UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
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INDEPENDENCE CONTRACT DRILLING, INC.
Index to Form 10-Q
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, customer consolidations, 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, 2023. 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)
March 31, | December 31, | |||||
| 2024 |
| 2023 | |||
Assets |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Other long-term assets, net |
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Total assets | $ | | $ | | ||
Liabilities and Stockholders’ Equity |
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Liabilities |
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Current portion of long-term debt | $ | | $ | | ||
Accounts payable |
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Accrued liabilities |
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Total current liabilities |
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Long-term debt, net |
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Deferred income taxes, net |
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Other long-term liabilities |
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Total liabilities |
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Commitments and contingencies (Note 12) |
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Stockholders’ equity |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
| ( |
| ( | ||
Treasury stock, at cost, |
| ( |
| ( | ||
Total stockholders’ equity |
| |
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Total liabilities and stockholders’ equity | $ | | $ | | ||
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 March 31, | ||||||
| 2024 |
| 2023 | |||
Revenues | $ | | $ | | ||
Costs and expenses |
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Operating costs |
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Selling, general and administrative |
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Depreciation and amortization |
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Gain on disposition of assets, net |
| ( |
| ( | ||
Total costs and expenses |
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Operating income |
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Interest expense |
| ( |
| ( | ||
(Loss) income before income taxes |
| ( |
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Income tax benefit |
| ( |
| ( | ||
Net (loss) income | $ | ( | $ | | ||
(Loss) income per share: |
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Basic | $ | ( | $ | | ||
Diluted | $ | ( | $ | | ||
Weighted average number of common shares outstanding: |
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Basic | | | ||||
Diluted |
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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, 2023 |
| | $ | | $ | | $ | ( | $ | ( |
| $ | | ||||
Restricted stock issued | | | ( | — | — | — | |||||||||||
RSUs vested, net of shares withheld for taxes | | | ( |
| — |
| — |
| ( | ||||||||
Purchase of treasury stock | ( | ( | — | — | ( | ( | |||||||||||
Stock-based compensation | — | — | |
| — |
| — |
| | ||||||||
Net loss | — |
| — |
| — |
| ( |
| — |
| ( | ||||||
Balances at March 31, 2024 |
| |
| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
Additional | Total | ||||||||||||||||
Common Stock | Paid-in | Accumulated | Treasury | Stockholders' | |||||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Stock |
| Equity | ||||||
Balances at December 31, 2022 |
| |
| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
RSUs vested, net of shares withheld for taxes | | | ( |
| — |
| — |
| ( | ||||||||
Issuance of common stock through at-the-market facility, net of offering costs | — | — | ( |
| — |
| — | ( | |||||||||
Stock-based compensation | — | — | |
| — |
| — |
| | ||||||||
Net income | — |
| — |
| — |
| |
| — |
| | ||||||
Balances at March 31, 2023 |
| |
| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
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)
Three Months Ended March 31, | ||||||
| 2024 |
| 2023 | |||
Cash flows from operating activities |
|
|
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| ||
Net (loss) income | $ | ( | $ | | ||
Adjustments to reconcile net loss to net cash provided by operating activities |
|
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Depreciation and amortization |
| |
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Stock-based compensation |
| |
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Gain on disposition of assets, net |
| ( |
| ( | ||
Non-cash interest expense | | | ||||
Amortization of deferred financing costs |
| |
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Amortization of Convertible Notes debt discount and issuance costs | | | ||||
Deferred income taxes |
| ( |
| ( | ||
Credit loss expense |
| — |
| | ||
Changes in operating assets and liabilities |
|
|
|
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Accounts receivable |
| |
| ( | ||
Inventories |
| ( |
| ( | ||
Prepaid expenses and other assets |
| |
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Accounts payable and accrued liabilities |
| ( |
| ( | ||
Net cash provided by operating activities |
| |
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Cash flows from investing activities |
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Purchases of property, plant and equipment |
| ( |
| ( | ||
Proceeds from the sale of assets |
| |
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Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities |
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Payments to redeem Convertible Notes | ( | — | ||||
Borrowings under Revolving ABL Credit Facility |
| |
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Repayments under Revolving ABL Credit Facility |
| ( |
| ( | ||
Proceeds from issuance of common stock through at-the-market facility, net of issuance costs | — |
| ( | |||
Purchase of treasury stock |
| ( |
| — | ||
Taxes paid for vesting of RSUs |
| ( |
| ( | ||
Payments for finance lease obligations |
| ( |
| ( | ||
Net cash (used in) provided by financing activities |
| ( |
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Net increase in cash and cash equivalents |
| |
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Cash and cash equivalents |
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Beginning of period |
| |
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End of period | $ | | $ | | ||
7
Three Months Ended March 31, | ||||||
(in thousands) |
| 2024 |
| 2023 | ||
Supplemental disclosure of cash flow information | ||||||
Cash paid during the period for interest |
| $ | |
| $ | |
Cash paid during the period for taxes | $ | | $ | — | ||
Supplemental disclosure of non-cash investing and financing activities | ||||||
Change in property, plant and equipment purchases in accounts payable |
| $ | ( |
| $ | ( |
Additions to property, plant and equipment through finance leases |
| $ | |
| $ | |
Extinguishment of finance lease obligations from sale of assets classified as finance leases |
| $ | ( |
| $ | — |
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 $
On August 22, 2022, natural gas prices reached a high of $
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, 2023, included in our Annual Report on Form 10-K for the year ended December 31, 2023. 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 months ended March 31, 2024 may not be indicative of results that will be realized for the full year ending December 31, 2024.
