Quarterly Report (10-q)

Date : 08/01/2019 @ 9:51PM
Source : Edgar (US Regulatory)
Stock : Independence Contract Drilling Inc (ICD)
Quote : 0.842  -0.0732 (-8.00%) @ 9:02PM
Independence Contract Dr... share price Chart

Quarterly Report (10-q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
Form 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-36590
Independence Contract Drilling, Inc.
(Exact name of registrant as specified in its charter)
Delaware
37-1653648
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
20475 State Highway 249, Suite 300
Houston, Texas
77070
(Address of principal executive offices)
(Zip code)
(281) 598-1230
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
 
Title of each class
 
Trading symbol(s)
 
Name of each exchange where registered
 
 
 
 
 
Common Stock, $0.01 par value per share
 
ICD
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer
¨
Accelerated filer
x
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
x
 
 
 
 
 
 
Emerging growth company
x
 
 
 
 
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. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨   No  x
76,948,679 shares of the registrant’s Common Stock were outstanding as of July 29, 2019 .



INDEPENDENCE CONTRACT DRILLING, INC.
Index to Form 10-Q
Part I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

3



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Various statements contained in this Quarterly Report on Form 10-Q, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “plan,” “goal,” “will” or other words that convey the uncertainty of future events or outcomes. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, contingencies and uncertainties include, but are not limited to, the following:
a decline in or substantial volatility of crude oil and natural gas commodity prices;
a sustained decrease in domestic spending by the oil and natural gas exploration and production industry;
our inability to implement our business and growth strategy, including plans to upgrade and convert SCR rigs acquired in the Sidewinder Drilling LLC combination;
fluctuation of our operating results and volatility of our industry;
inability to maintain or increase pricing of our contract drilling services, or early termination of any term contract for which early termination compensation is not paid;
our backlog of term contracts declining rapidly;
the loss of any of our customers, financial distress or management changes of potential customers or failure to obtain contract renewals and additional customer contracts for our drilling services;
overcapacity and competition in our industry;
an increase in interest rates and deterioration in the credit markets;
our inability to comply with the financial and other covenants in debt agreements that we may enter into as a result of reduced revenues and financial performance;
unanticipated costs, delays and other difficulties in executing our long-term growth strategy;
the loss of key management personnel;
new technology that may cause our drilling methods or equipment to become less competitive;
labor costs or shortages of skilled workers;
the loss of or interruption in operations of one or more key vendors;
the effect of operating hazards and severe weather on our rigs, facilities, business, operations and financial results, and limitations on our insurance coverage;
increased regulation of drilling in unconventional formations;
the incurrence of significant costs and liabilities in the future resulting from our failure to comply with new or existing environmental regulations or an accidental release of hazardous substances into the environment; and
the potential failure by us to establish and maintain effective internal control over financial reporting.

All forward-looking statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations, and, therefore, you are cautioned not to place undue reliance on such statements. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Form 10-Q and Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 . Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

4



PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Independence Contract Drilling, Inc.
Consolidated Balance Sheets
(Unaudited)
(in thousands, except par value and share amounts)

 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Cash and cash equivalents
$
10,278

 
$
12,247

Accounts receivable, net
35,862

 
41,987

Inventories
2,443

 
2,693

Assets held for sale
13,796

 
19,711

Prepaid expenses and other current assets
3,321

 
8,930

Total current assets
65,700

 
85,568

Property, plant and equipment, net
489,074

 
496,197

Goodwill
1,627

 
1,627

Other long-term assets, net
2,212

 
1,470

Total assets
$
558,613

 
$
584,862

Liabilities and Stockholders’ Equity
 
 
 
Liabilities
 
 
 
Current portion of long-term debt
$
1,161

 
$
587

Accounts payable
19,606

 
16,312

Accrued liabilities
16,057

 
29,219

Current portion of contingent consideration
13,950

 

Total current liabilities
50,774

 
46,118

Long-term debt
128,654

 
130,012

Contingent consideration

 
15,748

Deferred income taxes, net
1,132

 
774

Other long-term liabilities
1,125

 
677

Total liabilities
181,685

 
193,329

Commitments and contingencies (Note 13)

 

Stockholders’ equity
 
 
 
Common stock, $0.01 par value, 200,000,000 shares authorized; 77,469,233 and 77,598,806 shares issued, respectively, and 76,948,679 and 77,078,252 shares outstanding, respectively
769

 
771

Additional paid-in capital
504,074

 
503,446

Accumulated deficit
(124,869
)
 
(109,638
)
Treasury stock, at cost, 520,554 shares
(3,046
)
 
(3,046
)
Total stockholders’ equity
376,928

 
391,533

Total liabilities and stockholders’ equity
$
558,613

 
$
584,862


The accompanying notes are an integral part of these consolidated financial statements.

5



Independence Contract Drilling, Inc.
Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
52,879

 
$
25,754

 
$
113,237

 
$
51,381

Costs and expenses
 
 
 
 
 
 
 
Operating costs
37,453

 
17,966

 
76,786

 
36,892

Selling, general and administrative
3,008

 
3,495

 
7,553

 
6,974

Merger-related expenses
1,287

 
443

 
2,368

 
443

Depreciation and amortization
11,371

 
6,579

 
22,684

 
13,170

Asset impairment (insurance recoveries), net
5,855

 

 
7,873

 
(35
)
Loss (gain) on disposition of assets, net
18

 
(333
)
 
3,238

 
(415
)
Total costs and expenses
58,992

 
28,150

 
120,502

 
57,029

Operating loss
(6,113
)
 
(2,396
)
 
(7,265
)
 
(5,648
)
Interest expense
(3,592
)
 
(938
)
 
(7,353
)
 
(1,881
)
Other expense
(255
)
 

 
(255
)
 

Loss before income taxes
(9,960
)
 
(3,334
)
 
(14,873
)
 
(7,529
)
Income tax expense (benefit)
2,898

 
(21
)
 
358

 
(70
)
Net loss
$
(12,858
)
 
$
(3,313
)
 
$
(15,231
)
 
$
(7,459
)
Loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.17
)
 
$
(0.09
)
 
$
(0.20
)
 
$
(0.20
)
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic and diluted
75,692

 
38,253

 
75,692

 
38,188


The accompanying notes are an integral part of these consolidated financial statements.
 

6



Independence Contract Drilling, Inc.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in thousands, except share amounts)
 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Treasury Stock
 
Total Stockholders’ Equity
Balances at December 31, 2018
77,078,252

 
$
771

 
$
503,446

 
$
(109,638
)
 
$
(3,046
)
 
$
391,533

Common stock issuance costs

 

 
(177
)
 

 

 
(177
)
Stock-based compensation

 

 
387

 

 

 
387

Net loss

 

 

 
(2,373
)
 

 
(2,373
)
Balances at March 31, 2019
77,078,252

 
$
771

 
$
503,656

 
$
(112,011
)
 
$
(3,046
)
 
$
389,370

Restricted stock forfeiture
(129,573
)
 
(2
)
 
2

 

 

 

Stock-based compensation

 

 
416

 

 

 
416

Net loss

 

 

 
(12,858
)
 

 
(12,858
)
Balances at June 30, 2019
76,948,679

 
$
769

 
$
504,074

 
$
(124,869
)
 
$
(3,046
)
 
$
376,928


 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Treasury Stock
 
Total Stockholders’ Equity
Balances at December 31, 2017
37,985,225

 
$
380

 
$
326,616

 
$
(89,645
)
 
$
(1,869
)
 
$
235,482

RSUs vested, net of shares withheld for taxes
350,528

 
3

 
(98
)
 

 

 
(95
)
Purchase of treasury stock
(82,988
)
 

 

 

 
(350
)
 
(350
)
Stock-based compensation

 

 
644

 

 

 
644

Net loss

 

 

 
(4,146
)
 

 
(4,146
)
Balances at March 31, 2018
38,252,765

 
383

 
327,162

 
(93,791
)
 
(2,219
)
 
231,535

Stock-based compensation

 

 
718

 

 

 
718

Net loss

 

 

 
(3,313
)
 

 
(3,313
)
Balances at June 30, 2018
38,252,765

 
$
383

 
$
327,880

 
$
(97,104
)
 
$
(2,219
)
 
$
228,940



The accompanying notes are an integral part of these consolidated financial statements.


7



Independence Contract Drilling, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(15,231
)
 
$
(7,459
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
Depreciation and amortization
22,684

 
13,170

Asset impairment (insurance recoveries), net
7,873

 
(35
)
Stock-based compensation
803

 
1,362

Loss (gain) on disposition of assets, net
3,238

 
(415
)
Deferred income taxes
358

 
(70
)
Amortization of deferred financing costs
406

 
185

Bad debt (recovery) expense
(42
)
 
22

Changes in operating assets and liabilities
 
 
 
Accounts receivable
6,167

 
(1,668
)
Inventories
(61
)
 
(136
)
Prepaid expenses and other assets
2,751

 
(951
)
Accounts payable and accrued liabilities
(8,953
)
 
(539
)
Net cash provided by operating activities
19,993

 
3,466

Cash flows from investing activities
 
 
 
Purchases of property, plant and equipment
(23,344
)
 
(13,023
)
Proceeds from insurance claims
1,000

 

Proceeds from the sale of assets
3,912

 
327

Net cash used in investing activities
(18,432
)
 
(12,696
)
Cash flows from financing activities
 
 
 
Borrowings under ABL Credit Facility
2,511

 

Repayments under ABL Credit Facility
(5,077
)
 

Borrowings under CIT Credit Facility

 
27,441

Repayments under CIT Credit Facility

 
(17,200
)
Common stock issuance costs
(177
)
 

Purchase of treasury stock

 
(350
)
RSUs withheld for taxes

 
(95
)
Financing costs paid under Term Loan Facility
(5
)
 

Financing costs paid under ABL Credit Facility
(12
)
 

Financing costs paid under CIT Credit Facility

 
(215
)
Payments for finance and capital lease obligations
(770
)
 
(330
)
Net cash (used in) provided by financing activities
(3,530
)
 
9,251

Net (decrease) increase in cash and cash equivalents
(1,969
)
 
21

Cash and cash equivalents
 
 
 
Beginning of period
12,247

 
2,533

End of period
$
10,278

 
$
2,554



8



 
Six Months Ended June 30,
(in thousands)
2019
 
2018
Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
7,047

 
$
1,878

Supplemental disclosure of non-cash investing and financing activities
 
 
 
Change in property, plant and equipment purchases in accounts payable
$
591

 
$
3,621

Additions to property, plant and equipment through capital leases
$
2,223

 
$
309

Transfer of assets from held and used to held for sale
$
(4,028
)
 
$

Transfer from inventory to fixed assets
$
(311
)
 
$


The accompanying notes are an integral part of these consolidated financial statements.

