Notes to Consolidated Financial Statements
(Unaudited)
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1.
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Nature of Operations and Recent Events
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Except as expressly stated or the context otherwise requires, the terms “we,” “us,” “our,” “ICD,” and the “Company” refer to Independence Contract Drilling, Inc. and its subsidiary.
We provide land-based contract drilling services for oil and natural gas producers targeting unconventional resource plays in the United States. We own and operate a premium fleet comprised of modern, technologically advanced drilling rigs.
Our rig fleet includes 29 marketed AC powered (“AC”) rigs and a number of additional rigs requiring conversions or upgrades in order to meet our AC pad-optimal specifications.
We currently focus our operations on unconventional resource plays located in geographic regions that we can efficiently support from our Houston, Texas and Midland, Texas facilities in order to maximize economies of scale. Currently, our rigs are operating in the Permian Basin, the Haynesville Shale and the Eagle Ford Shale; however, our rigs have previously operated in the Mid-Continent and Eaglebine regions as well.
Our business depends on the level of exploration and production activity by oil and natural gas companies operating in the United States, and in particular, the regions where we actively market our contract drilling services. The oil and natural gas exploration and production industry is historically cyclical and characterized by significant changes in the levels of exploration and development activities. Oil and natural gas prices and market expectations of potential changes in those prices significantly affect the levels of those activities. Worldwide political, regulatory, economic and military events, as well as natural disasters have contributed to oil and natural gas price volatility historically, and are likely to continue to do so in the future. Any prolonged reduction in the overall level of exploration and development activities in the United States and the regions where we market our contract drilling services, whether resulting from changes in oil and natural gas prices or otherwise, could materially and adversely affect our business.
COVID-19 Pandemic and Market Conditions Update
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (“COVID-19”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The continued spread of the COVID-19 virus and the responses taken to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and shutdowns, has caused significant declines in global demand for crude oil. This reduction in demand has occurred concurrent with the initiation of a crude oil price war between members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (collectively, the “OPEC+” group). Even with recent production cuts announced by the OPEC+ group and others on April 9, 2020, and the cessation to the crude oil price war, crude oil inventories have continued to rise and to test storage capacity and logistics networks. These factors have led to a collapse in oil prices, with the WTI price for May delivery closing at negative $37.63 per barrel on April 20, 2020. Downward pressure on oil prices is expected to continue for the foreseeable future, and the long-term effects on production and demand are unknown at this time. Currently, there is considerable uncertainty regarding measures to contain the virus and what potential future measures may be put in place, therefore we cannot predict when worldwide demand for oil will stabilize and if or when it will begin to improve or reach pre-COVID-19 levels.
In response to these adverse market conditions, North American exploration companies, including all of our customers, have rapidly reduced planned capital expenditures and drilling activity. As a result, demand for our products and services began to rapidly decline late in the first quarter of 2020, and we expect demand for our products and services to continue to decline and remain low as our customers continue adjusting their operations in response to market conditions. During the first quarter of 2020, our operating rig count reached a peak of 22 rigs. Based upon customer actions to date, we expect our operating rig count to fall to six rigs by the end of the second quarter of 2020. However, due to the lack of visibility and confidence towards customer intentions, we cannot assure you that our operating rig count will not fall below these levels by that period of time or thereafter. Our current backlog of contracts stands at 3.2 average rigs during the third quarter of 2020 and 1.8 average rigs during the fourth quarter of 2020, and none of our current drilling contracts have terms extending into 2021 or beyond. As a result of this rapidly declining operating level coupled with downward pressure on dayrates we charge for our contract drilling services, we will experience corresponding reductions in revenue, operating margins and cash flows.
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:
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Salary or compensation reductions for substantially all our employees, including members of executive management;
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Suspension of all cash-based incentive compensation, including all members of executive management;
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•
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Reducing the number of executive management positions by two;
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Reducing the number of directors from seven to five, which would become effective following director elections at our 2020 Annual Meeting of Stockholders currently scheduled to occur on June 12, 2020;
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Annual compensation reductions for our directors; and
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Reducing headcount for non-field-based personnel by approximately 40%.
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Depending upon the nature and duration of the COVID-19 pandemic, the nature of containment measures taken in the future, it could have a material adverse effect on our business, results of operations and financial condition.
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.