9
Segment and Geographical Information
Our operations consist of
Recent Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This guidance requires an entity to disclose significant segment expenses impacting profit and loss that are regularly provided to the Chief Operating Decision Maker (“CODM”) to assess segment performance and to make decisions about resource allocations. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We do not expect the standard to have a material impact on our financial statement disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This guidance requires that an entity disclose specific categories in the effective tax rate reconciliation as well as provide additional information for reconciling items that meet a quantitative threshold. Also, this guidance requires certain disclosures of state versus federal income tax expense and taxes paid. The amendments in this guidance are effective for annual periods beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact this guidance will have on our financial statement disclosures.
3.Revenue from Contracts with Customers
The following table summarizes revenues from our contracts disaggregated by revenue generating activity contained therein for the three months ended March 31, 2024 and 2023:
Three Months Ended March 31, | ||||||
(in thousands) |
| 2024 |
| 2023 | ||
Dayrate drilling | $ | | $ | | ||
Mobilization |
| |
| | ||
Reimbursables |
| |
| | ||
Early termination |
| |
| | ||
Capital modification |
| — |
| | ||
Other |
| |
| | ||
Total revenue | $ | | $ | | ||
Accounts receivable is our right to consideration once it becomes unconditional. Payment terms typically range from
| March 31, |
| December 31, | |||
(in thousands) | 2024 | 2023 | ||||
Receivables, which are included in “Accounts receivable” | $ | | $ | | ||
Contract liabilities, which are included in “Accrued liabilities” | $ | ( | $ | ( | ||
10
The primary changes in contract liabilities balances during the period are as follows:
Three Months Ended March 31, | ||||||
(in thousands) |
| 2024 |
| 2023 | ||
Revenue recognized that was included in contract liabilities at beginning of period | $ | | $ | | ||
Increase in contract liabilities due to cash received, excluding amounts recognized as revenue | $ | ( | $ | ( | ||
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 March 31, 2024. The estimated revenue does not include amounts of variable consideration that are constrained.
Year Ending December 31, | ||||||||||||
(in thousands) |
| 2024 |
| 2025 |
| 2026 |
| 2027 | ||||
Revenue | | $ | — | $ | — | $ | — | |||||
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 $
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.
