Independence Contract Drilling 10Q 2022 Q3 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2022

☐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 ☒

13,617,005 shares of the registrant’s Common Stock were outstanding as of October 28, 2022.

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INDEPENDENCE CONTRACT DRILLING, INC.

Index to Form 10-Q

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (Unaudited)	4

Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (Unaudited)	5

Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (Unaudited)	6

Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (Unaudited)	7

Notes to Consolidated Financial Statements (Unaudited)	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3. Quantitative and Qualitative Disclosures About Market Risk	41

Item 4. Controls and Procedures	43

Part II. OTHER INFORMATION

Item 1. Legal Proceedings	44

Item 1A. Risk Factors	44

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3. Defaults Upon Senior Securities	45

Item 4. Mine Safety Disclosures	45

Item 5. Other Information	45

Item 6. Exhibits	46

Signatures	47

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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;

●

a decline in or substantial volatility of crude oil and natural gas commodity prices;

●

a 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;

●

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;

●

risks related to the ongoing conflict between Russia and Ukraine, including the effects of related sanctions and supply chain disruptions or general effects on the global economy;

●

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, 2021. 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.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Independence Contract Drilling, Inc.

Consolidated Balance Sheets

(Unaudited)

(in thousands, except par value and share amounts)


	September 30,		December 31,
	2022		2021
Assets
Cash and cash equivalents	$	7,566	$	4,140
Accounts receivable		33,967		22,211
Inventories		1,433		1,171
Prepaid expenses and other current assets		2,940		4,787
Total current assets		45,906		32,309
Property, plant and equipment, net		365,160		362,346
Other long-term assets, net		2,159		2,449
Total assets	$	413,225	$	397,104
Liabilities and Stockholders’ Equity
Liabilities
Current portion of long-term debt	$	3,302	$	4,464
Accounts payable		28,859		15,304
Accrued liabilities		13,162		11,245
Accrued interest		122		4,372
Current portion of merger consideration payable to an affiliate		—		2,902
Total current liabilities		45,445		38,287
Long-term debt		136,756		141,740
Deferred income taxes, net		19,391		19,037
Other long-term liabilities		1,661		2,811
Total liabilities		203,253		201,875
Commitments and contingencies (Note 12)
Stockholders’ equity
Common stock, $0.01 par value, 250,000,000 shares authorized; 13,698,851 and 10,287,931 shares issued, respectively, and 13,617,005 and 10,206,085 shares outstanding, respectively		136		102
Additional paid-in capital		616,316		532,826
Accumulated deficit		(402,557)		(333,776)
Treasury stock, at cost, 81,846 shares and 81,846 shares, respectively		(3,923)		(3,923)
Total stockholders’ equity		209,972		195,229
Total liabilities and stockholders’ equity	$	413,225	$	397,104

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

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Independence Contract Drilling, Inc.

Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues	$	49,147	$	24,035	$	126,451	$	59,394
Costs and expenses
Operating costs		31,379		20,123		87,448		51,704
Selling, general and administrative		7,007		4,068		17,096		11,829
Depreciation and amortization		10,120		9,739		29,719		29,244
Asset impairment, net		—		482		—		775
Loss (gain) on disposition of assets, net		433		222		(665)		(182)
Total costs and expenses		48,939		34,634		133,598		93,370
Operating income (loss)		208		(10,599)		(7,147)		(33,976)
Interest expense		(8,098)		(3,812)		(21,005)		(11,294)
Gain (loss) on extinguishment of debt		—		10,128		(46,347)		10,128
Change in fair value of embedded derivative liability		—		—		(4,265)		—
Realized gain on extinguishment of derivative		—		—		10,765		—
Loss before income taxes		(7,890)		(4,283)		(67,999)		(35,142)
Income tax (benefit) expense		(696)		19		783		86
Net loss	$	(7,194)	$	(4,302)	$	(68,782)	$	(35,228)
Loss per share:
Basic and diluted	$	(0.53)	$	(0.59)	$	(5.36)	$	(5.22)
Weighted average number of common shares outstanding:
Basic and diluted		13,590		7,321		12,836		6,754

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

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Independence Contract Drilling, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share amounts)


				Additional						Total
	Common Stock			Paid-in		Accumulated		Treasury		Stockholders'
	Shares	Amount		Capital		Deficit		Stock		Equity
Balances at December 31, 2021	10,206,085	$	102	$	532,826	$	(333,776)	$	(3,923)	$	195,229
RSUs vested, net of shares withheld for taxes	81,067		1		(33)		—		—		(32)
Issuance of common stock through at-the-market facility, net of offering costs	1,061,853		10		3,350		—		—		3,360
Shares issued for structuring fee	2,268,000		23		9,140		—		—		9,163
Stock-based compensation	—		—		292		—		—		292
Net loss	—		—		—		(58,796)		—		(58,796)
Balances at March 31, 2022	13,617,005	$	136	$	545,575	$	(392,572)	$	(3,923)	$	149,216
Issuance of common stock through at-the-market facility, net of offering costs	—		—		(205)		—		—		(205)
Extinguishment of derivative	—		—		69,232		—		—		69,232
Stock-based compensation	—		—		528		—		—		528
Net loss	—		—		—		(2,791)		—		(2,791)
Balances at June 30, 2022	13,617,005	$	136	$	615,130	$	(395,363)	$	(3,923)	$	215,980
Issuance of common stock through at-the-market facility, net of offering costs	—		—		(117)		—		—		(117)
Stock-based compensation	—		—		1,303		—		—		1,303
Net loss	—		—		—		(7,194)		—		(7,194)
Balances at September 30, 2022	13,617,005	$	136	$	616,316	$	(402,557)	$	(3,923)	$	209,972


				Additional						Total
	Common Stock			Paid-in		Accumulated		Treasury		Stockholders'
	Shares	Amount		Capital		Deficit		Stock		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
Issuance of common stock through at-the-market facility, net of offering costs	686,739		7		1,859		—		—		1,866
Issuance of common stock under purchase agreement	40,800		1		122		—		—		123
Stock-based compensation	—		—		459		—		—		459
Net loss	—		—		—		(4,302)		—		(4,302)
Balances at September 30, 2021	7,971,476	$	80	$	525,217	$	(302,292)	$	(3,913)	$	219,092

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

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Independence Contract Drilling, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities
Net loss	$	(68,782)	$	(35,228)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization		29,719		29,244
Asset impairment, net		—		775
Stock-based compensation		2,976		1,770
Gain on disposition of assets, net		(665)		(182)
Non-cash interest expense		15,859		2,828
Non-cash loss (gain) on extinguishment of debt		46,347		(10,128)
Amortization of deferred financing costs		320		836
Amortization of Convertible Notes issuance costs and debt discount		4,310		—
Change in fair value of embedded derivative liability		4,265		—
Gain on extinguishment of derivative		(10,765)		—
Deferred income taxes		354		86
Bad debt expense (recovery)		256		(52)
Changes in operating assets and liabilities
Accounts receivable		(12,012)		(6,863)
Inventories		(291)		(40)
Prepaid expenses and other assets		2,098		1,929
Accounts payable and accrued liabilities		208		7,322
Net cash provided by (used in) operating activities		14,197		(7,703)
Cash flows from investing activities
Purchases of property, plant and equipment		(22,286)		(9,692)
Proceeds from the sale of assets		2,749		1,849
Net cash used in investing activities		(19,537)		(7,843)
Cash flows from financing activities
Proceeds from issuance of convertible debt		157,500		—
Repayments under Term Loan Facility		(139,076)		—
Borrowings under Revolving ABL Credit Facility		1,576		4,309
Repayments under Revolving ABL Credit Facility		(28)		(17)
Payment of merger consideration		(2,902)		—
Proceeds from issuance of common stock through at-the-market facility, net of issuance costs		3,038		3,859
Proceeds from issuance of common stock under purchase agreement		—		2,072
RSUs withheld for taxes		(32)		(11)
Convertible debt issuance costs		(7,230)		—
Financing costs paid under Revolving ABL Credit Facility		(266)		—
Payments for finance lease obligations		(3,814)		(2,643)
Net cash provided by financing activities		8,766		7,569
Net increase (decrease) in cash and cash equivalents		3,426		(7,977)
Cash and cash equivalents
Beginning of period		4,140		12,279
End of period	$	7,566	$	4,302

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	Nine Months Ended September 30,
(in thousands)	2022		2021
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	4,745	$	6,660
Supplemental disclosure of non-cash investing and financing activities
Change in property, plant and equipment purchases in accounts payable	$	9,015	$	3,755
Additions to property, plant and equipment through finance leases	$	3,250	$	754
Extinguishment of finance lease obligations from sale of assets classified as finance leases	$	(163)	$	—
Transfer of assets from held and used to held for sale	$	—	$	(1,082)
Gain on extinguishment of debt	$	—	$	10,000
Shares issued for structuring fee	$	9,163	$	—

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

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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 and the Haynesville Shale; however, our rigs have previously operated in the Eagle Ford Shale, 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

Oil and natural gas prices were negatively impacted by the effects of the COVID-19 pandemic and significantly decreased the demand for drilling services in 2020 and early 2021. However, business conditions have begun to improve rapidly which has led to improved dayrates and margins for contract drilling services. In addition, the supply for pad-optimal, super-spec rigs is finite with limited spare capacity that can be reactivated without significant cost and expense. We expect the market for our contract drilling services to continue to remain tight and for pricing and margins to continue to improve throughout the remainder of 2022 and into 2023. As a result of these improving market conditions, we also are experiencing increases in labor and other operating costs as well as the costs of capital equipment. In addition, lead times for delivery of capital equipment and services are lengthening which is causing us to bring forward investments in order to meet our planned rig reactivation schedules.

Oil prices (WTI-Cushing) reached a high of $123.64 per barrel on March 8, 2022, and natural gas prices (Henry Hub) reached a recent high of $9.85 per mmcf on August 22, 2022, however prices have fallen since those highs reaching $79.91 per barrel and $6.40 per mmcf as of September 30, 2022 due to concerns surrounding U.S. and global recessions. As of September 30, 2022, we had 18 rigs operating, with our 19^th rig mobilizing for drilling operations at the end of October 2022 and our 20^th rig contracted and scheduled for reactivation in the fourth quarter of 2022. Additionally, our first 200 to 300 series rig conversion will be completed during the fourth quarter of 2022.

Amendment No. 5 to the Revolving ABL Credit Facility

On September 22, 2022, we amended our Revolving ABL Credit Facility Agreement, which included extending the maturity date by two years to September 30, 2025, replacing references to LIBOR interest rates with SOFR interest rates and amending the applicable margin for which interest is calculated as follows:

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Tier	Quarterly Average Excess Availability	Applicable Base Rate Margin	Applicable SOFR Margin
1	Greater than $26,666,666	1.50%	2.36%
2	Greater than $13,333,333 but less than or equal to $26,666,666	1.75%	2.61%
3	Less than or equal to $13,333,333	2.00%	2.86%

Certificate of Amendment to the Restated Certificate of Incorporation

On June 8, 2022, we filed a certificate of amendment to our Restated Certificate of Incorporation (the “Charter Amendment”) with the Delaware Secretary of State. The Charter Amendment increased the number of authorized shares of our common stock, par value $0.01 per share from 50 million shares to 250 million shares. The Charter Amendment does not change the number of authorized shares of our preferred stock or the par value per share of any stock.