On April 27, 2020, we entered into an unsecured loan in the aggregate principal amount of $10.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”), sponsored by the Small Business Administration (the “SBA”) as guarantor of loans under the PPP. The PPP is part of the CARES Act, and it provides for loans to qualifying businesses in a maximum amount equal to the lesser of $10.0 million and 2.5 times the average monthly payroll expenses of the qualifying business. The proceeds of the loan may only be used for payroll costs, rent, utilities, mortgage interests, and interest on other pre-existing indebtedness (the “permissible purposes”).
The application for these funds required us to, in good faith, certify that current economic uncertainty made the loan request necessary to support our ongoing operations. This certification further required us to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. In making our certification, we considered numerous factors, including (i) current market and economic conditions, including the significant declines in worldwide demand and oil prices as a result of the COVID-19 pandemic and the uncertainty and inability to predict when market conditions will stabilize and begin to improve, (ii) the actions and communications from our customers that have caused and will cause our operating rig count to fall (from a high of 22 rigs during the first quarter of 2020, to an estimated six rigs by the end of the second quarter of 2020 and potential further reductions depending on when oil supply and demand fundamentals rebalance and U.S. land rig counts stabilize and begin to improve), (iii) whether our current sources of liquidity, comprised of cash and cash equivalents, availability under our revolving credit facility and accordion under our term loan facility, would be sufficient to finance our operations and required expenditures while industry and market conditions remain distressed, (iv) our status as a micro-cap public company, and (v) our belief, after inquiry, that capital markets were not reasonably available or open to us at such time for new issuances of debt or equity.
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 begin 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.
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.
Reverse Stock Split
Following approval by our stockholders on February 6, 2020, our Board of Directors approved a 1-for-20 reverse stock split of our common stock. The reverse split was effective March 11, 2020, and all share and earnings per share information have been retroactively adjusted to reflect the reverse stock split and the associated decrease in par value was recorded with the offset to additional paid-in capital.
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2.
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Interim Financial Information
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These unaudited consolidated financial statements include the accounts of ICD and its subsidiary, and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These consolidated financial statements should be read along with our audited consolidated financial statements for the year ended December 31, 2019, included in our Annual Report on Form 10-K for the year ended December 31, 2019. 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, 2020 may not be indicative of results that will be realized for the full year ending December 31, 2020.
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 Impairments, net
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 recognized further impairment of $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. 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.
Additionally, in the first quarter of 2019, we recorded $2.0 million of asset impairment expense in conjunction with the sale of miscellaneous drilling equipment at auctions in April of 2019.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as additional guidance on the measurement of credit losses on financial instruments. The new guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. In addition, the guidance amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The new guidance is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after December 15, 2018. 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 plan to adopt this guidance on January 1, 2021 and are currently evaluating the impact of adoption on our consolidated financial statements.
We completed the merger with Sidewinder Drilling LLC on October 1, 2018.
During the three months ended March 31, 2019 we recorded $1.1 million of merger-related expenses comprised primarily of severance, professional fees and various other integration related expenses. There were no merger expenses recorded during the three months ended March 31, 2020.
Certain intangible liabilities were recorded in connection with the Sidewinder merger for drilling contracts in place at the closing date of the transaction that had unfavorable contract terms as compared to then current market terms for comparable drilling rigs. The intangible liabilities are amortized to operating revenues over the remaining underlying contract terms. During the three month period ended March 31, 2019, $1.0 million of intangible revenue was recognized as a result of this amortization. The intangible liabilities were fully amortized in the second quarter of 2019.
In addition, at the time of consummation of the Sidewinder Merger, Sidewinder owned 11 mechanical rigs and related equipment (the "Mechanical Rigs") located principally in the Utica and Marcellus plays. As these rigs are not consistent with ICD’s core strategy or geographic focus, ICD agreed that these rigs can be disposed of, with the Sidewinder unitholders receiving the net proceeds. As a result of this arrangement, on the merger date, we recorded the fair value of the Mechanical Rigs less costs to sell, as assets held for sale, with an offsetting liability in contingent consideration. Subsequently, a majority of these assets were sold at auction for substantially less than the appraised fair values on the merger date. As a result, the contingent consideration liability was reduced by the appraised fair values on the merger date and the proceeds were recorded as merger consideration payable to an affiliate on our consolidated balance sheets. We are required to pay out the related net proceeds in the second quarter of 2020.