11
The components of lease expense were as follows:
Three Months Ended March 31, | ||||||
(in thousands) |
| 2024 |
| 2023 | ||
Operating lease expense | $ | | $ | | ||
Short-term lease expense |
| |
| | ||
Variable lease expense |
| |
| | ||
Finance lease expense: |
|
|
|
| ||
Amortization of right-of-use assets | $ | | $ | | ||
Interest expense on lease liabilities |
| |
| | ||
Total finance lease expense |
| |
| | ||
Total lease expense | $ | | $ | | ||
Supplemental cash flow information related to leases is as follows:
Three Months Ended March 31, | ||||||
(in thousands) |
| 2024 |
| 2023 | ||
Cash paid for amounts included in measurement of lease liabilities: |
|
|
|
| ||
Operating cash flows from operating leases | $ | | $ | | ||
Operating cash flows from finance leases | $ | | $ | | ||
Financing cash flows from finance leases | $ | | $ | | ||
Right-of-use assets obtained or recorded in exchange for lease obligations: |
|
|
|
| ||
Operating leases | $ | | $ | | ||
Finance leases | $ | | $ | | ||
Supplemental balance sheet information related to leases is as follows:
(in thousands) |
| March 31, 2024 |
| December 31, 2023 | |||
Operating leases: |
|
|
|
| |||
$ | | $ | | ||||
$ | | $ | | ||||
| |
| | ||||
Total operating lease liabilities | $ | | $ | | |||
Finance leases: |
|
|
|
| |||
Property, plant and equipment | $ | | $ | | |||
Accumulated depreciation |
| ( |
| ( | |||
$ | | $ | | ||||
$ | | $ | | ||||
| |
| | ||||
Total finance lease liabilities | $ | | $ | | |||
Weighted-average remaining lease term |
|
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| |||
Operating leases |
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| |||||
Finance leases |
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| |||||
Weighted-average discount rate |
|
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| |||
Operating leases |
| | % |
| | % | |
Finance leases |
| | % |
| | % | |
12
Maturities of lease liabilities at March 31, 2024 were as follows:
(in thousands) |
| Operating Leases |
| Finance Leases | ||
2024 | $ | | | |||
2025 |
| | | |||
2026 |
| | | |||
2027 |
| |
| | ||
2028 |
| |
| | ||
Total cash lease payment |
| |
| | ||
Less: imputed interest |
| ( | ( | |||
Total lease liabilities | $ | | $ | | ||
5.Financial Instruments and Fair Value
Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, there exists a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1 | Unadjusted quoted market prices for identical assets or liabilities in an active market; |
Level 2 | Quoted market prices for identical assets or liabilities in an active market that have been adjusted for items such as effects of restrictions for transferability and those that are not quoted but are observable through corroboration with observable market data, including quoted market prices for similar assets or liabilities; and |
Level 3 | Unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date. |
This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, certain accrued liabilities and our debt. Our debt consists primarily of our Convertible Notes and Revolving ABL Facility as of March 31, 2024 and December 31, 2023. 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. We believe the carrying value of our Revolving ABL Facility approximates fair value because the interest rates are variable and reflective of current market rates.
The following table summarizes the carrying value and fair value of our Convertible Notes as of March 31, 2024 and December 31, 2023.
March 31, 2024 |
| December 31, 2023 | ||||||||||
Carrying | Fair | Carrying | Fair | |||||||||
(in thousands) |
| Value |
| Value |
| Value |
| Value | ||||
Convertible Notes | $ | | $ | | $ | | $ | | ||||
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 March 31, 2024 are subject to management's judgement and expertise and include, but are not limited to our share price, expected price volatility (
There were
See Note 9 “Stock-Based Compensation” for fair value of liability-based awards.
13
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 March 31, 2024 and December 31, 2023 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) |
| March 31, 2024 |
| December 31, 2023 | ||
Prepaid insurance | $ | | $ | | ||
Deferred mobilization costs |
| |
| | ||
Prepaid and other current assets |
| |
| | ||
$ | | $ | | |||
Accrued liabilities consisted of the following:
(in thousands) |
| March 31, 2024 |
| December 31, 2023 | ||
Accrued salaries and other compensation | $ | | $ | | ||
Insurance |
| |
| | ||
Deferred mobilization revenues |
| |
| | ||
Property and other taxes |
| |
| | ||
Interest |
| | | |||
Operating lease liability - current |
| |
| | ||
Cash-settled SARs liability | | | ||||
Other |
| |
| | ||
$ | | $ | | |||
8.Long-term Debt
Our long-term debt consisted of the following:
| ||||||
(in thousands) |
| March 31, 2024 |
| December 31, 2023 | ||
Convertible Notes due March 18, 2026 | $ | | $ | | ||
Revolving ABL Credit Facility due September 30, 2025 |
| |
| | ||
Finance lease obligations |
| |
| | ||
| |
| | |||
Less: Convertible Notes debt discount and issuance costs | ( | ( | ||||
Less: current portion of finance leases |
| ( |
| ( | ||
Long-term debt, net | $ | | $ | | ||
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 $
14
The Convertible Notes have a cash interest rate of the Secured Overnight Financing Rate plus a
The effective conversion price of the Convertible Notes is $
Each noteholder has a right to convert our Convertible Notes into shares of ICD common stock at any time after issuance through maturity. The conversion price is $
The Indenture includes a mandatory redemption offer requirement (the “Mandatory Offer Requirement”). 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. We redeemed $
The Indenture contains financial covenants, including a liquidity covenant of $
15
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 us or a subsidiary of us within 90 days after the date of such consent) and (ii) our Board of Directors. 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.
