Independence Contract Drilling 10Q 2023 Q3 Quarterly report

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2023

☐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 ☒

14,084,850 shares of the registrant’s Common Stock were outstanding as of October 27, 2023.

Table of Contents

INDEPENDENCE CONTRACT DRILLING, INC.

Index to Form 10-Q

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (Unaudited)	4

Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022 (Unaudited)	5

Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022 (Unaudited)	6

Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (Unaudited)	7

Notes to Consolidated Financial Statements (Unaudited)	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3. Quantitative and Qualitative Disclosures About Market Risk	38

Item 4. Controls and Procedures	39

Part II. OTHER INFORMATION

Item 1. Legal Proceedings	40

Item 1A. Risk Factors	40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3. Defaults Upon Senior Securities	40

Item 4. Mine Safety Disclosures	40

Item 5. Other Information	40

Item 6. Exhibits	41

Signatures	42

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Various statements contained in this Quarterly Report on Form 10-Q, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include projections and estimates concerning the timing and success of specific projects and our future revenues, income and capital spending. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “plan,” “goal,” “will” or other words that convey the uncertainty of future events or outcomes. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, contingencies and uncertainties include, but are not limited to, the following:

●

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;

●

restrictive covenants under our debt agreements limiting our ability to conduct our operations;

●

inability to obtain consents from the holders of our convertible notes necessary to maintain operations of our drilling rigs;

●

increased regulation of drilling in unconventional formations;

●

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

●

risks associated with a global pandemic that would cause a reduction in economic activity or reduction in oil and natural gas demand or prices;

●

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 and cybersecurity risks.

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, 2022. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Independence Contract Drilling, Inc.

Consolidated Balance Sheets

(Unaudited)

(in thousands, except par value and share amounts)


	September 30,		December 31,
	2023		2022
Assets
Cash and cash equivalents	$	6,044	$	5,326
Accounts receivable		26,874		39,775
Inventories		1,877		1,508
Assets held for sale		—		325
Prepaid expenses and other current assets		1,854		4,736
Total current assets		36,649		51,670
Property, plant and equipment, net		366,263		376,084
Other long-term assets, net		3,199		1,960
Total assets	$	406,111	$	429,714
Liabilities and Stockholders’ Equity
Liabilities
Current portion of long-term debt	$	1,405	$	2,485
Accounts payable		17,275		31,946
Accrued liabilities		12,128		17,608
Total current liabilities		30,808		52,039
Long-term debt, net		156,336		143,223
Deferred income taxes, net		10,869		12,266
Other long-term liabilities		1,642		7,474
Total liabilities		199,655		215,002
Commitments and contingencies (Note 12)
Stockholders’ equity
Common stock, $0.01 par value, 250,000,000 shares authorized; 14,169,942 and 13,698,851 shares issued, respectively, and 14,084,850 and 13,613,759 shares outstanding, respectively		141		136
Additional paid-in capital		621,092		617,606
Accumulated deficit		(410,844)		(399,097)
Treasury stock, at cost, 85,092 shares and 85,092 shares, respectively		(3,933)		(3,933)
Total stockholders’ equity		206,456		214,712
Total liabilities and stockholders’ equity	$	406,111	$	429,714

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

Table of Contents

Independence Contract Drilling, Inc.

Consolidated Statements of Operations

(Unaudited)

(in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues	$	44,164	$	49,147	$	164,276	$	126,451
Costs and expenses
Operating costs		27,494		31,379		98,781		87,448
Selling, general and administrative		6,865		7,007		18,816		17,096
Depreciation and amortization		10,229		10,120		32,488		29,719
Asset impairment, net		250		—		250		—
(Gain) loss on disposition of assets, net		(1,454)		433		539		(665)
Total costs and expenses		43,384		48,939		150,874		133,598
Operating income (loss)		780		208		13,402		(7,147)
Interest expense		(9,222)		(8,098)		(26,192)		(21,005)
Loss on extinguishment of debt		—		—		—		(46,347)
Change in fair value of embedded derivative liability		—		—		—		(4,265)
Realized gain on extinguishment of derivative		—		—		—		10,765
Loss before income taxes		(8,442)		(7,890)		(12,790)		(67,999)
Income tax (benefit) expense		(844)		(696)		(1,044)		783
Net loss	$	(7,598)	$	(7,194)	$	(11,746)	$	(68,782)
Loss per share:
Basic and diluted	$	(0.54)	$	(0.53)	$	(0.84)		(5.36)
Weighted average number of common shares outstanding:
Basic and diluted		14,071		13,590		13,992		12,836

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

Table of Contents

Independence Contract Drilling, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(in thousands, except share amounts)


				Additional						Total
	Common Stock			Paid-in		Accumulated		Treasury		Stockholders'
	Shares	Amount		Capital		Deficit		Stock		Equity
Balances at December 31, 2022	13,613,759	$	136	$	617,606	$	(399,097)	$	(3,933)	$	214,712
RSUs vested, net of shares withheld for taxes	448,635		5		(390)		—		—		(385)
Issuance of common stock through at-the-market facility, net of offering costs	—		—		(34)		—		—		(34)
Stock-based compensation	—		—		1,374		—		—		1,374
Net income	—		—		—		12		—		12
Balances at March 31, 2023	14,062,394	$	141	$	618,556	$	(399,085)	$	(3,933)	$	215,679
RSUs vested, net of shares withheld for taxes	3,333		—		(4)		—		—		(4)
Stock-based compensation	—		—		1,255		—		—		1,255
Net loss	—		—		—		(4,161)		—		(4,161)
Balances at June 30, 2023	14,065,727	$	141	$	619,807	$	(403,246)	$	(3,933)	$	212,769
RSUs vested, net of shares withheld for taxes	19,123		—		—		—		—		—
Stock-based compensation	—		—		1,285		—		—		1,285
Net loss	—		—		—		(7,598)		—		(7,598)
Balances at September 30, 2023	14,084,850	$	141	$	621,092	$	(410,844)	$	(3,933)	$	206,456


				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

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

Table of Contents

Independence Contract Drilling, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities
Net loss	$	(11,746)	$	(68,782)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		32,488		29,719
Asset impairment, net		250		—
Stock-based compensation		4,639		2,976
Loss (gain) on disposition of assets, net		539		(665)
Non-cash interest expense		18,202		15,859
Loss on extinguishment of debt		—		46,347
Amortization of deferred financing costs		83		320
Amortization of Convertible Notes debt discount and issuance costs		5,967		4,310
Change in fair value of embedded derivative liability		—		4,265
Gain on extinguishment of derivative		—		(10,765)
Deferred income taxes		(1,397)		354
Credit loss expense		1,177		256
Changes in operating assets and liabilities
Accounts receivable		11,724		(12,012)
Inventories		(419)		(291)
Prepaid expenses and other assets		1,330		2,098
Accounts payable and accrued liabilities		(9,289)		208
Net cash provided by operating activities		53,548		14,197
Cash flows from investing activities
Purchases of property, plant and equipment		(36,635)		(22,286)
Proceeds from the sale of assets		3,135		2,749
Net cash used in investing activities		(33,500)		(19,537)
Cash flows from financing activities
Proceeds from issuance of Convertible Notes		—		157,500
Payments to redeem Convertible Notes		(10,000)		—
Repayments under Term Loan Facility		—		(139,076)
Borrowings under Revolving ABL Credit Facility		23,540		1,576
Repayments under Revolving ABL Credit Facility		(30,351)		(28)
Payment of merger consideration		—		(2,902)
Proceeds from issuance of common stock through at-the-market facility, net of issuance costs		(34)		3,038
Taxes paid for vesting of RSUs		(389)		(32)
Convertible Notes issuance costs		—		(7,230)
Financing costs paid under Revolving ABL Credit Facility		—		(266)
Payments for finance lease obligations		(2,096)		(3,814)
Net cash (used in) provided by financing activities		(19,330)		8,766
Net increase in cash and cash equivalents		718		3,426
Cash and cash equivalents
Beginning of period		5,326		4,140
End of period	$	6,044	$	7,566