We have multi-year operating and financing leases for corporate office space, field location facilities, land, vehicles and various other equipment used in our operations. We also have a significant number of rentals related to our drilling operations that are day-to-day or month-to-month arrangements. Our multi-year leases have remaining lease terms of greater than one year to five years.
The components of lease expense were as follows:
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(in thousands)
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Three Months Ended March 31, 2020
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Three Months Ended March 31, 2019
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Operating lease expense
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$
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149
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$
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125
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Short-term lease expense
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1,281
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1,193
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Variable lease expense
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134
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86
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Finance lease expense:
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Amortization of right-of-use assets
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$
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392
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$
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265
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Interest expense on lease liabilities
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195
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32
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Total finance lease expense
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587
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297
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Total lease expense
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$
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2,151
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$
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1,701
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Supplemental cash flow information related to leases is as follows:
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(in thousands)
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Three Months Ended March 31, 2020
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Three Months Ended March 31, 2019
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Cash paid for amounts included in measurement of lease liabilities:
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Operating cash flows from operating leases
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$
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160
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$
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103
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Operating cash flows from finance leases
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$
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194
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$
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32
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Financing cash flows from finance leases
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$
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1,086
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$
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216
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Right-of-use assets obtained or recorded in exchange for lease obligations:
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Operating leases
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$
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178
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$
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955
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Finance leases
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$
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54
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$
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520
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Supplemental balance sheet information related to leases is as follows:
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(in thousands)
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March 31, 2020
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December 31, 2019
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Operating leases:
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Other long-term assets, net
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$
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1,095
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$
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1,033
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Accrued liabilities
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$
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545
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$
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475
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Other long-term liabilities
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1,198
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1,250
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Total operating lease liabilities
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$
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1,743
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$
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1,725
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Finance leases:
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Property, plant and equipment
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$
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13,774
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$
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14,375
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Accumulated depreciation
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(1,352
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)
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(1,425
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)
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Property, plant and equipment, net
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$
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12,422
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$
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12,950
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Current portion of long-term debt
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$
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3,268
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$
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3,685
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Long-term debt
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6,654
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7,472
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Total finance lease liabilities
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$
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9,922
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$
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11,157
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Weighted-average remaining lease term
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Operating leases
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3.3 years
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3.6 years
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Finance leases
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2.5 years
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2.7 years
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Weighted-average discount rate
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Operating leases
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8.00
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%
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8.07
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%
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Finance leases
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7.66
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%
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7.64
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%
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Maturities of lease liabilities at March 31, 2020 were as follows:
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(in thousands)
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Operating Leases
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Finance Leases
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2020
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$
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505
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$
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2,861
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2021
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616
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3,661
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2022
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444
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3,517
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2023
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370
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164
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2024
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47
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—
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Thereafter
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—
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—
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Total cash lease payment
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1,982
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10,203
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Add: expected residual value
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—
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832
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Less: imputed interest
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(239
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)
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(1,113
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)
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Total lease liabilities
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$
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1,743
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$
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9,922
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5.
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Revenue from Contracts with Customers
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The following table summarizes revenues from our contracts disaggregated by revenue generating activity contained therein for the three months ended March 31, 2020 and 2019:
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Three Months Ended March 31,
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(in thousands)
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2020
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2019
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Dayrate drilling
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$
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34,478
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$
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56,451
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Mobilization
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1,541
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1,260
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Reimbursables
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2,448
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1,604
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Early termination
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27
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—
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Capital modification
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—
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10
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Intangible
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—
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1,033
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Total revenue
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$
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38,494
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$
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60,358
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The following table provides information about receivables and contract liabilities related to contracts with customers. We had no contract assets as of March 31, 2020 or December 31, 2019.
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(in thousands)
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March 31, 2020
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December 31, 2019
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Receivables, which are included in “Accounts receivable, net”
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$
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26,752
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$
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35,378
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Contract liabilities, which are included in “Accrued liabilities - deferred revenue”
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$
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(505
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)
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$
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(311
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)
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Significant changes in the contract liabilities balance during the period are as follows:
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Three Months Ended March 31,
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(in thousands)
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2020
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2019
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Revenue recognized that was included in contract liabilities at beginning of period
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$
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311
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$
|
732
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Increase in contract liabilities due to cash received, excluding amounts recognized as revenue
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$
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(505
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)
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$
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(479
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)
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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, 2020. The estimated revenue does not include amounts of variable consideration that are constrained.
