10-Q 1 icd-20230930x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2023

OR

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.

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

2

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.

3

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.

4

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.

5

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.

6

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

7

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.

8

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.

9

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

10

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.

11

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

12

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.

13

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

$