UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549  

 

 

 

FORM 8-K

 

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): August 1, 2019

 

 

 

Independence Contract Drilling, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   001-36590   37-1653648

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

 

20475 State Highway 249

Suite 300

Houston, TX 77070

(Address of principal executive offices)

 

(281) 598-1230

(Registrant’s telephone number, including area code)

 

N/A

(Former name or former address, if changed since last report)

   

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

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 is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company 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

 

 

 

 

 

Item 1.01 Entry into a Material Definitive Agreement

 

On July 31, 2019, Independence Contract Drilling, Inc. (the “Company”) entered into a First Amendment (the “First Amendment”) to the Credit Agreement dated as of October 1, 2018, by and among the Company, Sidewinder Drilling LLC, a Delaware limited liability company (“Sidewinder Drilling” and, together with the Company, the “Borrowers”), the lenders identified on the signature pages thereto (each, a “Lender”), and U.S. Bank National Association, as administrative agent and collateral agent for the Lenders (the “Credit Agreement”).

 

The First Amendment revises the Credit Agreement to explicitly permit the repurchase of Equity Interests (as defined in the Credit Agreement) by the Borrowers pursuant to the stock purchase program that was approved by the Company’s Board of Directors (the “Board”) and which provides for the repurchase of up to $10.0 million of the Company’s common stock (the “Stock Purchase Program”).

 

Under the First Amendment, the Borrowers may consummate repurchases of common stock under the Stock Repurchase Program or pursuant to the Company’s equity compensation plans totaling no more than $15.0 million during the term of the Credit Agreement, and no more than $5.0 million during any calendar year, provided, however, that the Company may consummate additional repurchases pursuant to the Stock Purchase Program in an aggregate amount not to exceed $5.0 million during the period from August 2, 2019 through the earlier of the date of termination of the Stock Purchase Program and June 30, 2020.

 

The foregoing description of the First Amendment does not purport to be complete and is qualified in its entirety by reference to the complete text of the First Amendment, a copy of which is filed as Exhibit 10.1 hereto and incorporated by reference herein.

 

Item 2.02 Results of Operations and Financial Condition

 

On August 1, 2019, the Company issued a press release reporting financial results for the second quarter ended June 30, 2019. A copy of the press release is being furnished as Exhibit 99.1 hereto and is incorporated herein by reference.

 

The information furnished pursuant to Item 2.02, including Exhibit 99.1, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is not subject to the liabilities of that section and is not deemed incorporated by reference in any filing of the Company under the Exchange Act or the Securities Act of 1933, as amended, unless specifically identified therein as being incorporated therein by reference.

 

Item 8.01 Other Events

 

Stock Repurchase Program

 

On August 1, 2019, the Company issued a press release (as part of its earnings press release) announcing that its Board has authorized a Stock Repurchase Plan. Under the Stock Repurchase Plan, the Company may repurchase up to $10.0 million of its outstanding shares of common stock beginning on August 2, 2019 and ending August 1, 2022. The Company is authorized to repurchase its common stock from time to time in open market purchases or in privately negotiated transactions in accordance with applicable federal securities laws. The timing of any repurchases and the number of shares to be purchased will be determined by the Company’s management, in its discretion, and will depend upon market conditions and other factors.

 

 

 

 

Stockholders’ Agreement Consent for MSD Purchases

 

Previously, on December 24, 2018, the Company issued a press release announcing that the Board had consented to the acquisition by MSD Credit Opportunity Master Fund, MSD Credit Opportunity Fund X, LLC and MSD Energy Investments, L.P. (the “MSD Parties”) of up to an additional 2.5 million shares of the Company’s common stock from third parties in the open market or through privately negotiated transactions. Any such acquisitions were subject to compliance with all applicable securities laws as well as customary Company black-out periods and were required to be completed by June 30, 2019 (the “MSD Purchase Window”).  Such consent was also subject to early termination or suspension at any time by the Company.

 

Effective August 2, 2019, the Board modified its consent to extend the MSD Purchase Window to December 31, 2019, but reduced the number of shares permitted to be purchased by the MSD Parties to 2.0 million shares.

 

The Board's consent was provided pursuant to the terms and conditions of the Amended and Restated Stockholders’ Agreement, dated October 1, 2018, among the Company, the MSD Parties and certain other stockholders party thereto, which limits, among other activities, acquisitions by the MSD Parties of additional shares of the Company's common stock without the consent of the Board.  Such additional 2.0 million shares represent approximately 2.6 percent of the Company's currently issued and outstanding common stock.  Accordingly, based on the MSD Parties’ current combined current ownership of approximately 30 percent of the Company's outstanding shares of common stock, such combined ownership could increase up to approximately 32 percent. 

