iii) early termination revenues of $3.3 million and $1.4 million during the year ended December 31, 2020 and 2019, respectively.
(6)Average cost per operating day represents total operating costs incurred during the period divided by rig operating days in the period. The following costs are excluded in calculating average cost per operating day: (i) out-of-pocket costs reimbursed by customers of $9.0 million and $15.8 million during the years ended December 31, 2020 and 2019, respectively, (ii) new crew training costs of $0.2 million and $0.3 million during the years ended December 31, 2020 and 2019, respectively, (iii) construction overhead costs expensed due to reduced rig construction activity of $1.9 million and $1.1 million during the years ended December 31, 2020 and 2019, respectively, and (iv) rig decommissioning costs associated with stacking deactivated rigs and rig reactivation costs associated with the redeployment of previously stacked rigs of $2.0 million and $0.2 million during the year ended December 31, 2020 and 2019, respectively.
(7)WTI spot price as reported by the United States Energy Information Administration.
(8)Henry Hub spot price as reported by the United States Energy Information Administration.
Comparison of the years ended December 31, 2020 and 2019
Revenues
Revenues for the year ended December 31, 2020 were $83.4 million, representing a 59.0% decrease over revenues of $203.6 million for the year ended December 31, 2019. This decrease was attributable to a decrease in operating days to 3,739 days as compared to 8,985 days in 2019. The decrease in operating days was primarily attributable to the drastic downturn in market conditions as a result of the COVID-19 pandemic and the concurrent initiation of a crude oil price war between members of the “OPEC+” group. On a revenue per operating day basis, which excludes the impact of early termination and intangible revenues, our revenue per operating day decreased to $19,000 during 2020 compared to revenue per operating day of $20,628 during 2019. This decrease in average revenue per day resulted from a significant decline in spot dayrates during 2020, including the expiration of various higher dayrate legacy term contracts during 2020.
Operating Costs
Operating costs for the year ended December 31, 2020 were $65.4 million, representing a 54.9% decrease over operating costs for the year ended December 31, 2019 of $144.9 million. This decrease was attributable to a decrease in operating days to 3,739 days as compared to 8,985 days in 2019. On a cost per operating day basis, our cost per day decreased to $13,984 during 2020, compared to cost per day of $14,202 during 2019. This decrease was primarily attributable to cost reduction activities instituted by us at the beginning of the second quarter of 2020 as well as increased labor costs associated with inefficiencies and transitory downtime during 2019.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31, 2020 were $13.5 million, representing a 16.0% decrease over selling, general and administrative expenses for the year ended December 31, 2019 of $16.1 million. This decrease was primarily related to cost cutting initiatives implemented by us at the beginning of the second quarter of 2020.
Severance and Merger-related Expenses
Severance expense of $1.1 million was recorded during 2020 in connection with our cost reduction measures instituted in response to the COVID-19 pandemic and deteriorating market conditions.
Merger-related expenses of $2.7 million incurred during 2019 represent expenses associated with the Sidewinder Merger consisting primarily of severance, professional fees and other merger-related expenses.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2020 was $43.9 million, representing a 3.2% decrease compared to $45.4 million for the year ended December 31, 2019. This decrease was primarily the result of the asset impairments incurred in 2019 and 2020, offset by increases related to the introduction of new drilling rigs upgraded by us in 2019. We begin depreciating our rigs on a straight-line basis when they commence drilling operations.
Asset Impairment, net
Asset impairment expense of $41.0 million was recorded for the year ended December 31, 2020, as compared to $35.7 million for the year ended December 31, 2019. For further discussion, see “Significant Developments - Asset Impairments” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Loss on Disposition of Assets, net
A loss on the disposition of assets totaling $0.7 million and $4.9 million was recorded for the years ended December 31, 2020 and 2019, respectively. In the current and prior year period the loss relates primarily to the sale of certain surplus assets, acquired in the Sidewinder Merger, as well as various other miscellaneous sales.
Other Expense
Other expense was $0.4 million for the year ended December 31, 2019 related to the settlement of a lawsuit.
Interest Expense
Interest expense was $14.6 million for the year ended December 31, 2020, compared to $14.4 million for the year ended December 31, 2019. This interest expense primarily related to our $130.0 million term loan facility.
Income Tax (Benefit) Expense
Income tax benefit for the year ended December 31, 2020 amounted to $0.1 million compared to income tax benefit of $0.1 million for the year ended December 31, 2019. The effective tax rate was 0.2% for the year ended 2020 compared to 0.2% for the year ended 2019. Taxes in both years relate to Louisiana state income tax and Texas margin tax.
Liquidity and Capital Resources
Our liquidity as of December 31, 2020 included approximately $7.5 million of availability under our $40.0 million ABL Credit Facility, based on a borrowing base of $7.7 million, a $15.0 million committed accordion under our existing term loan facility, $5.0 million available under our Commitment Purchase Agreement, $12.3 million of cash and $7.3 million of other net working capital.
We expect our future capital and liquidity needs to be related to operating expenses, maintenance capital expenditures, working capital and general corporate purposes. We believe that our cash and cash equivalents, cash flows from operating activities and borrowings under our Revolving Credit Facility will adequately finance all of our anticipated purchase commitments, capital expenditures and other cash requirements over the next twelve months from issuance.
You should read "Item 1A Risk Factors" in particular, "Risks Related to Our Liquidity", for additional information regarding risks surrounding our operations and financial liquidity.
Contractual Obligations
As of December 31, 2020, we had contractual obligations as described below.
Our obligations include "off-balance sheet arrangements" whereby the liabilities associated with unconditional purchase obligations are not fully reflected in our consolidated balance sheets.
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|
(in thousands)
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|
2021
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|
2022
|
|
2023
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|
Thereafter
|
|
Total
|
Term Loan Facility
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|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
130,000
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|
|
$
|
—
|
|
|
$
|
130,000
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|
Interest on Term Loan Facility
|
|
11,863
|
|
|
11,863
|
|
|
11,863
|
|
|
—
|
|
|
35,589
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|
Deferred amendment fee
|
|
—
|
|
|
—
|
|
|
975
|
|
|
—
|
|
|
975
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|
Merger consideration payable to an affiliate, including interest
|
|
—
|
|
|
4,606
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|
|
—
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|
|
—
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|
|
4,606
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|
PPP Loan, including interest
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|
4,345
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|
|
5,719
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|
|
—
|
|
|
—
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|
|
10,064
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|
Finance leases
|
|
3,892
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|
|
4,275
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|
|
26
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|
|
—
|
|
|
8,193
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|
Purchase obligations
|
|
600
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|
|
—
|
|
|
—
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|
|
—
|
|
|
600
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|
Total contractual obligations
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|
$
|
20,700
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|
|
$
|
26,463
|
|
|
$
|
142,864
|
|
|
$
|
—
|
|
|
$
|
190,027
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|
Our long-term debt as of December 31, 2020 consisted of amounts due under our Term Loan Facility (as defined and further described below). Interest on long-term debt is related to our estimated future contractual interest obligations on long-term indebtedness outstanding as of December 31, 2020 under our Term Loan Facility. Interest payment obligations on our Term Loan Facility were estimated based on the 9.0% interest rate that was in effect at December 31, 2020, and the principal balance of $130 million at December 31, 2020, and assuming repayment of the outstanding balance occurs at October 1, 2023. On April 27, 2020, we entered into the PPP Loan in the aggregate principal amount of $10.0 million pursuant to the PPP,
sponsored by the SBA as guarantor of loans under the PPP. The PPP is part of the CARES Act, and it provides for loans to qualifying businesses in a maximum amount equal to the lesser of $10.0 million and 2.5 times the average monthly payroll expenses of the qualifying business. The proceeds of the loan may only be used for payroll costs, rent, utilities, mortgage interests, and interest on other pre-existing indebtedness. Additionally, included in our contractual obligations are finance leases on vehicles and certain drilling equipment. These leases generally have a term of 36 months and are paid monthly.
Our purchase obligations relate primarily to outstanding purchase orders for rig equipment or components ordered but not received. We have made progress payments on these orders of approximately $0.2 million that could be forfeited if we were to cancel these orders.
Cash Flows
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|
Year Ended December 31,
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(in thousands)
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2020
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|
2019
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|
|
Net cash provided by operating activities
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$
|
287
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|
|
$
|
27,921
|
|
|
|
Net cash used in investing activities
|
(8,977)
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|
|
(28,369)
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|
|
|
Net cash provided by (used in) financing activities
|
15,763
|
|
|
(6,593)
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
$
|
7,073
|
|
|
$
|
(7,041)
|
|
|
|
Net Cash Provided By Operating Activities
Cash provided by operating activities was $0.3 million for the year ended December 31, 2020 compared to $27.9 million for the year ended December 31, 2019. Factors affecting changes in operating cash flows are similar to those that impact net earnings, with the exception of non-cash items such as depreciation and amortization, impairments, gains or losses on disposals of assets, stock-based compensation, deferred taxes and amortization of deferred financing costs. Additionally, changes in working capital items such as accounts receivable, inventory, prepaid expense, accounts payable and accrued liabilities can significantly affect operating cash flows. Cash flows from operating activities during 2020 were lower as a result of an increase in net loss of $35.9 million, adjusted for non-cash items of $88.5 million, compared to $89.1 million in 2019. Additionally, working capital changes that increased cash flows from operating activities were $8.4 million in 2020 compared to working capital changes that decreased cash flows from operating activities of $0.4 million in 2019.
Net Cash Used In Investing Activities
Cash used in investing activities was $9.0 million for the year ended December 31, 2020 compared to $28.4 million for the year ended December 31, 2019. Our primary investing activities in 2020 related to minor rig upgrades and maintenance capital expenditures. Cash payments of $14.2 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $5.1 million and the collection of principal on note receivable of $0.1 million. Cash payments during 2020 included approximately $8.1 million associated with equipment purchased in 2019. During 2019, cash payments of $38.3 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $9.0 million and proceeds from insurance claims of $1.0 million.
