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.

We provide land-based contract drilling services for oil and natural gas producers targeting unconventional resource plays in the United States.

As of September 30, 2018, our rig fleet consisted of 15 premium 200 Series ShaleDriller® rigs, all of which are equipped with integrated omni-directional walking systems specifically designed to optimize pad drilling for our customers. Our 15th ShaleDriller rig commenced operations in the third quarter of 2018.

On October 1, 2018, we acquired all of the outstanding equity interests in Sidewinder Drilling LLC ("Sidewinder") pursuant to a merger of a subsidiary with and into Sidewinder (the “Sidewinder Combination”). See "Sidewinder Merger" below. As a result of the Sidewinder Combination, we added 19 rigs to our rig fleet. Following the Sidewinder Combination, our rig fleet includes 30 AC powered (“AC”) rigs and four 1500hp ultra-modern SCR rigs.

We currently focus our operations on unconventional resource plays located in geographic regions that we can efficiently support from our Texas-based facilities in order to maximize economies of scale. Currently, our rigs are operating in the Permian Basin and the Haynesville Shale; however, our rigs have previously operated in the Eagle Ford Shale and 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 a historically cyclical industry characterized by significant changes in the levels of exploration and development activities. Oil and natural gas prices and market expectations of potential changes in those prices significantly affect the levels of those activities. Worldwide political, regulatory, economic, and military events, as well as natural disasters have contributed to oil and natural gas price volatility historically, and are likely to continue to do so in the future. Any prolonged reduction in the overall level of exploration and development activities in the United States and the regions where we market our contract drilling services, whether resulting from changes in oil and natural gas prices or otherwise, could materially and adversely affect our business.

Oil and Natural Gas Prices and Drilling Activity

Oil prices declined from a high of $107.95 per barrel in the second quarter of 2014, to a low of $26.19 per barrel in the first quarter of 2016 (West Texas Intermediate - Cushing, Oklahoma (“WTI”) spot price as reported by the United States Energy Information Administration (the “EIA”). Similarly, natural gas prices (as measured at Henry Hub) declined from an average of $4.37 per MMBtu in 2014 to $2.52 per MMBtu in 2016. Oil and natural gas prices have recovered from the lows experienced in 2016, with WTI oil prices reaching a three-year high of $77.41 per barrel in the second quarter of 2018. Similarly, natural gas prices at Henry Hub have averaged $2.97 per MMBtu in 2018 as of October 15, 2018.

Sidewinder Merger

On July 19, 2018, we announced our entry into a definitive merger agreement (the "Merger Agreement") with Patriot Saratoga Merger Sub LLC, a Delaware limited liability company ("Merger Sub") and Sidewinder Drilling LLC, a Delaware limited liability company ("Sidewinder"), pursuant to which Merger Sub merged with and into Sidewinder (the "Sidewinder Merger") and we acquired all of the outstanding equity interests in Sidewinder on October 1, 2018. During the three and nine months ended September 30, 2018, we recorded $1.9 million and $2.4 million, respectively, of merger costs in connection with the Sidewinder Merger comprised primarily of legal and professional fees.

The Sidewinder Merger combined two complementary pad-optimal drilling fleets and operations focused in the Permian Basin, Haynesville region and other basins in Texas and its contiguous states, and will more than double the size of our pad-optimal rig fleet to 34 rigs following modest upgrades to five Sidewinder rigs.

Under the terms of the Merger Agreement, the Sidewinder unitholders received an aggregate of 36,752,657 shares of our common stock, representing approximately 49% of the total outstanding shares immediately following the closing of the transaction.

In conjunction with the closing of the Sidewinder Merger on October 1, 2018, we entered into a term loan Credit Agreement (the “Term Loan Credit Agreement”) for an initial term loan in an aggregate principal amount of $130.0 million, (the “Term Loan Facility”) and (b) a delayed draw term loan facility in an aggregate principal amount of up to $15.0 million (the “DDTL Facility”, and together with the Term Loan Facility, the “Term Facilities”). The Term Facilities have a maturity date of October 1, 2023, at which time all outstanding principal under the Term Facilities and other obligations become due and payable in full. Proceeds from the Term Loan Facility were used to repay our existing debt and the Sidewinder debt assumed in the Sidewinder Merger, as well as certain transaction costs.

