Independence Contract Drilling, Inc. (Form: 10-Q, Received: 11/03/2020 16:08:59)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ 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, TX 77070

(Address of principal executive offices)

(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	☒

Non-Accelerated Filer	¨ (Do not check if a smaller reporting company)	Smaller Reporting Company	☒

		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

6,175,818 shares of the registrant’s Common Stock were outstanding as of November 2, 2020.

INDEPENDENCE CONTRACT DRILLING, INC.

Index to Form 10-Q


Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (Unaudited)						4

Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019 (Unaudited)						5

Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019 (Unaudited)						6

Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (Unaudited)						7

Notes to Consolidated Financial Statements (Unaudited)						9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						23

Item 3. Quantitative and Qualitative Disclosures About Market Risk						37

Item 4. Controls and Procedures						38

Part II. OTHER INFORMATION

Item 1. Legal Proceedings						39

Item 1A. Risk Factors						39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						42

Item 3. Defaults Upon Senior Securities						42

Item 4. Mine Safety Disclosures						42

Item 5. Other Information						42

Item 6. Exhibits						42

Signatures						43

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:

•inability to predict the duration or magnitude of the effects of the COVID-19 pandemic on our business, operations, and financial condition and when or if worldwide oil demand will stabilize and begin to improve;

•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;

•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, 2019. 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.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Independence Contract Drilling, Inc.

Consolidated Balance Sheets

(Unaudited)

(in thousands, except par value and share amounts)


	September 30, 2020		December 31, 2019
Assets
Cash and cash equivalents	$	18,813	$	5,206
Accounts receivable, net	9,316		35,834
Inventories	1,162		2,325

Assets held for sale	1,700		8,740
Prepaid expenses and other current assets	3,725		4,640
Total current assets	34,716		56,745
Property, plant and equipment, net	418,557		457,530



Other long-term assets, net	2,444		2,726
Total assets	$	455,717	$	517,001
Liabilities and Stockholders’ Equity
Liabilities
Current portion of long-term debt	$	3,141	$	3,685
Accounts payable	3,595		22,674
Accrued liabilities	10,438		16,368
Merger consideration payable to an affiliate	—		3,022
Current portion of contingent consideration	—		2,814


Total current liabilities	17,174		48,563
Long-term debt	143,440		134,941
Merger consideration payable to an affiliate	2,902		—
Deferred income taxes, net	568		652
Other long-term liabilities	1,912		1,249
Total liabilities	165,996		185,405
Commitments and contingencies (Note 13)
Stockholders’ equity
Common stock, $0.01 par value, 50,000,000 shares authorized; 6,245,298 and 3,876,196 shares issued, respectively, and 6,166,720 and 3,812,050 shares outstanding, respectively	62		38
Additional paid-in capital	517,540		505,831
Accumulated deficit	(223,968)		(170,426)
Treasury stock, at cost, 78,589 shares and 64,146 shares, respectively	(3,913)		(3,847)
Total stockholders’ equity	289,721		331,596
Total liabilities and stockholders’ equity	$	455,717	$	517,001

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

Independence Contract Drilling, Inc.

Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues	$	10,224	$	45,073	$	70,099	$	158,310
Costs and expenses
Operating costs	8,663		34,246		52,987		111,032
Selling, general and administrative	2,796		3,755		10,101		11,308
Severance and merger-related expenses	—		320		1,076		2,688
Depreciation and amortization	10,767		11,154		33,338		33,838
Asset impairment	—		1,966		16,619		9,839
(Gain) loss on disposition of assets, net	(326)		265		(1,208)		3,503
Other expense	—		122		—		377
Total costs and expenses	21,900		51,828		112,913		172,585
Operating loss	(11,676)		(6,755)		(42,814)		(14,275)
Interest expense	(3,554)		(3,560)		(10,812)		(10,913)
Loss before income taxes	(15,230)		(10,315)		(53,626)		(25,188)
Income tax (benefit) expense	(31)		232		(84)		590
Net loss	$	(15,199)	$	(10,547)	$	(53,542)	$	(25,778)
Loss per share:
Basic and diluted	$	(2.67)	$	(2.80)	$	(11.91)	$	(6.82)

Weighted average number of common shares outstanding:
Basic and diluted	5,703		3,770		4,495		3,780

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

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, 2019	3,812,050	$	38	$	505,831	$	(170,426)	$	(3,847)	$	331,596
RSUs vested, net of shares withheld for taxes	11,941	—		(26)		—		—		(26)
Purchase of treasury stock	(14,443)	—		—		—		(66)		(66)
Stock-based compensation	—	—		570		—		—		570
Net loss	—	—		—		(28,223)		—		(28,223)
Balances at March 31, 2020	3,809,548	$	38	$	506,375	$	(198,649)	$	(3,913)	$	303,851
Restricted stock forfeiture	(5,716)	—		—		—		—		—
RSUs vested, net of shares withheld for taxes	6,711	—		(52)		—		—		(52)
Issuance of common stock, net of offering costs	1,192,566	12		6,789		—		—		6,801
Stock-based compensation	—	—		290		—		—		290
Net loss	—	—		—		(10,120)		—		(10,120)
Balances at June 30, 2020	5,003,109	$	50	$	513,402	$	(208,769)	$	(3,913)	$	300,770
Issuance of common stock, net of offering costs	1,163,611	12		3,444		—		—		3,456
Stock-based compensation	—	—		694		—		—		694
Net loss	—	—		—		(15,199)		—		(15,199)
Balances at September 30, 2020	6,166,720	$	62	$	517,540	$	(223,968)	$	(3,913)	$	289,721


	Common Stock
	Shares	Amount		Additional Paid-in Capital		Accumulated Deficit		Treasury Stock		Total Stockholders’ Equity
Balances at December 31, 2018	3,853,909	$	39	$	504,178	$	(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	3,853,909	$	39	$	504,388	$	(112,011)	$	(3,046)	$	389,370
Restricted stock forfeiture	(6,478)	—		—		—		—		—
Stock-based compensation	—	—		416		—		—		416
Net loss	—	—		—		(12,858)		—		(12,858)
Balances at June 30, 2019	3,847,431	$	39	$	504,804	$	(124,869)	$	(3,046)	$	376,928
Purchase of treasury stock	(14,344)	—		(2)		—		(326)		(328)
Stock-based compensation	—	—		582		—		—		582
Net loss	—	—		—		(10,547)		—		(10,547)
Balances at September 30, 2019	3,833,087	$	39	$	505,384	$	(135,416)	$	(3,372)	$	366,635

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

Independence Contract Drilling, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities
Net loss	$	(53,542)	$	(25,778)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization	33,338		33,838
Asset impairment	16,619		9,839
Stock-based compensation	1,554		1,385
(Gain) loss on disposition of assets, net	(1,208)		3,503
Deferred income taxes	(84)		590
Amortization of deferred financing costs	709		610

Bad debt expense (recovery)	16		(42)
Changes in operating assets and liabilities
Accounts receivable	26,985		9,265
Inventories	(7)		(586)
Prepaid expenses and other assets	660		3,330
Accounts payable and accrued liabilities	(17,948)		(8,786)
Net cash provided by operating activities	7,092		27,168
Cash flows from investing activities
Purchases of property, plant and equipment	(12,688)		(34,974)
Proceeds from the sale of assets	2,445		7,806
Proceeds from insurance claims	—		1,000
Collection of principal on note receivable	145		—
Net cash used in investing activities	(10,098)		(26,168)
Cash flows from financing activities
Borrowings under Revolving Credit Facility	11,038		2,511
Repayments under Revolving Credit Facility	(11,038)		(5,077)
Borrowings under PPP Loan	10,000		—
Proceeds from issuance of common stock	10,978		—
Common stock issuance costs	(721)		(177)
Purchase of treasury stock	(66)		(328)
RSUs withheld for taxes	(79)		—
Financing costs paid under Term Loan Facility	—		(5)
Financing costs paid under Revolving Credit Facility	—		(22)
Payments for finance lease obligations	(3,499)		(1,003)
Net cash provided by (used in) financing activities	16,613		(4,101)
Net increase (decrease) in cash and cash equivalents	13,607		(3,101)
Cash and cash equivalents
Beginning of period	5,206		12,247
End of period	$	18,813	$	9,146


	Nine Months Ended September 30,
(in thousands)	2020		2019
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	10,275	$	10,496

Supplemental disclosure of non-cash investing and financing activities

Change in property, plant and equipment purchases in accounts payable	$	(7,488)	$	(1,320)
Additions to property, plant and equipment through finance leases	$	3,326	$	2,181
Extinguishment of finance lease obligations from sale of assets classified as finance leases	$	(1,504)	$	(141)
Transfer of assets from held and used to held for sale	$	—	$	(5,327)
Transfer from inventory to fixed assets	$	—	$	(357)

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

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.

Our rig fleet includes 29 marketed AC powered (“AC”) rigs and a number of additional rigs requiring conversions or upgrades in order to meet our AC pad-optimal specifications.

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.

