Independence Contract Drilling, Inc. - Quarter Report: 2021 June (Form 10-Q)

Table of Contents

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 June 30, 2021

☐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 ☒ 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 ☒ 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	☒	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 ☒

7,243,937 shares of the registrant’s Common Stock were outstanding as of July 30, 2021.

Table of Contents

INDEPENDENCE CONTRACT DRILLING, INC.

Index to Form 10-Q

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020 (Unaudited)	4

Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020 (Unaudited)	5

Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020 (Unaudited)	6

Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (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	35

Item 4. Controls and Procedures	36

Part II. OTHER INFORMATION

Item 1. Legal Proceedings	37

Item 1A. Risk Factors	37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3. Defaults Upon Senior Securities	37

Item 4. Mine Safety Disclosures	37

Item 5. Other Information	37

Item 6. Exhibits	38

Signatures	39

Table of Contents

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;

●

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, 2020. 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.

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Independence Contract Drilling, Inc.

Consolidated Balance Sheets

(Unaudited)

(in thousands, except par value and share amounts)


	June 30,		December 31,
	2021		2020
Assets
Cash and cash equivalents	$	6,032	$	12,279
Accounts receivable, net		14,062		10,023
Inventories		1,077		1,038
Assets held for sale		507		—
Prepaid expenses and other current assets		2,308		4,102
Total current assets		23,986		27,442
Property, plant and equipment, net		368,733		382,239
Other long-term assets, net		3,006		3,528
Total assets	$	395,725	$	413,209
Liabilities and Stockholders’ Equity
Liabilities
Current portion of long-term debt	$	13,642	$	7,637
Accounts payable		10,245		4,072
Accrued liabilities		10,860		10,723
Current portion of merger consideration payable to an affiliate		2,902		—
Total current liabilities		37,649		22,432
Long-term debt		133,825		137,633
Merger consideration payable to an affiliate		—		2,902
Deferred income taxes, net		572		505
Other long-term liabilities		2,733		2,704
Total liabilities		174,779		166,176
Commitments and contingencies (Note 12)
Stockholders’ equity
Common stock, $0.01 par value, 50,000,000 shares authorized; 7,322,515 and 6,254,396 shares issued, respectively, and 7,243,937 and 6,175,818 shares outstanding, respectively		72		62
Additional paid-in capital		522,777		517,948
Accumulated deficit		(297,990)		(267,064)
Treasury stock, at cost, 78,578 shares and 78,578 shares, respectively		(3,913)		(3,913)
Total stockholders’ equity		220,946		247,033
Total liabilities and stockholders’ equity	$	395,725	$	413,209

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

Table of Contents

Independence Contract Drilling, Inc.

Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Revenues	$	19,817	$	21,381	$	35,359	$	59,875
Costs and expenses
Operating costs		17,040		14,095		31,581		44,324
Selling, general and administrative		4,075		3,544		7,761		7,305
Severance expense		—		—		—		1,076
Depreciation and amortization		9,516		11,055		19,505		22,571
Asset impairment, net		250		—		293		16,619
Loss (gain) on disposition of assets, net		31		(836)		(404)		(882)
Total costs and expenses		30,912		27,858		58,736		91,013
Operating loss		(11,095)		(6,477)		(23,377)		(31,138)
Interest expense		(3,773)		(3,654)		(7,482)		(7,258)
Loss before income taxes		(14,868)		(10,131)		(30,859)		(38,396)
Income tax expense (benefit)		33		(11)		67		(53)
Net loss	$	(14,901)	$	(10,120)	$	(30,926)	$	(38,343)
Loss per share:
Basic and diluted	$	(2.22)	$	(2.52)	$	(4.78)	$	(9.87)
Weighted average number of common shares outstanding:
Basic and diluted		6,714		4,018		6,466		3,884

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

Table of Contents

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, 2020	6,175,818	$	62	$	517,948	$	(267,064)	$	(3,913)	$	247,033
RSUs vested, net of shares withheld for taxes	25,285		—		(11)		—		—		(11)
Issuance of common stock through at-the-market facility, net of offering costs	140,377		1		520		—		—		521
Issuance of common stock under purchase agreement	174,100		2		872		—		—		874
Stock-based compensation	—		—		454		—		—		454
Net loss	—		—		—		(16,025)		—		(16,025)
Balances at March 31, 2021	6,515,580	$	65	$	519,783	$	(283,089)	$	(3,913)	$	232,846
Issuance of common stock through at-the-market facility, net of offering costs	445,557		4		1,468		—		—		1,472
Issuance of common stock under purchase agreement	282,800		3		1,072		—		—		1,075
Stock-based compensation	—		—		454		—		—		454
Net loss	—		—		—		(14,901)		—		(14,901)
Balances at June 30, 2021	7,243,937	$	72	$	522,777	$	(297,990)	$	(3,913)	$	220,946


	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 through at-the-market facility, 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

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

Table of Contents

Independence Contract Drilling, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	Six Months Ended June 30,
	2021		2020
Cash flows from operating activities
Net loss	$	(30,926)	$	(38,343)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
Depreciation and amortization		19,505		22,571
Asset impairment, net		293		16,619
Stock-based compensation		1,217		860
Gain on disposition of assets, net		(404)		(882)
Interest expense (non-cash)		2,828		—
Deferred income taxes		67		(53)
Amortization of deferred financing costs		558		431
Bad debt expense		—		149
Changes in operating assets and liabilities
Accounts receivable		(4,039)		22,622
Inventories		(39)		(16)
Prepaid expenses and other assets		2,209		1,319
Accounts payable and accrued liabilities		3,862		(16,258)
Net cash (used in) provided by operating activities		(4,869)		9,019
Cash flows from investing activities
Purchases of property, plant and equipment		(4,295)		(12,126)
Proceeds from the sale of assets		739		1,002
Collection of principal on note receivable		—		145
Net cash used in investing activities		(3,556)		(10,979)
Cash flows from financing activities
Borrowings under Revolving ABL Credit Facility		9		11,038
Repayments under Revolving ABL Credit Facility		(8)		(11,038)
Borrowings under PPP Loan		—		10,000
Proceeds from issuance of common stock through at-the-market facility, net of issuance costs		1,993		6,801
Proceeds from issuance of common stock under purchase agreement		1,949		—
Purchase of treasury stock		—		(66)
RSUs withheld for taxes		(11)		(79)
Payments for finance lease obligations		(1,754)		(2,506)
Net cash provided by financing activities		2,178		14,150
Net (decrease) increase in cash and cash equivalents		(6,247)		12,190
Cash and cash equivalents
Beginning of period		12,279		5,206
End of period	$	6,032	$	17,396

Table of Contents


	Six Months Ended June 30,
(in thousands)	2021		2020
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	3,406	$	7,021
Supplemental disclosure of non-cash investing and financing activities
Change in property, plant and equipment purchases in accounts payable	$	2,171	$	(7,412)
Additions to property, plant and equipment through finance leases	$	632	$	2,434
Extinguishment of finance lease obligations from sale of assets classified as finance leases	$	—	$	(599)
Transfer of assets from held and used to held for sale	$	(550)	$	—

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

Table of Contents

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.