Net Cash Provided By (Used In) Financing Activities
Cash provided by financing activities was $15.8 million for the year ended December 31, 2020 compared to cash used in financing activities of $6.6 million for the year ended December 31, 2019. During 2020, we made borrowings under our Revolving Credit Facility of $11.0 million and under the PPP Loan of $10.0 million, offset by repayments under our Revolving Credit Facility of $11.0 million, common stock issuance costs of $0.8 million, received proceeds from issuance of common stock of $11.0 million, had restricted stock units withheld for taxes paid of $44.0 thousand, purchased $0.1 million of treasury stock and made payments for finance lease obligations of $4.3 million.
Long-term Debt
On October 1, 2018, we entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”) for an initial term loan in an aggregate principal amount of $130.0 million, (the “Term Loan Facility”) and (b) a delayed draw term loan facility in an aggregate principal amount of up to $15.0 million (the “DDTL Facility”, and together with the Term Loan Facility, the “Term Facilities”). The Term Facilities have a maturity date of October 1, 2023, at which time all outstanding principal under the Term Facilities and other obligations become due and payable in full.
At our election, interest under the Term Loan Facility is determined by reference at our option to either (i) a “base rate” equal to the higher of (a) the federal funds effective rate plus 0.05%, (b) the London Interbank Offered Rate (“LIBOR”) with an interest period of one month, plus 1.0%, and (c) the rate of interest as publicly quoted from time to time by the Wall Street Journal as the “prime rate” in the United States, plus an applicable margin of 6.5%, or (ii) a “LIBOR rate” equal to LIBOR with an interest period of one month, plus an applicable margin of 7.5%.
The Term Loan Credit Agreement contains financial covenants, including a liquidity covenant of $10.0 million and a springing fixed charge coverage ratio covenant of 1.00 to 1.00 that is tested when availability under the ABL Credit Facility (defined below) and the DDTL Facility is below $5.0 million at any time that a DDTL Facility loan is outstanding. The Term Loan Credit Agreement also contains other customary affirmative and negative covenants, including limitations on indebtedness, liens, fundamental changes, asset dispositions, restricted payments, investments and transactions with affiliates. The Term Loan Credit Agreement also provides for customary events of default, including breaches of material covenants, defaults under the ABL Credit Facility or other material agreements for indebtedness, and a change of control.
The obligations under the Term Loan Credit Agreement are secured by a first priority lien on collateral (the “Term Priority Collateral”) other than accounts receivable, deposit accounts and other related collateral pledged as first priority collateral (“Priority Collateral”) under the ABL Credit Facility (defined below) and a second priority lien on such Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. MSD PCOF Partners IV, LLC (an affiliate of MSD Partners) is the lender of our $130.0 million Term Loan Facility. MSD Partners, together with MSD Capital, own approximately 15% of the outstanding shares of our common stock.
In July 2019, we revised our Term Loan Credit Agreement to explicitly permit the repurchase of equity interests by the Company pursuant to the stock purchase program that was approved by our Board of Directors.
In June 2020, we revised our Term Loan Credit Agreement to elect to pay accrued and unpaid interest, solely during one three-consecutive-month period immediately following such notice, in kind (the “PIK Amount”). We agreed to pay an additional amount equal to 0.75% of the aggregate principal amount of the loans under the Term Loan Credit Agreement plus all PIK Amounts, if any, that are added to such principal amount being repaid or prepaid on either the maturity date or upon the occurrence of an acceleration of obligations under the Term Loan Credit Agreement. As such, the additional amount, approximately $1.0 million, was recorded as a direct deduction from the face amount of the Term Loan Facility and as a long-term payable on our consolidated balance sheets. The additional amount will be amortized as interest expense over the term of the Term Loan Facility.
Additionally 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 financial covenants as of December 31, 2020.
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, 2020, the weighted-average interest rate on our borrowings was 9.00%. At December 31, 2020, the borrowing base under our ABL Credit Facility was $7.7 million, and we had $7.5 million of availability remaining of our $40.0 million commitment on that date.
In addition, on April 27, 2020, we entered into an unsecured loan in the aggregate principal amount of $10.0 million (the “PPP Loan”) pursuant to the PPP, sponsored by the SBA as guarantor of loans under the PPP. The PPP is part of the CARES Act, and it provides for loans to qualifying businesses in a maximum amount equal to the lesser of $10.0 million and 2.5 times the average monthly payroll expenses of the qualifying business. The proceeds of the loan may only be used for payroll costs, rent, utilities, mortgage interests, and interest on other pre-existing indebtedness (the “permissible purposes”) during the covered period ending October 13, 2020. Interest on the PPP Loan is equal to 1.0% per annum. All or part of the loan is forgivable based upon the level of permissible expenses incurred during the covered period and changes to the Company's headcount during the period from January 1, 2020 to February 15, 2020.
The application for these funds required us to, in good faith, certify that current economic uncertainty made the loan request necessary to support our ongoing operations. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The PPP Loan is subject to any new guidance and new requirements released by the Department of the Treasury who has indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (SBA) audit to further ensure PPP loans are limited to eligible borrowers in need. On October 7, 2020, the SBA released guidance clarifying the deferral period for PPP loan payments. The Paycheck Protection Flexibility Act of 2020 extended the deferral period for loan payments to either (1) the date that SBA remits the borrower's loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, ten months after the end of the borrower's loan forgiveness covered period. We intend to apply for forgiveness and we believe our first payment related to any unforgiven portion would be due during the fourth quarter of 2021, with a loan maturity date of April 27, 2022.
Additionally, included in our long-term debt are finance leases. These leases generally have initial terms of 36 months and are paid monthly.
Critical Accounting Policies and Accounting Estimates
The consolidated financial statements are impacted by the accounting policies and estimates and assumptions used by management during their preparation. These estimates and assumptions are evaluated on an on-going basis. Estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities if not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following is a discussion of the critical accounting policies and estimates used in our consolidated financial statements. Other significant accounting policies are summarized in Note 2 to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data."
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.
Property, Plant and Equipment
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
|
Buildings
|
20
|
-
|
39 years
|
Drilling rigs and related equipment
|
3
|
-
|
20 years
|
Machinery, equipment and other
|
3
|
-
|
7 years
|
Vehicles
|
2
|
-
|
5 years
|
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.
Asset impairment expense of $41.0 million was recorded for 2020, as compared to $35.7 million for 2019. For further discussion, see “Significant Developments - Asset Impairments” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 consolidated statement of operations.
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 consolidated statement of operations or capitalized in connection with rig construction activity.
Other Matters
Off-Balance Sheet Arrangements
We are party to certain arrangements defined as “off-balance sheet arrangements” that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. These arrangements relate to non-cancelable operating leases with terms of less than twelve months and unconditional purchase obligations not fully reflected on our consolidated balance sheets. See Note 14 - Commitments and Contingencies to our consolidated financial statements for additional information.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as additional guidance on the measurement of credit losses on financial instruments. The new guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. In addition, the guidance amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The new guidance is effective for 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 October 2019, the FASB approved a proposal which grants smaller reporting companies additional time to implement FASB standards on current expected credit losses (CECL) to January 2023. 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 consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes. The amendments in the update are effective for public companies for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We adopted this guidance on January 1, 2021 and there has been no material impact on our consolidated financial statements.
On April 1, 2020, we adopted the new standard, ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform (e.g. discontinuation of LIBOR) if certain criteria are met. As of December 31, 2020, we have not yet elected any optional expedients provided in the standard. We will apply the accounting relief as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period. We do not expect the standard to have a material impact on our consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt-Debt with Conversion and Other Options, for convertible instruments. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Page
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Independence Contract Drilling, Inc.
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Independence Contract Drilling, Inc.
Houston, Texas
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Independence Contract Drilling, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 5 to the consolidated financial statements, on January 1, 2019, the Company adopted Accounting Standards Codification Topic 842 - Leases, using the effective date method.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal controls over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of Recoverability of the Carrying Value of Marketed Drilling Rigs
As discussed in Note 7 to the consolidated financial statements, the Company recorded net property, plant and equipment of $382 million, including marketed drilling rigs and related equipment at a gross cost of $526 million as of December 31, 2020. The Company reviews long‐lived assets for impairment whenever events or changes in circumstances indicate the carrying value of such assets may not be recoverable (“triggering events”). During the quarter ended March 31, 2020, the Company determined a triggering event occurred, primarily due to the rapidly deteriorating market conditions related to the COVID-19 pandemic and downward pressure on oil prices, and performed an asset impairment test as of March 31, 2020. The marketed drilling rigs are impaired when management’s estimate of the undiscounted future cash flows is less than the carrying value of the assets.
We identified management’s assessment of the recoverability of the carrying value of the marketed drilling rigs included in the Company’s marketed rig fleet as a critical audit matter. Auditing management’s assessment of the recoverability of the carrying value of the Company’s marketed drilling rigs, and the amount of impairment charge, if any, that would be required, involved significant estimation and complex auditor judgement.
The primary procedures we performed to address this critical audit matter included:
•Testing the completeness, accuracy, and relevance of the underlying data used in estimating the undiscounted future cash flows used in the asset impairment test; and
•Evaluating the reasonableness of the significant assumptions used by management in developing the estimate of undiscounted future cash flows, including evaluating whether the projections were reasonable considering market data, and current and historical performance, and were consistent with evidence obtained through other areas of the audit.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2015.
Houston, Texas
March 1, 2021
Independence Contract Drilling, Inc.