COVID-19 Pandemic and Market Conditions Update

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (“COVID-19”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The continued spread of the COVID-19 virus and the responses taken to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and shutdowns, has caused significant declines in global demand for crude oil. This reduction in demand has occurred concurrent with the initiation of a crude oil price war between members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (collectively, the “OPEC+” group). Even with the production cuts announced by the OPEC+ group and others on April 9, 2020, and the cessation to the crude oil price war, crude oil inventories have continued to rise and to test storage capacity and logistics networks. These factors led to a collapse in oil prices, with the WTI price for May delivery closing at negative $37.63 per barrel on April 20, 2020. In July 2020, OPEC+ agreed to taper oil production cuts, which will reduce production cuts from 9.7 Mmbpd to 7.7 Mmbpd between August 2020 and January 2021. Downward pressure on oil prices is expected to continue for the foreseeable future, and the long-term effects on production and demand are unknown at this time. Currently, there is considerable uncertainty regarding measures to contain the virus and what potential future measures may be put in place, therefore we cannot predict when worldwide demand for oil will stabilize and if or when it will begin to improve or reach pre-COVID-19 levels. As of October 26, 2020, the WTI spot price was $38.39.

In response to these adverse market conditions, North American exploration companies, including our customers, have reduced planned capital expenditures and drilling activity. As a result, demand for our products and services began to rapidly decline late in the first and second quarters of 2020. During the first quarter of 2020, our operating rig count reached a peak of 22 rigs and temporarily reached a low of three rigs during the third quarter of 2020. During the third quarter, oil and natural gas prices began to stabilize, and demand for our products began to modestly improve from their historic lows, which allowed us to reactivate additional rigs during the back half of the third quarter 2020. As of September 30, 2020, we had six operating rigs and we have reactivated two additional rigs as of October 31, 2020. However, due to the lack of visibility and confidence towards customer intentions and the unknown future impacts of COVID-19 on economic conditions and oil and gas demand and drilling activity, we cannot assure you that we will be able to maintain this operating rig count or if our operating rig count will continue to improve in the future. Our current backlog of contracts with original terms of six months or longer stands at 4.4 average rigs during the fourth quarter of 2020, including two contracts expiring at the end of 2020 that

have higher dayrates than prevailing spot rates. As a result, although our operating rig count has been increasing, we do expect to see our average revenue per day decline as a greater portion of our revenues are generated from rigs operating at prevailing spot rates as our two remaining higher dayrate contracts expire at the end of 2020.

Availability under our revolving line of credit is based upon a borrowing base determined by the level of our accounts receivable, with uncollectable amounts or amounts greater than 90 days past due excluded from consideration. As a result, a continued reduction in the utilization of our rigs or delays in payment or payment defaults by any of our customers will continue to have a material adverse impact on our financial liquidity. Similarly, our suppliers may not extend credit to us or require less favorable payment terms or face similar challenges with their own suppliers. We also are reliant upon our third-party lenders’ ability to meet their commitments under our existing credit facilities. Given the dramatic impact of the COVID-19 pandemic across industries and geographic regions, we cannot predict the magnitude it may have on our lenders’ ability to meet their commitments to us, and any failure to do so would have a material adverse effect on our liquidity and financial position.

Due to these rapidly declining market conditions, we took the following actions in order to reduce our cost structure:

•Salary or compensation reductions for substantially all our employees, including members of executive management;

•Suspension of all cash-based incentive compensation, including all members of executive management;

•Reduced the number of executive management positions by two;

•Reduced the number of directors from seven to five, which became effective following director elections at our 2020 Annual Meeting of Stockholders;

•Annual compensation reductions for our directors; and

•Reduced headcount for non-field-based personnel by approximately 40%.

Depending upon the nature and duration of the COVID-19 pandemic and the nature of containment measures taken in the future, it could have a continued material adverse effect on our business, results of operations and financial condition.

On March 27, 2020, President Trump signed into law the “Coronavirus Aid, Relief, and Economic Security (CARES) Act.” The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. We deferred $0.5 million of employer side social security payments during the nine months ended September 30, 2020.

The application for these funds required us to, in good faith, certify that current economic uncertainty made the loan request necessary to support our ongoing operations. The receipt of these funds, and the forgiveness of the loan attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on our future adherence to the forgiveness criteria. The PPP Loan is subject to any new guidance and new requirements released by the Department of the Treasury who has indicated that all companies that have received funds in excess of $2.0 million will be subject to a government (SBA) audit to further ensure PPP loans are limited to eligible borrowers in need. On October 7, 2020, the SBA released guidance clarifying the deferral period for PPP loan payments. The Paycheck Protection Flexibility Act of 2020 extended the deferral period for loan payments to either (1) the date that SBA remits the borrower's loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, ten months after the end of the borrower's loan forgiveness covered period. We intend to apply for forgiveness and we believe our first payment related to any unforgiven portion would be due during the fourth quarter of 2021, with a loan maturity date of April 27, 2022.

pandemic; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus. As a result, our business, operating results and financial conditions are subject to various risks, many of which are aggravated as a result of the declining market conditions and significant uncertainty caused by the COVID-19 pandemic.

The CARES Act did not have a material impact on our income taxes. Management will continue to monitor future developments and interpretations for any further impacts on our financial condition, results of operations, or liquidity.

Third Amendment to Term Loan Credit Agreement

On June 4, 2020, we entered into a Third Amendment, dated as of June 4, 2020 (the “Third Amendment”), to the Credit Agreement, dated as of October 1, 2018 (the “Term Credit Loan Agreement”), to permit us, at our option, subject to required prior notice and a maximum available liquidity condition (including availability under our revolving credit agreement and available cash), to elect to pay accrued and unpaid interest, solely during one three-consecutive-month period immediately following such notice, in kind (the “PIK Amount”). In connection with the amendments, we agreed to pay an additional amount equal to 0.75% of the aggregate principal amount of the loans under the Term Loan Credit Agreement plus all PIK Amounts, if any, that are added to such principal amount being repaid or prepaid on either the maturity date or upon the occurrence of an acceleration of obligations under the Term Loan Credit Agreement.

Merger Consideration Amendment

On June 4, 2020, we entered into a letter agreement (the “Merger Consideration Amendment”) with MSD Credit Opportunity Master Fund, L.P. to allow for the deferral of payment of the Mechanical Rig Net Proceeds of $2.9 million, to the earlier of (i) June 30, 2022 and (ii) a Change of Control Transaction (the “Payment Date”), and requires us to pay an additional amount in connection with such deferred payment equal to interest accrued on the amount of Mechanical Rig Net Proceeds during the period between May 1, 2020 and the Payment Date, which interest shall accrue at a rate of 15% per annum, compounded quarterly, during the period beginning on May 1, 2020 and ending on December 31, 2020 and at a rate of 25% per annum, compounded quarterly, during any period following December 31, 2020. The Mechanical Rig Net Proceeds were previously payable in the second quarter of 2020.

ATM Offering

Reverse Stock Split

Following approval by our stockholders on February 6, 2020, our Board of Directors approved a 1-for-20 reverse stock split of our common stock. The reverse split was effective March 11, 2020, and all share and earnings per share information have been retroactively adjusted to reflect the reverse stock split and the associated decrease in par value was recorded with the offset to additional paid-in capital.

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 consolidated financial statements should be read along with our audited consolidated financial statements for the year ended December 31, 2019, included in our Annual Report on Form 10-K for the year ended December 31, 2019. 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 nine months ended September 30, 2020 may not be indicative of results that will be realized for the full year ending December 31, 2020.

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.

Asset Impairment

As a result of the rapidly deteriorating market conditions described in "COVID-19 Pandemic and Market Conditions Update", we concluded that a triggering event occurred as of March 31, 2020 and, accordingly, an interim asset impairment test was performed. As a result, we recognized impairment of $3.3 million associated with the decline in the market value of our assets held for sale based upon the market approach method and $13.3 million related to the remaining assets on rigs removed from our marketed fleet, as well as certain other component equipment and inventory; all of which was deemed to be unsaleable and of zero value based upon the current macroeconomic conditions and uncertainties surrounding COVID-19. We have not identified any additional triggering event and did not record any asset impairment during the three months ended June 30, 2020 or September 30, 2020. Due to the uncertainty around COVID-19 and current market conditions, we may have to make further impairment charges in future periods relating to, among other things, fixed assets and inventory.

We performed an impairment test during the quarter ended September 30, 2019 and recorded an impairment charge of $2.3 million, which represented the impairment of 100% of our previously recorded goodwill. In June 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 for certain drilling equipment on our silicon-controlled rectifier (“SCR”) rigs. Additionally, in the first and second quarters of 2019, we 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 of miscellaneous drilling equipment 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.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. In October 2019, the FASB approved a proposal which grants smaller reporting companies additional time to implement FASB standards on current expected credit losses (CECL) to January 2023. As a smaller reporting company, we will defer adoption of ASU 2016-13 until January 2023. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes. The amendments in the update are effective for public companies for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We plan to adopt this guidance on January 1, 2021 and are currently evaluating the impact of adoption on our consolidated financial statements.

On April 1, 2020, we adopted the new standard, ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform (e.g., discontinuation of LIBOR) if certain criteria are met. As of September 30, 2020, we have not yet elected any optional expedients provided in the standard. We will apply the accounting relief as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period. We do not expect the standard to have a material impact on our consolidated financial statements.