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.

Market Conditions and COVID-19 Pandemic Update

During 2020, reduced demand for crude oil related to the COVID-19 pandemic, combined with production increases from OPEC+ early in the year, led to a significant reduction in oil prices and demand for drilling services in the United States. In response to these adverse conditions and uncertainty, our customers reduced planned capital expenditures and drilling activity throughout 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 of 2020, 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 2020 and the first half of 2021.

Oil prices and natural gas prices have improved substantially since falling to historic lows in 2020, with oil prices (WTI-Cushing) reaching a recent high of $75.37 per barrel on July 2, 2021, and natural gas prices (Henry Hub) reaching a recent high of $3.80 per mmcf on July 14, 2021. Although our customers have increased drilling activity in response to these improvements, capital discipline and adherence to 2021 capital budgets, reduced access to capital markets and hedges in place based on lower commodity prices, have caused such increases to be less dramatic compared to prior industry cycles.

As of June 30, 2021, we had 13 rigs operating, with our 14^th and 15^th rigs reactivating in July 2021. However, due to the lack of visibility towards customer intentions, risk to commodity prices, including any economic declines caused by the uncertainty of the evolving nature of the COVID-19 pandemic, changes to OPEC+ production cuts, or other risks and conditions outside our control, we cannot assure you that we will be able to maintain this operating rig count or that our operating rig count will continue to improve in the future. As such, we will continue to actively monitor their impact on our operations and financial condition.

ATM Distribution Agreement

On June 5, 2020, we entered into an equity distribution agreement (the “ATM Distribution Agreement”) with Piper Sandler & Co. (the “Agent”), through its Simmons Energy division. Pursuant to the ATM Distribution Agreement, we were able to offer and sell through the Agent shares of our common stock, par value $0.01 per share, having an

Table of Contents

aggregate offering price of up to $11 million. We issued and sold approximately $11 million in shares of common stock during 2020.

On March 8, 2021, in conjunction with the ATM Distribution Agreement entered into on June 5, 2020, our board of directors authorized an additional $2.2 million in shares of common stock to be sold in transactions that are deemed to be “at the market offerings.” We began offering shares under this program during the first quarter of 2021 and completed this offering process during the second quarter of 2021, raising $2.2 million of gross proceeds and issuing an aggregate of 585,934 shares at an average gross offering price of $3.75 per share.

Common Stock Purchase Agreement

On November 11, 2020, we entered into a Common Stock Purchase Agreement (the “Commitment Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”) with Tumim Stone Capital LLC (“Tumim”). Pursuant to the Commitment Purchase Agreement, the Company has the right to sell to Tumim up to $5,000,000 (the “Total Commitment”) in shares of its common stock, par value $0.01 per share (the “Shares”) (subject to certain conditions and limitations) from time to time during the term of the Commitment Purchase Agreement. Sales of common stock pursuant to the Commitment Purchase Agreement, and the timing of any sales, are solely at our option and we are under no obligation to sell securities pursuant to this arrangement. Shares may be sold by the Company pursuant to this arrangement over a period of up to 24 months, commencing on December 1, 2020.

Under the applicable rules of the New York Stock Exchange (“NYSE”), in no event may we issue more than 1,234,546 shares of our common stock, which represents 19.99% of the shares of our common stock outstanding immediately prior to the execution of the Commitment Purchase Agreement (the “Exchange Cap”), to Tumim under the Commitment Purchase Agreement, unless (i) we obtain stockholder approval to issue shares of our common stock in excess of the Exchange Cap or (ii) the price of all applicable sales of our common stock to Tumim under the Commitment Purchase Agreement equals or exceeds the lower of (A) the official closing price on the NYSE immediately preceding the delivery by us of an applicable purchase notice under the Commitment Purchase Agreement and (B) the average of the closing prices of our common stock on the NYSE for the five business days immediately preceding the delivery by us of an applicable purchase notice under the Commitment Purchase Agreement, in each case plus $0.128, such that the transactions contemplated by the Commitment Purchase Agreement are exempt from the Exchange Cap limitation under applicable NYSE rules. In any event, the Commitment Purchase Agreement specifically provides that we may not issue or sell any shares of our common stock under the Commitment Purchase Agreement if such issuance or sale would breach any applicable rules or regulations of the NYSE. The Company has also limited the aggregate number of shares of common stock reserved for issuance under the Commitment Purchase Agreement to 1,500,000 shares without subsequent board approval.

In all instances, we may not sell shares of our common stock to Tumim under the Commitment Purchase Agreement if it would result in Tumim beneficially owning more than 4.99% of the common stock (the “Beneficial Ownership Cap”).

The proceeds under the Commitment Purchase Agreement will depend on the frequency and prices at which the Company sells shares of its stock to Tumim. We determined that the right to sell additional shares represents a freestanding put option under ASC 815 Derivatives and Hedging, but has a fair value of zero, and therefore no additional accounting was required. Transaction costs of $0.5 million, incurred in connection with entering into the Commitment Purchase Agreement were expensed as selling, general and administrative expense during the fourth quarter of 2020. As of June 30, 2021, we had sold 456,900 shares for a total of $1.9 million in proceeds at an average sales price of $4.27 per share.

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, 2020, included in our Annual Report on Form 10-K for the year ended December 31, 2020. 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.