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Year Ending December 31,
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(in thousands)
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2020
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2021
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2022
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2023
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Revenue
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$
|
505
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$
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—
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|
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$
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—
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|
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$
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—
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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 $0.5 million and $0.1 million on our consolidated balance sheets at March 31, 2020 and December 31, 2019, respectively. During the three months ended March 31, 2020 and 2019 contract costs increased by $1.2 million and $0.5 million, respectively, and we amortized $0.8 million and $0.7 million of contract costs.
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6.
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Financial Instruments and Fair Value
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Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
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Level 1
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Unadjusted quoted market prices for identical assets or liabilities in an active market;
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Level 2
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Quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets or liabilities; and
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Level 3
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Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
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This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The carrying value of certain of our assets and liabilities, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities approximates their fair value due to the short-term nature of such instruments.
The fair value of our long-term debt is determined by Level 3 measurements based on quoted market prices and terms for similar instruments, where available, and on the amount of future cash flows associated with the debt, discounted using our current borrowing rate for comparable debt instruments (the Income Method). Based on our evaluation of the risk free rate, the market yield and credit spreads on comparable company publicly traded debt issues, we used an annualized discount rate, including a credit valuation allowance, of 38.8%. The following table summarizes the carrying value and fair value of our long-term debt as of March 31, 2020 and December 31, 2019.
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March 31, 2020
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|
December 31, 2019
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(in thousands)
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Carrying Value
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Fair Value
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Carrying Value
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Fair Value
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Term Loan Facility
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$
|
130,000
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|
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$
|
62,559
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|
|
$
|
130,000
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|
|
$
|
138,567
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Revolving Credit Facility
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$
|
11,000
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|
|
$
|
4,464
|
|
|
$
|
—
|
|
|
$
|
—
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|
The fair value of our assets held for sale is determined using Level 3 measurements. In the first quarter of 2020, we obtained a third-party appraisal to determine the fair value of our assets held for sale. Fair value measurements are applied with respect to our non-financial assets and liabilities measured on a non-recurring basis, which would consist of measurements primarily of long-lived assets.
All of our inventory as of March 31, 2020 and December 31, 2019 consisted of supplies held for use in our drilling operations.
Accrued liabilities consisted of the following:
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|
|
|
|
|
|
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(in thousands)
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March 31, 2020
|
|
December 31, 2019
|
Accrued salaries and other compensation
|
$
|
2,177
|
|
|
$
|
3,500
|
|
Insurance
|
2,007
|
|
|
2,861
|
|
Deferred revenues
|
505
|
|
|
701
|
|
Property and other taxes
|
2,569
|
|
|
4,716
|
|
Interest
|
3,104
|
|
|
3,244
|
|
Operating lease liability - current
|
545
|
|
|
475
|
|
Other (1)
|
2,051
|
|
|
871
|
|
|
$
|
12,958
|
|
|
$
|
16,368
|
|
(1) Accrued Liabilities - Other includes $1.1 million in accrued severance, as of March 31, 2020, in connection with our cost reduction measures instituted in response to the COVID-19 pandemic and current deteriorating market conditions.
Our long-term debt consisted of the following:
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|
|
|
|
|
|
|
|
|
(in thousands)
|
|
March 31, 2020
|
|
December 31, 2019
|
Term Loan Facility due October 1, 2023
|
|
$
|
130,000
|
|
|
$
|
130,000
|
|
Revolving Credit Facility due October 1, 2023
|
|
11,000
|
|
|
—
|
|
Finance lease obligations
|
|
9,922
|
|
|
11,157
|
|
|
|
150,922
|
|
|
141,157
|
|
Less: current portion
|
|
(3,268
|
)
|
|
(3,685
|
)
|
Less: Term Loan Facility deferred financing costs
|
|
(2,363
|
)
|
|
(2,531
|
)
|
Long-term debt
|
|
$
|
145,291
|
|
|
$
|
134,941
|
|
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 with an interest period of one month (“LIBOR”), plus 1.0%, and (c) the rate of interest as publicly quoted from time to time by the Wall Street Journal as the “prime rate” in the United States; plus an applicable margin of 6.5%, or (ii) a “LIBOR rate” equal to LIBOR with an interest period of one month, plus an applicable margin of 7.5%.
