UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 6, 2018
Independence Contract Drilling, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware | 001-36590 | 37-1653648 | ||
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
20475 State Highway 249, Suite 300
Houston, Texas 77070
(Address of Principal Executive Offices)
Registrants telephone number, including area code: (281) 598-1230
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Item 8.01 Other Events
On July 18, 2018, Independence Contract Drilling, Inc. (the Company) entered into an Agreement and Plan of Merger, dated as of July 18, 2018 (the Merger Agreement), by and among the Company, Patriot Saratoga Merger Sub, LLC (Merger Sub), and Sidewinder Drilling LLC (Sidewinder or Successor). On October 1, 2018, pursuant to the Merger Agreement, the Company acquired Sidewinder in a transaction in which Merger Sub merged with and into Sidewinder, with Sidewinder surviving as a wholly owned subsidiary of the Company (the Merger). A copy of the Merger Agreement is filed as an exhibit to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission (the SEC) on July 19, 2018.
In connection with the Merger, the Company is filing herewith (i) the pro forma financial statements as Exhibit 99.1 and (ii) the unaudited interim financial statements of Sidewinder (and, for periods prior to February 15, 2017, its predecessor, Sidewinder Drilling Inc. (Predecessor)) as Exhibit 99.2.
Item 9.01 Financial Statements and Exhibits
(a) |
Financial statements.
| Unaudited financial statements of Sidewinder Drilling LLC comprised of the balance sheets as of December 31, 2017 and September 30, 2018 (Successor), the related statements of operations for the nine months ended September 30, 2018 (Successor), and the period from February 15, 2017 to September 30, 2017 (Successor), and the period from January 1, 2017 through February 15, 2017 (Predecessor), are included as Exhibit 99.2 hereto. |
(b) |
Pro forma financial information.
The following unaudited pro forma financial information of the Company, giving effect to the Merger and the related financing transactions, is included as Exhibit 99.1 hereto:
| Unaudited pro forma balance sheet as of September 30, 2018 |
| Unaudited pro forma statement of operations for the nine months ended September 30, 2018 and the year ended December 31, 2017 |
| Notes to the unaudited pro forma financial statements |
(d) |
Exhibits. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Date: November 6, 2018 |
INDEPENDENCE CONTRACT DRILLING, INC. | |||
By: |
/s/ Philip A. Choyce | |||
Name: Philip A. Choyce | ||||
Title: Executive Vice President & Chief Financial Officer |
Exhibit 99.1
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On July 18, 2018, we entered into a definitive merger agreement (the Merger Agreement) with Patriot Saratoga Merger Sub LLC, a Delaware limited liability company (Merger Sub), and Sidewinder Drilling LLC, a Delaware limited liability company (Sidewinder), pursuant to which Merger Sub merged with and into Sidewinder (the Merger) and we acquired all of the outstanding equity interests in Sidewinder on October 1, 2018.
Pursuant to the terms of the Merger Agreement, Sidewinder Series A members received 36,752,657 shares of the Companys common stock (the Specified Parent Common Stock) in exchange for 100% of the outstanding member units of Sidewinder. The Merger will be accounted for using the acquisition method of accounting with the Company identified as the accounting acquirer.
Sidewinder owns 15 AC drilling rigs and four modern 1500hp SCR rigs, each marketed or operating in the Permian or Haynesville plays. Sidewinder also owns four smaller 1000hp SCR rigs and one smaller 1000hp AC rig, which ICD will use for spare equipment and does not intend to market following the Merger.
In addition, Sidewinder owns 11 mechanical rigs and related equipment located in the Utica and Marcellus plays. As these rigs are not consistent with ICDs core strategy or geographic focus, ICD has agreed that these rigs can be disposed, with the Sidewinder unitholders receiving the net proceeds. Thus, in addition to the Specified Parent Common Stock, the Sidewinder Series A members will be entitled to receive such members share of any Mechanical Rig Net Sales (as defined by the Merger Agreement), payable in accordance with the Merger Agreement to the extent such proceeds were not either used to repay certain Sidewinder indebtedness or paid as a dividend to the Sidewinder members prior to the closing of the Merger.
The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2018 and the year ended December 31, 2017 combine the historical statements of operations of the Company and Sidewinder, giving effect to the Merger as if it had occurred on January 1, 2017. The unaudited pro forma condensed combined balance sheet as of September 30, 2018 combines the historical condensed balance sheets of the Company and Sidewinder, giving effect to the Merger as if it had occurred on September 30, 2018. The historical condensed consolidated financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give effect to events that are (1) directly attributable to the Merger, (2) factually supportable, and (3) with respect to the statements of operations, expected to have a continuing impact on the combined companys results. The unaudited pro forma condensed combined financial statements are based on and should be read in conjunction with:
| The Companys historical audited financial statements for the year ended December 31, 2017, included in the Companys Annual Report on Form 10-K for the year ended December 31, 2017 and the Companys historical unaudited financial statements for the quarterly period ended September 30, 2018 included in the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018. |
| Sidewinders historical audited financial statements as of and for the year ended December 31, 2017, which were filed as Exhibit 99.3 to the Companys Form 8-K filed on July, 2018, and Sidewinders historical unaudited financial statements as of and for the nine months ended September 30, 2018, which are filed as Exhibit 99.2 with this Current Report on Form 8-K. |
The unaudited pro forma condensed combined financial statements have been presented for informational purposes only. Such pro forma information is not necessarily indicative of what the combined companys financial position or results of operations actually would have been had the Merger been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future financial position or operating results of the combined company.
The unaudited pro forma condensed combined financial statements do not reflect any cost savings or operating synergies that the combined company may achieve as a result of the merger, the costs to integrate the operations of the Company and Sidewinder, or the costs necessary to achieve any such cost savings or operating synergies.
INDEPENDENCE CONTRACT DRILLING, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2018
ICD | Sidewinder | Reclass and Restructuring Adjustments |
Pro Forma Adjustments |
Pro Forma Combined |
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Assets |
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Cash and cash equivalents |
$ | 2,965 | $ | 10,744 | $ | | $ | (359 | ) | D | $ | 13,350 | ||||||||||||
Accounts receivable, net |
23,728 | 21,974 | | | 45,702 | |||||||||||||||||||
Inventories |
3,087 | | 274 | A | | 3,361 | ||||||||||||||||||
Assets held for sale |
3,898 | 525 | 20,162 | B | (15,662 | ) | E | 8,923 | ||||||||||||||||
Prepaid expenses and other current assets |
4,188 | 3,170 | (274 | ) | A | (1,952 | ) | F | 5,132 | |||||||||||||||
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Total current assets |
37,866 | 36,413 | 20,162 | (17,973 | ) | 76,468 | ||||||||||||||||||
Property, plant and equipment, net |
277,978 | 210,772 | (20,162 | ) | B | 25,437 | G | 494,025 | ||||||||||||||||
Goodwill |
| | | 2,500 | H | 2,500 | ||||||||||||||||||
Intangible assets, net |
| 1,866 | | (1,866 | ) | I | | |||||||||||||||||
Other long-term assets, net |
1,763 | 892 | | (551 | ) | J | 2,104 | |||||||||||||||||
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Total assets |
$ | 317,607 | $ | 249,943 | $ | | $ | 7,547 | $ | 575,097 | ||||||||||||||
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Liabilities and Stockholders Equity |
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Liabilities |
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Current portion of long-term debt |
$ | 575 | $ | | $ | | $ | | $ | 575 | ||||||||||||||
Accounts payable and accrued liabilities |
21,485 | 16,042 | | 11,937 | K | 49,464 | ||||||||||||||||||
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Total current liabilities |
22,060 | 16,042 | | 11,937 | 50,039 | |||||||||||||||||||
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Long-term debt |
68,631 | 151,678 | (93,442 | ) | C | 688 | L | 127,555 | ||||||||||||||||
Contingent consideration |
| | | 4,500 | M | 4,500 | ||||||||||||||||||
Deferred income taxes |
563 | 485 | | | 1,048 | |||||||||||||||||||
Other long-term liabilities |
632 | 1,287 | (1,286 | ) | C | | 633 | |||||||||||||||||
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Total liabilities |