Table of Contents

As we had no items of other comprehensive income in any period presented, no other components of comprehensive income is presented.

Interim results for the three and six months ended June 30, 2021 may not be indicative of results that will be realized for the full year ending December 31, 2021.

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, net

During the first quarter of 2021, our management committed to a plan to sell one of our field location facilities. As a result, we reclassified an aggregate $0.5 million of land and buildings to assets held for sale and recognized a $43 thousand impairment charge representing the difference between the carrying value and the fair value, less the costs to sell the related property. Additionally, during the second quarter of 2021, we impaired a damaged piece of drilling equipment for $0.3 million, net of insurance recoveries.

During the first quarter of 2020, as a result of the rapidly deteriorating market conditions related to the COVID-19 pandemic and declining industry conditions, we concluded that a triggering event occurred and, accordingly, an interim asset impairment test was performed. As a result, as of March 31, 2020 we impaired $3.3 million associated with the decline in the market value of our assets held for sale 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.

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 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.

On April 1, 2020, we adopted the standard, ASU No. 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. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform to provide clarifying guidance regarding the scope of Topic 848, effective immediately. As of June 30, 2021, 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.

In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt-Debt with Conversion and Other Options, for convertible instruments. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning

Table of Contents

after December 15, 2021, with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options, which clarifies that issuers should account for modifications and exchanges of freestanding equity-classified written call options that remain equity-classified after these transactions as an exchange of the original instrument for a new instrument. The pronouncement is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

3.Revenue from Contracts with Customers

The following table summarizes revenues from our contracts disaggregated by revenue generating activity contained therein for the three and six months ended June 30, 2021 and 2020:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Dayrate drilling	$	17,614	$	16,410	$	31,875	$	50,888
Mobilization		704		912		1,226		2,453
Reimbursables		1,446		1,891		2,205		4,339
Early termination		—		2,168		—		2,195
Capital modification		53		—		53		—
Total revenue	$	19,817	$	21,381	$	35,359	$	59,875

The following table provides information about receivables, contract assets and contract liabilities related to contracts with customers:


	June 30,		December 31,
(in thousands)	2021		2020
Receivables, which are included in “Accounts receivable, net”	$	14,042	$	9,772
Contract liabilities, which are included in “Accrued liabilities - deferred revenue”	$	(496)	$	(119)

The primary changes in contract assets and contract liabilities balances during the period are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Revenue recognized that was included in contract liabilities at beginning of period	$	208	$	505	$	119	$	311
(Increase) decrease in contract liabilities due to cash received, excluding amounts recognized as revenue	$	(288)	$	—	$	(496)	$	—

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of June 30, 2021. The estimated revenue does not include amounts of variable consideration that are constrained.


	Year Ending December 31,
(in thousands)	2021		2022		2023		2024
Revenue	$	496	$	—	$	—	$	—

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

Table of Contents

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 $0.5 million and $0.1 million on our consolidated balance sheets at June 30, 2021 and December 31, 2020, respectively. During the three and six months ended June 30, 2021, contract costs increased by $0.7 million and $1.2 million, respectively, and we amortized $0.4 million and $0.8 million of contract costs, respectively. During the three and six months ended June 30, 2020, contract costs increased by zero and $1.2 million, respectively, and we amortized $0.5 million and $1.3 million of contract costs, respectively.

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 June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Operating lease expense	$	234	$	154	$	469	$	303
Short-term lease expense		660		645		1,222		1,926
Variable lease expense		102		95		199		229

Finance lease expense:
Amortization of right-of-use assets	$	286	$	320	$	545	$	712
Interest expense on lease liabilities		155		257		321		452
Total finance lease expense		441		577		866		1,164
Total lease expense	$	1,437	$	1,471	$	2,756	$	3,622

Supplemental cash flow information related to leases is as follows:


	Six Months Ended June 30,
(in thousands)	2021		2020
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	487	$	311
Operating cash flows from finance leases	$	317	$	450
Financing cash flows from finance leases	$	1,754	$	2,506

Right-of-use assets obtained or recorded in exchange for lease obligations:
Operating leases	$	—	$	235
Finance leases	$	632	$	2,434

Table of Contents

Supplemental balance sheet information related to leases is as follows:


(in thousands)	June 30, 2021			December 31, 2020
Operating leases:
Other long-term assets, net	$	1,792		$	2,150

Accrued liabilities	$	834		$	964
Other long-term liabilities		1,372			1,729
Total operating lease liabilities	$	2,206		$	2,693

Finance leases:
Property, plant and equipment	$	14,332		$	13,700
Accumulated depreciation		(1,526)			(981)
Property, plant and equipment, net	$	12,806		$	12,719

Current portion of long-term debt	$	3,642		$	3,351
Long-term debt		3,160			4,570
Total finance lease liabilities	$	6,802		$	7,921

Weighted-average remaining lease term
Operating leases		2.8 years			3.2 years
Finance leases		1.6 years			2.0 years

Weighted-average discount rate
Operating leases		10.71	%		8.25	%
Finance leases		9.01	%		8.88	%

Maturities of lease liabilities at June 30, 2021 were as follows:


(in thousands)	Operating Leases		Finance Leases
2021	$	582	$	2,055
2022		840		4,448
2023		760		733
2024		372		142
2025		—		—
Thereafter		—		—
Total cash lease payment		2,554		7,378
Less: imputed interest		(348)		(576)
Total lease liabilities	$	2,206	$	6,802

5.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.

Table of Contents

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 7.7%. The following table summarizes the carrying value and fair value of our long-term debt and merger consideration payable to an affiliate as of June 30, 2021 and December 31, 2020.


	June 30, 2021				December 31, 2020
	Carrying		Fair		Carrying		Fair
(in thousands)	Value		Value		Value		Value
Term Loan Facility	$	132,828	$	138,099	$	130,000	$	106,854
Revolving ABL Credit Facility	$	9	$	9	$	8	$	6
PPP Loan	$	10,000	$	9,413	$	10,000	$	8,589
Merger consideration payable to an affiliate	$	2,902	$	4,054	$	2,902	$	3,490

The fair value of our assets held for sale is determined using Level 3 measurements. Fair value measurements are applied with respect to our non-financial assets and liabilities measured on a non-recurring basis, which would consist of measurements primarily of long-lived assets.

