BASSDRILL ALPHA LTD. FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2014 AND 2013

Transcription

1 FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2014 AND 2013

2 BassDrill MANAGER S REPORT FOR THE YEAR ENDED DECEMBER 31, 2014 General Overview BassDrill Alpha Ltd. (the Company ) was established in The Company is registered in Bermuda and is in good standing. The Company s objective is the operation and ownership of the Tender Assist Drilling Rig Alpha for the provision of drilling services internationally to major independent and national oil and gas companies. BassDrill Alpha Ltd. is a single asset entity and has no employees. The Company has a management agreement with Atlantica Management (USA) Inc. (the Manager ), a wholly owned subsidiary of Atlantica Tender Drilling Ltd. (a 25.26% equity owner of the Company), for the management and marketing affairs of the Company. The BassDrill Alpha is the first of its kind, modern flat bottom Tender Assist Drilling Rig incorporating recent technical, safety, maritime and drilling technologies, built on a proprietary design developed and owned by Bassoe Technology AB, Sweden. The BassDrill Alpha offers a unique design; the sole drilling unit to have its main crane on the bow of the vessel, as opposed to mid-ship in the design of the competitors fleets. The advantages of the bow-mounted crane are a more efficient and less expensive anchoring and rigup/rig-down cycle for the customer. The Unit has obtained all requisite certifications, is classed to the American Bureau of Shipping (ABS) and is flagged in Panama. Following mobilization to the Republic of Congo in Q4 of 2010 for a one year drilling campaign with Perenco, a contract with Total E&P Congo ( Total ) in the Republic of Congo was entered into for the drilling of six wells with up to four options covering six additional wells. The Unit was mobilized to its first Total platform in November of Total exercised all four of its options under the contract for six additional wells, which kept the Unit under contract into Q4 of During the initial term of the Total contract, the Company negotiated a further two-year extension to the contract for the Unit, and it is expected to continue to work in the Republic of Congo with Total through the second quarter of The Alpha operated through 2014 without a single recordable incident. Its record of recordable incident free days has continued into 2015: 1,015 consecutive days per March 31, Both operationally and financially, the BassDrill Alpha achieved by far its best year to date with average revenue efficiency of 95.7% during 2014 (92.7% in 2013). With the exception of January, when revenue was impacted by a drilling component failure, and July and August, when the rig was on the moving rate while moving between platforms, the Alpha achieved close to perfect revenue efficiency through The high revenue efficiency was combined with reduced operating expenses. Geographical continuity, few moves between platforms, lower crew turnover and more appropriate inventory levels were all contributing factors towards the lower operating expenses. In February 2015, due to the significant decline in oil prices, the Company and Total agreed to a discounted rate for BassDrill Alpha and to continue the 2011 agreement on a well-by-well basis. The early termination fee amounts to 180 days at 50% of the original operational rate if terminated prior to the end of May Between May 27 th and November 27 th of 2015, the rate decreases linearly from $ 11.4 million to zero.

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4 CONTENTS Page Independent Auditor s Report... 2 Balance Sheets... 3 Statements of Operations... 4 Statements of Stockholders Equity... 5 Statements of Cash Flows... 6 Notes to Financial Statements... 7

5 Tel: Fax: Allen Parkway, 20th Floor Houston, TX Independent Auditor s Report Board of Directors BassDrill Alpha Ltd. Bermuda We have audited the accompanying financial statements of BassDrill Alpha Ltd.(the Company ), which comprise the balance sheet as of December 31, 2014, and the related statements of operations, changes in stockholders equity, and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BassDrill Alpha Ltd. as of December 31, 2014, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter The 2013 financial statements of BassDrill Alpha Ltd. were audited by other auditors (UHY LLP), whose report dated April 29, 2014 expressed an unmodified opinion on those statements. The Texas-based practice of UHY LLP was acquired by BDO USA, LLP effective December 1, BDO USA, LLP Houston, Texas April 28, 2015 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. [2]