 

The MSD Parties are affiliates of MSD Partners, L.P. and MSD Capital, L.P.

 

Item 9.01 Financial Statements and Exhibits 

     
(d)   Exhibits
     
10.1   First Amendment to the Credit Agreement, dated as of October 1, 2018, by and among Independence Contract Drilling, Inc. and Sidewinder Drilling LLC, each as Borrowers, the Lenders party thereto, and U.S. Bank National Association, as Agent, dated as of July 31, 2019.
     
99.1   Press Release dated August 1, 2019.

 

 

 

  

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    Independence Contract Drilling, Inc.
         
Date: August 1, 2019   By:   /s/ Philip A. Choyce
    Name:   Philip A. Choyce
    Title:   Executive Vice President and Chief Financial Officer

 

 

Exhibit 10.1

 

FIRST AMENDMENT TO CREDIT AGREEMENT

 

This FIRST AMENDMENT TO CREDIT AGREEMENT (this “ Agreement ”), is entered into as of July 31, 2019 by and among INDEPENDENCE CONTRACT DRILLING, INC. , a Delaware corporation (“ ICD ”), SIDEWINDER DRILLING LLC , a Delaware limited liability company formerly named ICD Operating LLC (“ Sidewinder ” and, together with ICD, as the context requires, each a “ Borrower ”, and collectively, the “ Borrowers ”), the lenders identified on the signature pages hereof (each of such lenders, together with its successors and permitted assigns, is referred to hereinafter as a “ Lender ”), and U.S. BANK NATIONAL ASSOCIATION , as administrative agent and collateral agent for the Lenders (in such capacities, together with its successors and assigns in such capacities, “ Agent ”).

 

W I T N E S S E T H :

 

WHEREAS , pursuant to that certain Credit Agreement, dated as of October 1, 2018 (as amended, restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), by and among the Borrowers, the Lenders and the Agent, the Lenders made Loans to the Borrowers pursuant to the terms and conditions thereof;

 

WHEREAS , initially capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Credit Agreement; and

 

WHEREAS , the Borrowers and the Lenders desire to amend the Credit Agreement in certain respects as more particularly set forth herein.

 

NOW, THEREFORE , in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of the parties hereto hereby agrees as follow:

 

1.                   Amendments to Credit Agreement . Subject to the satisfaction of the conditions set forth in Section 2 of this Agreement, the Credit Agreement is hereby amended as follows:

 

(a)                Section 1.1 of the Credit Agreement is hereby amended by adding the following new definition in the appropriate alphabetical order therefor:

 

“ Stock Purchase Program ” means that certain stock repurchase program approved by ICD’s Board of Directors, providing for the repurchase of up to $10,000,000 of Equity Interests of ICD consisting of shares of common stock.

 

(b)                Section 6.7(d) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

 

“(d) the Loan Parties may, so long as each of the Payment Conditions shall be satisfied prior to the making of such repurchase, redemption, acquisition or retirement, consummate repurchases pursuant to the Stock Purchase Program and other repurchases, redemptions or other acquisitions or retirements for value of Equity Interests made or deemed to be made in connection with any exercise, vesting, settlement or exchange, as applicable, of stock options, warrants, restricted stock, restricted stock units or other similar rights in an aggregate amount not to exceed (i) $5,000,000 during any calendar year; provided that ICD may consummate additional repurchases pursuant to the Stock Purchase Program in an aggregate amount not to exceed $5,000,000 during the period from August 2, 2019 through the earlier of the date of termination of the Stock Purchase Program and June 30, 2020; and (ii) $15,000,000 during the term of this Agreement, and”

 

 

 

 

2.                   Conditions . This Agreement shall become effective as of the date first set forth above upon the satisfaction of each of the following conditions (the “ First Amendment Effective Date ”):

 

(a)                the Lenders shall have received counterparts of this Agreement duly executed by the Required Lenders and the Borrowers (it being understood electronic executed copies are sufficient for satisfaction of this subsection (a));

 

(b)                no Default or Event of Default shall have occurred and be continuing;

 

(c)                all representations and warranties made by each Loan Party contained herein and in the other Loan Documents shall be true and correct in all material respects, in each case, with the same effect as though such representations and warranties had been made on and as of the date hereof; provided that in the case of any representation or warranty that expressly relates to a given date or period, such representation and warranty shall be true and correct in all material respects as of the respective date or for the respective period, as the case may be; provided , further , that if any of the representations are qualified by or subject to a “material adverse effect”, “material adverse change” or similar term or qualification, such representations shall be true and correct in all respects; and

 

(d)                the Borrowers shall have paid the reasonable fees, charges and disbursements of counsel to the Agent and the Lenders incurred prior to the date hereof or in connection with this Agreement.

