ITEM 1. FINANCIAL STATEMENTS
Independence Contract Drilling, Inc.
Consolidated Balance Sheets
(Unaudited)
(in thousands, except par value and share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
Assets
|
|
|
|
Cash and cash equivalents
|
$
|
5,440
|
|
|
$
|
12,279
|
|
Accounts receivable, net
|
10,340
|
|
|
10,023
|
|
Inventories
|
1,071
|
|
|
1,038
|
|
|
|
|
|
Assets held for sale
|
507
|
|
|
—
|
|
Prepaid expenses and other current assets
|
3,920
|
|
|
4,102
|
|
Total current assets
|
21,278
|
|
|
27,442
|
|
Property, plant and equipment, net
|
373,749
|
|
|
382,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term assets, net
|
3,271
|
|
|
3,528
|
|
Total assets
|
$
|
398,298
|
|
|
$
|
413,209
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
Liabilities
|
|
|
|
Current portion of long-term debt
|
$
|
12,093
|
|
|
$
|
7,637
|
|
Accounts payable
|
4,837
|
|
|
4,072
|
|
Accrued liabilities
|
9,472
|
|
|
10,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
26,402
|
|
|
22,432
|
|
Long-term debt
|
132,954
|
|
|
137,633
|
|
Merger consideration payable to an affiliate
|
2,902
|
|
|
2,902
|
|
Deferred income taxes, net
|
539
|
|
|
505
|
|
Other long-term liabilities
|
2,655
|
|
|
2,704
|
|
Total liabilities
|
165,452
|
|
|
166,176
|
|
Commitments and contingencies (Note 12)
|
|
|
|
Stockholders’ equity
|
|
|
|
Common stock, $0.01 par value, 50,000,000 shares authorized; 6,594,158 and 6,254,396 shares issued, respectively, and 6,515,580 and 6,175,818 shares outstanding, respectively
|
65
|
|
|
62
|
|
Additional paid-in capital
|
519,783
|
|
|
517,948
|
|
Accumulated deficit
|
(283,089)
|
|
|
(267,064)
|
|
Treasury stock, at cost, 78,578 shares and 78,578 shares, respectively
|
(3,913)
|
|
|
(3,913)
|
|
Total stockholders’ equity
|
232,846
|
|
|
247,033
|
|
Total liabilities and stockholders’ equity
|
$
|
398,298
|
|
|
$
|
413,209
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Independence Contract Drilling, Inc.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
2021
|
|
2020
|
Revenues
|
|
|
|
|
$
|
15,542
|
|
|
$
|
38,494
|
|
Costs and expenses
|
|
|
|
|
|
|
|
Operating costs
|
|
|
|
|
14,541
|
|
|
30,229
|
|
Selling, general and administrative
|
|
|
|
|
3,686
|
|
|
3,761
|
|
Severance expense
|
|
|
|
|
—
|
|
|
1,076
|
|
Depreciation and amortization
|
|
|
|
|
9,989
|
|
|
11,516
|
|
Asset impairment
|
|
|
|
|
43
|
|
|
16,619
|
|
Gain on disposition of assets, net
|
|
|
|
|
(435)
|
|
|
(46)
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
|
|
27,824
|
|
|
63,155
|
|
Operating loss
|
|
|
|
|
(12,282)
|
|
|
(24,661)
|
|
Interest expense
|
|
|
|
|
(3,709)
|
|
|
(3,604)
|
|
Loss before income taxes
|
|
|
|
|
(15,991)
|
|
|
(28,265)
|
|
Income tax expense (benefit)
|
|
|
|
|
34
|
|
|
(42)
|
|
Net loss
|
|
|
|
|
$
|
(16,025)
|
|
|
$
|
(28,223)
|
|
Loss per share:
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
$
|
(2.58)
|
|
|
$
|
(7.53)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
6,215
|
|
|
3,750
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Independence Contract Drilling, Inc.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Treasury Stock
|
|
Total Stockholders’ Equity
|
Balances at December 31, 2020
|
6,175,818
|
|
|
$
|
62
|
|
|
$
|
517,948
|
|
|
$
|
(267,064)
|
|
|
$
|
(3,913)
|
|
|
$
|
247,033
|
|
RSUs vested, net of shares withheld for taxes
|
25,285
|
|
|
—
|
|
|
(11)
|
|
|
—
|
|
|
—
|
|
|
(11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock through at-the-market facility, net of offering costs
|
140,377
|
|
|
1
|
|
|
520
|
|
|
—
|
|
|
—
|
|
|
521
|
|
Issuance of common stock under purchase agreement
|
174,100
|
|
|
2
|
|
|
872
|
|
|
—
|
|
|
—
|
|
|
874
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
454
|
|
|
—
|
|
|
—
|
|
|
454
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,025)
|
|
|
—
|
|
|
(16,025)
|
|
Balances at March 31, 2021
|
6,515,580
|
|
|
$
|
65
|
|
|
$
|
519,783
|
|
|
$
|
(283,089)
|
|
|
$
|
(3,913)
|
|
|
$
|
232,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional Paid-in Capital
|
|
Accumulated Deficit
|
|
Treasury Stock
|
|
Total Stockholders’ Equity
|
Balances at December 31, 2019
|
3,812,050
|
|
|
$
|
38
|
|
|
$
|
505,831
|
|
|
$
|
(170,426)
|
|
|
$
|
(3,847)
|
|
|
$
|
331,596
|
|
RSUs vested, net of shares withheld for taxes
|
11,941
|
|
|
—
|
|
|
(26)
|
|
|
—
|
|
|
—
|
|
|
(26)
|
|
Purchase of treasury stock
|
(14,443)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(66)
|
|
|
(66)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
570
|
|
|
—
|
|
|
—
|
|
|
570
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
(28,223)
|
|
|
—
|
|
|
(28,223)
|
|
Balances at March 31, 2020
|
3,809,548
|
|
|
$
|
38
|
|
|
$
|
506,375
|
|
|
$
|
(198,649)
|
|
|
$
|
(3,913)
|
|
|
$
|
303,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Independence Contract Drilling, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2021
|
|
2020
|
Cash flows from operating activities
|
|
|
|
Net loss
|
$
|
(16,025)
|
|
|
$
|
(28,223)
|
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
|
|
|
|
Depreciation and amortization
|
9,989
|
|
|
11,516
|
|
Asset impairment
|
43
|
|
|
16,619
|
|
Stock-based compensation
|
537
|
|
|
570
|
|
Gain on disposition of assets, net
|
(435)
|
|
|
(46)
|
|
Deferred income taxes
|
34
|
|
|
(42)
|
|
Amortization of deferred financing costs
|
279
|
|
|
204
|
|
|
|
|
|
Bad debt expense
|
—
|
|
|
16
|
|
Changes in operating assets and liabilities
|
|
|
|
Accounts receivable
|
(317)
|
|
|
8,925
|
|
Inventories