9



INDEPENDENCE CONTRACT DRILLING, INC.
Notes to Consolidated Financial Statements
(Unaudited)

1.
Nature of Operations and Recent Events
Except as expressly stated or the context otherwise requires, the terms “we,” “us,” “our,” “ICD,” and the “Company” refer to Independence Contract Drilling, Inc. and its subsidiary.
We provide land-based contract drilling services for oil and natural gas producers targeting unconventional resource plays in the United States. We own and operate a premium fleet comprised of modern, technologically advanced drilling rigs that are specifically engineered and designed to optimize the development of our customers’ most technically demanding oil and gas properties.
Our rig fleet includes 29 AC powered (“AC”) rigs and three 1500-HP ultra-modern SCR rigs. During the second quarter of 2019, we elected to cease marketing these three SCR rigs in order to convert them to meet our AC pad-optimal specifications. These rigs will be removed from our marketed fleet until their conversions are complete. We ordered long lead-time items required to complete the conversions in the fourth quarter of 2018, and the first conversion is scheduled for completion during the third quarter of 2019. In addition, we own two idle rigs, including one non-walking 1500-HP AC rig and one 1500-HP SCR, which will not be marketed or reactivated until converted to AC pad-optimal status prior to entering our fleet. These two rigs will not be scheduled for conversion until market conditions improve.
We currently focus our operations on unconventional resource plays located in geographic regions that we can efficiently support from our Houston, Texas and Midland, Texas facilities in order to maximize economies of scale. Currently, our rigs are operating in the Permian Basin, the Haynesville Shale and the Eagle Ford Shale; however, our rigs have previously operated in the Mid-Continent and Eaglebine regions as well.
Our business depends on the level of exploration and production activity by oil and natural gas companies operating in the United States, and in particular, the regions where we actively market our contract drilling services. The oil and natural gas exploration and production industry is historically cyclical and characterized by significant changes in the levels of exploration and development activities. Oil and natural gas prices and market expectations of potential changes in those prices significantly affect the levels of those activities. Worldwide political, regulatory, economic, and military events, as well as natural disasters have contributed to oil and natural gas price volatility historically, and are likely to continue to do so in the future. Any prolonged reduction in the overall level of exploration and development activities in the United States and the regions where we market our contract drilling services, whether resulting from changes in oil and natural gas prices or otherwise, could materially and adversely affect our business.
Oil and Natural Gas Prices and Drilling Activity
Oil prices declined from a high of $107.95 per barrel in the second quarter of 2014, to a low of $26.19 per barrel in the first quarter of 2016 (West Texas Intermediate - Cushing, Oklahoma (“WTI”) spot price as reported by the United States Energy Information Administration (the “EIA”). Similarly, natural gas prices (as measured at Henry Hub) declined from an average of $4.37 per MMBtu in 2014 to $2.52 per MMBtu in 2016. As a result, our industry experienced an exceptional downturn, with the U.S. land rig count falling from a high of 1,930 rigs in 2014 to a low of 404 rigs in 2016. In addition to overall rig count decline, pricing for our contract drilling services also substantially declined during this period of time. Although crude oil prices experienced a mild recovery in 2017 and 2018, reaching a high of $77.41 per barrel in the second quarter of 2018, the U.S. land rig count never recovered to its 2014 highs, only reaching 1,083 rigs the week ended December 28, 2018. Similarly, although pricing for our drilling services improved during this period, pricing never reached the rates experienced in 2014.
During the fourth quarter of 2018, oil prices began to decline, reaching a low of $44.48 . Although oil prices have recently recovered to the $50.00 to $60.00 range as of the end of the second quarter 2019, most of our E&P customers have decreased planned capital expenditure budgets with the goal of operating within their cash flows. These changes have resulted in softening demand for contract drilling services. Although we believe market conditions for our services have stabilized, we believe this stabilization is predicated on oil prices remaining above a $50 per barrel or higher range. If oil prices were to fall below these levels for any sustainable period, demand and pricing for our contract drilling services could decline and have a material adverse affect on our operations and financial condition.

10



Sidewinder Merger
On July 18, 2018, ICD, Patriot Saratoga Merger Sub, LLC, a wholly owned subsidiary of ICD (“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 merged with and into Sidewinder (the “Merger”), with Sidewinder surviving the Merger and becoming a wholly owned subsidiary of the ICD. 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 ICD common stock in exchange for 100% of the outstanding Series A Common Units of Sidewinder (the “Series A Common Units”). The Merger was accounted for using the acquisition method of accounting with ICD identified as the accounting acquirer.
2.
Interim Financial Information
These unaudited consolidated financial statements include the accounts of ICD and its subsidiary, and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These financial statements should be read along with our audited financial statements for the year ended December 31, 2018 , included in our Annual Report on Form 10-K for the year ended December 31, 2018 . In management’s opinion, these financial statements contain all adjustments necessary to fairly present our financial position, results of operations, cash flows and changes in stockholders’ equity for all periods presented.
As we had no items of other comprehensive income in any period presented, no other components of comprehensive income is presented.
Interim results for the three and six months ended June 30, 2019 may not be indicative of results that will be realized for the full year ending December 31, 2019 .
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases, to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. Under the new guidance, lessees are required to recognize (with the exception of leases with terms of 12 months or less) at the commencement date, a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.          
In July 2018, the FASB issued ASU No. 2018-11, Leases: Targeted Improvements, which provides an option to apply the guidance prospectively, and provides a practical expedient allowing lessors to combine the lease and non-lease components of revenues where the revenue recognition pattern is the same and where the lease component, when accounted for separately, would be considered an operating lease.  The practical expedient also allows a lessor to account for the combined lease and non-lease components under ASC Topic 606, Revenue from Contracts with Customers, when the non-lease component is the predominant element of the combined components.
We adopted ASU No. 2016-02 and its related amendments (collectively known as ASC 842) effective on January 1, 2019, using the effective date method.
See Note 3 “Leases” for the required disclosures related to the impact of adopting this standard and a discussion of our policies related to leases.
Segment and Geographical Information
Our operations consist of one reportable segment because all of our drilling operations are located in the United States and have similar economic characteristics. Corporate management administers all properties as a whole rather than as discrete operating segments. Operational data is tracked by rig; however, financial performance is measured as a single enterprise and not on a rig-by-rig basis. Further, the allocation of capital resources is employed on a project-by-project basis across our entire asset base to maximize profitability without regard to individual geographic areas.
Other Matters
We have not elected to avail ourselves of the extended transition period available to emerging growth companies (“EGCs”) as provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards; therefore, we will be subject to new or revised accounting standards at the same time as other public companies that are not EGCs.

11



Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as additional guidance on the measurement of credit losses on financial instruments.  The new guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. In addition, the guidance amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The new guidance is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after December 15, 2018. We are currently evaluating the impact this guidance will have on our accounts receivable.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other, which simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under this new standard, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognize an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after January 1, 2017. We do not believe this new guidance will have a material impact on our consolidated financial statements.
3.
Leases
Effective January 1, 2019, we adopted ASC 842. The most significant changes of the new standard are (1) lessees recognize a lease liability and a right-of-use (“ROU”) asset for all leases, including operating leases, with an initial term greater than 12 months on their balance sheets and (2) lessees and lessors disclose additional key information about their leasing transactions.
We have elected to implement ASC 842 using the effective date method which recognizes and measures all leases that exist at the effective date, January 1, 2019, using a modified retrospective transition approach. There was no cumulative-effect adjustment required to be recorded in connection with the adoption of the new standard and the reported amount of lease expense and cash flows are substantially unchanged under ASC 842. Comparative periods are presented in accordance with ASC 840 and do not include any retrospective adjustments.
As a Lessor
Our daywork drilling contracts, under which the vast majority of our revenues are derived, contain both a lease component and a service component.
ASU 2018-11 amended ASC 842 to, among other things, provide lessors with a practical expedient to not separate non-lease components from lease components and, instead, to account for those components as a single amount, if the non-lease components otherwise would be accounted for under Topic 606 and both of the following are met:
1)
The timing and pattern of transfer of non-lease components and lease components are the same.
2)
The lease component, if accounted for separately, would be classified as an operating lease.
If the non-lease component is the predominant component of the combined amount, an entity is required to account for the combined amount in accordance with Topic 606. Otherwise, the entity must account for the combined amount as an operating lease in accordance with Topic 842.
Revenues from our daywork drilling contracts meet both of the criteria above and we have determined both quantitatively and qualitatively that the service component of our daywork drilling contracts is the predominant component. Accordingly, we combine the lease and service components of our daywork drilling contracts and account for the combined amount under Topic 606. See Note 5 - Revenue from Contracts with Customers.
We have multi-year operating and financing leases for corporate office space, field location facilities, land, vehicles and various other equipment used in our operations. We also have a significant number of rentals related to our drilling operations that are day-to-day or month-to-month arrangements. Our multi-year leases have remaining lease terms of greater than one year to 5 years.