Consolidated Balance Sheets
(In thousands, except par value and share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Assets
|
|
|
|
Cash and cash equivalents
|
$
|
12,279
|
|
|
$
|
5,206
|
|
Accounts receivable, net
|
10,023
|
|
|
35,834
|
|
Inventories
|
1,038
|
|
|
2,325
|
|
Assets held for sale
|
—
|
|
|
8,740
|
|
Prepaid expenses and other current assets
|
4,102
|
|
|
4,640
|
|
Total current assets
|
27,442
|
|
|
56,745
|
|
Property, plant and equipment, net
|
382,239
|
|
|
457,530
|
|
|
|
|
|
Other long-term assets, net
|
3,528
|
|
|
2,726
|
|
Total assets
|
$
|
413,209
|
|
|
$
|
517,001
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Liabilities
|
|
|
|
Current portion of long-term debt
|
$
|
7,637
|
|
|
$
|
3,685
|
|
Accounts payable
|
4,072
|
|
|
22,674
|
|
Accrued liabilities
|
10,723
|
|
|
16,368
|
|
Merger consideration payable to an affiliate
|
—
|
|
|
3,022
|
|
Current portion of contingent consideration
|
—
|
|
|
2,814
|
|
Total current liabilities
|
22,432
|
|
|
48,563
|
|
Long-term debt
|
137,633
|
|
|
134,941
|
|
Merger consideration payable to an affiliate
|
2,902
|
|
|
—
|
|
Deferred income taxes, net
|
505
|
|
|
652
|
|
Other long-term liabilities
|
2,704
|
|
|
1,249
|
|
Total liabilities
|
166,176
|
|
|
185,405
|
|
Commitments and contingencies (Note 14)
|
|
|
|
Stockholders’ equity
|
|
|
|
Common stock, $0.01 par value, 50,000,000 shares authorized; 6,254,396 and 3,876,196 shares issued, respectively; and 6,175,818 and 3,812,050 shares outstanding, respectively
|
62
|
|
|
38
|
|
Additional paid-in capital
|
517,948
|
|
|
505,831
|
|
Accumulated deficit
|
(267,064)
|
|
|
(170,426)
|
|
Treasury stock, at cost, 78,578 and 64,146 shares, respectively
|
(3,913)
|
|
|
(3,847)
|
|
Total stockholders’ equity
|
247,033
|
|
|
331,596
|
|
Total liabilities and stockholders’ equity
|
$
|
413,209
|
|
|
$
|
517,001
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Independence Contract Drilling, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Revenues
|
$
|
83,418
|
|
|
$
|
203,602
|
|
|
$
|
142,609
|
|
Costs and expenses
|
|
|
|
|
|
Operating costs
|
65,367
|
|
|
144,913
|
|
|
95,220
|
|
Selling, general and administrative
|
13,484
|
|
|
16,051
|
|
|
15,907
|
|
Severance and merger-related expenses
|
1,076
|
|
|
2,698
|
|
|
13,646
|
|
Depreciation and amortization
|
43,919
|
|
|
45,367
|
|
|
30,891
|
|
Asset impairment, net
|
41,007
|
|
|
35,748
|
|
|
25
|
|
Loss (gain) on disposition of assets, net
|
723
|
|
|
4,943
|
|
|
(740)
|
|
Other expense
|
—
|
|
|
377
|
|
|
—
|
|
Total cost and expenses
|
165,576
|
|
|
250,097
|
|
|
154,949
|
|
Operating loss
|
(82,158)
|
|
|
(46,495)
|
|
|
(12,340)
|
|
Interest expense
|
(14,627)
|
|
|
(14,415)
|
|
|
(7,562)
|
|
Loss before income taxes
|
(96,785)
|
|
|
(60,910)
|
|
|
(19,902)
|
|
Income tax (benefit) expense
|
(147)
|
|
|
(122)
|
|
|
91
|
|
Net loss
|
$
|
(96,638)
|
|
|
$
|
(60,788)
|
|
|
$
|
(19,993)
|
|
Loss per share:
|
|
|
|
|
|
Basic and diluted
|
$
|
(19.69)
|
|
|
$
|
(16.11)
|
|
|
$
|
(8.40)
|
|
Weighted-average number of common shares outstanding:
|
|
|
|
|
|
Basic and diluted
|
4,907
|
|
|
3,774
|
|
|
2,379
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Independence Contract Drilling, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock(1)
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Deficit
|
|
Treasury
Stock(1)
|
|
Total
Stockholders’
Equity
|
|
Shares
|
|
Amount
|
|
Balances at December 31, 2017
|
1,899,261
|
|
|
$
|
19
|
|
|
$
|
326,977
|
|
|
$
|
(89,645)
|
|
|
$
|
(1,869)
|
|
|
$
|
235,482
|
|
Restricted stock issued
|
69,295
|
|
|
1
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
RSUs vested, net of shares withheld for taxes
|
60,663
|
|
|
1
|
|
|
(711)
|
|
|
—
|
|
|
—
|
|
|
(710)
|
|
Purchase of treasury stock
|
(12,943)
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
|
(1,177)
|
|
|
(1,180)
|
|
Shares issued in connection with Sidewinder Merger
|
1,837,633
|
|
|
18
|
|
|
173,087
|
|
|
—
|
|
|
—
|
|
|
173,105
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
4,829
|
|
|
—
|
|
|
—
|
|
|
4,829
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,993)
|
|
|
—
|
|
|
(19,993)
|
|
Balances at December 31, 2018
|
3,853,909
|
|
|
$
|
39
|
|
|
$
|
504,178
|
|
|
$
|
(109,638)
|
|
|
$
|
(3,046)
|
|
|
$
|
391,533
|
|
Restricted stock forfeited
|
(6,478)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
RSUs vested, net of shares withheld for taxes
|
2,737
|
|
|
—
|
|
|
(34)
|
|
|
—
|
|
|
—
|
|
|
(34)
|
|
Purchase of treasury stock
|
(38,118)
|
|
|
(1)
|
|
|
(7)
|
|
|
—
|
|
|
(801)
|
|
|
(809)
|
|
Common stock issuance costs
|
—
|
|
|
—
|
|
|
(177)
|
|
|
—
|
|
|
—
|
|
|
(177)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
1,871
|
|
|
—
|
|
|
—
|
|
|
1,871
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(60,788)
|
|
|
—
|
|
|
(60,788)
|
|
Balances at December 31, 2019
|
3,812,050
|
|
|
$
|
38
|
|
|
$
|
505,831
|
|
|
$
|
(170,426)
|
|
|
$
|
(3,847)
|
|
|
$
|
331,596
|
|
Restricted stock forfeited
|
(5,716)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
RSUs vested, net of shares withheld for taxes
|
27,750
|
|
|
—
|
|
|
(44)
|
|
|
—
|
|
|
—
|
|
|
(44)
|
|
Purchase of treasury stock
|
(14,443)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(66)
|
|
|
(66)
|
|
Issuance of common stock, net of offering costs
|
2,356,177
|
|
|
24
|
|
|
10,182
|
|
|
—
|
|
|
—
|
|
|
10,206
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
1,979
|
|
|
—
|
|
|
—
|
|
|
1,979
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(96,638)
|
|
|
—
|
|
|
(96,638)
|
|
Balances at December 31, 2020
|
6,175,818
|
|
|
$
|
62
|
|
|
$
|
517,948
|
|
|
$
|
(267,064)
|
|
|
$
|
(3,913)
|
|
|
$
|
247,033
|
|
(1) Prior period results have been adjusted to reflect the 1-for-20 reverse stock split that took place in February 2020. See Reverse Stock Split in Note 1 - Nature of Operations and Recent Developments.
The accompanying notes are an integral part of these consolidated financial statements.
Independence Contract Drilling, Inc.
