BassDrill Alpha Ltd. Financial Statements. As of and for the Years Ended December 31, 2015 and 2014

Transcription

1 Financial Statements As of and for the Years Ended December 31, 2015 and 2014 The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee.

2 Financial Statements As of and for the Years Ended December 31, 2015 and 2014

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5 Contents Independent Auditor s Report 3-4 Financial Statements Page Balance Sheets as of December 31, 2015 and Statements of Income for the Years Ended December 31, 2015 and Statements of Stockholders Equity for the Years Ended December 31, 2015 and Statements of Cash Flows for the Years Ended December 31, 2015 and Notes to Financial Statements

6 Tel: Fax: Allen Parkway, 20th Floor Houston, TX Independent Auditor s Report To the Board of Directors of BassDrill Alpha Ltd. Bermuda We have audited the accompanying financial statements of BassDrill Alpha Ltd. (the Company ), which comprise the balance sheets as of December 31, 2015 and 2014, and the related statements of income, stockholders equity, and cash flows for the years 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 audits. We conducted our audits 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, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America. 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. 3

7 Emphasis of Matters As discussed in Note 3 to the financial statements, the Company has changed its method of accounting for the presentation of debt issuance costs as of December 31, 2015 due to the early adoption of Accounting Standards Update (ASU) , Interest Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the financial statements, the Company does not have an existing contract to generate revenues in order to meet debt service requirements and fund warm stacking costs which raise substantial doubt about its ability to continue as a going concern. Management s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter. April 25, 2016 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. 4

8 Financial Statements 5

9 Balance Sheets December 31, Assets Current Assets Cash and cash equivalents $ 8,554,861 $ 14,567,126 Accounts receivable - 4,150,999 Other current assets 264, ,862 Total Current Assets 8,819,366 19,138,987 Property and Equipment Drilling rig and equipment 99,176,853 99,056,376 Furniture and office equipment 782, ,152 99,959,201 99,834,528 Less: accumulated depreciation 22,391,460 17,973,849 77,567,741 81,860,679 Construction in progress 1,806,712 - Inventory - capital spares 640, ,074 Property and Equipment, net 80,014,927 82,351,753 Restricted Cash 5,000,000 5,000,000 Other Assets 362, ,570 Total Assets $ 94,196,942 $ 106,769,310 See Notes to Financial Statements. 6

10 Balance Sheets December 31, Liabilities and Stockholders Equity Current Liabilities Accounts payable $ 357,404 $ 1,182,018 Accounts payable - related party 510, ,180 Accrued liabilities 1,438,246 3,062,481 Current portion of long-term debt 67,636,595 6,000,000 Total Current Liabilities 69,943,086 11,231,679 Long-Term Liabilities Long-term debt, net - 73,083,099 Total Liabilities 69,943,086 84,314,778 Commitments and Contingencies (Note 5) Stockholders Equity Common stock, $0.01 par value, 280,000,000 shares authorized and 249,726,709 issued and outstanding at December 31, 2015 and ,497,267 2,497,267 Additional paid-in capital 40,063,271 40,063,271 Accumulated deficit (18,306,682) (20,106,006) Total Stockholders Equity 24,253,856 22,454,532 Total Liabilities and Stockholders Equity $ 94,196,942 $ 106,769,310 See Notes to Financial Statements. 7

11 Statements of Income Year Ended December 31, Revenues Contract drilling $ 15,557,166 $ 43,322,870 Early contract termination fee 11,499,390 - Reimbursables 841,542 1,917,897 Demobilization revenue 500,000 - Total Revenues 28,398,098 45,240,767 Operating Expenses Operating 11,865,730 20,699,748 General and administrative 3,259,726 4,157,672 Depreciation 4,417,611 4,555,417 Total Operating Expenses 19,543,067 29,412,837 Income from Operations 8,855,031 15,827,930 Other Income (Expense) Interest expense, net (6,421,919) (7,381,425) Gain on early extinguishment of debt 2,060,800 - Foreign currency exchange loss (50,310) (190,384) Total Other Expense, net (4,411,429) (7,571,809) Income before Foreign Income Tax Expense 4,443,602 8,256,121 Foreign Income Tax Expense (2,644,278) (4,453,075) Net Income $ 1,799,324 $ 3,803,046 See Notes to Financial Statements. 8