3. Sidewinder Merger

We completed the merger with Sidewinder Drilling LLC (“Sidewinder”) on October 1, 2018 (the “Sidewinder Merger”).

During the three and nine months ended September 30, 2019 we recorded $0.3 million and $2.7 million, respectively, of merger-related expenses comprised primarily of severance, professional fees and various other integration related expenses. There were no merger expenses recorded during the three and nine months ended September 30, 2020.

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 were amortized to operating revenues over the remaining underlying contract terms. As of June 30, 2019, $1.1 million of intangible revenue was recognized as a result of this amortization and the intangible liabilities were fully amortized.

In addition, at the time of consummation of the Sidewinder Merger, Sidewinder owned various mechanical rig assets and related equipment (the "Mechanical Rigs") located principally in the Utica and Marcellus plays. As these assets are not consistent with ICD’s core strategy or geographic focus, ICD agreed that these assets can be disposed of, with the Sidewinder unitholders receiving the net proceeds. As a result of this arrangement, on the merger date, we recorded the fair value of the Mechanical Rigs less costs to sell, as assets held for sale, with an offsetting liability in contingent consideration. Subsequently, a majority of these assets were sold at auction for substantially less than the appraised fair values on the merger date. As a result, the contingent consideration liability was reduced by the appraised fair values on the merger date and the proceeds were recorded as merger consideration payable to an affiliate on our consolidated balance sheets.

4. Leases

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 four years.

The components of lease expense were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Operating lease expense	$	153	$	127	$	456	$	376
Short-term lease expense	374		1,480		2,300		3,907
Variable lease expense	65		92		294		363

Finance lease expense:
Amortization of right-of-use assets	$	285	$	273	$	997	$	852
Interest expense on lease liabilities	228		41		680		120
Total finance lease expense	513		314		1,677		972
Total lease expense	$	1,105	$	2,013	$	4,727	$	5,618

Supplemental cash flow information related to leases is as follows:


	Nine Months Ended		Nine Months Ended
(in thousands)	September 30, 2020		September 30, 2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	469	$	357
Operating cash flows from finance leases	$	672	$	115
Financing cash flows from finance leases	$	3,499	$	1,003

Right-of-use assets obtained or recorded in exchange for lease obligations:
Operating leases	$	252	$	1,205
Finance leases	$	3,326	$	2,181

Supplemental balance sheet information related to leases is as follows:


(in thousands)	September 30, 2020			December 31, 2019
Operating leases:
Other long-term assets, net	$	928		$	1,033

Accrued liabilities	$	571		$	475
Other long-term liabilities	937			1,250
Total operating lease liabilities	$	1,508		$	1,725

Finance leases:
Property, plant and equipment	$	14,549		$	14,375
Accumulated depreciation	(851)			(1,425)
Property, plant and equipment, net	$	13,698		$	12,950

Current portion of long-term debt	$	3,141		$	3,685
Long-term debt	6,343			7,472
Total finance lease liabilities	$	9,484		$	11,157

Weighted-average remaining lease term
Operating leases	2.8 years			3.6 years
Finance leases	2.2 years			2.7 years

Weighted-average discount rate
Operating leases	8.14		%	8.07		%
Finance leases	9.02		%	7.64		%

Maturities of lease liabilities at September 30, 2020 were as follows:


(in thousands)	Operating Leases		Finance Leases
2020	$	193	$	972
2021	625		3,846
2022	451		5,138
2023	370		262
2024	47		—
Thereafter	—		—
Total cash lease payment	1,686		10,218
Add: expected residual value	—		564
Less: imputed interest	(178)		(1,298)
Total lease liabilities	$	1,508	$	9,484

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 nine months ended September 30, 2020 and 2019:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Dayrate drilling	$	8,367	$	39,894	$	59,255	$	144,478
Mobilization	300		2,010		2,753		4,447
Reimbursables	404		2,795		4,743		7,349
Early termination	1,153		314		3,348		815
Capital modification	—		43		—		115
Intangible	—		—		—		1,079
Other	—		17		—		27
Total revenue	$	10,224	$	45,073	$	70,099	$	158,310

The following table provides information about receivables and contract liabilities related to contracts with customers. We had no contract assets as of September 30, 2020 or December 31, 2019.


(in thousands)	September 30, 2020		December 31, 2019
Receivables, which are included in “Accounts receivable, net”	$	8,514	$	35,378
Contract liabilities, which are included in “Accrued liabilities - deferred revenue”	$	(212)	$	(311)

Significant changes in the contract liabilities balance during the period are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Revenue recognized that was included in contract liabilities at beginning of period	$	—	$	47	$	311	$	1,352
Decrease (increase) in contract liabilities due to cash received, excluding amounts recognized as revenue	$	(212)	$	428	$	(212)	$	(233)

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 September 30, 2020. The estimated revenue does not include amounts of variable consideration that are constrained.


	Year Ending December 31,
(in thousands)	2020		2021		2022		2023
Revenue	$	179	$	33	$	—	$	—

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.

If present, these amounts would 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 $0.4 million and $0.1 million on our consolidated balance sheets at September 30, 2020 and December 31, 2019, respectively. During the three and nine months ended September 30, 2020, contract costs increased by $0.6 million and $1.8 million, respectively, and we amortized $0.2 million and $1.5 million of contract costs, respectively. During the three and nine months ended September 30, 2019, contract costs increased by $0.2 million and $1.7 million, respectively, and we amortized $1.0 million and $2.6 million of contract costs, respectively.

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;

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 and merger consideration payable to an affiliate are 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 28.0%. The following table

summarizes the carrying value and fair value of our long-term debt and merger consideration payable to an affiliate as of September 30, 2020 and December 31, 2019.


	September 30, 2020				December 31, 2019
(in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Term Loan Facility	$	130,000	$	83,487	$	130,000	$	138,567
Revolving Credit Facility	$	—	$	—	$	—	$	—
PPP Loan	$	10,000	$	7,344	$	—	$	—
Merger consideration payable to an affiliate	$	2,902	$	2,991	$	3,022	$	3,022

The fair value of our assets held for sale is determined using Level 3 measurements. In the first quarter of 2020, we obtained a third-party appraisal to determine the fair value of our assets held for sale. 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 September 30, 2020 and December 31, 2019 consisted of supplies held for use in our drilling operations. In the first quarter of 2020, we impaired $1.2 million of inventory deemed to have zero value based upon the current macroeconomic conditions and uncertainties surrounding COVID-19.

8. Accrued Liabilities

Accrued liabilities consisted of the following:


(in thousands)	September 30, 2020		December 31, 2019
Accrued salaries and other compensation	$	1,169	$	3,500
Insurance	1,636		2,861
Deferred revenues	212		701
Property and other taxes	2,373		4,716
Interest	3,072		3,244
Operating lease liability - current	571		475
Other (1)	1,405		871
	$	10,438	$	16,368

(1) Accrued Liabilities - Other includes $0.8 million in accrued severance, as of September 30, 2020, in connection with our cost reduction measures instituted in response to the COVID-19 pandemic and current deteriorating market conditions.

9. Long-term Debt

Our long-term debt consisted of the following:


(in thousands)	September 30, 2020		December 31, 2019
Term Loan Facility due October 1, 2023	$	130,000	$	130,000

PPP Loan	10,000		—
Finance lease obligations	9,484		11,157
	149,484		141,157

Less: current portion of finance leases	(3,141)		(3,685)
Less: Term Loan Facility deferred financing costs	(2,903)		(2,531)
Long-term debt	$	143,440	$	134,941

Credit Facilities

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 (“LIBOR”) with an interest period of one month, 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. We are in compliance with our covenants as of September 30, 2020.

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.

In July 2019, we revised our Term Loan Credit Agreement to explicitly permit the repurchase of equity interests by the Company pursuant to the stock purchase program that was approved by our Board of Directors.

In June 2020, we revised our Term Loan Credit Agreement to elect to pay accrued and unpaid interest, solely during one three-consecutive-month period immediately following such notice, in kind (the “PIK Amount”). We agreed to pay an additional amount equal to 0.75% of the aggregate principal amount of the loans under the Term Loan Credit Agreement plus all PIK Amounts, if any, that are added to such principal amount being repaid or prepaid on either the maturity date or upon the occurrence of an acceleration of obligations under the Term Loan Credit Agreement. As such, the additional amount, approximately $1.0 million, was recorded as a direct deduction from the face amount of the Term Loan Facility and as a long-term payable on our consolidated balance sheets. The additional amount will be amortized as interest expense over the term of the Term Loan Facility.

Additionally 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

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 September 30, 2020.

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 September 30, 2020, the weighted-average interest rate on our borrowings was 8.50%. At September 30, 2020, the borrowing base under our ABL Credit Facility was $5.5 million, and we had $5.2 million of availability remaining of our $40.0 million commitment on that date.