Table of Contents


	Nine Months Ended September 30,
(in thousands)	2023		2022
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	1,940	$	4,745
Cash paid during the period for taxes	$	739	$	—
Supplemental disclosure of non-cash investing and financing activities
Change in property, plant and equipment purchases in accounts payable	$	(11,806)	$	9,015
Additions to property, plant and equipment through finance leases	$	1,482	$	3,250
Extinguishment of finance lease obligations from sale of assets classified as finance leases	$	(324)	$	(163)
Initial embedded derivative liability upon issuance of Convertible Notes	$	—	$	75,733
Shares issued for structuring fee	$	—	$	9,163

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

Table of Contents

INDEPENDENCE CONTRACT DRILLING, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1.Nature of Operations and Recent Events

Except as expressly stated or the context otherwise requires, the terms “we,” “us,” “our,” “ICD,” and the “Company” refer to Independence Contract Drilling, Inc. and its subsidiary.

We provide land-based contract drilling services for oil and natural gas producers targeting unconventional resource plays in the United States. We own and operate a premium fleet comprised of modern, technologically advanced drilling rigs.

We currently focus our operations on unconventional resource plays located in geographic regions that we can efficiently support from our Houston, Texas and Midland, Texas facilities in order to maximize economies of scale. Currently, our rigs are operating in the Permian Basin 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

Oil prices (WTI-Cushing) reached a high of $123.64 per barrel on March 8, 2022; however, prices have fallen since those highs. As of October 23, 2023, oil was $85.49 per barrel.

Natural gas prices (Henry Hub) have fallen dramatically since the third quarter of 2022. On August 22, 2022, natural gas prices reached a high of $9.85 per mmcf, but fell to $3.52 per mmcf as of December 31, 2022 and was $2.65 per mmcf as of October 23, 2023. These commodity price declines, as well as take away capacity issues, caused market conditions in the Haynesville Shale to weaken rapidly, which resulted in a reduction in the number of drilling rigs operating in the Haynesville Shale, including a reduction in our operating rigs. At the end of the first quarter of 2023, we began relocating a portion of these rigs to the Permian Basin where market conditions remain strong. However, there can be no assurance that market conditions in the Permian Basin will remain strong and will not be adversely affected by recent volatility in oil prices nor any assurance that we will be successful in marketing all of these rigs in the Permian Basin or that they will be contracted on a timely basis or upon terms that are acceptable to us.

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 consolidated financial statements should be read along with our audited consolidated financial statements for the year ended December 31, 2022, included in our Annual Report on Form 10-K for the year ended December 31, 2022. 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 are presented.

Interim results for the three and nine months ended September 30, 2023 may not be indicative of results that will be realized for the full year ending December 31, 2023.

Table of Contents

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. We adopted ASU 2016-13 on January 1, 2023. Trade receivables (including the allowance for credit losses) are the only financial instrument in scope for ASU 2016-13 for the Company. We evaluated historical losses to develop our allowance for credit losses and will continue to monitor current conditions to estimate our future expected credit losses. The adoption of this guidance did not have a material impact to us as it did not result in a transition adjustment as of January 1, 2023. As of September 30, 2023, our total allowance for credit losses was zero.

In September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. This guidance enhances transparency of an entity’s use of supplier finance programs by requiring quarterly and annual disclosures about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts annually, and a description of where in the financial statements outstanding amounts are presented. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. Effective January 1, 2023, we completed our assessment and adopted this standard concluding that it is not applicable to us at this time as we currently have no supplier finance programs in place.

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, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Dayrate drilling	$	39,893	$	45,910	$	146,531	$	116,421
Mobilization		886		687		4,821		3,560
Reimbursables		2,539		2,451		6,665		6,208
Early termination		733		—		5,864		—
Capital modification		83		92		312		255
Other		30		7		83		7
Total revenue	$	44,164	$	49,147	$	164,276	$	126,451

Two customers accounted for approximately 31% and 11% of consolidated revenue for the three months ended September 30, 2023 and two customers accounted for approximately 21% and 10% of consolidated revenue for the nine months ended September 30, 2023. Three customers accounted for approximately 25%, 13%, and 12% of consolidated

Table of Contents

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.

Accounts receivable is our right to consideration once it becomes unconditional. Payment terms typically range from 30 to 60 days. 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, 2023 or December 31, 2022.


	September 30,		December 31,
(in thousands)	2023		2022
Receivables, which are included in “Accounts receivable”	$	26,847	$	39,732
Contract liabilities, which are included in “Accrued liabilities”	$	(434)	$	(1,158)

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)	2023		2022		2023		2022
Revenue recognized that was included in contract liabilities at beginning of period	$	131	$	209	$	1,046	$	542
Decrease (increase) in contract liabilities due to cash received, excluding amounts recognized as revenue	$	524	$	(1,186)	$	(322)	$	(1,227)

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, 2023. The estimated revenue does not include amounts of variable consideration that are constrained.


	Year Ending December 31,
(in thousands)	2023		2024		2025		2026
Revenue	$	397	$	37	$	—	$	—

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 $0.2 million and $0.3 million on our consolidated balance sheets at September 30, 2023 and December 31, 2022, respectively. During the three and nine months ended September 30, 2023, contract costs increased by zero and $1.6 million, respectively, and we amortized $0.5 million and $1.7 million of contract costs, 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.

Table of Contents

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.