6 BALANCE SHEETS December 31, ASSETS CURRENT ASSETS Cash and cash equivalents $ 14,567,126 $ 10,242,929 Accounts receivables 4,150,999 5,712,626 Other current assets 420, ,494 TOTAL CURRENT ASSETS 19,138,987 16,253,049 PROPERTY AND EQUIPMENT Barge and equipment 99,056,376 98,323,113 Other property and equipment 778, ,349 Property and equipment subject to deprecation 99,834,528 98,946,462 Less: accumulated depreciation 17,973,849 13,418,432 Net Property and equipment subject to deprecation 81,860,679 85,528,030 Inventory - capital spares 491, ,074 NET PROPERTY AND EQUIPMENT 82,351,753 86,019,104 RESTRICTED CASH 5,000,000 5,000,000 DEFERRED DEBT ISSUE COSTS 1,838,151 2,366,936 OTHER ASSETS 278,570 - TOTAL ASSETS $ 108,607,461 $ 109,639,089 LIABILITIES AND STOCKHOLDERS EQUITY CURRENT LIABILITIES Accounts payable $ 1,182,018 $ 1,102,846 Accounts payable - related party 926, ,665 Accrued expenses 3,123,234 2,797,092 Current portion of long-term debt 6,000,000 6,000,000 TOTAL CURRENT LIABILITIES 11,231,679 10,522,603 LONG-TERM DEBT, NET OF DISCOUNT OF $1,578,750 AND $2,035,000 AT DECEMBER 31, 2014 AND 2013, respectively 74,921,250 80,465,000 TOTAL LIABILITIES 86,152,929 90,987,603 COMMITMENTS AND CONTINGENCIES (See Note H) STOCKHOLDERS EQUITY Common stock, $.01 par value, 280,000,000 shares authorized, and 249,726,709 issued and outstanding at December 31, 2014 and ,497,267 2,497,267 Additional paid-in capital 40,063,271 40,063,271 Accumulated deficit (20,106,006) (23,909,052) TOTAL STOCKHOLDERS EQUITY 22,454,532 18,651,486 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 108,607,461 $ 109,639,089 See Notes to Financial Statements. [3]

7 STATEMENTS OF OPERATIONS Years Ended December 31, OPERATING REVENUES Contract drilling revenues $ 44,635,950 $ 40,093,705 Reimbursables 1,917,897 2,013,361 TOTAL OPERATING REVENUES 46,553,847 42,107,066 COSTS AND EXPENSES Operating and maintenance 20,699,748 21,454,671 Depreciation 4,555,417 4,484,533 General and administrative 5,470,752 5,109,161 TOTAL COSTS AND EXPENSES 30,725,917 31,048,365 INCOME FROM OPERATIONS 15,827,930 11,058,701 OTHER INCOME (EXPENSE) Interest income 11,421 3,199 Interest expense (7,392,846) (6,895,708) Foreign currency exchange loss (190,384) (134,889) Loss on early extinguishment of debt - (711,877) TOTAL OTHER EXPENSE (7,571,809) (7,739,275) INCOME BEFORE INCOME TAX EXPENSE 8,256,121 3,319,426 FOREIGN INCOME TAX EXPENSE (4,453,075) (3,996,444) NET INCOME (LOSS) $ 3,803,046 $ (677,018) See Notes to Financial Statements. [4]

8 STATEMENTS OF STOCKHOLDERS EQUITY Common Stock Additional Paid-in Accumulated Shares Amount Capital Deficit Total Balance at January 1, ,726,709 $ 2,497,267 $ 61,062,790 $ (23,232,034) $ 40,328,023 Return of equity distribution (20,999,519) (20,999,519) Net loss (677,018) (677,018) Balance at December 31, ,726,709 2,497,267 40,063,271 (23,909,052) 18,651,486 Net income ,803,046 3,803,046 Balance at December 31, ,726,709 $ 2,497,267 $ 40,063,271 $ (20,106,006) $ 22,454,532 See Notes to Financial Statements. [5]