Amendment No. 1 to the 2019 Plan

On June 8, 2022, our stockholders approved an amendment to our 2019 Omnibus Incentive Plan (the “2019 Plan”) to increase the number of shares of Common Stock authorized for issuance under the 2019 Plan by 4.3 million shares (from 275,000 shares to 4,575,000 shares).

Convertible Notes

We have the right at our option, to PIK interest under the Convertible Notes for the entire term of the Convertible Notes. We elected to pay in-kind outstanding interest as of September 30, 2022, resulting in an additional $12.7 million principal amount of Convertible Notes being issued as of September 30, 2022.

The effective conversion price of the Convertible Notes is $4.51 per share (221.72949 shares of Common Stock per $1,000 principal amount of Convertible Notes). We may issue up to $7.5 million of additional Convertible Notes. We may convert all Convertible Notes (including PIK notes) upon conversion of Convertible Notes in connection with a Qualified Merger Conversion (as defined in the Indenture) and may issue additional shares of common stock to the extent the number of shares issuable upon such conversion would exceed the number of shares of common stock issuable at the otherwise then-current conversion price. In connection with the placement of the Convertible Notes, we issued 2,268,000 shares of our common stock as a structuring fee. The structuring fee shares were issued on March 18, 2022, concurrent with the closing of the private placement of the Convertible Notes. See Note 8 “Long-term Debt” for additional information.

ATM Distribution Agreement

In December 2021, our board of directors authorized the sale of $5.9 million of common stock to be sold in transactions that are deemed to be “at-the-market offerings” and increased the authorization by $6.5 million in May 2022. In the first quarter of 2022, we raised gross proceeds of $3.6 million from the sale of 1,061,853 shares in this offering. We did not participate in this program in the second or third quarter of 2022. As of September 30, 2022, we have $8.8 million remaining availability under this ATM program.

2.Interim Financial Information

These unaudited consolidated financial statements include the accounts of the Company and its subsidiary, and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These

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consolidated financial statements should be read along with our audited consolidated financial statements for the year ended December 31, 2021, included in our Annual Report on Form 10-K for the year ended December 31, 2021. In management’s opinion, these financial statements contain all adjustments necessary for a fair statement of our financial position, results of operations, cash flows and changes in stockholders’ equity for all periods presented.

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

Interim results for the three and nine months ended September 30, 2022 may not be indicative of results that will be realized for the full year ending December 31, 2022.

Derivatives

We do not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging (“ASC 815”). The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. All derivative instruments are measured at fair value.

As described in Note 8, we determined that certain features under our Convertible Notes required bifurcation from the debt host agreement in accordance with ASC 815 as of March 18, 2022. Accordingly, we recognized a derivative liability at fair value for this instrument in our consolidated balance sheet and adjusted the carrying value of the liability to fair value at each reporting period until the features underlying the instrument were exercised, redeemed, cancelled or expired. The changes in fair value were assessed quarterly and recorded in our consolidated statement of operations. After the approval of certain matters by our stockholders at our 2022 Annual Meeting of Stockholders held June 8, 2022, certain features under our Convertible Notes were modified and no longer met the criteria to bifurcate from the host debt agreement. Accordingly, as of June 8, 2022, we recognized the change in fair value of the embedded derivative, $4.3 million, and extinguished the fair value of the conversion rate feature ($69.2 million) of the derivative liability on our balance sheet to stockholders’ equity, as the conversion rate feature now met the criteria to be classified in equity, and recognized a gain on extinguishment of derivative liability on our consolidated statement of operations of $10.8 million associated with the PIK interest rate feature of the derivative liability. See Note 5 “Financial Instruments and Fair Value” for additional information.

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.

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 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

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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 after December 15, 2021, with early adoption permitted. For smaller reporting companies the pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2023. We early adopted this standard on January 1, 2022. See Note 8 “Long-term Debt” for additional information.

In September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. This guidance requires a business entity operating as a buyer in a supplier finance agreement to disclose qualitative and quantitative information about its supplier finance programs. This guidance is effective for annual reporting periods beginning after December 15, 2022, and interim periods within those years. The Company is currently evaluating the provisions of the guidance.

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 nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Dayrate drilling	$	45,910	$	21,575	$	116,421	$	53,450
Mobilization		687		1,393		3,560		2,619
Reimbursables		2,451		1,032		6,208		3,237
Capital modification		92		33		255		86
Other		7		2		7		2
Total revenue	$	49,147	$	24,035	$	126,451	$	59,394

Three customers accounted for approximately 25%, 13%, and 12% of consolidated revenue for the three months ended September 30, 2022 and three customers accounted for approximately 18%, 15%, and 13% of consolidated revenue for the nine months ended September 30, 2022. Two customers accounted for approximately 27% and 10% of consolidated revenue for the three months ended September 30, 2021, and two customers accounted for approximately 25% and 12% of the consolidated revenue for the nine months ended September 30, 2021.

The following table provides information about receivables and contract liabilities related to contracts with customers. There were no contract assets recorded as of September 30, 2022 or December 31, 2021.


	September 30,		December 31,
(in thousands)	2022		2021
Receivables, which are included in “Accounts receivable”	$	33,914	$	22,167
Contract liabilities, which are included in “Accrued liabilities - deferred revenue”	$	(1,227)	$	(542)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Revenue recognized that was included in contract liabilities at beginning of period	$	209	$	385	$	542	$	119
Decrease (increase) in contract liabilities due to cash received, excluding amounts recognized as revenue	$	(1,186)	$	(380)	$	(1,227)	$	(491)

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The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of September 30, 2022. The estimated revenue does not include amounts of variable consideration that are constrained.


	Year Ending December 31,
(in thousands)	2022		2023		2024		2025
Revenue	$	1,143	$	84	$	—	$	—

The amounts presented in the table above consist only of fixed consideration related to fees for rig mobilizations and demobilizations, if applicable, which are allocated to the drilling services performance obligation as such performance obligation is satisfied. We have elected the exemption from disclosure of remaining performance obligations for variable consideration. Therefore, dayrate revenue to be earned on a rate scale associated with drilling conditions and level of service provided for each fractional-hour time increment over the contract term and other variable consideration such as penalties and reimbursable revenues, have been excluded from the disclosure.

Contract Costs

We capitalize costs incurred to fulfill our contracts that (i) relate directly to the contract, (ii) are expected to generate resources that will be used to satisfy our performance obligations under the contract and (iii) are expected to be recovered through revenue generated under the contract. These costs, which principally relate to rig mobilization costs at the commencement of a new contract, are deferred as a current or noncurrent asset (depending on the length of the contract term), and amortized ratably to contract drilling expense as services are rendered over the initial term of the related drilling contract. Such contract costs, recorded as “Prepaid expenses and other current assets”, amounted to $0.9 million and $0.6 million on our consolidated balance sheets at September 30, 2022 and December 31, 2021, respectively. During the three and nine months ended September 30, 2022, contract costs increased by $1.0 million and $3.1 million, respectively, and we amortized $0.2 million and $2.8 million of contract costs, respectively. During the three and nine months ended September 30, 2021, contract costs increased by $1.1 million and $2.3 million, respectively, and we amortized $1.1 million and $1.9 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 three years.

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The components of lease expense were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Operating lease expense	$	193	$	234	$	580	$	703
Short-term lease expense		1,505		796		4,170		2,018
Variable lease expense		157		113		413		313

Finance lease expense:
Amortization of right-of-use assets	$	464	$	312	$	1,109	$	857
Interest expense on lease liabilities		92		141		305		462
Total finance lease expense		556		453		1,414		1,319
Total lease expense	$	2,411	$	1,596	$	6,577	$	4,353

Supplemental cash flow information related to leases is as follows:


	Nine Months Ended September 30,
(in thousands)	2022		2021
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	557	$	739
Operating cash flows from finance leases	$	300	$	458
Financing cash flows from finance leases	$	3,814	$	2,643

Right-of-use assets obtained or recorded in exchange for lease obligations:
Operating leases	$	153	$	—
Finance leases	$	3,250	$	754

Supplemental balance sheet information related to leases is as follows:


(in thousands)	September 30, 2022			December 31, 2021
Operating leases:
Other long-term assets, net	$	1,111		$	1,437

Accrued liabilities	$	729		$	693
Other long-term liabilities		569			1,036
Total operating lease liabilities	$	1,298		$	1,729

Finance leases:
Property, plant and equipment	$	17,607		$	14,989
Accumulated depreciation		(2,646)			(1,989)
Property, plant and equipment, net	$	14,961		$	13,000

Current portion of long-term debt	$	3,302		$	4,464
Long-term debt		1,745			1,305
Total finance lease liabilities	$	5,047		$	5,769

Weighted-average remaining lease term
Operating leases		1.8 years			2.5 years
Finance leases		1.2 years			1.3 years

Weighted-average discount rate
Operating leases		10.78	%		10.84	%
Finance leases		7.91	%		8.64	%

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Maturities of lease liabilities at September 30, 2022 were as follows:


(in thousands)	Operating Leases		Finance Leases
2022	$	207	$	1,942
2023		833		2,203
2024		390		856
2025		—		318
Total cash lease payment		1,430		5,319
Less: imputed interest		(132)		(272)
Total lease liabilities	$	1,298	$	5,047

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.

This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, certain accrued liabilities and our debt. Our debt consists primarily of our Convertible Notes and Revolving ABL Facility as of September 30, 2022 and our Term Loan and our Revolving ABL Facility as of December 31, 2021. The fair value of cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities approximate their carrying value because of the short-term nature of these instruments.

The estimated fair value of our Revolving ABL Credit Facility, Term Loan Facility, and merger consideration payable to an affiliate are determined to be Level 3 measurements as our debt is not actively traded and the fair value estimate is based on discounted estimated future cash flows or a fair value in-exchange assumption, which are significant unobservable inputs in the fair value hierarchy. Based on our evaluation of the risk-free rate, the market yield and credit spreads on comparable company publicly traded debt issues, we used a yield of L+542 bps on the Revolving ABL Credit Facility and L+3400 bps for the Convertible Notes. The following table sets forth the estimated fair value of our Revolving ABL Credit Facility, Term Loan Facility and merger consideration payable to an affiliate as of September 30, 2022 and December 31, 2021.


(in thousands)	September 30, 2022			December 31, 2021
Revolving ABL Credit Facility	$	7,806	$	6,030
Term Loan Facility	$	—	$	140,664
Merger consideration payable to an affiliate	$	—	$	4,449

The fair value of the Convertible Notes was estimated as $136.2 million as of September 30, 2022. The fair value of the Convertible Notes is also determined to be a Level 3 measurement and was estimated using a binomial lattice model. The factors used to determine fair value are subject to management's judgement and expertise and include, but are not limited to our share price, expected price volatility, risk-free rate, market yield and credit spreads relative to our credit rating.