The components of lease expense were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Operating lease expense	$	298	$	193	$	787	$	580
Short-term lease expense		1,670		1,505		5,332		4,170
Variable lease expense		140		157		451		413

Finance lease expense:
Amortization of right-of-use assets	$	264	$	464	$	1,470	$	1,109
Interest expense on lease liabilities		68		92		216		305
Total finance lease expense		332		556		1,686		1,414
Total lease expense	$	2,440	$	2,411	$	8,256	$	6,577

Supplemental cash flow information related to leases is as follows:


	Nine Months Ended September 30,
(in thousands)	2023		2022
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases	$	674	$	557
Operating cash flows from finance leases	$	216	$	300
Financing cash flows from finance leases	$	2,096	$	3,814

Right-of-use assets obtained or recorded in exchange for lease obligations:
Operating leases	$	2,106	$	153
Finance leases	$	1,482	$	3,250

Table of Contents

Supplemental balance sheet information related to leases is as follows:


(in thousands)	September 30, 2023			December 31, 2022
Operating leases:
Other long-term assets, net	$	2,450		$	976

Accrued liabilities	$	992		$	751
Other long-term liabilities		1,564			373
Total operating lease liabilities	$	2,556		$	1,124

Finance leases:
Property, plant and equipment	$	6,665		$	7,307
Accumulated depreciation		(2,009)			(1,994)
Property, plant and equipment, net	$	4,656		$	5,313

Current portion of long-term debt	$	1,405		$	2,485
Long-term debt		1,514			1,599
Total finance lease liabilities	$	2,919		$	4,084

Weighted-average remaining lease term
Operating leases		3.5 years			1.6 years
Finance leases		1.8 years			1.6 years

Weighted-average discount rate
Operating leases		8.84	%		10.86	%
Finance leases		8.08	%		8.12	%

Maturities of lease liabilities at September 30, 2023 were as follows:


(in thousands)	Operating Leases		Finance Leases
2023	$	300		460
2024		1,086		1,416
2025		516		948
2026		401		370
2027		370		—
Thereafter		285		—
Total cash lease payment		2,958		3,194
Less: imputed interest		(402)		(275)
Total lease liabilities	$	2,556	$	2,919

5.Financial Instruments and Fair Value

Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1

Unadjusted quoted market prices for identical assets or liabilities in an active market;

Level 2

Quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets or liabilities; and

Level 3

Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.

Table of Contents

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

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, 2023 and December 31, 2022. 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 following table summarizes the carrying value and fair value of our long-term debt as of September 30, 2023 and December 31, 2022.


	September 30, 2023				December 31, 2022
	Carrying		Fair		Carrying		Fair
(in thousands)	Value		Value		Value		Value
Convertible Notes	$	184,209	$	170,700	$	170,166	$	159,200
Revolving ABL Credit Facility	$	5,000	$	5,000	$	11,811	$	11,870

The fair value of the Convertible Notes is also determined to be a Level 3 measurement as this instrument is not actively traded and was estimated using a binomial lattice model. The factors used to determine fair value as of September 30, 2023 are subject to management's judgement and expertise and include, but are not limited to our share price, expected price volatility (57.3%), risk-free rate (4.9%), and credit spread (2,806 bps) relative to our credit rating. The factors used to determine fair value as of December 31, 2022 included, but were not limited to our share price, expected price volatility (59.0%), risk-free rate (4.2%) and credit spread (3,262 bps) relative to our credit rating.

The fair value of our Revolving ABL Credit Facility is determined to be a Level 3 measurement 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. To determine the fair value of our outstanding floating rate debt as of September 30, 2023, we utilized a credit spread of 307 bps on the Revolving ABL Credit Facility based on an analysis of credit spreads of comparably rated public debt items as well as the original issuance price of the debt. We utilized a credit spread of 493 bps to determine the fair value of our Revolving ABL Credit Facility as of December 31, 2022.

Recurring Fair Value Measurements

As described in Note 8, we determined that certain features under our Convertible Notes required bifurcation from the debt host agreement in accordance with Accounting Standards Codification (“ASC”) 815 as of March 18, 2022. Accordingly, on the issuance date of the Convertible Notes, March 18, 2022, we recorded the fair value of the embedded derivative liability of $75.7 million, in our consolidated balance sheet. The change in the fair value of the embedded derivative liability was assessed quarterly and recorded in our consolidated statement of operations as “Change in fair value of embedded derivative liability” until the features underlying the instrument were exercised, redeemed, cancelled or expired. In the first quarter of 2022, we recognized a loss of $1.9 million representing the estimated change in the fair value of the embedded derivative liability between March 18, 2022 and March 31, 2022.

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 debt host agreement. Accordingly, in the second quarter of 2022, we recognized an additional loss of $2.4 million representing the change in fair value of the embedded derivative liability for the period between March 31, 2022 and June 8, 2022. We recorded the extinguishment of the embedded derivative liability by reclassifying $69.2 million to stockholders’ equity, representing the fair value of the conversion rate feature of the derivative liability on our balance sheet, as the conversion rate feature then met the criteria to be classified as equity during the second quarter of 2022. We recognized a gain on extinguishment of the derivative liability of $10.8 million in our consolidated statement of operations associated with the PIK interest rate feature of the embedded derivative liability during the second quarter of 2022. As of September 30, 2023 and December 31, 2022, we had no embedded derivative liability recorded.

Table of Contents

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.

The significant unobservable inputs used in the fair value measurement of our embedded derivative liability as of June 8, 2022 were 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 was estimated based on the historical volatility of our common stock and the remaining term of the Convertible Notes of 3.7 years as of June 8, 2022.

There were no transfers between fair value measurement levels during the first, second or third quarters of 2023.

See Note 9 “Stock-Based Compensation” for fair value of liability-based awards.

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 related to the potential impairment of long-lived assets.

6.Inventories

All of our inventory as of September 30, 2023 and December 31, 2022 consisted of supplies held for use in our drilling operations.

7.Supplemental Balance Sheet Information

Prepaid expenses and other current assets consisted of the following:


(in thousands)	September 30, 2023		December 31, 2022
Prepaid insurance	$	819	$	3,796
Deferred mobilization costs		195		283
Prepaid and other current assets		840		657
	$	1,854	$	4,736

Accrued liabilities consisted of the following:


(in thousands)	September 30, 2023		December 31, 2022
Accrued salaries and other compensation	$	4,841	$	6,908
Insurance		942		3,002
Deferred mobilization revenues		434		1,003
Property and other taxes		2,231		3,621
Interest		27		101
Operating lease liability - current		992		751
Cash-settled SARs liability		2,380		1,826
Other		281		396
	$	12,128	$	17,608

Table of Contents

8.Long-term Debt

Our long-term debt consisted of the following:



(in thousands)	September 30, 2023		December 31, 2022
Convertible Notes due March 18, 2026	$	184,209	$	170,166
Revolving ABL Credit Facility due September 30, 2025		5,000		11,811
Finance lease obligations		2,919		4,084
		192,128		186,061
Less: Convertible Notes debt discount and issuance costs		(34,387)		(40,353)
Less: current portion of finance leases		(1,405)		(2,485)
Long-term debt, net	$	156,336	$	143,223

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”), and currently have $184.2 million of Convertible Notes outstanding as of September 30, 2023. 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 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 a PIK interest rate of SOFR plus 9.5%. We have the right at our option, to PIK interest under the Convertible Notes for the entire term of the Convertible Notes. Interest on the Convertible Notes is due on March 31 and September 30 each year. We elected to PIK outstanding interest as of September 30, 2022, March 31, 2023, and September 30, 2023, resulting in the issuance of an additional $12.7 million, $11.6 million and $12.4 million principal amount of Convertible Notes, respectively. As of December 31, 2022, accrued PIK interest of $5.8 million, which was due March 31, 2023 and resulted in the issuance of additional Convertible Notes, was classified as “Other Long-Term Liabilities” on our consolidated balance sheet. As of September 30, 2023, this amount was de minimis.