6.Inventories

All of our inventory as of June 30, 2021 and December 31, 2020 consisted of supplies held for use in our drilling operations.

7.Supplemental Balance Sheet Information

Prepaid expenses and other current assets consisted of the following:


(in thousands)	June 30, 2021		December 31, 2020
Prepaid insurance	$	1,032	$	3,346
Prepaid other		596		636
Deferred mobilization costs		530		89
Insurance claim receivable		148		27
Other current assets		2		4
	$	2,308	$	4,102

Accrued liabilities consisted of the following:


(in thousands)	June 30, 2021		December 31, 2020
Accrued salaries and other compensation	$	2,464	$	1,472
Insurance		547		2,127
Deferred revenues		496		119
Property and other taxes		2,156		2,166
Interest		3,904		3,573
Operating lease liability - current		834		964
Other		459		302
	$	10,860	$	10,723

Table of Contents

8.Long-term Debt

Our long-term debt consisted of the following:


(in thousands)	June 30, 2021		December 31, 2020
Term Loan Facility due October 1, 2023	$	132,828	$	130,000
Revolving ABL Credit Facility due October 1, 2023		9		8
PPP Loan		10,000		10,000
Finance lease obligations		6,802		7,921
		149,639		147,929
Less: current portion of PPP Loan		(10,000)		(4,286)
Less: current portion of finance leases		(3,642)		(3,351)
Less: Term Loan Facility deferred financing costs		(2,172)		(2,659)
Long-term debt	$	133,825	$	137,633

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 June 30, 2021.

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 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 is amortized as interest expense over the term of the Term Loan Facility. On April 1, 2021, we elected to pay in kind the $2.8 million interest payment due under our Term Loan, which increased our Term Loan balance accordingly.

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

Table of Contents

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 financial covenants as of June 30, 2021.

The obligations under the ABL Credit Facility are secured by a first priority lien on Priority Collateral, which includes all accounts receivable and deposit accounts, and a second priority lien on the Term Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. As of June 30, 2021, the weighted-average interest rate on our borrowings was 9.00%. At June 30, 2021, the borrowing base under our ABL Credit Facility was $11.5 million, and we had $11.3 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 the 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 submitted our application for forgiveness of the entire loan during the second quarter of 2021. Given the nature of the process, we do not know when a final determination on our application will be made and cannot assure you that all or part of the loan will be forgiven, but 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.

9.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, restricted stock unit awards, and stock appreciation rights (“SARs”), 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 June 30, 2021, approximately 50,212 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.

Table of Contents

A summary of compensation cost recognized for stock-based payment arrangements is as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020
Compensation cost recognized:
Restricted stock and restricted stock units	$	454	$	290		908	$	860
Cash-settled stock appreciation rights		226		—		309		—
Total stock-based compensation	$	680	$	290	$	1,217	$	860

No stock-based compensation was capitalized in connection with rig construction activity during the three and six months ended June 30, 2021 or 2020.

Stock Options

We use the Black-Scholes option pricing model to estimate the fair value of stock options granted to employees and non-employee directors. The fair value of the options is amortized to compensation expense on a straight-line basis over the requisite service periods of the stock awards, which are generally the vesting periods.

There were no stock options granted during the six months ended June 30, 2021 or 2020.

A summary of stock option activity and related information for the six months ended June 30, 2021 is as follows:


	Six Months Ended June 30, 2021
		Weighted
		Average
		Exercise
	Options	Price
Outstanding at January 1, 2021	33,458	$	254.80
Granted	—		—
Exercised	—		—
Forfeited/expired	(5,591)		254.80
Outstanding at June 30, 2021	27,867	$	254.80
Exercisable at June 30, 2021	27,867	$	254.80

The number of options vested at June 30, 2021 was 27,867 with a weighted average remaining contractual life of 0.7 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 June 30, 2021.

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 June 30, 2021, there was $1.3 million in unrecognized compensation cost related to unvested restricted stock awards. This cost is expected to be recognized over a weighted-average period of 1.3 years.

Table of Contents

A summary of the status of our time-based restricted stock awards and of changes in our time-based restricted stock awards outstanding for the six months ended June 30, 2021 is as follows:


	Six Months Ended June 30, 2021
		Weighted
		Average
		Grant-Date
		Fair Value
	Shares	Per Share
Outstanding at January 1, 2021	40,334	$	64.40
Granted	—		—
Vested	—		—
Forfeited	—		—
Outstanding at June 30, 2021	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. The fair value of time-based restricted stock unit awards is determined based on the estimated fair market value of our shares on the grant date. As of June 30, 2021, there was $0.8 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 0.6 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 six months ended June 30, 2021 is as follows:


	Six Months Ended June 30, 2021
		Weighted
		Average
		Grant-Date
		Fair Value
	RSUs	Per Share
Outstanding at January 1, 2021	63,897	$	22.78
Granted	77,938		4.95
Vested and converted	(25,285)		16.74
Forfeited	(2,356)		33.93
Outstanding at June 30, 2021	114,194	$	11.71

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. Vesting and conversion of the market-based restricted stock unit awards is based on our total shareholder return (“TSR”) as measured against the TSR of a defined peer group and vesting of the performance-based restricted stock unit awards is based on our cumulative return on invested capital (“ROIC”) as measured against ROIC performance goals determined by the compensation committee of our Board of Directors. We used a Monte Carlo simulation model to value the TSR market-based restricted stock unit awards. The fair value of the performance-based restricted stock unit awards is based on the market price of our common stock on the date of grant. During the restriction period, the performance-based and market-based restricted stock unit awards may not be transferred or encumbered, and the recipient does not receive dividend equivalents or have voting rights until the units vest. As of June 30, 2021, there was unrecognized compensation cost related to unvested performance-based or market-based restricted stock unit awards totaling $0.2 million. This cost is expected to be recognized over a weighted-average period of 0.7 years.