91,886 | 169,492 | (94,728 | ) | 17,125 | 183,775 | ||||||||||||||||||
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Total equity |
225,721 | 80,451 | 94,728 | C | (9,578 | ) | N | 391,322 | ||||||||||||||||
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Total liabilities and equity |
$ | 317,607 | $ | 249,943 | $ | | $ | 7,547 | $ | 575,097 | ||||||||||||||
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See notes to unaudited pro forma condensed combined financial statements
INDEPENDENCE CONTRACT DRILLING, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018
ICD | Sidewinder | Mechanical Rigs (O) |
Pro Forma Adjustments |
Pro Forma Combined |
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Revenues |
$ | 79,820 | $ | 88,851 | $ | (3,424 | ) | $ | | $ | 165,247 | |||||||||||
Costs and expenses |
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Operating costs (1) |
55,312 | 68,470 | (1,432 | ) | | 122,350 | ||||||||||||||||
Selling, general and administrative |
10,877 | 9,474 | (1,152 | ) | | 19,199 | ||||||||||||||||
Merger expenses |
2,376 | 1,629 | | (4,005 | ) | P | | |||||||||||||||
Depreciation and amortization |
20,001 | 14,649 | (1,507 | ) | 240 | Q | 33,383 | |||||||||||||||
Asset impairment |
396 | 2,389 | | | 2,785 | |||||||||||||||||
Gain on disposition of assets, net |
(675 | ) | (145 | ) | (731 | ) | | (1,551 | ) | |||||||||||||
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Total cost and expenses |
88,287 | 96,466 | (4,822 | ) | (3,765 | ) | 176,166 | |||||||||||||||
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Operating (loss) income |
(8,467 | ) | (7,615 | ) | 1,398 | 3,765 | (10,919 | ) | ||||||||||||||
Interest expense |
(3,049 | ) | (12,711 | ) | | 5,207 | R | (10,553 | ) | |||||||||||||
Other income, net |
| 265 | | | 265 | |||||||||||||||||
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(Loss) income before income taxes |
(11,516 | ) | (20,061 | ) | 1,398 | 8,972 | (21,207 | ) | ||||||||||||||
Income tax (benefit) expense |
(120 | ) | 300 | 9 | | 189 | ||||||||||||||||
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Net (loss) income |
$ | (11,396 | ) | $ | (20,361 | ) | $ | 1,389 | $ | 8,972 | $ | (21,396 | ) | |||||||||
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Loss per share: |
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Basic and diluted |
$ | (0.30 | ) | $ | (0.29 | ) | ||||||||||||||||
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Weighted average number of common shares outstanding: |
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Basic and diluted |
38,210 | 36,753 | S | 74,963 | ||||||||||||||||||
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(1) | For Sidewinder, includes $2.1 million of rig reactivation costs. |
See notes to unaudited pro forma condensed combined financial statements
INDEPENDENCE CONTRACT DRILLING, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2017
ICD | Sidewinder Successor |
Sidewinder Predecessor |
Mechanical Rigs (O) |
Pro Forma Adjustments |
Pro Forma Combined |
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Revenues |
$ | 90,007 | $ | 93,320 | $ | 8,292 | $ | (9,211 | ) | $ | 2,289 | T | $ | 184,697 | ||||||||||||
Costs and expenses |
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Operating costs (1) |
67,733 | 67,224 | 9,641 | (6,195 | ) | | 138,403 | |||||||||||||||||||
Selling, general and administrative (2) |
13,213 | 9,900 | 8,119 | | | 31,232 | ||||||||||||||||||||
Depreciation and amortization |
25,844 | 18,347 | 4,748 | (2,335 | ) | (3,429 | ) | U | 43,175 | |||||||||||||||||
Asset impairments, net of insurance recoveries |
2,568 | 1,479 | | (1,165 | ) | | 2,882 | |||||||||||||||||||
Loss (gain) on disposition of assets, net |
1,677 | 59 | (3 | ) | (71 | ) | | 1,662 | ||||||||||||||||||
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Total cost and expenses |
111,035 | 97,009 | 22,505 | (9,766 | ) | (3,429 | ) | 217,354 | ||||||||||||||||||
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Operating (loss) income |
(21,028 | ) | (3,689 | ) | (14,213 | ) | 555 | 5,718 | (32,657 | ) | ||||||||||||||||
Interest expense |
(2,983 | ) | (13,600 | ) | (10,002 | ) | | 12,555 | V | (14,030 | ) | |||||||||||||||
Other income, net |
| 54 | | | | 54 | ||||||||||||||||||||
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(Loss) income before income taxes |
(24,011 | ) | (17,235 | ) | (24,215 | ) | 555 | 18,273 | (46,633 | ) | ||||||||||||||||
Income tax expense |
287 | 185 | 433 | 12 | 20 | W | 937 | |||||||||||||||||||
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Net (loss) income |
$ | (24,298 | ) | $ | (17,420 | ) | $ | (24,648 | ) | $ | 543 | $ | 18,253 | $ | (47,570 | ) | ||||||||||
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Loss per share: |
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Basic and diluted |
$ | (0.64 | ) | $ | (0.64 | ) | ||||||||||||||||||||
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Weighted average number of common shares outstanding: |
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Basic and diluted |
37,762 | 36,753 | S | 74,515 | ||||||||||||||||||||||
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(1) | For ICD, includes $1.1 million in rig reactivation costs. For Sidewinder, includes $3.7 million and $0.8 million of rig reactivation costs recorded in the Successor and Predecessor periods, respectively, and $0.7 million and $0.2 million in restructuring charges in the Successor and Predecessor periods, respectively. |
(2) | For Sidewinder, includes restructuring charges of $1.4 million and $7.5 million in the Successor and Predecessor periods, respectively. |
See notes to unaudited pro forma condensed combined financial statements
INDEPENDENCE CONTRACT DRILLING, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. | Description of Transaction |
On July 18, 2018, Independence Contract Drilling, Inc. (the Company or ICD), Patriot Saratoga Merger Sub, LLC, a wholly owned subsidiary of the Company (Merger Sub), Sidewinder Drilling, LLC (Sidewinder) and MSD Credit Opportunity Master Fund, L.P., as Members Representative, entered into a definitive merger agreement (the Merger Agreement) pursuant to which Merger Sub will merge with and into Sidewinder (the Merger), with Sidewinder surviving the merger and becoming a wholly owned subsidiary of the Company. The Merger transaction was completed on October 1, 2018. Pursuant to the terms of the Merger Agreement, Sidewinder Series A members received 36,752,657 shares of the Companys common stock (the Specified Parent Common Stock) in exchange for 100% of the outstanding Series A Common Units of Sidewinder (the Series A Common Units). The Merger will be accounted for using the acquisition method of accounting with the Company identified as the accounting acquirer. The Series C Units of Sidewinder will be cancelled pursuant to the Merger Agreement.
Sidewinder owns 15 AC drilling rigs and four modern 1500hp SCR rigs, each marketed or operating in the Permian or Haynesville plays. Sidewinder also owns four smaller 1000hp SCR rigs and one smaller 1000hp AC rig, which ICD will use for spare equipment and does not intend to market following the Merger.
In addition, Sidewinder owns 11 mechanical rigs and related equipment located in the Utica and Marcellus plays. As these rigs are not consistent with ICDs core strategy or geographic focus, ICD has agreed that these rigs can be disposed, with the Sidewinder unitholders receiving the net proceeds. Thus, in addition to the Specified Parent Common Stock, the Sidewinder Series A Members will be entitled to receive such members share of any Mechanical Rig Net Sales (as defined by the Merger Agreement), payable in accordance with the Merger Agreement to the extent such proceeds were not either used to repay certain Sidewinder indebtedness or paid as a dividend to the Sidewinder members prior to the closing of the Merger.
In order to finance (i) a portion of the consideration of the Merger and to pay fees, commissions, severance and other expenses and costs related thereto, (ii) the repayment of a fixed amount of outstanding Sidewinders first lien notes ($58.5 million), (iii) the repayment of any Sidewinder debt under its revolving credit agreement, (iv) the repayment of the Companys debt under its revolving credit agreement and (v) other transaction expenses, the Company incurred indebtedness of $130.0 million pursuant to the new Credit Facilities as defined below.
In conjunction with the closing of the Sidewinder Merger on October 1, 2018, we entered into a term loan Credit Agreement (the Term Loan Credit Agreement) for an initial term loan in an aggregate principal amount of $130.0 million, (the Term Loan Facility) and (b) a delayed draw term loan facility in an aggregate principal amount of up to $15.0 million (the DDTL Facility, and together with the Term Loan Facility, the Term Facilities). The Term Facilities have a maturity date of October 1, 2023, at which time all outstanding principal under the Term Facilities and other obligations become due and payable in full. Proceeds from the Term Loan Facility were used to repay our existing debt and the Sidewinder debt assumed in the Sidewinder Merger, as well as certain transaction costs.