12 Statements of Stockholders Equity Additional Total Common Stock Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity Balance at January 1, ,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 Net income ,799,324 1,799,324 Balance at December 31, ,726,709 $ 2,497,267 $ 40,063,271 $ (18,306,682) $ 24,253,856 See Notes to Financial Statements. 9

13 Statements of Cash Flows Year Ended December 31, Cash Flows From Operating Activities Net income $ 1,799,324 $ 3,803,046 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,417,611 4,555,417 Amortization of debt issue costs 508, ,123 Amortization of bond discount 436, ,250 Gain on early extinguishment of debt (2,060,800) - Changes in operating assets and liabilities: Accounts receivable 4,150,999 1,561,627 Other assets 72,278 (401,938) Accounts payable and accrued expenses (2,448,849) 389,961 Accounts payable - related party (476,339) 319,115 Net Cash Provided By Operating Activities 6,399,172 11,213,601 Cash Flows From Investing Activities Cash paid for Capital expenditures (274,073) (888,066) Cash paid for Construction in progress (1,806,712) - Net Cash Used In Investing Activities (2,080,785) (888,066) Cash Flows from Financing Activities Repayment of long-term debt (10,330,652) (6,000,000) Debt issuance costs - (1,338) Net Cash Used In Financing Activities (10,330,652) (6,001,338) Net Increase (Decrease) In Cash and Cash Equivalents (6,012,265) 4,324,197 Cash and Cash Equivalents - Beginning of Year 14,567,126 10,242,929 Cash and Cash Equivalents - End of Year $ 8,554,861 $ 14,567,126 Supplemental Cash Flow Information Cash paid for interest $ 5,903,073 $ 6,468,817 Cash paid for income taxes 3,041,410 4,372,679 See Notes to Financial Statements. 10

14 Notes to Financial Statements 1. Organization and Nature of Operations BassDrill Alpha Ltd. (the Company ), a Bermuda corporation, was formed in June 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 operated under a contract in West Africa with Total E&P Congo ( Total ) until May 2015, when the contract was terminated early. The Unit is currently warm stacked a few miles offshore of Congo while the Company markets it to other operators in West Africa and Southeast Asia. 2. Liquidity These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ( US GAAP ), including the applicability of a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business in the near future. The Company currently has no contract for the Unit and, therefore, no operating source of cash. The Company s existing liquid assets do not meet the needs to warm stack the Unit and meet current debt requirements. The Company is considering a potential restructuring of its capital structure, which could include additional equity offerings and/or the refinancing its current debt. There can be no assurance that sufficient funding will be obtained. The foregoing matters raise substantial doubt about the Company s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event the Company cannot continue in existence. 3. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with US GAAP 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. Revenue and Operating Expenses Revenue is recognized as services are performed based on contracted day-rates and the number of operating days during the period. Revenue includes commission expenses that are based upon the contract drilling revenue. Upon completion or termination of a drilling contract, the Company recognizes any demobilization fees or early termination fees owed as revenue, and recognizes demobilization expenses in operating expenses. 11

15 Notes to Financial Statements 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 4) require the Company to maintain a debt reserve account with a minimum balance of $5,000,000 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, 2015 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, 2015 and 2014, all of the Company s revenues were received from Total E&P Congo. The Company had receivables from Total E&P Congo of $0 and $4.2 million at December 31, 2015 and 2014, respectively. The Company is subject to concentrations of credit risk with respect to cash, and restricted 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. 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 straightline method over the estimated useful lives of the assets. Depreciation expense for the years ended December 31, 2015 and 2014 was $4.4 million and $4.6 million, respectively. The estimated useful lives, in years, are defined below: 12

16 Notes to Financial Statements Drilling rig and equipment: Barge and related marine equipment Mast equipment package and related equipment Furniture and office equipment 30 years 3-15 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, 2015 and Income Taxes The Company is a Bermuda limited liability company. No activities were carried out in Bermuda in 2015 and 2014, 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, 2015 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. The Company follows guidance issued by the Financial Accounting Standards Board which clarifies accounting for uncertainty in income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. The Company believes that it has no uncertain income tax positions and that there are no tax positions taken or expected to be taken that would significantly increase or decrease unrecognized tax benefits within the next twelve months. In accordance with this guidance, the Company will record income tax related interest and penalties, if applicable, as a component of the provision for income tax expense. However, there were no amounts recognized for income tax related interest and penalties in the statements of income for the years ended December 31, 2015 and Recently Adopted Accounting Pronouncements In April 2015, the FASB issued Accounting Standard Update ( ASU ) , Interest Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying value of the related debt liability. The Company early adopted ASU and applied the new standard retrospectively for all periods presented. The effect of the reclassification of Debt Issuance Costs on the Consolidated Balance Sheet as of December 31, 2014 is presented below: 13