9 STATEMENTS OF CASH FLOWS Years Ended December 31, CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 3,803,046 $ (677,018) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation expense 4,555,417 4,484,533 Amortization of debt issue costs 530, ,234 Amortization of bond discount 456, ,000 Loss on early extinguishment of debt - write-off of debt issue costs - 361,306 Changes in operating assets and liabilities: Accounts receivable 1,561,627 1,129,885 Other current assets (401,938) 162,867 Accounts payable, accrued expenses and other liabilities 405,314 (662,954) Accounts receivable/payable - related party 303,762 50,908 NET CASH PROVIDED BY OPERATING ACTIVITIES 11,213,601 5,667,761 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures - barge and equipment (733,263) (126,774) Other property and equipment (154,803) (44,557) Restricted cash - (2,000,000) NET CASH USED IN INVESTING ACTIVITIES (888,066) (2,171,331) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of bonds payable - 87,750,000 Repayment of long-term debt (6,000,000) (60,169,875) Cash paid for return of equity - (20,999,519) Cash paid for commitment and other related fees (1,338) (2,597,497) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (6,001,338) 3,983,109 NET INCREASE IN CASH AND CASH EQUIVALENTS 4,324,197 7,479,539 CASH AND CASH EQUIVALENTS, Beginning of year 10,242,929 2,763,390 CASH AND CASH EQUIVALENTS, End of year $ 14,567,126 $ 10,242,929 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 6,468,817 $ 4,651,069 Cash paid for taxes $ 4,372,679 $ 3,993,166 See Notes to Financial Statements. [6]

10 NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2014 AND 2013 NOTE A - ORGANIZATION AND NATURE OF BUSINESS BassDrill Alpha Ltd. (the Company ), a Bermuda corporation, was formed on June 19, 2008, as an asset owning company in the business of providing offshore tender assist drilling services to the offshore market. The Company s revenue generating asset is a tender assist barge, BassDrill Alpha (the Unit ), which began construction in June 2008 and was delivered in January The Unit is currently operating under a contract in West Africa. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management reviews all significant estimates affecting its financial statements on a recurring basis and records the effect of any necessary adjustments in the financial statements. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements. While management believes current estimates are reasonable and appropriate, actual results could differ from those estimates. Fair Value of Financial Instruments: The Company s financial instruments consist primarily of cash and cash equivalents, accounts receivable, restricted cash, accounts payable and long-term debt. The carrying amounts of cash and cash equivalents, accounts receivable, restricted cash and accounts payable are representative of their respective fair values due to the short-term maturity of these. The fair value of the long-term debt was approximately $74.3 million based on quoted market prices. Revenue: Revenue is recognized as services are performed based on contracted day-rates and the number of operating days during the period. The Company records reimbursements from customers for reimbursable costs and expenses as revenue and the related direct costs as operating expenses. Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted Cash: The 7.5% Senior Bonds (see Note E) require the Company to maintain a debt reserve account with a minimum balance of $5.0 million at all times. Accounts Receivable and Allowance for Doubtful Accounts: Accounts receivable are comprised of contract receivables, are recorded at the invoiced amount and do not bear interest. Earnings are charged with a provision for doubtful accounts based on a current review of the collectability of accounts. Accounts deemed uncollectable are applied against the allowance for doubtful accounts. No allowance for doubtful accounts was recorded by the Company at December 31, 2014 and Concentrations of Credit Risk: The Company s customer concentration may impact its overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions affecting the drilling industry. For the years ended December 31, 2014 and 2013, 100% of the Company's revenues were received from Total E&P Congo. The Company had receivables from Total E&P Congo of $4,150,999 and $5,712,626 at December 31, 2014 and 2013, respectively. [7]