|
(33)
|
|
|
(27)
|
|
Prepaid expenses and other assets
|
323
|
|
|
(462)
|
|
Accounts payable and accrued liabilities
|
(685)
|
|
|
(5,959)
|
|
Net cash (used in) provided by operating activities
|
(6,290)
|
|
|
3,091
|
|
Cash flows from investing activities
|
|
|
|
Purchases of property, plant and equipment
|
(1,742)
|
|
|
(9,139)
|
|
Proceeds from the sale of assets
|
654
|
|
|
628
|
|
|
|
|
|
Collection of principal on note receivable
|
—
|
|
|
145
|
|
Net cash used in investing activities
|
(1,088)
|
|
|
(8,366)
|
|
Cash flows from financing activities
|
|
|
|
Borrowings under Revolving ABL Credit Facility
|
—
|
|
|
11,038
|
|
Repayments under Revolving ABL Credit Facility
|
(8)
|
|
|
(38)
|
|
|
|
|
|
Proceeds from issuance of common stock through at-the-market facility, net of issuance costs
|
521
|
|
|
—
|
|
Proceeds from issuance of common stock under purchase agreement
|
874
|
|
|
—
|
|
Purchase of treasury stock
|
—
|
|
|
(66)
|
|
RSUs withheld for taxes
|
(11)
|
|
|
(26)
|
|
|
|
|
|
|
|
|
|
Payments for finance lease obligations
|
(837)
|
|
|
(1,086)
|
|
Net cash provided by financing activities
|
539
|
|
|
9,822
|
|
Net (decrease) increase in cash and cash equivalents
|
(6,839)
|
|
|
4,547
|
|
Cash and cash equivalents
|
|
|
|
Beginning of period
|
12,279
|
|
|
5,206
|
|
End of period
|
$
|
5,440
|
|
|
$
|
9,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2021
|
|
2020
|
Supplemental disclosure of cash flow information
|
|
|
|
Cash paid during the period for interest
|
$
|
3,171
|
|
|
$
|
3,541
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities
|
|
|
|
|
|
|
|
Change in property, plant and equipment purchases in accounts payable
|
$
|
70
|
|
|
$
|
(5,285)
|
|
Additions to property, plant and equipment through finance leases
|
$
|
376
|
|
|
$
|
55
|
|
Extinguishment of finance lease obligations from sale of assets classified as finance leases
|
$
|
—
|
|
|
$
|
(204)
|
|
Transfer of assets from held and used to held for sale
|
$
|
(550)
|
|
|
$
|
—
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
INDEPENDENCE CONTRACT DRILLING, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Nature of Operations and Recent Events
Except as expressly stated or the context otherwise requires, the terms “we,” “us,” “our,” “ICD,” and the “Company” refer to Independence Contract Drilling, Inc. and its subsidiary.
We provide land-based contract drilling services for oil and natural gas producers targeting unconventional resource plays in the United States. We 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 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 (“COVID-19”) and the risks to the international community as the virus spread globally. 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, caused significant declines in global demand for crude oil. This reduction in demand 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 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 2020 delivery closing at negative $37.63 per barrel on April 20, 2020. Oil prices have recently recovered with the WTI price reaching $63.33 on April 19, 2021 supported by production cuts by OPEC+.
The long-term effects of the pandemic on production and demand are unknown at this time. While vaccinations have become available and made progress in certain regions during the first quarter of 2021, considerable uncertainty remains regarding ongoing measures to contain the virus, including travel restrictions, as well as uncertainty on how long OPEC+ will continue to maintain current production cuts. Accordingly, 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 throughout 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 April 30, 2021, we had 13 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, and we 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;
•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. The social security deferral program ended December 31, 2020. We deferred $0.8 million of employer side 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.
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 issued and sold approximately $11 million in shares of common stock during 2020.
On March 8, 2021, in conjunction with the equity distribution agreement entered into on June 5, 2020, our board of directors authorized an additional $2.2 million in shares of common stock to be sold in transactions that are deemed to be “at the market offerings.” As of March 31, 2021, we raised gross proceeds of $0.7 million from the sale of shares in the offering.
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 during the fourth quarter of 2020. During the first quarter of 2021, we sold 174,100 shares for a total of $0.9 million in proceeds.
2. Interim Financial Information
These unaudited consolidated financial statements include the accounts of ICD and its subsidiary, and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These consolidated financial statements should be read along with our audited consolidated financial statements for the year ended December 31, 2020, included in our Annual Report on Form 10-K for the year ended December 31, 2020. In management’s opinion, these financial statements contain all adjustments necessary to fairly present our financial position, results of operations, cash flows and changes in stockholders’ equity for all periods presented.
As we had no items of other comprehensive income in any period presented, no other components of comprehensive income is presented.