On April 27, 2020, we entered into an unsecured loan in the aggregate principal amount of $10.0 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”), sponsored by the Small Business Administration (the “SBA”) as guarantor of loans under the PPP. The PPP is part of the CARES Act, and it provides for loans to qualifying businesses in a maximum amount equal to the lesser of $10.0 million and 2.5 times the average monthly payroll expenses of the qualifying business. The proceeds of the loan may only be used for payroll costs, rent, utilities, mortgage interests, and interest on other pre-existing indebtedness (the “permissible purposes”) during the covered period that ended on or about October 13, 2020. Interest on the PPP loan is equal to 1.0% per annum. All or part of the loan is forgivable based upon the level of permissible expenses incurred during the covered period and changes to the Company's headcount during the covered period to headcount during the period from January 1, 2020 to February 15, 2020. On October 7, 2020, the SBA released guidance clarifying the deferral period for PPP loan payments. The Paycheck Protection Flexibility Act of 2020 extended the deferral period for loan payments to either (1) the date that SBA remits the borrower's loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower's loan forgiveness covered period. While there can be no assurance that such PPP loan can be forgiven, we intend to apply for forgiveness and we believe our first payment related to any unforgiven portion would be due during the fourth quarter of 2021, with a loan maturity date of April 27, 2022.

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 275,000 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 September 30, 2020, approximately 105,055 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. 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 September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Compensation cost recognized:

Restricted stock and restricted stock units	$	694	$	582	$	1,554	$	1,385
Total stock-based compensation	$	694	$	582	$	1,554	$	1,385

No stock-based compensation was capitalized in connection with rig construction activity during the three and nine months ended September 30, 2020 or 2019.

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 nine months ended September 30, 2020 or 2019.

A summary of stock option activity and related information for the nine months ended September 30, 2020 is as follows:


	Nine Months Ended September 30, 2020
	Options	Weighted Average Exercise Price
Outstanding at January 1, 2020	33,458	$	254.80
Granted	—	—
Exercised	—	—
Forfeited/expired	—	—
Outstanding at September 30, 2020	33,458	$	254.80
Exercisable at September 30, 2020	33,458	$	254.80

The number of options vested at September 30, 2020 was 33,458 with a weighted average remaining contractual life of 1.5 years and a weighted average exercise price of $254.80 per share. There were no unvested options or unrecognized compensation cost related to outstanding stock options at September 30, 2020.

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 over 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 September 30, 2020, there was $1.7 million in unrecognized compensation cost related to unvested restricted stock awards. This cost is expected to be recognized over a weighted-average period of 1.7 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 nine months ended September 30, 2020 is as follows:


	Nine Months Ended September 30, 2020
	Shares	Weighted Average Grant-Date Fair Value Per Share
Outstanding at January 1, 2020	62,817	$	64.40
Granted	—	—
Vested	(16,767)	64.40
Forfeited	(5,716)	64.40
Outstanding at September 30, 2020	40,334	$	64.40

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 September 30, 2020, there was $1.2 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 0.9 years.

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 nine months ended September 30, 2020 is as follows:


	Nine Months Ended September 30, 2020
	RSUs	Weighted Average Grant-Date Fair Value Per Share
Outstanding at January 1, 2020	44,439	$	59.71
Granted	64,914	12.96
Vested and converted	(17,392)	33.06
Forfeited	(16,152)	19.21
Outstanding at September 30, 2020	75,809	$	34.42

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 September 30, 2020, there was unrecognized compensation cost related to unvested performance-based or market-based restricted stock unit awards totaling $0.3 million. This cost is expected to be recognized over a weighted-average period of 1.0 years.

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 nine months ended September 30, 2020 is as follows:


	Nine Months Ended September 30, 2020
	RSUs	Weighted Average Grant-Date Fair Value Per Share
Outstanding at January 1, 2020	23,480	$	33.90
Granted	24,854	12.42
Vested and converted	(1,260)	30.89
Forfeited	(8,515)	21.24
Outstanding at September 30, 2020	38,559	$	22.95

11. Stockholders’ Equity and Earnings (Loss) per Share

As of September 30, 2020, we had a total of 6,166,720 shares of common stock, $0.01 par value, outstanding. We also had 78,589 shares held as treasury stock. Total authorized common stock is 50,000,000 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 September 30,				Nine Months Ended September 30,
(in thousands, except per share data)	2020		2019		2020		2019
Net loss (numerator):	$	(15,199)	$	(10,547)	$	(53,542)	$	(25,778)
Loss per share:
Basic and diluted	$	(2.67)	$	(2.80)	$	(11.91)	$	(6.82)

Shares (denominator):
Weighted average common shares outstanding - basic	5,703		3,770		4,495		3,780

Weighted average common shares outstanding - diluted	5,703		3,770		4,495		3,780

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 33,458 during the three and nine months ended September 30, 2020 and 33,458 during the three and nine months ended September 30, 2019. 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 114,368 for the three and nine months ended September 30, 2020 and 72,218 for the three and nine months ended September 30, 2019.

12. Income Taxes

Our effective tax rate was 0.2%, (2.2)%, 0.2%, and (2.3)% for the three and nine months ended September 30, 2020 and 2019, respectively. Taxes in both periods relate to Louisiana state income tax and Texas margin tax.

13. Commitments and Contingencies

Purchase Commitments

As of September 30, 2020, we had outstanding purchase commitments to a number of suppliers totaling $0.4 million related primarily to the operation of drilling rigs. All of these commitments relate to equipment and services currently scheduled for delivery in 2020.

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.

We made interest payments on the Term Loan Facility totaling $2.9 million, $9.2 million, $3.3 million and $9.9 million for the three and nine months ended September 30, 2020 and 2019, respectively.

Additionally, we have recorded merger consideration payable to an affiliate of $2.9 million related to proceeds received from the sale of specific assets earmarked in the Sidewinder Merger agreement as assets held for sale with the Sidewinder unitholders receiving the net proceeds.

On June 4, 2020, we entered into a letter agreement with MSD Credit Opportunity Master Fund, L.P. to allow for the deferral of payment of the merger consideration payable to an affiliate of $2.9 million (see “Merger Consideration Amendment” in Note 1 “Nature of Operations”). The merger consideration payable to an affiliate was previously payable in the second quarter of 2020. As of September 30, 2020, accrued interest payable to MSD Credit Opportunity Master Fund, L.P. was $0.2 million.

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, 2019, filed with the Securities and Exchange Commission on March 2, 2020 (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. Our first rig began drilling in May 2012. On October 1, 2018, we completed a merger with Sidewinder Drilling LLC (“Sidewinder”). As a result of this merger, we more than doubled our operating fleet and personnel.

Our rig fleet includes 29 marketed AC powered (“AC”) rigs and a number of additional rigs requiring conversions or upgrades in order to meet our AC pad-optimal specifications. We do not intend to complete these conversions or upgrades until market conditions improve.

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.

Significant Developments

COVID-19 Pandemic and Market Conditions Update

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (“COVID-19”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The continued spread of the COVID-19 virus and the responses taken to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and shutdowns, has caused significant declines in global demand for crude oil. This reduction in demand has occurred concurrent with the initiation of a crude oil price war between members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (collectively, the “OPEC+” group). Even with the production cuts announced by the OPEC+ group and others on April 9, 2020, and the cessation to the crude oil price war, crude oil inventories have continued to rise and to test storage capacity and logistics networks. These factors led to a collapse in oil prices, with the WTI price for May delivery closing at negative $37.63 per barrel on April 20, 2020. As of October 26, 2020, the WTI spot price was $38.39. In July 2020, OPEC+ agreed to taper oil production cuts, which will reduce production cuts from 9.7 Mmbpd to 7.7 Mmbpd between August 2020 and January 2021. Downward pressure on oil prices is expected to continue for the foreseeable future, and the long-term effects on production and demand are unknown at this time. Currently, there is considerable uncertainty regarding measures to contain the virus and what potential future measures may be put in place, therefore we cannot predict when worldwide demand for oil will stabilize and if or when it will begin to improve or reach pre-COVID-19 levels.

Due to these rapidly declining market conditions, we took the following actions in order to reduce our cost structure:

•Salary or compensation reductions for substantially all our employees, including members of executive management;

•Suspension of all cash-based incentive compensation, including all members of executive management;

•Reduced the number of executive management positions by two;

•Reduced the number of directors from seven to five, which became effective following director elections at our 2020 Annual Meeting of Stockholders;

•Annual compensation reductions for our directors; and

•Reduced headcount for non-field-based personnel by approximately 40%

We cannot predict the length of time that the market disruptions resulting from the COVID-19 pandemic will continue; or when, or if, oil and gas prices and demand for our contract drilling services will decline, continue to improve or return to pre-COVID-19 levels. The extent to which our operating and financial results are affected by the COVID-19 pandemic will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus. As a result, our business, operating results and financial conditions are subject to various risks, many of which are aggravated as a result of the declining market conditions and significant uncertainty caused by the COVID-19 pandemic.

Assets Held for Sale

During the fourth quarter of 2020, we intend to place the remaining assets classified as held for sale at September 30, 2020 in auction. Although these assets held for sale were impaired in the first quarter of 2020 to what we believe is the fair value less cost to sell in current market conditions, we cannot provide any assurance that these assets will sell for this value and we may incur an additional impairment in the fourth quarter of 2020 related to the sale of these assets.