The Term Loan Credit Agreement contains financial covenants, including a liquidity covenant of $10.0 million and a springing fixed charge coverage ratio covenant of 1.00 to 1.00 that is tested when availability under the ABL Credit Facility (defined below) and the DDTL Facility is below $5.0 million at any time that a DDTL Facility loan is outstanding. The Term Loan Credit Agreement also contains other customary affirmative and negative covenants, including limitations on indebtedness, liens, fundamental changes, asset dispositions, restricted payments, investments and transactions with affiliates. The Term Loan Credit Agreement also provides for customary events of default, including breaches of material covenants, defaults under the ABL Credit Facility or other material agreements for indebtedness, and a change of control.
The obligations under the Term Loan Credit Agreement are secured by a first priority lien on collateral (the “Term Priority Collateral”) other than accounts receivable, deposit accounts and other related collateral pledged as first priority collateral (“Priority Collateral”) under the ABL Credit Facility (defined below) and a second priority lien on such Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. MSD PCOF Partners IV, LLC (an affiliate of MSD Partners, L.P. "MSD Partners") is the lender of our $130.0 million Term Loan Facility.
MSD Partners, together with its affiliate, MSD Capital, L.P. (“MSD Capital”) own approximately 30% of the outstanding shares of the Company’s common stock.
In July 2019, we revised our 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.
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 covenants as of March 31, 2020.
The obligations under the ABL Credit Facility are secured by a first priority lien on Priority Collateral, which includes all accounts receivable and deposit accounts, and a second priority lien on the Term Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. As of March 31, 2020, the weighted-average interest rate on our borrowings was 9.84%. At March 31, 2020, the borrowing base under our ABL Credit Facility was $20.1 million, and we had $8.6 million of availability remaining of our $40.0 million commitment on that date.
|
|
10.
|
Stock-Based Compensation
|
Prior to June 2019, we issued common stock-based awards to employees and non-employee directors under our 2012 Long-Term Incentive Plan adopted in March 2012 (the “2012 Plan”). In June 2019, we adopted the 2019 Omnibus Incentive Plan (the “2019 Plan”) providing for common stock-based awards to employees and non-employee directors. The 2019 Plan permits the granting of various types of awards, including stock options, restricted stock and restricted stock unit awards, and up to 275,000 shares were authorized for issuance. Restricted stock and restricted stock units may be granted for no consideration other than prior and future services. The purchase price per share for stock options may not be less than the market price of the underlying stock on the date of grant. As of March 31, 2020, approximately 87,532 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)
|
2020
|
|
2019
|
Compensation cost recognized:
|
|
|
|
Restricted stock and restricted stock units
|
570
|
|
|
387
|
|
Total stock-based compensation
|
$
|
570
|
|
|
$
|
387
|
|
No stock-based compensation was capitalized in connection with rig construction activity during the three months ended March 31, 2020 or 2019.
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, 2020 or 2019.
A summary of stock option activity and related information for the three months ended March 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
Outstanding at January 1, 2020
|
33,458
|
|
|
$
|
254.80
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
Forfeited/expired
|
—
|
|
|
—
|
|
Outstanding at March 31, 2020
|
33,458
|
|
|
$
|
254.80
|
|
Exercisable at March 31, 2020
|
33,458
|
|
|
$
|
254.80
|
|
The number of options vested at March 31, 2020 was 33,458 with a weighted average remaining contractual life of 2.0 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, 2020.