12



As a Lessee
As a practical expedient, a lessee may elect not to apply the recognition requirements in ASC 842 to short-term leases. Instead a lessee may recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred. We have elected to utilize this practical expedient.
We have elected the package of practical expedients permitted in ASC 842. Accordingly, we accounted for our existing capital leases as finance leases under the new guidance, without reassessing whether the contracts contained a lease under ASC 842, whether classification of the capital lease would be different in accordance with ASC 842 and without reassessing any initial costs associated with the lease. As a result, we recognized on January 1, 2019 a lease liability at the carrying amount of the capital lease obligation on December 31, 2018, of $1.2 million and a ROU asset at the carrying amount of the capital lease asset of $1.3 million . Additionally, we accounted for our existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contract contains a lease under ASC 842 or (b) whether classification of the operating lease would be different in accordance with ASC 842. As a result, we recognized on January 1, 2019 a lease liability of $1.7 million , which represents the present value of the remaining lease payments discounted using our incremental borrowing rate of 8.17% , and a ROU asset of $0.9 million , which represents the lease liability of $1.7 million plus any prepaid lease payments, and less any unamortized lease incentives, totaling $0.8 million .
On January 1, 2019, the vehicle leases assumed in the Sidewinder merger were amended to be consistent with our existing vehicle leases, which resulted in a change in the classification from operating leases to finance leases. On the amendment date, we recorded $0.4 million in finance lease obligations and right of use assets.
The components of lease expense were as follows:
(in thousands)
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease expense
$
124

 
$
249

Short-term lease expense
1,234

 
2,427

Variable lease expense
185

 
271

 
 
 
 
Finance lease cost:
 
 
 
Amortization of right-of-use assets
$
314

 
$
579

Interest expense on lease liabilities
47

 
79

Total finance lease expense
361

 
658

Total lease expenses
$
1,904

 
$
3,605

Supplemental cash flow information related to leases is as follows:
(in thousands)
 
Six Months Ended June 30, 2019
Cash paid for amounts included in measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
216

Operating cash flows from finance leases
 
$
74

Financing cash flows from finance leases
 
$
770

 
 
 
Right-of-use assets obtained or recorded in exchange for lease obligations:
 
 
Operating leases
 
$
955

Finance leases
 
$
2,223


13



Supplemental balance sheet information related to leases is as follows:
(in thousands)
 
June 30, 2019
Operating leases:
 
 
Operating lease right-of-use assets
 
$
772

 
 
 
Accrued liabilities
 
$
421

Other long-term liabilities
 
1,126

Total operating lease liabilities
 
$
1,547

 
 
 
Finance leases:
 
 
Property and equipment
 
$
4,313

Accumulated depreciation
 
(1,347
)
Property and equipment, net
 
$
2,966

 
 
 
Current portion of long-term debt
 
$
1,161

Long-term debt
 
1,523

Total finance lease liabilities
 
$
2,684

 
 
 
Weighted-average remaining lease term
 
 
Operating leases
 
4.2 years

Finance leases
 
2.2 years

 
 
 
Weighted-average discount rate
 
 
Operating leases
 
8.17
%
Finance leases
 
7.06
%
Maturities of lease liabilities at June 30, 2019 were as follows:
(in thousands)
Operating Leases
 
Finance Leases
2019
$
315

 
$
601

2020
384

 
915

2021
350

 
607

2022
360

 
129

2023
370

 

Thereafter
47

 

Total cash lease payment
1,826

 
2,252

Add: expected residual value

 
679

Less: imputed interest
(279
)
 
(247
)
Total lease liabilities
$
1,547

 
$
2,684

As of December 31, 2018, future total obligations on our noncancellable capital and operating leases were $3.7 million in the aggregate, which consisted of the following: $1.4 million in 2019, $1.0 million in 2020, $0.5 million in 2021 and $0.8 million thereafter.




14




4.
Sidewinder Merger
We completed the merger with Sidewinder Drilling LLC on October 1, 2018, through an exchange of 100% of Sidewinder’s outstanding voting interests for 36,752,657 shares of ICD common stock, which were valued at $173.1 million at the time of closing. We also assumed $58.5 million of Sidewinder indebtedness in the transaction.
During the three and six months ended June 30, 2019 , we recorded $1.3 million and $2.4 million , respectively, of merger-related expenses comprised primarily of severance, professional fees and various other integration related expenses.
Certain intangible liabilities were recorded in connection with the Sidewinder merger for drilling contracts in place at the closing date of the transaction that had unfavorable contract terms as compared to then current market terms for comparable drilling rigs. The intangible liabilities are amortized to operating revenues over the remaining underlying contract terms. During the three and six months ended June 30, 2019 , $46.0 thousand and $1.1 million of intangible revenue was recognized as a result of this amortization and the intangible liabilities were fully amortized.
The following table summarizes the components of intangible liabilities, net:
(in thousands)
June 30, 2019
 
December 31, 2018
Intangible liabilities
$
3,123

 
$
3,123

Accumulated amortization
(3,123
)
 
(2,044
)
Intangible liabilities, net
$

 
$
1,079

In addition, at the time of consummation of the Sidewinder Merger,  Sidewinder owned 11 mechanical rigs and related equipment (the "Mechanical Rigs") located principally in the Utica and Marcellus plays. As these rigs are not consistent with ICD’s core strategy or geographic focus, ICD agreed that these rigs can be disposed of, with the Sidewinder unitholders receiving the net proceeds. As a result of this arrangement, on the closing date, we recorded $15.9 million , representing the fair value of the Mechanical Rigs less costs to sell, as assets held for sale, with an offsetting liability in contingent consideration at the closing of the transaction.  Certain of these assets have been sold, and we expect to sell or liquidate substantially all of the remaining assets and pay out the related net proceeds by April 2020. 
5.      Revenue from Contracts with Customers
The following table summarizes revenues from our contracts disaggregated by revenue generating activity contained therein for the three and six months ended June 30, 2019 and 2018 :
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Dayrate drilling
$
48,133

 
$
24,447

 
$
104,584

 
$
48,224

Mobilization
1,177

 
271

 
2,437

 
730

Reimbursables
2,950

 
1,002

 
4,554

 
2,233

Early termination
501

 

 
501

 

Capital modification
62

 
34

 
72

 
194

Intangible
46

 

 
1,079

 

Other
10

 

 
10

 

Total revenue
$
52,879

 
$
25,754

 
$
113,237

 
$
51,381


15



The following table provides information about receivables, contract assets and contract liabilities related to contracts with customers:
(in thousands)
June 30, 2019
 
December 31, 2018
Receivables, which are included in “Accounts receivable, net”
$
35,670

 
$
41,987

Contract assets
$

 
$

Contract liabilities
$
(730
)
 
$
(1,374
)
Significant changes in contract assets and contract liabilities balances during the period are as follows:
 
Three Months Ended 
 June 30, 2019
 
Six Months Ended 
 June 30, 2019
(in thousands)
Contract Assets
 
Contract Liabilities
 
Contract Assets
 
Contract Liabilities
Revenue recognized that was included in contract liabilities at beginning of period
$

 
$
574

 
$

 
$
1,305

Increase in contract liabilities due to cash received, excluding amounts recognized as revenue
$

 
$
(500
)
 
$

 
$
(661
)
Transferred to receivables from contract assets at beginning of period
$

 
$

 
$

 
$

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of June 30, 2019 . The estimated revenue does not include amounts of variable consideration that are constrained.
 
Year Ending December 31,
(in thousands)
2019
 
2020
 
2021
 
Total
Revenue
$
730

 
$

 
$

 
$
730

The amounts presented in the table above consist only of fixed consideration related to fees for rig mobilizations and demobilizations, if applicable, which are allocated to the drilling services performance obligation as such performance obligation is satisfied. We have elected the exemption from disclosure of remaining performance obligations for variable consideration. Therefore, dayrate revenue to be earned on a rate scale associated with drilling conditions and level of service provided for each fractional-hour time increment over the contract term and other variable consideration such as penalties and reimbursable revenues, have been excluded from the disclosure.
Contract Costs
We capitalize costs incurred to fulfill our contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy our performance obligations under the contract and (iii) are expected to be recovered through revenue generated under the contract. These costs, which principally relate to rig mobilization costs at the commencement of a new contract, are deferred as a current or noncurrent asset (depending on the length of the contract term), and amortized ratably to contract drilling expense as services are rendered over the initial term of the related drilling contract. Such contract costs, recorded as “Prepaid expenses and other current assets”, amounted to  $1.0 million  and  $1.1 million  on our consolidated balance sheets at June 30, 2019 and December 31, 2018, respectively. During the three and six months ended June 30, 2019 , contract costs increased by  $0.9 million  and $1.5 million , respectively, and we amortized  $0.9 million and $1.6 million  of contract costs.
6.
Financial Instruments and Fair Value
Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1
Unadjusted quoted market prices for identical assets or liabilities in an active market;

16



Level 2
Quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets or liabilities; and
Level 3
Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.
This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
The carrying value of certain of our assets and liabilities, consisting primarily of cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities approximates their fair value due to the short-term nature of such instruments.
The fair value of our long-term debt is determined by Level 3 measurements based on quoted market prices and terms for similar instruments, where available, and on the amount of future cash flows associated with the debt, discounted using our current borrowing rate for comparable debt instruments (the Income Method). Based on our evaluation of the risk free rate, the market yield and credit spreads on comparable company publicly traded debt issues, we used an annualized discount rate, including a credit valuation allowance, of 7.1% . The following table summarizes the carrying value and fair value of our long-term debt as of June 30, 2019  and  December 31, 2018 .
 
Balances at June 30, 2019
 
December 31, 2018
(in thousands)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Term Loan Facility
$
130,000

 
$
141,496

 
$
130,000

 
$
131,893

ABL Credit Facility
$

 
$

 
$
2,566

 
$
2,258

The fair value of our assets held for sale is determined using Level 3 measurements. Fair value measurements are applied with respect to our non-financial assets and liabilities measured on a non-recurring basis, which would consist of measurements primarily of long-lived assets.
7.
Inventories
All of our inventory as of June 30, 2019 and December 31, 2018 consisted of supplies held for use in our drilling operations.
8.
Accrued Liabilities
Accrued liabilities consisted of the following:
(in thousands)
June 30, 2019
 
December 31, 2018
Accrued salaries and other compensation
$
3,157

 
$
12,379

Insurance
2,930

 
5,464

Deferred revenues (contract liabilities)
730

 
1,374

Property and other taxes
3,224

 
3,829

Intangible liability

 
1,079

Interest
3,370

 
3,318

Operating lease liability - current
421

 

Other
2,225

 
1,776

 
$
16,057

 
$
29,219


17



9.
Long-term Debt
Our long-term debt consisted of the following:    
 
 
June 30,
 
December 31,
(in thousands)
 
2019
 
2018
Term Loan Facility due October 1, 2023
 
$
130,000

 
$
130,000

ABL Credit Facility due October 1, 2023
 

 
2,566

Finance and capital lease obligations
 
2,684

 
1,235

 
 
132,684

 
133,801

Less: current portion
 
(1,161
)
 
(587
)
Less: Term Loan Facility deferred financing costs
 
(2,869
)
 