Interim results for the three months ended March 31, 2021 may not be indicative of results that will be realized for the full year ending December 31, 2021.
Segment and Geographical Information
Our operations consist of one reportable segment because all of our drilling operations are located in the United States and have similar economic characteristics. Corporate management administers all properties as a whole rather than as discrete operating segments. Operational data is tracked by rig; however, financial performance is measured as a single enterprise and not on a rig-by-rig basis. Further, the allocation of capital resources is employed on a project-by-project basis across our entire asset base to maximize profitability without regard to individual geographic areas.
Asset Impairment
During the first quarter of 2021, our management committed to a plan to sell one of our field location facilities. As a result, we reclassified an aggregate $0.5 million of land and buildings to assets held for sale on our March 31, 2021 balance sheet and recognized a $43 thousand impairment charge representing the difference between the carrying value and the fair value, less the costs to sell the related property.
During the three months ended March 31, 2020, 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 and, accordingly, an interim asset impairment test was performed as of March 31, 2020. As a result, we further impaired $3.3 million associated with the decline in the market value of our assets held for sale 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.
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 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 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 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. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform to provide clarifying guidance regarding the scope of Topic 848, effective immediately. As of March 31, 2021, 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. Revenue from Contracts with Customers
The following table summarizes revenues from our contracts disaggregated by revenue generating activity contained therein for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
|
|
|
2021
|
|
2020
|
Dayrate drilling
|
|
|
|
|
$
|
14,261
|
|
|
$
|
34,478
|
|
Mobilization
|
|
|
|
|
522
|
|
|
1,541
|
|
Reimbursables
|
|
|
|
|
759
|
|
|
2,448
|
|
Early termination
|
|
|
|
|
—
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
|
$
|
15,542
|
|
|
$
|
38,494
|
|
The following table provides information about receivables, contract assets and contract liabilities related to contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2021
|
|
December 31, 2020
|
Receivables, which are included in “Accounts receivable, net”
|
$
|
10,261
|
|
|
$
|
9,772
|
|
Contract assets, which are included in "Prepaid expenses and other current assets"
|
$
|
32
|
|
|
$
|
—
|
|
Contract liabilities, which are included in “Accrued liabilities - deferred revenue”
|
$
|
(208)
|
|
|
$
|
(119)
|
|
Significant changes in contract assets and contract liabilities balances during the period are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
|
|
|
2021
|
|
2020
|
Revenue recognized that was included in contract liabilities at beginning of period
|
|
|
|
|
$
|
119
|
|
|
$
|
311
|
|
Decrease (increase) in contract liabilities due to cash received, excluding amounts recognized as revenue
|
|
|
|
|
$
|
(208)
|
|
|
$
|
(505)
|
|
|
|
|
|
|
|
|
|
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2021. The estimated revenue does not include amounts of variable consideration that are constrained.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
(in thousands)
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Revenue
|
$
|
217
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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 $0.2 million and $0.1 million on our consolidated balance sheets at March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021, contract costs increased by $0.5 million, and we amortized $0.4 million of contract costs. During the three months ended March 31, 2020, contract costs increased by $1.2 million, and we amortized $0.8 million of contract costs.
4. Leases
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 four years.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
|
|
|
2021
|
|
2020
|
Operating lease expense
|
|
|
|
|
$
|
235
|
|
|
$
|
149
|
|
Short-term lease expense
|
|
|
|
|
550
|
|
|
1,281
|
|
Variable lease expense
|
|
|
|
|
97
|
|
|
134
|
|
|
|
|
|
|
|
|
|
Finance lease expense:
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
|
|
|
$
|
259
|
|
|
$
|
392
|
|
Interest expense on lease liabilities
|
|
|
|
|
166
|
|
|
195
|
|
Total finance lease expense
|
|
|
|
|
425
|
|
|
587
|
|
Total lease expense
|
|
|
|
|
$
|
1,307
|
|
|
$
|
2,151
|
|
Supplemental cash flow information related to leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2021
|
|
2020
|
Cash paid for amounts included in measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
$
|
241
|
|
|
$
|
160
|
|
Operating cash flows from finance leases
|
$
|
164
|
|
|
$
|
194
|
|
Financing cash flows from finance leases
|
$
|
837
|
|
|
$
|
1,086
|
|
|
|
|
|
Right-of-use assets obtained or recorded in exchange for lease obligations:
|
|
|
|
Operating leases
|
$
|
—
|
|
|
$
|
178
|
|
Finance leases
|
$
|
376
|
|
|
$
|
54
|
|
Supplemental balance sheet information related to leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31, 2021
|
|
December 31, 2020
|
Operating leases:
|
|
|
|
|
Other long-term assets, net
|
|
$
|
1,966
|
|
|
$
|
2,150
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
908
|
|
|
$
|
964
|
|
Other long-term liabilities
|
|
1,544
|
|
|
1,729
|
|
Total operating lease liabilities
|
|
$
|
2,452
|
|
|
$
|
2,693
|
|
|
|
|
|
|
Finance leases:
|
|
|
|
|
Property, plant and equipment
|
|
$
|
14,076
|
|
|
$
|
13,700
|
|
Accumulated depreciation
|
|
(1,239)
|
|
|
(981)
|
|
Property, plant and equipment, net
|
|
$
|
12,837
|
|
|
$
|
12,719
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
3,522
|
|
|
$
|
3,351
|
|
Long-term debt
|
|
3,940
|
|
|
4,570
|
|
Total finance lease liabilities
|
|
$
|
7,462
|
|
|
$
|
7,921
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
|
|
Operating leases
|
|
3.0 years
|
|
3.2 years
|
Finance leases
|
|
1.8 years
|
|
2.0 years
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
|
Operating leases
|
|
10.68
|
%
|
|
8.25
|
%
|
Finance leases
|
|
8.89
|
%
|
|
8.88
|
%
|
Maturities of lease liabilities at March 31, 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Operating Leases
|
|
Finance Leases
|
2021
|
$
|
888
|
|
|
$
|
3,043
|
|
2022
|
840
|
|
|
4,377
|
|
2023
|
760
|
|
|
662
|
|
2024
|
372
|
|
|
74
|
|
2025
|
—
|
|
|
—
|
|
Thereafter
|
—
|
|
|
—
|
|
Total cash lease payment
|
2,860
|
|
|
8,156
|
|
Less: imputed interest
|
(408)
|
|
|
(694)
|
|
Total lease liabilities
|
$
|
2,452
|
|
|
$
|
7,462
|
|
5. Financial Instruments and Fair Value
Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 Unadjusted quoted market prices for identical assets or liabilities in an active market;
Level 2 Quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets or liabilities; and
Level 3 Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The carrying value of certain of our assets and liabilities, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities approximates their fair value due to the short-term nature of such instruments.