Table of Contents

A summary of the status of our performance-based and market-based restricted stock unit awards and of changes in our restricted stock unit awards outstanding for the six months ended June 30, 2021 is as follows:


	Six Months Ended June 30, 2021
		Weighted
		Average
		Grant-Date
		Fair Value
	RSUs	Per Share
Outstanding at January 1, 2021	38,559	$	22.95
Granted	—		—
Vested and converted	—		—
Forfeited	(11,274)		19.20
Outstanding at June 30, 2021	27,285	$	24.50

Time-Based Cash-Settled Stock Appreciation Rights

We have granted time-based, cash-settled stock appreciation rights (“SARs”) to certain employees. The SARs have a term of seven years, an exercise price of $5.73 per share, with the market price upon exercise capped at $10.00 per share, and vest ratably on the first, second and third anniversaries of the date of grant. Because these SARs are cash-settled, they are classified as “liability-classified awards” which are remeasured at their fair value at the end of each reporting period until settlement.

Time-based, cash-settled SARs have no effect on dilutive shares or shares outstanding as any appreciation of our common stock over the exercise price is paid in cash and not in common stock.

The fair value of time-based cash-settled SARs is revalued (mark-to-market) each reporting period using a Monte Carlo simulation model based on period-end stock price. Expected term of the SARs is calculated as the average of each vesting tranche’s midpoint between vesting date and expiration date plus the vesting period. Expected volatility is based on the historical volatility of our stock for the length of time corresponding to the expected term of the SARs. The risk-free interest rate is based on the U.S. treasury yield curve in effect as of the reporting date for the length of time corresponding to the expected term of the SARs.

The following weighted-average assumptions were used in calculating the fair value of time-based cash-settled SARs granted during the six months ended June 30, 2021 using the Monte Carlo simulation model:


	Six Months Ended
	June 30, 2021
Expected term of cash-settled SARs	4.1 years
Expected volatility factor	117.0	%
Expected dividend yield	—	%
Risk-free interest rate	0.69	%

Table of Contents

Changes to the company’s non-vested time-based cash-settled SARs during the six months ended June 30, 2021 are as follows:


	Six Months Ended June 30, 2021
		Weighted Average
	Cash-settled SARs	Fair Value Price
	(in thousands)	Per Share
Non-vested cash-settled SARs at January 1, 2021	—	$	—
Granted	2,954		0.83
Vested	—		—
Forfeited	(41)		0.83
Non-vested cash-settled SARs at June 30, 2021	2,913	$	0.83

As of June 30, 2021, there was $2.1 million of unrecognized compensation cost related to non-vested time-based cash-settled SARs that is expected to be recognized over a weighted-average period of 1.4 years.

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

As of June 30, 2021, we had a total of 7,243,937 shares of common stock, $0.01 par value, outstanding. We also had 78,578 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 June 30,				Six Months Ended June 30,
(in thousands, except per share data)	2021		2020		2021		2020
Net loss (numerator):	$	(14,901)	$	(10,120)	$	(30,926)	$	(38,343)
Loss per share:
Basic and diluted	$	(2.22)	$	(2.52)	$	(4.78)	$	(9.87)
Shares (denominator):
Weighted average common shares outstanding - basic		6,714		4,018		6,466		3,884
Weighted average common shares outstanding - diluted		6,714		4,018		6,466		3,884

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 27,867 during the three and six months ended June 30, 2021 and 33,458 during the three and six months ended June 30, 2020. 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 141,479 for the three and six months ended June 30, 2021 and 114,368 for the three and six months ended June 30, 2020.

11.Income Taxes

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, to simplify the accounting for income taxes. We adopted this guidance on January 1, 2021 and there has been no material impact on our consolidated financial statements.

Our effective tax rate was (0.2)% and (0.2)% for the three and six months ended June 30, 2021, respectively, and 0.1% and 0.1% for the three and six months ended June 30, 2020, respectively. Taxes in both periods relate to Louisiana state income tax and Texas margin tax.

Table of Contents

12.Commitments and Contingencies

Purchase Commitments

As of June 30, 2021, we had outstanding purchase commitments to a number of suppliers totaling $2.6 million related primarily to the operation of drilling rigs. All of these commitments relate to equipment and services currently scheduled for delivery in the second half of 2021.

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.

13.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.

On April 1, 2021, we elected to pay in kind the $2.8 million interest payment due under our Term Loan, which increased our Term Loan balance accordingly. We made cash interest payments on the Term Loan Facility totaling $2.9 million for the six months ended June 30, 2021 and $3.1 million and $6.3 million for the three and six months ended June 30, 2020, respectively.

Additionally, we 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, 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 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 merger consideration payable 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 merger consideration payable was previously payable in the second quarter of 2020. As of June 30, 2021, accrued interest payable on the merger consideration payable was $0.7 million.

Table of Contents

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, 2020, filed with the Securities and Exchange Commission on March 1, 2021 (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 24 marketed AC powered (“AC”) rigs plus additional idle AC rigs that require significant upgrades in order to meet our AC pad-optimal specifications that we do not plan to market absent a material improvement in market conditions.

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

Market Conditions and COVID-19 Pandemic Update

Table of Contents

As of June 30, 2021, we had 13 rigs operating, with our 14^th and 15^th rigs reactivating in July 2021 and believe in the current commodity price environment, there will be opportunities to reactivate several additional rigs by the end of 2021, with additional opportunities in 2022 as our customers reset their drilling budgets. However, due to the lack of visibility towards customer intentions, risk to commodity prices, including any economic declines caused by the evolving nature of the COVID-19 pandemic, changes to OPEC+ production cuts, or other risks and conditions outside our control, we cannot assure you that we will be able to maintain this operating rig count or that our operating rig count will continue to improve in the future. As such, we will continue to actively monitor their impact on our operations and financial condition.

ATM Distribution Agreement

On March 8, 2021, in conjunction with the ATM Distribution Agreement entered into June 5, 2020, our board of directors authorized an additional $2.2 million in shares of common stock to be sold in transactions that are deemed to be “at the market offerings”. We began offering shares under this program during the first quarter of 2021 and completed this offering process during the second quarter of 2021, raising $2.2 million of gross proceeds and issuing an aggregate of 585,934 shares at an average gross offering price of $3.75 per share. We have used the net proceeds from the sales pursuant to the ATM Distribution 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 ATM Distribution Agreement contains 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 ATM Distribution Agreement, we paid the Agent a commission equal to 3% of the gross sales price of the shares sold under such agreement.