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, 2020, there was $3.0 million in unrecognized compensation cost related to unvested restricted stock awards. This cost is expected to recognized over a weighted-average period of 1.9 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, 2020 is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
Outstanding at January 1, 2020
|
62,817
|
|
|
$
|
64.40
|
|
Granted
|
—
|
|
|
—
|
|
Vested
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding at March 31, 2020
|
62,817
|
|
|
$
|
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 with no exercise price. The fair value of time-based restricted stock unit awards is determined based on the estimated fair market value of our shares on the grant date. As of March 31, 2020, there was $2.3 million of total unrecognized compensation cost related to unvested time-based restricted stock unit awards. This cost is expected to be recognized over a weighted-average period of 1.1 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, 2020 is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
RSUs
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
Outstanding at January 1, 2020
|
44,439
|
|
|
$
|
59.71
|
|
Granted
|
62,534
|
|
|
11.98
|
|
Vested and converted
|
(9,561
|
)
|
|
38.80
|
|
Forfeited
|
(3,031
|
)
|
|
38.80
|
|
Outstanding at March 31, 2020
|
94,381
|
|
|
$
|
30.88
|
|
Performance-Based and Market-Based Restricted Stock Units
We have granted three-year performance-based and market-based restricted stock unit awards, where each unit represents the right to receive, at the end of a vesting period, up to two shares of ICD common stock with no exercise price. Exercisability of the market-based restricted stock unit awards is based on our total shareholder return ("TSR") as measured against the TSR of a defined peer group and vesting of the performance-based restricted stock unit awards is based on our cumulative return on invested capital ("ROIC") as measured against ROIC performance goals determined by the compensation committee of our Board of Directors. 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, 2020, there was unrecognized compensation cost related to unvested performance-based or market-based restricted stock unit awards totaling $0.5 million. This cost is expected to be recognized over a weighted-average period of 1.3 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, 2020 is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
RSUs
|
|
Weighted
Average
Grant-Date
Fair Value
Per Share
|
Outstanding at January 1, 2020
|
23,480
|
|
|
$
|
33.90
|
|
Granted
|
24,854
|
|
|
12.50
|
|
Vested and converted
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding at March 31, 2020
|
48,334
|
|
|
$
|
22.90
|
|
|
|
11.
|
Stockholders’ Equity and Earnings (Loss) per Share
|
As of March 31, 2020, we had a total of 3,809,548 shares of common stock, $0.01 par value, outstanding. We also had 78,589 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)
|
2020
|
|
2019
|
Net loss (numerator):
|
$
|
(28,223
|
)
|
|
$
|
(2,373
|
)
|
Loss per share:
|
|
|
|
Basic and diluted
|
$
|
(7.53
|
)
|
|
$
|
(0.63
|
)
|
Shares (denominator):
|
|
|
|
Weighted average common shares outstanding - basic
|
3,750
|
|
|
3,785
|
|
Weighted average common shares outstanding - diluted
|
3,750
|
|
|
3,785
|
|
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, 2020 and 33,458 during the three months ended March 31, 2019. 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 142,715 for the three months ended March 31, 2020 and 20,480 for the three months ended March 31, 2019.
Our effective tax rate was 0.1% and 51.7% for the three months ended March 31, 2020 and 2019, respectively. Taxes in both periods relate to Louisiana state income tax and Texas margin tax. In the first quarter of 2020, the rate is largely driven by the recording of a valuation allowance against the Louisiana deferred tax assets, caused by the asset impairment recorded. In the first quarter of 2019, our effective tax rate was significantly higher based on our then full year forecast of net income before taxes and the application of our estimated annual rate to our year-to-date results. We finished 2019 with an annual effective rate of 0.2%.
|
|
13.
|
Commitments and Contingencies
|
Purchase Commitments
As of March 31, 2020, we had outstanding purchase commitments to a number of suppliers totaling $2.9 million related primarily to the operation of drilling rigs. All of these commitments relate to equipment and services currently scheduled for delivery in 2020.
Contingencies
We may be the subject of lawsuits and claims arising in the ordinary course of business from time to time. Management cannot predict the ultimate outcome of such lawsuits and claims. While lawsuits and claims are asserted for amounts that may be material should an unfavorable outcome be the result, management does not currently expect that the outcome of any of these known legal proceedings or claims will have a material adverse effect on our financial position or results of operations.
In conjunction with the closing of the Sidewinder Merger on October 1, 2018, we entered into the Term Loan Credit Agreement for an initial term loan in an aggregate principal amount of $130.0 million and a delayed draw term loan facility in an aggregate principal amount of up to $15.0 million. MSD PCOF Partners IV, LLC (an affiliate of MSD Partners) is the lender of our $130.0 million Term Loan Facility. MSD Partners, together with MSD Capital, own approximately 30% of the outstanding shares of the Company’s common stock as of March 31, 2020.
We made interest payments on the Term Loan Facility totaling $3.2 million and $3.3 million for the three months ended March 31, 2020 and 2019, 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 as assets held for sale with the Sidewinder unitholders receiving the net proceeds. We are required to make this payment to MSD, the shareholders’ representative, in the second quarter of 2020.