17 Notes to Financial Statements Select Consolidated Balance Sheet Line Items December 31, 2014 Original Presentation Adopting Adjustment Revised Presentation Deferred debt issue costs 1,838,151 (1,838,151) - Total Assets 108,607,461 (1,838,151) 106,769,310 Long-term debt, net 74,921,250 (1,838,151) 73,083,099 Total Liabilities 86,152,929 (1,838,151) 84,314,778 Total Liabilities and Stockholders' Equity 108,607,461 (1,838,151) 106,769,310 Reclassifications Certain reclassifications have been made to prior period financial statements to conform to current period presentations. The reclassifications had no effect on the Company s consolidated financial position, results of operations or cash flows. 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 25, 2016, the date the financial statements were available for issuance. 4. Long-Term Debt Long-term debt consists of the following: December 31, % Senior Bonds $ 69,848,105 $ 82,500,000 Debt Discount, net (1,022,386) (1,578,750) Debt Issuance Costs, net (1,189,124) (1,838,151) Total Debt $ 67,636,595 $ 79,083,099 Less Current Portion of Long-Term Debt (67,636,595) (6,000,000) Long-Term Debt, net $ - $ 73,083, % Senior Bonds In July 2013, the Company issued $90,000,000 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%, principal payments of $1,500,000 plus interest payable quarterly that commenced October 4, During 2015, the Company purchased and retired $6.8 million of Senior Bonds at an average price of 66% of par value, resulting in a gain on early extinguishment of $2.1 million. 14

18 Notes to Financial Statements 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 order to facilitate discussions between the Company s shareholders and bondholders regarding a potential restructuring of the Company s capital structure, the bondholders agreed to a temporary waiver in April The temporary waiver, among other things, delayed the principal and interest payment due April 5, 2016 to May 20, 2016, and waived the debt financial covenant related to the minimum market value of the rig at December 31, 2015, as discussed above. During the waiver period, the principal and interest payment due April 5, 2016, will accrue additional interest of 5% per annum. As there is uncertainly in regards to the Company s ability to make the required principal and interest payments and meet the market value covenant as discussed above, the Company classified the entire debt balance as a current liability in the accompanying financial statements. Debt Discount The Bonds were issued at 97.5% of the face value. This discount will be amortized to interest expense over the scheduled maturity of the debt utilizing the straight-line method, which approximates the interest method. Amortization of the debt discount for the years ended December 31, 2015 and 2014 was $0.5 million and $0.4 million, respectively. Debt Issuance 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, 2015 and 2014 was $0.5 million for each period. 5. 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, 2015, 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 two years with a monthly rate of approximately $9,000 per month. Rent expense was approximately $0.1 million for each of the years ended December 31, 2015 and 2014, respectively. Future minimum noncancelable lease payments are approximately $0.1 million for the year ended December 31,

19 Notes to Financial Statements 6. Related Party Transactions The Company has a shared service agreement with Atlantica Delta Ltd. ( AD ), a wholly-owned subsidiary of Atlantica Tender Drilling, Ltd. (a 25.26% equity investor in the Company) ( ATDL ), in regards to certain shore-based costs in the Congo. For the year ended December 31, 2015, fees for shared, shore-based costs and other reimbursable expenses billed to AD were $0.6 million. Atlantica Management (USA) Inc., a wholly-owned subsidiary ATDL (a 25.26% equity investor in the Company), 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, 2015 and 2014, Atlantica Management (USA) Inc. billed $1.6 million in each period for management services provided to the Company and a performance bonus of $0.4 million and $0.6 million, respectively. At December 31, 2015 and 2014, the Company had a net payable of $0.5 million and $1.0 million, respectively, due to subsidiaries of ATDL related to management services, allocated shared shorebased costs in the Congo and other reimbursable expenses, including certain employee related costs, paid on the Company s behalf. 16