The fair value of our long-term debt and merger consideration payable to an affiliate are determined by Level 3 measurements based on quoted market prices and terms for similar instruments, where available, and on the amount of future cash flows associated with the debt, discounted using our current borrowing rate for comparable debt instruments (the Income Method). Based on our evaluation of the risk free rate, the market yield and credit spreads on comparable company publicly traded debt issues, we used an annualized discount rate, including a credit valuation allowance, of 10.4%. The following table summarizes the carrying value and fair value of our long-term debt and merger consideration payable to an affiliate as of March 31, 2021 and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
(in thousands)
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Term Loan Facility
|
$
|
130,000
|
|
|
$
|
124,599
|
|
|
$
|
130,000
|
|
|
$
|
106,854
|
|
Revolving ABL Credit Facility
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
6
|
|
PPP Loan
|
$
|
10,000
|
|
|
$
|
9,154
|
|
|
$
|
10,000
|
|
|
$
|
8,589
|
|
Merger consideration payable to an affiliate
|
$
|
2,902
|
|
|
$
|
3,873
|
|
|
$
|
2,902
|
|
|
$
|
3,490
|
|
The fair value of our assets held for sale is determined using Level 3 measurements. Fair value measurements are applied with respect to our non-financial assets and liabilities measured on a non-recurring basis, which would consist of measurements primarily of long-lived assets.
6. Inventories
All of our inventory as of March 31, 2021 and December 31, 2020 consisted of supplies held for use in our drilling operations.
7. Accrued Liabilities
Accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2021
|
|
December 31, 2020
|
Accrued salaries and other compensation
|
$
|
1,961
|
|
|
$
|
1,472
|
|
Insurance
|
1,008
|
|
|
2,127
|
|
Deferred revenues
|
208
|
|
|
119
|
|
Property and other taxes
|
1,651
|
|
|
2,166
|
|
Interest
|
3,472
|
|
|
3,573
|
|
Operating lease liability - current
|
908
|
|
|
964
|
|
Other
|
264
|
|
|
302
|
|
|
$
|
9,472
|
|
|
$
|
10,723
|
|
8. Long-term Debt
Our long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31, 2021
|
|
December 31, 2020
|
Term Loan Facility due October 1, 2023
|
|
$
|
130,000
|
|
|
$
|
130,000
|
|
Revolving ABL Credit Facility due October 1, 2023
|
|
—
|
|
|
8
|
|
PPP Loan
|
|
10,000
|
|
|
10,000
|
|
Finance lease obligations
|
|
7,462
|
|
|
7,921
|
|
|
|
147,462
|
|
|
147,929
|
|
Less: current portion of PPP Loan
|
|
(8,571)
|
|
|
(4,286)
|
|
Less: current portion of finance leases
|
|
(3,522)
|
|
|
(3,351)
|
|
Less: Term Loan Facility deferred financing costs
|
|
(2,415)
|
|
|
(2,659)
|
|
Long-term debt
|
|
$
|
132,954
|
|
|
$
|
137,633
|
|
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 March 31, 2021.
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. On April 1, 2021, we elected to pay in kind the $2.8 million interest payment due under our Term Loan, which will increase our Term Loan balance accordingly.
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 March 31, 2021.
The obligations under the ABL Credit Facility are secured by a first priority lien on Priority Collateral, which includes all accounts receivable and deposit accounts, and a second priority lien on the Term Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. As of March 31, 2021, the weighted-average interest rate on our borrowings was 9.00%. At March 31, 2021, the borrowing base under our ABL Credit Facility was $7.9 million, and we had $7.7 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 the 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 submitted our application for forgiveness during the first quarter of 2021. Given the nature of the process, we do not know when a final determination on
our application will be made, but 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.
9. 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, restricted stock unit awards, and stock appreciation rights (“SARs”), 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. As of March 31, 2021, approximately 48,687 shares were available for future awards under the 2019 Plan. In connection with the adoption of the 2019 Plan, no further awards will be made under the 2012 Plan. Our policy is to account for forfeitures of share-based compensation awards as they occur.
A summary of compensation cost recognized for stock-based payment arrangements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
|
|
|
|
2021
|
|
2020
|
Compensation cost recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and restricted stock units
|
|
|
|
|
$
|
454
|
|
|
$
|
570
|
|
Cash-settled stock appreciation rights
|
|
|
|
|
83
|
|
|
—
|
|
Total stock-based compensation
|
|
|
|
|
$
|
537
|
|
|
$
|
570
|
|
No stock-based compensation was capitalized in connection with rig construction activity during the three months ended March 31, 2021 or 2020.
Stock Options
We use the Black-Scholes option pricing model to estimate the fair value of stock options granted to employees and non-employee directors. The fair value of the options is amortized to compensation expense on a straight-line basis over the requisite service periods of the stock awards, which are generally the vesting periods.