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Recurring Fair Value Measurements

In conjunction with the issuance of the Convertible Notes on March 18, 2022, we recorded an embedded derivative liability of $75.7 million.

After the approval of our stockholders on June 8, 2022, certain features under our Convertible Notes were modified and no longer met the criteria to bifurcate from the host debt agreement. Accordingly, as of June 8, 2022, we recognized the change in fair value of the embedded derivative, $4.3 million, and extinguished the fair value of the conversion rate feature ($69.2 million) of the derivative liability on our balance sheet to stockholders’ equity, as the conversion rate feature now met the criteria to be classified in equity, and recognized a gain on our consolidated statement of operations of $10.8 million associated with the PIK interest rate feature of the derivative liability. As of December 31, 2021, we had no embedded derivative liability recorded.

The loss associated with the change in the fair value of the embedded derivative as of June 8, 2022 is reported in our consolidated statement of operations within change in fair value of embedded derivative liability. The fair value of the embedded derivative liability as of June 8, 2022 was estimated using a “with and without” approach:

•“With” scenario: the fair value of the Convertible Notes as of the valuation date is estimated based on a binomial lattice model.

•“Without” scenario: the fair value of the Convertible Notes “without” the embedded features was estimated using a discounted cash flow model whereby the expected cash flows absent the embedded derivative (i.e., the coupon and principal payments) are discounted at a credit-adjusted rate.

No financial instruments were measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021.

There were no transfers between fair value measurement levels during the first, second or third quarter of 2022.

The significant unobservable inputs used in the fair value measurement of our embedded derivative liability are a volatility rate of 58.9%, a credit spread of 3,570 basis points and a risk-free rate of 3.0%. The expected volatility is estimated based on the historical volatility of our common stock and the remaining term of the Convertible Notes of 3.7 years at June 8, 2022.

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 September 30, 2022 and December 31, 2021 consisted of supplies held for use in our drilling operations.

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7.Supplemental Balance Sheet Information

Prepaid expenses and other current assets consisted of the following:


(in thousands)	September 30, 2022		December 31, 2021
Prepaid insurance	$	1,259	$	3,463
Prepaid other		671		575
Deferred mobilization costs		908		618
Insurance claim receivable		—		122
Other current assets		102		9
	$	2,940	$	4,787

Accrued liabilities consisted of the following:


(in thousands)	September 30, 2022		December 31, 2021
Accrued salaries and other compensation	$	5,380	$	4,154
Insurance		1,102		2,523
Deferred revenues		1,227		542
Property and other taxes		2,846		2,594
Operating lease liability - current		729		693
Other		1,878		739
	$	13,162	$	11,245

8.Long-term Debt

Our long-term debt consisted of the following:



(in thousands)	September 30, 2022		December 31, 2021
Convertible Notes due March 18, 2026	$	170,166	$	—
Revolving ABL Credit Facility due September 30, 2025		7,848		6,300
Term Loan Facility due October 1, 2023		—		135,883
Finance lease obligations		5,047		5,769
		183,061		147,952
Less: Convertible Notes issuance costs and debt discount		(43,003)		—
Less: Term Loan Facility deferred financing costs		—		(1,748)
Less: current portion of finance leases		(3,302)		(4,464)
Long-term debt	$	136,756	$	141,740

Convertible Notes

On March 18, 2022, we entered into a subscription agreement with affiliates of MSD Partners, L.P. and an affiliate of Glendon Capital Management L.P. (the “Subscription Agreement”) for the placement of $157.5 million aggregate principal amount of convertible secured PIK toggle notes due 2026 (the “Convertible Notes”). The Convertible Notes were issued pursuant to an Indenture, dated as of March 18, 2022 (the “Indenture”). The obligations under the Convertible Notes are secured by a first priority lien on collateral (the “Note Priority Collateral”) other than accounts receivable, deposit accounts and other related collateral pledged as first priority collateral (“Priority Collateral”) under the Revolving ABL Credit Facility (defined below). Proceeds from the private placement of the Convertible Notes were used to repay all of our outstanding indebtedness under our term loan credit agreement, to repay obligations to prior equity holders of Sidewinder Drilling LLC, and for working capital purposes. In connection with the placement of the Convertible Notes, we issued 2,268,000 shares of our common stock as a structuring fee. The structuring fee shares were issued on March 18, 2022, concurrent with the closing of the private placement of the Convertible Notes. The Convertible Notes mature on March 18, 2026.

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kind, or “PIK,” interest rate of SOFR plus 14.0% through September 30, 2022. The PIK interest rate decreased to SOFR plus 9.5% as of September 30, 2022. We have the right at our option, to PIK interest under the Convertible Notes for the entire term of the Convertible Notes. We elected to pay in-kind outstanding interest as of September 30, 2022, resulting in an additional $12.7 million principal amount of Convertible Notes being issued as of September 30, 2022.

The following changes to the terms of the Convertible Notes and Indenture, and to the shares issuable upon conversion of the Convertible Notes, became effective based on approvals of matters by our stockholders at our 2022 Annual Meeting of Stockholders held on June 8, 2022 (constituting “Shareholder Approval” as defined in the Indenture): (a) the Convertible Notes initial PIK interest rate of SOFR plus 14.0% decreased to SOFR plus 9.5% as of September 30, 2022; (b) our initial option to pay interest in additional PIK notes for a period of 18 months was increased to 48 months (the entire term of the Convertible Notes); (c) the effective conversion price of $5.07 per share (197.23866 shares of common stock per $1,000 principal amount of Convertible Notes) was decreased to $4.51 per share (221.72949 shares of Common Stock per $1,000 principal amount of Convertible Notes); (d) the issuance by us of up to $7.5 million of additional Convertible Notes, if and when issued by us; and (e) the issuance of additional shares of common stock upon conversion of Convertible Notes in connection with a Qualified Merger Conversion (as defined in the Indenture) to the extent the number of shares issuable upon such conversion would exceed the number of shares of common stock issuable at the otherwise then-current conversion price.

Each noteholder has a right to convert our Convertible Notes for shares of ICD common stock at any time after issuance through maturity. The conversion price is $4.51 per share. Interest on the Convertible Notes is due on March 31 and September 30 each year, beginning on September 30, 2022. Under the Indenture, a holder is not entitled to receive shares of our common stock upon conversion of any Convertible Notes to the extent to which the aggregate number of shares of common stock that may be acquired by such beneficial owner upon conversion of Convertible Notes, when added to the aggregate number of shares of common stock deemed beneficially owned, directly or indirectly, by such beneficial owner and each person subject to aggregation of Common Stock with such beneficial owner under Section 13 or Section 16 of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules promulgated thereunder at such time (an “Aggregated Person”) (other than by virtue of the ownership of securities or rights to acquire securities that have limitations on such beneficial owner’s or such person’s right to convert, exercise or purchase similar to this limitation), as determined pursuant to the rules and regulations promulgated under Section 13(d) of the Exchange Act, would exceed 9.9% (the “Restricted Ownership Percentage”) of the total issued and outstanding shares of Common Stock (the “Section 16 Conversion Blocker”); provided that any holder has the right to elect for the Restricted Ownership Percentage to be 19.9% with respect to such Holder, (x) at any time, in which case, such election will become effective sixty-one days following written notice thereof to us or (y) in the case of a holder acquiring Convertible Notes on the Issue Date, in such Holder’s Subscription Agreement. In lieu of any shares of common stock not delivered to a converting holder by operation of the Restricted Ownership Percentage limitation, we will deliver to such Holder Pre-Funded Warrants in respect of any equal number of shares of common stock. Such Pre-Funded Warrants will contain substantially similar Restricted Ownership Percentage terms.

The Indenture includes a mandatory redemption offer requirement (the “Mandatory Offer Requirement”). Beginning June 30, 2023, we are obligated to offer to redeem $5.0 million of Convertible Notes on a quarterly basis through December 31, 2023, and $3.5 million of Convertible Notes on a quarterly basis through March 31, 2025. The mandatory offer price is an amount in cash equal to the principal amount of such Note plus accrued and unpaid interest on such Note. The Indenture also includes an optional redemption right (the “Company Redemption Right”) that permits us to redeem on one or more occasions during the period beginning September 19, 2022 and ending September 19, 2023, up to $25 million aggregate principal amount of notes at redemption price of 104% of par, plus accrued and unpaid interest. The Mandatory Offer Requirement is reduced by the amount of any Convertible Notes repurchased pursuant to our Redemption Right.

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under the Revolving ABL Credit Facility (defined below) is below $5.0 million at any time that the Convertible Notes are outstanding; and capital expenditure limits of $25.0 million during 2022 and $15.0 million during 2023 and 2024, subject to adjustment upward by $500,000 per year for each rig above 17 that operates during each year. In addition, capital expenditures are excluded from this covenant (a) if funded from equity proceeds, (b) if relating to the reactivation of a rig so long as (i) we have a signed contract with a customer with respect to each such rig of at least one (1) year duration providing for early termination payments consistent with past practice equal to at least the expected margin on the contract, (ii) the expected margin on such rig contract will be equal to or exceed such reactivation capital expenditures, and (iii) the reactivation capital expenditures, rig contract and the expected margin calculation are approved by our board of directors or (c) relate to other capital expenditures specifically approved by written or electronic consent by both (i) the required holders (which approval may, for the avoidance of doubt, be provided by the required holders in their sole discretion for an amount of capital expenditures to be committed or made by the Company or a subsidiary of the Company within ninety (90) days after the date of such consent) and (ii) the Board of Directors of the Company. The Indenture 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 Indenture also provides for customary events of default, including breaches of material covenants, defaults under the Revolving ABL Credit Facility or other material agreements for indebtedness, and a change of control. Beginning 18 months prior to maturity, we may elect to suspend the Convertible Debt covenant requirements by depositing cash and short-term treasuries with the Trustee in an amount equal to all amounts due to the noteholders including principal, premium (if any) and interest. We are in compliance with our covenants as of September 30, 2022.