At any time on or after September 18, 2024, we may execute an in-substance defeasance of the Convertible Notes and suspend all covenants and related security interests in the Company’s equipment and assets under the Indenture by irrevocably depositing with the trustee funds sufficient funds to pay the principal and interest on the outstanding Convertible Notes through the maturity date of the Convertible Notes. Our Board of Directors has initiated a formal review process to begin evaluating alternatives with respect to refinancing the Convertible Notes and other strategic opportunities and has formed a special committee of independent directors for that purpose. There can be no assurance that this process or evaluation will result in one or more transactions or any particular transaction or strategic outcome.
We are in compliance with our covenants as of March 31, 2024.
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) $
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We recorded a debt discount of $
Revolving ABL Credit Facility
On October 1, 2018, we entered into a $
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
The Revolving ABL Credit Facility contains a springing fixed charge coverage ratio covenant of
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 March 31, 2024, the weighted-average interest rate on our borrowings was
9.Stock-Based Compensation
In June 2019, we adopted the 2019 Omnibus Incentive Plan (the “2019 Plan”) providing for common stock-based awards to employees and non-employee directors. The 2019 Plan permits the granting of various types of awards, including stock options, restricted stock, restricted stock unit awards, and stock appreciation rights (“SARs”), and up to
17
A summary of compensation cost recognized for stock-based payment arrangements is as follows:
| Three Months Ended March 31, | |||||
(in thousands) |
| 2024 |
| 2023 | ||
Compensation cost recognized: |
|
|
| |||
Restricted stock, restricted stock units and stock-settled stock appreciation rights | $ | | $ | | ||
Cash-settled stock appreciation rights and performance-based phantom units |
| ( |
| | ||
Total stock-based compensation | $ | | $ | | ||
Time-based Restricted Stock and Restricted Stock Units
We have granted time-based restricted stock and restricted stock units to key employees under the 2019 Plan.
Time-based Restricted Stock
In the first quarter of 2024, we granted time-based restricted stock awards that vest over to
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 three months ended March 31, 2024 is as follows:
Weighted | |||||
Average | |||||
Grant-Date | |||||
Fair Value | |||||
| Shares |
| Per Share | ||
Outstanding at January 1, 2024 |
| |
| $ | |
Granted |
| |
| | |
Vested |
| |
| | |
Forfeited |
| |
| | |
Outstanding at March 31, 2024 |
| | $ | | |
Time-based Restricted Stock Units
We have granted to
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A summary of the status of our time-based restricted stock unit awards and of changes in our time-based restricted stock unit awards outstanding for the three months ended March 31, 2024 is as follows:
Weighted | |||||
Average | |||||
Grant-Date | |||||
Fair Value | |||||
| RSUs |
| Per Share | ||
Outstanding at January 1, 2024 |
| | $ | | |
Granted |
| |
| | |
Vested and converted |
| ( |
| | |
Forfeited |
| ( |
| | |
Outstanding at March 31, 2024 |
| | $ | | |
Performance-Based and Market-Based Restricted Stock Units
In the first quarter of 2023, we granted certain employees
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 March 31, 2024, there was $
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
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 three months ended March 31, 2024 is as follows:
Weighted | |||||
Average | |||||
Grant-Date | |||||
Fair Value | |||||
| RSUs |
| Per Share | ||
Outstanding at January 1, 2024 |
| | $ | | |
Granted |
| |
| | |
Vested and converted |
| ( |
| | |
Forfeited |
| ( |
| | |
Outstanding at March 31, 2024 |
| | $ | | |
Phantom Units
In the first quarter of 2024, we granted
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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 $
In the first quarter of 2024, we granted independent directors
In the first quarter of 2024, we granted
In the first quarter of 2023, we granted
In the first quarter of 2023, we granted independent directors
In the first quarter of 2023, we granted
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being remeasured to fair value at the end of each reporting period due to their liability-award classification. We recognized $
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
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
Changes to our time-based stock-settled SARs outstanding during the three months ended March 31, 2024 are as follows:
Weighted Average | |||||
Grant Date | |||||
Fair Value | |||||
| Stock-settled SARs |
| Per Share | ||
Outstanding at January 1, 2024 | |
| $ | | |
Granted | |
| | ||
Exercised | |
| | ||
Forfeited/Expired | | | |||
Outstanding at March 31, 2024 | | $ | | ||
Exercisable at March 31, 2024 | | $ | | ||
Non-vested at January 1, 2024 | | $ | | ||
Vested | ( | | |||
Non-vested at March 31, 2024 | |
| $ | | |
As of March 31, 2024, there was $
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
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.