11 NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2014 AND 2013 The Company is subject to concentrations of credit risk with respect to cash and cash equivalents, which the Company attempts to minimize by maintaining cash and cash equivalents with major high credit quality financial institutions. At times cash balances may exceed limits federally insured by the United States Federal Deposit Insurance Corporation. Certain of the Company s cash balances are maintained in foreign banks which may not be covered by deposit insurance. Foreign Exchange Transactions: The Company s functional currency is the United States (U.S.) dollar as the Company primarily contracts with contractors, finances capital and purchases equipment and services using the U.S. dollar. Transactions that are completed in a foreign currency are translated into U.S. dollars, and any gain or loss is recorded in the statements of operations. Debt Issue Costs: Costs incurred in connection with the issuance of long-term debt are capitalized and amortized to interest expense over the scheduled maturity of the debt utilizing the straight-line method, which approximates the interest method. Amortization expense for the years ended December 31, 2014 and 2013 was $530,123 and $603,234, respectively. Property and Equipment: Property and equipment is carried at cost less accumulated depreciation. The Company capitalizes expenditures for renewals, replacements and improvements, and expenses costs of maintenance and repairs as incurred. Depreciation on equipment is calculated on the straight-line method over the estimated useful lives of the assets. The method of depreciation does not change when equipment becomes idle. Depreciation expense for the years ended December 31, 2014 and 2013 was $4,555,417 and $4,484,533, respectively. The estimated useful lives, in years, are defined below: Barge and related marine equipment Mast equipment package, spare parts, and related equipment Office furniture, fixtures, vehicles and equipment Computer hardware and software 30 years 3-15 years 3 years 3 years Impairment of Long-lived Assets: The carrying values of long-lived assets that are held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the undiscounted future net cash flows expected to result from the asset, including eventual disposition. If the undiscounted future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset s carrying value and fair value. The Company recorded no impairments for the years ended December 31, 2014 and Income Taxes: The Company is a Bermuda limited liability company. No activities were carried out in Bermuda in 2014 and 2013, and as such, the Company was not taxed by Bermuda. The Company s activities were taxable in the Republic of Congo during the years ended December 31, 2014 and Income taxes have been provided based upon the tax laws and rates in effect in the countries in which operations are conducted and income is earned. Subsequent Events: The Company evaluates events and transactions occurring after the balance sheet date but before the financial statements are available to be issued. The Company evaluated such events and transactions through April 28, 2015, the date the financial statements were available for issuance. [8]

12 NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2014 AND 2013 NOTE C - PROPERTY AND EQUIPMENT December 31, Barge and related marine equipment $ 72,986,594 $ 72,966,980 Mast equipment package, spare parts, and related equipment 26,069,782 25,356,133 Office furniture, fixtures and equipment 298, ,084 Computer hardware and software 479, ,264 99,834,528 98,946,461 Less: accumulated depreciation 17,973,849 13,418,432 81,860,679 85,528,029 Inventory - capital spares 491, ,074 Total property and equipment $ 82,351,753 $ 86,019,103 NOTE D - ACCRUED EXPENSES Accrued expenses consist of the following: December 31, Accrued interest expense $ 1,577,656 $ 1,640,000 Accrued income taxes 396, ,285 Accrued expenses 1,148, ,807 Total accrued liabilities $ 3,123,234 $ 2,797,092 NOTE E - FINANCING ARRANGEMENTS Long-term debt consists of the following: 7.5% Senior Bonds In July 2013, the Company issued $90.0 million of Senior Bonds ( Bonds ), maturing in July 2018 that are collateralized by the Unit. The Bonds were issued at 97.5% of the face value and bear interest at 7.5%, with interest and principal payments payable quarterly that commenced October 4, The Bonds further require the Company to comply with certain quarterly financial covenants as follows: Minimum cash balance of $5.0 million in a debt reserve account The market value of the rig at all times exceeds 120% of the aggregate value of the outstanding Bonds In addition, the Company is required to deposit $5.0 million in a restricted account to cover the remaining initial dividend payment (as defined in the Bond agreement) to its stockholders until July 2015, at which time, if the dividends are not declared, the restriction is relieved. In March 2015, the Company transferred an additional $5.0 million to the debt reserve account. [9]