Consolidated Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Cash flows from operating activities
|
|
|
|
|
|
Net loss
|
$
|
(96,638)
|
|
|
$
|
(60,788)
|
|
|
$
|
(19,993)
|
|
Adjustments to reconcile net loss to net cash provided by operating activities
|
|
|
|
|
|
Depreciation and amortization
|
43,919
|
|
|
45,367
|
|
|
30,891
|
|
Asset impairment, net
|
41,007
|
|
|
35,748
|
|
|
25
|
|
Stock-based compensation
|
1,979
|
|
|
1,871
|
|
|
4,829
|
|
Loss (gain) on disposition of assets, net
|
723
|
|
|
4,943
|
|
|
(740)
|
|
Amortization of deferred rent
|
—
|
|
|
—
|
|
|
105
|
|
Deferred income taxes
|
(147)
|
|
|
(122)
|
|
|
91
|
|
Amortization of deferred financing costs
|
988
|
|
|
814
|
|
|
492
|
|
Write-off of deferred financing costs
|
—
|
|
|
—
|
|
|
856
|
|
Bad debt expense
|
16
|
|
|
459
|
|
|
22
|
|
Changes in operating assets and liabilities, net of effects of Sidewinder Merger
|
|
|
|
|
|
Accounts receivable
|
26,026
|
|
|
5,695
|
|
|
(1,022)
|
|
Inventories
|
117
|
|
|
(349)
|
|
|
250
|
|
Prepaid expenses and other assets
|
(1,023)
|
|
|
1,473
|
|
|
(4,681)
|
|
Accounts payable and accrued liabilities
|
(16,680)
|
|
|
(7,190)
|
|
|
5,010
|
|
Net cash provided by operating activities
|
287
|
|
|
27,921
|
|
|
16,135
|
|
Cash flows from investing activities
|
|
|
|
|
|
Cash acquired in Sidewinder Merger
|
—
|
|
|
—
|
|
|
10,743
|
|
Purchases of property, plant and equipment
|
(14,229)
|
|
|
(38,320)
|
|
|
(37,550)
|
|
Proceeds from insurance claims
|
—
|
|
|
1,000
|
|
|
257
|
|
Proceeds from the sale of assets
|
5,107
|
|
|
8,951
|
|
|
1,303
|
|
Collection of principal on note receivable
|
145
|
|
|
—
|
|
|
—
|
|
Net cash used in investing activities
|
(8,977)
|
|
|
(28,369)
|
|
|
(25,247)
|
|
Cash flows from financing activities
|
|
|
|
|
|
Borrowings under Term Loan Facility
|
—
|
|
|
—
|
|
|
130,000
|
|
Borrowings under Revolving Credit Facilities
|
11,045
|
|
|
4,511
|
|
|
55,732
|
|
Borrowings under PPP Loan
|
10,000
|
|
|
—
|
|
|
—
|
|
Repayments under Revolving Credit Facilities
|
(11,038)
|
|
|
(7,077)
|
|
|
(101,707)
|
|
Repayment of Sidewinder debt
|
—
|
|
|
—
|
|
|
(58,512)
|
|
Proceeds from issuance of common stock
|
10,978
|
|
|
—
|
|
|
—
|
|
Common stock issuance costs
|
(772)
|
|
|
(177)
|
|
|
—
|
|
Purchase of treasury stock
|
(66)
|
|
|
(809)
|
|
|
(1,180)
|
|
RSUs withheld for taxes
|
(44)
|
|
|
(34)
|
|
|
(710)
|
|
Financing costs paid under Term Loan Facility
|
—
|
|
|
(5)
|
|
|
(3,371)
|
|
Financing costs paid under Revolving Credit Facilities
|
—
|
|
|
(22)
|
|
|
(790)
|
|
Payments of finance and capital lease obligations
|
(4,340)
|
|
|
(2,980)
|
|
|
(636)
|
|
Net cash provided by (used in) financing activities
|
15,763
|
|
|
(6,593)
|
|
|
18,826
|
|
Net increase (decrease) in cash and cash equivalents
|
7,073
|
|
|
(7,041)
|
|
|
9,714
|
|
Cash and cash equivalents
|
|
|
|
|
|
Beginning of year
|
5,206
|
|
|
12,247
|
|
|
2,533
|
|
End of year
|
$
|
12,279
|
|
|
$
|
5,206
|
|
|
$
|
12,247
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Independence Contract Drilling, Inc.
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.
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.
COVID-19 Pandemic, Drilling Activity and Market Conditions Update
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (“COVID-19”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The continued spread of the COVID-19 virus and the responses taken to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and shutdowns, has caused significant declines in global demand for crude oil. This reduction in demand has occurred concurrent with the initiation of a crude oil price war between members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (collectively, the “OPEC+” group). Even with the production cuts announced by the OPEC+ group and others on April 9, 2020, and the cessation to the crude oil price war, crude oil inventories have continued to rise and to test storage capacity and logistics networks. These factors led to a collapse in oil prices, with the WTI price for May delivery closing at negative $37.63 per barrel on April 20, 2020. Our operating rig count experienced a similar collapse, bottoming at three operating rigs during the third quarter of 2020. Oil prices have recently recovered with the WTI price reaching $60.07 on February 16, 2021 supported by production cuts by OPEC+. The long-term effects on production and demand are unknown at this time. Currently, there is considerable uncertainty regarding measures to contain the virus and what potential future measures may be put in place, as well as uncertainty on how long OPEC+ will continue to maintain current production cuts, therefore we cannot predict when worldwide supply and demand for oil will stabilize.
In response to these adverse market conditions and uncertainty, our customers reduced planned capital expenditures and drilling activity. As a result, demand for our services rapidly declined late in the first and second quarters of 2020. During the first quarter of 2020, our operating rig count reached a peak of 22 rigs and temporarily reached a low of three rigs during the third quarter of 2020. During the third quarter, oil and natural gas prices began to stabilize, and demand for our products began to modestly improve from their historic lows, which allowed us to reactivate additional rigs during the back half of 2020. As of December 31, 2020, we had eleven contracted rigs. However, due to the lack of visibility and confidence towards customer intentions and the unknown future impacts of COVID-19 and changes to OPEC+ production cuts on economic conditions and oil and gas demand and drilling activity, we cannot assure you that we will be able to maintain this operating rig count or that our operating rig count will continue to improve in the future. Two contracts that expired at the end of 2020 had higher dayrates than prevailing spot rates. As a result, although our operating rig count has been increasing, these rigs are being contracted at prevailing market rates that remain depressed, therefore, we do expect to see our average revenue per day decline.
Due to these rapidly declining market conditions, we took the following actions at the end of the first quarter of 2020 in order to reduce our cost structure:
•Salary or compensation reductions for substantially all our employees, including members of executive management;
•Suspension of all cash-based incentive compensation, including all members of executive management;
•Reduced the number of executive management positions by two;
•Reduced the number of directors from seven to five, which became effective following director elections at our 2020 Annual Meeting of Stockholders;
•Reduced annual compensation reductions for our directors; and
•Reduced headcount significantly for non-field-based personnel.
On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. We deferred $0.8 million of employer social security payments during the year ended December 31, 2020.
The CARES Act did not have a material impact on our income taxes. Management will continue to monitor future developments and interpretations for any further impacts on our financial condition, results of operations, or liquidity.
We cannot predict the length of time that the market disruptions resulting from the COVID-19 pandemic will continue; or when, or if, oil and gas prices and demand for our contract drilling services will decline, continue to improve or return to pre-COVID-19 levels. The extent to which our operating and financial results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus. As a result, our business, operating results and financial conditions are subject to various risks, many of which are aggravated as a result of the declining market conditions and significant uncertainty caused by the COVID-19 pandemic.
PPP Loan
On April 27, 2020, we entered into an unsecured loan in the aggregate principal amount of $10.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”), sponsored by the Small Business Administration (the “SBA”) as guarantor of loans under the PPP. The PPP is part of the CARES Act, and it provides for loans to qualifying businesses in a maximum amount equal to the lesser of $10.0 million and 2.5 times the average monthly payroll expenses of the qualifying business. The proceeds of the loan may only be used for payroll costs, rent, utilities, mortgage interests, and interest on other pre-existing indebtedness (the “permissible purposes”).
The application for these funds required us to, in good faith, certify that current economic uncertainty made the loan request necessary to support our ongoing operations. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The PPP Loan is subject to any new guidance and new requirements released by the Department of the Treasury who has indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (SBA) audit to further ensure PPP loans are limited to eligible borrowers in need. On October 7, 2020, the SBA released guidance clarifying the deferral period for PPP loan payments. The Paycheck Protection Flexibility Act of 2020 extended the deferral period for loan payments to either (1) the date that SBA remits the borrower's loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, ten months after the end of the borrower's loan forgiveness covered period. We intend to apply for forgiveness and we believe our first payment related to any unforgiven portion would be due during the fourth quarter of 2021, with a loan maturity date of April 27, 2022.
Common Stock Purchase Agreement
On November 11, 2020, we entered into a Common Stock Purchase Agreement (the “Commitment Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with Tumim Stone Capital LLC (“Tumim”). Pursuant to the Commitment Purchase Agreement, the Company has the right to sell to Tumim up to $5,000,000 (the “Total Commitment”) in shares of its common stock, par value $0.01 per share (the “Shares”) (subject to certain conditions and limitations) from time to time during the term of the Commitment Purchase Agreement. Sales of common stock pursuant to the Commitment Purchase Agreement, and the timing of any sales, are solely at our option and we are under no obligation to
sell securities pursuant to this arrangement. Shares may be sold by the Company pursuant to this arrangement over a period of up to 24 months, commencing on December 1, 2020.
Under the applicable rules of the New York Stock Exchange (“NYSE”), in no event may we issue more than 1,234,546 shares of our common stock, which represents 19.99% of the shares of our common stock outstanding immediately prior to the execution of the Commitment Purchase Agreement (the “Exchange Cap”), to Tumim under the Commitment Purchase Agreement, unless (i) we obtain stockholder approval to issue shares of our common stock in excess of the Exchange Cap or (ii) the price of all applicable sales of our common stock to Tumim under the Commitment Purchase Agreement equals or exceeds the lower of (A) the official closing price on the NYSE immediately preceding the delivery by us of an applicable purchase notice under the Commitment Purchase Agreement and (B) the average of the closing prices of our common stock on the NYSE for the five business days immediately preceding the delivery by us of an applicable purchase notice under the Commitment Purchase Agreement, in each case plus $0.128, such that the transactions contemplated by the Commitment Purchase Agreement are exempt from the Exchange Cap limitation under applicable NYSE rules. In any event, the Commitment Purchase Agreement specifically provides that we may not issue or sell any shares of our common stock under the Commitment Purchase Agreement if such issuance or sale would breach any applicable rules or regulations of the NYSE. The Company has also limited the aggregate number of shares of common stock reserved for issuance under the Commitment Purchase Agreement to 1,500,000 shares without subsequent board approval.
In all instances, we may not sell shares of our common stock to Tumim under the Commitment Purchase Agreement if it would result in Tumim beneficially owning more than 4.99% of the common stock (the “Beneficial Ownership Cap”).
The proceeds under the Commitment Purchase Agreement will depend on the frequency and prices at which the Company sells shares of its stock to Tumim. We determined that the right to sell additional shares represents a freestanding put option under ASC 815 Derivatives and Hedging, but has a fair value of zero, and therefore no additional accounting was required. Transaction costs, of $0.5 million, incurred in connection with entering into the Purchase Agreement were expensed as selling, general and administrative expense.