(3,202
)
Long-term debt
 
$
128,654

 
$
130,012

Credit Facilities
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.
At our election, interest under the Term Loan Facility is determined by reference at our option to either (i) a “base rate” equal to the higher of (a) the federal funds effective rate plus  0.05% , (b) the London Interbank Offered Rate with an interest period of one month (“LIBOR”), plus  1.0% , and (c) the rate of interest as publicly quoted from time to time by the Wall Street Journal as the “prime rate” in the United States; plus an applicable margin of  6.5% , or (ii) a “LIBOR rate” equal to LIBOR with an interest period of one month, plus an applicable margin of  7.5% .
The Term Loan Credit Agreement contains financial covenants, including a liquidity covenant of  $10.0 million  and a springing fixed charge coverage ratio covenant of  1.00  to 1.00 that is tested when availability under the ABL Credit Facility (defined below) and the DDTL Facility is below  $5.0 million  at any time that a DDTL Facility loan is outstanding. The Term Loan Credit Agreement also contains other customary affirmative and negative covenants, including limitations on indebtedness, liens, fundamental changes, asset dispositions, restricted payments, investments and transactions with affiliates. The Term Loan Credit Agreement also provides for customary events of default, including breaches of material covenants, defaults under the ABL Credit Facility or other material agreements for indebtedness, and a change of control.
The obligations under the Term Loan Credit Agreement are secured by a first priority lien on collateral (the “Term Priority Collateral”) other than accounts receivable, deposit accounts and other related collateral pledged as first priority collateral (“Priority Collateral”) under the ABL Credit Facility (defined below) and a second priority lien on such Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. MSD PCOF Partners IV, LLC (an affiliate of MSD Partners, L.P. "MSD Partners") is the lender of our  $130.0 million  Term Loan Facility.  MSD Partners, together with its affiliate, MSD Capital, L.P. (“MSD Capital”) own approximately  30%  of the outstanding shares of the Company’s common stock.
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 “ABL Credit Facility”), including availability for letters of credit in an aggregate amount at any time outstanding not to exceed  $7.5 million . Availability under the ABL Credit Facility is subject to a borrowing base calculated based on  85%  of the net amount of our eligible accounts receivable, minus reserves. The ABL Credit Facility has a maturity date of the earlier of October 1, 2023 or the maturity date of the Term Loan Credit Agreement.
At our election, interest under the ABL Credit Facility is determined by reference at our option to either (i) a “base rate” equal to the higher of (a) the federal funds effective rate plus  0.05% , (b) LIBOR with an interest period of one month, plus  1.0% , and (c) the prime rate of Wells Fargo, plus in each case, an applicable base rate margin ranging from  1.0%  to  1.5%  based on quarterly availability, or (ii) a revolving loan rate equal to LIBOR for the applicable interest period plus an applicable LIBOR margin ranging from  2.0%  to  2.5%  based on quarterly availability. We also pay, on a quarterly basis, a commitment fee of  0.375%  (or  0.25%  at any time when revolver usage is greater than  50%  of the maximum credit) per annum on the unused portion of the ABL Credit Facility commitment.

18



The ABL Credit Facility contains a springing fixed charge coverage ratio covenant of  1.00  to 1.00 that is tested when availability is less than  10%  of the maximum credit. The ABL Credit Facility also contains other customary affirmative and negative covenants, including limitations on indebtedness, liens, fundamental changes, asset dispositions, restricted payments, investments and transactions with affiliates. The ABL Credit Facility also provides for customary events of default, including breaches of material covenants, defaults under the Term Loan Agreement or other material agreements for indebtedness, and a change of control. We are in compliance with our covenants as of  June 30, 2019 .
The obligations under the ABL Credit Facility are secured by a first priority lien on Priority Collateral, which includes all accounts receivable and deposit accounts, and a second priority lien on the Term Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries.  As of  June 30, 2019 , the weighted-average interest rate on our borrowings was 10.09% .   At June 30, 2019 , the borrowing base under our ABL Credit Facility was  $24.2 million , and we had  $21.7 million  of availability remaining of our  $40.0 million  commitment on that date. Subsequent to June 30, 2019, we received notification from our insurance carrier that our collateral requirement supported by a letter of credit from our ABL Credit Facility decreased from $2.5 million to $0.4 million . Pro forma for the new collateral requirement, availability under our ABL Credit Facility at June 30, 2019 would have been $23.8 million .
10.
Stock-Based Compensation
Prior to June 2019, we issued common stock-based awards to employees and non-employee directors under our 2012 Long-Term Incentive Plan adopted in March 2012 (the “2012 Plan”). In June 2019, we adopted the 2019 Omnibus Incentive Plan (the “2019 Plan”) providing for common stock-based awards to employees and non-employee directors. The 2019 Plan permits the granting of various types of awards, including stock options, restricted stock and restricted stock unit awards, and up to 5,500,000 shares were authorized for issuance. Restricted stock and restricted stock units may be granted for no consideration other than prior and future services. The purchase price per share for stock options may not be less than the market price of the underlying stock on the date of grant. As of June 30, 2019 , approximately 3,995,488 shares were available for future awards under the 2019 Plan. In connection with the adoption of the 2019 Plan, no further awards will be made under the 2012 Plan.
In the first quarter of 2017, we adopted ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The FASB issued this accounting standard in an effort to simplify the accounting for employee share-based payments and improve the usefulness of the information provided to users of financial statements. Our policy is to account for forfeitures of share-based compensation awards as they occur.
A summary of compensation cost recognized for stock-based payment arrangements is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Compensation cost recognized:
 
 
 
 
 
 
 
Stock options
$

 
$

 
$

 
$

Restricted stock and restricted stock units
416

 
718

 
803

 
1,362

Total stock-based compensation
$
416

 
$
718

 
$
803

 
$
1,362

No stock-based compensation was capitalized in connection with rig construction activity during the three and six months ended June 30, 2019 or 2018 .
Stock Options
We use the Black-Scholes option pricing model to estimate the fair value of stock options granted to employees and non-employee directors. The fair value of the options is amortized to compensation expense on a straight-line basis over the requisite service periods of the stock awards, which are generally the vesting periods.
There were no stock options granted during the six months ended June 30, 2019 or 2018 .

19



A summary of stock option activity and related information for the six months ended June 30, 2019 is as follows:
 
Six Months Ended June 30, 2019
 
Options
 
Weighted
Average
Exercise
Price
Outstanding at January 1, 2019
669,213

 
$
12.74

Granted

 

Exercised

 

Forfeited/expired

 

Outstanding at June 30, 2019
669,213

 
$
12.74

Exercisable at June 30, 2019
669,213

 
$
12.74

The number of options vested at June 30, 2019 was 669,213 with a weighted average remaining contractual life of 2.8 years and a weighted average exercise price of $12.74 per share. There were no unvested options or unrecognized compensation cost related to outstanding stock options at June 30, 2019 .
Time-based Restricted Stock and Restricted Stock Units
We have granted time-based restricted stock and restricted stock units to key employees under the 2012 Plan and 2019 Plan.
Time-based Restricted Stock
Time-based restricted stock awards consist of grants of our common stock that vest ratably over three to five years . We recognize compensation expense on a straight-line basis over the vesting period. The fair value of restricted stock awards is determined based on the estimated fair market value of our shares on the grant date. As of June 30, 2019 , there was $3.6 million in unrecognized compensation cost related to unvested restricted stock awards. This cost is expected to recognized over a weighted-average period of 2.3 years.
A summary of the status of our time-based restricted stock awards and of changes in our time-based restricted stock awards outstanding for the six months ended June 30, 2019 is as follows:
 
Six Months Ended June 30, 2019
 
Shares
 
Weighted
Average
Grant-Date
Fair Value
Per Share
Outstanding at January 1, 2019
1,385,973

 
$
3.22

Granted

 

Vested

 

Forfeited
(129,573
)
 
3.22

Outstanding at June 30, 2019
1,256,400

 
$
3.22

Time-based Restricted Stock Units
We have granted three -year time vested restricted stock unit awards where each unit represents the right to receive, at the end of a vesting period, one share of ICD common stock with no exercise price. The fair value of time-based restricted stock unit awards is determined based on the estimated fair market value of our shares on the grant date. As of June 30, 2019 , there was $2.5 million of total unrecognized compensation cost related to unvested time-based restricted stock unit awards. This cost is expected to be recognized over a weighted-average period of 1.2 years.

20



A summary of the status of our time-based restricted stock unit awards and of changes in our time-based restricted stock unit awards outstanding for the six months ended June 30, 2019 is as follows:
 
Six Months Ended June 30, 2019
 
RSUs
 
Weighted
Average
Grant-Date
Fair Value
Per Share
Outstanding at January 1, 2019
409,607

 
$
4.79

Granted
564,994

 
1.94

Vested and converted

 

Forfeited

 

Outstanding at June 30, 2019
974,601

 
$
3.14

Performance-Based and Market-Based Restricted Stock Units
We have granted three-year performance-based and market-based restricted stock unit awards, where each unit represents the right to receive, at the end of a vesting period, up to two shares of ICD common stock with no exercise price. Exercisability of the market-based restricted stock unit awards is based on our total shareholder return ("TSR") as measured against the TSR of a defined peer group and vesting of the performance-based restricted stock unit awards is based on our cumulative return on invested capital ("ROIC") as measured against ROIC performance goals determined by the compensation committee of our Board of Directors. We used a Monte Carlo simulation model to value the TSR market-based restricted stock unit awards. The fair value of the performance-based restricted stock unit awards is based on the market price of our common stock on the date of grant. During the restriction period, the performance-based and market-based restricted stock unit awards may not be transferred or encumbered, and the recipient does not receive dividend equivalents or have voting rights until the units vest. As of June 30, 2019 , there was unrecognized compensation cost related to unvested performance-based or market-based restricted stock unit awards totaling $0.8 million . This cost is expected to be recognized over a weighted-average period of 1.4 years .
The assumptions used to value our TSR market-based restricted stock unit awards granted during the six months ended June 30, 2019 were a risk-free interest rate of 1.86% , an expected volatility of 58.2% and an expected dividend yield of 0.0% . Based on the Monte Carlo simulation, these restricted stock unit awards were valued at $1.45 .
A summary of the status of our performance-based and market-based restricted stock unit awards and of changes in our restricted stock unit awards outstanding for the six months ended June 30, 2019 is as follows:
 
Six Months Ended June 30, 2019
 
RSUs
 
Weighted
Average
Grant-Date
Fair Value
Per Share
Outstanding at January 1, 2019

 
$

Granted
469,759

 
1.69

Vested and converted

 

Forfeited

 