Upon a Qualified Merger (defined below), we may elect to convert all, but not less than all, of the Convertible Notes at a Conversion Rate equal to our Conversion Rate on the date on which the relevant “Qualified Merger” is consummated (a “Qualified Merger Conversion”), so long as the “MOIC Condition” is satisfied with respect to such potential Qualified Merger Conversion. A “Qualified Merger” means a Common Stock Change Event consolidation, merger, combination or binding or statutory share exchange of the Company with a Qualified Acquirer. A “Qualified Merger Conversion Date” means the date on which the relevant Qualified Merger is consummated. A “Qualified Acquirer” means any entity that (i) has its common equity listed on the New York Stock Exchange, the NYSE American, Nasdaq Global Market or Nasdaq Global Select Market, or Toronto Stock Exchange, (ii) has an aggregate equity market capitalization of at least $350 million, and (iii) has a “public float” (as defined in Rule 12b-2 under the Securities Act of 1933) of at least $250 million in each case, as determined by the calculation agent based on the last reported sale price of such common equity on date of the signing of the definitive agreement in respect of the relevant Common Stock Change Event. A “Common Stock Change Event” means the occurrence of any: (i) recapitalization, reclassification or change of our common stock (other than (x) changes solely resulting from a subdivision or combination of the common stock, (y) a change only in par value or from par value to no par value or no par value to par value and (z) stock splits and stock combinations that do not involve the issuance of any other series or class of securities); (ii) consolidation, merger, combination or binding or statutory share exchange involving us; (iii) sale, lease or other transfer of all or substantially all of the assets of ours and our Subsidiaries, taken as a whole, to any person; or (iv) other similar event, and, as a result of which, the common stock is converted into, or is exchanged for, or represents solely the right to receive, other securities, cash or other property, or any combination of the foregoing. A “Company Conversion Rate” means, in respect of any Qualified Merger, the greater of (a) the relevant Conversion Rate, (b) $1,000 divided by our Conversion VWAP, and (c) the lowest rate that would cause the MOIC Condition to be satisfied with respect to the related Qualified Merger Conversion. A “Company Conversion VWAP” means, in respect of any Qualified Merger, the average of daily VWAP over the five (5) VWAP Trading Days prior to the earlier of signing or public announcement (by any party, and whether formal or informal, including for the avoidance of doubt any media reports thereof) of a definitive agreement in respect of such Qualified Merger as calculated by the Calculation Agent. The “MOIC Condition” means, with respect to any potential Qualified Merger Conversion, MOIC is greater than or equal to the MOIC Required Level. The “MOIC Required Level” means $1,350.00. “MOIC” means, with respect to any potential Qualified Merger Conversion, an amount determined by the Calculation Agent equal to the aggregate return on a hypothetical Note with $1,000 face amount, issued on the Issue Date, from the Issue Date through the potential Qualified Merger Conversion Date, including (x) the aggregate amount of any cash interest paid on such hypothetical Note from the Issue Date through the potential Qualified Merger Conversion Date, (y) the aggregate fair market value of any Conversion Consideration that would be received by the Holder of such hypothetical Note on the relevant Qualified Merger Conversion Date and (z) the aggregate fair market value of any Conversion Consideration that would be received on the relevant Qualified Merger Conversion Date by the Holder of any PIK Notes issued in respect of (or the relevant increase in value of) such hypothetical Note.

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We early adopted ASU 2020-06 as of January 1, 2022 and concluded the Convertible Notes are accounted for as debt, with embedded features. As a consequence of the embedded features, the Convertible Notes gave rise to a derivative liability. See Embedded Derivative Liability. The debt terms of the Convertible Notes, of which affiliates of our prior Term Loan Facility are 50.1% noteholders, were determined to be substantially different terms from the Term Loan Facility and therefore required to be accounted for as an extinguishment of the Term Loan Facility. Accordingly, we recognized a loss on the extinguishment of debt of approximately $46.3 million during the quarter ended March 31, 2022. This is a non-cash expense primarily associated with the recognition of unamortized debt issuance costs, non-cash fees settled in shares to the affiliates of our prior Term Loan Facility and the fair value of the embedded derivatives. We recorded a derivative liability of $75.7 million at the time of the issuance and a debt discount of $37.6 million. Issuance costs consisting of cash fees of $7.1 million and a non-cash structuring fee settled in shares of $2.3 million along with the debt discount are recorded as a direct deduction from the Convertible Notes in the consolidated balance sheet. The debt discount is amortized to interest expense using the effective interest rate method over the term of the Convertible Notes. The effective interest rate for the Convertible Notes as of September 30, 2022 is 24.5%. For the three and nine months ended September 30, 2022, the contractual interest expense was $5.8 million and $12.7 million, respectively; the amortization of the debt discount was $1.4 million and $3.0 million, respectively; and the amortization of the issuance costs was $0.6 million and $1.3 million, respectively.

Embedded Derivative Liability

The Convertible Notes contained the following embedded features upon issuance (i) an increase of the noteholder’s optional conversion rate for the Convertible Notes from 197.23866 shares of common stock per $1,000 principal amount of Convertible Notes ($5.07 per share) to 221.72949 shares of Common Stock per $1,000 principal amount of Convertible Notes ($4.51 per share) following the receipt of the Shareholder Approval, (ii) a decrease in the PIK interest rate from SOFR plus 14.0% to SOFR plus 9.5% following receipt of the Shareholder Approval, (iii) a conversion feature associated with the MOIC condition in the event of a Qualified Merger and (iv) a contingent interest feature as a result of violations of credit-risk related covenants. We evaluated these embedded features under the guidance of ASC 815 and determined that they required bifurcation at fair value. However, management determined the probability of a Qualified Merger to be remote and as such the fair value of the embedded conversion feature has been estimated to be zero. Management also evaluated the contingent interest feature and determined the likelihood of payment to be remote. Accordingly, the fair value of the contingent interest feature was also estimated to be zero. Lastly, management evaluated the conversion rate feature and the decrease in PIK interest feature and determined that these embedded features met all three criteria in ASC 815-15-25-1 and therefore required bifurcation. Accordingly, as of March 18, 2022, we recorded a derivative liability representing the increase in conversion rate feature and the decrease in PIK interest feature. The derivative liability was presented as a non-current liability in our consolidated balance sheet and was adjusted to reflect fair value at each period end with changes in fair value recorded in the “Change in fair value of embedded derivative liability” financial statement line item of our consolidated statements of operations.

After the approval of certain matters by our stockholders at our 2022 Annual Meeting of Stockholders held June 8, 2022, certain features under our Convertible Notes were modified and no longer met the criteria to bifurcate from the host debt agreement. Accordingly, through June 8, 2022, we recognized the change in fair value of the embedded derivative, $4.3 million, and extinguished the fair value of the conversion rate feature ($69.2 million) of the derivative liability on our balance sheet to stockholders’ equity, as the conversion rate feature now met the criteria to be classified in equity, and recognized a gain on extinguishment of derivative liability of $10.8 million on our consolidated statement of operations associated with the PIK interest rate feature of the derivative liability. See Note 5 “Financial Instruments and Fair Value” for additional information.

Term Loan Facility

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 had a maturity date of October 1, 2023, but were repaid in their entirety on March 18, 2022 with proceeds from the issuance of the Convertible Notes.

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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%.

In June 2020, we revised the 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 were 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 while the Term Loan remained outstanding. The additional amount was 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. In September 2021, we amended our Term Loan Credit Agreement and elected to pay in-kind the $3.1 million October 1, 2021 interest payment which reduced the amount of the Term Loan Accordion by the PIK amount. On December 30, 2021, we amended our Term Loan Credit Agreement and elected to pay in-kind the $3.2 million January 3, 2022 interest payment which reduced the Term Loan Accordion by a corresponding amount.

Revolving ABL Credit Facility

On October 1, 2018, we entered into a $40.0 million revolving credit agreement (the “Revolving 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 Revolving 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 Revolving ABL Credit Facility had a maturity date of October 1, 2023.

Interest under the Revolving 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 Revolving ABL Credit Facility commitment.

The Revolving 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 Revolving 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 Revolving ABL Credit Facility also provides for customary events of default, including breaches of material covenants, defaults under the Term Loan Credit Agreement or other material agreements for indebtedness, and a change of control. We are in compliance with our financial covenants as of September 30, 2022.

The obligations under the Revolving ABL Credit Facility are secured by a first priority lien on Priority Collateral, which includes all accounts receivable and deposit accounts, and a second priority lien on the Term Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. As of September 30, 2022, the weighted-average interest rate on our borrowings was 14.70%. At September 30, 2022, the borrowing base under our Revolving ABL Credit Facility was $27.7 million, and we had $19.9 million of availability remaining of our $40.0 million commitment on that date.

On March 18, 2022, we entered into a third amendment to that certain Credit Agreement, dated as of October 1, 2018 (the “Third Amendment to the Credit Agreement”), by and among us, Sidewinder Drilling LLC (“Sidewinder”), the Lenders named therein and Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent. The Third Amendment to the Credit Agreement amends the original credit agreement, dated as of October 1, 2018 (the “Credit Agreement”) by deleting references to the “Term Loan Agreement” and related definitions and adding certain references and clauses related to our placement of $157.5 million aggregate principal amount of convertible secured PIK toggle notes due 2026 (the “Convertible Notes”), which were issued pursuant to an Indenture, dated as of March 18, 2022 (the “Indenture”), with U.S. Bank Trust Company, National Association as trustee and collateral agent.

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Tier	Quarterly Average Excess Availability	Applicable Base Rate Margin	Applicable SOFR Margin
1	Greater than $26,666,666	1.50%	2.36%
2	Greater than $13,333,333 but less than or equal to $26,666,666	1.75%	2.61%
3	Less than or equal to $13,333,333	2.00%	2.86%

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. On June 8, 2022, an additional 4.3 million shares were authorized for issuance. Restricted stock and restricted stock units may be granted for no consideration other than prior and future services. The purchase price per share for stock options may not be less than the market price of the underlying stock on the date of grant. As of September 30, 2022, approximately 1,429,059 shares were available for future awards under the 2019 Plan. In connection with the adoption of the 2019 Plan, no further awards will be made under the 2012 Plan. Our policy is to account for forfeitures of share-based compensation awards as they occur.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Compensation cost recognized:
Restricted stock, restricted stock units and stock-settled stock appreciation rights	$	1,303	$	459	$	2,123	$	1,367
Cash-settled stock appreciation rights		470		94		853		403
Total stock-based compensation	$	1,773	$	553	$	2,976	$	1,770

No stock-based compensation was capitalized in connection with rig construction activity during the three and nine months ended September 30, 2022 or 2021.

Stock Options

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

There were no stock options granted during the nine months ended September 30, 2022 or 2021.

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A summary of stock option activity and related information for the nine months ended September 30, 2022 is as follows:


	Nine Months Ended September 30, 2022
		Weighted
		Average
		Exercise
	Options	Price
Outstanding at January 1, 2022	27,867	$	254.80
Granted	—		—
Exercised	—		—
Forfeited/expired	(27,867)		254.80
Outstanding at September 30, 2022	—	$	—
Exercisable at September 30, 2022	—	$	—

There were no options vested at September 30, 2022. There were no unvested options or unrecognized compensation cost related to outstanding stock options at September 30, 2022.

Time-based Restricted Stock and Restricted Stock Units

We have granted time-based restricted stock and restricted stock units to key employees under the 2012 Plan and 2019 Plan.

Time-based Restricted Stock

Time-based restricted stock awards consist of grants of our common stock that vest over five years. We recognize compensation expense on a straight-line basis over the vesting period. The fair value of restricted stock awards is determined based on the estimated fair market value of our shares on the grant date. As of September 30, 2022, there was $0.6 million in unrecognized compensation cost related to unvested restricted stock awards. This cost is expected to be recognized over a weighted-average period of 0.7 years.