Common Stock Purchase Agreement

Table of Contents

Asset Impairment and Assets Held for Sale

During the first quarter of 2021, our management committed to a plan to sell one of our field location facilities. As a result, we reclassified an aggregate $0.5 million of land and buildings to assets held for sale and recognized a $43.0 thousand impairment charge representing the difference between the carrying value and the fair value, less the costs to sell the related property. Additionally, during the second quarter of 2021, we impaired a damaged piece of drilling equipment for $0.3 million, net of insurance recoveries.

During the first quarter of 2020, as a result of the rapidly deteriorating market conditions related to COVID-19 and declining industry conditions, we concluded that a triggering event occurred and, accordingly, an interim asset impairment test was performed. As a result, as of March 31, 2020, we impaired $3.3 million associated with the decline in the market value of our assets held for sale 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.

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 six months ended June 30, 2021, we reactivated two rigs and stacked our 100 series rig. Our operating costs during this period included approximately $1.4 million of costs associated with these reactivations and deactivation. 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.

Table of Contents

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.

Table of Contents

Results of Operations

The following summarizes our financial and operating data for the three and six months ended June 30, 2021 and 2020:


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands, except per share data)	2021			2020			2021			2020
Revenues	$	19,817		$	21,381		$	35,359		$	59,875
Costs and expenses
Operating costs		17,040			14,095			31,581			44,324
Selling, general and administrative		4,075			3,544			7,761			7,305
Severance expense		—			—			—			1,076
Depreciation and amortization		9,516			11,055			19,505			22,571
Asset impairment, net		250			—			293			16,619
Loss (gain) on disposition of assets, net		31			(836)			(404)			(882)
Total cost and expenses		30,912			27,858			58,736			91,013
Operating loss		(11,095)			(6,477)			(23,377)			(31,138)
Interest expense		(3,773)			(3,654)			(7,482)			(7,258)
Loss before income taxes		(14,868)			(10,131)			(30,859)			(38,396)
Income tax expense (benefit)		33			(11)			67			(53)
Net loss	$	(14,901)		$	(10,120)		$	(30,926)		$	(38,343)

Other financial and operating data
Number of marketed rigs (end of period) (1)		24			29			24			29
Rig operating days (2)		1,077			834			2,006			2,572
Average number of operating rigs (3)		11.8			9.2			11.1			14.1
Rig utilization (4)		49	%		32	%		46	%		49	%
Average revenue per operating day (5)	$	16,514		$	19,741		$	16,028		$	19,796
Average cost per operating day (6)	$	13,352		$	12,741		$	13,033		$	14,030
Average rig margin per operating day	$	3,162		$	7,000		$	2,995		$	5,766

(1)Marketed rigs exclude five idle rigs that will not be reactivated unless market conditions materially improve.

(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 $2.0 million and $2.7 million during the three months ended June 30, 2021 and 2020, respectively, and $3.2 million and $6.8 million during the six months ended June 30, 2021 and 2020, respectively, and (ii) early termination revenues of $2.2 million during the three and six months ended June 30, 2020. The three and six months ended June 30, 2021 did not include any early termination 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 $2.0 million and $2.7 million during the three months ended June 30, 2021 and 2020, respectively, and $3.2 million and $6.8 million during the six months ended June 30, 2021 and 2020, respectively; (ii) overhead costs expensed due to reduced rig upgrade activity of $0.4 million and $0.4 million during the three months ended June 30, 2021 and 2020, respectively, and $0.8 million and $1.0 million during the six months ended June 30, 2021 and 2020, respectively; (iii) rig reactivation costs, inclusive of new crew training costs, of $0.2 million

Table of Contents

and zero during the three months ended June 30, 2021 and 2020, respectively, and $1.3 million and zero during the six months ended June 30, 2021 and 2020, respectively; and (iv) rig decommissioning costs associated with stacking deactivated rigs of $0.1 million and $0.3 million during the three months ended June 30, 2021 and 2020, respectively, and $0.1 million and $0.3 million during the six months ended June 30, 2021 and 2020, respectively.

Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020

Revenues

Revenues for the three months ended June 30, 2021 were $19.8 million, representing a 7.3% decrease as compared to revenues of $21.4 million for the three months ended June 30, 2020. This decrease was primarily attributable to a decrease in revenue per day. On a revenue per operating day basis, which excludes the impact of early termination revenues, our revenue per day decreased by 16.3% to $16,514 during the three months ended June 30, 2021, as compared to revenue per day of $19,741 for the three months ended June 30, 2020. This decrease in revenue per day was the result of declining dayrates as compared to the prior year comparable quarter and expiration of various higher dayrate pre-COVID-19 pandemic term contracts that expired prior to 2021. Operating days increased to 1,077 days as compared to 834 days in the prior year comparable quarter. The increase in operating days was primarily attributable to our efforts to reactivate rigs in response to the ongoing market recovery.

Operating Costs

Operating costs for the three months ended June 30, 2021 were $17.0 million, representing a 20.9% increase as compared to operating costs of $14.1 million for the three months ended June 30, 2020. This increase was primarily attributable to an increase in operating days to 1,077 days as compared to 834 days in the prior year comparable quarter as well as increased reactivation costs. On a cost per operating day basis, our operating costs increased to $13,352 per day during the three months ended June 30, 2021, representing a 4.8% increase compared to cost per operating day of $12,741 for the three months ended June 30, 2020. This increase in cost per operating day was primarily attributable to higher personnel costs associated with staffing for planned rig reactivations and tighter labor markets as well as repairs and maintenance.

Selling, General and Administrative

Selling, general and administrative expenses for the three months ended June 30, 2021 were $4.1 million, representing a 15.0% increase as compared to selling, general and administrative expense of $3.5 million for the three months ended June 30, 2020. This increase in selling, general and administrative expenses as compared to the prior year comparable quarter primarily relates to higher incentive compensation accruals in the current quarter. We suspended our incentive compensation plan in 2020 as a result of the COVID-19 pandemic.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended June 30, 2021 was $9.5 million, representing a 13.9% decrease compared to depreciation and amortization expense of $11.1 million for the three months ended June 30, 2020. The decrease in depreciation and amortization expense is primarily the result of the asset impairments incurred in 2020.

Asset Impairment, net

During the second quarter of 2021, we impaired a damaged piece of drilling equipment for $0.3 million, net of insurance recoveries. There was no asset impairment during the second quarter of 2020.