13 NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2014 AND 2013 Senior Secured Term Loan Facility In December 2011, the Company entered into a $55,000,000 Senior Secured Term Loan Facility Agreement (the Loan ) with two financial institutions. The Loan was collateralized by the Unit and substantially all revenues related to the operation of the Unit. The Loan bore interest at a variable rate of LIBOR plus 5.25% payable quarterly and required quarterly principal payments ranging from $1,718,750 to $2,292,000, which payments commenced in March The terms of the Loan required the Company to enter into interest rate swap arrangements in order to fix the cash flows associated with this variable rate debt (see Note F) for at least 75% of the amount outstanding. The Senior Secured Term Loan Facility was repaid in its entirety in July 2013 in conjunction with the issuance of the Senior Secured Bonds. In connection with the retirement of the facility, the Company recognized a $711,877 loss on the early extinguishment of debt. Shareholder Loans In December 2011, the Company entered into various shareholder loan agreements totaling $10,000,000 with each of its major shareholders on a proportional basis to each major shareholder s relative equity interest in the Company. The unsecured loans bore interest at 20% and did not require the payment of principal or interest until the loans were to mature in June Interest was compounded on a quarterly basis effective March 31, The shareholder loans were repaid in their entirety in July 2013 in conjunction with the issuance of the Senior Bonds. Future Maturities of Long-term Debt The above financing arrangements are payable in future years as follows: Years Ending December 31: 2015 $ 6,000, ,000, ,000, ,500,000 82,500,000 Less: Future amortization of bond discount (1,578,750) Net debt $ 80,921,250 NOTE F - DERIVATIVE FINANCIAL INSTRUMENTS The Company s business operations give rise to certain market risk exposures mostly due to changes in interest rates. The Company managed this risk through the use of derivative financial instruments (i.e., interest rate swaps) to reduce the exposure to interest rate risk associated with the Loan. Risk management programs are reviewed and monitored by the Company s management. These programs will be revised as market conditions dictate. The current risk management program utilizes industry-standard models that take into account the implicit cost of hedging. Risks associated with market risks and those created by derivative instruments and the mark-to-market valuations are monitored periodically, using value-at-risk and stress tests. [10]

14 NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2014 AND 2013 The objective of the undesignated interest rate swaps was to manage interest rate risk exposure on the Loan (see Note E). The interest rate swap agreements effectively modified the Company s exposure to interest rate risk by converting a portion of the Loan to a fixed rate of approximately 6.18% through maturity, thus reducing the impact of the interest-rate changes on future interest expense. The Company had not designated these interest rate swaps as hedges due to future, unquantifiable differences between the notional and recorded debt caused by uncertain, mandatory prepayments in the future; therefore, the Company did not apply hedge accounting to its interest rate derivative instruments. The Company marked this position to fair value through operations at each reporting date, and the amounts are included in interest expense. For the year ended December 31, 2013, the Company recognized a gain of $236,104 of mark-to-market swap valuation in the statements of operations. The Company had no open position as of December 31, 2014 and 2013 as the related variable rate debt was repaid in July 2013 (see Note E). NOTE G - STOCKHOLDERS EQUITY During 2013, in connection with the issuance of the Bonds, the Company used a portion of the proceeds for a return of equity distribution of $20,999,519 to its stockholders. NOTE H - COMMITMENTS AND CONTINGENCIES The Company may in the future be involved as a party to various legal proceedings that are incidental to the ordinary course of business. The Company regularly analyzes current information and, as necessary, provides accruals for probable liabilities on the eventual disposition of these matters. As of December 31, 2014, there were no threatened or pending legal matters that would have a material impact on the Company s financial statements. In September 2014, the Company amended its office lease in the Congo for 2 years with a monthly rate of approximately $9,000 per month. Rent expense was approximately $109,000 and $132,000 for the years ended December 31, 2014 and 2013, respectively. Future minimum non-cancelable lease payments are approximately $111,000 and $83,000 for the years ended December 31, 2015 and 2016, respectively. NOTE I - RELATED PARTY TRANSACTIONS Atlantica Management (USA) Inc., a wholly-owned subsidiary of Atlantica Tender Drilling, Ltd. (a 25.26% equity investor in the Company) ( ATDL ), has been contracted to provide management services for the Company for the management, marketing and operations of the Unit. In addition to managing the Unit, the Manager manages other tender drilling units ultimately owned by ATDL. One or more of these units may, from time to time, compete with the Alpha in the market for drilling services. At such times, as the Manager is wholly owned by ATDL, the interests of the Manager may conflict with those of the Company. For the years ended December 31, 2014 and 2013, Atlantica Management (USA) Inc. received $1,642,500 and $1,567,000, respectively, for management services provided to the Company and a performance bonus of $621,785 and $402,795, respectively. At December 31, 2014 and 2013, the Company had a payable of $926,427 and $622,665, respectively, due to subsidiaries of ATDL related to management services and other reimbursable expenses, including certain employee related costs, paid on the Company s behalf. During 2013, the Company entered into several shareholder loan agreements (see Note E) which were repaid in For the year ended December 31, 2013, the Company recognized interest expense on the shareholder loans of $1,354,468. [11]