Third Amendment to Term Loan Credit Agreement
On June 4, 2020, we entered into a Third Amendment, dated as of June 4, 2020 (the “Third Amendment”), to the Credit Agreement, dated as of October 1, 2018 (the “Term Credit Loan Agreement”), to permit us, at our option, subject to required prior notice and a maximum available liquidity condition (including availability under our revolving credit agreement and available cash), to elect to pay accrued and unpaid interest, solely during one three-consecutive-month period immediately following such notice, in kind (the “PIK Amount”). In connection with the amendments, we agreed to pay an additional amount equal to 0.75% of the aggregate principal amount of the loans under the Term Loan Credit Agreement plus all PIK Amounts, if any, that are added to such principal amount being repaid or prepaid on either the maturity date or upon the occurrence of an acceleration of obligations under the Term Loan Credit Agreement.
ATM Offering
On June 5, 2020, we entered into an equity distribution agreement (the “Agreement”) with Piper Sandler & Co. (the “Agent”), through its Simmons Energy division. Pursuant to the Agreement, we were able to offer and sell through the Agent shares of our common stock, par value $0.01 per share, having an aggregate offering price of up to $11,000,000 (the “Shares”). We began offering shares under this program during the second quarter of 2020 and completed this offering process during the third quarter of 2020, raising $11 million of gross proceeds and issuing an aggregate of 2.4 million shares at an average gross offering price of $4.66 per share.
Reverse Stock Split
Following approval by our stockholders on February 6, 2020, our Board of Directors approved a 1-for-20 reverse stock split of our common stock. The reverse stock split reduced the number of shares of common stock issued and outstanding from 77,523,973 and 76,241,045 shares, respectively, to 3,876,196 and 3,812,050 shares, respectively, and reduced the number of authorized shares of our common stock from 200,000,000 shares to 50,000,000 shares. The reverse split was effective March 11, 2020, and all share and earnings per share information in these consolidated financial statements have been retroactively adjusted to reflect the reverse stock split and the associated decrease in par value was recorded with the offset to additional paid-in capital.
Sidewinder Merger and Merger Consideration Amendment
We completed the merger with Sidewinder Drilling LLC on October 1, 2018. During the year ended December 31, 2019 and 2018, we recorded $2.7 million and $13.6 million, respectively, of merger-related expenses comprised primarily of
severance, professional fees and various other integration related expenses. There were no merger expenses recorded during the year ended December 31, 2020.
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. During the year ended December 31, 2019 and 2018, $1.1 million and $2.0 million, respectively, of intangible revenue was recognized as a result of this amortization. The intangible liabilities were fully amortized in the second quarter of 2019.
In addition, at the time of consummation of the Sidewinder Merger, Sidewinder owned various mechanical rig assets and related equipment (the "Mechanical Rigs") located principally in the Utica and Marcellus plays. As these assets were not consistent with ICD’s core strategy or geographic focus, ICD agreed that these assets could be disposed of, with the Sidewinder unitholders receiving the net proceeds. As a result of this arrangement, on the merger date, we recorded the fair value of the Mechanical Rigs less costs to sell, as assets held for sale, with a related liability in contingent consideration. Subsequently, these assets were sold at auction for substantially less than the appraised fair values on the merger date. As a result, in the second quarter of 2020, the contingent consideration liability was reduced by the appraised fair values on the merger date and the proceeds were recorded as merger consideration payable to an affiliate on our consolidated balance sheets.
On June 4, 2020, we entered into a letter agreement (the “Merger Consideration Amendment”) with MSD Credit Opportunity Master Fund, L.P. to allow for the deferral of payment of the Mechanical Rig net proceeds of $2.9 million, to the earlier of (i) June 30, 2022 and (ii) a change of control transaction (such applicable date, the “Payment Date”), and requires us to pay an additional amount in connection with such deferred payment equal to interest accrued on the amount of Mechanical Rig net proceeds during the period between May 1, 2020 and the Payment Date, which interest shall accrue at a rate of 15% per annum, compounded quarterly, during the period beginning on May 1, 2020 and ending on December 31, 2020 and at a rate of 25% per annum, compounded quarterly, during any period following December 31, 2020. The Mechanical Rig net proceeds were previously payable in the second quarter of 2020.
Asset Impairment
As a result of the rapidly deteriorating market conditions described in "COVID-19 Pandemic and Market Conditions Update", we concluded that a triggering event occurred as of March 31, 2020 and, accordingly, an interim asset impairment test was performed. As a result, we recognized impairment of $3.3 million associated with the decline in the market value of our assets held for sale based upon the market approach method and $13.3 million related to the remaining assets on rigs removed from our marketed fleet, as well as certain other component equipment and inventory; all of which was deemed to be unsaleable and of zero value based upon the then current macroeconomic conditions and uncertainties surrounding COVID-19.
In the fourth quarter of 2020, due to the highly competitive market and in an effort to minimize capital spending, management drafted and approved a plan to upgrade our existing fleet by utilizing the primary components needed to complete the upgrades from five of our existing rigs and these five rigs were removed from our marketed fleet. We recorded an impairment charge of $21.9 million related to the remaining assets on these non-marketed rigs. Additionally, we recorded a $2.4 million asset impairment based upon the market approach method on certain capital spare parts, all of which were deemed to be incompatible with our upgraded fleet. Due to the uncertainty around the COVID-19 pandemic and current market conditions, we may have to make further impairment charges in future periods relating to, among other things, fixed assets and inventory.
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 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 then current environment as SCR rigs and we removed them from our marketed fleet. 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 then current market environment, and therefore took the impairment charge.
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
As a result of the rapidly deteriorating market conditions described in "COVID-19 Pandemic and Market Conditions Update", we recognized impairment of $3.3 million as of March 31, 2020 associated with the decline in the market value of our assets held for sale. Throughout 2020, we sold $2.6 million of assets held for sale and received cash proceeds of $1.3 million, resulting in $1.3 million of loss on sale of assets. Additionally during 2020, assets held for sale were reduced by $2.8 million related to the remaining fair value of mechanical rigs acquired in the Sidewinder Merger which was recorded as a reduction in the related contingent consideration liability on our consolidated balance sheets.
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. 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.
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, 2020 and 2019.
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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-
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39 years
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Drilling rigs and related equipment
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3
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-
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20 years
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Machinery, equipment and other
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3
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-
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7 years
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Vehicles
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2
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-
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5 years
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Our operations are managed from field locations that we own or lease, that contain office, shop and yard space to support day-to-day operations, including repair and maintenance of equipment, as well as storage of equipment, materials and supplies. We currently have six such field locations.
Additionally, we lease office space for our corporate headquarters in northwest Houston. 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. We did not capitalize any interest for the year ended December 31, 2020. Capitalized interest amounted to $0.3 million and $0.2 million for the years ended December 31, 2019 and 2018, 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:
Level 1 Unadjusted quoted market prices for identical assets or liabilities in an active market;
Level 2 Quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets; and
Level 3 Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date
This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The carrying value of certain of our assets and liabilities, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities approximates their fair value due to the short-term nature of such instruments.
The fair value of our long-term debt is determined by Level 3 measurements based on quoted market prices and terms for similar instruments, where available, and on the amount of future cash flows associated with the debt, discounted using our current borrowing rate for comparable debt instruments (the Income Method). Based on our evaluation of the risk free rate, the market yield and credit spreads on comparable company publicly traded debt, we used an annualized discount rate, including a credit valuation allowance, of 17.2%. The following table summarizes the carrying value and fair value of our long-term debt as of December 31, 2020 and 2019.
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December 31, 2020
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December 31, 2019
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(in thousands)
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Carrying Value
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Fair Value
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Carrying Value
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Fair Value
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Term Loan Facility
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$
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130,000
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$
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106,854
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$
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130,000
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$
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138,567
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Revolving Credit Facility
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8
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6
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—
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—
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PPP Loan
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10,000
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8,589
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—
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—
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Merger consideration payable to an affiliate
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2,902
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3,490
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—
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—
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The fair value of our assets held for sale is determined using Level 3 measurements. Fair value measurements are applied with respect to our non-financial assets and liabilities measured on a nonrecurring basis, which would consist of measurements primarily of long-lived assets. There were no transfers between levels of the hierarchy for the years ended December 31, 2020 and 2019.
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 third quarter of 2019 and recorded an impairment charge of $2.3 million, 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.
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 5 - 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 and assets held for sale, the collectability of accounts receivable and the fair value of the assets acquired and liabilities assumed in connection with acquired in business combinations.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as additional guidance on the measurement of credit losses on financial instruments. The new guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. In addition, the guidance amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The new guidance is effective for 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 October 2019, the FASB approved a proposal which grants smaller reporting companies additional time to implement FASB standards on current expected credit losses (CECL) to January 2023. 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 consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes. The amendments in the update are effective for public companies for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We adopted this guidance on January 1, 2021 and there has been no material impact on our consolidated financial statements.
On April 1, 2020, we adopted the new standard, ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform (e.g. discontinuation of LIBOR) if certain criteria are met. As of December 31, 2020, we have not yet elected any optional expedients provided in the standard. We will apply the accounting relief as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period. We do not expect the standard to have a material impact on our consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt-Debt with Conversion and Other Options, for convertible instruments. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
3. Sidewinder Merger
We completed the merger with Sidewinder Drilling LLC on October 1, 2018. The results of Sidewinder’s operations have been included in our consolidated financial statements since the acquisition date.
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.
4. Revenue from Contracts with Customers
Effective January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method. This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaborative arrangements and financial instruments. Under ASC 606, an entity recognizes revenue when it transfers control of the promised goods or services to its customer, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. If control transfers to the customer over time, an entity selects a method to measure progress that is consistent with the objective of depicting its performance.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under the agreement, the following steps must be performed at contract inception: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation.