A summary of the status of our time-based restricted stock awards and of changes in our time-based restricted stock awards outstanding for the nine months ended September 30, 2022 is as follows:


	Nine Months Ended September 30, 2022
		Weighted
		Average
		Grant-Date
		Fair Value
	Shares	Per Share
Outstanding at January 1, 2022	26,890	$	64.40
Granted	—		—
Vested	—		—
Forfeited	—		—
Outstanding at September 30, 2022	26,890	$	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 September 30, 2022, there was $5.5 million of total unrecognized compensation cost related to unvested time-based restricted stock unit awards. This cost is expected to be recognized over a weighted-average period of 1.1 years.

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A summary of the status of our time-based restricted stock unit awards and of changes in our time-based restricted stock unit awards outstanding for the nine months ended September 30, 2022 is as follows:


	Nine Months Ended September 30, 2022
		Weighted
		Average
		Grant-Date
		Fair Value
	RSUs	Per Share
Outstanding at January 1, 2022	109,911	$	8.50
Granted	1,526,385		4.16
Vested and converted	(78,011)		7.78
Forfeited	(2,743)		38.80
Outstanding at September 30, 2022	1,555,542	$	4.22

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 September 30, 2022, there was unrecognized compensation cost related to unvested performance-based or market-based restricted stock unit awards totaling $29 thousand. This cost is expected to be recognized over a weighted-average period of 0.2 years.

A summary of the status of our performance-based and market-based restricted stock unit awards and of changes in our restricted stock unit awards outstanding for the nine months ended September 30, 2022 is as follows:


	Nine Months Ended September 30, 2022
		Weighted
		Average
		Grant-Date
		Fair Value
	RSUs	Per Share
Outstanding at January 1, 2022	27,285	$	24.50
Granted	—		—
Vested and converted	(3,056)		29.00
Forfeited	(13,486)		33.10
Outstanding at September 30, 2022	10,743	$	12.42

Time-Based Stock-Settled Stock Appreciation Rights

We have granted time-based, stock-settled stock appreciation rights (“SARs”) to certain employees. The SARs have a term of seven years, an exercise price of $5.19 per share, and vest one-third on March 18, 2023 and in equal quarterly increments thereafter, until fully vested on March 18, 2025. Because these SARs are stock-settled, they are classified as an “equity award” which are measured at their fair value at the grant date and are fixed and not revalued unless the award is modified.

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The fair value of time-based stock-settled SARs at the valuation date was determined using the Black-Scholes-Merton model. The following assumptions were used in calculating the fair value of time-based stock-settled SARs granted during the nine months ended September 30, 2022:


	Nine Months Ended
	September 30, 2022
Remaining term to maturity	6.8 years
Expected volatility factor	103.3	%
Expected dividend yield	—	%
Risk-free interest rate	3.03	%

Changes to the company’s time-based stock-settled SARs during the nine months ended September 30, 2022 are as follows:


	Nine Months Ended September 30, 2022
		Weighted Average
		Grant Date
	Stock-settled SARs	Fair Value
	(in thousands)	Per Share
Outstanding at January 1, 2022	—	$	—
Granted	1,422		2.83
Vested	—		—
Forfeited/Expired	—		—
Outstanding at September 30, 2022	1,422	$	2.83

As of September 30, 2022, there was $3.5 million of unrecognized compensation cost related to time-based stock-settled SARs that is expected to be recognized over a weighted-average period of 1.3 years.

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 nine months ended September 30, 2022 using the Monte Carlo simulation model:


	Nine Months Ended
	September 30, 2022
Remaining term to maturity	5.4 years
Expected volatility factor	111.3	%
Expected dividend yield	—	%
Risk-free interest rate	4.00	%

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Changes to the company’s time-based cash-settled SARs during the nine months ended September 30, 2022 are as follows:


	Nine Months Ended September 30, 2022
		Weighted Average
	Cash-settled SARs	Exercise Price
	(in thousands)	Per Share
Outstanding at January 1, 2022	2,913	$	5.73
Granted	—		—
Exercised	—		—
Forfeited/Expired	(27)		5.73
Outstanding at September 30, 2022	2,886	$	5.73
Exercisable at September 30, 2022	971	$	5.73

The number of cash-settled SARs exercisable at September 30, 2022 was 1.0 million with a weighted average remaining contractual life of 5.4 years and a weighted average exercise price of $5.73 per share. As of September 30, 2022, there was $1.2 million of unrecognized compensation cost related to time-based cash-settled SARs that is expected to be recognized over a weighted-average period of 0.7 years.

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

As of September 30, 2022, we had a total of 13,617,005 shares of common stock, $0.01 par value, outstanding. We also had 81,846 shares held as treasury stock. Total authorized common stock is 250,000,000 shares.

Basic earnings (loss) per common share (“EPS”) are computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS are computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period, including potential dilutive securities. When the Convertible Notes are dilutive, interest expense, net of tax, is added back to net income to calculate diluted EPS. A reconciliation of the numerators and denominators of the basic and diluted losses per share computations is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share data)	2022		2021		2022		2021
Net loss (numerator):	$	(7,194)	$	(4,302)	$	(68,782)	$	(35,228)
Loss per share:
Basic and diluted	$	(0.53)	$	(0.59)	$	(5.36)	$	(5.22)
Shares (denominator):
Weighted average common shares outstanding - basic		13,590		7,321		12,836		6,754
Weighted average common shares outstanding - diluted		13,590		7,321		12,836		6,754

The following numbers of potential common shares at the end of each period were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive for the periods presented.


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2022		2021		2022		2021
Convertible Notes		34,983		—		25,221		—
RSUs		1,566		141		1,566		141
SARs		1,422		—		1,422		—
Stock options		—		28		—		28

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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 8.8% and (1.2)% for the three and nine months ended September 30, 2022, respectively and (0.4)% and (0.2)% for the three and nine months ended September 30, 2021.

12.Commitments and Contingencies

Purchase Commitments

As of September 30, 2022, we had outstanding purchase commitments to a number of suppliers totaling $8.7 million related primarily to the operation of drilling rigs. All of these commitments relate to equipment and services currently scheduled for delivery in 2022 and 2023.

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 connection with the issuance of the Convertible Notes on March 18, 2022, we issued to affiliates of MSD Partners, L.P. (the “MSD Investors”) $78.9 million principal amount of Convertible Notes and entered into an Investor’s Rights Agreement permitting MSD Partners to nominate one director to our Board so long as MSD Partners and its affiliates continue to own $25.0 million principal amount of Convertible Notes (the “Sunset Date”). We also entered into an Investor’s Rights Agreement with Glendon Capital Management L.P. (“GCM”) that permits GCM to designate one director on the same terms. In addition, as long as each of such parties continues to have the right to appoint such holder representatives, the two holder representatives will have the right to nominate one additional representative as a director, provided that the third representative must be an independent director unless one of the MSD Partners and the GCM representatives is independent for New York Stock Exchange purposes. The proposed representatives are subject to review by our Nominating and Corporate Governance Committee. Following the Sunset Date for the applicable party, MSD Partners and/or GCM, as applicable, will cause its designee to offer to tender his or her resignation, unless otherwise requested by the Board, and the third representative may be removed by the Board. Two holders representatives of the MSD Investors and GCM were initially nominated and appointed to the Board pursuant to the Investor’s Rights Agreement, and the third representative was appointed in connection with an increase in the number of directors from six to seven members effective July 1, 2022.

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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, 2021, filed with the Securities and Exchange Commission on March 15, 2022 (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 I “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.

As of September 30, 2022, our rig fleet includes 26 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

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end of October 2022 and our 20^th rig contracted and scheduled for reactivation in the fourth quarter of 2022. Additionally, our first 200 to 300 series rig conversion will be completed during the fourth quarter of 2022.

Amendment No. 5 to the Revolving ABL Credit Facility

On September 22, 2022, we amended our Revolving ABL Credit Facility Agreement which included extending the maturity date by two years to September 30, 2025, replacing references to LIBOR interest rates with SOFR interest rates and amending the applicable margin for which interest is calculated as follows:


Tier	Quarterly Average Excess Availability	Applicable Base Rate Margin	Applicable SOFR Margin
1	Greater than $26,666,666	1.50%	2.36%
2	Greater than $13,333,333 but less than or equal to $26,666,666	1.75%	2.61%
3	Less than or equal to $13,333,333	2.00%	2.86%

Certificate of Amendment to the Restated Certificate of Incorporation

On June 8, 2022, we filed a certificate of amendment to our Restated Certificate of Incorporation (the “Charter Amendment”) with the Delaware Secretary of State. The Charter Amendment increased the number of authorized shares of our common stock, par value $0.01 per share from 50 million shares to 250 million shares. The Charter Amendment does not change the number of authorized shares of the Company’s preferred stock or the par value per share of any stock.

Amendment No. 1 to the 2019 Plan

Convertible Notes

On March 18, 2022, we issued $157.5 million aggregate principal amount of convertible secured PIK toggle notes due 2026 (the “Convertible Notes”). Proceeds from the private placement of the Convertible Notes were used to repay all of our outstanding indebtedness under our term loan credit agreement, to repay merger consideration payable with associated accrued interest to prior equity holders of Sidewinder Drilling LLC, and for working capital purposes. The Convertible Notes mature on March 18, 2026. The Convertible Notes have a cash interest rate of the Secured Overnight Financing Rate plus a 10 basis point credit spread, with a floor of 1% (collectively, “SOFR”) plus 12.5%. The Convertible Notes have an initial payment in-kind, or “PIK,” interest rate of SOFR plus 14.0% through September 30, 2022. The PIK interest rate decreases to SOFR plus 9.5% as of September 30, 2022. We have the right at our option, to PIK interest under the Convertible Notes for the entire term of the Convertible Notes. We elected to pay in-kind outstanding interest as of September 30, 2022, resulting in additional $12.7 million principal amount of Convertible Notes being issued as of September 30, 2022, increasing the outstanding principal balance under the Convertible Notes to $170.2 million.

The effective conversion price of the Convertible Notes is $4.51 per share (221.72949 shares of Common Stock per $1,000 principal amount of Convertible Notes). We may issue up to $7.5 million of additional Convertible Notes. We may convert all Convertible Notes (including PIK notes) upon conversion of Convertible Notes in connection with a Qualified Merger Conversion (as defined in the Indenture) and may issue additional shares of common stock to the extent the number of shares issuable upon such conversion would exceed the number of shares of common stock issuable at the otherwise then-current conversion price. In connection with the placement of the Convertible Notes, we issued 2,268,000 shares of our common stock as a structuring fee. The structuring fee shares were issued on March 18, 2022, concurrent with the closing of the private placement of the Convertible Notes. See “Liquidity and Capital Resources – Long-term Debt” in this Management Discussion and Analysis for additional information.

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ATM Distribution Agreement

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.