Loss (Gain) on Disposition of Assets, net

A loss on the disposition of assets totaling $31.0 thousand was recorded for the three months ended June 30, 2021 compared to a gain on the disposition of assets totaling $0.8 million in the prior year comparable quarter. In the current and prior year quarter, the loss and gain, related to the sale of miscellaneous drilling equipment.

Table of Contents

Interest Expense

Interest expense was $3.8 million for the three months ended June 30, 2021 and $3.7 million for the three months ended June 30, 2020. The increase in the current quarter primarily relates to higher interest on our term loan as a result of our election to pay in kind our second quarter 2021 term loan interest payment.

Income Tax Expense (Benefit)

Income tax expense recorded for the three months ended June 30, 2021 amounted to $33.0 thousand as compared to income tax benefit of $11.0 thousand for the three months ended June 30, 2020. Our effective tax rates for the three months ended June 30, 2021 and 2020 were (0.2)% and 0.1%, respectively. Taxes in both periods relate to Louisiana state income tax and Texas margin tax.

Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020

Revenues

Revenues for the six months ended June 30, 2021 were $35.4 million, representing a 40.9% decrease as compared to revenues of $59.9 million for the six months ended June 30, 2020. This decrease was primarily attributable to a decrease in operating days and revenue per day in the current year period. Operating days decreased to 2,006 days as compared to 2,572 days in the prior year comparable period. The decrease in operating days was primarily attributable to the downturn in demand for crude oil and the resulting impact on demand for our services in 2020. On a revenue per operating day basis, which excludes the impact of early termination revenues, our revenue per day decreased by 19.0% to $16,028 during the six months ended June 30, 2021, as compared to revenue per day of $19,796 for the six months ended June 30, 2020. This decrease in revenue per day was primarily the result of declining dayrates as compared to the prior year comparable period and expiration of various higher dayrate pre-COVID-19 pandemic term contracts that expired prior to 2021.

Operating Costs

Operating costs for the six months ended June 30, 2021 were $31.6 million, representing a 28.7% decrease as compared to operating costs of $44.3 million for the six months ended June 30, 2020. This decrease was primarily attributable to a decrease in operating days to 2,006 days as compared to 2,572 days in the prior year comparable period, as well as increased reactivation costs. On a cost per operating day basis, our cost decreased to $13,033 per day during the six months ended June 30, 2021, representing a 7.1% decrease compared to cost per operating day of $14,030 for the six months ended June 30, 2020. This decrease in cost per operating day was primarily attributable to cost reduction activities instituted at the beginning of the second quarter of 2020, which have fully benefitted the first six months of 2021.

Selling, General and Administrative

Selling, general and administrative expenses for the six months ended June 30, 2021 were $7.8 million, representing a 6.2% increase as compared to selling, general and administrative expense of $7.3 million for the six months ended June 30, 2020. This increase in selling, general and administrative expenses as compared to the prior year comparable period primarily relates to higher incentive compensation accruals. We suspended our incentive compensation plan in 2020 as a result of the COVID-19 pandemic.

Severance Expense

No severance expense was recorded during the six months ended June 30, 2021. Severance expense of $1.1 million was recorded during the six months ended June 30, 2020, in association with the cost reduction activities instituted at the beginning the second quarter of 2020.

Depreciation and Amortization

Depreciation and amortization expense for the six months ended June 30, 2021 was $19.5 million, representing a 13.6% decrease compared to depreciation and amortization expense of $22.6 million for the six months ended

Table of Contents

June 30, 2020. The decrease in depreciation and amortization expense is primarily the result of the asset impairments incurred in 2020.

Asset Impairment, net

During the first quarter of 2021, our management committed to a plan to sell one of our field location facilities. As a result, we reclassified an aggregate $0.5 million of land and buildings to assets held for sale and recognized a $43.0 thousand impairment charge representing the difference between the carrying value and the fair value, less the costs to sell the related property. Additionally, during the second quarter of 2021, we impaired a damaged piece of drilling equipment for $0.3 million, net of insurance recoveries.

During the first quarter of 2020, as a result of the rapidly deteriorating market conditions related to the COVID-19 pandemic and declining industry conditions, we concluded that a triggering event occurred and, accordingly, an interim asset impairment test was performed as of March 31, 2020. As a result, we impaired $3.3 million associated with the decline in the market value of our assets held for sale 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.

Gain on Disposition of Assets, net

A gain on the disposition of assets totaling $0.4 million was recorded for the six months ended June 30, 2021 compared to a gain on the disposition of assets totaling $0.9 million in the prior year comparable period. In the current and prior year comparable period, the gains related to the sale of miscellaneous drilling equipment.

Interest Expense

Interest expense was $7.5 million for the six months ended June 30, 2021 and $7.3 million for the six months ended June 30, 2020. The increase in the current year period primarily relates to higher interest on our term loan as a result of our election to pay in kind our second quarter 2021 term loan interest payment.

Income Tax Expense (Benefit)

Income tax expense recorded for the six months ended June 30, 2021 amounted to $67.0 thousand as compared to income tax benefit of $53.0 thousand for the six months ended June 30, 2020. Our effective tax rates for the six months ended June 30, 2021 and 2020 were (0.2)% and 0.1%, respectively. Taxes in both periods relate to Louisiana state income tax and Texas margin tax.

Liquidity and Capital Resources

Our liquidity at June 30, 2021 was $35.4 million consisting of cash on hand of $6.0 million, $11.3 million of availability under our $40.0 million ABL Credit Facility, based on a borrowing base of $11.5 million, a $15 million committed accordion under our existing term loan facility, and a maximum of $3.1 million available under our Commitment Purchase Agreement.

We expect our future capital and liquidity needs to be related to operating expenses, maintenance capital expenditures, rig reactivation costs and working capital and general corporate purposes.

Due to lack of visibility and confidence towards customer intentions, although our operating rig count has begun to improve, 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 second quarter of 2021, cash flow from operations, ignoring working capital fluctuations, was negative. On April 1, 2021, we elected to pay in kind the $2.8 million interest payment due under our Term Loan, which increased our Term Loan balance accordingly. Looking forward past June 30, 2021, we currently estimate that required non-operating cash payments for interest under our credit facilities and finance lease payments will approximate $17.1 million for the 12 months ending June 30, 2022. In addition, the final merger consideration payment due pursuant to our merger agreement executed in connection with our merger with Sidewinder Drilling matures on June 30, 2022. Payments for capital expenditures and financing leases and to fund operations will be in addition to these amounts.