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) in connection with a Qualified Merger Conversion (as defined in the Indenture) and may issue additional shares of common stock upon conversion of Convertible Notes 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. 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

Table of Contents

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. On June 30, 2023 and September 30, 2023, our noteholders accepted our offer to redeem $5.0 million of Convertible Notes. As such, on June 30, 2023, we redeemed and paid cash for $5.0 million of principal of Convertible Notes and $0.2 million of accrued interest on such Notes; and on September 30, 2023, we redeemed and paid cash for $5.0 million of principal of Convertible Notes and $0.4 million of accrued interest on such Notes. We have the ability and intent to refinance the mandatory redemption offers that occur within the next twelve months under our Revolving ABL Credit Facility and as a result such amounts have been classified as long-term debt. On June 30, 2023 and September 30, 2023, we borrowed $5.0 million and $5.0 million, respectively, under our Revolving ABL Credit Facility to refinance the accepted mandatory offerings.

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 108% 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. 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) if relating 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. During 2022, the holders of our Convertible Notes consented to capital expenditure adjustments under this covenant aggregating $10.6 million and consented to $16.9 million of capital expenditures in February 2023. The Indenture also contains other customary affirmative and negative covenants, including limitations on indebtedness, liens, fundamental changes, asset dispositions, restricted payments (including the payment of dividends), 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, 2023.

Table of Contents

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. “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.

We early adopted ASU 2020-06 as of January 1, 2022 and concluded the Convertible Notes were accounted for as debt, with embedded features. As a consequence of the embedded features, the Convertible Notes gave rise to an embedded 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, in the second quarter of 2022 we recognized a loss on the extinguishment of debt of approximately $46.3 million. This was 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 an embedded derivative liability of $75.7 million at the time of the issuance and a debt discount of $37.8 million. Issuance costs consisting of cash fees of $7.4 million and a non-cash structuring fee settled in shares of $2.3 million along with the debt discount were recorded as a direct deduction from the Convertible Notes in the consolidated balance sheet. The debt discount and issuance costs are 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, 2023 is 25.2%. For the three and nine months ended September 30, 2023, the contractual interest expense was $6.5 million and $18.9 million, respectively, and the debt discount and issuance cost amortization was $2.4 million and $6.0 million, respectively. For the three and nine months ended September 30, 2022, the contractual interest expense was $5.8 million and $12.7 million, respectively, and the debt discount and issuance cost amortization was $2.0 million and $4.3 million, respectively.

Embedded Derivative Liability

Table of Contents

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 the Convertible Notes issuance date, we recorded an embedded derivative liability representing the increase in the conversion rate feature and the decrease in PIK interest feature. The embedded derivative liability was presented as a non-current liability in our consolidated balance sheet as of March 31, 2022 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 our stockholders on June 8, 2022, certain features under our Convertible Notes were modified and no longer met the criteria to bifurcate from the debt host agreement. As of September 30, 2023 and December 31, 2022, we had no embedded derivative liability recorded. See Note 5 “Financial Instruments and Fair Value” for additional information.

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 has a maturity date of September 30, 2025.

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 floor, or 0.0%, (b) the federal funds effective rate plus 0.05%, (c) term SOFR for a one month tenor plus 1.0% based on availability and (d) 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 SOFR for the applicable interest period plus an applicable SOFR margin ranging from 2.36% to 2.86% 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 (including the payment of dividends), 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 Indenture or other material agreements for indebtedness, and a change of control. We are in compliance with our financial covenants as of September 30, 2023.

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 Indenture, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. As of September 30, 2023, the weighted-average interest rate on our borrowings was 14.94%. As of September 30, 2023, the borrowing base under our Revolving ABL Credit Facility was $20.9 million, and we had $15.7 million of availability remaining of our $40.0 million commitment on that date.

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

Table of Contents

unit awards, and stock appreciation rights (“SARs”), and up to 4.6 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 and SARs may not be less than the market price of the underlying stock on the date of grant. As of September 30, 2023, approximately 891,790 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)	2023		2022		2023		2022
Compensation cost recognized:
Restricted stock, restricted stock units and stock-settled stock appreciation rights	$	1,285	$	1,303	$	3,915	$	2,123
Cash-settled stock appreciation rights and performance-based phantom units		501		470		724		853
Total stock-based compensation	$	1,786	$	1,773	$	4,639	$	2,976

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, 2023, there was $0.1 million in unrecognized compensation cost related to unvested restricted stock awards. This cost is expected to be recognized over a weighted-average period of 0.2 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, 2023 is as follows:


		Weighted
		Average
		Grant-Date
		Fair Value
	Shares	Per Share
Outstanding at January 1, 2023	13,446	$	64.40
Granted	—		—
Vested	—		—
Forfeited	—		—
Outstanding at September 30, 2023	13,446	$	64.40

Time-based Restricted Stock Units

We have granted one to 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, 2023, there was $3.4 million of total unrecognized compensation cost related to unvested time-based restricted stock unit awards. This cost is expected to be recognized over a weighted-average period of 0.7 years.

Table of Contents

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, 2023 is as follows:


		Weighted
		Average
		Grant-Date
		Fair Value
	RSUs	Per Share
Outstanding at January 1, 2023	1,555,542	$	4.22
Granted	272,736		4.00
Vested and converted	(464,649)		4.36
Forfeited	(143,641)		4.16
Outstanding at September 30, 2023	1,219,988	$	4.13

Performance-Based and Market-Based Restricted Stock Units

In the first quarter of 2020, we granted three-year market-based restricted stock unit awards, where each unit represents the right to receive, at the end of a vesting period, up to two shares of ICD common stock with no exercise price. Exercisability of the market-based restricted stock unit awards is based on our total shareholder return (“TSR”) as measured against the TSR of a defined peer group over a three-year period. 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. In the first quarter of 2023, 6,442 shares were vested and issued under these awards. The remaining shares were unearned and forfeited. There are no further vestings under this grant.

In the first quarter of 2023, we granted certain employees 299,411 three-year performance-based restricted stock unit awards with a market condition. Based on target shares of 173,570, a minimum of 0% and a maximum of 150% of the units could be awarded based upon the measurement of free cash flow (“FCF”) as measured against FCF performance goals determined by the compensation committee of our Board of Directors, during the three-year performance period of January 1, 2023 to December 31, 2025 and vest fully on December 31, 2025 subject to continued employment. The payout of the awards will be further adjusted by a TSR multiplier that may adjust the payout between 85% and 115% based upon our relative total shareholder return for the three-year period ending on third anniversary of the date of grant compared to the relative total shareholder return of an eight-company peer group of oilfield service companies for the same period. As these awards are performance-based with a market condition, we utilized a Monte Carlo simulation model to determine grant date fair value per share.

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, 2023, there was $0.3 million of unrecognized compensation cost related to unvested performance-based and market-based restricted stock unit awards, which is expected to be recognized over a weighted-average period of 2.3 years.