How We Evaluate our Operations

We regularly use a number of financial and operational measures to analyze and evaluate the performance of our business and compensate our employees, including the following:

●

Safety Performance. Maintaining a strong safety record is a critical component of our business strategy. We measure safety by tracking the total recordable incident rate for our operations. In addition, we closely monitor and measure compliance with our safety policies and procedures, including “near miss” reports and job safety analysis compliance. We believe our Risk-Based HSE management system provides the required control, yet needed flexibility, to conduct all activities safely, efficiently and appropriately.

●

Utilization. Rig utilization measures the percentage of time that our rigs are earning revenue under a contract during a particular period. We measure utilization by dividing the total number of Operating Days (defined below) for a rig by the total number of days the rig is available for operation in the applicable calendar period. A rig is available for operation commencing on the earlier of the date it spuds its initial well following construction or when it has been completed and is actively marketed. “Operating Days” represent the total number of days a rig is earning revenue under a contract, beginning when the rig spuds its initial well under the contract and ending with the completion of the rig’s demobilization.

●

Revenue Per Day. Revenue per day measures the amount of revenue that an operating rig earns on a daily basis during a particular period. We calculate revenue per day by dividing total contract drilling revenue earned during the applicable period by the number of Operating Days in the period. Revenues attributable to costs reimbursed by customers are excluded from this measure.

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●

Operating Cost Per Day. Operating cost per day measures the operating costs incurred on a daily basis during a particular period. We calculate operating cost per day by dividing total operating costs during the applicable period by the number of Operating Days in the period. Operating costs attributable to costs reimbursed by customers and rig construction costs are excluded from this measure.

●

Operating Efficiency and Uptime. Maintaining our rigs’ operational efficiency is a critical component of our business strategy. We measure our operating efficiency by tracking each drilling rig’s unscheduled downtime on a daily, monthly, quarterly and annual basis.

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Results of Operations

The following summarizes our financial and operating data for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per share data)	2022			2021			2022			2021
Revenues	$	49,147		$	24,035		$	126,451		$	59,394
Costs and expenses
Operating costs		31,379			20,123			87,448			51,704
Selling, general and administrative		7,007			4,068			17,096			11,829
Depreciation and amortization		10,120			9,739			29,719			29,244
Asset impairment, net		—			482			—			775
Loss (gain) on disposition of assets, net		433			222			(665)			(182)
Total cost and expenses		48,939			34,634			133,598			93,370
Operating income (loss)		208			(10,599)			(7,147)			(33,976)
Interest expense		(8,098)			(3,812)			(21,005)			(11,294)
Gain (loss) on extinguishment of debt		—			10,128			(46,347)			10,128
Change in fair value of embedded derivative liability		—			—			(4,265)			—
Realized gain on extinguishment of derivative		—			—			10,765			—
Loss before income taxes		(7,890)			(4,283)			(67,999)			(35,142)
Income tax (benefit) expense		(696)			19			783			86
Net loss	$	(7,194)		$	(4,302)		$	(68,782)		$	(35,228)

Other financial and operating data
Number of marketed rigs (end of period) (1)		26			24			26			24
Rig operating days (2)		1,601			1,268			4,604			3,273
Average number of operating rigs (3)		17.4			13.8			16.9			12.0
Rig utilization (4)		70	%		58	%		69	%		50	%
Average revenue per operating day (5)	$	28,646		$	17,141		$	25,216		$	16,459
Average cost per operating day (6)	$	17,305		$	13,685		$	16,452		$	13,285
Average rig margin per operating day	$	11,341		$	3,456		$	8,764		$	3,174

(1)Marketed rigs exclude 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 out-of-pocket costs paid by customers of $3.3 million and $2.3 million during the three months ended September 30, 2022 and 2021, respectively, and $10.3 million and $5.5 million during the nine months ended September 30, 2022 and 2021, respectively.

(6)Average cost per operating day represents operating costs incurred during the period divided by rig operating days in the period. The following costs are excluded in calculating average cost per operating day: (i) out-of-pocket costs paid by customers of $3.3 million and $2.3 million during the three months ended September 30, 2022 and 2021, respectively, and $10.3 million and $5.5 million during the nine months ended September 30, 2022 and 2021, respectively; (ii) overhead costs of $0.4 million and $0.4 million during the three months ended September 30, 2022 and 2021, respectively, and $1.4 million and $1.2 million during the nine months ended September 30, 2022 and 2021,

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respectively; and (iii) rig reactivation costs, inclusive of new crew training costs, of zero and $0.1 million during the three months ended September 30, 2022 and 2021, respectively, and zero and $1.4 million during the nine months ended September 30, 2022 and 2021, respectively.

Three Months Ended September 30, 2022 Compared to the Three Months Ended September 30, 2021

Revenues

Revenues for the three months ended September 30, 2022 were $49.1 million, representing a 104.5% increase as compared to revenues of $24.0 million for the three months ended September 30, 2021. This increase was primarily attributable to an increase in operating days resulting from the reactivation of rigs in late 2021 and first quarter of 2022 (such increase in days noted below), as well as increases in contractual dayrates driven by improving demand for our contract drilling services. Revenue per day increased by 67.1% to $28,646 during the three months ended September 30, 2022, as compared to revenue per day of $17,141 for the three months ended September 30, 2021.

Operating Costs

Operating costs for the three months ended September 30, 2022 were $31.4 million, representing a 55.9% increase as compared to operating costs of $20.1 million for the three months ended September 30, 2021. This increase was primarily attributable to an increase in operating days to 1,601 days as compared to 1,268 days in the prior year comparable quarter as well as increases in daily operating costs. Operating costs per day increased to $17,305 during the three months ended September 30, 2022, representing a 26.5% increase compared to cost per operating day of $13,685 for the three months ended September 30, 2021. This increase in cost per operating day was primarily attributable to higher personnel costs driven by a much tighter labor market compared to the prior period in 2021 as well as inflationary pressures.

Selling, General and Administrative

Selling, general and administrative expenses for the three months ended September 30, 2022 were $7.0 million, representing a 72.2% increase as compared to selling, general and administrative expense of $4.1 million for the three months ended September 30, 2021. This increase in selling, general and administrative expenses as compared to the prior year comparable quarter primarily relates to higher incentive compensation accruals and higher stock-based compensation expense associated primarily with awards granted in the second quarter of 2022.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended September 30, 2022 was $10.1 million, representing a 3.9% increase compared to depreciation and amortization expense of $9.7 million for the three months ended September 30, 2021. The increase in depreciation and amortization expense is primarily the result of asset additions related to reactivated rigs in the fourth quarter of 2021 and throughout 2022.

Loss on Disposition of Assets, net

A loss on the disposition of assets totaling $0.4 million was recorded for the three months ended September 30, 2022 compared to a loss on the disposition of assets totaling $0.2 million in the prior year comparable quarter. In the current and prior year quarter, the loss related to the sale of miscellaneous drilling equipment.

Interest Expense

Interest expense was $8.1 million for the three months ended September 30, 2022 and $3.8 million for the three months ended September 30, 2021. The increase in the current quarter interest expense primarily relates to higher interest and principal debt associated with the Convertible Notes issued on March 18, 2022, as well as non-cash amortization of debt discount and debt issuance costs associated with the Convertible Notes.

Gain on Extinguishment of Debt

A gain on extinguishment of debt totaling $10.1 million was recorded for the three months ended September 30, 2021 related to the forgiveness of our PPP Loan.

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Income Tax (Benefit) Expense

Income tax benefit recorded for the three months ended September 30, 2022 amounted to $0.7 million as compared to income tax expense of $19 thousand for the three months ended September 30, 2021. Our effective tax rates for the three months ended September 30, 2022 and 2021 were 8.8% and (0.4)%, respectively.

Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021

Revenues

Revenues for the nine months ended September 30, 2022 were $126.5 million, representing a 112.9% increase as compared to revenues of $59.4 million for the nine months ended September 30, 2021. This increase was primarily attributable to an increase in operating days resulting from the reactivation of rigs in late 2021 and 2022 (such increase in days noted below), as well as increases in contractual dayrates driven by improving demand for our contract drilling services. Revenue per day increased by 53.2% to $25,216 during the nine months ended September 30, 2022, as compared to revenue per day of $16,459 during the nine months ended September 30, 2021.

Operating Costs

Operating costs for the nine months ended September 30, 2022 were $87.4 million, representing a 69.1% increase as compared to operating costs of $51.7 million for the nine months ended September 30, 2021. This increase was primarily attributable to an increase in operating days to 4,604 days for the nine months ended September 30, 2022 as compared to 3,273 days in the prior year comparable period as well as higher per day operating expenses. Operating costs per day increased to $16,452 during the nine months ended September 30, 2022, representing a 23.8% increase compared to cost per operating day of $13,285 for the nine months ended September 30, 2021. This increase in cost per operating day was primarily attributable to higher personnel costs driven by a much tighter labor market compared to the prior period in 2021, higher incentive compensation accruals and inflationary pressures.

Selling, General and Administrative

Selling, general and administrative expenses for the nine months ended September 30, 2022 were $17.1 million, representing a 44.5% increase as compared to selling, general and administrative expense of $11.8 million for the nine months ended September 30, 2021. This increase in selling, general and administrative expenses as compared to the prior year comparable period primarily relates to the reinstatement of pre-COVID salaries and benefits, higher incentive compensation accruals, and higher stock-based compensation expense associated primarily with awards granted in the second quarter of 2022.

Depreciation and Amortization

Depreciation and amortization expense for the nine months ended September 30, 2022 was $29.7 million, representing a 1.6% increase compared to depreciation and amortization expense of $29.2 million for the nine months ended September 30, 2021. The increase in depreciation and amortization expense is primarily the result of asset additions related to reactivated rigs in the fourth quarter of 2021 and throughout 2022.

Gain on Disposition of Assets, net

A gain on the disposition of assets totaling $0.7 million was recorded for the nine months ended September 30, 2022 compared to a gain on the disposition of assets totaling $0.2 million in the prior year comparable period. In the current and prior year periods, the gains related to the sale of miscellaneous drilling equipment.

Interest Expense

Interest expense was $21.0 million for the nine months ended September 30, 2022 and $11.3 million for the nine months ended September 30, 2021. The increase in the current period primarily relates to higher interest rates and principal debt associated with the Convertible Notes issued on March 18, 2022, as well as non-cash amortization of debt discount and deferred financing costs associated with the Convertible Notes.

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(Loss) Gain on Extinguishment of Debt

Loss on extinguishment of debt was $46.3 million for the nine months ended September 30, 2022. The debt terms of the Convertible Notes, of which affiliates of our prior Term Loan Facility are 50.1% noteholders, were determined to be substantially different terms from the Term Loan Facility and therefore required to be accounted for as an extinguishment of the Term Loan Facility. Accordingly, we recognized a loss on the extinguishment of debt of approximately $46.3 million during the nine months ended September 30, 2022. This is a non-cash expense primarily associated with the recognition of unamortized debt issuance costs, non-cash fees settled in shares to the affiliates of our prior Term Loan facility and the fair value of the embedded derivatives attributable to the affiliates of our prior Term loan facility. A gain on extinguishment of debt totaling $10.1 million was recorded for the nine months ended September 30, 2021 related to the forgiveness of our PPP Loan.