Table of Contents

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 continue to draw down under our equity line of credit and 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. 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 (Used In) Provided By Operating Activities

Cash used in operating activities was $4.9 million for the six months ended June 30, 2021 compared to cash provided by operating activities of $9.0 million during the same period in 2020. 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, non-cash interest expense, non-cash compensation, deferred taxes and amortization of deferred financing costs. Additionally, changes in working capital items such as accounts receivable, inventory, prepaid expense and accounts payable can significantly affect operating cash flows. Cash flows from operating activities during the first six months of 2021 were lower as a result of a decrease in net loss of $7.4 million, adjusted for non-cash items, of $24.1 million for the six months ended June 30, 2021 compared to $39.7 million for non-cash items during the same period in 2020. Additionally, working capital changes increased cash flows from operating activities by $2.0 million for the six months ended June 30, 2021 compared to an increase of cash flows of $7.7 million during the same period in 2020.

Net Cash Used In Investing Activities

Cash used in investing activities was $3.6 million for the six months ended June 30, 2021 compared to cash used in investing activities of $11.0 million during the same period in 2020. During the first six months of 2021, cash payments of $4.3 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $0.7 million. During the 2020 period, cash payments of $12.1 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $1.0 million and the collection of principal on a note receivable of $0.1 million.

Net Cash Provided by Financing Activities

Cash provided by financing activities was $2.2 million for the six months ended June 30, 2021 compared to cash provided by financing activities of $14.2 million during the same period in 2020. During the first six months of 2021, we received proceeds from borrowings under our revolving credit facility of $9.0 thousand, proceeds from the issuance of common stock through our ATM transaction, net of issuance costs of $2.0 million and proceeds from the issuance of common stock under purchase agreement of $1.9 million. These proceeds were offset by repayments under our revolving credit facility of $8.0 thousand, restricted stock units withheld for taxes paid of $11.0 thousand and payments for finance lease obligations of $1.8 million. During the first six 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, net of issuance costs of $6.8 million. These proceeds were offset by repayments under our revolving credit facility of $11.0 million, the purchase of treasury stock of $66.0 thousand, restricted stock units withheld for taxes paid of $79.0 thousand and payments for finance lease obligations of $2.5 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.

Table of Contents

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 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 6.1% of the outstanding shares of our common stock.

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 is amortized as interest expense over the term of the Term Loan Facility. During the second quarter of 2021, we utilized this PIK option to pay interest due during the quarter.

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.

Table of Contents

Credit Facility was $11.5 million, and we had $11.3 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 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.

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 the 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 submitted our application for forgiveness of the entire loan during the second quarter of 2021. Given the nature of the process, we do not know when a final determination on our application will be made and cannot assure you that all or part of the loan will be forgiven, but 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.

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 12 “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.

In the first quarter of 2021, in relation to the pending sale of one of our field location facilities, we impaired the property to its fair market value less the cost of sale and recognized $43.0 thousand of impairment expense. In the second quarter of 2021, we impaired a damaged piece of drilling equipment for $0.3 million, net of insurance recoveries.

In the first quarter of 2020, as a result of the rapidly deteriorating market conditions described in “Market Conditions and COVID-19 Pandemic Update”, we concluded that a triggering event occurred 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

Table of Contents

inventory; all of which was deemed to be unsaleable and of zero value based upon the macroeconomic conditions and uncertainties surrounding the COVID-19 pandemic.

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, 2020.

Recent Accounting Pronouncements

See Note 2 “Interim Financial Information – Recent Accounting Pronouncements” for information on recently adopted accounting standards and new accounting standards not yet adopted.

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of market risks including risks related to potential adverse changes in interest rates and commodity prices. We actively monitor exposure to market risk and continue to develop and utilize appropriate risk management techniques. We do not use derivative financial instruments for trading or to speculate on changes in commodity prices.

Interest Rate Risk

Total long-term debt at June 30, 2021 included $132.8 million of floating-rate debt attributed to borrowings at an average interest rate of 9.00%. As a result, our annual interest cost in 2021 will fluctuate based on short-term interest rates. The impact on annual cash flow of a 10% change in the floating-rate (approximately 0.90%) would be approximately $1.2 million annually based on the floating-rate debt and other obligations outstanding at June 30, 2021; 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 economic effects of the global actions taken in response to the COVID-19 pandemic caused significant declines in the global demand for crude oil, and although market conditions and commodity prices have been improving, the risk remains that additional outbreaks could cause new declines in demand for crude oil.

We cannot predict whether there will be additional disruptions resulting from the COVID-19 pandemic in the future that could cause commodity prices and demand for our drilling services to fall. 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 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, in particular, risks associated with declining market conditions and 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.

All of our customers, lenders and suppliers have been adversely affected in some fashion by the COVID-19 pandemic. Although we are not currently experiencing any material disruption in payments by customers, given the impact the COVID-19 pandemic has had on the oil and gas industry and our customers, there is no assurance that our

Table of Contents

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 reduction in the utilization of our rigs or delays in payment or payment defaults by any of our customers could 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 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 June 30, 2021 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.

Table of Contents

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are the subject of certain legal proceedings and claims arising in the ordinary course of business from time to time. Management cannot predict the ultimate outcome of such legal proceedings and claims. While the legal proceedings and claims may be asserted for amounts that may be material should an unfavorable outcome be the result, management does not currently expect that the resolution of these matters will have a material adverse effect on our financial position or results of operations. In addition, management monitors our legal proceedings and claims on a quarterly basis and establishes and adjusts any reserves as appropriate to reflect our assessment of the then-current status of such matters.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the risks related to our business set forth under “Risk Factors” in our Form 10-K for the year ended December 31, 2020. These risks are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

Table of Contents

ITEM 6. EXHIBITS


Exhibit Number		Description

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

104		Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

*	Filed with this report

Table of Contents

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:	Vice President and Chief Accounting Officer (Principal Accounting Officer)

Date: August 4, 2021