Drilling Services
Our revenues are principally derived from contract drilling services and the activities in our drilling contracts, for which revenues may be earned, include: (i) providing a drilling rig and the crews and supplies necessary to operate the rig; (ii) mobilizing and demobilizing the rig to and from the initial and final drill site, respectively; (iii) certain reimbursable activities; (iv) performing rig modification activities required for the contract; and (v) early termination revenues. We account for these integrated services provided under our drilling contracts as a single performance obligation, satisfied over time, that is comprised of a series of distinct time increments. Consideration for activities that are not distinct within the context of our contracts, and that do not correspond to a distinct time increment within the contract term, are allocated across the single performance obligation and recognized ratably in proportion to the actual services performed over the initial term of the contract. If taxes are required to be collected from customers relating to our drilling services, they are excluded from revenue.
Dayrate Drilling Revenue. Our drilling contracts provide that revenue is earned based on a specified rate per day for the activity performed. The majority of revenue earned under daywork contracts is variable, and depends on a rate scale associated with drilling conditions and level of service provided for each fractional-hour time increment over the contract term. Such rates generally include the full operating rate, moving rate, standby rate, and force majeure rate and determination of the rate per time increment is made based on the actual circumstances as they occur. Other variable consideration under these contracts could include reduced revenue related to downtime, delays or moving caps.
Mobilization/Demobilization Revenue. We may receive fees (on either a fixed lump-sum or variable dayrate basis) for the mobilization and demobilization of our rigs. These activities are not considered to be distinct within the context of the contract and therefore, the associated revenue is allocated to the overall performance obligation and recognized ratably over the initial term of the related drilling contract. We record a contract liability for mobilization fees received, which is amortized ratably to revenue as services are rendered over the initial term of the related drilling contract. Demobilization fee revenue expected to be received upon contract completion is estimated as part of the overall transaction price at contract inception and recognized in earnings ratably over the initial term of the contract with an offset to an accretive contract asset.
In our contracts, there is generally significant uncertainty as to the amount of demobilization fee revenue that may ultimately be collected due to contractual provisions which stipulate that certain conditions be present at contract completion for such revenue to be received. For example, the amount collectible may be reduced to zero if the rig has been contracted with a new customer upon contract completion. Accordingly, the estimate for such revenue may be constrained depending on the facts and circumstances pertaining to the specific contract. We assess the likelihood of receiving such revenue based on past experience and knowledge of the market conditions.
Reimbursable Revenue. We receive reimbursements from our customers for the purchase of supplies, equipment and other services provided at their request in accordance with a drilling contract or other agreement. Such reimbursable revenue is variable and subject to uncertainty, as the amounts received and timing thereof is highly dependent on factors outside of our influence. Accordingly, reimbursable revenue is fully constrained and not included in the total transaction price until the uncertainty is resolved, which typically occurs when the related costs are incurred on behalf of a customer. We are generally considered a principal in such transactions and record the associated revenue at the gross amount billed to the customer.
Capital Modification Revenue. From time to time, we may receive fees (on either a fixed lump-sum or variable dayrate basis) from our customers for capital improvements to our rigs to meet their requirements. Such revenue is allocated to the overall performance obligation and recognized ratably over the initial term of the related drilling contract, as these activities are not considered to be distinct within the context of our contracts. We record a contract liability for such fees received up front, and recognize them ratably as contract drilling revenue over the initial term of the related drilling contract.
Early Termination Revenue. Our contracts provide for early termination fees in the event our customers choose to cancel the contract prior to the specified contract term. We record a contract liability for such fees received up front, and recognize them ratably as contract drilling revenue over the initial term of the related drilling contract or until such time that all performance obligations are satisfied.
Intangible Revenue. Intangible liabilities were recorded in connection with the Sidewinder Merger for drilling contracts in place at the closing date of the transaction that had unfavorable contract terms as compared to current market terms for comparable drilling rigs. The various factors considered in the determination are (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig at the transaction closing date. The intangible liabilities were computed based on the present value of the differences in cash inflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated current market day rate using a risk adjusted discount rate. The intangible liabilities were 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, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
Dayrate drilling
|
$
|
70,976
|
|
|
$
|
184,374
|
|
|
$
|
133,278
|
|
Mobilization
|
3,256
|
|
|
5,365
|
|
|
2,100
|
|
Reimbursables
|
5,838
|
|
|
11,237
|
|
|
4,970
|
|
Early termination
|
3,348
|
|
|
1,405
|
|
|
—
|
|
Capital modification
|
—
|
|
|
115
|
|
|
216
|
|
Intangible
|
—
|
|
|
1,079
|
|
|
2,044
|
|
Other
|
—
|
|
|
27
|
|
|
1
|
|
Total revenue
|
$
|
83,418
|
|
|
$
|
203,602
|
|
|
$
|
142,609
|
|
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, 2020 and 2019, respectively. We had no contract assets in either year.
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
|
December 31, 2019
|
Receivables, which are included in "Accounts receivable, net"
|
$
|
9,772
|
|
|
$
|
35,378
|
|
Contract liabilities, which are included in "Accrued liabilities - deferred revenue"
|
$
|
(119)
|
|
|
$
|
(311)
|
|
Significant changes in the contract liabilities balance during the years ended December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2020
|
|
2019
|
Revenue recognized that was included in contract liabilities at beginning of period
|
$
|
311
|
|
|
$
|
1,374
|
|
Increase in contract liabilities due to cash received, excluding amounts recognized as revenue
|
$
|
(119)
|
|
|
$
|
(311)
|
|
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, 2020. The estimated revenue does not include amounts of variable consideration that are constrained.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
(in thousands)
|
2021
|
|
2022
|
|
2023
|
|
Total
|
Revenue
|
$
|
119
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
119
|
|
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 $0.1 million on our consolidated balance sheets at December 31, 2020 and December 31, 2019, respectively. During the year ended December 31, 2020, contract costs increased by $2.1 million and we amortized $2.1 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.
5. Leases
Effective January 1, 2019, we adopted ASC 842. The most significant changes of the 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 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:
1)The timing and pattern of transfer of non-lease components and lease components are the same.
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 4 - 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 elected to utilize this practical expedient.
We 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
(in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
Operating lease expense
|
|
$
|
616
|
|
|
$
|
524
|
|
Short-term lease expense
|
|
2,863
|
|
|
4,755
|
|
Variable lease expense
|
|
382
|
|
|
569
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
1,257
|
|
|
$
|
1,163
|
|
Interest expense on lease liabilities
|
|
806
|
|
|
206
|
|
Total finance lease expense
|
|
2,063
|
|
|
1,369
|
|
Total lease expenses
|
|
$
|
5,924
|
|
|
$
|
7,217
|
|
Supplemental cash flow information related to leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
(in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
Cash paid for amounts included in measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
634
|
|
|
$
|
509
|
|
Operating cash flows from finance leases
|
|
$
|
798
|
|
|
$
|
193
|
|
Financing cash flows from finance leases
|
|
$
|
4,340
|
|
|
$
|
2,980
|
|
|
|
|
|
|
Right-of-use assets obtained or recorded in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
|
$
|
1,601
|
|
|
$
|
1,427
|
|
Finance leases
|
|
$
|
2,648
|
|
|
$
|
13,143
|
|
Supplemental balance sheet information related to leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2020
|
|
December 31, 2019
|
Operating leases:
|
|
|
|
|
Other long-term assets, net
|
|
$
|
2,150
|
|
|
$
|
1,033
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
964
|
|
|
$
|
475
|
|
Other long-term liabilities
|
|
1,729
|
|
|
1,250
|
|
Total operating lease liabilities
|
|
$
|
2,693
|
|
|
$
|
1,725
|
|
|
|
|
|
|
Finance leases:
|
|
|
|
|
Property, plant and equipment
|
|
$
|
13,700
|
|
|
$
|
14,375
|
|
Accumulated depreciation
|
|
(981)
|
|
|
(1,425)
|
|
Property, plant and equipment, net
|
|
$
|
12,719
|
|
|
$
|
12,950
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
3,351
|
|
|
$
|
3,685
|
|
Long-term debt
|
|
4,570
|
|
|
7,472
|
|
Total finance lease liabilities
|
|
$
|
7,921
|
|
|
$
|
11,157
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
|
|
Operating leases
|
|
3.2 years
|
|
3.6 years
|
Finance leases
|
|
2.0 years
|
|
2.7 years
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
|
Operating leases
|
|
8.25
|
%
|
|
8.07
|
%
|
Finance leases
|
|
8.88
|
%
|
|
7.64
|
%
|
Maturities of lease liabilities at December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Operating Leases
|
|
Finance Leases
|
2021
|
|
$
|
1,195
|
|
|
$
|
3,892
|
|
2022
|
|
840
|
|
|
4,275
|
|
2023
|
|
760
|
|
|
26
|
|
2024
|
|
372
|
|
|
—
|
|
2025
|
|
—
|
|
|
—
|
|
Thereafter
|
|
—
|
|
|
—
|
|
Total cash lease payment
|
|
3,167
|
|
|
8,193
|
|
Add: expected residual value
|
|
—
|
|
|
534
|
|
Less: imputed interest
|
|
(474)
|
|
|
(806)
|
|
Total lease liabilities
|
|
$
|
2,693
|
|
|
$
|
7,921
|
|
Rent expense was $5.1 million for the year ended December 31, 2018.
6. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Rig components and supplies
|
|
$
|
1,038
|
|
|
$
|
2,325
|
|
We determined that no reserve for obsolescence was needed at December 31, 2020 or 2019. No inventory obsolescence expense was recognized during the years ended December 31, 2020, 2019 and 2018.