Change in Fair Value of Embedded Derivative Liability

We recognized a loss of $4.3 million for the nine months ended September 30, 2022 related to the change in fair value of the embedded derivative liability between the issuance date of the Convertible Notes and June 8, 2022. See “Embedded Derivative Liability” in Liquidity and Capital Resources.

Realized Gain on Extinguishment of Derivative

We recognized a gain of $10.8 million for the nine months ended September 30, 2022 related to the extinguishment of the variable component of the PIK interest rate feature of the derivative liability.

Income Tax Expense

Income tax expense recorded for the nine months ended September 30, 2022 amounted to $0.8 million as compared to income tax expense of $86 thousand for the nine months ended September 30, 2021. Our effective tax rates for the nine months ended September 30, 2022 and 2021 were (1.2)% and (0.2)%, respectively.

Liquidity and Capital Resources

Our liquidity at September 30, 2022 was $27.5 million, consisting of cash on hand of $7.6 million and $19.9 million of availability under our $40.0 million Revolving ABL Credit Facility, based on a borrowing base of $27.7 million.

During the first nine months of 2022, cash flow from operations was positive. On January 1, 2022, we elected to PIK the $3.2 million interest payment due under our Term Loan Facility. In March 2022, we issued the Convertible Notes, which permit us to PIK interest, at our election, for the entire term of the Convertible Notes. On September 29, 2022, we elected to PIK the $12.7 million interest payment due under our Convertible Notes. During the first quarter of 2022, we continued our “at-the-market” offering process, raising an additional $3.6 million of gross proceeds and issuing an additional 1,061,853 shares. We did not participate in this program in the second or third quarter of 2022.

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.

We currently believe that the actions we have taken to date and our existing sources of liquidity are sufficient to fund our operations for at least the next twelve months.

Net Cash Provided by (Used In) Operating Activities

Cash provided by operating activities was $14.2 million for the nine months ended September 30, 2022 compared to cash used in operating activities of $7.7 million for the nine months ended September 30, 2021. 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, gains or losses on extinguishment of debt, non-cash interest expense, non-cash compensation, deferred taxes, and amortization of debt issuance costs and debt discount. Additionally, changes in working capital items such as accounts receivable, inventory, prepaid expense and accounts payable can significantly affect operating cash flows. Cash flows from operating activities during the first nine months of 2022 were higher as a result of an increase in net loss of $33.6 million, adjusted for non-

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cash items, of $93.0 million for the nine months ended September 30, 2022, which included $46.3 million of non-cash extinguishment of debt and $10.8 million gain on extinguishment of debt, compared to $25.2 million for non-cash items for the nine months ended September 30, 2021. Working capital changes decreased cash flows from operating activities by $10.0 million for the nine months ended September 30, 2022 and increased cash flows from operating activities by $2.3 million for the nine months ended September 30, 2021.

Net Cash Used In Investing Activities

Cash used in investing activities was $19.5 million for the nine months ended September 30, 2022 and $7.8 million for the nine months ended September 30, 2021. During the first nine months of 2022, cash payments of $22.3 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $2.7 million. During the 2021 period, cash payments of $9.7 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $1.8 million.

Net Cash Provided by Financing Activities

Cash provided by financing activities was $8.8 million for the nine months ended September 30, 2022 and $7.6 million for the nine months ended September 30, 2021. During the first nine months of 2022, we received proceeds from borrowings under our new Convertible Notes of $157.5 million, proceeds from borrowings under our revolving credit facility of $1.6 million, and proceeds from the issuance of common stock through our ATM transaction, net of issuance costs of $3.0 million. These proceeds were offset by repayment of our term loan of $139.1 million, payment of our merger consideration of $2.9 million, issuance costs paid related to our Convertible Notes of $7.2 million, financing costs paid related to our Revolving ABL Credit Facility of $0.3 million, repayments under our revolving credit facility of $28 thousand, restricted stock units withheld for taxes paid of $32 thousand and payments for finance lease obligations of $3.8 million. During the first nine months of 2021, we received proceeds from borrowings under our revolving credit facility of $4.3 million, proceeds from the issuance of common stock through our ATM transaction, net of issuance costs of $3.9 million and proceeds from the issuance of common stock under the purchase agreement of $2.1 million. These proceeds were offset by repayments under our revolving credit facility of $17 thousand, restricted stock units withheld for taxes paid of $11 thousand and payments for finance lease obligations of $2.6 million.

Long-term Debt

On March 18, 2022, we entered into a subscription agreement with affiliates of MSD Partners, L.P. and an affiliate of Glendon Capital Management L.P. (the “Subscription Agreement”) for the placement of $157.5 million aggregate principal amount of convertible secured PIK toggle notes due 2026 (the “Convertible Notes”). The Convertible Notes were issued pursuant to an Indenture, dated as of March 18, 2022 (as amended in the Supplemental Indenture, dated as of July 21, 2022, the “Indenture”). The obligations under the Convertible Notes are secured by a first priority lien on collateral (the “Note Priority Collateral”) other than accounts receivable, deposit accounts and other related collateral pledged as first priority collateral (“Priority Collateral”) under the Revolving ABL Credit Facility (defined below). Proceeds from the private placement of the Convertible Notes were used to repay all of our outstanding indebtedness under our term loan credit agreement, to repay obligations to prior equity holders of Sidewinder Drilling LLC, and for working capital purposes. In connection with the placement of the Convertible Notes, we issued 2,268,000 shares of our common stock as a structuring fee. The structuring fee shares were issued on March 18, 2022, concurrent with the closing of the private placement of the Convertible Notes. The Convertible Notes mature on March 18, 2026.

The Convertible Notes have a cash interest rate of the Secured Overnight Financing Rate plus a 10 basis point credit spread, with a floor of 1% (collectively, “SOFR”) plus 12.5%. The Convertible Notes have an initial payment in-kind, or “PIK,” interest rate of SOFR plus 14.0% through September 30, 2022. The PIK interest rate decreased to SOFR plus 9.5% as of September 30, 2022. We have the right, at our option, to PIK interest under the Convertible Notes for the entire term of the Convertible Notes. We elected to pay in-kind outstanding interest as of September 30, 2022, resulting in an additional $12.7 million principal amount of Convertible Notes being issued as of September 30, 2022.

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The following changes to the terms of the Convertible Notes and Indenture, and to the shares issuable upon conversion of the Convertible Notes, became effective based on approvals of matters by our stockholders at our 2022 Annual Meeting of Stockholders held on June 8, 2022 (constituting “Shareholder Approval” as defined in the Indenture): (a) the Convertible Notes initial PIK interest rate of SOFR plus 14.0% decreased to SOFR plus 9.5% as of September 30, 2022; (b) the initial option to pay interest in additional PIK notes for a period of 18 months was increased to 48 months (the entire term of the Convertible Notes); (c) the effective conversion price of $5.07 per share (197.23866 shares of common stock per $1,000 principal amount of Convertible Notes) was decreased to $4.51 per share (221.72949 shares of Common Stock per $1,000 principal amount of Convertible Notes); (d) the issuance by us of up to $7.5 million of additional Convertible Notes, if and when issued by us; and (e) the issuance of shares of common stock upon conversion of Convertible Notes in connection with a Qualified Merger Conversion (as defined in the Indenture) to the extent the number of shares issuable upon such conversion would exceed the number of shares of common stock issuable at the otherwise then-current conversion rate.

Each noteholder has a right to convert our Convertible Notes for shares of ICD common stock at any time after issuance through maturity. The conversion price is $4.51 per share. Interest on the Convertible Notes is due on March 31 and September 30 each year, beginning on September 30, 2022. Under the Indenture, a holder is not entitled to receive shares of our common stock upon conversion of any Convertible Notes to the extent to which the aggregate number of shares of common stock that may be acquired by such beneficial owner upon conversion of Convertible Notes, when added to the aggregate number of shares of common stock deemed beneficially owned, directly or indirectly, by such beneficial owner and each person subject to aggregation of common stock with such beneficial owner under Section 13 or Section 16 of the Securities Exchange Act of 1934 (the “Exchange Act”) and the rules promulgated thereunder at such time (an “Aggregated Person”) (other than by virtue of the ownership of securities or rights to acquire securities that have limitations on such beneficial owner’s or such person’s right to convert, exercise or purchase similar to this limitation), as determined pursuant to the rules and regulations promulgated under Section 13(d) of the Exchange Act, would exceed 9.9% (the “Restricted Ownership Percentage”) of the total issued and outstanding shares of common stock (the “Section 16 Conversion Blocker”); provided that any holder has the right to elect for the Restricted Ownership Percentage to be 19.9% with respect to such note holder, (x) at any time, in which case, such election will become effective sixty-one days following written notice thereof to us or (y) in the case of a holder acquiring Convertible Notes on the Issue Date, in such note holder’s Subscription Agreement. In lieu of any shares of common stock not delivered to a converting holder by operation of the Restricted Ownership Percentage limitation, we will deliver to such note holder Pre-Funded Warrants in respect of any equal number of shares of common stock. Such Pre-Funded Warrants will contain substantially similar Restricted Ownership Percentage terms.

The Indenture includes a mandatory redemption offer requirement (the “Mandatory Offer Requirement”). Beginning June 30, 2023, we are obligated to offer to redeem $5.0 million of Convertible Notes on a quarterly basis through December 31, 2023, and $3.5 million of Convertible Notes on a quarterly basis through March 31, 2025. The mandatory offer price is an amount in cash equal to the principal amount of such Convertible Note plus accrued and unpaid interest on such Convertible Note. The Indenture also includes an optional redemption right (the “Company Redemption Right”) that permits us to redeem on one or more occasions during the period beginning September 19, 2022 and ending September 19, 2023, up to $25 million aggregate principal amount of notes at redemption price of 104% of par, plus accrued and unpaid interest. The Mandatory Offer Requirement is reduced by the amount of any Convertible Notes repurchased pursuant to our Redemption Right.

The Indenture contains financial covenants, including a liquidity covenant of $10.0 million beginning September 30, 2022; a springing fixed charge coverage ratio covenant of 1.00 to 1.00 that is tested when availability under the Revolving ABL Credit Facility (defined below) is below $5.0 million at any time that the Convertible Notes are outstanding; and capital expenditure limits of $25.0 million during 2022 and $15.0 million during 2023 and 2024, subject to adjustment upward by $500,000 per year for each rig above 17 that operates during each year, as well as an amount equal to capital expenditures specifically approved by both the required holder and our board of directors. In addition, capital expenditures are excluded from this covenant (a) if funded from equity proceeds, (b) if relating to the reactivation of a rig so long as (i) we have a signed contract with a customer with respect to each such rig of at least one (1) year duration providing for early termination payments consistent with past practice equal to at least the expected margin on the contract, (ii) the expected margin on such rig contract will be equal to or exceed such reactivation capital expenditures, and (iii) the reactivation capital expenditures, rig contract and the expected margin calculation are approved by our board of directors or (c) relate to other capital expenditures specifically approved by written or electronic consent by both (i) the required holders (which approval may, for the avoidance of doubt, be provided by the required holders in their sole discretion for an amount of capital expenditures to be committed or made by the Company

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or a subsidiary of the Company within ninety (90) days after the date of such consent) and (ii) the Board of Directors of the Company. The Indenture 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 Indenture also provides for customary events of default, including breaches of material covenants, defaults under the Revolving ABL Credit Facility or other material agreements for indebtedness, and a change of control. Beginning 18 months prior to maturity, we may elect to suspend the Convertible Debt covenant requirements by depositing cash and short-term treasuries with the Trustee in an amount equal to all amounts due to the noteholders including principal, premium (if any) and interest. We are in compliance with our covenants as of September 30, 2022.