There were no stock options granted during the three months ended March 31, 2021 or 2020.
A summary of stock option activity and related information for the three months ended March 31, 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
Outstanding at January 1, 2021
|
33,458
|
|
|
$
|
254.80
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
Forfeited/expired
|
—
|
|
|
—
|
|
Outstanding at March 31, 2021
|
33,458
|
|
|
$
|
254.80
|
|
Exercisable at March 31, 2021
|
33,458
|
|
|
$
|
254.80
|
|
The number of options vested at March 31, 2021 was 33,458 with a weighted average remaining contractual life of 0.8 years and a weighted average exercise price of $254.80 per share. There were no unvested options or unrecognized compensation cost related to outstanding stock options at March 31, 2021.
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 2019 Plan.
Time-based Restricted Stock
Time-based restricted stock awards consist of grants of our common stock that vest over five years. We recognize compensation expense on a straight-line basis over the vesting period. The fair value of restricted stock awards is determined based on the estimated fair market value of our shares on the grant date. As of March 31, 2021, there was $1.4 million in unrecognized compensation cost related to unvested restricted stock awards. This cost is expected to be recognized over a weighted-average period of 1.4 years.
A summary of the status of our time-based restricted stock awards and of changes in our time-based restricted stock awards outstanding for the three months ended March 31, 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
Outstanding at January 1, 2021
|
40,334
|
|
|
$
|
64.40
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding at March 31, 2021
|
40,334
|
|
|
$
|
64.40
|
|
Time-based Restricted Stock Units
We have granted three-year, time-vested restricted stock unit awards where each unit represents the right to receive, at the end of a vesting period, one share of ICD common stock. The fair value of time-based restricted stock unit awards is determined based on the estimated fair market value of our shares on the grant date. As of March 31, 2021, there was $1.1 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 three months ended March 31, 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
|
RSUs
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
Outstanding at January 1, 2021
|
63,897
|
|
|
$
|
22.78
|
|
Granted
|
77,938
|
|
|
4.95
|
|
Vested and converted
|
(25,285)
|
|
|
16.74
|
|
Forfeited
|
(1,809)
|
|
|
38.80
|
|
Outstanding at March 31, 2021
|
114,741
|
|
|
$
|
11.74
|
|
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. Vesting and conversion 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. 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 March 31, 2021, there was unrecognized compensation cost related to unvested performance-based or market-based
restricted stock unit awards totaling $0.2 million. This cost is expected to be recognized over a weighted-average period of 0.8 years.
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 three months ended March 31, 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
|
RSUs
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
Outstanding at January 1, 2021
|
38,559
|
|
|
$
|
22.95
|
|
Granted
|
—
|
|
|
—
|
|
Vested and converted
|
—
|
|
|
—
|
|
Forfeited
|
(10,785)
|
|
|
18.92
|
|
Outstanding at March 31, 2021
|
27,774
|
|
|
$
|
24.51
|
|
Time-Based Cash-Settled Stock Appreciation Rights
We have granted time-based, cash-settled stock appreciation rights (“SARs”) to certain employees. The SARs have a term of seven years, an exercise price of $5.73 per share, with the market price upon exercise capped at $10.00 per share, and vest ratably on the first, second and third anniversaries of the date of grant. Because these SARs are cash-settled, they are classified as “liability-classified awards” which are remeasured at their fair value at the end of each reporting period until settlement.
Time-based, cash-settled SARs have no effect on dilutive shares or shares outstanding as any appreciation of our common stock over the exercise price is paid in cash and not in common stock.
The fair value of time-based cash-settled SARs is revalued (mark-to-market) each reporting period using a Monte Carlo simulation model based on period-end stock price. Expected term of the SARs is calculated as the average of each vesting tranche’s midpoint between vesting date and expiration date plus the vesting period. Expected volatility is based on the historical volatility of our stock for the length of time corresponding to the expected term of the SARs. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the reporting date for the length of time corresponding to the expected term of the SARs.
The following weighted-average assumptions were used in calculating the fair value of time-based cash-settled SARs granted during the three months ended March 31, 2021 using the Monte Carlo simulation model:
|
|
|
|
|
|
|
Three Months Ended
March 31, 2021
|
Expected term of cash-settled SARs
|
4.4 years
|
Expected volatility factor
|
113.3
|
%
|
Expected dividend yield
|
0.00
|
%
|
Risk-free interest rate
|
0.73
|
%
|
Changes to the company's non-vested time-based cash-settled SARs during the three months ended March 31, 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
|
Cash-settled SARs
(in thousands)
|
|
Weighted Average
Fair Value Price
Per Share
|
Non-vested cash-settled SARs at January 1, 2021
|
—
|
|
|
$
|
—
|
|
Granted
|
2,954
|
|
|
0.64
|
|
Vested
|
—
|
|
|
—
|
|
Non-vested cash-settled SARs at March 31, 2021
|
2,954
|
|
|
$
|
0.64
|
|
As of March 31, 2021, there was $1.8 million of unrecognized compensation cost related to non-vested time-based cash-settled SARs that is expected to be recognized over a weighted-average period of 1.5 years.
10. Stockholders’ Equity and Earnings (Loss) per Share
As of March 31, 2021, we had a total of 6,515,580 shares of common stock, $0.01 par value, outstanding. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
(in thousands, except per share data)
|
2021
|
|
2020
|
|
|
|
|
Net loss (numerator):
|
$
|
(16,025)
|
|
|
$
|
(28,223)
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(2.58)
|
|
|
$
|
(7.53)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator):
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
6,215
|
|
|
3,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - diluted
|
6,215
|
|
|
3,750
|
|
|
|
|
|
For all periods presented, the computation of diluted loss per share excludes the effect of certain outstanding stock options and RSUs because their inclusion would be anti-dilutive. The number of options that were excluded from diluted loss per share were 33,458 during the three months ended March 31, 2021 and 33,458 during the three months ended March 31, 2020. The number of RSUs, which are not participating securities, that were excluded from our basic and diluted loss per share because they are anti-dilutive, were 142,515 for the three months ended March 31, 2021 and 142,715 for the three months ended March 31, 2020.