At our election, interest under the Term Loan Facility is determined by reference at our option to either (i) a base rate equal to the higher of (a) the federal funds effective rate plus 0.05%, (b) the London Interbank Offered Rate with an interest period of one month (LIBOR), plus 1.0%, and (c) the rate of interest as publicly quoted from time to time by the Wall Street Journal as the prime rate in the United States; plus an applicable margin of 6.5%, or (ii) a LIBOR rate equal to LIBOR with an interest period of one month, plus an applicable margin of 7.5%.
The Term Loan Credit Agreement contains financial covenants, including a liquidity covenant of $10.0 million and a fixed charge coverage ratio of 1.00 to 1.00 when availability under the New 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 New ABL Credit Facility or other material agreements for indebtedness, and a change of control (as defined).
The obligations under the Term Loan Credit Agreement are secured by a first priority lien on collateral (the Term Priority Collateral) other than accounts receivable, deposit accounts and other related collateral pledged as first priority collateral (Priority Collateral) under the New 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.
Additionally, in connection with the closing of the Sidewinder Merger on October 1, 2018, we entered into a $40.0 million revolving Credit Agreement (the New 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 New ABL Credit Facility is subject to a borrowing base determined based on 85% of the net amount of our eligible accounts receivable, minus reserves. The New 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 New 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 New ABL Credit Facility commitment.
The New ABL Credit Facility contains a financial covenant with a fixed charge coverage ratio of 1.00 to 1.00 that is tested when availability is less than 10% of the maximum credit. The New 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 New 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.
The obligations under New 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. We collectively refer to the Term Facilities and the New ABL Credit Facility as the Credit Facilities.
On July 18, 2018, Sidewinder, all of the holders of their Series A Common Units, all of the holders of their Secured Notes due February 15, 2020 (First Lien Notes) and all of the holders of their Amended and Restated Secured Notes due February 15, 2020 (Second Lien Notes) entered into the Contribution, Exchange and Restructuring Agreement. Pursuant to the agreement and immediately prior to the closing of the Merger, the holders of the First Lien Notes contributed a portion of their notes, and the holders of the Second Lien Notes contributed all of their notes, in each case together with accrued and unpaid interest, in exchange for newly issued Series A Common Units of Sidewinder.
2. | Basis of Presentation |
The unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and are not intended to represent the consolidated results of operations or financial position of the combined company that would have been recorded had the merger been completed as of the dates presented and should not be taken as representative of future results of operations or financial position of the combined company. The unaudited pro forma condensed combined financial statements do not reflect the impacts of any potential operational efficiencies, cost savings or economies of scale that the combined company may achieve with respect to the combined operations of the Company and Sidewinder. Additionally, the pro forma statements of operations do not include non-recurring expenses or gains and the related tax effects that result directly from the Merger. The Merger represents a change of control as defined under the Companys 2012 Omnibus Long-Term Incentive Plan, which will result in the vesting or forfeiture of all of the Companys outstanding stock-based compensation awards. This will result in a non-cash charge estimated at $2.6 million that is not reflected in these unaudited pro forma condensed combined financial statements.
The Merger is reflected in the unaudited pro forma condensed combined financial statements using the acquisition method of accounting. As such, the total estimated purchase price as described in Note 3, was measured at the closing date of the Merger using the market price of the Companys common stock on that date. The assets and liabilities of Sidewinder have been adjusted to fair value based on various preliminary estimates using assumptions that the Companys management believes are reasonable and using information that is currently available. Additional information may become available that could materially affect these estimates. Further, many of these fair value measurements can be highly subjective, and it is possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts. To the extent these preliminary estimates are refined and revised based on updated information, materially different values may result.
An excess of the purchase price over the estimated fair values of identified assets and liabilities will be allocated to goodwill, while a shortfall will be recognized as a bargain purchase gain.
Further review of Sidewinders accounting policies and financial statement presentation may result in revisions to Sidewinders historical presentation and classification to conform to the Companys presentation and classification.
The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical financial statements of the Company and accompanying notes filed in the Companys Annual Report on Form 10-K for the year ended December 31, 2017, and the Companys Quarterly Report on Form 10-Q for the nine months ended September 30, 2018, as well as Sidewinders historical financial statements and accompanying notes included in Exhibit 99.3 of the Companys Form 8-K filed in July 31, 2018 and Exhibit 99.3 to this Form 8-K.
3. | Merger Related Consideration and Purchase Price Allocation |
Under the terms of the Merger Agreement, the Company issued an aggregate 36,752,657 shares of the Companys common stock in exchange for 100% of the outstanding Sidewinder member units. Additionally, the Company repaid $58.5 million of Sidewinders existing indebtedness at the closing of the Merger. Using the closing price of $4.71, the Companys common stock on October 1, 2018, the following represents the merger-related consideration:
(in thousand, except share price) |
||||
Equity consideration: |
||||
Number of shares of ICD stock to be issued |
36,753 | |||
ICD common share price on October 1, 2018 |
$ | 4.71 | ||
|
|
|||
Equity consideration |
$ | 173,105 | ||
Other consideration: |
||||
Sidewinder existing indebtedness repaid by ICD |
$ | 58,512 | ||
|
|
|||
Estimated merger consideration |
$ | 231,617 | ||
|
|
The following is a preliminary allocation of the merger-related consideration to the assets acquired and liabilities assumed:
(in thousand) |
||||
Current assets |
$ | 38,961 | ||
Non-current assets |
216,598 | |||
|
|
|||
Total assets acquired |
255,559 | |||
Liabilities assumed or created |
(26,442 | ) | ||
|
|
|||
Net assets acquired excluding goodwill |
229,117 | |||
Goodwill |
2,500 | |||
|
|
|||
Net assets acquired |
$ | 231,617 | ||
|
|
When the consideration transferred in an acquisition exceeds the fair value assigned to the net assets acquired, the difference is reflected as goodwill. The amount of goodwill recorded in the transaction is highly dependent on the finalization of appraisals and other fair value determinations that have not yet been completed, and is therefore subject to change.
4. | Adjustments |
A. Represents a reclass of Sidewinder inventories to conform to the Companys presentation.
B. Represents a reclassification of Sidewinders mechanical rigs from property, plant and equipment, net to assets held for sale. The Companys business strategy is focused entirely on the operation of pad-optimal drilling rigs within the geographic areas of Texas and its contiguous states, which differs from Sidewinders historical business strategy, which included the marketing of mechanical rigs, as well as operations in the Utica and Bakken resource plays. Pursuant to the merger agreement, these rigs will not be operated by the Company, but will be held for sale, with 100% of any net proceeds being paid to the members of Sidewinder.
C. Represents the conversion of $93.4 million of Sidewinders historical indebtedness, along with accrued and unpaid interest, to equity just prior to, and in connection with, the merger transaction pursuant to Sidewinders Contribution, Exchange and Restructuring Agreement.
D. Represents the pro forma adjustments to cash and cash equivalents as follows (in thousands):
Proceeds from new term loan |
$ | 130,000 | ||
Repayment of ICD credit facility |
(67,917 | ) | ||
Repayment of $58.5 million of Sidewinder historical indebtedness |
(58,512 | ) | ||
Repayment of ICD accrued interest |
(125 | ) | ||
Payment of debt issuance costs on new revolving credit facility |
(646 | ) | ||
Payment of debt issuance costs on new term loan (1) |
(3,159 | ) | ||
|
|
|||
$ | (359 | ) | ||
|
|
(1) | Includes 2% commitment fee plus estimated expenses. |
The pro forma adjustments to cash and cash equivalents reflect the proceeds of the new term loan, which will be used primarily to repay the historical indebtedness of the Company and Sidewinder, together with accrued and unpaid interest, as well as to pay the related debt issuance costs on the new Term Loan Facility and the new ABL Credit Facility.
E. To reduce the carrying amount of the mechanical rigs held for sale for the benefit of the Sidewinder members to their estimated fair value less the estimated costs to sell to sell the rigs.
F. To eliminate Sidewinders historical deferred expenses associated with drilling contracts related to deferred mobilization costs.
G. Represents the pro forma adjustment to record Sidewinder property plant and equipment at its estimated fair value, excluding the mechanical rigs that will not be operated by the Company and have been reclassified to assets held for sale.
H. To record goodwill for the excess of the consideration transferred over the preliminary fair value assigned to the net assets acquired.