At our election, interest under the Term Loan Facility is determined by reference at our option to either (i) a “base rate” equal to the higher of (a) the federal funds effective rate plus 0.05%, (b) the London Interbank Offered Rate with an interest period of one month (“LIBOR”), plus 1.0%, and (c) the rate of interest as publicly quoted from time to time by the Wall Street Journal as the “prime rate” in the United States; plus an applicable margin of 6.5%, or (ii) a “LIBOR rate” equal to LIBOR with an interest period of one month, plus an applicable margin of 7.5%.

The Term Loan Credit Agreement contains financial covenants, including a liquidity covenant of $10.0 million and a springing fixed charge coverage ratio covenant of 1.00 to 1.00 that is tested when availability under the New 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 New ABL Credit Facility or other material agreements for indebtedness, and a change of control (as defined).

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 New 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.

Additionally, in connection with the closing of the Sidewinder Merger on October 1, 2018, we entered into a $40.0 million revolving Credit Agreement (the “New 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 New ABL Credit Facility is subject to a borrowing base determined based on 85% of the net amount of our eligible accounts receivable, minus reserves. The New 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 New 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 New ABL Credit Facility commitment.

The New 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 New 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 New 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.

The obligations under the New 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.

On October 1, 2018, in connection with our entry into the New ABL Credit Facility, we repaid all outstanding borrowings and obligations under our existing Credit Facility, and terminated it.

Amendment to Articles of Incorporation

In connection with the Sidewinder Merger, on October 1, 2018, following approval by our shareholders, we amended our certificate of incorporation to increase the authorized number of shares of Common Stock from 100,000,000 shares to 200,000,000 shares.

Change in Plan of Sale of Assets

During the second quarter of 2017, our management committed to a plan to sell our corporate headquarters and rig assembly yard complex located at 11601 North Galayda Street, Houston, Texas (the "Galayda Facility"). This plan of sale was subsequently affected by Hurricane Harvey, which caused substantial water-related damage to the Galayda Facility in August 2017, as well as our entry into a definitive merger agreement with Sidewinder Drilling in July 2018. The following summarizes material financial statement impacts of this plan of sale and associated changes as result of these matters:

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In connection with our initial decision to sell the Galayda Facility, at June 30, 2017, we reclassified an aggregate $4.0 million of land, buildings and equipment from property, plant and equipment to assets held for sale on our balance sheet and recognized a $0.5 million asset impairment charge representing the difference between the carrying value and the fair value, less the costs to sell the related property.


•	As a result of water-related damage caused by Hurricane Harvey, in the third quarter of 2017, we recorded an additional impairment on this group of assets totaling $0.6 million.

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Following an evaluation of the Galayda Facility and our operating plans following Hurricane Harvey, during the first quarter of 2018, management changed its plan to sell all of the Galayda Facility assets and decided to improve and utilize a portion of the land and buildings on the property. Based on this decision, which was previously considered unlikely, certain land and buildings at the Galayda Facility were reclassified to assets held and used as of March 31, 2018. Accordingly, we reduced assets held for sale by $2.7 million and increased property, plant and equipment by $2.9 million on our March 31, 2018 balance sheet and recognized a recovery of asset impairment expense of approximately $208 thousand in our statement of operations for the three months ended March 31, 2018.

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During the third quarter of 2018, as a result of the pending merger with Sidewinder Drilling LLC, management decided to again enter into a plan to sell the entire Galayda Facility and entered into an agreement with a third-party buyer to sell the Galayda Facility in “as-is” condition for $3.1 million. As a result, the $2.6 million of property, plant and equipment, representing the portion of the Galayda Facility that was classified as held and used, was reclassified as held for sale on our September 30, 2018 balance sheet and we recognized an impairment charge of $650 thousand representing the difference between the carrying value of the property and the fair value of the property, less costs to sell.