Nature of Operations and Recent Events	9 Months Ended
Sep. 30, 2024
Nature of Operations and Recent Events
Nature of Operations and Recent Events	1.Nature of Operations and Recent Events Except as expressly stated or the context otherwise requires, the terms “we,” “us,” “our,” “ICD,” and the “Company” refer to Independence Contract Drilling, Inc. and its subsidiary. We provide land-based contract drilling services for oil and natural gas producers targeting unconventional resource plays in the United States. We own and operate a premium fleet comprised of modern, technologically advanced drilling rigs. We currently focus our operations on unconventional resource plays located in geographic regions that we can efficiently support from our Houston, Texas and Midland, Texas facilities in order to maximize economies of scale. Currently, our rigs are operating in the Permian Basin and the Haynesville Shale; however, our rigs have previously operated in the Eagle Ford Shale, Mid-Continent and Eaglebine regions as well. Our business depends on the level of exploration and production activity by oil and natural gas companies operating in the United States, and in particular, the regions where we actively market our contract drilling services. The oil and natural gas exploration and production industry is historically cyclical and characterized by significant changes in the levels of exploration and development activities. Oil and natural gas prices and market expectations of potential changes in those prices significantly affect the levels of those activities. Worldwide political, regulatory, economic and military events, as well as natural disasters have contributed to oil and natural gas price volatility historically and are likely to continue to do so in the future. Any prolonged reduction in the overall level of exploration and development activities in the United States and the regions where we market our contract drilling services, whether resulting from changes in oil and natural gas prices or otherwise, could materially and adversely affect our business. Market Conditions Oil prices (WTI-Cushing) reached a high of $123.64 per barrel on March 8, 2022; however, prices have fallen since those highs. At December 31, 2022 and December 31, 2023, oil was $80.16 and $71.89 per barrel, respectively, and as of November 12, 2024, oil was $68.43 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 $1.92 per mmcf as of November 12, 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. As of September 30, 2024, nine of our 12 contracted rigs were operating in the Permian Basin and three were operating in the Haynesville. However, there can be no assurance that market conditions in our core markets will not decline and will not be adversely affected by recent volatility in oil and natural gas prices nor any assurance that we will be successful in marketing our rigs in our core markets or that they will be contracted on a timely basis or upon terms that are acceptable to us. In this regard, although oil prices have remained relatively stable, demand for land rigs in our core markets of the Permian Basin, and also in the gas-directed Haynesville Shale, continues to be negatively impacted by industry consolidation of our target market customer base as well as increased operating efficiencies that have allowed customers to complete budgeted drilling programs in less time than expected. In addition, increased fiscal discipline by E&P customers has slowed the pace at which customers redeploy capital into drilling and completion activities. During 2024, these factors have significantly increased the pace of rig releases and recontracting with new customers, often referred to as rig churn, resulting in increased competition between land rig contractors in spite of relatively stable commodity prices. For example, at the end of the third quarter of 2024, following the merger of two of our customers, including our largest customer, we were informed that three of our rigs operating on pad-to-pad contracts for the combined company would be released by the end of 2024. We are now marketing these additional rigs across our customer base for fourth quarter 2024 and early 2025 opportunities. As a result, while we have already been successful in recontracting some of these rigs with new or existing customers, we expect to experience some idle time prior to recontracting and our average operating rig count during the fourth quarter of 2024 will fall below third quarter 2024 average rig count levels. Liquidity and Going Concern Pursuant to the requirements of FASB ASC Topic 205-40, Presentation of Financial Statements – Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern for one year from the date these financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying unaudited consolidated financial statements have been prepared assuming we will continue as a going concern. The going concern basis of presentation assumes that we will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. This also means that the accompanying unaudited consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainties described below, which could be material. We expect our future capital and liquidity needs to be related to operating expenses, capital expenditures, payment of mandatory offer obligations on our Convertible Notes, working capital