I. To eliminate the historical intangible assets of Sidewinder.
J. Represents the pro forma adjustments to other long-term assets, net as follows (in thousands):
Elimination of ICDs historical debt issuance costs |
$ | (856 | ) | |
Elimination of Sidewinders historical debt issuance costs |
(341 | ) | ||
To record debt issuance costs on new revolving credit facility |
646 | |||
|
|
|||
$ | (551 | ) | ||
|
|
K. Represents the pro forma adjustments to accounts payable and accrued liabilities as follows (in thousands):
Estimate of additional ICD transaction costs |
$ | 6,648 | ||
Estimate of additional Sidewinders transaction costs |
3,789 | |||
Elimination of accrued interest from repayment of ICD debt |
(125 | ) | ||
Elimination of Sidewinders historical deferred revenues |
(1,057 | ) | ||
Estimated fair value of Sidewinders drilling contracts |
2,682 | |||
|
|
|||
$ | 11,937 | |||
|
|
The pro forma adjustment for the Companys transaction costs include advisory and legal fees, as well as retention and severance payments. These amounts will be expensed as incurred, and while not reflected in the unaudited pro forma condensed combined statements of operations because they will not have a continuing impact to the combined companys results of operations, they are however reflected as an adjustment to retained earnings on the pro forma balance sheets.
The pro forma adjustment of Sidewinder transaction costs include advisory and legal fees as well as amounts relating to employee benefits such as change in control payments. These amounts will be expensed by Sidewinder as incurred and are not reflected in the unaudited pro forma condensed combined statements of operations because they will not have a continuing impact to the combined companys results of operations.
The pro forma adjustment to eliminate Sidewinder historical deferred revenues are primarily related to mobilization revenues that were previously paid by a customer as compensation to mobilize a rig to the drilling location. Such payments are deferred and amortized over the term of the related drilling contract. The deferred revenue does not represent future obligations of the Company and are eliminated from the pro forma financial statements.
The pro forma adjustment to record the estimated fair value of Sidewinder drilling contracts represents the intangible liabilities recognized for drilling contracts in place at the pro forma balance sheet date that have unfavorable contract terms as compared to current market day rates for comparable drilling rigs. The various factors considered in the pro forma adjustment are (1) the contracted day rate for each contract, (2) the remaining term of each contract, (3) the rig class and (4) the market conditions for each respective rig class at the pro forma balance sheet date. The intangible liabilities are computed based on the present value of the difference in cash inflows over the remaining contract term as compared to a hypothetical contract with the same remaining term at an estimated current market day rate using a risk-adjusted discount rate. The computed amount is subject to change based on contract positions and market conditions at the closing date of the merger. This balance will be amortized to operating revenues over the remaining contract terms on a straight-line basis. The remaining terms of these contracts range from 1 to 14 months, with a weighted average term of approximately 4 months.
L. Represents the pro forma adjustments to long-term debt as follows (in thousands):
To record new term loan |
$ | 130,000 | ||
Repayment of ICD credit facility |
(67,917 | ) | ||
Repayment of $58.5 million of Sidewinder historical indebtedness |
(58,512 | ) | ||
Elimination of Sidewinders historical debt issuance costs |
276 | |||
To record debt issuance costs on new term loan |
(3,159 | ) | ||
|
|
|||
$ | 688 | |||
|
|
M. To record the contingent consideration expected to be paid to the members of Sidewinder upon the sale of the mechanical rigs. This amount has been recorded at the estimated fair value of the mechanical rigs less the expected costs to sell.
N. Represents the pro forma adjustments to total equity as follows (in thousands):
Elimination of Sidewinders historical equity, including debt conversion |
$ | (175,179 | ) | |
ICD shares issued as merger consideration, par value |
368 | |||
ICD shares issued as merger consideration, additional paid-in capital |
172,737 | |||
Estimated additional ICD transaction costs |
(6,648 | ) | ||
Write-off of ICD historical debt issuance costs |
(856 | ) | ||
|
|
|||
$ | (9,578 | ) | ||
|
|
O. To eliminate the historical results of operations for the Sidewinder mechanical rigs that will not be operated by the Company, and are expected to be disposed of after the closing of the Merger.
P. To eliminate merger expenses associated with the transaction.
Q. Represents the pro forma adjustments to depreciation expense as follows (in thousands):
Eliminate the historical depreciation and intangible amortization expense of Sidewinder |
$ | (13,142 | ) | |
Depreciation expense on Sidewinders assets at fair value conformed ICD depreciation policies |
13,382 | |||
|
|
|||
$ | 240 | |||
|
|
The pro forma depreciation adjustments relate to the pro forma adjustment to record the estimated fair value of Sidewinders drilling rigs and related equipment after conforming depreciable lives and salvage values and computing depreciation using the straight-line method. The Sidewinder rigs were depreciated over their remaining estimated useful lives of between 5 and 13 years for these unaudited pro forma condensed combined financial statements.
R. Represents the pro forma adjustments to interest expense as follows (in thousands):
Eliminate the historical interest expense of Sidewinder. |
$ | 12,711 | ||
Eliminate the historical interest expense associated with ICD credit facility |
2,956 | |||
Record interest expense and amortization of debt issuance costs related to new term loan |
(10,250 | ) | ||
Record amortization of debt issuance costs related to new revolving credit facility |
(210 | ) | ||
|
|
|||
$ | 5,207 | |||
|
|
The new term loan bears interest at LIBOR plus 7.5%, and a rate of 9.9% was assumed for these unaudited pro forma condensed combined financial statements.
S. Represents the pro forma adjustment for the Companys shares of common stock issued to Sidewinder Series A members upon closing of the Merger.
T. To record the amortization of the intangible liability associated with Sidewinders drilling contracts that were at dayrates that were below the required returns on working capital, fixed assets and an assembled workforce, as if it had been amortized beginning on January 1, 2017.
U. Represents the pro forma adjustments to depreciation expense as follows (in thousands):
Eliminate the historical depreciation and intangible amortization expense of Sidewinder |
$ | (20,760 | ) | |
Depreciation expense on Sidewinders assets at fair value conformed ICD depreciation policies |
17,331 | |||
|
|
|||
$ | (3,429 | ) | ||
|
|
The pro forma depreciation adjustments relate to the pro forma adjustment to record the estimated fair value of Sidewinders drilling rigs and related equipment after conforming depreciable lives and salvage values and computing depreciation using the straight-line method. The Sidewinder rigs were depreciated over their remaining estimated useful lives of between 5 and 13 years for these unaudited pro forma condensed combined financial statements.
V. Represents the pro forma adjustments to interest expense as follows (in thousands):
Eliminate the historical interest expense of Sidewinder. |
$ | 23,602 | ||
Eliminate the historical interest expense associated with ICD credit facility |
2,899 | |||
Record interest expense and amortization of debt issuance costs related to new term loan |
(13,667 | ) | ||
Record amortization of debt issuance costs related to new revolving credit facility |
(279 | ) | ||
|
|
|||
$ | 12,555 | |||
|
|
The new term loan bears interest at LIBOR plus 7.5%, and a rate of 9.9% was assumed for these unaudited pro forma condensed combined financial statements.
W. To record the tax impact of the pro forma adjustments.
Exhibit 99.2
SIDEWINDER DRILLING LLC
CONDENSED BALANCE SHEET
(in thousands)
(UNAUDITED)
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 10,744 | $ | 9,987 | ||||
Accounts receivable, net |
21,974 | 20,037 | ||||||
Other receivables |
179 | 643 | ||||||
Assets held for sale |
525 | 1,650 | ||||||
Prepaid expenses and other current assets |
2,991 | 6,831 | ||||||
|
|
|
|
|||||
TOTAL CURRENT ASSETS |
36,413 | 39,148 | ||||||
|
|
|
|
|||||
Property and equipment, net |
210,772 | 217,155 | ||||||
Intangible assets, net |
1,866 | 2,376 | ||||||
Goodwill |
| 2,325 | ||||||
Deferred financing costs, net |
341 | 568 | ||||||
Other assets |
551 | 749 | ||||||
|
|
|
|
|||||
TOTAL ASSETS |
$ | 249,943 | $ | 262,321 | ||||
|
|
|
|
|||||
LIABILITIES and EQUITY |
||||||||
Accounts payable |
$ | 5,438 | $ | 6,958 | ||||
Accrued interest |
| 284 | ||||||
Other current liabilities |
10,604 | 5,623 | ||||||
|
|
|
|
|||||
TOTAL CURRENT LIABILITIES |
16,042 | 12,865 | ||||||
|
|
|
|
|||||
Long-term debt |
151,678 | 147,214 | ||||||
Deferred tax liability |
485 | 185 | ||||||
Other long-term liabilities |
1,287 | 1,235 | ||||||
|
|
|
|
|||||
TOTAL LIABILITIES |
169,492 | 161,499 | ||||||
|
|
|
|
|||||
EQUITY |
||||||||
Members equity |
118,232 | 118,242 | ||||||
Accumulated deficit |
(37,781 | ) | (17,420 | ) | ||||
|
|
|
|
|||||
TOTAL EQUITY |
80,451 | 100,822 | ||||||
|
|
|
|
|||||
TOTAL LIABILITIES and EQUITY |
$ | 249,943 | $ | 262,321 | ||||
|
|
|
|
See accompanying notes.