The assumptions used to value our TSR market-based restricted stock unit awards granted during the year ended December 31, 2020 were a risk-free interest rate of 1.38%, an expected volatility of 68.5% and an expected dividend yield of 0.0%. Based on the Monte Carlo simulation, these restricted stock unit awards were valued at $12.42.

The assumptions used to value our FCF restricted stock unit awards on the grant date in the first quarter of 2023 were a risk-free interest rate of 4.15%, an expected volatility of 135.3% and an expected dividend yield of 0.0%. Based on the Monte Carlo simulation, these restricted stock unit awards were valued at $4.47.

Table of Contents

A summary of the status of our performance-based and market-based restricted stock unit awards and of changes in our restricted stock unit awards outstanding for the nine months ended September 30, 2023 is as follows:


		Weighted
		Average
		Grant-Date
		Fair Value
	RSUs	Per Share
Outstanding at January 1, 2023	10,743	$	12.42
Granted	299,411		4.47
Vested and converted	(6,442)		12.42
Forfeited	(4,301)		12.42
Outstanding at September 30, 2023	299,411	$	4.47

Phantom Units

In the first quarter of 2023, we granted certain employees 149,709 three-year performance-based phantom units with a market condition. Based on target shares of 86,789, a minimum of 0% and a maximum of 150% of the units could be awarded based upon the measurement of free cash flow (“FCF”) as measured against FCF performance goals determined by the compensation committee of our Board of Directors, during the three-year performance period of January 1, 2023 to December 31, 2025 and vest fully on December 31, 2025 subject to continued employment. The payout of the awards will be further adjusted by a TSR multiplier that may adjust the payout between 85% and 115% based upon our relative total shareholder return for the three-year period ending on third anniversary of the date of grant compared to the relative total shareholder return of an eight-company peer group of oilfield service companies for the same period. The phantom units are cash-settled awards and are accounted for as a liability classified award. The grant date fair value of the phantom units was $0.3 million. Compensation expense is recognized on a straight-line basis over the performance period, with the amount recognized fluctuating as a result of the phantom units being remeasured to fair value at the end of each reporting period due to their liability-award classification. We recognized $13.0 thousand and $29.0 thousand of compensation expense in the three and nine months ended September 30, 2023, respectively.

In the first quarter of 2023, we granted 94,708 three-year time-vested phantom unit awards where each unit represents the right to receive, at the end of a vesting period, one share of ICD common stock. In the third quarter of 2023, 1,250 shares were forfeited. As of September 30, 2023, there were 93,458 unvested shares outstanding. The phantom units are cash-settled awards and are accounted for as a liability classified award. The grant date fair value of the phantom units was $0.4 million. Compensation expense is recognized on a straight-line basis over the performance period, with the amount recognized fluctuating as a result of the phantom units being remeasured to fair value at the end of each reporting period due to their liability-award classification. We recognized $27.0 thousand and $60.0 thousand of compensation expense in the three and nine months ended September 30, 2023, respectively.

In the first quarter of 2023, we granted independent directors 41,665 one-year time-vested phantom unit awards where each unit represents the right to receive, at the end of a vesting period, one share of ICD common stock. In the second quarter of 2023, 8,333 shares were forfeited due to the resignation of a director. As of September 30, 2023, there were 33,332 unvested shares outstanding. The phantom units are cash-settled awards and are accounted for as a liability classified award. The grant date fair value of the phantom units was $0.2 million. Compensation expense is recognized on a straight-line basis over the performance period, with the amount recognized fluctuating as a result of the phantom units being remeasured to fair value at the end of each reporting period due to their liability-award classification. We recognized $29.0 thousand and $64.0 thousand of compensation expense in the three and nine months ended September 30, 2023, respectively.

Time-Based Stock-Settled Stock Appreciation Rights

In the second quarter of 2022, we 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 vested 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.

Table of Contents

The assumptions used in calculating the fair value of time-based stock-settled SARs as of the grant date were a risk-free interest rate of 3.03%, an expected volatility factor of 103.3% and an expected dividend yield of 0.0%.

Changes to our time-based stock-settled SARs outstanding during the nine months ended September 30, 2023 are as follows:


		Weighted Average
		Grant Date
		Fair Value
	Stock-settled SARs	Per Share
Outstanding at January 1, 2023	1,421,740	$	2.83
Granted	—		—
Exercised	—		—
Forfeited/Expired	—		—
Outstanding at September 30, 2023	1,421,740	$	2.83
Exercisable at September 30, 2023	710,870	$	2.83
Non-vested at January 1, 2023	1,421,740	$	2.83
Vested	710,870		2.83
Non-vested at September 30, 2023	710,870	$	2.83

The number of stock-settled SARs exercisable at September 30, 2023 was 0.7 million with a weighted average remaining contractual life of 5.5 years. As of September 30, 2023, there was $2.1 million of unrecognized compensation cost related to time-based stock-settled SARs that is expected to be recognized over a weighted-average period of 0.8 years.

Time-Based Cash-Settled Stock Appreciation Rights

In the first quarter of 2021, we 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. As of September 30, 2023 and December 31, 2022, we have recorded a liability, classified as “Accrued Liabilities” on our consolidated balance sheets, of $2.4 million and $1.8 million, respectively.

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 the time-based cash-settled SARs using the Monte Carlo simulation model:


	Nine Months Ended		Year Ended
	September 30, 2023		December 31, 2022
Remaining term to maturity	4.4 years		5.1 years
Expected volatility factor	120.4	%	113.0	%
Expected dividend yield	—	%	—	%
Risk-free interest rate	4.61	%	3.95	%

Table of Contents

Changes to our time-based cash-settled SARs outstanding during the nine months ended September 30, 2023 are as follows:


		Weighted Average
		Exercise Price
	Cash-settled SARs	Per Share
Outstanding at January 1, 2023	2,885,722	$	5.73
Granted	—		—
Exercised	—		—
Forfeited/Expired	—		—
Outstanding at September 30, 2023	2,885,722	$	5.73
Exercisable at September 30, 2023	1,928,330	$	5.73

As of September 30, 2023, there was $0.3 million of unrecognized compensation cost related to time-based cash-settled SARs that is expected to be recognized over a weighted-average period of 0.2 years.

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

As of September 30, 2023, we had a total of 14,084,850 shares of common stock, $0.01 par value, outstanding. We also had 85,092 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)	2023		2022		2023		2022
Net loss (numerator):	$	(7,598)	$	(7,194)	$	(11,746)	$	(68,782)
Loss per share:
Basic and diluted	$	(0.54)	$	(0.53)	$	(0.84)	$	(5.36)
Shares (denominator):
Weighted average common shares outstanding - basic		14,071		13,590		13,992		12,836
Weighted average common shares outstanding - diluted		14,071		13,590		13,992		12,836

The following number 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)

2023

2022

2023

2022

Potentially dilutive securities excluded as anti-dilutive

39,254

37,971

39,135

28,209

11.Income Taxes

Our effective income tax rate fluctuates from the U.S. statutory tax rate based on, among other factors, changes in pretax income in jurisdictions with varying statutory tax rates, the impact of U.S. state and local taxes, the realizability of deferred tax assets and other differences related to the recognition of income and expense between GAAP and tax accounting.