Third Amendment to Term Loan Credit Agreement

Merger Consideration Amendment

ATM Offering

On June 5, 2020, we entered into an equity distribution agreement (the “Agreement”) with Piper Sandler & Co. (the “Agent”), through its Simmons Energy division. Pursuant to the Agreement, we were able to offer and sell through the Agent shares of our common stock, par value $0.01 per share, having an aggregate offering price of up to $11,000,000 (the “Shares”). We began offering shares under this program during the second quarter of 2020 and completed this offering process during the third quarter of 2020, raising an aggregate $11 million of gross proceeds and issuing an aggregate of 2.4 million shares at an average gross offering price of $4.66 per share. We have used and plan to continue using the net proceeds from the sales pursuant to the Agreement, after deducting the sales agent’s commissions and our offering expenses, for general corporate purposes, which may include, among other things, repayment of indebtedness and capital expenditures.

The Agreement contained customary representations, warranties and agreements by the Company, indemnification obligations of the Company and the Agent, including for liabilities under the Securities Act, other obligations of the parties and termination provisions. Under the terms of the Agreement, we paid the Agent a commission equal to 3% of the gross sales price of the Shares sold.

Asset Impairment

As a result of the rapidly deteriorating market conditions described in "COVID-19 Pandemic and Market Conditions Update", we concluded that a triggering event occurred as of March 31, 2020 and, accordingly, an interim asset impairment test was performed. As a result, we recognized impairment of $3.3 million associated with the decline in the market value of our assets held for sale based upon the market approach method and $13.3 million related to the remaining assets on rigs removed from our marketed fleet, as well as certain other component equipment and inventory; all of which was deemed to be unsaleable and of zero value based upon the current macroeconomic conditions and uncertainties surrounding COVID-19. We did not record any asset impairment during the three months ended June 30, 2020 or September 30, 2020. Due to the uncertainty around the COVID-19 pandemic and current market conditions, we may have to make further impairment charges in future periods relating to, among other things, fixed assets and inventory.

Reverse Stock Split

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.

During the three and nine months ended September 30, 2020, our operating costs also included approximately $0.8 million of costs associated with the reactivation of idle rigs. These costs include costs associated with recommissioning the rig, the hiring and training of new crews and the purchase of supplies and other consumables required for the operation of the rigs.

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.

•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 nine months ended September 30, 2020 and 2019:


	Three Months Ended						Nine Months Ended
(In thousands, except per share data)	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Revenues	$	10,224		$	45,073		$	70,099		$	158,310
Costs and expenses
Operating costs	8,663			34,246			52,987			111,032
Selling, general and administrative	2,796			3,755			10,101			11,308
Severance and merger-related expenses	—			320			1,076			2,688
Depreciation and amortization	10,767			11,154			33,338			33,838
Asset impairment	—			1,966			16,619			9,839
(Gain) loss on disposition of assets, net	(326)			265			(1,208)			3,503
Other expense	—			122			—			377
Total cost and expenses	21,900			51,828			112,913			172,585
Operating loss	(11,676)			(6,755)			(42,814)			(14,275)
Interest expense	(3,554)			(3,560)			(10,812)			(10,913)
Loss before income taxes	(15,230)			(10,315)			(53,626)			(25,188)
Income tax (benefit) expense	(31)			232			(84)			590
Net loss	$	(15,199)		$	(10,547)		$	(53,542)		$	(25,778)

Other financial and operating data
Number of marketed rigs (end of period) (1)	29			29			29			29
Rig operating days (2)	460			1,943			3,032			7,001
Average number of operating rigs (3)	5.0			21.1			11.1			25.6
Rig utilization (4)	17.2		%	75.6		%	38.2		%	85.0		%
Average revenue per operating day (5)	$	18,078		$	20,559		$	19,536		$	20,738
Average cost per operating day (6)	$	14,155		$	14,914		$	14,049		$	14,034
Average rig margin per operating day	$	3,923		$	5,645		$	5,487		$	6,704

(1) 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.

(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 $0.8 million and $4.8 million during the three months ended September 30, 2020 and 2019, respectively, and $7.5 million and $11.2 million during the nine months ended September 30, 2020 and 2019, respectively, (ii) revenues associated with the amortization of intangible revenue acquired in the Sidewinder merger of $1.1 million during the nine months ended September 30, 2019, and (iii) early termination revenues of $1.2 million and $0.3 million during the three months ended September 30, 2020 and 2019, respectively, and $3.3 million and $0.8 million during the nine months ended September 30, 2020 and 2019, respectively. The three and nine months ended September 30, 2020 and the three months ended September 30, 2019 did not include any intangible revenue.

(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 $0.8 million and $4.8 million during the three months ended September 30, 2020 and 2019, respectively, and $7.5 million and $11.2 million during the nine months ended September 30, 2020 and 2019, respectively, (ii) overhead costs expensed due to reduced rig upgrade activity of $0.5 million and $0.2 million during the three months ended September 30, 2020 and 2019, respectively, and $1.5 million and $1.3 million during the nine months ended September 30, 2020 and 2019, respectively, (iii) new crew training costs of $0.1 million during the three months ended September 30, 2019 and $0.2 million and $0.1 million during the nine months ended September 30, 2020 and 2019, respectively, (iv) rig decommissioning costs associated with stacking deactivated rigs of $0.2 million and $0.1 million during the three months ended September 30, 2020 and 2019, respectively, and $0.5 million and $0.2 million during the nine months ended September 30, 2020 and 2019, respectively, and (v) rig reactivation costs of $0.8 million during the three and nine months ended September 30, 2020.

Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019

Revenues

Revenues for the three months ended September 30, 2020 were $10.2 million, representing a 77.3% decrease as compared to revenues of $45.1 million for the three months ended September 30, 2019. This decrease was attributable to a decrease in operating days to 460 days as compared to 1,943 days in the prior year comparable quarter. The decrease in operating days was primarily attributable to the current drastic downturn in market conditions as a result of the COVID-19 pandemic and the concurrent initiation of a crude oil price war between members of the “OPEC+” group. On a revenue per operating day basis, which excludes the impact of intangible and early termination revenues, our revenue per day decreased by 12.1% to $18,078 during the three months ended September 30, 2020, as compared to revenue per day of $20,559 for the three months ended September 30, 2019. This decrease in revenue per day was the result of declining dayrates as compared to the prior year quarter and expiration of various higher dayrate legacy contracts during the quarter.

Operating Costs

Operating costs for the three months ended September 30, 2020 were $8.7 million, representing a 74.7% decrease as compared to operating costs of $34.2 million for the three months ended September 30, 2019. This decrease was primarily attributable to a decrease in operating days to 460 days as compared to 1,943 days in the prior year comparable quarter. On a cost per operating day basis, our cost decreased to $14,155 per day during the three months ended September 30, 2020, representing an 5.1% decrease compared to cost per operating day of $14,914 for the three months ended September 30, 2019. This decrease was primarily attributable to cost reduction activities instituted at the beginning of the second quarter of 2020 as well as increased labor costs associated with inefficiencies and transitory downtime during the third quarter of 2019, as well as increased labor costs during the third quarter of 2019 associated with inefficiencies and transitory downtime.

Selling, General and Administrative

Selling, general and administrative expenses for the three months ended September 30, 2020 were $2.8 million, representing a 25.5% decrease as compared to selling, general and administrative expense of $3.8 million for the three months ended September 30, 2019. This decrease as compared to the prior year comparable quarter primarily relates to cost cutting initiatives that were implemented at the beginning of the second quarter of 2020.

Severance and Merger-related Expenses

No severance or merger-related expenses were recorded during the third quarter of 2020. Merger-related expenses of $0.3 million were recorded for the three months ended September 30, 2019, primarily comprised of severance, professional fees and other merger-related expenses.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended September 30, 2020 was $10.8 million, representing a 3.5% decrease compared to depreciation and amortization expense of $11.2 million for the three months ended September 30, 2019. The decrease in depreciation and amortization expense is primarily the result of the asset impairments incurred in 2019 and the first quarter of 2020.

Asset Impairment

We did not record any asset impairment during the three months ended September 30, 2020. Due to the uncertainty around COVID-19 and current market conditions, we may have to make further impairment charges in future periods relating to, among other things, fixed assets and inventory.

We performed an impairment test during the quarter ended September 30, 2019 and recorded an impairment charge, which represented the impairment of 100% of our previously recorded goodwill. The impairment was primarily the result of the downturn in industry conditions since the consummation of the Sidewinder merger in the fourth quarter of 2018 and the subsequent related decline in the price of our common stock as of September 30, 2019.

(Gain) Loss on Disposition of Assets, net

A gain on the disposition of assets totaling $0.3 million was recorded for the three months ended September 30, 2020 compared to a loss on the disposition of assets totaling $0.3 million in the prior year comparable quarter. In the current and prior year quarter, the gain and loss, respectively, related to the sale of miscellaneous drilling equipment.

Interest Expense

Interest expense was $3.6 million for the three months endedSeptember 30, 2020 and for the three months ended September 30, 2019.

Income Tax (Benefit) Expense

Income tax benefit recorded for the three months ended September 30, 2020 amounted to $31.0 thousand as compared to income tax expense of $0.2 million for the three months ended September 30, 2019. Our effective tax rates for the three months ended September 30, 2020 and 2019 were 0.2% and (2.2)%, respectively. Taxes in both periods relate to Louisiana state income tax and Texas margin tax.

Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019

Revenues

Revenues for the nine months ended September 30, 2020 were $70.1 million, representing a 55.7% decrease compared to revenues of $158.3 million for the nine months ended September 30, 2019. This decrease was attributable to a decrease in operating days to 3,032 days as compared to 7,001 days in the prior year period. The decrease in operating days was primarily attributable to the current drastic downturn in market conditions as a result of the COVID-19 pandemic and the concurrent initiation of a crude oil price war between members of the "OPEC+" group. On a revenue per operating day basis, our revenue per day decreased by 5.8% to $19,536 during the nine months ended September 30, 2020, as compared to revenue per day of $20,738 for the nine months ended September 30, 2019. This decrease in revenue per day was the result of declining dayrates as compared to the prior year period and the expiration of higher dayrate legacy contracts.

Operating Costs

Operating costs for the nine months ended September 30, 2020 were $53.0 million, representing a 52.3% decrease compared to operating costs of $111.0 million for the nine months ended September 30, 2019. This decrease was primarily attributable to a decrease in operating days to 3,032 days compared to 7,001 days in the prior year period. On a cost per operating day basis, excluding decommissioning costs and reactiviation costs, cost increased to $14,049 per day during the nine months ended September 30, 2020, representing a 0.1% increase compared to cost per operating day of $14,034 for the nine months ended September 30, 2019. This increase was primarily attributable to inefficiencies associated with lower operating days offset by cost reduction initiatives instituted at the beginning of the second quarter of 2020.

Selling, General and Administrative

Selling, general and administrative expenses for the nine months ended September 30, 2020 were $10.1 million, representing a 10.7% decrease compared to selling, general and administrative expenses of $11.3 million for the nine months ended September 30, 2019. This decrease as compared to the prior year period primarily related to cost reduction measures implemented at the beginning of the second quarter of 2020.

Severance and Merger-related Expenses

Severance expense of $1.1 million was recorded for the nine months ended September 30, 2020 in connection with our cost reduction measures instituted in response to the COVID-19 pandemic and current deteriorating market conditions.

Merger-related expenses of $2.7 million were recorded for the nine months ended September 30, 2019, primarily comprised of severance, professional fees and other merger-related expenses.

Depreciation and Amortization

Depreciation and amortization expense for the nine months ended September 30, 2020 was $33.3 million, representing a 1.5% decrease compared to depreciation and amortization expense of $33.8 million for the nine months ended September 30, 2019. The decrease in depreciation and amortization expense is primarily the result of the asset impairments incurred in 2019 and the first quarter of 2020, offset by property additions during the period.

Asset Impairment

As a result of the rapidly deteriorating market conditions described in "COVID-19 Pandemic and Market Conditions Update," we concluded that a triggering event occurred as of March 31, 2020 and, accordingly, an interim asset impairment test was performed. As a result, we recognized impairment of $3.3 million associated with the decline in the market value of our assets held for sale based upon the market approach method and $13.3 million related to the remaining assets on rigs removed from our marketed fleet, as well as certain other component equipment and inventory; all of which was deemed to be unsaleable and of zero value based upon the current macroeconomic conditions and uncertainties surrounding COVID-19. We did not record any asset impairment during the three months ended June 30, 2020 or September 30, 2020. Due to the uncertainty around COVID-19 and current market conditions, we may have to make further impairment charges in future periods relating to, among other things, fixed assets and inventory.

Asset impairment expense of $9.8 million was recorded for the nine months ended September 30, 2019 comprised of (i) a $3.1 million impairment of non-marketable SCR drilling equipment, (ii) a $3.3 million impairment of assets sold at auction, (iii) a $1.2 million impairment of miscellaneous drilling equipment previously held for sale, but deemed unsalable in the current market environment, and (iv) a $2.3 million impairment of our previously recorded goodwill from the Sidewinder merger.

(Gain) Loss on Disposition of Assets, net

A gain on the disposition of assets totaling $1.2 million was recorded for the nine months ended September 30, 2020 compared to a loss on the disposition of assets totaling $3.5 million in the prior year period. In the current year period, the gain relates to the sale of miscellaneous drilling equipment. In the prior year period, the loss relates primarily to the sale of certain surplus assets, acquired in the Sidewinder merger, at auctions.

Other Expense

Other expense was $0.4 million for the nine months ended September 30, 2019, related to the settlement of a lawsuit.

Interest Expense

Interest expense for nine months ended September 30, 2020 was $10.8 million, as compared to $10.9 million for the nine months ended September 30, 2019.

Income Tax (Benefit) Expense

Income tax benefit recorded for the nine months ended September 30, 2020 amounted to $84.0 thousand as compared to income tax expense of $0.6 million for the nine months ended September 30, 2019. Our effective tax rates for the nine months ended September 30, 2020 and 2019 were 0.2% and (2.3)%, respectively. Taxes in both periods relate to Louisiana state income tax and Texas margin tax.

Liquidity and Capital Resources

Our liquidity at September 30, 2020 consisted of cash on hand of $18.8 million, $5.2 million of availability under our revolving credit facility and $15 million available under the accordion feature of our term loan facility. As a result of the extreme and rapid nature of the decline in market conditions caused by the COVID-19 pandemic, our liquidity and capital resources were impaired and will continue to be impaired until market conditions improve.

Due to lack of visibility and confidence towards customer intentions, although our operating rig count has begun to improve, and reached eight rigs as of October 31, 2020, we cannot assure you that future declines in operating rigs will not occur or that our operating rig count will continue to improve. During the third quarter of 2020, cash flow from operations, ignoring working capital fluctuations, was negative and we expect such metrics to be negative during the fourth quarter as

well, and we can provide no assurance as to when it will return to positive. Looking forward past September 30, 2020, we currently estimate that required non-operating cash payments for interest under our credit facilities and finance lease payments will approximate $12.2 million for the next 12 months. Payments for capital expenditures and to fund operations will be in addition to these amounts.

Because our cash flows from operations have been and may continue to be materially impacted by depressed market conditions caused by the COVID-19 pandemic, we may be required to draw down funds pursuant to the $15 million accordion feature under our term loan facility to meet required non-operating expenditures and if necessary to fund operations. In the second quarter of 2020, we entered into the $10 million PPP Loan pursuant to the Paycheck Protection Program (the “PPP”). We used the proceeds of the loan for payroll costs, rent, utilities, mortgage interests, and other permitted purposes. Additionally, in order to decrease near term non-operating commitments, we modified the term loan credit agreement to permit us to elect to pay accrued and unpaid interest for one quarter in kind, and we amended the Merger Consideration Agreement to extend the required payment date to the earlier of (i) June 30, 2022 and (ii) a change of control transaction. We also completed an ATM equity offering in which we raised an aggregate of $11 million in gross proceeds during the second and third quarters of 2020 (see “Significant Developments” for additional information). We currently believe that the actions we have taken to date and our existing sources of liquidity are sufficient to fund our operations for the next twelve months. However, due to the uncertainty regarding the duration of the COVID-19 pandemic and its effects on the oil and gas industry and our business and operations, there can be no assurance in this regard.

Net Cash Provided By Operating Activities

Cash provided by operating activities was $7.1 million for the nine months ended September 30, 2020 compared to cash provided by operating activities of $27.2 million during the same period in 2019. 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 nine months of 2020 were lower as a result of an increase in net loss of $27.8 million, adjusted for non-cash items, of $50.9 million for the nine months ended September 30, 2020 compared to $49.7 million for non-cash items during the same period in 2019. Additionally, working capital changes increased cash flows from operating activities by $9.7 million for the nine months ended September 30, 2020 compared to a reduction of cash flows of $3.2 million during the same period in 2019.

Net Cash Used In Investing Activities

Cash used in investing activities was $10.1 million for the nine months ended September 30, 2020 compared to cash used in investing activities of $26.2 million during the same period in 2019. During the first nine months of 2020, cash payments of $12.7 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $2.4 million and the collection of principal on a note receivable of $0.1 million. During the 2019 period, cash payments of $35.0 million for capital expenditures were offset by insurance proceeds of $1.0 million and proceeds from the sale of property, plant and equipment of $7.8 million.

Net Cash Provided by (Used In) Financing Activities

Cash provided by financing activities was $16.6 million for the nine months ended September 30, 2020 compared to cash used in financing activities of $4.1 million during the same period in 2019. During the first nine months of 2020, we made borrowings under our revolving credit facility of $11.0 million, received PPP Loan proceeds of $10.0 million and proceeds from the issuance of common stock through our ATM transaction of $11.0 million. These proceeds were offset by repayments under our revolving credit facility of $11.0 million, common stock issuance costs of $0.7 million, the purchase of treasury stock of $66.0 thousand, restricted stock unit’s withheld for taxes paid of $79.0 thousand and payments for finance lease obligations of $3.5 million. During the first nine months of 2019 we made borrowings under our revolving credit facility of $2.5 million. These proceeds were offset by repayments under our revolving credit facility of $5.1 million, common stock issuance costs of $0.2 million, the purchase of treasury stock of $0.3 million and payments for finance lease obligations of $1.0 million.

Long-term Debt

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.

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 19% of the outstanding shares of our common stock.

weighted-average interest rate on our borrowings was 8.50%. At September 30, 2020, the borrowing base under our ABL Credit Facility was $5.5 million, and we had $5.2 million of availability remaining of our $40.0 million commitment on that date.