1
SIDEWINDER DRILLING LLC
CONDENSED STATEMENTS OF OPERATIONS
(in thousands)
(UNAUDITED)
Successor | Predecessor | |||||||||||||
Nine months | Period from | Period from | ||||||||||||
ended | February 15 to | January 1 | ||||||||||||
September 30, 2018 |
September 30, 2017 |
through February 15, 2017 |
||||||||||||
OPERATING REVENUE |
||||||||||||||
Contract drilling revenue |
$ | 77,634 | $ | 46,612 | $ | 7,362 | ||||||||
Other operating revenue |
11,217 | 19,781 | 930 | |||||||||||
|
|
|
|
|
|
|||||||||
TOTAL OPERATING REVENUE |
88,851 | 66,393 | 8,292 | |||||||||||
|
|
|
|
|
|
|||||||||
OPERATING COSTS AND EXPENSES |
||||||||||||||
Operating and maintenance |
68,470 | 49,106 | 9,641 | |||||||||||
Selling, general and administrative |
9,474 | 6,462 | 8,119 | |||||||||||
Depreciation and amortization |
14,649 | 13,409 | 4,748 | |||||||||||
Acquisition costs |
1,629 | | | |||||||||||
Impairment charge |
2,389 | 314 | | |||||||||||
Net (gain) loss on asset disposals |
(145 | ) | 174 | (3 | ) | |||||||||
|
|
|
|
|
|
|||||||||
TOTAL COSTS AND EXPENSES |
96,466 | 69,465 | 22,505 | |||||||||||
|
|
|
|
|
|
|||||||||
OPERATING LOSS |
(7,615 | ) | (3,072 | ) | (14,213 | ) | ||||||||
OTHER INCOME (EXPENSE) |
||||||||||||||
Interest expense |
(12,711 | ) | (9,569 | ) | (10,002 | ) | ||||||||
Gain on extinguishment of debt |
219 | | | |||||||||||
Other income, net |
46 | 39 | | |||||||||||
|
|
|
|
|
|
|||||||||
TOTAL OTHER EXPENSE, NET |
(12,446 | ) | (9,530 | ) | (10,002 | ) | ||||||||
|
|
|
|
|
|
|||||||||
LOSS BEFORE INCOME TAXES |
(20,061 | ) | (12,602 | ) | (24,215 | ) | ||||||||
Income tax expense |
300 | 148 | 433 | |||||||||||
|
|
|
|
|
|
|||||||||
NET INCOME (LOSS) |
$ | (20,361 | ) | $ | (12,750 | ) | $ | (24,648 | ) | |||||
|
|
|
|
|
|
See accompanying notes.
2
SIDEWINDER DRILLING LLC
CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
(UNAUDITED)
Successor | Predecessor | |||||||||||||
Period from | ||||||||||||||
Nine Months | February 15 | |||||||||||||
Ended | through | Period from | ||||||||||||
September 30, | September 30, | January 1 to | ||||||||||||
2018 | 2017 | February 15, 2017 | ||||||||||||
Cash flows from operating activities |
||||||||||||||
Net loss |
$ | (20,361 | ) | $ | (12,750 | ) | $ | (24,648 | ) | |||||
Adjustments to reconcile net loss to net cash (provided by) operating activities: |
||||||||||||||
Depreciation and amortization |
14,649 | 13,409 | 4,748 | |||||||||||
Impairment charge |
2,389 | 314 | | |||||||||||
Net gain on asset disposals |
(145 | ) | 174 | (3 | ) | |||||||||
Amortization of other long-term liability |
(395 | ) | (14,330 | ) | | |||||||||
Amortization of deferred financing costs and discounts on long-term debt |
377 | 124 | 254 | |||||||||||
Deferred mobilization costs |
751 | (1,503 | ) | (295 | ) | |||||||||
Deferred revenue |
(3 | ) | 1,178 | 270 | ||||||||||
Bad debt expense |
1,129 | (57 | ) | (1,050 | ) | |||||||||
Deferred income taxes benefit |
300 | 148 | (2,015 | ) | ||||||||||
Debt issuance costs |
| | | |||||||||||
Other, net |
(2 | ) | | (9 | ) | |||||||||
Net change in operating assets and liabilities: |
||||||||||||||
Accounts receivable |
(2,998 | ) | (7,107 | ) | (3,063 | ) | ||||||||
Other receivables |
464 | (286 | ) | (143 | ) | |||||||||
Prepaid expenses and other current assets |
3,221 | 1,585 | (776 | ) | ||||||||||
Other assets |
65 | (3,626 | ) | 8 | ||||||||||
Accounts payable and other current liabilities |
3,868 | (11,193 | ) | 9,438 | ||||||||||
Accrued interest |
11,147 | 8,231 | 9,572 | |||||||||||
|
|
|
|
|
|
|||||||||
Net cash (provided by) operating activities |
14,456 | (25,689 | ) | (7,712 | ) | |||||||||
|
|
|
|
|
|
|||||||||
Cash flows from investing activities |
||||||||||||||
Capital expenditures |
(10,444 | ) | (2,606 | ) | (1,014 | ) | ||||||||
Proceeds from sale of property and equipment |
3,394 | 437 | 3 | |||||||||||
Insurance proceeds |
| | ||||||||||||
|
|
|
|
|
|
|||||||||
Net cash (used in) investing activities |
(7,050 | ) | (2,169 | ) | (1,011 | ) | ||||||||
|
|
|
|
|
|
|||||||||
Cash flows from financing activities |
||||||||||||||
Proceeds from debt issuance |
| 80,000 | | |||||||||||
Payment of debt issuance costs |
| (600 | ) | | ||||||||||
Repayments under revolving credit agreements |
(120 | ) | (27,112 | ) | 2,098 | |||||||||
Borrowings under revolving credit agreements |
149 | (17,601 | ) | | ||||||||||
Repayment of debt |
(6,678 | ) | | | ||||||||||
|
|
|
|
|
|
|||||||||
Net cash (used in) by financing activities |
(6,649 | ) | 34,687 | 2,098 | ||||||||||
|
|
|
|
|
|
|||||||||
Net change in cash and cash equivalents |
757 | 6,829 | (6,625 | ) | ||||||||||
Cash and cash equivalents at beginning of period |
9,987 | 2,890 | 9,515 | |||||||||||
|
|
|
|
|
|
|||||||||
Cash and cash equivalents at end of period |
$ | 10,744 | $ | 9,719 | $ | 2,890 | ||||||||
|
|
|
|
|
|
|||||||||
Non-cash activities: |
||||||||||||||
Change in accounts payable and other current liabilities related to capital expenditures |
$ | (433 | ) | $ | (75 | ) | $ | (99 | ) | |||||
Change in long-term debt and interest payable related to interest paid-in-kind |
$ | 10,983 | $ | 7,277 | $ | | ||||||||
Accounts and other receivables for sale of property and equipment |
$ | (68 | ) | $ | (367 | ) | $ | |
See accompanying notes.
3
SIDEWINDER DRILLING LLC
CONDENSED STATEMENT OF EQUITY
(in thousands, except units)
(UNAUDITED)
Series A Units | Series C Units | Accumulated Deficit |
Total Equity |
|||||||||||||||||||||
Units | Value | Units | Value | |||||||||||||||||||||
Balance, February 15, 2017 |
| $ | | | $ | | $ | | $ | | ||||||||||||||
Issuance of Units |
950 | 116,355 | 96.271 | 1,887 | | 118,242 | ||||||||||||||||||
Net Gain/(Loss) |
| | | | (17,420 | ) | (17,420 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, December 31, 2017 |
950 | 116,355 | 96.271 | 1,887 | (17,420 | ) | 100,822 | |||||||||||||||||
Q3 Distribution |
(10 | ) | (10 | ) | ||||||||||||||||||||
Net Gain/(Loss) |
| | | (20,361 | ) | (20,361 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, September 30, 2018 |
950 | $ | 116,355 | 96.271 | $ | 1,877 | $ | (37,781 | ) | $ | 80,451 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
SIDEWINDER DRILLING LLC
Notes to Condensed Financial Statements
September 30, 2018
1. Nature of Business
Sidewinder Drilling LLC (Sidewinder Drilling, we, us, our or the Company) was formed on January 31, 2017 as a Delaware limited liability company. On February 15, 2017, Sidewinder Drilling Inc. (SDI), a Delaware corporation, merged with and into the Company (hereafter the Merger) with the Company as the surviving entity. The Merger was accounted for using the acquisition method of accounting as more fully described in Note 4. The assets acquired and liabilities assumed of SDI are recorded at their fair values on the date of the Merger, which differed materially from the recorded values of its assets and liabilities as reflected in the historical financial statements of SDI. Accordingly, our financial condition and results of operations after the date of the Merger may not be comparable to the financial condition and results of operations of SDI prior to the date of the Merger.