Table of Contents

Our effective tax rate was 10.0% and 8.2% for the three and nine months ended September 30, 2023 and 8.8% and (1.2)% for the three and nine months ended September 30, 2022. Our effective tax rate for the three and nine months ended September 30, 2023 and 2022 differed from the statutory federal income tax rate primarily due to the impact of the change in valuation allowance on deferred tax assets, state taxes, and permanent items related to certain debt items that are expensed for book purposes but are not deductible for tax purposes. The impact of the permanent items related to the debt continues into 2023 but has less of an impact as a significant loss on extinguishment of debt was recorded in 2022.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, and when necessary, valuation allowances are recorded. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We assess the realizability of our deferred tax assets quarterly and consider carryback availability, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In the first, second and third quarter of 2023, the effective tax rate takes into consideration the estimated valuation allowance based on forecasted 2023 income.

We continue to monitor income tax developments in the United States. We will incorporate into our future financial statements the impacts, if any, of future regulations and additional authoritative guidance when finalized.

12.Commitments and Contingencies

Purchase Commitments

As of September 30, 2023, we had outstanding purchase commitments to a number of suppliers totaling $2.3 million related primarily to the operation of drilling rigs. All of these commitments relate to equipment and services currently scheduled for delivery in 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.Defined Contribution Plan

Substantially all employees may elect to participate in our 401(k) plan by contributing a portion of their earnings. We contribute an amount equal to 100 percent of the first six percent of the participant’s compensation subject to certain limitations. The expense incurred for this defined contribution plan was $0.3 million and $1.2 million for three and nine months ended September 30, 2023, respectively. The expense incurred for this defined contribution plan for the three and nine months ended September 30, 2022 was $0.4 million and $1.0 million, respectively.

14.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

Table of Contents

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.

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, 2022, filed with the Securities and Exchange Commission on March 6, 2023 (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.

As of September 30, 2023, 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

Oil prices (WTI-Cushing) reached a high of $123.64 per barrel on March 8, 2022; however, prices have fallen since those highs. As of October 23, 2023, oil was $85.49 per barrel.

Table of Contents

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 and early termination revenues are excluded from this measure.

●

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

Table of Contents

●

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

Table of Contents

Results of Operations

The following summarizes our financial and operating data for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per share data)	2023			2022			2023			2022
Revenues	$	44,164		$	49,147		$	164,276		$	126,451
Costs and expenses
Operating costs		27,494			31,379			98,781			87,448
Selling, general and administrative		6,865			7,007			18,816			17,096
Depreciation and amortization		10,229			10,120			32,488			29,719
Asset impairment, net		250			—			250			—
(Gain) loss on disposition of assets, net		(1,454)			433			539			(665)
Total cost and expenses		43,384			48,939			150,874			133,598
Operating income (loss)		780			208			13,402			(7,147)
Interest expense		(9,222)			(8,098)			(26,192)			(21,005)
Loss on extinguishment of debt		—			—			—			(46,347)
Change in fair value of embedded derivative liability		—			—			—			(4,265)
Realized gain on extinguishment of derivative		—			—			—			10,765
Loss before income taxes		(8,442)			(7,890)			(12,790)			(67,999)
Income tax (benefit) expense		(844)			(696)			(1,044)			783
Net loss	$	(7,598)		$	(7,194)		$	(11,746)		$	(68,782)

Other financial and operating data
Number of marketed rigs (end of period) (1)		26			26			26			26
Rig operating days (2)		1,229			1,601			4,341			4,604
Average number of operating rigs (3)		13.4			17.4			15.9			16.9
Rig utilization (4)		51	%		70	%		61	%		69	%
Average revenue per operating day (5)	$	32,925		$	28,646		$	34,193		$	25,216
Average cost per operating day (6)	$	18,920		$	17,305		$	19,061		$	16,452
Average rig margin per operating day	$	14,005		$	11,341		$	15,131		$	8,764

(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. During the three and nine months ended September 30, 2023, there were 92.3 and 204.8 operating days in which we earned revenue on a standby basis, respectively. During the three and nine months ended September 30, 2022, there were 4.6 and 27.8 days in which we earned revenue on a standby basis, respectively. During the three and nine months ended September 30, 2023, the Company recognized $0.7 million and $5.9 million of early termination revenue, respectively.

(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.

Table of Contents

(5)Average revenue per operating day represents total contract drilling revenues earned during the period divided by rig operating days in the period. Excluded in calculating average revenue per operating day are revenues associated with the reimbursement of (i) out-of-pocket costs paid by customers of $3.0 million and $3.3 million during the three months ended September 30, 2023 and 2022, respectively, and $10.0 million and $10.3 million during the nine months ended September 30, 2023 and 2022, respectively and (ii) early termination revenues of $0.7 million during the three months ended September 30, 2023 and $5.9 million during the nine months ended September 30, 2023. There were no early termination revenues during the three and nine months ended September 30, 2022.

(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 $3.0 million and $3.3 million during the three months ended September 30, 2023 and 2022, respectively, and $10.0 million and $10.3 million during the nine months ended September 30, 2023 and 2022, respectively; (ii) overhead costs of $0.4 million and $0.4 million during the three months ended September 30, 2023 and 2022, respectively, and $1.8 million and $1.4 million during the nine months ended September 30, 2023 and 2022, respectively; and (iii) rig decommissioning and transition costs between basins of $0.8 million and zero during the three months ended September 30, 2023 and 2022, respectively, and $4.3 million and zero during the nine months ended September 30, 2023 and 2022, respectively.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Revenues

Revenues for the three months ended September 30, 2023 were $44.2 million, representing a 10.1% decrease as compared to revenues of $49.1 million for the three months ended September 30, 2022. This decrease was primarily attributable to a decrease in operating days. Operating days decreased to 1,229 days during the three months ended September 30, 2023 as compared to 1,601 days during the three months ended September 30, 2022. Revenue per day increased by 14.9% to $32,925 during the three months ended September 30, 2023, as compared to revenue per day of $28,646 during the three months ended September 30, 2022. Additionally, we recognized $0.7 million of early termination revenue during the three months ended September 30, 2023. There were no early termination revenues during the three months ended September 30, 2022.

Operating Costs

Operating costs for the three months ended September 30, 2023 were $27.5 million, representing a 12.4% decrease as compared to operating costs of $31.4 million for the three months ended September 30, 2022. This decrease was primarily attributable to a decrease in operating days. Operating days decreased to 1,229 during the three months ended September 30, 2023 as compared to 1,601 days during the three months ended September 30, 2022. We also incurred approximately $0.8 million in costs associated with transitioning rigs from the Haynesville to the Permian Basin during the three months ended September 30, 2023. Operating costs per day increased to $18,920 during the three months ended September 30, 2023, representing a 9.3% increase compared to cost per operating day of $17,305 for the three months ended September 30, 2022.