In addition, on April 27, 2020, we entered into an unsecured loan in the aggregate principal amount of $10.0 million (the “PPP Loan”) pursuant to the PPP, sponsored by the SBA as guarantor of loans under the PPP. The PPP is part of the CARES Act, and it provides for loans to qualifying businesses in a maximum amount equal to the lesser of $10.0 million and 2.5 times the average monthly payroll expenses of the qualifying business. The proceeds of the loan may only be used for payroll costs, rent, utilities, mortgage interests, and interest on other pre-existing indebtedness (the “permissible purposes”) during the covered period ending October 13, 2020. Interest on the PPP Loan is equal to 1.0% per annum. All or part of the loan is forgivable based upon the level of permissible expenses incurred during the covered period and changes to the Company's headcount during the period from January 1, 2020 to February 15, 2020.

Additionally, included in our long-term debt are finance 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).

Critical Accounting Policies and Accounting Estimates

We review our assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets that are held and used is measured by comparison of the estimated future undiscounted cash flows associated with the asset to the carrying amount of the asset. If the carrying value of such assets is less than the estimated undiscounted cash flow, an impairment charge is recorded in the amount by which the carrying amount of the assets exceeds their estimated fair value.

As a result of the rapidly deteriorating market conditions described in “COVID-19 Pandemic and Market Conditions Update”, we concluded that a triggering event occurred as of March 31, 2020 and, accordingly, an interim asset impairment test was performed. As a result, we recognized impairment of $3.3 million associated with the decline in the market value of our assets held for sale based upon the market approach method and $13.3 million related to the remaining assets on rigs removed from our marketed fleet, as well as certain other component equipment and inventory; all of which was deemed to be unsaleable and of zero value based upon the current macroeconomic conditions and uncertainties surrounding COVID-19. We have not identified any additional triggering event and did not record any asset impairment during the three months ended June 30, 2020 or September 30, 2020. Due to the uncertainty around COVID-19 and current market conditions, we may have to make further impairment charges in future periods relating to, among other things, fixed assets and inventory.

For a complete discussion of our critical accounting policies and accounting estimates, please see our Annual Report on Form 10-K for the year ended December 31, 2019.

Recent Accounting Pronouncements

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 September 30, 2020 included $130.0 million of floating-rate debt attributed to borrowings at an average interest rate of 8.50%. As a result, our annual interest cost in 2020 will fluctuate based on short-term interest rates. The impact on annual cash flow of a 10% change in the floating-rate (approximately 9.35%) would be approximately $1.1 million annually based on the floating-rate debt and other obligations outstanding at September 30, 2020; 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.

The COVID-19 pandemic, responses taken and economic effects have caused significant declines in the global demand for crude oil. This demand declines in has occurred concurrent with the initiation of a crude oil price war between members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (collectively, the “OPEC+” group). These combined events have resulted significant declines in demand for oil and major disruptions to global energy prices. Even with the production cuts announced by the OPEC+ group and others on April 9, 2020, and the cessation to the crude oil price war, crude oil inventories have continued to rise and to test storage capacity and logistics networks. These factors have led to a collapse in oil prices, with the WTI price for May delivery closing at negative $37.63 per barrel on April 20, 2020. In July 2020, OPEC+ agreed to taper oil production cuts, which will reduce production cuts from 9.7 Mmbpd to 7.7 Mmbpd between August 2020 and January 2021. Downward pressure on oil prices is expected to continue for the foreseeable future, and the long-term effects on production and demand are unknown at this time. As of October 26, 2020, the WTI spot price was $38.39.

We cannot predict the length of time that the market disruptions resulting from the COVID-19 pandemic will continue or when, or if, oil and gas prices and demand for our contract drilling services will begin to improve or return to pre-COVID-19 levels. The extent to which our operating and financial results are affected by COVID-19 will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus. As a result, our business, operating results and financial conditions are subject to various risks outlined in this Current Report on Form 10-Q under Part II, Section 1a “Risk Factors”, as well as the risk factors outlined in our Annual Report on Form 10-K, many of which are aggravated as a result of the declining market conditions and significant uncertainty caused by the COVID-19 pandemic.

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.

We expect all of our customers, lenders and suppliers are being adversely affected in some fashion by the COVID-19 pandemic. Although we are not currently experiencing any material disruption in payments by customers at this time, given the dramatic impact the COVID-19 pandemic has had on the oil and gas industry and our customers, there is no assurance that our customers’ financial position will not be adversely impacted which could result in payment delays and payment defaults. Availability under our revolving line of credit is based upon a borrowing base determined by the level of our accounts receivable, with uncollectable amounts or amounts greater than 90 days past due excluded from consideration. As a result, a continued reduction in the utilization of our rigs or delays in payment or payment defaults by any of our customers will continue to have a material adverse impact on our financial liquidity. Similarly, our suppliers may not extend credit to us or require less favorable payment terms or face similar challenges with their own suppliers. We also are reliant upon our third-party lenders’ ability to meet their commitments under our existing credit facilities. Given the dramatic impact of the COVID-19 pandemic across industries and geographic regions, we cannot predict the magnitude it may have on our lenders’ ability to meet their commitments to us, and any failure to do so would have a material adverse effect on our liquidity and financial position.

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 disclosure controls and procedures were effective as of September 30, 2020 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.

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 risks related to our business set forth under “Risk Factors” in our Form 10-K for the year ended December 31, 2019, our business is subject to the following risks:

The ongoing COVID-19 pandemic and related economic repercussions have had, and are expected to continue to have, a significant impact on our business, results of operations and financial condition, and depending on the duration of the pandemic and its effect on the oil and gas industry, could have a material adverse effect on our business, liquidity, results of operations and financial condition.

The worldwide outbreak of COVID-19, the uncertainty regarding the impact of COVID-19 and various governmental actions taken to mitigate the impact of COVID-19, have resulted in a decline in demand for oil and natural gas. To the extent that the outbreak of COVID-19 continues to negatively impact demand and OPEC members and other oil exporting nations fail to implement agreed to production cuts or other actions that are sufficient to support and stabilize commodity prices, we expect our business, operating results and financial condition to remain depressed with further declines in activity levels possible.

Given the nature and significance of the COVID-19 pandemic on demand for oil, and the uncertainty regarding the length of this impact, our business is subject to substantial risks outside of our control, which include, but are not limited to:

•disruption to our supply chain for equipment, supplies and materials essential to our business;

•notices from customers or suppliers arguing that their non-performance under our contracts with them is permitted as a result of force majeure or other reasons;

•reductions in our borrowing base under our revolving line of credit related to delayed customer payments and payment defaults associated with customer liquidity issues and bankruptcies;

•a need to preserve liquidity, which could result in reductions or delays to planned maintenance capital expenditures or failure to pursue other business opportunities;

•actions by the lenders under our revolving credit facility that additional borrowings will not be permitted as a result of the occurrence of a material adverse effect caused by the COVID-19 pandemic;

•actions by the lenders under our term loan that additional borrowings pursuant to our $15 million term loan accordion will not be permitted as a result of the occurrence of a material adverse effect caused by the COVID-19 pandemic;

•our ability to comply with minimum liquidity and springing fixed charge coverage ratio covenants contained in our credit facilities;

•cybersecurity issues, as digital technologies may become more vulnerable and experience a higher rate of cyberattacks in the current environment of remote connectivity;

•litigation risk and possible loss contingencies related to COVID-19 and its impact, including with respect to commercial contracts, employee matters and insurance arrangements;

•additional reductions to our workforce to adjust to market conditions, including severance payments, retention issues, and an inability to hire employees when market conditions improve;

•additional asset impairments, including an impairment of the carrying value of our assets as demand for our contract drilling services decreases;

•infections and quarantining of our employees and the personnel of our customers, suppliers and other third parties in areas in which we operate; and

•changes in the regulation of the production of hydrocarbons, such as the imposition of limitations on the production of oil and gas by states in our target markets or other jurisdictions, that may result in additional limits on demand for our contract drilling services.

If any of these risk factors were to come to fruition, they could have a material adverse effect on our business, liquidity, results of operations and financial condition.

Due to the adverse effects of the COVID-19 pandemic on the oil and gas industry, our operating rig count is dropping rapidly, and as a result, we incurred negative cash flow from operations during the third quarter of 2020 and expect to incur negative cash flow from operations during the fourth quarter of 2020. Although our operating rig count has improved recently, we cannot assure you that this will continue or that our operating rig count will not decline again. Depending upon the duration of this decline and the length of time it takes for our operating rig count to improve, this could have a material adverse effect on our business, liquidity, results of operations and financial condition.

During the first quarter of 2020, our operating rig count reached a peak of 22 rigs. Since that time, market deterioration caused by COVID-19 has caused our customers to reduce drilling activity, which has resulted in our operating rig count to begin to rapidly decline, reaching a low of three rigs during the third quarter of 2020. Recently, we have been able to reactivate rigs and have eight rigs operating under contracts as of October 31, 2020. However, due to the lack of visibility and confidence towards customer intentions, we cannot assure you that our rig count will not decline from these levels. We also cannot assure you if market conditions will continue to improve and if or when our operating rig count will improve further or reach pre-COVID-19 levels. Maintaining our current operating rig count without improvement or continued improvement later in 2020 or in 2021 could have materially adverse effect on our business, liquidity, results of operations and financial condition.