At September 30, 2018, we own and market 35 rigs in two areas including the Texas market (the Delaware, Midland and Eagle Ford Basins) and Mid-Continent (Haynesville, Mississippi Lime, Woodford, and Fayetteville Basins),
SDI was formed in 2011 by our management team and a private equity investor to build, own and operate premium land drilling rigs and to provide contract drilling services to exploration and production (E&P) companies targeting unconventional resource plays in North America.
References to Successor refer to the Company on and subsequent to February 15, 2017. The Company was inactive until the Merger. References to Predecessor refer to SDI on and prior to February 15, 2017. This report contains the financial statements as of September 30, 2018 and December 31, 2017, the nine months ending September 30, 2018 and the period from February 15, 2017 to September 30, 2017 (all Successor), and the period from January 1, 2017 to February 15, 2017 (Predecessor).
2. Significant Accounting Policies
Basis of Presentation
We have prepared our accompanying unaudited financial statements in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. Pursuant to such rules, these financial statements do not include all disclosures required by GAAP for complete financial statements. The unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. Such adjustments are considered to be of a normal recurring nature unless otherwise noted. Operating results of the Company for the period ended September 30, 2018 are not necessarily indicative of the results that may be expected for the period ending December 31, 2018, or for any future period. The accompanying unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in our 2017 Annual Report.
The information in Note 2 is applicable to the financial statements of both the Company and SDI, unless otherwise indicated. The results of operations and cash flows presented for the period January 1 through February 15, 2017 (Predecessor) include all transactions for the period immediately prior to the Merger as well as the U.S. federal and state income tax provisions of SDI related to the merger transactions.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation, with no effect on previously reported net income (loss) or cash flows.
Accounting Estimates
To prepare financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP), we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses and the disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including those related to our allowance for doubtful accounts receivable, property and equipment, intangible assets, impairment of long-lived assets, income taxes, insurance claims liabilities, and contingencies. We base our estimates and assumptions on managements historical experience and on various other information we believe is supportable and reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from such estimates. We may be required to recognize additional losses in future periods related to impairment of long-lived assets if significant unfavorable changes occur to actual or projected dayrates, rig utilization or operating costs.
5
SIDEWINDER DRILLING LLC
Notes to Condensed Financial Statements
September 30, 2018
Assets Held for Sale
As of September 30, 2018, assets held for sale of $0.53 million include the estimated fair value less costs to sell of an idle facility. As of December 31, 2017, assets held for sale of $1.65 million included the estimated value less costs to sell of three idle properties, including land and buildings totaling $1.38 million, and of three mechanical drilling rigs totaling $0.27 million. During the first quarter of 2018, the Company sold two of the properties and the three mechanical drilling rigs, received proceeds totaling $1.24 million, and recorded a gain on the disposals of assets held for sale of $0.2 million.
Pursuant to the merger, Sidewinder has left the Appalachian market (Marcellus and Utica) and is facilitating the sales of the mechanical rigs utilized therein. Proceeds for Asset Sales relating to the Appalachian market will be return to the Sidewinder Drilling LLC members less the cost associated with the sale.
Operating Revenue and Costs
Contract drilling revenues are recognized as they are earned, based on contractual daily rates. Revenues earned related to mobilization and capital upgrades are deferred and recognized over the estimated primary contract term on a straight-line basis, which is consistent with the general pace of activity, level of services being provided and dayrates being earned over the life of the contract. Upon completion of drilling contracts, any demobilization fees received are recognized in our statement of operations, as are any related expenses.
Other operating revenue includes revenue from recharges. Revenue from recharges are billings to our customers for reimbursement of equipment rentals, supplies, third-party services, client requested incentive compensation paid to our employees and other expenses that we recognize in operating and maintenance costs, the result of which has little effect on operating income.
The actual costs incurred for capital upgrades are capitalized and depreciated over the estimated useful life of the related asset. For the initial mobilization of newly constructed assets, the related costs to mobilize the rig to its first operating location are capitalized and depreciated over the estimated useful life of the asset. For subsequent drilling contracts, the incremental costs directly related to contract preparation and mobilization are deferred and amortized over the estimated primary term of the drilling contract on a straight-line basis. The costs of relocating assets without contracts are expensed as incurred.
Income Taxes (Successor)
The Company is a limited liability company treated as a partnership for income tax purposes and, as such, is a pass-through entity that is not liable for income tax in the jurisdictions in which it operates, with the exception of the state of Texas, where limited liability companies are subject to Texas margin tax.
Income Taxes (Predecessor)
SDI recorded deferred tax assets and liabilities for the future tax consequences of temporary differences between the basis of existing assets and liabilities calculated according to GAAP and their respective basis for income tax purposes. A deferred tax asset was reduced by a valuation allowance when, based on the SDIs estimates, it was more likely than not that a portion of those assets would not be realized in a future period. SDI recognized interest and penalties relating to income tax matters as a component of income tax expense.
Subsequent Events
We evaluated subsequent events through November 1, 2018, the date our financial statements were available to be issued.
On July 19, 2018, we announced our entry into a definitive merger agreement (the Merger Agreement) with Patriot Saratoga Merger Sub LLC, a Delaware limited liability company (Merger Sub) and Independence Contract Drilling, Inc., a Delaware corporation (ICD), pursuant to which Merger Sub merged with and into the Company on October 1, 2018 (the Merger). During the nine months ended September 30, 2018, we recorded $1.629 million of merger costs in connection with the Merger comprised primarily of legal and professional fees.
The Merger combined two complementary pad-optimal drilling fleets with operations focused in the Permian Basin, Haynesville region and other basins in Texas and its contiguous states and will more than double the size of our pad-optimal rig fleet to 34 rigs following modest upgrades to five of our rigs.
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SIDEWINDER DRILLING LLC
Notes to Condensed Financial Statements
September 30, 2018
Under the terms of the Merger Agreement, the Sidewinder unitholders received an aggregate of 36,752,657 shares of ICD common stock, representing approximately 49% of the total outstanding shares immediately following the closing of the transaction.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to identify the performance obligations and determine the transaction price in a contract, allocate the transaction price to the performance obligations and recognize revenue as the entity satisfies the performance obligations. The standard also specifies the accounting for costs to obtain or fulfill a contract with a customer that may be either deferred and amortized or expensed as incurred depending on the circumstances. The standard will require more extensive disclosures including qualitative and quantitative information about our contracts and the significant judgments and changes in judgment used in determining the performance obligations, transaction prices and timing of revenue recognition and any assets recognized from the costs to obtain or fulfill a contract. The requirements must be reported retrospectively by either restating all periods presented or by recognizing the cumulative effect at the date of initial application. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date by one year and allows early application, but no earlier than the original effective date. Under the deferral, the requirements for the Company are effective for annual reporting periods beginning on or after December 15, 2018 and interim reporting periods within annual reporting periods beginning after December 15, 2019. The FASB has also issued several technical corrections and improvements to ASU No. 2014-09, which have the same effective date. We are currently assessing the effects of the pronouncement on the way we recognize and disclose revenue and we have not determined the implementation method or the expected impact, if any, it will have on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The requirements are effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. Lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of practical expedients that entities may elect to apply relating to leases that commenced before the effective date. We have not yet evaluated the requirements of ASU No. 2016-02 nor determined our implementation method upon adoption or what impact adoption will have on our financial statements. ICD is currently implementing, and Sidewinder will implement the new standard using the same resources and methodology as ICD.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Credit Losses. The amendments in this update replace the incurred loss impairment methodology in current use with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Entities will apply the new guidance as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The update is effective for the fiscal years beginning after December 15, 2020, and interim periods therein. Early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2016-13 will have on our financial statements.
3. Business Acquisition
The Merger of SDI with and into the Company was completed on February 15, 2017 in conjunction with the restructuring of SDI. The Merger was accounted for using the acquisition method of accounting under FASB Accounting Standards Codification (ASC) 805, Business Combinations and ASC 820, Fair Value Measurements, with the Company as the acquirer. SDIs assets acquired, and liabilities assumed were recorded at their fair values on the date of the Merger as determined by an independent valuation. The fair value of assets and liabilities was determined using level 3 inputs as defined by ASC 820.