Selling, General and Administrative

Selling, general and administrative expenses for the three months ended September 30, 2023 were $6.9 million, representing a 2.0% decrease as compared to selling, general and administrative expense of $7.0 million for the three months ended September 30, 2022. This decrease in selling, general and administrative expenses as compared to the prior year comparable period primarily relates to lower incentive compensation expense and professional fees offset by higher credit loss expense and stock-based compensation expense associated with awards granted in the first quarter of 2023.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended September 30, 2023 was $10.2 million, representing a 1.1% increase compared to depreciation and amortization expense of $10.1 million for the three months ended September 30, 2022.

Table of Contents

Asset Impairment, net

During the three months ended September 30, 2023, we impaired a damaged piece of drilling equipment for $0.3 million, net of insurance recoveries.

(Gain) Loss on Disposition of Assets, net

A gain on the disposition of assets totaling $1.5 million was recorded for the three months ended September 30, 2023 compared to a loss on the disposition of assets totaling $0.4 million for the three months ended September 30, 2022. In the current and prior year quarter, the gain and loss related to the disposal or sale of miscellaneous drilling equipment.

Interest Expense

Interest expense was $9.2 million for the three months ended September 30, 2023 and $8.1 million for the three months ended September 30, 2022. The increase in the current quarter interest expense primarily relates to higher principal debt balances compared to the prior period. Non-cash amortization on the debt discount and issuance costs was $2.4 million and $2.0 million during the three months ended September 30, 2023 and 2022, respectively.

Income Tax (Benefit) Expense

Income tax benefit for the three months ended September 30, 2023 amounted to $0.8 million as compared to income tax expense of $0.7 million for the three months ended September 30, 2022. Our effective tax rates for the three months ended September 30, 2023 and 2022 were 10.0% and 8.8%, respectively. Our effective tax rate for the three months ended September 30, 2023 and 2022 differed from the statutory federal income tax rate primarily due to the impact of the change in valuation allowance on deferred tax assets, state taxes, and permanent items related to certain debt items that are expensed for book purposes but are not deductible for tax purposes. The impact of the permanent items related to the debt continues into 2023.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, and when necessary, valuation allowances are recorded. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We assess the realizability of our deferred tax assets quarterly and consider carryback availability, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In the third quarter of 2023, the effective tax rate takes into consideration the estimated valuation allowance based on forecasted 2023 income.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Revenues

Revenues for the nine months ended September 30, 2023 were $164.3 million, representing a 29.9% increase as compared to revenues of $126.5 million for the nine months ended September 30, 2022. This increase was primarily attributable to increases in contractual dayrates. Revenue per day increased by 35.6% to $34,193 during the nine months ended September 30, 2023, as compared to revenue per day of $25,216 during the nine months ended September 30, 2022. Additionally, we recognized $5.9 million of early termination revenue during the nine months ended September 30, 2023. There were no early termination revenues during the nine months ended September 30, 2022.

Table of Contents

Operating Costs

Operating costs for the nine months ended September 30, 2023 were $98.8 million, representing a 13.0% increase as compared to operating costs of $87.4 million for the nine months ended September 30, 2022. This increase was primarily attributable to higher per day operating expenses associated with higher personnel and repair and maintenance costs. We also incurred approximately $4.3 million in costs associated with transitioning rigs from the Haynesville to the Permian Basin during the nine months ended September 30, 2023. Operating costs per day increased to $19,061 during the nine months ended September 30, 2023, representing a 15.9% increase compared to cost per operating day of $16,452 for the nine months ended September 30, 2022.

Selling, General and Administrative

Selling, general and administrative expenses for the nine months ended September 30, 2023 were $18.8 million, representing a 10.1% increase as compared to selling, general and administrative expense of $17.1 million for the nine months ended September 30, 2022. This increase in selling, general and administrative expenses as compared to the prior year comparable period primarily relates to higher professional fees, credit loss expense and stock-based compensation expense associated with awards granted in the second quarter of 2022 and the first quarter of 2023, offset by lower incentive compensation expense.

Depreciation and Amortization

Depreciation and amortization expense for the nine months ended September 30, 2023 was $32.5 million, representing a 9.3% increase compared to depreciation and amortization expense of $29.7 million for the nine months ended September 30, 2022. The increase in depreciation and amortization expense is primarily the result of capital expenditures related to reactivated rigs in 2022 and 2023.

Asset Impairment, net

During the nine months ended September 30, 2023, we impaired a damaged piece of drilling equipment for $0.3 million, net of insurance recoveries.

(Gain) Loss on Disposition of Assets, net

A loss on the disposition of assets totaling $0.5 million was recorded for the nine months ended September 30, 2023 compared to a gain on the disposition of assets totaling $0.7 million for the nine months ended September 30, 2022. In the current and prior year, the loss and gain related to the disposal or sale of miscellaneous drilling equipment.

Interest Expense

Interest expense was $26.2 million for the nine months ended September 30, 2023 and $21.0 million for the nine months ended September 30, 2022. The increase in the current period interest expense primarily relates to higher principal debt balances on the Convertible Notes, issued March 18, 2022, compared to the prior year period. Non-cash amortization on the debt discount and issuance costs was $6.0 million and $4.3 million during the nine months ended September 30, 2023 and 2022, respectively. The nine months ended September 30, 2022 also included $2.6 million of interest on our prior Term Loan which was repaid upon issuance of our Convertible Notes.

Loss 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 was 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.

Table of Contents

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, March 18, 2022, 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 (Benefit) Expense

Income tax benefit for the nine months ended September 30, 2023 amounted to $1.0 million as compared to income tax expense of $0.8 million for the nine months ended September 30, 2022. Our effective tax rates for the nine months ended September 30, 2023 and 2022 were 8.2% and (1.2)%, respectively. Our effective tax rate for the nine months ended September 30, 2023 and 2022 differed from the statutory federal income tax rate primarily due to the impact of the change in valuation allowance on deferred tax assets, state taxes, and permanent items related to certain debt items that are expensed for book purposes but are not deductible for tax purposes. The impact of the permanent items related to the debt continues into 2023 but has less of an impact as a significant loss on extinguishment of debt was recorded in 2022.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized, and when necessary, valuation allowances are recorded. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We assess the realizability of our deferred tax assets quarterly and consider carryback availability, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In the first nine months of 2023, the effective tax rate takes into consideration the estimated valuation allowance based on forecasted 2023 income.

Liquidity and Capital Resources

Our liquidity as of September 30, 2023 was $19.1 million, consisting of cash on hand of $6.0 million and $15.7 million of availability under our $40.0 million Revolving ABL Credit Facility, based on a borrowing base of $20.9 million.

During the first nine months of 2023, cash flow from operations was positive. On March 31, 2023 and September 30, 2023, we paid in-kind the $11.6 million and $12.4 million interest payment due under our Convertible Notes, respectively. On June 30, 2023 and September 30, 2023, our noteholders accepted our mandatory offer to redeem $5.0 million and $5.0 million, respectively, of Convertible Notes plus accrued interest. As a result, on June 30, 2023, we paid $5.0 million principal and $0.2 million in accrued interest in cash, and on September 30, 2023, we paid $5.0 million principal and $0.4 million in accrued interest in cash. We funded these redemptions through borrowings under our Revolving ABL Credit Facility.