investments and general corporate purposes. Our liquidity as of September 30, 2024 was $19.1 million, consisting of cash on hand of $6.1 million and $13.0 million of availability under our Revolving ABL Credit Facility, based on a borrowing base of $17.4 million. Our Revolving ABL Credit Facility matures on September 30, 2025, as a result we have begun classifying balances due under our Revolving ABL Credit Facility as current debt and also have begun classifying as current debt the future mandatory offer obligations under our Convertible Notes which we intend to finance through borrowings under our Revolving ABL Credit Facility. As a result, at September 30, 2024, we had negative working capital of $9.5 million, which includes the impact of $4.25 million outstanding under our Revolving ABL Credit Facility and $10.5 million of required mandatory offer repayments being classified as current debt. In order to fund future obligations, including this $9.5 million working capital deficit, we currently expect to pay interest in-kind under our Convertible Notes until they mature on March 18, 2026. As a result, even after taking into consideration mandatory offer payments of principal, we expect that the face amount outstanding under our Convertible Notes to continue to increase through maturity. On September 30, 2024, we paid interest in-kind aggregating $13.8 million relating to the six-month period ended September 30, 2024. We have elected to pay in-kind interest aggregating $13.9 million on March 31, 2025, prior to taking into account any payments on mandatory offers during this period. We expect to fund future obligations through cash flows from operations as well as borrowings under our Revolving ABL Credit Facility. As our anticipated operating activity levels decline during the fourth quarter of 2024 while we transition certain rigs to new customers, we expect the borrowing base under our Revolving ABL Credit Facility to decline and that cash flows from operations will not exceed cash flows from investing activities during that period. Our ability to continue to be able to borrow under our Revolving ABL Credit Facility to fund future cash flow deficits is predicated on our ability to comply with various financial covenants contained in our debt agreements, including a minimum liquidity covenant contained in the indenture governing our Convertible Notes as well as springing fixed charge coverage ratio covenants contained in the Convertible Notes indenture and Revolving ABL Credit Facility. While we are not currently in violation of any of our covenants under our debt agreements, we believe that, in the absence of applicable waivers or forbearance agreements, it is probable that we will violate one or more of these financial covenants within the next 12 months, which constitutes an event of default under these instruments and raises substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of the unaudited consolidated financial statements included in this report. In addition, it is an event of default under our debt instruments if a going concern or substantial doubt qualification is included in the audit report contained in our Annual Report on Form 10-K for the year ended December 31, 2024. To address and mitigate the risks associated with our expanding debt levels, covenant compliance and liquidity contraction, our Board of Directors has established a committee of independent directors and we have engaged financial and legal advisors to assist us in, among other things, analyzing various strategic alternatives to address these risks and our liquidity and capital structure. In addition to having evaluated and considered the feasibility of transactions with third parties, we currently are discussing with the holders of our Convertible Notes their willingness to equitize and refinance our existing indebtedness, and in connection with such a transaction, provide near-term liquidity through the uncommitted $7.5 million accordion feature under the Convertible Notes indenture. If we reach an agreement with the holders of our Convertible Notes regarding such a transaction, in order to facilitate stakeholder approvals necessary to effectuate such a transaction, we expect the transaction would be effectuated through a statutory restructuring under Chapter 11 of the United States Bankruptcy Code that would not impair general unsecured creditors, employees, customers, vendors, suppliers, or holders of other indebtedness of the Company. However, as we have not yet entered into any binding commitments that would address these risks and uncertainties, there is substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited consolidated financial statements. Delisting Following the close of business on August 28, 2024, the New York Stock Exchange (“NYSE”) notified us that we were no longer compliant with the NYSE’s minimum market capitalization rule which requires a company to maintain an average market capitalization of $15 million over a consecutive 30-day trading period. There is no cure period permitted for non-compliance with the NYSE market capitalization rule; therefore, the NYSE immediately suspended trading of our common stock and delisted ICD from the NYSE. Beginning at the open of business on August 29, 2024, our common stock commenced trading under the new symbol ICDI on the OTCQX Best Market.