7. Property, Plant and Equipment
Major classes of property, plant, and equipment, which include finance lease assets, consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Land
|
|
$
|
487
|
|
|
$
|
487
|
|
Buildings
|
|
3,189
|
|
|
3,408
|
|
Drilling rigs and related equipment
|
|
525,933
|
|
|
568,675
|
|
Machinery, equipment and other
|
|
1,576
|
|
|
1,396
|
|
Finance leases
|
|
13,700
|
|
|
14,375
|
|
Vehicles
|
|
17
|
|
|
355
|
|
Construction in progress
|
|
19,876
|
|
|
22,260
|
|
Total
|
|
$
|
564,778
|
|
|
$
|
610,956
|
|
Less: Accumulated depreciation
|
|
(182,539)
|
|
|
(153,426)
|
|
Total Property, plant and equipment, net
|
|
$
|
382,239
|
|
|
$
|
457,530
|
|
Repairs and maintenance expense included in operating costs in our statements of operations totaled $9.7 million, $27.2 million and $19.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Depreciation expense was $43.9 million, $45.4 million and $30.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.
8. Supplemental Consolidated Balance Sheet and Cash Flow Information
Prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Prepaid insurance
|
|
$
|
3,346
|
|
|
$
|
2,450
|
|
Prepaid other
|
|
636
|
|
|
829
|
|
Deferred mobilization costs
|
|
89
|
|
|
112
|
|
Notes receivable
|
|
—
|
|
|
145
|
|
Insurance claim receivable
|
|
27
|
|
|
27
|
|
Other current assets
|
|
4
|
|
|
1,077
|
|
|
|
$
|
4,102
|
|
|
$
|
4,640
|
|
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Accrued salaries and other compensation
|
|
$
|
1,472
|
|
|
$
|
3,500
|
|
Insurance
|
|
2,127
|
|
|
2,861
|
|
Deferred revenue
|
|
119
|
|
|
701
|
|
Property taxes and other
|
|
2,166
|
|
|
4,716
|
|
Interest
|
|
3,573
|
|
|
3,244
|
|
Operating lease liability - current
|
|
964
|
|
|
475
|
|
Other
|
|
302
|
|
|
871
|
|
|
|
$
|
10,723
|
|
|
$
|
16,368
|
|
Supplemental consolidated cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
Cash paid during the year for interest
|
$
|
13,309
|
|
|
$
|
13,974
|
|
|
$
|
3,202
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
Change in property, plant and equipment purchases in accounts payable
|
$
|
(7,201)
|
|
|
$
|
1,607
|
|
|
$
|
1,175
|
|
Additions to property, plant & equipment through finance and capital leases
|
$
|
2,650
|
|
|
$
|
13,143
|
|
|
$
|
601
|
|
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
|
$
|
(1,549)
|
|
|
$
|
(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)
|
|
2020
|
|
2019
|
Term Loan Facility due October 1, 2023
|
|
$
|
130,000
|
|
|
$
|
130,000
|
|
Revolving Credit Facility due October 1, 2023
|
|
8
|
|
|
—
|
|
PPP Loan
|
|
10,000
|
|
|
—
|
|
Finance lease obligations
|
|
7,921
|
|
|
11,157
|
|
|
|
147,929
|
|
|
141,157
|
|
Less: current portion of PPP Loan
|
|
(4,286)
|
|
|
—
|
|
Less: current portion of finance leases
|
|
(3,351)
|
|
|
(3,685)
|
|
Less: Term Loan Facility deferred financing costs
|
|
(2,659)
|
|
|
(2,531)
|
|
Long-term debt
|
|
$
|
137,633
|
|
|
$
|
134,941
|
|
Presented below is a schedule of the principal repayment requirements of long-term debt by fiscal year as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
Term Loan Facility
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
130,000
|
|
|
$
|
—
|
|
|
$
|
130,000
|
|
PPP Loan
|
4,286
|
|
|
5,714
|
|
|
—
|
|
|
—
|
|
|
10,000
|
|
Total
|
$
|
4,286
|
|
|
$
|
5,714
|
|
|
$
|
130,000
|
|
|
$
|
—
|
|
|
$
|
140,000
|
|
Credit Facilities
On October 1, 2018, we entered into a term loan Credit Agreement (the “Term Loan Credit Agreement”) for an initial term loan in an aggregate principal amount of $130.0 million, (the “Term Loan Facility”) and (b) a delayed draw term loan facility in an aggregate principal amount of up to $15.0 million (the “DDTL Facility”, and together with the Term Loan Facility, the “Term Facilities”). The Term Facilities have a maturity date of October 1, 2023, at which time all outstanding principal under the Term Facilities and other obligations become due and payable in full.
At our election, interest under the Term Loan Facility is determined by reference at our option to either (i) a “base rate” equal to the higher of (a) the federal funds effective rate plus 0.05%, (b) the London Interbank Offered Rate (“LIBOR”) with an interest period of one month, 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. We are in compliance with our covenants as of December 31, 2020.
The obligations under the Term Loan Credit Agreement are secured by a first priority lien on collateral (the “Term Priority Collateral”) other than accounts receivable, deposit accounts and other related collateral pledged as first priority collateral (“Priority Collateral”) under the ABL Credit Facility (defined below) and a second priority lien on such Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. MSD PCOF Partners IV, LLC (an affiliate of MSD Partners, L.P. “MSD Partners”) is the lender of our $130.0 million Term Loan Facility.
In July 2019, we revised our Term Loan Credit Agreement to explicitly permit the repurchase of equity interests by the Company pursuant to the stock purchase program that was approved by our Board of Directors.
In June 2020, we revised our Term Loan Credit Agreement to elect to pay accrued and unpaid interest, solely during one three-consecutive-month period immediately following such notice, in kind (the “PIK Amount”). We agreed to pay an additional amount equal to 0.75% of the aggregate principal amount of the loans under the Term Loan Credit Agreement plus all PIK Amounts, if any, that are added to such principal amount being repaid or prepaid on either the maturity date or upon the occurrence of an acceleration of obligations under the Term Loan Credit Agreement. As such, the additional amount, approximately $1.0 million, was recorded as a direct deduction from the face amount of the Term Loan Facility and as a long-term payable on our consolidated balance sheets. The additional amount will be amortized as interest expense over the term of the Term Loan Facility.
Additionally, 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 financial covenants as of December 31, 2020.
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, 2020, the weighted-average interest rate on our borrowings was 9.00%. At December 31, 2020, the borrowing base under our ABL Credit Facility was $7.7 million, and we had $7.5 million of availability remaining of our $40.0 million commitment on that date.
On April 27, 2020, we entered into an unsecured loan in the aggregate principal amount of $10.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”), sponsored by the Small Business Administration (the “SBA”) as guarantor of loans under the PPP. The PPP is part of the CARES Act, and it provides for loans to qualifying businesses in a maximum amount equal to the lesser of $10.0 million and 2.5 times the average monthly payroll expenses of the qualifying business. The proceeds of the loan may only be used for payroll costs, rent, utilities, mortgage interests, and interest on other pre-existing indebtedness (the “permissible purposes”) during the covered period that ended on or about October 13, 2020. Interest on the PPP loan is equal to 1.0% per annum. All or part of the loan is forgivable based upon the level of permissible expenses incurred during the covered period and changes to the Company's headcount during the covered period to headcount during the period from January 1, 2020 to February 15, 2020. On October 7, 2020, the SBA released guidance clarifying the deferral period for PPP loan payments. The Paycheck Protection Flexibility Act of 2020 extended the deferral period for loan payments to either (1) the date that SBA remits the borrower's loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower's loan forgiveness covered period. While there can be no assurance that such PPP loan can be forgiven, we intend to apply for forgiveness and we believe our first payment related to any unforgiven portion would be due during the fourth quarter of 2021, with a loan maturity date of April 27, 2022.
10. Income Taxes
The components of the income tax expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
(147)
|
|
|
(122)
|
|
|
91
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
$
|
(147)
|
|
|
$
|
(122)
|
|
|
$
|
91
|
|
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)
|
2020
|
|
2019
|
|
2018
|
Income tax benefit at the statutory federal rate (21%)
|
$
|
(20,285)
|
|
|
$
|
(12,791)
|
|
|
$
|
(4,233)
|
|
|
|
|
|
|
|
Nondeductible expenses
|
103
|
|
|
360
|
|
|
(270)
|
|
Valuation allowance
|
19,800
|
|
|
12,626
|
|
|
3,625
|
|
State taxes, net of federal benefit
|
(116)
|
|
|
(396)
|
|
|
14
|
|
Stock-based compensation and other
|
351
|
|
|
79
|
|
|
955
|
|
Income tax (benefit) expense
|
$
|
(147)
|
|
|
$
|
(122)
|
|
|
$
|
91
|
|
Effective tax rate
|
0.2
|
%
|
|
0.2
|
%
|
|
0.5
|
%
|
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)
|
2020
|
|
2019
|
Deferred income tax assets
|
|
|
|
Merger-related expenses
|
$
|
836
|
|
|
$
|
836
|
|
Bad debts
|
119
|
|
|
115
|
|
Stock-based compensation
|
1,168
|
|
|
1,136
|
|
Accrued liabilities and other
|
49
|
|
|
285
|
|
Deferred revenue
|
28
|
|
|
164
|
|
Interest limitation
|
3,298
|
|
|
555
|
|
ROU Asset(1)
|
507
|
|
|
404
|
|
Net operating losses
|
65,635
|
|
|
46,975
|
|
Total net deferred tax assets
|
$
|
71,640
|
|
|
$
|
50,470
|
|
Deferred income tax liabilities
|
|
|
|
Prepaids
|
$
|
(769)
|
|
|
$
|
(563)
|
|
Property, plant and equipment
|
(20,159)
|
|
|
(21,347)
|
|
Intangible assets
|
(231)
|
|
|
(124)
|
|
ROU Liability(1)
|
(628)
|
|
|
(242)
|
|
Other
|
(194)
|
|
|
—
|
|
Total net deferred tax liabilities
|
$
|
(21,981)
|
|
|
$
|
(22,276)
|
|
Valuation allowance
|
$
|
(50,164)
|
|
|
$
|
(28,846)
|
|
Net deferred tax liability
|
$
|
(505)
|
|
|
$
|
(652)
|
|
(1) Certain prior year amounts have been reclassified for consistency with the current year presentation. A reclass has been made to identify the ROU Asset and ROU Liability within the Income Tax footnote. This reclassification had no effect on the reported results of operations.