 

3.                   Representations and Warranties of Loan Parties . Each Loan Party hereby represents and warrants to the Lenders as follows:

 

(a)                it (i) is duly organized and existing and in good standing under the laws of the jurisdiction of its organization, (ii) is qualified to do business in any state where the failure to be so qualified could reasonably be expected to result in a Material Adverse Effect, and (iii) has all requisite power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into this Agreement and to carry out the transactions contemplated hereby and by the Credit Agreement as amended hereby;

 

(b)                the execution and delivery of this Agreement, and the performance by it of this Agreement and the Credit Agreement as amended hereby, (i) have been duly authorized by all necessary action on the part of such Loan Party and (ii) do not and will not (A) violate any material provision of federal, state, or local law or regulation applicable to such Loan Party or its Subsidiaries, the Governing Documents of such Loan Party or its Subsidiaries, or any order, judgment, or decree of any court or other Governmental Authority binding on such Loan Party or its Subsidiaries, (B) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any Material Contract of such Loan Party or its Subsidiaries where any such conflict, breach or default could individually or in the aggregate reasonably be expected to have a Material Adverse Effect, (C) result in or require the creation or imposition of any Lien of any nature whatsoever upon any assets of such Loan Party, other than Permitted Liens, (D) require any approval of any holder of Equity Interests of such Loan Party or any approval or consent of any Person under any material agreement of any Loan Party, other than consents or approvals that have been obtained and that are still in force and effect and except, in the case of material agreements, for consents or approvals, the failure of which to obtain could not individually or in the aggregate reasonably be expected to cause a Material Adverse Effect, or (E) require any registration with, consent, or approval of, or notice to or other action with or by, any Governmental Authority, other than registrations, consents, approvals, notices, or other actions that have been obtained and that are still in force and effect;

 

  - 2 -  

 

 

(c)                this Agreement and the Credit Agreement as amended hereby are the legally valid and binding obligations of such Loan Party, enforceable against such Loan Party in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors’ rights generally; and

 

(d)                the representations and warranties contained in Section 4 of the Credit Agreement are true and correct in all material respects, in each case, with the same effect as though such representations and warranties had been made on and as of the First Amendment Effective Date; provided that in the case of any representation or warranty that expressly relates to a given date or period, such representation and warranty shall be true and correct in all material respects as of the respective date or for the respective period, as the case may be; provided , further , that if any of the representations are qualified by or subject to a “material adverse effect”, “material adverse change” or similar term or qualification, such representations shall be true and correct in all respects.

 

4.                   Choice of Law and Venue; Jury Trial Waiver . THIS AGREEMENT SHALL BE SUBJECT TO THE PROVISIONS REGARDING CHOICE OF LAW AND VENUE AND JURY TRIAL WAIVER SET FORTH IN SECTION 12 OF THE CREDIT AGREEMENT, AND SUCH PROVISIONS ARE INCORPORATED HEREIN BY THIS REFERENCE, MUTATIS MUTANDIS.

 

5.                   Binding Effect . This Agreement shall be binding upon each Loan Party and shall inure to the benefit of the Agent and the Lenders.

 

6.                   Effect on Loan Documents; Ratification .

 

(a)                Except as expressly amended or otherwise modified hereby, the Credit Agreement and all documents, instruments and agreements related thereto, including, but not limited to, the other Loan Documents, and the grant by each of the Grantors (as defined in the Guaranty and Security Agreement) to the Agent, for the benefit of each member of the Lender Group, of a continuing security interest in any and all right, title and interest of each Grantor in and to all of the Collateral (as defined in the Guaranty and Security Agreement), are hereby ratified and confirmed in all respects and shall continue in full force and effect. No amendment, consent or waiver herein granted or agreement herein made shall extend beyond the terms expressly set forth herein for such amendment, consent, waiver or agreement, as the case may be, nor shall anything contained herein be deemed to imply any willingness of the Agent or the Lenders to agree to, or otherwise prejudice any rights of the Agent or the Lenders with respect to, any similar amendments, consents, waivers or agreements that may be requested for any future period, and this Agreement shall not be construed as a waiver of any other provision of the Loan Documents or to permit any Borrower or any other Loan Party to take any other action which is prohibited by the terms of the Credit Agreement and the other Loan Documents. Each Loan Party hereby ratifies and reaffirms the validity and enforceability of all of the Liens and security interests heretofore granted and pledged by such Loan Party pursuant to the Loan Documents to the Agent, on behalf and for the benefit of the Lender Group, as collateral security for the Obligations, and acknowledges that all of such Liens and security interests, and all Collateral heretofore granted, pledged or otherwise created as security for the Obligations continue to be and remain collateral security for the Obligations from and after the date hereof. Each of the Guarantors hereby acknowledges and consents to this Agreement and agrees that the Guaranty and Security Agreement and all other Loan Documents to which such Guarantor is a party remain in full force and effect, and each of the Guarantors confirms and ratifies all of its Obligations thereunder.