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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:
Three Months Ended | Year Ended | |||||
| March 31, 2024 | December 31, 2023 | ||||
Remaining term to maturity | ||||||
Expected volatility factor | | % | | % | ||
Expected dividend yield | — | % | | % | ||
Risk-free interest rate | | % | | % |
Changes to our time-based cash-settled SARs outstanding during the three months ended March 31, 2024 are as follows:
Weighted Average | |||||
Exercise Price | |||||
| Cash-settled SARs |
| Per Share | ||
Outstanding at January 1, 2024 | |
| $ | | |
Granted | |
| | ||
Exercised | |
| | ||
Forfeited/Expired | | | |||
Outstanding at March 31, 2024 | | $ | | ||
Exercisable at March 31, 2024 | |
| $ | | |
As of March 31, 2024, there was
10.Stockholders’ Equity and Earnings (Loss) per Share
As of March 31, 2024, we had a total of
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 March 31, | ||||||
(in thousands, except per share data) |
| 2024 |
| 2023 | ||
Net (loss) income (numerator): | $ | ( | $ | | ||
(Loss) income per share: |
|
|
|
| ||
Basic | $ | ( | $ | | ||
Diluted | $ | ( | $ | | ||
Shares (denominator): |
|
|
|
| ||
Weighted average common shares outstanding - basic |
| |
| | ||
Weighted average common shares outstanding - diluted |
| |
| | ||
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 March 31, | |||||
(in thousands) | 2024 |
| 2023 | ||
Potentially dilutive securities excluded as anti-dilutive | | | |||
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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.
Our effective tax rate was
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 quarter of 2024, the effective tax rate takes into consideration the estimated valuation allowance based on forecasted 2024 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 March 31, 2024, we had outstanding purchase commitments to a number of suppliers totaling $
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
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”) $
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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.
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, 2023, filed with the Securities and Exchange Commission on February 28, 2024 (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 March 31, 2024, our rig fleet includes 26 AC powered (“AC”) 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.
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 April 22, 2024, oil was $83.82 per barrel.
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 were $2.58 per mmcf as of December 31, 2023 and $1.59 per mmcf as of April 23, 2024. 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 were stronger. However, there can be no assurance that market conditions in the Permian Basin will not decline and will not be adversely affected by recent volatility in oil prices nor any
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assurance that we will be successful in marketing our rigs in the Permian Basin or that they will be contracted on a timely basis or upon terms that are acceptable to us.
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 |
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| customers, reactivation and decommissioning of rigs, including transition costs between basins, and rig construction costs are excluded from this measure. |
| ● | Operating Efficiency and Uptime. Maintaining our rigs’ operational efficiency is a critical component of our business strategy. We measure our operating efficiency by tracking each drilling rig’s unscheduled downtime on a daily, monthly, quarterly and annual basis. |
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Results of Operations
The following summarizes our financial and operating data for the three months ended March 31, 2024 and 2023:
Three Months Ended March 31, | |||||||
(In thousands, except per share data) |
| 2024 |
| 2023 | |||
Revenues | $ | 46,636 |
| $ | 63,756 | ||
Costs and expenses |
|
|
|
| |||
Operating costs |
| 30,816 |
| 37,460 | |||
Selling, general and administrative |
| 4,337 |
| 6,727 | |||
Depreciation and amortization |
| 11,826 |
| 10,854 | |||
Gain on disposition of assets, net |
| (1,004) |
| (14) | |||
Total cost and expenses |
| 45,975 |
| 55,027 | |||
Operating income |
| 661 |
| 8,729 | |||
Interest expense |
| (9,878) |
| (8,719) | |||
(Loss) income before income taxes |
| (9,217) |
| 10 | |||
Income tax benefit |
| (231) |
| (2) | |||
Net (loss) income | $ | (8,986) |
| $ | 12 | ||
Other financial and operating data |
|
|
|
| |||
Number of marketed rigs (end of period) |
| 26 |
| 26 | |||
Rig operating days (1) |
| 1,376 |
| 1,744 | |||
Average number of operating rigs (2) |
| 15.1 |
| 19.4 | |||
Rig utilization (3) |
| 58 | % | 75 | % | ||
Average revenue per operating day (4) | $ | 30,313 |
| $ | 34,870 | ||
Average cost per operating day (5) | $ | 18,484 |
| $ | 19,205 | ||
Average rig margin per operating day | $ | 11,829 |
| $ | 15,665 | ||
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Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023
Revenues
Revenues for the three months ended March 31, 2024 were $46.6 million, representing a 26.9% decrease as compared to revenues of $63.8 million for the three months ended March 31, 2023. This decrease was primarily attributable to decreases in contractual dayrates and a decrease in operating days. Revenue per day decreased by 13.1% to $30,313 during the three months ended March 31, 2024, as compared to revenue per day of $34,870 during the three months ended March 31, 2023. Operating days decreased to 1,376 during the three months ended March 31, 2024 as compared to operating days of 1,744 for the three months ended March 31, 2023.