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

We believe that our cash and cash equivalents, cash flows from operating activities and borrowings under our Revolving Credit Facility will adequately finance all of our anticipated purchase commitments, capital expenditures and other cash requirements over the next twelve months from issuance.

Table of Contents

Net Cash Provided by Operating Activities

Cash provided by operating activities was $53.5 million for the nine months ended September 30, 2023 compared to cash provided by operating activities of $14.2 million for the nine months ended September 30, 2022. 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 discount and debt issuance costs. Additionally, changes in working capital items such as accounts receivable, inventory, prepaid expense and accounts payable can significantly affect operating cash flows. Cash flows from operating activities during the first nine months of 2023 were higher as a result of a decrease in net loss of $57.0 million, adjusted for non-cash items, of $61.9 million for the nine months ended September 30, 2023, compared to $93.0 million for non-cash items 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 derivative. Working capital changes increased cash flows from operating activities by $3.3 million for the nine months ended September 30, 2023 and decreased cash flows from operating activities by $10.0 million for the nine months ended September 30, 2022.

Net Cash Used In Investing Activities

Cash used in investing activities was $33.5 million for the nine months ended September 30, 2023 and $19.5 million for the nine months ended September 30, 2022. During the first nine months of 2023, cash payments of $36.6 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $3.1 million. During the 2022 period, 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.

Net Cash (Used In) Provided by Financing Activities

Cash used in financing activities was $19.3 million for the nine months ended September 30, 2023 and cash provided by financing activities was $8.8 million for the nine months ended September 30, 2022. During the first nine months of 2023, we received proceeds from borrowings under our revolving credit facility of $23.5 million. These proceeds were offset by repayments under our revolving credit facility of $30.4 million, redemption of $10.0 million of our Convertible Notes, taxes paid for vesting of restricted stock units of $0.4 million and payments for finance lease obligations of $2.1 million. 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 $28.0 thousand, taxes paid for vesting of restricted stock units of $32.0 thousand and payments for finance lease obligations of $3.8 million.

Long-term Debt

Table of Contents

outstanding interest as of September 30, 2022, March 31, 2023, and September 30, 2023, resulting in the issuance of an additional $12.7 million, $11.6 million and $12.4 million principal amount of Convertible Notes, respectively. As of December 31, 2022, accrued PIK interest of $5.8 million, which was due March 31, 2023 and resulted in the issuance of additional Convertible Notes, was classified as “Other Long-Term Liabilities” on our consolidated balance sheet. As of September 30, 2023, this amount was de minimis.

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. 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. On June 30, 2023 and September 30, 2023, our noteholders accepted our offer to redeem $5.0 million of Convertible Notes. As such, on June 30, 2023, we redeemed and paid cash for $5.0 million of principal of Convertible Notes and $0.2 million of accrued interest on such Notes; and on September 30, 2023 we redeemed and paid cash for $5.0 million of principal of Convertible Notes and $0.4 million of accrued interest on such Notes. We have the ability and intent to refinance the mandatory redemption offers that occur within the next twelve months under our Revolving ABL Credit Facility and as a result such amounts have been classified as long-term debt. On June 30, 2023 and September 30, 2023, we borrowed $5.0 million and $5.0 million, respectively, under our Revolving ABL Credit Facility to refinance the accepted mandatory offerings.

Table of Contents

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) if relating 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. During 2022, the holders of our Convertible Notes consented to capital expenditure adjustments under this covenant aggregating $10.6 million and consented to $16.9 million of capital expenditures in February 2023. The Indenture also contains other customary affirmative and negative covenants, including limitations on indebtedness, liens, fundamental changes, asset dispositions, restricted payments (including the payment of dividends), 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, 2023.

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. “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.

Table of Contents

embedded 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, in the second quarter of 2022 we recognized a loss on the extinguishment of debt of approximately $46.3 million. This was 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 an embedded derivative liability of $75.7 million at the time of the issuance and a debt discount of $37.8 million. Issuance costs consisting of cash fees of $7.4 million and a non-cash structuring fee settled in shares of $2.3 million along with the debt discount were recorded as a direct deduction from the Convertible Notes in the consolidated balance sheet. The debt discount and issuance costs are 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, 2023 is 25.2%. For the three and nine months ended September 30, 2023, the contractual interest expense was $6.5 million and $18.9 million, respectively, and the debt discount and issuance cost amortization was $2.4 million and $6.0 million, respectively. For the three and nine months ended September 30, 2022, the contractual interest expense was $5.8 million and $12.7 million, respectively, and the debt discount and issuance cost amortization was $2.0 million and $4.3 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 the Convertible Notes issuance date, we recorded an embedded derivative liability representing the increase in the conversion rate feature and the decrease in PIK interest feature. The embedded derivative liability was presented as a non-current liability in our consolidated balance sheet as of March 31, 2022 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 our stockholders on June 8, 2022, certain features under our Convertible Notes were modified and no longer met the criteria to bifurcate from the debt host agreement. As of September 30, 2023 and December 31, 2022, we had no embedded derivative liability recorded. See Note 5 “Financial Instruments and Fair Value” for additional information.

Revolving ABL Credit Facility

Table of Contents

is greater than 50% of the maximum credit) per annum on the unused portion of the Revolving ABL Credit Facility commitment.

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 4 “Leases” and Note 12 “Commitments and Contingencies” for additional information).

Recent Accounting Pronouncements

See Note 2 “Interim Financial Information – Recent Accounting Pronouncements” for information on recent accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

Total long-term debt at September 30, 2023 included $189.2 million of floating-rate debt attributed to borrowings at an average interest rate of 14.94%. As a result, our annual interest cost in 2023 will fluctuate based on short-term interest rates. The impact on annual cash flow of a 10% change in the floating-rate (approximately 16.44%) would be approximately $2.8 million annually based on the floating-rate debt and other obligations outstanding at September 30, 2023; 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

Table of Contents

historically declined. 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 market conditions were depressed 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.

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.

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.

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, 2023 at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the risks related to our business set forth under “Risk Factors” in our Form 10-K for the year ended December 31, 2022. These risks are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition or results of operations.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

Table of Contents

ITEM 6. EXHIBITS


Exhibit Number		Description

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

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

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

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

101.CAL*		XBRL Calculation Linkbase Document

101.DEF*		XBRL Definition Linkbase Document

101.INS*		XBRL Instance Document

101.LAB*		XBRL Labels Linkbase Document

101.PRE*		XBRL Presentation Linkbase Document

101.SCH*		XBRL Schema Document

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

*	Filed with this report

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

Table of Contents

SIGNATURES

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


	INDEPENDENCE CONTRACT DRILLING, INC.
	By:	/s/ J. Anthony Gallegos, Jr.
		Name:	J. Anthony Gallegos, Jr.
		Title:	President and Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Philip A. Choyce
		Name:	Philip A. Choyce
		Title:	Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer)

	By:	/s/ Katherine Kokenes
		Name:	Katherine Kokenes
		Title:	Vice President and Chief Accounting Officer (Principal Accounting Officer)

Date: November 1, 2023

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Independence Contract Drilling (ICDIQ) 10-Q2023 Q3 Quarterly report

Content analysis