 

  - 3 -  

 

 

(b)                Each reference in the Credit Agreement or any other Loan Document to this “Agreement”, “hereunder”, “herein”, “hereof”, “thereunder”, “therein”, “thereof”, or words of like import referring to the Credit Agreement or any other Loan Document shall mean and refer to such agreement as supplemented by this Agreement.

 

7.                   Miscellaneous .

 

(a)                This Agreement is a Loan Document. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission shall be equally effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile or other electronic method of transmission also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement.

 

(b)                Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof in that jurisdiction or affecting the validity or enforceability of such provision in any other jurisdiction. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.

 

(c)                Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement.

 

  - 4 -  

 

 

(d)                Neither this Agreement nor any uncertainty or ambiguity herein shall be construed against any member of the Lender Group or any Loan Party, whether under any rule of construction or otherwise. This Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto.

 

(e)                The pronouns used herein shall include, when appropriate, either gender and both singular and plural, and the grammatical construction of sentences shall conform thereto.

 

(f)                 This Agreement shall be subject to the rules of construction set forth in Section 1.4 of the Credit Agreement, and such rules of construction are incorporated herein by this reference, mutatis mutandis .

 

[remainder of this page intentionally left blank].

 

  - 5 -  

 

 

IN WITNESS WHEREOF, each Loan Party and the Required Lenders have caused this Agreement to be duly executed by its authorized officer as of the day and year first above written.

 

BORROWERS:

INDEPENDENCE CONTRACT DRILLING, INC. , a Delaware corporation

 

 

By: /s/ Philip A. Choyce
Name: Philip A. Choyce

Title: Executive Vice President & Chief Financial Officer

 

 

SIDEWINDER DRILLING LLC ( formerly named ICD Operating LLC), a Delaware limited liability company

 

 

By: /s/ Philip A. Choyce
Name: Philip A. Choyce

Title: Executive Vice President & Chief Financial Officer

[First Amendment to ICD Credit Agreement]

 

 

 

LENDERS: MSD PCOF PARTNERS IV, LLC
   
   
  By: /s/ Kenneth Gerold
  Name: Kenneth Gerold
  Title: Vice President

 

 

[First Amendment to ICD Credit Agreement]

Exhibit 99.1

Independence Contract Drilling, Inc. Reports Financial Results For The Second Quarter Ended June 30, 2019 And Announces $10 Million Stock Repurchase Program

HOUSTON, Aug. 1, 2019 /PRNewswire/ -- Independence Contract Drilling, Inc. (the "Company") (NYSE: ICD) today reported financial results for the three months ended June 30, 2019 and also announced that its Board of Directors has authorized the Company to engage in a stock repurchase program of up to $10 million.

Second Quarter 2019 Highlights

  • Net loss of $12.9 million, or $0.17 per share.
  • Adjusted net loss, as defined below, of $5.5 million, or $0.07 per share. Adjusted net loss includes a charge of $2.7 million, or $0.03 per share, associated with a tax rate adjustment described below.
  • Adjusted EBITDA, as defined below, of $12.8 million.
  • Net debt, excluding finance leases, of $119.7 million.
  • Fleet utilization of 83.7%.
  • Fully burdened margin of $6,713 per day.

In the second quarter of 2019, the Company reported revenues of $52.9 million, a net loss of $12.9 million, or $0.17 per share, adjusted net loss (defined below) of $5.5 million, or $0.07 per share, and adjusted EBITDA (defined below) of $12.8 million. Included in net loss and adjusted net loss during the quarter was a tax charge of $2.7 million, or $0.03 per share, associated with a change in expected tax rate compared to the first quarter of 2019 which resulted in a reversal of the tax benefit recorded during the first quarter of 2019.