Outstanding at June 30, 2019
469,759

 
$
1.69



21



11.
Stockholders’ Equity and Earnings (Loss) per Share
As of June 30, 2019 , we had a total of 76,948,679 shares of common stock, $0.01 par value, outstanding. We also had 520,554 shares held as treasury stock. Total authorized common stock is 200,000,000 shares.
Basic earnings (loss) per common share (“EPS”) are computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. A reconciliation of the numerators and denominators of the basic and diluted losses per share computations is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands, except per share data)
2019
 
2018
 
2019
 
2018
Net loss (numerator):
$
(12,858
)
 
$
(3,313
)
 
$
(15,231
)
 
$
(7,459
)
Loss per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.17
)
 
$
(0.09
)
 
$
(0.20
)
 
$
(0.20
)
Shares (denominator):
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
75,692

 
38,253

 
75,692

 
38,188

Weighted average common shares outstanding - diluted
75,692

 
38,253

 
75,692

 
38,188

For all periods presented, the computation of diluted loss per share excludes the effect of certain outstanding stock options and RSUs because their inclusion would be anti-dilutive. The number of options that were excluded from diluted loss per share were 669,213 during the three and six months ended June 30, 2019 and 682,950 during the three and six months ended June 30, 2018 . The number of RSUs, which are not participating securities, that were excluded from our basic and diluted loss per share because they are anti-dilutive, were 1,444,360 for the three and six months ended June 30, 2019 and 1,226,173 for the three and six months ended June 30, 2018 .
12.
Income Taxes
Our effective tax rate was (29.1)% and (2.4)% for the three and six months ended June 30, 2019 , and 0.6% and 0.9% for the three and six months ended June 30, 2018 . Taxes in both periods relate to Louisiana state income tax and Texas margin tax. For federal income tax purposes, we have applied a valuation allowance against any potential deferred tax asset which would have ordinarily resulted.
13.
Commitments and Contingencies
Purchase Commitments
As of June 30, 2019 , we had outstanding purchase commitments to a number of suppliers totaling $10.5 million , net of deposits previously made, related primarily to the operation and upgrade of drilling rigs. All of these commitments relate to equipment and services currently scheduled for delivery in 2019.
Contingencies
We may be the subject of lawsuits and claims arising in the ordinary course of business from time to time. Management cannot predict the ultimate outcome of such lawsuits and claims. While lawsuits and claims are asserted for amounts that may be material should an unfavorable outcome be the result, management does not currently expect that the outcome of any of these known legal proceedings or claims will have a material adverse effect on our financial position or results of operations.
14.
Related Parties
In conjunction with the closing of the Sidewinder Merger on October 1, 2018, we entered into the Term Loan Credit Agreement for an initial term loan in an aggregate principal amount of  $130.0 million and a delayed draw term loan facility in an aggregate principal amount of up to  $15.0 million . MSD PCOF Partners IV, LLC (an affiliate of MSD Partners) is the lender of our  $130.0 million  Term Loan Facility.  MSD Partners, together with MSD Capital, own approximately  30%  of the outstanding shares of the Company’s common stock as of June 30, 2019 .

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We made interest payments on the Term Loan Facility totaling $3.3 million and $6.6 million for the three and six months ended June 30, 2019 , respectively.



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with the financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 1, 2019 (the “Form 10-K”). This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described in the section titled Cautionary Statement Regarding Forward-Looking Statements” and those set forth under Part 1“Item 1A. Risk Factors” or in other parts of the Form 10-K.
Management Overview
We were incorporated in Delaware on November 4, 2011. We provide land-based contract drilling services for oil and natural gas producers targeting unconventional resource plays in the United States. We own and operate a premium fleet comprised of modern, technologically advanced drilling rigs that are specifically engineered and designed to optimize the development of our customers’ most technically demanding oil and gas properties. On October 1, 2018, we completed a merger with Sidewinder Drilling LLC. As a result of this merger, we more than doubled our operating fleet and personnel.
Our rig fleet includes 29 AC powered (“AC”) rigs and three 1500-HP ultra-modern SCR rigs. During the second quarter of 2019, we elected to cease marketing these three SCR rigs in order to convert them to meet our AC pad-optimal specifications. These rigs will be removed from our marketed fleet until their conversions are complete. We ordered long lead-time items required to complete the conversions in the fourth quarter of 2018, and the first conversion is scheduled for completion during the third quarter of 2019. In addition, we own two idle rigs, including one non-walking 1500-HP AC rig and one 1500-HP SCR which will not be marketed or reactivated until converted to AC pad-optimal status prior to entering our fleet. These two rigs will not be scheduled for conversion until market conditions improve.
We currently focus our operations on unconventional resource plays located in geographic regions that we can efficiently support from our Houston, Texas and Midland, Texas facilities in order to maximize economies of scale. Currently, our rigs are operating in the Permian Basin, the Haynesville Shale and the Eagle Ford Shale; however, our rigs have previously operated in the Mid-Continent and Eaglebine regions as well.
Our business depends on the level of exploration and production activity by oil and natural gas companies operating in the United States, and in particular, the regions where we actively market our contract drilling services. The oil and natural gas exploration and production industry is historically cyclical and characterized by significant changes in the levels of exploration and development activities. Oil and natural gas prices and market expectations of potential changes in those prices significantly affect the levels of those activities. Worldwide political, regulatory, economic, and military events, as well as natural disasters have contributed to oil and natural gas price volatility historically, and are likely to continue to do so in the future. Any prolonged reduction in the overall level of exploration and development activities in the United States and the regions where we market our contract drilling services, whether resulting from changes in oil and natural gas prices or otherwise, could materially and adversely affect our business.
Emerging Growth Company
We are an emerging growth company (“EGC”) as defined under the Jumpstart Our Business Startups Act of 2012, commonly referred to as the “JOBS Act”.  We will remain an EGC for up to five years from the date of the completion of our initial public offering (the “IPO”) on August 13, 2014, or until the earlier of (1) the last day of the fiscal year in which our total annual gross revenues exceed $1.07 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common equity that is held by non-affiliates is $700 million or more as of the last business day of our most recently completed second fiscal quarter or (3) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. 
As an EGC, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs including, but not limited to: 
not being required to comply with the auditor attestation requirements related to our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and 

24




exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. 
In addition, Section 107 of the JOBS Act provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. Under this provision, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We have not elected to avail ourselves of the extended transition period available to EGCs as provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards; therefore, we will be subject to new or revised accounting standards at the same time as other public companies that are not EGCs.
Significant Developments
Oil and Natural Gas Prices and Drilling Activity
Oil prices declined from a high of $107.95 per barrel in the second quarter of 2014, to a low of $26.19 per barrel in the first quarter of 2016 (West Texas Intermediate - Cushing, Oklahoma (“WTI”) spot price as reported by the United States Energy Information Administration (the “EIA”). Similarly, natural gas prices (as measured at Henry Hub) declined from an average of $4.37 per MMBtu in 2014 to $2.52 per MMBtu in 2016. As a result, our industry experienced an exceptional downturn, with the U.S. land rig count falling from a high of 1,930 rigs in 2014 to a low of 404 rigs in 2016. In addition to overall rig count decline, pricing for our contract drilling services also substantially declined during this period of time. Although crude oil prices recovered in 2017 and 2018, reaching a high of $77.41 per barrel in the second quarter of 2018, the U.S. land count never recovered to its 2014 highs, only reaching 1,083 rigs the week ending December 28, 2018. Similarly, although pricing improved during this period, pricing never reached rates experienced in 2014.
During the fourth quarter of 2018, oil prices began to decline, reaching a low of $44.48. Although oil prices have recently recovered to the $50.00 to $60.00 range as of the end of the second quarter 2019, most of our E&P customers have decreased planned capital expenditure budgets with the goal of operating within their cash flows. These changes have resulted in softening demand for contract drilling services. Although we believe market conditions for our services have stabilized, we believe this stabilization is predicated on oil prices remaining above a $50 per barrel or higher range. If oil prices were to fall below these levels for any sustainable period, demand and pricing for our contract drilling services could decline and have a material adverse affect on our operations and financial condition.
Sidewinder Merger
On July 18, 2018, ICD, Patriot Saratoga Merger Sub, LLC, a wholly owned subsidiary of ICD (“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 merged with and into Sidewinder (the “Merger”), with Sidewinder surviving the Merger and becoming a wholly owned subsidiary of the ICD. 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 ICD common stock in exchange for 100% of the outstanding Series A Common Units of Sidewinder (the “Series A Common Units”). The Merger was accounted for using the acquisition method of accounting with ICD identified as the accounting acquirer.
Asset Impairments
In June 2019, in light of the softening demand for contract drilling services, our management approved the impairment of certain drilling equipment on our SCR rigs. Management determined that these rigs could not be competitively marketed in the current environment as SCR rigs and that the rigs will be marketed in the future as AC rigs after conversion to AC pad-optimal status. The three SCR rigs will be removed from our marketed fleet until their conversions to AC pad-optimal specifications are complete. The first conversion is scheduled for completion during the third quarter of 2019. Due to the high volume of idle SCR drilling equipment on the market at this time, management does not believe that the SCR drilling equipment could be sold for a material amount in the current market environment. Therefore, as of June 30, 2019 we reduced property, plant and equipment on our consolidated balance sheet by $3.1 million and recorded $3.1 million of asset impairment expense.
Additionally, in the first and second quarters of 2019, we have reduced property, plant and equipment on our consolidated balance sheet by $2.3 million and $1.7 million, respectively, and recorded $2.0 million and $1.1 million, respectively, of asset impairment expense in conjunction with the sale and anticipated sale of miscellaneous drilling equipment