Operating Costs
Operating costs for the three months ended March 31, 2024 were $30.8 million, representing a 17.7% decrease as compared to operating costs of $37.5 million for the three months ended March 31, 2023. This decrease was primarily attributable to cost cutting initiatives implemented in the first quarter of 2024 as well as a decrease in operating days. Operating costs per day decreased to $18,484 during the three months ended March 31, 2024, representing a 3.8% decrease compared to cost per operating day of $19,205 for the three months ended March 31, 2023. Operating days decreased to 1,376 during the three months ended March 31, 2024 as compared to operating days of 1,744 for the three months ended March 31, 2023.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended March 31, 2024 were $4.3 million, representing a 35.5% decrease as compared to selling, general and administrative expense of $6.7 million for the three months ended March 31, 2023. This decrease in selling, general and administrative expenses as compared to the prior year comparable period primarily relates to cost cutting initiatives implemented in the first quarter of 2024 as well as decreased stock-based compensation of $1.5 million associated with the variable accounting of phantom awards.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended March 31, 2024 was $11.8 million, representing a 9.0% increase compared to depreciation and amortization expense of $10.9 million for the three months ended March 31, 2023. The increase in depreciation and amortization expense is primarily attributable to asset additions related to upgrades and reactivations in 2023.
Gain on Disposition of Assets, net
A gain on the disposition of assets totaling $1.0 million was recorded for the three months ended March 31, 2024 compared to a gain on the disposition of assets totaling $14.0 thousand for the three months ended March 31, 2023. In the current and prior year period, the gains related to the disposal or sale of miscellaneous drilling equipment.
Interest Expense
Interest expense was $9.9 million for the three months ended March 31, 2024 and $8.7 million for the three months ended March 31, 2023. The increase in the current period interest expense relates primarily to higher principal debt balances on the Convertible Notes compared to the prior year period.
Income Tax Benefit
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.
Income tax benefit for the three months ended March 31, 2024 amounted to $0.2 million as compared to income tax benefit of $2.0 thousand for the three months ended March 31, 2023. Our effective tax rates for the three months ended March 31, 2024 and 2023 were 2.5% and (20.0)%, respectively. Our effective tax rate for the three
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months ended March 31, 2024 and 2023 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.
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 quarter of 2024, the effective tax rate takes into consideration the estimated valuation allowance based on forecasted 2024 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.
Liquidity and Capital Resources
Our liquidity as of March 31, 2024 was $20.4 million, consisting of cash on hand of $6.9 million and $13.5 million of availability under our $40.0 million Revolving ABL Credit Facility, based on a borrowing base of $21.9 million.
During the first quarter of 2024, cash flow from operations was positive. On March 31, 2024, we paid in-kind the $13.3 million interest payment due under our Convertible Notes. On March 31, 2024, our noteholders accepted our mandatory offer to redeem $3.5 million of Convertible Notes plus accrued interest. As a result, on March 31, 2024, we paid $3.5 million principal and $0.3 million in accrued interest in cash. We funded the redemption through borrowings under our Revolving ABL Credit Facility. Looking forward, we have elected to pay in-kind interest under our Convertible Notes that is due and payable on September 30, 2024.
We expect our future capital and liquidity needs to be related to operating expenses, maintenance capital expenditures, payment of mandatory offer obligations on our Convertible Notes, 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.
Net Cash Provided by Operating Activities
Cash provided by operating activities was $11.0 million for the three months ended March 31, 2024 compared to cash provided by operating activities of $13.6 million for the three months ended March 31, 2023. 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 three months of 2024 were higher as a result of an increase in net loss of $9.0 million, adjusted for non-cash items, of $20.0 million for the three months ended March 31, 2024, compared to $26.6 million for non-cash items for the three months ended March 31, 2023. Working capital changes increased cash flows from operating activities by $0.1 million for the three months ended March 31, 2024 and decreased cash flows from operating activities by $13.0 million for the three months ended March 31, 2023.