We early adopted ASU 2020-06 as of January 1, 2022 and concluded the Convertible Notes are accounted for as debt, with embedded features. As a consequence of the embedded features, the Convertible Notes gave rise to a derivative liability. See Embedded Derivative Liability. The debt terms of the Convertible Notes, of which affiliates of our prior Term Loan Facility are 50.1% noteholders, were determined to be substantially different terms from the Term Loan Facility and therefore required to be accounted for as an extinguishment of the Term Loan Facility. Accordingly, we recognized a loss on the extinguishment of debt of approximately $46.3 million during the quarter ended March 31, 2022. This is a non-cash expense primarily associated with the recognition of unamortized debt issuance costs, non-cash fees settled in shares to the affiliates of our prior Term Loan Facility and the fair value of the embedded derivatives. We recorded a derivative liability of $75.7 million at the time of the issuance and a debt discount of $37.6 million. Issuance costs consisting of cash fees of $7.1 million and a non-cash structuring fee settled in shares of $2.3 million along with the debt discount are recorded as a direct deduction from the Convertible Notes in the consolidated balance sheet. The debt discount is amortized to interest expense using the effective interest rate method over the term of the Convertible

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Notes. The effective interest rate for the Convertible Notes as of September 30, 2022 is 24.5%. For the three and nine months ended September 30, 2022, the contractual interest expense was $5.8 million and $12.7 million, respectively; the amortization of the debt discount was $1.4 million and $3.0 million, respectively; and the amortization of the issuance costs was $0.6 million and $1.3 million, respectively.

Embedded Derivative Liability

Term Loan Facility

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 had a maturity date of October 1, 2023, but were repaid in their entirety on March 18, 2022 with proceeds from the issuance of the Convertible Notes.

Interest under the Term Loan Facility was 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%.

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balance accordingly. In September 2021, we amended our Term Loan Credit Agreement and elected to pay in-kind the $3.1 million October 1, 2021 interest payment which reduced the amount of the Term Loan Accordion by the PIK amount. On December 30, 2021, we amended our Term Loan Credit Agreement and elected to pay in-kind the $3.2 million January 3, 2022 interest payment which reduced the Term Loan Accordion by a corresponding amount.

Revolving ABL Credit Facility

On October 1, 2018, we entered into a $40.0 million revolving Credit Agreement (the “Revolving 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 Revolving 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 Revolving ABL Credit Facility had a maturity date of October 1, 2023.

The Revolving 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 Revolving 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 Revolving 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 September 30, 2022.


Tier	Quarterly Average Excess Availability	Applicable Base Rate Margin	Applicable SOFR Margin
1	Greater than $26,666,666	1.50%	2.36%
2	Greater than $13,333,333 but less than or equal to $26,666,666	1.75%	2.61%
3	Less than or equal to $13,333,333	2.00%	2.86%

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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

As described in Note 8, we determined that certain features under our Convertible Notes required bifurcation from the debt host agreement in accordance with ASC 815 as of March 18, 2022. Accordingly, we recognized a derivative liability at fair value for this instrument in our consolidated balance sheet and adjusted the carrying value of the liability to fair value at each reporting period until the features underlying the instrument were exercised, redeemed, cancelled, or expired. The changes in fair value were assessed quarterly and recorded in our consolidated statement of operations. After the approval of certain matters by our stockholders at our 2022 Annual Meeting of Stockholders held June 8, 2022, certain features under our Convertible Notes were modified and no longer met the criteria to bifurcate from the host debt agreement. Accordingly, through June 8, 2022, we recognized the change in fair value of the embedded derivative, $4.3 million, and extinguished the fair value of the conversion rate feature ($69.2 million) of the derivative liability on our balance sheet to stockholders’ equity, as the conversion rate feature now met the criteria to be classified in equity, and recognized a gain on extinguishment of derivative liability on our consolidated statement of operations of $10.8 million associated with the PIK interest rate feature of the derivative liability. See Note 5 “Financial Instruments and Fair Value” for additional information.

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. There are no such indicators of impairment this period.

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, 2021.

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.

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.

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Interest Rate Risk

Total long-term debt at September 30, 2022 included $178.0 million of floating-rate debt attributed to borrowings at an average interest rate of 14.70%. As a result, our annual interest cost in 2022 will fluctuate based on short-term interest rates. The impact on annual cash flow of a 10% change in the floating-rate (approximately 16.17%) would be approximately $2.6 million annually based on the floating-rate debt and other obligations outstanding at September 30, 2022; 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, Item 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 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

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pandemic across industries and geographic regions, we cannot predict the magnitude it may have on our lenders’ ability to meet their commitments to us, and any failure to do so would have a material adverse effect on our liquidity and financial position.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2022 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.

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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, 2021. 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.

The conversion of the Convertible Notes issued on March 18, 2022 into shares of our common stock would result in significant dilution to our existing stockholders.

On March 18, 2022, we issued $157.5 million principal amount of Convertible Notes. We have the ability to issue up to an additional $7.5 million principal amount of Convertible Notes to holders willing to purchase such additional Convertible Notes. The Convertible Notes are convertible into shares of our common stock at the option of the holders at any time during the term of the Convertible Notes. The effective conversion price is $4.51 per share. In addition, we have the right to PIK interest for the entire term of the Convertible Notes. The election by us to PIK interest will increase outstanding principal balance under the Convertible Notes and thus the number of shares of common stock issuable upon conversion of the Convertible Notes. We elected to pay in-kind outstanding interest as of September 30, 2022, resulting in an additional $12.7 million principal amount of Convertible Notes being issued as of September 30, 2022.The conversion of the Convertible Notes would result in substantial dilution in the percentage of the outstanding common stock owned by our existing stockholders.

The market price of our common stock could decline as a result of the large number of shares that will become eligible for sale following conversion of the Convertible Notes.

A substantial number of additional shares of our common stock would be eligible for resale in the public market following conversion of the Convertible Notes. Current holders of our Convertible Notes may wish to dispose of some or all of their shares of common stock acquired upon conversion of the Convertible Notes. Sales of substantial numbers of shares of both the newly issued and the existing shares of our common stock in the public market following conversion of the Convertible Notes could adversely affect the market price of our shares of common stock

Affiliates of MSD Partners, L.P. and Glendon Capital Management, L.P. (the “Primary Noteholders”) collectively own a large percentage of our common stock as a result of the transactions relating to the issuance of the Convertible Notes, and have rights to acquire additional shares upon conversion of Convertible Notes held by them. The Primary Noteholders also have rights to nominate up to an aggregate of three individuals to serve on our Board of Directors. As a result, the Primary Noteholders collectively will have significant influence over the outcome of corporate actions requiring stockholder approval, and the priorities of the Primary Noteholders for our business may be different from our other stockholders.

The Primary Noteholders collectively own approximately 19% of the outstanding shares of our common stock, and collectively beneficially own approximately 28% of the outstanding shares of our common stock (after giving effect to permitted conversions of the Convertible Notes based on the current beneficial ownership limitations after giving effect to such conversions, including a 9.9% limitation on Glendon Capital Management, L.P. and 19.9% limitation on MSD Partners, L.P.). Accordingly, the MSD Parties acting alone, or the Primary Noteholders voting together, while not a group, may be able to significantly influence the outcome of many corporate transactions or other matters submitted to our stockholders for approval, including any merger, consolidation or sale of all or substantially all of our assets or any

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other significant corporate transaction, such that the Primary Noteholders collectively could potentially delay or prevent a change of control of the Company, even if such a change of control would benefit our other stockholders. The interests of the Primary Noteholders may differ from the interests of other stockholders.

Inflationary and supply chain pressures may decrease our operating margins and increase working capital investments required to operate our business.

As a result of improved U.S. land rig activity driven by improving market conditions, demand and competition for rig personnel in our operating regions has increased significantly, driven not only by competition between land drilling companies but also other industries where economic activity has improved. This has resulted in meaningful increases in field-level pay over the past twelve months and the costs to recruit and train new employees. We intend to reactivate additional rigs during the remainder of 2022, which will require the hiring of additional personnel. Inflationary factors have also increased other costs to reactivate and to operate our drilling rigs. Although our term drilling contracts typically allow us to pass-through to our customers labor costs increases and cost increases for other items (based upon changes to the applicable oilfield price index for such other items) through adjustment to contractual dayrates, the majority of our current contracts are short-term in nature, which requires us to recoup labor and other price increases through increased dayrates upon repricing of each short-term contract upon its expiration. If we are unable to recoup cost increases through adjustment to term contract dayrates or successful renegotiation of short-term contract dayrates, our daily operating margins will fall, which could materially adversely affect our operating results and financial condition.

In addition, as worldwide economic activity has improved following emergence from the COVID-19 pandemic, supply chain pressures and bottlenecks have developed (including due to both COVID-19 and the war in the Ukraine) and could potentially develop which could reduce the availability of equipment, supplies and other products needed to operate our business. This may cause us to increase investments in critical spare inventory and capital spare items to compensate for increased delivery lead times or potential unavailability of items. If we are required to invest substantial additional amounts to increase inventory levels of critical spare inventory or capital items, it will reduce our financial resources available to invest in rig reactivations which could have a material adverse effect on our future cash flows and ability to pursue plans to reactivate additional rigs.

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.

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ITEM 6. EXHIBITS


Exhibit Number		Description

10.1		First Supplemental Indenture dated July 21, 2022, by and among the Company, the Guarantor thereto, and U.S Bank Trust Company National Association (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on July 27, 2022)

10.2*		Fourth Amendment, dated as of July 31, 2022, to Credit Agreement, dated as of October 1, 2018, by and among Independence Contract Drilling, Inc., ICD Operating LLC, the Lenders party thereto and U.S. National Bank Association as Agent

10.3		Fifth Amendment, dated as of September 22, 2022, to Credit Agreement, dated as of October 1, 2018, by and among Independence Contract Drilling, Inc., ICD Operating LLC, the Lenders party thereto and U.S. National Bank Association as Agent (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on September 26, 2022)

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

†	Indicates a management contract or compensatory plan or arrangement filed pursuant to Item 601(b)(10)(iii) of Regulation S-K

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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: November 1, 2022

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Independence Contract Drilling (ICDIQ) 10-Q2022 Q3 Quarterly report

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