25



at auctions in April and August of 2019, and reduced assets held for sale on our consolidated balance sheet by $1.2 million and recorded $1.2 million of asset impairment expense related to miscellaneous drilling equipment previously held for sale, but deemed unsalable in the current market environment.
Our Revenues
We earn contract drilling revenues pursuant to drilling contracts entered into with our customers. We perform drilling services on a “daywork” basis, under which we charge a specified rate per day, or “dayrate.” The dayrate associated with each of our contracts is a negotiated price determined by the capabilities of the rig, location, depth and complexity of the wells to be drilled, operating conditions, duration of the contract and market conditions. The term of land drilling contracts may be for a defined number of wells or for a fixed time period. We generally receive lump-sum payments for the mobilization of rigs and other drilling equipment at the commencement of a new drilling contract. Revenue and costs associated with the initial mobilization are deferred and recognized ratably over the term of the related drilling contract once the rig spuds. Costs incurred to relocate rigs and other equipment to an area in which a contract has not been secured are expensed as incurred. If a contract is terminated prior to the specified contract term, early termination payments received from the customer are only recognized as revenues when all contractual obligations, such as mitigation requirements, are satisfied. While under contract, our rigs generally earn a reduced rate while the rig is moving between wells or drilling locations, or on standby waiting for the customer. Reimbursements for the purchase of supplies, equipment, trucking and other services that are provided at the request of our customers are recorded as revenue when incurred.  The related costs are recorded as operating expenses when incurred. Revenue is presented net of any sales tax charged to the customer that we are required to remit to local or state governmental taxing authorities.
Our Operating Costs
Our operating costs include all expenses associated with operating and maintaining our drilling rigs. Operating costs include all “rig level” expenses such as labor and related payroll costs, repair and maintenance expenses, supplies, workers’ compensation and other insurance, ad valorem taxes and equipment rental costs. Also included in our operating costs are certain costs that are not incurred at the “rig level.” These costs include expenses directly associated with our operations management team as well as our safety and maintenance personnel who are not directly assigned to our rigs but are responsible for the oversight and support of our operations and safety and maintenance programs across our fleet.
Our operating costs also include costs and expenses associated with construction activities at our Galayda yard location to the extent that construction activities cease or are not continuous. As a result of the significant downturn in industry conditions, we substantially reduced our rig construction activities during the fourth quarter of 2015 and throughout 2016, 2017 and 2018. As a result, we began expensing a portion of our Galayda yard construction costs during the fourth quarter of 2015 and expect to continue expensing such costs until we resume continuous rig construction activities.
How We Evaluate our Operations
We regularly use a number of financial and operational measures to analyze and evaluate the performance of our business and compensate our employees, including the following:
Safety Performance . Maintaining a strong safety record is a critical component of our business strategy. We measure safety by tracking the total recordable incident rate for our operations. In addition, we closely monitor and measure compliance with our safety policies and procedures, including “near miss” reports and job safety analysis compliance. We believe our Risk-Based HSE management system provides the required control, yet needed flexibility, to conduct all activities safely, efficiently and appropriately.
Utilization . Rig utilization measures the percentage of time that our rigs are earning revenue under a contract during a particular period. We measure utilization by dividing the total number of Operating Days (defined below) for a rig by the total number of days the rig is available for operation in the applicable calendar period. A rig is available for operation commencing on the earlier of the date it spuds its initial well following construction or when it has been completed and is actively marketed. “Operating Days” represent the total number of days a rig is earning revenue under a contract, beginning when the rig spuds its initial well under the contract and ending with the completion of the rig’s demobilization.
Revenue Per Day . Revenue per day measures the amount of revenue that an operating rig earns on a daily basis during a particular period. We calculate revenue per day by dividing total contract drilling revenue earned during the applicable period by the number of Operating Days in the period. Revenues attributable to costs reimbursed by customers are excluded from this measure.

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Operating Cost Per Day.  Operating cost per day measures the operating costs incurred on a daily basis during a particular period. We calculate operating cost per day by dividing total operating costs during the applicable period by the number of Operating Days in the period. Operating costs attributable to costs reimbursed by customers and rig construction costs are excluded from this measure.
Operating Efficiency and Uptime . Maintaining our rigs’ operational efficiency is a critical component of our business strategy. We measure our operating efficiency by tracking each drilling rig’s unscheduled downtime on a daily, monthly, quarterly and annual basis.
Results of Operations
The following summarizes our financial and operating data for the three and six months ended June 30, 2019 and 2018 :
 
Three Months Ended
 
Six Months Ended
(In thousands, except per share data)
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Revenues
$
52,879

 
$
25,754

 
$
113,237

 
$
51,381

Costs and expenses
 
 
 
 
 
 
 
Operating costs
37,453

 
17,966

 
76,786

 
36,892

Selling, general and administrative
3,008

 
3,495

 
7,553

 
6,974

Merger-related expenses
1,287

 
443

 
2,368

 
443

Depreciation and amortization
11,371

 
6,579

 
22,684

 
13,170

Asset impairment, (insurance recoveries), net
5,855

 

 
7,873

 
(35
)
Loss (gain) on disposition of assets, net
18

 
(333
)
 
3,238

 
(415
)
Total cost and expenses
58,992

 
28,150

 
120,502

 
57,029

Operating loss
(6,113
)
 
(2,396
)
 
(7,265
)
 
(5,648
)
Interest expense
(3,592
)
 
(938
)
 
(7,353
)
 
(1,881
)
Other expense
(255
)
 

 
(255
)
 

Loss before income taxes
(9,960
)
 
(3,334
)
 
(14,873
)
 
(7,529
)
Income tax expense (benefit)
2,898

 
(21
)
 
358

 
(70
)
Net loss
$
(12,858
)
 
$
(3,313
)
 
$
(15,231
)
 
$
(7,459
)
 
 
 
 
 
 
 
 
Other financial and operating data
 
 
 
 
 
 
 
Number of marketed rigs (end of period) (1)
30

 
14

 
30

 
14

Rig operating days (2)
2,330.2

 
1,264.7

 
5,058.3

 
2,524.1

Average number of operating rigs (3)
25.6

 
13.9

 
27.9

 
13.9

Rig utilization (4)
83.7
%
 
99.3
%
 
89.3
%
 
99.6
%
Average revenue per operating day (5)
$
20,868

 
$
19,411

 
$
20,807

 
$
19,233

Average cost per operating day (6)
$
14,155

 
$
13,034

 
$
13,695

 
$
13,223

Average rig margin per operating day
$
6,713

 
$
6,377

 
$
7,112

 
$
6,010

(1)
Number of marketed rigs as of  June 30, 2019  increased by 16 rigs as compared to the number of marketed rigs as of  June 30, 2018 as a result of the Sidewinder Merger. Marketed rigs exclude idle rigs that will not be reactivated until upgrades or conversions are complete.
(2)
Rig operating days represent the number of days our rigs are earning revenue under a contract during the period, including days that standby revenues are earned.
(3)
Average number of operating rigs is calculated by dividing the total number of rig operating days in the period by the total number of calendar days in the period.
(4)
Rig utilization is calculated as rig operating days divided by the total number of days our drilling rigs are available during the applicable period.

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(5)
Average revenue per operating day represents total contract drilling revenues earned during the period divided by rig operating days in the period. Excluded in calculating average revenue per operating day are revenues associated with the reimbursement of (i) out-of-pocket costs paid by customers of $3.7 million and $1.2 million during the three months ended June 30, 2019 and 2018 , respectively, and $6.4 million and $2.8 million during the six months ended June 30, 2019 and 2018 , respectively, (ii) revenues associated with the amortization of intangible revenue acquired in the Sidewinder Merger of  $46 thousand and $1.1 million  during the three and six months ended June 30, 2019 , respectively, and (iii) early termination revenues of $0.5 million and $0.5 million during the three and six months ended June 30, 2019 , respectively. The three and six months ended June 30, 2018 did not include any intangible or early termination revenues.
(6)
Average cost per operating day represents operating costs incurred during the period divided by rig operating days in the period. The following costs are excluded in calculating average cost per operating day: (i) out-of-pocket costs reimbursed by customers of $3.7 million and $1.2 million during the three months ended June 30, 2019 and 2018 , respectively, and $6.4 million and $2.8 million during the six months ended June 30, 2019 and 2018 , respectively, (ii) new crew training costs of zero and $68 thousand during the three months ended June 30, 2019 and 2018 , respectively and zero and $93 thousand during the six months ended June 30, 2019 and 2018 , respectively, (iii) construction overhead costs expensed due to reduced rig construction activity of $0.7 million and $0.2 million during the three months ended June 30, 2019 and 2018 , respectively, and $1.0 million and $0.6 million during the six months ended June 30, 2019 and 2018 , respectively, and (iv) rig de-commissioning costs associated with stacking deactivated rigs of $0.1 million and $0.1 million during the three and six months ended June 30, 2019 , respectively. The three and six months ended June 30, 2018 did not include any de-commissioning costs.
Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018
Revenues
Revenues for the three months ended June 30, 2019 were $52.9 million , representing a 105.3% increase as compared to revenues of $25.8 million for the three months ended June 30, 2018 . This increase was attributable to an increase in operating days to 2,330 days as compared to 1,265 days in the prior year comparable quarter and higher dayrates as compared to the prior year comparable quarter. The increase in operating days was primarily attributable to the Sidewinder Merger that closed on October 1, 2018. Additionally, we recorded early termination revenues of $0.5 million associated with two contract terminations during the three months ended June 30, 2019 . On a revenue per operating day basis, which excludes the impact of intangible and early termination revenues, our revenue per day increased by 7.5% to $20,868 during the three months ended June 30, 2019 , as compared to revenue per day of $19,411 for the three months ended June 30, 2018 . This increase in revenue per day was primarily the result of increased dayrates as compared to the prior year quarter. The prior year quarter did not include any early termination revenues.
Operating Costs
Operating costs for the three months ended June 30, 2019 were $37.5 million , representing a 108.5% increase as compared to operating costs of $18.0 million for the three months ended June 30, 2018 . This increase was primarily attributable to an increase in operating days to 2,330 days as compared to 1,265 days in the prior year comparable quarter. The increase in operating days was primarily attributable to the Sidewinder Merger that closed on October 1, 2018. On a cost per operating day basis, our cost increased to $14,155 per day during the three months ended June 30, 2019 , representing an 8.6% increase compared to cost per operating day of $13,034 for the three months ended June 30, 2018 . This increase was primarily attributable to increased labor costs associated with inefficiencies and transitory downtime resulting from rig releases and the reduction of operating rigs during the current quarter.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended June 30, 2019 were $3.0 million , representing a 13.9% decrease as compared to selling, general and administrative expense of $3.5 million for the three months ended June 30, 2018 . This decrease as compared to the prior year comparable quarter primarily relates to lower stock-based and incentive compensation offset by higher salary expense associated with the Sidewinder Merger in the current quarter.
Merger-related Expenses
Merger-related expenses of $1.3 million were recorded for the three months ended June 30, 2019 as compared to $0.4 million for the three months ended June 30, 2018 , primarily comprised of severance, professional fees and other merger related expenses.