11. Income Taxes
Our effective tax rate was (0.2)% and 0.1% for the three months ended March 31, 2021 and 2020, respectively. Taxes in both periods relate to Louisiana state income tax and Texas margin tax.
12. Commitments and Contingencies
Purchase Commitments
As of March 31, 2021, we had outstanding purchase commitments to a number of suppliers totaling $0.4 million related primarily to the operation of drilling rigs. All of these commitments relate to equipment and services currently scheduled for delivery in 2021.
Contingencies
We may be the subject of lawsuits and claims arising in the ordinary course of business from time to time. Management cannot predict the ultimate outcome of such lawsuits and claims. While lawsuits and claims are asserted for amounts that may be material should an unfavorable outcome be the result, management does not currently expect that the outcome of any of these known legal proceedings or claims will have a material adverse effect on our financial position or results of operations.
13. Related Parties
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 $2.9 million and $3.2 million for the three months ended March 31, 2021 and 2020, respectively.
Additionally, we have recorded merger consideration payable to an affiliate of $2.9 million related to proceeds received from the sale of specific assets earmarked in the Sidewinder Merger agreement, with the Sidewinder unitholders receiving the net proceeds. On June 4, 2020, we entered into a letter agreement with MSD Credit Opportunity Master Fund, L.P. to allow for the deferral of payment of the merger consideration payable, to the earlier of (i) June 30, 2022 and (ii) a Change of Control Transaction (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 merger consideration payable 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 merger consideration payable was previously payable in the second quarter of 2020. As of March 31, 2021, accrued interest payable on the merger consideration payable was $0.5 million.
ITEM 2. 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 financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 1, 2021 (the “Form 10-K”). 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 those described in the section titled “Cautionary Statement Regarding Forward-Looking Statements” and those set forth under Part 1“Item 1A. Risk Factors” or in other parts of the Form 10-K.
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 first rig began drilling in May 2012. On October 1, 2018, we completed a merger with Sidewinder Drilling LLC (“Sidewinder”). As a result of this merger, we more than doubled our operating fleet and personnel.
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.
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 (“COVID-19”) and the risks to the international community as the virus spread globally. 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, caused significant declines in global demand for crude oil. This reduction in demand 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 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 2020 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 244 on August 14, 2020. Although oil prices have recently recovered with the WTI price reaching $63.33 on April 19, 2021 supported by production cuts by OPEC, the U.S. land rig count remains very low and has only modestly improved, reaching 427 rigs on April 23, 2021.
The long-term effects of the pandemic on production and demand are unknown at this time. While vaccinations have become available and made progress in certain regions during the first quarter of 2021, considerable uncertainty remains regarding ongoing measures to contain the virus, including travel restrictions, as well as uncertainty on how long OPEC+ will continue to maintain current production cuts. Accordingly, 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 throughout 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 April 30, 2021, we had 13 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, and 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;
•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. The social security deferral program ended December 31, 2020. We deferred $0.8 million of employer side 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.
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 issued and sold approximately $11 million in shares of common stock during 2020.
On March 8, 2021, in conjunction with the equity distribution agreement entered into June 5, 2020, our board of directors authorized an additional $2.2 million in shares of common stock to be sold in transactions that are deemed to be “at the market offerings”. As of March 31, 2021, we raised gross proceeds of $0.7 million from the sale of shares in the offering. 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 contains 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.
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 during the fourth quarter of 2020. During the first quarter of 2021, we sold 174,100 shares for a total of $0.9 million in proceeds pursuant to the terms of the Commitment Purchase Agreement
Asset Impairment and Assets Held for Sale
During the first quarter of 2021, our management committed to a plan to sell one of our field location facilities. As a result, we reclassified an aggregate $0.5 million of land and buildings to assets held for sale on our March 31, 2021 balance sheet and recognized a $43.0 thousand impairment charge representing the difference between the carrying value and the fair value, less the costs to sell the related property.
During the three months ended March 31, 2020, 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 and, accordingly, an interim asset impairment test was performed as of March 31, 2020. As a result, we further impaired $3.3 million associated with the decline in the market value of our assets held for sale 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.
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.
During the three months ended March 31, 2021, our operating costs also included approximately $1.1 million of costs associated with the reactivation of idle rigs. These 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 percentage 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 (defined below) 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 and rig construction costs 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 three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands, except per share data)
|
|
|
|
|
2021
|
|
2020
|
Revenues
|
|
|
|
|
$
|
15,542
|
|
|
$
|
38,494
|
|
Costs and expenses
|
|
|
|
|
|
|
|
Operating costs
|
|
|
|
|
14,541
|
|
|
30,229
|
|
Selling, general and administrative
|
|
|
|
|
3,686
|
|
|
3,761
|
|
Severance expense
|
|
|
|
|
—
|
|
|
1,076
|
|
Depreciation and amortization
|
|
|
|
|
9,989
|
|
|
11,516
|
|
Asset impairment
|
|
|
|
|
43
|
|
|
16,619
|
|
Gain on disposition of assets, net
|
|
|
|
|
(435)
|
|
|
(46)
|
|
|
|
|
|
|
|
|
|
Total cost and expenses
|
|
|
|
|
27,824
|
|
|
63,155
|
|
Operating loss
|
|
|
|
|
(12,282)
|
|
|
(24,661)
|
|
Interest expense
|
|
|
|
|
(3,709)
|
|
|
(3,604)
|
|
Loss before income taxes
|
|
|
|
|
(15,991)
|
|
|
(28,265)
|
|
Income tax expense (benefit)
|
|
|
|
|
34
|
|
|
(42)
|
|
Net loss
|
|
|
|
|
$
|
(16,025)
|
|
|
$
|
(28,223)
|
|
|
|
|
|
|
|
|
|
Other financial and operating data
|
|
|
|
|
|
|
|
Number of marketed rigs (end of period) (1)
|
|
|
|
|
24
|
|
|
29
|
|
Rig operating days (2)
|
|
|
|
|
929
|
|
|
1,738
|
|
Average number of operating rigs (3)
|
|
|
|
|
10.3
|
|
|
19.1
|
|
Rig utilization (4)
|
|
|
|
|
43.0
|
%
|
|
66.0
|
%
|
Average revenue per operating day (5)
|
|
|
|
|
$
|
15,465
|
|
|
$
|
19,823
|
|
Average cost per operating day (6)
|
|
|
|
|
$
|
12,663
|
|
|
$
|
14,648
|
|
Average rig margin per operating day
|
|
|
|
|
$
|
2,802
|
|
|
$
|
5,175
|
|
(1) Marketed rigs exclude five idle rigs that will not be reactivated unless market conditions materially 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 out-of-pocket costs paid by customers of $1.2 million and $4.0 million during the three months ended March 31, 2021 and 2020, respectively.