These results compare to revenues of $25.8 million, a net loss of $3.3 million, or $0.09 per share, adjusted net loss of $3.2 million, or $0.08 per share, and adjusted EBITDA of $5.0 million in the second quarter of 2018, revenues of $60.4 million, a net loss of $2.4 million, or $0.03 per share, an adjusted net income of $2.9 million, or $0.04 per share, and adjusted EBITDA of $15.8 million in the first quarter of 2019. Net income and adjusted net income during the first quarter of 2019 included a tax benefit of $2.5 million, or $0.03 per share.

Chief Executive Officer Anthony Gallegos commented, "Second quarter market conditions softened more than original expectations as our customers increased their focus on budget discipline in light of investor demands and commodity price volatility. As a result, we exited the quarter with 22 rigs operating in the field. Since exiting the second quarter, we have seen improvement in our contracted AC pad-optimal rig count and we expect to add more contracted rigs during the third quarter. The rig releases experienced during the second quarter caused higher and longer-than-expected, transitory downtime and cost inefficiencies for our rig fleet during the quarter.

Looking forward, we believe ICD is well positioned with a strong balance sheet and liquidity position supporting our pad-optimal fleet and relentless focus on safety, operational excellence, and customer satisfaction. Our merger integration is complete, and we are now seeing increased near-term customer high-grading opportunities that were not available to the Company pre-merger. We have reentered the Eagle Ford and expect to add additional rigs to that market during the second half of this year. We have exciting initiatives underway involving rig conversions, upgrades, and technology that were all budgeted and require minimal incremental capital outlays. These initiatives are expected to generate significant free cash flow and value for ICD, our customers, and our stockholders.

In light of current stock valuations and the fact that the merger integration and associated costs are now behind us, I am pleased to announce that our Board of Directors has authorized a stock repurchase program of up to $10 million. We plan to make future capital allocation decisions based on free cash flow generation and prioritizing between stock repurchases, our most economic investment opportunities within our existing fleet, and debt repayment."

Quarterly Operational Results

In the second quarter of 2019, the Company's fleet operated at 83.7% utilization and recorded 2,330 revenue days, compared to 99.3% utilization and 1,265 revenue days in the second quarter of 2018, and 94.8% utilization and 2,728 revenue days in the first quarter of 2019.

Operating revenues in the second quarter of 2019 totaled $52.9 million, compared to $25.8 million in the second quarter of 2018 and $60.4 million in the first quarter of 2019. Second quarter 2019 revenues include $0.5 million of early termination revenue, and second quarter and first quarter 2019 revenues include $46 thousand and $1.0 million, respectively, of non-cash intangible revenue associated with the Sidewinder merger that closed on October 1, 2018. Excluding this early termination revenue and non-cash revenue, revenue per day in the second quarter of 2019 was $20,868, compared to $19,411 in the second quarter of 2018 and $20,755 in the first quarter of 2019. Sequential revenue per day increases were driven by higher dayrates from recontracting of older legacy contracts.

Operating costs in the second quarter of 2019 totaled $37.5 million, compared to $18.0 million in the second quarter of 2018 and $39.3 million in the first quarter of 2019. Fully burdened operating costs were $14,155 per day in the second quarter of 2019, compared to $13,034 in the second quarter of 2018 and $13,302 in the first quarter of 2019. Sequential increases in per day operating costs were primarily the result of decreased operating days and transitory personnel costs associated with the reduction in operating rigs.

Fully burdened rig operating margins in the second quarter of 2019 were $6,713 per day, compared to $6,377 per day in the second quarter of 2018 and $7,453 per day in the first quarter of 2019. Sequential reductions in margin per day were associated with the transitory increases in cost per day.

Selling, general and administrative expenses in the second quarter of 2019 were $3.0 million (including $0.4 million of non-cash stock-based compensation), compared to $3.5 million (including $0.7 million of non-cash stock-based compensation) in the second quarter of 2018 and $4.5 million (including $0.4 million of non-cash stock-based compensation) in the first quarter of 2019. Sequential decreases in SG&A were primarily associated with continued merger synergy realization and reduced incentive compensation accruals in light of reduced operating activity.

A tax charge of $2.7 million ($0.03 per share) was recorded in the second quarter of 2019 as a result of applying the Company's revised estimated annual tax rate to the year-to-date results. The expected annual tax expense for 2019 consists of Louisiana and Texas tax.

During the second quarter of 2019, the Company incurred other expenses of $0.3 million related to costs associated with the resolution of non-recurring pre-IPO litigation matters.