Nature of Operations and Recent Events

9 Months Ended

Sep. 30, 2024

Nature of Operations and Recent Events

1.Nature of Operations and Recent Events

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

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

We currently focus our operations on unconventional resource plays located in geographic regions that we can efficiently support from our Houston, Texas and Midland, Texas facilities in order to maximize economies of scale. Currently, our rigs are operating in the Permian Basin and the Haynesville Shale; however, our rigs have previously operated in the Eagle Ford Shale, Mid-Continent and Eaglebine regions as well.

Our business depends on the level of exploration and production activity by oil and natural gas companies operating in the United States, and in particular, the regions where we actively market our contract drilling services. The oil and natural gas exploration and production industry is historically cyclical and characterized by significant changes in the levels of exploration and development activities. Oil and natural gas prices and market expectations of potential changes in those prices significantly affect the levels of those activities. Worldwide political, regulatory, economic and military events, as well as natural disasters have contributed to oil and natural gas price volatility historically and are likely to continue to do so in the future. Any prolonged reduction in the overall level of exploration and development activities in the United States and the regions where we market our contract drilling services, whether resulting from changes in oil and natural gas prices or otherwise, could materially and adversely affect our business.

Market Conditions

Oil prices (WTI-Cushing) reached a high of $123.64 per barrel on March 8, 2022; however, prices have fallen since those highs. At December 31, 2022 and December 31, 2023, oil was $80.16 and $71.89 per barrel, respectively, and as of November 12, 2024, oil was $68.43 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 $1.92 per mmcf as of November 12, 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. As of September 30, 2024, nine of our 12 contracted rigs were operating in the Permian Basin and three were operating in the Haynesville. However, there can be no assurance that market conditions in our core markets will not decline and will not be adversely affected by recent volatility in oil and natural gas prices nor any assurance that we will be successful in marketing our rigs in our core markets or that they will be contracted on a timely basis or upon terms that are acceptable to us.

In this regard, although oil prices have remained relatively stable, demand for land rigs in our core markets of the Permian Basin, and also in the gas-directed Haynesville Shale, continues to be negatively impacted by industry consolidation of our target market customer base as well as increased operating efficiencies that have allowed customers to complete budgeted drilling programs in less time than expected. In addition, increased fiscal discipline by E&P customers has slowed the pace at which customers redeploy capital into drilling and completion activities. During 2024, these factors have significantly increased the pace of rig releases and recontracting with new customers, often referred to as rig churn, resulting in increased competition between land rig contractors in spite of relatively stable commodity prices. For example, at the end of the third quarter of 2024, following the merger of two of our customers, including our largest customer, we were informed that three of our rigs operating on pad-to-pad contracts for the combined company would be released by the end of 2024. We are now marketing these additional rigs across our customer base for fourth quarter 2024 and early 2025 opportunities. As a result, while we have already been successful in recontracting some of these rigs with new or existing customers, we expect to experience some idle time prior to recontracting and our average operating rig count during the fourth quarter of 2024 will fall below third quarter 2024 average rig count levels.

Liquidity and Going Concern

Pursuant to the requirements of FASB ASC Topic 205-40, Presentation of Financial Statements – Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern for one year from the date these financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt exists under this methodology, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.

The accompanying unaudited consolidated financial statements have been prepared assuming we will continue as a going concern. The going concern basis of presentation assumes that we will be able to realize our assets and discharge our liabilities and commitments in the normal course of business. This also means that the accompanying unaudited consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainties described below, which could be material.