(6) Average cost per operating day represents 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 paid by customers of $1.2 million and $4.0 million during the three months ended March 31, 2021 and 2020, respectively; (ii) overhead costs expensed due to reduced rig upgrade activity of $0.5 million and $0.6 million during the three months ended March 31, 2021 and 2020, respectively; and (iii) rig reactivation costs, inclusive of new crew training costs, of $1.1 million and $0.2 million during the three months ended March 31, 2021 and 2020, respectively.
Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020
Revenues
Revenues for the three months ended March 31, 2021 were $15.5 million, representing a 59.6% decrease as compared to revenues of $38.5 million for the three months ended March 31, 2020. This decrease was attributable to a decrease in operating days and revenue per day. Operating days decreased to 929 days as compared to 1,738 days in the prior year comparable quarter. The decrease in operating days was primarily attributable to the ongoing downturn in market conditions as a result of the COVID-19 pandemic impacts on demand for crude oil, and resulting impacts on demand for our services. On a revenue per operating day basis, which excludes the impact of early termination revenues, our revenue per day decreased by 22.0% to $15,465 during the three months ended March 31, 2021, as compared to revenue per day of $19,823 for the three months ended March 31, 2020. This decrease in revenue per day was the result of declining dayrates as compared to the prior year quarter and expiration of various higher dayrate legacy contracts during the year.
Operating Costs
Operating costs for the three months ended March 31, 2021 were $14.5 million, representing a 51.9% decrease as compared to operating costs of $30.2 million for the three months ended March 31, 2020. This decrease was primarily attributable to a decrease in operating days to 929 days as compared to 1,738 days in the prior year comparable quarter. On a cost per operating day basis, our cost decreased to $12,663 per day during the three months ended March 31, 2021, representing an 13.6% decrease compared to cost per operating day of $14,648 for the three months ended March 31, 2020. This decrease was primarily attributable to cost reduction activities instituted at the beginning of the second quarter of 2020 as well as one of our operating rigs earning revenues on a standby basis for most of the first quarter of 2021.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended March 31, 2021 were $3.7 million, representing a 2.0% decrease as compared to selling, general and administrative expense of $3.8 million for the three months ended March 31, 2020. This decrease as compared to the prior year comparable quarter primarily relates to cost cutting initiatives that were implemented at the beginning of the second quarter of 2020, offset by higher accrued incentive pay.
Severance Expense
No severance expense was recorded during the first quarter of 2021. Severance expense of $1.1 million was recorded for the three months ended March 31, 2020, in association with the cost reduction activities instituted at the beginning of 2020.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March 31, 2021 was $10.0 million, representing a 13.3% decrease compared to depreciation and amortization expense of $11.5 million for the three months ended March 31, 2020. The decrease in depreciation and amortization expense is primarily the result of the asset impairments reported in 2020.
Asset Impairment
During the three months ended March 31, 2021, our management committed to a plan to sell one of our field location facilities. As a result, we reclassified an aggregate $0.5 million of land and buildings to assets held for sale on our March 31, 2021 balance sheet and recognized a $43.0 thousand impairment charge representing the difference between the carrying value and the fair value, less the costs to sell the related property.
During the three months ended March 31, 2020, 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 and, accordingly, an interim asset impairment test was performed as of March 31, 2020. As a result, we further impaired $3.3 million associated with the decline in the market value of our assets held for sale 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.
Gain on Disposition of Assets, net
A gain on the disposition of assets totaling $0.4 million was recorded for the three months ended March 31, 2021 compared to a gain on the disposition of assets totaling $46.0 thousand in the prior year comparable quarter. In the current and prior year quarter, the gains, related to the sale of miscellaneous drilling equipment.
Interest Expense
Interest expense was $3.7 million for the three months ended March 31, 2021 and $3.6 million for the three months ended March 31, 2020.
Income Tax Expense (Benefit)
Income tax expense recorded for the three months ended March 31, 2021 amounted to $34.0 thousand as compared to income tax benefit of $42.0 thousand for the three months ended March 31, 2020. Our effective tax rates for the three months ended March 31, 2021 and 2020 were (0.2)% and 0.1%, respectively. Taxes in both periods relate to Louisiana state income tax and Texas margin tax.
Liquidity and Capital Resources
Our liquidity at March 31, 2021 consisted of cash on hand of $5.4 million, $7.7 million of availability under our $40.0 million ABL Credit Facility, based on a borrowing base of $7.9 million, a $15 million committed accordion under our existing term loan facility, and a maximum of $4.1 million available under our Commitment Purchase Agreement.