Drilling Operations Update

In light of market conditions, the Company elected during the second quarter of 2019 to decommission the remaining three operating SCR rigs in its fleet. All of these rigs ceased operations by early July 2019. These rigs will not re-enter the Company's marketed fleet until their conversions to AC pad-optimal status are complete. As a result, the Company recorded a $3.1 million non-cash asset impairment during the quarter relating to equipment that will be replaced. Long lead-time items for these conversions were previously ordered, and the first conversion is scheduled for completion at the end of the third quarter of 2019.

The Company's backlog of drilling contracts with original terms of six months or longer is $84.2 million as of June 30, 2019, representing 10.8 rig years of activity. Approximately 66% of this backlog is expected to be realized during the remainder of 2019. The Company also has 4 rigs currently operating under short-term contracts not included in this reported backlog.

Capital Expenditures and Liquidity Update

The Company's capital expenditure budget for 2019, net of asset sales and recoveries, remains $29 million. During the second quarter of 2019, cash outlays for capital expenditures, net of asset sales and recoveries, was $9.1 million. Budgeted capital expenditures for the remainder of the year include maintenance and ancillary equipment items, completion of budgeted 300 series upgrades, the first of which is scheduled for completion during the third quarter of 2019, and items associated with budgeted SCR conversions, the first of which is scheduled for completion at the end of the third quarter of 2019.

As of June 30, 2019, the Company had cash on hand of $10.3 million, no amounts drawn on its $40 million revolving credit facility, and $130 million principal amount outstanding under its term loan. The term loan includes a fully committed $15 million accordion that remains undrawn and fully available to the Company.

Conference Call Details

A conference call for investors will be held today, August 1, 2019, at 11:00 a.m. Central Time (12:00 p.m. Eastern Time) to discuss the Company's second quarter 2019 results.

The call can be accessed live over the telephone by dialing (855) 239-3115 or for international callers, (412) 542-4125. A replay will be available shortly after the call and can be accessed by dialing (877) 344-7529 or for international callers, (412) 317-0088. The passcode for the replay is 10133851. The replay will be available until August 8, 2019.

Interested parties may also listen to a simultaneous webcast of the conference call by logging onto the Company's website at www.icdrilling.com in the Investor Relations section. A replay of the webcast will also be available for approximately 30 days following the call.

About Independence Contract Drilling, Inc.

Independence Contract Drilling provides land-based contract drilling services for oil and natural gas producers in the United States. The Company constructs, owns and operates a fleet of pad-optimal ShaleDriller rigs that are specifically engineered and designed to accelerate its clients' production profiles and cash flows from their most technically demanding and economically impactful oil and gas properties. For more information, visit www.icdrilling.com.

Forward-Looking Statements

This news release contains certain forward-looking statements within the meaning of the federal securities laws. Words such as "anticipated," "estimated," "expected," "planned," "scheduled," "targeted," "believes," "intends," "objectives," "projects," "strategies" and similar expressions are used to identify such forward-looking statements. However, the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements relating to Independence Contract Drilling's operations are based on a number of expectations or assumptions which have been used to develop such information and statements but which may prove to be incorrect. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict, and there can be no assurance that actual outcomes and results will not differ materially from those expected by management of Independence Contract Drilling. For more information concerning factors that could cause actual results to differ materially from those conveyed in the forward-looking statements, please refer to the "Risk Factors" section of the Company's Annual Report on Form 10-K, filed with the SEC and the information included in subsequent amendments and other filings. These forward-looking statements are based on and include our expectations as of the date hereof. Independence Contract Drilling does not undertake any obligation to update or revise such forward-looking statements to reflect events or circumstances that occur, or which Independence Contract Drilling becomes aware of, after the date hereof.

INDEPENDENCE CONTRACT DRILLING, INC.

Unaudited

(in thousands, except par value and share data )


CONSOLIDATED BALANCE SHEETS






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)

$             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 (2)

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




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



(1)

Current portion of long-term debt relates to the current portion of vehicle finance and capital lease obligations. 



(2)

As of June 30, 2019, long-term debt includes $1.5 million of long-term vehicle finance lease obligations.  As of December 31, 2018, long-term debt included $0.6 million of long-term vehicle capital lease obligations.   

