ICD Independence Contract Drilling Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form 10-Q

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

For the quarterly period ended March 31, 2022

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OR

20475 State Highway 249, Suite 300

Houston, TX 77070

(Address of principal executive offices)

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(281) 598-1230

(Registrant’s telephone number, including area code)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ☒    No  ☐

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ☒    No  ☐

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

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13,617,005 shares of the registrant’s Common Stock were outstanding as of May 12, 2022.

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INDEPENDENCE CONTRACT DRILLING, INC.

Index to Form 10-Q

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

All forward-looking statements are necessarily only estimates of future results, and there can be no assurance that actual results will not differ materially from expectations, and, therefore, you are cautioned not to place undue reliance on such statements. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Form 10-Q and Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

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

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

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

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INDEPENDENCE CONTRACT DRILLING, INC.

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The Convertible Notes mature on March 18, 2026. The Convertible Notes have a cash interest rate of the Secured Overnight Financing Rate plus a 10 basis point credit spread, with a floor of 1% (collectively, “SOFR”) plus 12.5%. The Convertible Notes have an initial payment in-kind, or “PIK,” interest rate of SOFR plus 14.0%. As described below, the PIK interest rate is subject to a decrease to SOFR plus 9.5% following receipt of the Shareholder Approval (defined below). In the absence of receipt of the Shareholder Approval, we will be entitled to pay interest in additional PIK notes (“PIK Notes”) for a period of 18 months. Following the Shareholder Approval, we will have the right at our option, to PIK interest under the Convertible Notes for the entire term of the Convertible Notes. Under the Indenture, we are required to submit the following matters for stockholder approval (the “Shareholder Approval”): (i) in accordance with Section 312.03 of The New York Stock Exchange Listed Company Manual, the issuance by us of shares of common stock upon conversion of the Notes, based on each of (a) an increase of the noteholder’s optional conversion rate for the Notes from 197.23866 shares of common stock per $1,000 principal amount of Notes to 221.72949 shares of Common Stock per $1,000 principal amount of Notes (i.e., representing decrease in the effective conversion price of $5.07 per share to $4.51 per share), (b) the issuance by us of up to $7.5 million of additional Notes, if and when issued by us, (c) the conversion of all Notes (including PIK Notes) without any limitation of the 75% Pre-Approval Conversion Ratio (as detailed in the Indenture) and (d) the issuance of shares of common stock upon conversion of Notes in connection with a Qualified Merger Conversion (as defined in the Indenture) to the extent the number of shares issuable upon such conversion would exceed the number of shares of common stock issuable at the otherwise then-current conversion rate; and (ii) an amendment to increase the number of shares of our common stock authorized under our certificate of incorporation to 250,000,000 shares. Under the Indenture, the conversion of the Convertible Notes prior to the Shareholder Approval is subject to a “Pre-Approval Conversion Ratio” of 75%. In connection with the placement of the Convertible Notes, we issued 2,268,000 shares of our common stock as a structuring fee. The structuring fee shares were issued on March 18, 2022, concurrent with the closing of the private placement of the Convertible Notes. See Note 8 “Long-term Debt” for additional information.

ATM Distribution Agreement

On December 16, 2021, in conjunction with the ATM Distribution Agreement entered into on August 19, 2021, our board of directors authorized the sale of an additional $5.9 million of common stock to be sold in transactions that are deemed to be “at-the-market offerings.” We began offering shares under this program during the first quarter of 2022. As of March 31, 2022, we raised gross proceeds of $3.6 million from the sale of 1,061,853 shares in this offering.

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2.Interim Financial Information

These unaudited consolidated financial statements include the accounts of ICD 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, 2021, included in our Annual Report on Form 10-K for the year ended December 31, 2021. In management’s opinion, these financial statements contain all adjustments necessary to fairly present our financial position, results of operations, cash flows and changes in stockholders’ equity for all periods presented.

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

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

Derivatives

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

As described in Note 8, we have determined that certain features under our Convertible Notes (as defined in Note 8) require bifurcation from the debt host agreement in accordance with ASC 815. Accordingly, we recognized a

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derivative liability at fair value for this instrument in our consolidated balance sheet and will adjust the carrying value of the liability to fair value at each reporting period until the features underlying the instrument are exercised, redeemed, cancelled or expires. The changes in fair value are assessed quarterly and recorded in our consolidated statement of operations. See Note 5 “Financial Instruments and Fair Value” for additional information.