We expect our future capital and liquidity needs to be related to operating expenses, maintenance capital expenditures, working capital and general corporate purposes.
Due to lack of visibility and confidence towards customer intentions, although our operating rig count has begun to improve, and reached 13 rigs as of April 30, 2021, we cannot assure you that future declines in operating rigs will not occur or that our operating rig count will continue to improve. During the first quarter of 2021, cash flow from operations, ignoring working capital fluctuations, was negative and we expect such metrics to be negative during the second quarter as well, and we can provide no assurance as to when it will return to positive. On April 1, 2021, we elected to pay in kind the $2.8 million interest payment due under our Term Loan, which will increase our Term Loan balance accordingly. Looking forward past March 31, 2021, and taking into account this payment of interest in kind, we currently estimate that required non-operating cash payments for interest under our credit facilities and finance lease payments will approximate $13.9 million for the 12 months ending March 31, 2022. Payments for capital expenditures and to fund operations will be in addition to these amounts.
Because our cash flows from operations have been and may continue to be materially impacted by depressed market conditions caused by the COVID-19 pandemic, we may be required to draw down funds pursuant to the $15 million accordion feature under our term loan facility to meet required non-operating expenditures and if necessary to fund operations. In the second quarter of 2020, we entered into the $10 million PPP Loan pursuant to the Paycheck Protection Program (the “PPP”). We used the proceeds of the loan for payroll costs, rent, utilities, mortgage interests, and other permitted purposes. Additionally, in order to decrease near term non-operating commitments, we modified the term loan credit agreement to permit us to elect to pay accrued and unpaid interest for one quarter in kind. Subsequent to the first quarter of 2021, we exercised the option to pay one quarter interest in kind on April 1, 2021. Additionally, we amended the Merger Consideration Agreement to extend the required payment date to the earlier of (i) June 30, 2022 and (ii) a change of control transaction and also initiated an additional ATM equity offering in which we raised an aggregate of $0.7 million in gross proceeds during the first quarter of 2021 (see “Significant Developments” for additional information). We currently believe that the actions we have taken to date and our existing sources of liquidity are sufficient to fund our operations for the next twelve months. However, due to the uncertainty regarding the duration of the COVID-19 pandemic and its effects on the oil and gas industry and our business and operations, there can be no assurance in this regard.
Net Cash (Used In) Provided By Operating Activities
Cash used in operating activities was $6.3 million for the three months ended March 31, 2021 compared to cash provided by operating activities of $3.1 million during the same period in 2020. 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, non-cash compensation, deferred taxes and amortization of deferred financing costs. Additionally, changes in working capital items such as accounts receivable, inventory, prepaid expense and accounts payable can significantly affect operating cash flows. Cash flows from operating activities during the first three months of 2021 were lower as a result of a decrease in net loss of $12.2 million, adjusted for non-cash items, of $10.4 million for the three months ended March 31, 2021 compared to $28.8 million for non-cash items during the same period in 2020. Additionally, working capital changes decreased cash flows from operating activities by $0.7 million for the three months ended March 31, 2021 compared to an increase of cash flows of $2.5 million during the same period in 2020.
Net Cash Used In Investing Activities
Cash used in investing activities was $1.1 million for the three months ended March 31, 2021 compared to cash used in investing activities of $8.4 million during the same period in 2020. During the first three months of 2021, cash payments of $1.7 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $0.7 million. During the 2020 period, cash payments of $9.1 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $0.6 million and the collection of principal on a note receivable of $0.1 million.
Net Cash Provided by Financing Activities
Cash provided by financing activities was $0.5 million for the three months ended March 31, 2021 compared to cash provided by financing activities of $9.8 million during the same period in 2020. During the first three months of 2021, we received proceeds from the issuance of common stock through our ATM transaction, net of issuance costs of $0.5 million and proceeds from the issuance of common stock under purchase agreement of $0.9 million. These proceeds were offset by repayments under our revolving credit facility of $8.0 thousand, restricted stock unit’s withheld for taxes paid of $11.0 thousand and payments for finance lease obligations of $0.8 million. During the first three months of 2020 we made borrowings under our revolving credit facility of $11.0 million. These proceeds were offset by repayments under our revolving credit facility of $38.0 thousand, the purchase of treasury stock of $66.0 thousand, restricted stock unit's withheld for taxes paid of $26.0 thousand and payments for finance lease obligations of $1.1 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 9.8% 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 March 31, 2021.
The obligations under the ABL Credit Facility are secured by a first priority lien on Priority Collateral, which includes all accounts receivable and deposit accounts, and a second priority lien on the Term Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. As of March 31, 2021, the weighted-average interest rate on our borrowings was 9.00%. At March 31, 2021, the borrowing base under our ABL Credit Facility was $7.9 million, and we had $7.7 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 the 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 submitted our application for forgiveness during the first quarter of 2021. Given the nature of the process, we do not know when a final determination on our application will be made, but 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.
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 and unconditional purchase obligations not fully reflected on our balance sheets (see Note 12 “Commitments and Contingencies” for additional information).
Critical Accounting Policies and Accounting Estimates
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.
In the first quarter of 2021, in relation to the pending sale of one of our field location facilities, we impaired the property to its fair market value less the cost of sale and recognized $43.0 thousand of impairment expense.
In the first quarter of 2020, 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 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. Due to the uncertainty around COVID-19 and current market conditions, we may have to make further impairment charges in future periods relating to, among other things, fixed assets and inventory.
For a complete discussion of our critical accounting policies and accounting estimates, please see our Annual Report on Form 10-K for the year ended December 31, 2020.
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 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 2016-13 until January 2023. We are currently evaluating the impact this guidance will have on our accounts receivable.
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 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. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform to provide clarifying guidance regarding the scope of Topic 848, effective immediately. As of March 31, 2021, 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.