INDEPENDENCE CONTRACT DRILLING, INC.
Unaudited
(in thousands, except per share amounts)


CONSOLIDATED STATEMENTS OF OPERATIONS









Three Months Ended


Six Months Ended




June 30,


March 31,


June 30,




2019


2018


2019


2019


2018













Revenues

$  52,879


$25,754


$     60,358


$113,237


$51,381

Costs and expenses











Operating costs

37,453


17,966


39,333


76,786


36,892


Selling, general and administrative

3,008


3,495


4,545


7,553


6,974


Merger-related expenses

1,287


443


1,081


2,368


443


Depreciation and amortization

11,371


6,579


11,313


22,684


13,170


Asset impairment (insurance recoveries), net 

5,855


-


2,018


7,873


(35)


Loss (gain) on disposition of assets, net

18


(333)


3,220


3,238


(415)



Total cost and expenses

58,992


28,150


61,510


120,502


57,029



Operating loss

(6,113)


(2,396)


(1,152)


(7,265)


(5,648)

Interest expense

(3,592)


(938)


(3,761)


(7,353)


(1,881)

Other expense

(255)


-


-


(255)


-



Loss before income taxes

(9,960)


(3,334)


(4,913)


(14,873)


(7,529)

Income tax expense (benefit)

2,898


(21)


(2,540)


358


(70)



Net loss

$(12,858)


$ (3,313)


$     (2,373)


$ (15,231)


$ (7,459)













Loss per share:











Basic and Diluted

$  (0.17)


$ (0.09)


$     (0.03)


$   (0.20)


$ (0.20)













Weighted average number of common shares outstanding:











Basic and Diluted

75,692


38,253


75,692


75,692


38,188

INDEPENDENCE CONTRACT DRILLING, INC.

Unaudited

(in thousands )


CONSOLIDATED STATEMENTS OF CASH FLOWS


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





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 activity




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 following table provides various financial and operational data for the Company's operations for the three months ending June 30, 2019 and 2018 and March 31, 2019, and the six months ending June 30, 2019 and 2018. This information contains non-GAAP financial measures of the Company's operating performance. The Company believes this non-GAAP information is useful because it provides a means to evaluate the operating performance of the Company on an ongoing basis using criteria that are used by our management. Additionally, it highlights operating trends and aids analytical comparisons. However, this information has limitations and should not be used as an alternative to operating income (loss) or cash flow performance measures determined in accordance with GAAP, as this information excludes certain costs that may affect the Company's operating performance in future periods.

OTHER FINANCIAL & OPERATING DATA

Unaudited



Three Months Ended


Six Months Ended


June 30,


June 30,


March 31,


June 30,


June 30,


2019


2018


2019


2019


2018











Number of marketed rigs end of period(1)

30


14


32


30


14

Rig operating days(2)

2,330.2


1,264.7


2,728.1


5,058.3


2,524.1

Average number of operating rigs(3)

25.6


13.9


30.3


27.9


13.9

Rig utilization (4)

83.7%


99.3%


94.8%


89.3%


99.6%

Average revenue per operating day (5)

$ 20,868


$ 19,411


$    20,755


$ 20,807


$ 19,233

Average cost per operating day(6)

$ 14,155


$ 13,034


$    13,302


$ 13,695


$ 13,223

Average rig margin per operating day

$   6,713


$   6,377


$     7,453


$   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 marketed drilling rigs are available during the applicable period.



(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, $1.2 million and $2.7 million during the three months ended June 30, 2019 and 2018, and March 31, 2019, 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 paid by customers of $3.7 million, $1.2 million and $2.7 million during the three months ended June 30, 2019 and 2018, and March 31, 2019, 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, $68 thousand and zero during the three months ended June 30, 2019 and 2018, and March 31, 2019, 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, $0.2 million and $0.3 million during the three months ended June 30, 2019 and 2018, and March 31, 2019, 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 and the three months ended March 31, 2019 did not include any de-commissioning costs.

Non-GAAP Financial Measures

Adjusted net (loss) income, EBITDA and adjusted EBITDA are supplemental non-GAAP financial measures that are used by management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. In addition, adjusted EBITDA is consistent with how EBITDA is calculated under our credit facility for purposes of determining our compliance with various financial covenants. We define "EBITDA" as earnings (or loss) before interest, taxes, depreciation, and amortization, and we define "adjusted EBITDA" as EBITDA before stock-based compensation, non-cash asset impairments, gains or losses on disposition of assets, and other non-recurring items added back to, or subtracted from, net income for purposes of calculating EBITDA under our credit facilities. Neither adjusted net (loss) income, EBITDA or adjusted EBITDA is a measure of net income as determined by U.S. generally accepted accounting principles ("GAAP").