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Depreciation and Amortization
Depreciation and amortization expense for the three months ended June 30, 2019 was $11.4 million , representing a 72.8% increase compared to depreciation and amortization expense of $6.6 million for the three months ended June 30, 2018 . This increase relates primarily to the Sidewinder Merger.
Assets Impairment (Insurance Recoveries), net
For the three months ended June 30, 2019 , we recorded an impairment of $5.9 million to reflect (i) a $3.1 million impairment of non-marketable SCR drilling equipment on rigs that will be upgraded, (ii) a $1.1 million impairment of drilling assets to be sold at auction in August 2019, (iii) a $0.2 million impairment of real property acquired in the Sidewinder Merger that is expected to be sold in the third quarter of 2019 and (iv) a $1.2 million impairment of miscellaneous drilling equipment previously held for sale, but deemed unsalable in the current market environment.
Loss (Gain) on Disposition of Assets, net
A loss on the disposition of assets totaling $18.0 thousand was recorded for the three months ended June 30, 2019 as compared to a gain of $0.3 million for the three months ended June 30, 2018 . The loss in the current quarter primarily related to a loss on the sale of the Galayda Facility of $157.8 thousand offset by a gain on the sale of certain drilling equipment of $139.7 thousand. The gain in the prior year quarter was primarily related to the sale or disposition of miscellaneous drilling equipment.
Interest Expense
Interest expense for the three months ended June 30, 2019 was $3.6 million , as compared to $0.9 million for the three months ended June 30, 2018 . The increase relates primarily to our new $130.0 term loan facility that was put in place in connection with the Sidewinder Merger.
Other Expense
Other expense was $0.3 million for the three months ended June 30, 2019 , related to the settlement of a lawsuit.
Income Tax Expense (Benefit)
Income tax expense recorded for the three months ended June 30, 2019 amounted to $2.9 million compared to income tax benefit of $21.0 thousand for the three months ended June 30, 2018 . Our effective tax rates for the three months ended June 30, 2019 and 2018 were (29.1)% and 0.6% , respectively. Taxes in both the current and prior period relate to Louisiana state income tax and to Texas margin tax. The significant change in the expected effective tax rate for the year is the result of downward revisions in our financial forecasts for 2019.

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Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018
Revenues
Revenues for the six months ended June 30, 2019 were $113.2 million , representing a 120.4% increase compared to revenues of $51.4 million for the six months ended June 30, 2018 . This increase was attributable to an increase in operating days to 5,058 days as compared to 2,524 days in the prior year period. The increase in operating days was primarily attributable to the Sidewinder Merger that closed on October 1, 2018. Additionally, we recorded revenues of  $1.1 million  associated with the amortization of intangible revenue acquired in the Sidewinder Merger and early termination revenues of $0.5 million associated with two contract terminations during the six months ended June 30, 2019 . The first six months of 2018 did not include any intangible or early termination revenues. Revenue per operating day, which excludes the impact of intangible and early termination revenues, increased to $20,807 during the six months ended June 30, 2019 compared to revenue per day of $19,233 during the six months ended June 30, 2018 . This increase in revenue per day was primarily the result of increased dayrates during the six months ended June 30, 2019 .
Operating Costs
Operating costs for the six months ended June 30, 2019 were $76.8 million , representing a 108.1% increase compared to operating costs of $36.9 million for the six months ended June 30, 2018 . This increase was attributable to an increase in operating days to 5,058 days as compared to 2,524 days in the prior year period. The increase in operating days was primarily attributable to the Sidewinder Merger that closed on October 1, 2018. On a cost per operating day basis, our cost per day increased to $13,695 during the six months ended June 30, 2019 , representing a 3.6% increase compared to cost per day of $13,223 for the six months ended June 30, 2018 . This increase was primarily attributable to increased labor costs associated with the transitory downtime resulting from rig releases during the 2019 period.
Selling, General and Administrative
Selling, general and administrative expenses for the six months ended June 30, 2019 were $7.6 million , representing a 8.3% increase compared to selling, general and administrative expenses of $7.0 million for the six months ended June 30, 2018 . This increase as compared to the prior year period primarily relates to an incremental increase in selling, general and administrative costs associated with the Sidewinder Merger offset by lower stock-based and incentive compensation in the current period.
Merger Expenses
Merger expenses of $2.4 million were recorded for the six months ended June 30, 2019 as compared to $0.4 million for the six months ended June 30, 2018 primarily comprised of severance, professional fees and other merger related expenses.
Depreciation and Amortization
Depreciation and amortization expense for the six months ended June 30, 2019 was $22.7 million , representing a 72.2% increase compared to depreciation and amortization expense of $13.2 million for the six months ended June 30, 2018 . This increase relates primarily to the Sidewinder Merger.
Assets Impairment (Insurance Recoveries), net
Asset impairment expense of $7.9 million was recorded for the six months ended June 30, 2019 comprised of (i) a $3.1 million impairment of non-marketable SCR drilling equipment, (ii) a $2.0 million impairment of assets sold at auction in April 2019, (iii) a $1.1 million impairment of drilling assets to be sold at auction in August 2019, (iv) a $0.2 million impairment of real property acquired in the Sidewinder Merger expected to be sold in the third quarter of 2019 and (v) a $1.2 million impairment of miscellaneous drilling equipment previously held for sale, but deemed unsalable in the current market environment.
Loss (Gain) on Disposition of Assets, net
A loss on the disposition of assets totaling $3.2 million was recorded for the six months ended June 30, 2019 compared to a gain on the disposition of assets totaling $0.4 million in the prior year comparable period. In the current year period, the loss relates primarily to $3.2 million related to the sale of certain surplus assets, acquired in the Sidewinder Merger, at auction in the first quarter of 2019. Additionally in the second quarter of 2019, a loss on the sale of the Galayda Facility of $157.8 thousand was recorded offset by a gain on the sale of certain drilling equipment of $139.7 thousand.

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Interest Expense
Interest expense for the six months ended June 30, 2019 was $7.4 million compared to interest expense of $1.9 million for the six months ended June 30, 2018 . The increase relates primarily to our new $130.0 term loan facility that was put in place in connection with the Sidewinder Merger.
Other Expense
Other expense was $0.3 million for the six months ended June 30, 2019 , related to the settlement of a lawsuit.
Income Tax Expense (Benefit)
The income tax expense recorded for the six months ended June 30, 2019 amounted to $358.0 thousand compared to an income tax benefit of $70.0 thousand for the six months ended June 30, 2018 . The effective tax rates for the six months ended June 30, 2019 and 2018 were (2.4)% and 0.9% , respectively. Taxes in the current year and prior year period relate to Louisiana state income tax and to Texas margin tax.

Future Liquidity and Capital Resources
Our liquidity as of June 30, 2019 included approximately $21.7 million of availability under our $40.0 million ABL, a $15.0 million committed accordion under our existing term loan facility and $10.3 million of cash. Subsequent to June 30, 2019, we received notification from our insurance carrier that our collateral requirement supported by a letter of credit from our ABL Credit Facility decreased from $2.5 million to $0.4 million. Pro forma for the new collateral requirement, availability under our ABL Credit Facility at June 30, 2019 would have been $23.8 million.
We expect our future capital and liquidity needs to be related to funding capital expenditures for our planned rig conversions and upgrades, capital spare inventory, operating expenses, maintenance capital expenditures, working capital, stock repurchases and general corporate purposes. We believe that our cash and cash equivalents, cash flows from operating activities and borrowings under our ABL Credit Facility will adequately finance all of our purchase commitments, capital expenditures and other cash requirements over the next twelve months.
Net Cash Provided By Operating Activities
Cash provided by operating activities was $20.0 million for the six months ended June 30, 2019 compared to cash provided by operating activities of $3.5 million during the same period in 2018 . Factors affecting changes in operating cash flows are similar to those that impact net earnings, with the exception of non-cash items such as depreciation and amortization, impairments, gains or losses on disposals of assets, stock-based compensation, deferred taxes and amortization of deferred financing costs. Additionally, changes in working capital items such as accounts receivable, inventory, prepaid expense and accounts payable can significantly affect operating cash flows. Cash flows from operating activities during the first six months of 2019 were higher as a result of a increase in net loss of $7.8 million , adjusted for non-cash items, of $35.3 million for the six months ended June 30, 2019 compared to $14.2 million for non-cash items during the same period in 2018 . Additionally, working capital changes decreased cash flows from operating activities by $0.1 million for the six months ended June 30, 2019 compared to a reduction of cash flows of $3.3 million during the same period in 2018 .
Net Cash Used In Investing Activities
Cash used in investing activities was $18.4 million for the six months ended June 30, 2019 compared to cash used in investing activities of $12.7 million during the same period in 2018 . During the first six months of 2019 , cash payments of $23.3 million for capital expenditures were offset by insurance proceeds of $1.0 million related to the Galayda Facility water damage incurred during Hurricane Harvey and proceeds of $3.9 million primarily related to the sale of the Galayda Facility ($2.3 million) and other miscellaneous drilling equipment. During the 2018 period, cash payments of $13.0 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $0.3 million .