Net Cash Used In Investing Activities
Cash used in investing activities was $8.2 million for the three months ended March 31, 2024 and $18.1 million for the three months ended March 31, 2023. During the first three months of 2024, cash payments of $10.0 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $1.8 million. During the 2023 period, cash payments of $18.8 million for capital expenditures were offset by proceeds from the sale of property, plant and equipment of $0.7 million.
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Net Cash (Used In) Provided by Financing Activities
Cash used in financing activities was $1.4 million for the three months ended March 31, 2024 and cash provided by financing activities was $5.9 million for the three months ended March 31, 2023. During the first three months of 2024, we received proceeds from borrowings under our revolving credit facility of $19.6 million. These proceeds were offset by repayments under our revolving credit facility of $16.9 million, redemption of $3.5 million of our Convertible Notes, purchase of treasury stock of $0.2 million, taxes paid for vesting of restricted stock units of $12.0 thousand and payments for finance lease obligations of $0.5 million. During the first three months of 2023, we received proceeds from borrowings under our revolving credit facility of $11.3 million. These proceeds were offset by repayments under our revolving credit facility of $4.3 million, restricted stock units withheld for taxes paid of $0.4 million and payments for finance lease obligations of $0.7 million.
Long-term Debt
On March 18, 2022, we entered into a subscription agreement with affiliates of MSD Partners, L.P. and an affiliate of Glendon Capital Management L.P. (the “Subscription Agreement”) for the placement of $157.5 million aggregate principal amount of convertible secured PIK toggle notes due 2026 (the “Convertible Notes”), and currently have $189.0 million of Convertible Notes outstanding as of March 31, 2024. 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). 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, September 30, 2023 and March 31, 2024, resulting in the issuance of an additional $50.0 million principal amount of Convertible Notes as of March 31, 2024. We also have elected to PIK outstanding interest that will be due and payable on September 30, 2024. As of March 31, 2024 and December 31, 2023, accrued PIK interest of $0.1 million and $6.8 million, respectively, was classified as “Other Long-Term Liabilities” on our consolidated balance sheets.
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 into 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
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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”). 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. We redeemed $5.0 million of Convertible Notes plus accrued interest on a quarterly basis June 30, 2023 through December 31, 2023, and redeemed $3.5 million of Convertible Notes plus accrued interest on March 31, 2024. We are obligated to offer to redeem $3.5 million of Convertible Notes on a quarterly basis through March 31, 2025. 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 each of the mandatory offer payment dates we borrowed the principal amount of such note under our Revolving ABL Credit Facility to refinance the accepted mandatory offerings.
The Indenture contains financial covenants, including a liquidity covenant of $10.0 million; 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 $14.8 million during the nine months ended September 30, 2024 and $11.25 million during the nine months ended June 30, 2025, 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 year duration providing for early termination payments consistent with past practice equal to at least the expected margin on the contract, (ii) the expected margin on such rig contract will be equal to or exceed such reactivation capital expenditures, and (iii) the reactivation capital expenditures, rig contract and the expected margin calculation are approved by our board of directors or (c) relate to other capital expenditures specifically approved by written or electronic consent by both (i) the required holders (which approval may, for the avoidance of doubt, be provided by the required holders in their sole discretion for an amount of capital expenditures to be committed or made by us or a subsidiary of us within 90 days after the date of such consent) and (ii) our Board of Directors. 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.
At any time on or after September 18, 2024, we may execute an in-substance defeasance of the Convertible Notes and suspend all covenants and related security interests in the Company’s equipment and assets under the Indenture by irrevocably depositing with the trustee funds sufficient funds to pay the principal and interest on the outstanding Convertible Notes through the maturity date of the Convertible Notes. Our Board of Directors has initiated a formal review process to begin evaluating alternatives with respect to refinancing the Convertible Notes and other strategic opportunities and has formed a special committee of independent directors for that purpose. There can be no assurance that this process or evaluation will result in one or more transactions or any particular transaction or strategic outcome.
We are in compliance with our covenants as of March 31, 2024.
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
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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 recorded a debt discount of $37.8 million upon the issuance of the Convertible Notes and issuance costs consisting of cash fees of $7.4 million and a non-cash structuring fee settled in shares of $2.3 million. The debt discount and issuance costs are recorded as a direct deduction from the Convertible Notes in the consolidated balance sheets and 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 March 31, 2024 is 25.7%. For the three months ended March 31, 2024, the contractual interest expense was $6.9 million and the debt discount and issuance cost amortization was $2.7 million. For the three months ended March 31, 2023, the contractual interest expense was $5.9 million and the debt discount and issuance cost amortization was $2.4 million.