Management believes adjusted net (loss) income, EBITDA and adjusted EBITDA are useful because they allow our stockholders to more effectively evaluate our operating performance and compliance with various financial covenants under our credit facility and compare the results of our operations from period to period and against our peers without regard to our financing methods or capital structure or non-recurring, non-cash transactions. We exclude the items listed above from net income (loss) in calculating adjusted net (loss) income, EBITDA and adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. None of adjusted net (loss) income, EBITDA or adjusted EBITDA should be considered an alternative to, or more meaningful than, net income (loss), the most closely comparable financial measure calculated in accordance with GAAP, or as an indicator of our operating performance or liquidity. Certain items excluded from adjusted net (loss) income, EBITDA and adjusted EBITDA are significant components in understanding and assessing a company's financial performance, such as a company's return on assets, cost of capital and tax structure. Our presentation of adjusted net (loss) income, EBITDA and adjusted EBITDA should not be construed as an inference that our results will be unaffected by unusual or non-recurring items. Our computations of adjusted net (loss) income, EBITDA and adjusted EBITDA may not be comparable to other similarly titled measures of other companies.

Reconciliation of Net Loss to Adjusted Net (Loss) Income:



(Unaudited)


(Unaudited)

Three Months Ended


Six Months Ended


June 30,


June 30,


March 31,


June 30,


June 30,


2019


2018


2019


2019


2018


Amount


Per
Share


Amount


Per
Share


Amount


Per
Share


Amount


Per
Share


Amount


Per
Share

(in thousands)




















Net loss

$ (12,858)


$(0.17)


$(3,313)


$(0.09)


$(2,373)


$ (0.03)


$(15,231)


$  (0.20)


$(7,459)


$ (0.20)

Add back:




















Asset impairment (insurance recoveries), net (1)

5,855


0.08


-


-


2,018


0.03


7,873


0.10


(35)


-

Loss (gain) on disposition of assets, net(2)

18


-


(333)


-


3,220


0.04


3,238


0.04


(415)


(0.01)

Intangible revenue(3)

(46)


-


-


-


(1,033)


(0.01)


(1,079)


(0.01)


-


-

Merger-related expenses(4)

1,287


0.02


443


0.01


1,081


0.01


2,368


0.04


443


0.01

Other expense

255


-


-


-


-


-


255


-


-


-

Adjusted net (loss) income

$   (5,489)


$(0.07)


$(3,203)


$(0.08)


$  2,913


$  0.04


$  (2,576)


$  (0.03)


$(7,466)


$ (0.20)

Reconciliation of Net Loss to EBITDA and Adjusted EBITDA:



(Unaudited)


(Unaudited)

Three Months Ended


Six Months Ended


June 30,


June 30,


March 31,


June 30,


June 30,


2019


2018


2019


2019


2018

(in thousands)










Net loss

$(12,858)


$ (3,313)


$    (2,373)


$(15,231)


$ (7,459)

Add back:










Income tax expense (benefit)

2,898


(21)


(2,540)


358


(70)

Interest expense

3,592


938


3,761


7,353


1,881

Depreciation and amortization

11,371


6,579


11,313


22,684


13,170

Asset impairment (insurance recoveries), net(1)

5,855


-


2,018


7,873


(35)

EBITDA

10,858


4,183


12,179


23,037


7,487

Loss (gain) on disposition of assets, net(2)

18


(333)


3,220


3,238


(415)

Stock-based compensation

416


718


387


803


1,362

Intangible revenue(3)

(46)


-


(1,033)


(1,079)


-

Merger-related expenses(4)

1,287


443


1,081


2,368


443

Other expense

255


-


-


255


-

Adjusted EBITDA

$  12,788


$   5,011


$    15,834


$  28,622


$   8,877



(1)

In the second quarter of 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 scheduled to be sold during 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. In the first quarter of 2019, we recorded a $2.0 million impairment of drilling assets that were sold at auction in April 2019.    



(2)

In the second quarter of 2018, we recorded a gain on disposition of assets of $0.3 million, primarily due to a gain on the sale or disposition of miscellaneous drilling equipment.  In the first quarter of 2019, we recorded a loss on the disposition of assets of $3.2 million primarily related to the sale of certain surplus assets, acquired in the Sidewinder merger, at auctions during the quarter. 



(3)

For the three and six months ended June 30, 2019, and the three months ended March 31, 2019, we amortized intangible revenue related to an unfavorable contract liability acquired in the Sidewinder merger.



(4)

For all periods presented, we incurred costs directly associated with the Sidewinder merger.  These costs were primarily comprised of severance, professional fees and other merger integration related expenses.

INVESTOR CONTACTS:

Independence Contract Drilling, Inc.

E-mail inquiries to: Investor.relations@icdrilling.com

Phone inquiries: (281) 598-1211