As of December 31, 2020, we had a total of $303.6 million of net operating loss carryforwards, of which $131.4 million will begin to expire in 2031 and $172.2 million will be carried forward indefinitely.
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 October 2018 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 October 2018 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, 2020, 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, 2020 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 275,000 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, 2020, approximately 105,055 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)
|
2020
|
|
2019
|
|
2018
|
Compensation cost recognized:
|
|
|
|
|
|
Stock options
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted stock and restricted stock units
|
1,979
|
|
|
1,871
|
|
|
4,829
|
|
Total stock-based compensation
|
$
|
1,979
|
|
|
$
|
1,871
|
|
|
$
|
4,829
|
|
Stock Options
Prior to 2016, we granted stock options that remain outstanding. No options were exercised or granted during the years ended December 31, 2020, 2019 or 2018. 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, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
Outstanding at January 1, 2020
|
33,458
|
|
|
$
|
254.80
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
Forfeited/expired
|
—
|
|
|
—
|
|
Outstanding at December 31, 2020
|
33,458
|
|
|
$
|
254.80
|
|
Exercisable at December 31, 2020
|
33,458
|
|
|
$
|
254.80
|
|
The number of options exercisable at December 31, 2020 was 33,458 with a weighted-average remaining contractual life of 1.3 years and a weighted-average exercise price of $254.80 per share.
As of December 31, 2020, there was no unrecognized compensation cost related to outstanding stock options. No options vested during the years ended December 31, 2020, 2019 and 2018.
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, 2020, there was $1.5 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 1.5 years.
A summary of the status of our time-based restricted stock awards and of changes in our time-based restricted stock awards outstanding for the year ended December 31, 2020, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
Outstanding at January 1, 2018
|
—
|
|
|
$
|
—
|
|
Granted – Former Sidewinder executives (1)
|
32,331
|
|
|
64.40
|
|
Granted - Other
|
36,964
|
|
|
64.40
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited/expired
|
—
|
|
|
—
|
|
Outstanding at January 1, 2019
|
69,295
|
|
|
64.40
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited/expired
|
(6,478)
|
|
|
64.40
|
|
Outstanding at January 1, 2020
|
62,817
|
|
|
64.40
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
(16,767)
|
|
|
64.40
|
|
Forfeited/expired
|
(5,716)
|
|
|
64.40
|
|
Outstanding at December 31, 2020
|
40,334
|
|
|
$
|
64.40
|
|
(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-based 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, 2020, there was $1.0 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 0.7 years.
A summary of the status of our time-based restricted stock unit awards and of changes in our time-based restricted stock unit awards outstanding for the year ended December 31, 2020, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
Outstanding at January 1, 2018
|
39,449
|
|
|
$
|
101.00
|
|
Granted – Former Sidewinder executives (1)
|
20,479
|
|
|
95.80
|
|
Granted - Other
|
20,726
|
|
|
89.20
|
|
Vested and converted
|
(51,020)
|
|
|
98.20
|
|
Forfeited/expired
|
(9,155)
|
|
|
90.00
|
|
Outstanding at January 1, 2019
|
20,479
|
|
|
95.80
|
|
Granted
|
28,244
|
|
|
38.80
|
|
Vested and converted
|
(2,737)
|
|
|
94.20
|
|
Forfeited/expired
|
(1,547)
|
|
|
94.20
|
|
Outstanding at January 1, 2020
|
44,439
|
|
|
59.71
|
|
Granted
|
64,914
|
|
|
12.96
|
|
Vested and converted
|
(26,490)
|
|
|
54.97
|
|
Forfeited/expired
|
(18,966)
|
|
|
30.75
|
|
Outstanding at December 31, 2020
|
63,897
|
|
|
$
|
22.78
|
|
(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, 2020, 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 0.9 years.
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 $104.60.
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 $29.00.
The assumptions used to value our TSR market-based restricted stock unit awards granted during the year ended December 31, 2020 were a risk-free interest rate of 1.38%, an expected volatility of 68.5% and an expected dividend yield of 0.0%. Based on the Monte Carlo simulation, these restricted stock unit awards were valued at $12.42.
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, 2020, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
Outstanding at January 1, 2018
|
10,215
|
|
|
$
|
107.00
|
|
Granted
|
11,326
|
|
|
94.40
|
|
Vested and converted
|
(8,147)
|
|
|
100.80
|
|
Forfeited/expired
|
(13,394)
|
|
|
100.00
|
|
Outstanding at January 1, 2019
|
—
|
|
|
—
|
|
Granted
|
23,480
|
|
|
33.90
|
|
Vested and converted
|
—
|
|
|
—
|
|
Forfeited/expired
|
—
|
|
|
—
|
|
Outstanding at January 1, 2020
|
23,480
|
|
|
33.90
|
|
Granted
|
24,854
|
|
|
12.42
|
|
Vested and converted
|
(1,260)
|
|
|
30.89
|
|
Forfeited/expired
|
(8,515)
|
|
|
21.24
|
|
Outstanding at December 31, 2020
|
38,559
|
|
|
$
|
22.95
|
|
12. Stockholders’ Equity and Loss per Share
As of December 31, 2020, we had a total of 6,175,818 shares of common stock, $0.01 par value, outstanding, including 40,334 shares of restricted stock. We also had 78,578 shares held as treasury stock. Total authorized common stock is 50,000,000 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
(in thousands, except for per share data)
|
2020
|
|
2019
|
|
2018
|
Net loss (numerator)
|
$
|
(96,638)
|
|
|
$
|
(60,788)
|
|
|
$
|
(19,993)
|
|
Loss per share:
|
|
|
|
|
|
Basic and diluted(1)
|
$
|
(19.69)
|
|
|
$
|
(16.11)
|
|
|
$
|
(8.40)
|
|
|
|
|
|
|
|
Shares (denominator):
|
|
|
|
|
|
Weighted-average number of shares outstanding-basic(1)
|
4,907
|
|
|
3,774
|
|
|
2,379
|
|
Net effect of dilutive stock options and restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average common shares outstanding-diluted(1)
|
4,907
|
|
|
3,774
|
|
|
2,379
|
|
(1) Prior period results have been adjusted to reflect the 1-for-20 reverse stock split that took place in February 2020. See Reverse Stock Split in Note 1 -Nature of Operations and Recent Developments.
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 33,458, 33,458 and 33,458 during the years ended December 31, 2020, 2019 and 2018, respectively. RSUs, which are not participating securities and are excluded from our diluted loss per share because they are anti-dilutive were 102,456, 44,447 and 20,480 for the years ended December 31, 2020, 2019 and 2018, 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, 2020, we had outstanding purchase commitments to a number of suppliers totaling $0.6 million related primarily to rig equipment or components ordered but not received. We have paid deposits of $0.2 million related to these commitments.
Letters of Credit
As of December 31, 2020, we had outstanding letters of credit totaling $0.2 million as collateral for Sidewinder’s pre-acquisition insurance programs. As of December 31, 2020, no amounts had been drawn under these letters of credit.
Employment Agreements
We have entered into employment agreements with six 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 in aggregate provide for minimum annual cash compensation of $1.7 million and cash severance payments totaling $4.4 million for termination by ICD without cause, or termination by the employee for good reason, both as defined in the agreements.
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 2020, these customers included Diamondback Energy, Inc. (16%), BPX Operating Company (15%), GeoSouthern Energy Corporation (12%) and Indigo Minerals, LLC (12%). 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%).
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. As of December 31, 2020, BPX Operating Company (26%), Indigo Minerals, LLC (25%), GeoSouthern Energy Corporation (13%) and Triple Crown Resources, LLC (10%) accounted for 10% or more of our accounts receivable. 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.
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, 2020, we had approximately $11.8 million in cash and cash equivalents in excess of FDIC limits.
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 $12.0 million during the year ended December 31, 2020. Additionally, we have recorded merger consideration payable to an affiliate of $2.9 million plus accrued interest of $0.3 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, by the earlier of (i) June 30, 2022 and (ii) a Change of Control Transaction.
17. Unaudited Quarterly Financial Data
A summary of our unaudited quarterly financial data is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
Quarter Ended
|
(in thousands, except for per share data)
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Revenue
|
$
|
38,494
|
|
|
$
|
21,381
|
|
|
$
|
10,224
|
|
|
$
|
13,319
|
|
Operating loss
|
(24,661)
|
|
|
(6,477)
|
|
|
(11,676)
|
|
|
(39,344)
|
|
Income tax (benefit) expense
|
(42)
|
|
|
(11)
|
|
|
(31)
|
|
|
(63)
|
|
Net loss
|
(28,223)
|
|
|
(10,120)
|
|
|
(15,199)
|
|
|
(43,096)
|
|
Loss per share:
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(7.53)
|
|
|
$
|
(2.52)
|
|
|
$
|
(2.67)
|
|
|
$
|
(7.02)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1)
|
$
|
(0.63)
|
|
|
$
|
(3.4)
|
|
|
$
|
(2.80)
|
|
|
$
|
(9.32)
|
|
(1) Prior period results have been adjusted to reflect the 1-for-20 reverse stock split that took place in February 2020. See Reverse Stock Split in Note 1 -Nature of Operations and Recent Developments.