Due to the adverse effects of the COVID-19 pandemic on the oil and gas industry, our cash flows from operations have decreased dramatically, which could have a material adverse effect on our business, liquidity, results of operations and financial condition.

As a result of the ongoing decline in our operating rig count and associated dayrate pressure and margin contraction in the current oil and gas operating environment our cash flows from operations have decreased dramatically, and we will need to draw on our existing sources of available liquidity until market conditions improve in order to maintain operations and make required non-operating expenditures. Current sources of liquidity at September 30, 2020 include $18.8 million of cash, $5.2 million of availability under our revolving credit facility and $15 million available under our term loan accordion. We currently believe that these sources of liquidity are sufficient to fund our operations for the next twelve months, but this assumes that our operating rig count continues to steadily increase from current levels during the remainder of 2020 and first half of 2021 in response to recently improving market conditions. However, due to the uncertainty regarding the duration of the COVID-19 pandemic and its effects on the oil and gas industry, we cannot predict the length of time that the market disruptions resulting from the COVID-19 pandemic will continue, if market conditions will continue to improve or when, or if, oil and gas prices and demand for our contract drilling services will return to pre-COVID-19 levels. As a result, we cannot assure that our current sources of financial liquidity will be sufficient to fund our operations, and any failure to do so could have a material adverse effect on our business, liquidity, results of operations and financial condition.

Our business and operations are dependent upon various third parties and counterparties who may be adversely affected by the COVID-19 pandemic which could have a material adverse effect on our business, liquidity, results of operations and financial condition.

We expect all of our customers, lenders and suppliers are being adversely affected in some fashion by the COVID-19 pandemic. Although we are not currently experiencing any material disruption in payments by customers at this time, given the dramatic impact the COVID-19 pandemic has had on the oil and gas industry and our customers, there is no assurance that our customers’ financial position will not be adversely impacted which could result in payment delays and payment defaults. Availability under our revolving line of credit is based upon a borrowing base determined by the level of our accounts receivable, with uncollectable amounts or amounts greater than 90 days past due excluded from consideration. As a result, a continued reduction in the utilization of our rigs or delays in payment or payment defaults by any of our customers will continue to have a material adverse impact on our financial liquidity. Similarly, our suppliers may not extend credit to us or require less favorable payment terms or face similar challenges with their own suppliers. We also are reliant upon our third-party lenders’ ability to meet their commitments under our existing credit facilities. Given the dramatic impact of the COVID-19 pandemic across industries and geographic regions, we cannot predict the magnitude it may have had or may have in the future on our lenders’ ability to meet their commitments to us, and any failure to do so by them would have a material adverse effect on our business, liquidity, results of operations and financial condition.

As a result of the significant downturn in the oil and gas business and demand for our contract drilling services caused by the COVID-19 pandemic, we may lose our listing on the New York Stock Exchange, which could have a material adverse effect on the market value of our common stock.

Under New York Stock Exchange listing requirements, in order to maintain our listing status we are required to maintain at all times a minimum 30-day trading average public market capitalization of $15 million. Unlike certain other listing standards tied to minimum share price, there is no cure period or grace period associated with this listing standard. In response to the substantial negative impact the COVID-19 pandemic has caused, the New York Stock Exchange granted a temporary waiver from compliance with this standard through June 30, 2020. As of October 30, 2020, we estimated that our 30-day average public float was approximately $15.5 million. Because we cannot predict the length of time that the market disruptions resulting from the COVID-19 pandemic will continue or when, or if, oil and gas prices and demand for our contract drilling services will begin to improve or return to pre-COVID-19 levels, we cannot assure you that our common stock will remain listed on the New York Stock Exchange , which could have a material adverse effect on the trading value of our common stock and our ability to raise additional funds through new issuances.

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.

ITEM 6. EXHIBITS


Exhibit Number						Description

10.1						First Amendment to Credit Agreement, dated as of July 31, 2019, to Credit Agreement, dated as of October 1, 2018, by and among Independence Contract Drilling, Inc. and Sidewinder Drilling LLC (formerly named ICD Operating LLC), each as a Borrower, the Lenders party thereto, and U.S. Bank National Association, as Agent (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by Independence Contract Drilling, Inc. on August 1, 2019 (File No. 0-01-36590).

10.2						Second Amendment to Credit Agreement, dated as of November 22, 2019, to Credit Agreement, dated as of October 1, 2018, by and among Independence Contract Drilling, Inc. and Sidewinder Drilling LLC (formerly named ICD Operating LLC), each as a Borrower, the Lenders party thereto, and U.S. Bank National Association, as Agent.

31.1*						Certification by Chief Executive Officer required by Rule 13a-14(a) and 15d-14(a) under the Exchange Act

31.2*						Certification by Chief Financial Officer required by Rule 13a-14(a) and 15d-14(a) under the Exchange Act

32.1*						Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*						Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

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/ Katherine Kokenes
	Name:	Katherine Kokenes
	Title:	Chief Accounting Officer (Principal Accounting Officer)

Date: November 3, 2020

Exhibit 31.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO

RULE 13a-14(a) AND 15d-14(a) UNDER THE EXCHANGE ACT

I, J. Anthony Gallegos, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended September 30, 2020 of Independence Contract Drilling, Inc. (the "registrant");

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2020


/s/ J. Anthony Gallegos, Jr.
J. Anthony Gallegos, Jr.
Chief Executive Officer

Exhibit 31.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO

RULE 13a-14(a) AND 15d-14(a) UNDER THE EXCHANGE ACT

I, Philip A. Choyce, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended September 30, 2020 of Independence Contract Drilling, Inc. (the "registrant");

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2020


/s/ Philip A. Choyce
Philip A. Choyce
Chief Financial Officer

Exhibit 32.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Independence Contract Drilling, Inc. (the “Company”) on Form 10-Q for the quarter ending September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Anthony Gallegos, Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 3, 2020


/s/ J. Anthony Gallegos, Jr.
J. Anthony Gallegos, Jr.
Chief Executive Officer

Exhibit 32.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Independence Contract Drilling, Inc. (the “Company”) on Form 10-Q for the quarter ending September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip A. Choyce, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 3, 2020


/s/ Philip A. Choyce
Philip A. Choyce
Chief Financial Officer

SECOND AMENDMENT TO CREDIT AGREEMENT

This SECOND AMENDMENT TO CREDIT AGREEMENT (this “Agreement”), is entered into as of November 22, 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”), and 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”).

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 amending and restating the definition of “Permitted Purchase Money Indebtedness” contained therein in its entirety as follows:

“Permitted Purchase Money Indebtedness” means, as of any date of determination, Indebtedness (other than the Obligations, but including Capitalized Lease Obligations) at the time of, or within 60 days after, the acquisition of any fixed assets (other than Rig Fleet Equipment (excluding Permitted Rig Fleet Equipment)) for the purpose of financing all or any part of the acquisition cost thereof, in an aggregate principal amount outstanding not in excess of $15,000,000 at any one time.

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

“Permitted Rig Fleet Equipment” means the items of Equipment subject to the applicable purchase order and total cost amount described in the table below:1


Purchase Order	Vendor	Item	Total Cost
MA-101521	Schlumberger Rig Technology	Mud Pump House	$1,647,607.72
PO 00117141	NOV Rig Solutions Capital Eqt	BOP Stack	$2,232,656.00
PO–117142	Cameron Rig Solutions	BOP Stack	$1,260,000.00
AFE-004651	National Oilwell Varco: Rig 223	Drawworks, Power & Control House	$2,832,031.00
AFE-004655	National Oilwell Varco	Drawwprls Power & Control House	$2,832,031.00

1.Conditions. The amendments set forth in Section 1 of this Agreement shall become effective as of the date first set forth above upon the satisfaction of each of the following conditions (the “Second Amendment Effective Date”):

i.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));

ii.no Default or Event of Default shall have occurred and be continuing;

iii.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

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

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

1 Company to confirm/update.

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i.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;

ii.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;

iii.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

iv.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 Second 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.

3.Choice of Law and Venue; Jury Trial Waiver. THE VALIDITY OF THIS AGREEMENT, THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT

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HEREOF, THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO, AND ANY CLAIMS, CONTROVERSIES OR DISPUTES ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. THIS AGREEMENT SHALL BE SUBJECT TO THE PROVISIONS REGARDING 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.

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

5.Effect on Loan Documents; Ratification.

i.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.

ii.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.

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6.Miscellaneous.

iii.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.

iv.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.

v.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.

vi.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.

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

viii.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].

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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 VP & CFO
			SIDEWINDER DRILLING LLC (formerly named ICD Operating LLC), a Delaware limited liability company By: /s/ Philip A. Choyce Name: Philip A. Choyce Title: Executive VP & CFO

[Second Amendment to ICD Credit Agreement]


LENDERS:			MSD PCOF PARTNERS IV, LLC


			By: Kenneth Gerold Name: Kenneth Gerold
			Title: Vice President

[Second Amendment to ICD Credit Agreement]