31



Net Cash (Used In) Provided by Financing Activities
Cash used in financing activities was $ 3.5 million for the six months ended June 30, 2019 compared to cash provided by financing activities of $ 9.3 million during the same period in 2018 . During the first six months of 2019 , we made borrowings under our ABL Credit Facility of $2.5 million . These proceeds were offset by repayments under our ABL Credit Facility of $5.1 million , common stock issuance costs of $0.2 million , payments for capital lease obligations of $0.8 million and financing costs paid under the Term Loan and ABL Credit Facilities of $5.0 thousand and $12.0 thousand , respectively. During the first six months of 2018 we made borrowings under our CIT Credit Facility of $27.4 million . These proceeds were offset by repayments under our CIT Credit Facility of $17.2 million , the purchase of treasury stock of $0.4 million , restricted stock unit’s withheld for taxes paid of $0.1 million , financing costs paid under the CIT Credit Facility $0.2 million and payments for capital lease obligations of $0.3 million .
Long-term Debt
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.
At our election, interest under the Term Loan Facility is determined by reference at our option to either (i) a “base rate” equal to the higher of (a) the federal funds effective rate plus 0.05%, (b) the London Interbank Offered Rate with an interest period of one month (“LIBOR”), plus 1.0%, and (c) the rate of interest as publicly quoted from time to time by the Wall Street Journal as the “prime rate” in the United States; plus an applicable margin of 6.5%, or (ii) a “LIBOR rate” equal to LIBOR with an interest period of one month, plus an applicable margin of 7.5%.
The Term Loan Credit Agreement contains financial covenants, including a liquidity covenant of $10.0 million and a springing fixed charge coverage ratio covenant of 1.00 to 1.00 that is tested when availability under the ABL Credit Facility (defined below) and the DDTL Facility is below $5.0 million at any time that a DDTL Facility loan is outstanding. The Term Loan Credit Agreement also contains other customary affirmative and negative covenants, including limitations on indebtedness, liens, fundamental changes, asset dispositions, restricted payments, investments and transactions with affiliates. The Term Loan Credit Agreement also provides for customary events of default, including breaches of material covenants, defaults under the ABL Credit Facility or other material agreements for indebtedness, and a change of control.
The obligations under the Term Loan Credit Agreement are secured by a first priority lien on collateral (the “Term Priority Collateral”) other than accounts receivable, deposit accounts and other related collateral pledged as first priority collateral (“Priority Collateral”) under the ABL Credit Facility (defined below) and a second priority lien on such Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. MSD PCOF Partners IV, LLC (an affiliate of MSD Partners) is the lender of our $130.0 million Term Loan Facility.  MSD Partners, together with MSD Capital, own approximately 30% of the outstanding shares of the Company’s common stock.
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 “ABL Credit Facility”), including availability for letters of credit in an aggregate amount at any time outstanding not to exceed $7.5 million. Availability under the ABL Credit Facility is subject to a borrowing base calculated based on 85% of the net amount of our eligible accounts receivable, minus reserves. The ABL Credit Facility has a maturity date of the earlier of October 1, 2023 or the maturity date of the Term Loan Credit Agreement.
At our election, interest under the ABL Credit Facility is determined by reference at our option to either (i) a “base rate” equal to the higher of (a) the federal funds effective rate plus 0.05%, (b) LIBOR with an interest period of one month, plus 1.0%, and (c) the prime rate of Wells Fargo, plus in each case, an applicable base rate margin ranging from 1.0% to 1.5% based on quarterly availability, or (ii) a revolving loan rate equal to LIBOR for the applicable interest period plus an applicable LIBOR margin ranging from 2.0% to 2.5% based on quarterly availability. We also pay, on a quarterly basis, a commitment fee of 0.375% (or 0.25% at any time when revolver usage is greater than 50% of the maximum credit) per annum on the unused portion of the ABL Credit Facility commitment.
The ABL Credit Facility contains a springing fixed charge coverage ratio covenant of 1.00 to 1.00 that is tested when availability is less than 10% of the maximum credit. The ABL Credit Facility also contains other customary affirmative and negative covenants, including limitations on indebtedness, liens, fundamental changes, asset dispositions, restricted payments, investments and transactions with affiliates. The ABL Credit Facility also provides for customary events of default, including

32



breaches of material covenants, defaults under the Term Loan Agreement or other material agreements for indebtedness, and a change of control. We are in compliance with our covenants as of  June 30, 2019 .
The obligations under the ABL Credit Facility are secured by a first priority lien on Priority Collateral, which includes all accounts receivable and deposit accounts, and a second priority lien on the Term Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries.  As of  June 30, 2019 , the weighted-average interest rate on our borrowings was  10.09% .   At June 30, 2019 , the borrowing base under our ABL Credit Facility was  $24.2 million , and we had  $21.7 million  of availability remaining of our $40.0 million commitment on that date. Subsequent to June 30, 2019, we received notification from our insurance carrier that our collateral requirement supported by a letter of credit from our ABL Credit Facility decreased from $2.5 million to $0.4 million. Pro forma for the new collateral requirement, availability under our ABL Credit Facility at June 30, 2019 would have been $23.8 million.
Additionally, included in our long-term debt are capital leases. These leases generally have initial terms of 36 months and are paid monthly.
  Other Matters
Off-Balance Sheet Arrangements
We are party to certain arrangements defined as “off-balance sheet arrangements” that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.  These arrangements relate to non-cancelable operating leases and unconditional purchase obligations not fully reflected on our balance sheets (see Note 13 “Commitments and Contingencies” for additional information).
Emerging Growth Company
We have not elected to avail ourselves of the extended transition period available to emerging growth companies (“EGCs”) as provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards; therefore, we will be subject to new or revised accounting standards at the same time as other public companies that are not EGCs.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as additional guidance on the measurement of credit losses on financial instruments.  The new guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. In addition, the guidance amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The new guidance is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after December 15, 2018. We are currently evaluating the impact this guidance will have on our accounts receivable.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other, which simplifies the subsequent measurement of goodwill by eliminating Step 2 of the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under this new standard, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and then recognize an impairment charge, as necessary, for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after January 1, 2017. We do not believe this new guidance will have a material impact on our consolidated financial statements.

33



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks including risks related to potential adverse changes in interest rates and commodity prices. We actively monitor exposure to market risk and continue to develop and utilize appropriate risk management techniques. We do not use derivative financial instruments for trading or to speculate on changes in commodity prices.
Interest Rate Risk
Total long-term debt at June 30, 2019 included $130.0 million of floating-rate debt attributed to borrowings at an average interest rate of 10.09% . As a result, our annual interest cost in 2019 will fluctuate based on short-term interest rates.
The impact on annual cash flow of a 10% change in the floating-rate (approximately 11.10% ) would be approximately $1.3 million annually based on the floating-rate debt and other obligations outstanding at June 30, 2019 ; however, there are no assurances that possible rate changes would be limited to such amounts.
Commodity Price Risk
Oil and natural gas prices, and market expectations of potential changes in these prices, significantly impact the level of worldwide drilling and production services activities. Reduced demand for oil and natural gas generally results in lower prices for these commodities and may impact the economics of planned drilling projects and ongoing production projects, resulting in the curtailment, reduction, delay or postponement of such projects for an indeterminate period of time. When drilling and production activity and spending decline, both dayrates and utilization have also historically declined. Further declines in oil and natural gas prices and the general economy, could materially and adversely affect our business, results of operations, financial condition and growth strategy.
In addition, if oil and natural gas prices decline, companies that planned to finance exploration, development or production projects through the capital markets may be forced to curtail, reduce, postpone or delay drilling activities even further, and also may experience an inability to pay suppliers. Adverse conditions in the global economic environment could also impact our vendors’ and suppliers’ ability to meet obligations to provide materials and services in general. If any of the foregoing were to occur, or if current depressed market conditions continue for a prolonged period of time, it could have a material adverse effect on our business and financial results and our ability to timely and successfully implement our growth strategy.
Oil prices declined from a high of $107.95 per barrel in the second quarter of 2014, to a low of $26.19 per barrel in the first quarter of 2016 (West Texas Intermediate - Cushing, Oklahoma (“WTI”) spot price as reported by the United States Energy Information Administration (the “EIA”). Similarly, natural gas prices (as measured at Henry Hub) declined from an average of $4.37 per MMBtu in 2014 to $2.52 per MMBtu in 2016. As a result, our industry experienced an exceptional downturn, with the U.S. land rig count falling from a high of 1930 rigs in 2014 to a low of 404 rigs in 2016. In addition to overall rig count decline, pricing for our contract drilling services also substantially declined during this period of time. Although crude oil prices recovered in 2017 and 2018, reaching a high of $77.41 per barrel in the second quarter of 2018, the U.S. land count never recovered to its 2014 highs, only reaching 1,083 rigs the week ending December 28, 2018. Similarly, although pricing improved during this period, pricing never reached rates experienced in 2014.     
During the fourth quarter of 2018, oil prices began to decline, reaching a low of $44.48. Although oil prices have recently recovered to the mid-sixties in April 2019, most of our E&P customers have decreased planned capital expenditure budgets with the goal of operating within their cash flows. These changes have resulted in softening demand for contract drilling services. Although we believe market conditions for our services have stabilized, we believe this stabilization is predicated on oil prices remaining above a $50 per barrel or higher range. If oil prices were to fall below these levels for any sustainable period, demand and pricing for our contract drilling services could decline and have a material adverse affect on our operations and financial condition.
Credit and Capital Market Risk
Our customers may finance their drilling activities through cash flow from operations, the incurrence of debt or the issuance of equity. Any deterioration in the credit and capital markets, as currently being experienced, can make it difficult for our customers to obtain funding for their capital needs. A reduction of cash flow resulting from declines in commodity prices, or a reduction of available financing may result in a reduction in customer spending and the demand for our drilling services. This reduction in spending could have a material adverse effect on our business, financial condition, cash flows, and results of operations.

34



ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our principal executive officer and principal financial officer have concluded that our current disclosure controls and procedures were effective as of June 30, 2019 at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
During the most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


35



PART II — OTHER INFORMATION
ITEM  1. LEGAL PROCEEDINGS
We are the subject of certain legal proceedings and claims arising in the ordinary course of business from time to time. Management cannot predict the ultimate outcome of such legal proceedings and claims. While the legal proceedings and claims may be asserted for amounts that may be material should an unfavorable outcome be the result, management does not currently expect that the resolution of these matters will have a material adverse effect on our financial position or results of operations. In addition, management monitors our legal proceedings and claims on a quarterly basis and establishes and adjusts any reserves as appropriate to reflect our assessment of the then-current status of such matters.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the risks discussed in Part 1, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 . These risks are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition or results of operations.     
ITEM  2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.

ITEM  3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM  4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM  5. OTHER INFORMATION
None.

36




ITEM 6. EXHIBITS
Exhibit
Number
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.CAL*
 
XBRL Calculation Linkbase Document
 
 
 
101.DEF*
 
XBRL Definition Linkbase Document
 
 
 
101.INS*
 
XBRL Instance Document
 
 
 
101.LAB*
 
XBRL Labels Linkbase Document
 
 
 
101.PRE*
 
XBRL Presentation Linkbase Document
 
 
 
101.SCH*
 
XBRL Schema Document

*
Filed with this report


37



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 thereunto duly authorized.
 
INDEPENDENCE CONTRACT DRILLING, INC.
 
By:
/s/ J. Anthony Gallegos, Jr.
 
 
Name:
J. Anthony Gallegos, Jr.
 
 
Title:
President and Chief Executive Officer (Principal Executive Officer)
 
By:
/s/ Philip A. Choyce
 
 
Name:
Philip A. Choyce
 
 
Title:
Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer)
 
By:
/s/ Michael J. Harwell
 
 
Name:
Michael J. Harwell
 
 
Title:
Vice President - Finance and Chief Accounting Officer (Principal Accounting Officer)
Date: August 1, 2019

38

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