We expect our future capital and liquidity needs to be related to operating expenses, capital expenditures, payment of mandatory offer obligations on our Convertible Notes, working capital investments and general corporate purposes. Our liquidity as of September 30, 2024 was $19.1 million, consisting of cash on hand of $6.1 million and $13.0 million of availability under our Revolving ABL Credit Facility, based on a borrowing base of $17.4 million. Our Revolving ABL Credit Facility matures on September 30, 2025, as a result we have begun classifying balances due under our Revolving ABL Credit Facility as current debt and also have begun classifying as current debt the future mandatory offer obligations under our Convertible Notes which we intend to finance through borrowings under our Revolving ABL Credit Facility. As a result, at September 30, 2024, we had negative working capital of $9.5 million, which includes the impact of $4.25 million outstanding under our Revolving ABL Credit Facility and $10.5 million of required mandatory offer repayments being classified as current debt.

In order to fund future obligations, including this $9.5 million working capital deficit, we currently expect to pay interest in-kind under our Convertible Notes until they mature on March 18, 2026. As a result, even after taking into consideration mandatory offer payments of principal, we expect that the face amount outstanding under our Convertible Notes to continue to increase through maturity. On September 30, 2024, we paid interest in-kind aggregating $13.8 million relating to the six-month period ended September 30, 2024. We have elected to pay in-kind interest aggregating $13.9 million on March 31, 2025, prior to taking into account any payments on mandatory offers during this period.

We expect to fund future obligations through cash flows from operations as well as borrowings under our Revolving ABL Credit Facility. As our anticipated operating activity levels decline during the fourth quarter of 2024 while we transition certain rigs to new customers, we expect the borrowing base under our Revolving ABL Credit Facility to decline and that cash flows from operations will not exceed cash flows from investing activities during that period. Our ability to continue to be able to borrow under our Revolving ABL Credit Facility to fund future cash flow deficits is predicated on our ability to comply with various financial covenants contained in our debt agreements, including a minimum liquidity covenant contained in the indenture governing our Convertible Notes as well as springing fixed charge coverage ratio covenants contained in the Convertible Notes indenture and Revolving ABL Credit Facility. While we are not currently in violation of any of our covenants under our debt agreements, we believe that, in the absence of applicable waivers or forbearance agreements, it is probable that we will violate one or more of these financial covenants within the next 12 months, which constitutes an event of default under these instruments and raises substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of the unaudited consolidated financial statements included in this report. In addition, it is an event of default under our debt instruments if a going concern or substantial doubt qualification is included in the audit report contained in our Annual Report on Form 10-K for the year ended December 31, 2024.

To address and mitigate the risks associated with our expanding debt levels, covenant compliance and liquidity contraction, our Board of Directors has established a committee of independent directors and we have engaged financial and legal advisors to assist us in, among other things, analyzing various strategic alternatives to address these risks and

our liquidity and capital structure. In addition to having evaluated and considered the feasibility of transactions with third parties, we currently are discussing with the holders of our Convertible Notes their willingness to equitize and refinance our existing indebtedness, and in connection with such a transaction, provide near-term liquidity through the uncommitted $7.5 million accordion feature under the Convertible Notes indenture. If we reach an agreement with the holders of our Convertible Notes regarding such a transaction, in order to facilitate stakeholder approvals necessary to effectuate such a transaction, we expect the transaction would be effectuated through a statutory restructuring under Chapter 11 of the United States Bankruptcy Code that would not impair general unsecured creditors, employees, customers, vendors, suppliers, or holders of other indebtedness of the Company. However, as we have not yet entered into any binding commitments that would address these risks and uncertainties, there is substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited consolidated financial statements.

Delisting

Following the close of business on August 28, 2024, the New York Stock Exchange (“NYSE”) notified us that we were no longer compliant with the NYSE’s minimum market capitalization rule which requires a company to maintain an average market capitalization of $15 million over a consecutive 30-day trading period. There is no cure period permitted for non-compliance with the NYSE market capitalization rule; therefore, the NYSE immediately suspended trading of our common stock and delisted ICD from the NYSE. Beginning at the open of business on August 29, 2024, our common stock commenced trading under the new symbol ICDI on the OTCQX Best Market.

Independence Contract Drilling, Inc. 10-Q