Effective with the Merger, all of SDIs outstanding common shares and equity awards were cancelled without receiving a distribution, and substantially all of SDIs preferred shares outstanding were exchanged for Series C Units of the Company. SDIs management, including the executive team, remained with the Company following the Merger.
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SIDEWINDER DRILLING LLC
Notes to Condensed Financial Statements
September 30, 2018
The restructuring of SDI was completed on February 15, 2017 pursuant to the transactions set forth in the Contribution, Exchange and Restructuring Agreement (the Restructuring Transactions) executed by SDI, certain preferred stockholders of SDI, the Second Lien Noteholders (Predecessor) and the Third Lien Noteholders (Predecessor). The Restructuring Transactions consisted of the following: (i) delivery of the Third Lien Notes by the Third Lien Noteholders to the Company in exchange for Series A Units in the Company, (ii) the Merger described in the second preceding paragraph, (iii) the issuance and sale by the Company of Floating Rate Secured Notes due February 15, 2020 with an aggregate principal amount of $80,000,000 for cash; (iv) completion of the transactions contemplated by the Purchase Agreement between SDI and the Senior Noteholders using proceeds of $17.6 million from the sale of the Floating Rate Secured Notes to retire the Senior Note obligation; (v) the obligations outstanding under the Amended Revolver of $27.2 million were paid in full in cash using proceeds from the sale of the Floating Rate Secured Notes; (v) the Company and the Second Lien Noteholders executed an amendment and restatement of the Second Lien Note Purchase Agreement, whereby the original Second Lien Notes outstanding were exchanged for Amended and Restated Secured Notes with a due date of February 15, 2020 and with a principal value of $54.8 million; and (vi) payment of the costs and expenses of SDI of approximately $5.4 million related to the Restructuring Transactions using proceeds from the Floating Rate Secured Notes.
The following table summarizes the fair value of net assets acquired in the Merger (in thousands):
Fair Value of Net Assets Acquired from Predecessor |
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Cash and cash equivalents |
$ | 2,890 | ||
Accounts receivable and other receivables |
12,204 | |||
Prepaid expenses and other current assets |
2,461 | |||
Property and equipment |
234,000 | |||
Intangible assets |
2,972 | |||
Goodwill |
2,325 | |||
Other assets, long-term |
666 | |||
Accounts payable |
(12,925 | ) | ||
Debt due within one year |
(44,714 | ) | ||
Accrued interest payable |
(132 | ) | ||
Other current liabilities |
(7,180 | ) | ||
Long-term debt |
(56,981 | ) | ||
Other long-term liabilities |
(17,345 | ) | ||
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Net assets acquired |
$ | 118,242 | ||
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SIDEWINDER DRILLING LLC
Notes to Condensed Financial Statements
September 30, 2018
A detail of intangible assets and other long-term liabilities as of September 30, 2018 and December 31, 2017 is as follows:
September 30, 2018 |
December 31, 2017 |
Amortization Period |
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Intangible assets: |
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Tradenames |
$ | 2,013 | $ | 2,013 | 10 years | |||||||
Customer Relationships |
959 | 959 | 2 years | |||||||||
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2,972 | 2,972 | |||||||||||
Accumulated amortization |
(1,106 | ) | (596 | ) | ||||||||
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Intangible assets, net |
$ | 1,866 | $ | 2,376 | ||||||||
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Goodwill |
| 2,325 | ||||||||||
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Included in other long-term liability: |
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Order Backlog |
$ | 17,345 | $ | 17,345 | 1.4 years | |||||||
Accumulated amortization |
(17,345 | ) | (16,949 | ) | ||||||||
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Included in other long-term liability, net |
$ | | $ | 396 | ||||||||
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Goodwill as of the acquisition date was measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed and represents the fair value of the going-concern element of SDI. The Company does not anticipate that goodwill, intangible assets and the other long-term liability will be deductible as an expense or recognized as income in determining taxable income. We assessed goodwill for impairment as of March 31, 2018 and recorded an impairment reserve of $2.3 million.
The other long-term liability is related to the order backlog of the Predecessor as of the date of the Merger and represents the fair value of the estimated discounted cash flows for the order backlog less contributory asset charges consisting of required returns on working capital, fixed assets and assembled workforce. The other long-term liability was amortized ratably over the life of the order backlog and is included in other operating revenue.
4. Debt
A summary of debt at September 30, 2018 and December 31, 2017 is below (in thousands):
June 30, 2018 |
December 31, 2017 |
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Floating rate secured notes (net of unamortized deferred financing costs of $376 and $425 at March 31, 2018 and December 31, 2017, respectively.) |
$ | 89,924 | $ | 84,235 | ||||
12% amended and restated secured notes |
61,754 | 62,979 | ||||||
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Total debt |
151,678 | 147,214 | ||||||
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Current portion of long-term debt |
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Long-term debt |
$ | 151,678 | $ | 147,214 | ||||
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Floating Rate Secured Notes
The First Lien Note Purchase Agreement was executed on February 15, 2017, and the Company issued Floating Rate Secured Notes due February 15, 2020 in an aggregate principal value of $80,000,000 and received cash proceeds of the same amount. The Floating Rate Secured Notes are secured by a first priority lien on substantially all the assets of the Company (subject to the collateral rights of the Credit Facility discussed below) and are subject to a floating interest rate generally calculated as the greater of LIBOR or 3% plus an interest rate margin of 7% (adjustments to the floating interest rate may occur subject to the availability of the required LIBOR rate). At each interest payment date (February 15,
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SIDEWINDER DRILLING LLC
Notes to Condensed Financial Statements
September 30, 2018
May 15, August 15, and November 15) the Company is required to pay interest in cash on $20 million of principal amount and has an option to pay interest in kind on the remaining principal balance; the amount of any such interest in kind is added to the principal balance outstanding of the Floating Rate Secured Notes at such interest payment date and thereafter bears interest at the floating interest rate. Interest expense included in the statement of operations for the three months ended September 30, 2018 in the amount of $5.54 million was added to the principal outstanding of the Floating Rate Secured Notes; during the period from February 15, 2015 to September 30, 2017, no interest was added to the principal outstanding of the Floating Rate Secured Notes. The Company may prepay the Floating Rate Secured Notes at any time.
As of September 30, 2018, certain of the Floating Rate Secured Notes Noteholders are also holders of the Series A Units of the Company.
The First Lien Note Purchase Agreement includes an Accordion Facility of $10 million, and the Company may offer notes for purchase to the Floating Rate Secured Noteholders under the same terms including interest rate and maturity date as the Floating Rate Secured Notes, subject to certain limitations and in increments of no less than $1 million. The Floating Rate Secured Noteholders have the option to purchase the Accordion Notes at each offering.
Amended and Restated Secured Notes
The Amended and Restated Secured Notes bear interest at 12% and are due on February 15, 2020. Interest is payable at the end of each calendar quarter; in lieu of making interest payments in cash, the Company is required to add the interest accrued for each quarter to the outstanding principal. Interest expense included in the statement of operations for the nine months ended September 30, 2018 and the period from February 15 to September 30, 2017 in the amount of $5.44 million and $4.23 million, respectively, was added to the principal outstanding of the Amended and Restated Secured Notes. The Amended and Restated Secured Notes are secured by a first priority lien on substantially all of the assets of the Company, subject to the collateral rights of the Credit Facility discussed below and the Floating Rate Secured Notes.
The Amended and Restated Second Lien Note Purchase Agreement includes an Accordion Facility of $10 million, subject to similar terms as those described above for the First Lien Note Purchase Agreement. Certain of the Amended and Restated Secured Noteholders are holders of the Series A and Series C Units of the Company.
The covenants under the First Lien Note Purchase Agreement and the Amended and Restated Second Lien Note Purchase Agreement include customary affirmative and negative covenants for financing of this type, including without limitation compliance with laws, insurance requirements, payment of taxes, maintenance of books and records, covenants limiting other indebtedness, liens, investments, guaranties of indebtedness, transactions with affiliates, sales of assets, capital expenditures, conduct of business and change in fiscal year, in each case, subject to certain exceptions and baskets.
Revolving Credit Facility
On November 15, 2017, we entered into a revolving credit and security agreement (the Credit Agreement) for a $20,000,000 senior secured revolving loan facility (the Credit Facility) with Wells Fargo Bank, National Association (Lender). The Credit Facility has a maturity date of November 15, 2019.
Borrowings under the Credit Facility accrue interest at an optional rate per annum equal to either (a) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50 percent or (ii) the commercial lending rate of the Lender, in both cases plus an applicable margin based on the facility usage, or (b) a LIBOR rate determined by the Lender as defined in the agreement plus an applicable margin based on the facility usage. Interest is payable at dates based upon the option selected. In addition to paying interest on outstanding principal under the facility, the Company is required to pay customary fees and a facility fee.