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 March 31, 2024.
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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 March 31, 2024, the weighted-average interest rate on our borrowings was 14.87%. As of March 31, 2024, the borrowing base under our Revolving ABL Credit Facility was $21.9 million, and we had $13.5 million of availability remaining of our $40.0 million commitment on that date.
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 March 31, 2024 included $197.3 million of floating-rate debt attributed to borrowings at an average interest rate of 14.87%. As a result, our annual interest cost in 2024 will fluctuate based on short-term interest rates. The impact on annual cash flow of a 10% change in the floating-rate (approximately 16.36%) would be approximately $2.9 million annually based on the floating-rate debt and other obligations outstanding at March 31, 2024; however, there are no assurances that possible rate changes would be limited to such amounts.
Commodity Price Risk
Oil and natural gas prices, and market expectations of potential changes in these prices, significantly impact the level of worldwide drilling and production services activities. Reduced demand for oil and natural gas generally results in lower prices for these commodities and may impact the economics of planned drilling projects and ongoing production projects, resulting in the curtailment, reduction, delay or postponement of such projects for an indeterminate period of time. When drilling and production activity and spending decline, both dayrates and utilization have also historically declined. 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.
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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 March 31, 2024 at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
During the most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are the subject of certain legal proceedings and claims arising in the ordinary course of business from time to time. Management cannot predict the ultimate outcome of such legal proceedings and claims. While the legal proceedings and claims may be asserted for amounts that may be material should an unfavorable outcome be the result, management does not currently expect that the resolution of these matters will have a material adverse effect on our financial position or results of operations. In addition, management monitors our legal proceedings and claims on a quarterly basis and establishes and adjusts any reserves as appropriate to reflect our assessment of the then-current status of such matters.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the risks related to our business set forth under “Risk Factors” in our Form 10-K for the year ended December 31, 2023. 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
Issuer Purchases of Equity Securities
During the first quarter of 2024, we withheld shares of our common stock to satisfy minimum tax withholding obligations in connection with the vesting of certain restricted stock unit awards. These shares are deemed to be “issuer purchases” of shares that are required to be disclosed pursuant to this Item but were not purchased as part of a publicly announced program to purchase common shares. The following table provides information relating to our repurchase of shares of restricted stock unit awards during the three months ended March 31, 2024 (dollars in thousands, except average price paid per share):
Issuer Purchases of Equity Securities | ||||||||||
Total Number of | Approximate Dollar | |||||||||
Shares Purchased as | Value of Shares That | |||||||||
Total Number of | Average Price Paid | Part of Publicly | May Yet be Purchased | |||||||
Period |
| Shares Purchased |
| Per Share |
| Announced Program |
| Under the Program (1) | ||
January 1 — January 31 | — | $ | — | — | $ | — | ||||
February 1 — February 29 | — | $ | — | — | $ | — | ||||
March 1 — March 31 | 58,999 | $ | 2.69 | — | $ | — | ||||
Total | 58,999 | $ | 2.69 | — | $ | — | ||||
| (1) | We do not have a current share repurchase program authorized by the board of directors. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
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ITEM 6. EXHIBITS
Exhibit |
| Description |
10.1* | ||
10.2†* | ||
10.3†* | ||
10.4†* | Form of Cash Settled Free Cash Flow Performance Award Agreement | |
31.1* | ||
31.2* | ||
32.1* | ||
32.2* | ||
101.CAL* | XBRL Calculation Linkbase Document | |
101.DEF* | XBRL Definition Linkbase Document | |
101.INS* | XBRL Instance Document | |
101.LAB* | XBRL Labels Linkbase Document | |
101.PRE* | XBRL Presentation Linkbase Document | |
101.SCH* | XBRL Schema Document | |
104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
* | Filed with this report |
† | Indicates a management contract or compensatory plan or arrangement filed pursuant to Item 601(b)(10)(iii) of Regulation S-K |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INDEPENDENCE CONTRACT DRILLING, INC. | |||
By: | /s/ J. Anthony Gallegos, Jr. | ||
Name: | J. Anthony Gallegos, Jr. | ||
Title: | President and Chief Executive Officer (Principal Executive Officer) | ||
By: | /s/ Philip A. Choyce | ||
Name: | Philip A. Choyce | ||
Title: | Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer) | ||
By: | /s/ Katherine Kokenes | ||
Name: | Katherine Kokenes | ||
Title: | Vice President and Chief Accounting Officer (Principal Accounting Officer) | ||
Date: May 1, 2024 | |||
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