As of September 30, 2018, we had no outstanding borrowings of the Credit Facility, and our borrowing base as defined under the Credit Agreement was $11.673 million.
All obligations under the Credit Agreement are secured, subject to certain exceptions, by a first lien interest in substantially all of the Companys assets. The Credit Agreement contains covenants that, among other things, require the maintenance of certain financial ratios and include restrictions on incurring indebtedness, creating liens, mergers, sale of assets, equity issuances, investments, capital expenditures, entering into transactions with affiliates, forming any
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SIDEWINDER DRILLING LLC
Notes to Condensed Financial Statements
September 30, 2018
subsidiary or entering into joint ventures and substantially changing the nature of the business in which the Company was engaged on the date of the agreement. The Credit Agreement includes a subjective acceleration clause and has a requirement for the Company to maintain a lock-box with the Lender, so borrowings under the Credit Agreement are classified as current liabilities.
In conjunction with the execution of the Credit Agreement, we executed amendments with the Floating Rate Secured Noteholders and the Amended and Restated Noteholders to adjust their collateral rights to holding second and third lien interests, respectively.
9.75% Senior Notes (Predecessor)
Prior to the Merger, SDI had outstanding aggregate principal amount of $117.3 million of 9.75% senior notes due November 15, 2019 (the Senior Notes). The Senior Notes were unsecured and ranked effectively junior to SDIs secured debt to the extent of the collateral, including secured debt under the Restated Revolving Credit Facility, the Second Lien Notes (Predecessor) and the Third Lien Notes.
Second Lien Note Purchase Agreement (Predecessor)
Prior to the Merger, SDI had outstanding an aggregate principal amount of $52.08 million Second Lien Notes due November 15, 2019. The obligations under the Second Lien Note Purchase Agreement were secured by a second priority lien on all of SDIs collateral. The Second Lien Notes accrued interest at a rate of 12.0 percent per annum, and interest was payable in arrears at the end of the calendar quarter of each year. The interest accrued under the Second Lien Notes was $2.71 million prior to the Merger.
Third Lien Note Purchase Agreement (Predecessor)
Under the Third Lien Note Purchase Agreement, SDI authorized the issuance of $109.4 million of Third Lien Notes due November 15, 2019. The obligations under the Third Lien Note Purchase Agreement were secured by a third priority lien on all of SDIs collateral. The Third Lien Notes accrued interest at a rate of 9.75 percent per annum, and interest was payable in arrears at the end of the calendar quarter of each year. Under the Third Lien Purchase Agreement, SDI could pay in kind up to $5,000,000 of interest expense on such Third Lien Notes. The principal balance outstanding and interest accrued under the Third Lien Notes was $114.4 million and $10.5 million, respectively, prior to the Merger.
Amended and Restated Revolving Credit and Security Agreement (Predecessor)
SDI entered into a revolving credit and security agreement (the Credit Agreement) and related security agreements in 2012, and following various amendments in 2014 and 2016, the commitment under the amended credit facility was for a $40,000,000 senior secured revolving loan facility (the Amended and Restated Revolver) with PNC Bank, National Association (PNC). All obligations under the Amended Revolver were secured, subject to certain exceptions, by substantially all of SDIs assets, as well as a first-priority pledge of all of the capital stock of future subsidiaries.
Restructuring Transactions
During the fourth quarter of 2016, SDI elected to defer interest payments due to the Senior Noteholders and the Second and Third Lien Noteholders and entered into forbearance agreements with PNC, the Senior Noteholders, and the Second and Third Lien Noteholders. In January 2017, the Company and the Senior Noteholders executed a Purchase Agreement whereby the Senior Noteholders agreed to sell the Senior Notes to SDI for $17.6 million.
As part of the Restructuring Transactions discussed in Note 3, the outstanding obligation under the Purchase Agreement of $17.6 million was paid to the Senior Noteholders and the Notes were cancelled, the outstanding obligation under the Revolving Credit Facility totaling $27.2 million was paid and the Amended Revolver terminated, and the Third Lien Notes were exchanged for the Series A Units of the Company.
5. Members Equity
The Company is currently authorized to issue four classes of Units, designated as Series A, Series B-1 and Series C and may issue additional classes of Units as authorized by the Board of Directors.
Series A Units
The Company issued 950 Series A Units to the Third Lien Noteholders in exchange for the Third Lien Notes in conjunction with the Restructuring Transactions on February 15, 2017. The Series A Units are the only Units authorized that hold voting rights.
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SIDEWINDER DRILLING LLC
Notes to Condensed Financial Statements
September 30, 2018
Series C Units
The Company issued 96.271 Series C Units in exchange for the Series A and Series A-1 Preferred Stock of SDI in conjunction with the Restructuring Transactions on February 15, 2017.
Distributions are subject to a participation threshold for the Series C Units that applies to certain aggregate or terminating distributions, and the Series C Members will receive distributions in the amount of 5% of distributions in excess of the participation threshold. The Participation Threshold has a value of $350,000,000.
The Series A Units and the Series C Units were assigned an aggregate fair value of $118,242,000 based on the independent valuation of the fair value of the assets acquired and liabilities assumed. The fair value of the equity as of the date of the Merger was allocated to the Series A and Series C Units in the amounts of $116,355,000 and $1,887,000, respectively, in the independent valuation using an option valuation model. In September a distribution of $10,000 was made to the Series C shareholders.
6. Income Taxes
Income Taxes (Successor)
The Company is a limited liability company treated as a partnership for income tax purposes and, as such, is a pass-through entity that is not liable for income tax in the jurisdictions in which it operates, with the exception of the state of Texas, where limited liability companies are subject to Texas margin tax. For the nine months ended September 30, 2018, the Company did not have a current liability for Texas margin taxes and recorded a deferred tax provision of $.3 million. For the period from February 15 through September 30, 2017. the Company recorded a deferred tax provision of $.2 million.
Income Taxes (Predecessor)
SDI provided for income taxes during interim periods based on an estimate of the effective tax rate for the year. Discrete items and changes in the estimate of the annual effective tax rate were recorded in the period in which they occur. The effective income tax rate for the period from January 1 to February 15, 2017 was (1.8) percent.
The effective income tax rates of SDI differed from the federal statutory rate of 35 percent, primarily due to state income taxes, changes in the valuation allowance for deferred tax assets, and permanent differences including the 50 percent deduction limitation on meal per diem expenses. Additionally, as discussed below, the effective tax rate and tax provision for the period from January 1 to February 15, 2017 was impacted by the alternative minimum tax and changes in the deferred tax liability resulting from the Merger.
The Merger was treated as a taxable sale of assets by SDI to the Company, and the fair value as of the date of the Merger exceeded the taxable basis in the assets, resulting in taxable income for the period from January 1 to February 15, 2017. SDI had sufficient U.S. federal and state net operating loss carryforwards to offset a significant portion of the taxable income. A current tax provision of $2.4 million is included in the statement of operations for the period from January 1 to February 15, 2017 and represents the U.S federal alternative minimum tax liability and state tax liabilities for those states where net operating losses were not available.
In assessing the realizability of SDIs deferred tax assets for the period ended February 15, 2017, consideration was given to both positive and negative evidence of future taxable income and the scheduled reversals of deferred tax liabilities. Significant objective evidence evaluated was the Merger, which was treated for tax purposes as a taxable sale of assets and complete liquidation. As a result of the transaction, all deferred tax assets, related valuation allowances, and deferred tax liabilities were reduced to zero either due to reversal or to write-off as a result of the liquidation of SDI after the Merger, with an offsetting deferred tax benefit of $2.0 million included in the statement of operations for the period from January 1 to February 15, 2017.
12
SIDEWINDER DRILLING LLC
Notes to Condensed Financial Statements
September 30, 2018
During the period from January 1, 2017 to February 15, 2017, SDI recognized a decrease in the valuation allowance against federal deferred tax assets of $54.7 million and a decrease in the valuation allowance against state deferred tax assets of $9.2 million, as a result of realization or write-off of the deferred tax assets due to the Merger and complete liquidation of SDI.
SDI had U.S. federal and state net operating loss carryforwards of approximately $347.6 million and $155.5 million, respectively, at December 31, 2016. SDI utilized $109.4 million of the federal net operating loss carryforwards and $12.1 million in state net operating loss carryforwards in the period ended February 15, 2017. The remaining net operating loss carryforwards were written off due to the Merger and complete liquidation of SDI, and all valuation allowances associated with those net operating losses were reversed as of February 15, 2017
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