Segment and Geographical Information

Our operations consist of one reportable segment because all of our drilling operations are located in the United States and have similar economic characteristics. Corporate management administers all properties as a whole rather than as discrete operating segments. Operational data is tracked by rig; however, financial performance is measured as a single enterprise and not on a rig-by-rig basis. Further, the allocation of capital resources is employed on a project-by-project basis across our entire asset base to maximize profitability without regard to individual geographic areas.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, as additional guidance on the measurement of credit losses on financial instruments. The guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. In addition, the guidance amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The new guidance is effective for public companies for interim and annual periods beginning after December 15, 2019, with early adoption permitted for interim and annual periods beginning after December 15, 2018. In October 2019, the FASB approved a proposal which grants smaller reporting companies additional time to implement FASB standards on current expected credit losses (CECL) to January 2023. As a smaller reporting company, we will defer adoption of ASU 2016-13 until January 2023. We do not expect the standard to have a material impact on our consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to simplify the accounting for convertible instruments by removing certain separation models in Subtopic 470-20, Debt-Debt with Conversion and Other Options, for convertible instruments. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. For smaller reporting companies the pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2023. We early adopted this standard on January 1, 2022. See Note 8 “Long-term Debt” for additional information.

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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, 2022 and 2021:

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The following table provides information about receivables, contract assets and contract liabilities related to contracts with customers:

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

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The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2022. The estimated revenue does not include amounts of variable consideration that are constrained.

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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 $1.4 million and $0.6 million on our consolidated balance sheets at March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022, contract costs increased by $2.0 million and we amortized $1.2 million of contract costs. During the three months ended March 31, 2021, contract costs increased by $0.5 million and we amortized $0.4 million of contract costs.

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4.Leases

We have multi-year operating and financing leases for corporate office space, field location facilities, land, vehicles and various other equipment used in our operations. We also have a significant number of rentals related to our drilling operations that are day-to-day or month-to-month arrangements. Our multi-year leases have remaining lease terms of greater than one year to three years.

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The components of lease expense were as follows:

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Supplemental cash flow information related to leases is as follows:

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Supplemental balance sheet information related to leases is as follows:

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Maturities of lease liabilities at March 31, 2022 were as follows:

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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:

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, our debt, an embedded derivative liability and merger consideration payable to an affiliate. Our debt consists primarily of our Convertible Notes and Revolving ABL Facility as of March 31, 2022 and our Term Loan and our Revolving ABL Facility as of December 31, 2021. The fair value of cash and cash equivalents, accounts receivable, accounts payable and certain accrued liabilities approximate their carrying value because of the short-term nature of these instruments.

The estimated fair value of our Revolving ABL Credit Facility, Term Loan Facility, and merger consideration payable to an affiliate are determined to be Level 3 measurements based on quoted market prices and terms for similar instruments, where available, and on the amount of future cash flows associated with the debt, discounted using our current borrowing rate for comparable debt instruments (the Income Method). Based on our evaluation of the risk-free rate, the market yield and credit spreads on comparable company publicly traded debt issues, we used an annualized discount rate, including a credit valuation allowance, of 7.3%. The following table sets forth the estimated fair value of our Revolving ABL Credit Facility, Term Loan Facility and merger consideration payable to an affiliate as of March 31, 2022 and December 31, 2021.

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The fair value of the Convertible Notes was estimated as $162.1 million as of March 31, 2022. The fair value was estimated using a discounted cash flow analysis with a yield based on our credit rating.

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Recurring Fair Value Measurements

The fair value of the embedded derivative liability was estimated using a “with and without” approach as of March 31, 2022:

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

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

The following table summarizes fair value measurements by level at March 31, 2022 for instruments measured at fair value on a recurring basis (in thousands):

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No financial instruments were measured at fair value on a recurring basis at December 31, 2021.

As of December 31, 2021, we had no embedded derivative liability recorded. In conjunction with the issuance of the Convertible Notes on March 18, 2022, we recorded an embedded derivative liability of $75.7 million. Based on the estimated change in fair value of the embedded derivative liability between March 18, 2022 and March 31, 2022, we recorded a loss of $1.9 million. The loss is reported in our consolidated statement of operations within change in fair value of embedded derivative liability. As of March 31, 2022, the fair value of the embedded derivative liability was $77.6 million.

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

The significant unobservable inputs used in the fair value measurement of our embedded derivative liability are a volatility rate of 57.5%, a credit spread of 3,481 basis points and a risk-free rate of 2.4%. The expected volatility is estimated based on the historical volatility of our common stock and the remaining term of the Convertible Notes of 4.0 years at March 31, 2022.

Fair value measurements are applied with respect to our non-financial assets and liabilities measured on a non-recurring basis, which would consist of measurements primarily of long-lived assets.

6.Inventories

All of our inventory as of March 31, 2022 and December 31, 2021 consisted of supplies held for use in our drilling operations.

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7.Supplemental Balance Sheet Information

Prepaid expenses and other current assets consisted of the following:

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Accrued liabilities consisted of the following:

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8.Long-term Debt

Our long-term debt consisted of the following:

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Convertible Notes

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

The Convertible Notes have a cash interest rate of the Secured Overnight Financing Rate plus a 10 basis point credit spread, with a floor of 1% (collectively, “SOFR”) plus 12.5%. The Convertible Notes have an initial payment in-kind, or “PIK,” interest rate of SOFR plus 14.0%. The PIK interest rate is subject to a decrease to SOFR plus 9.5% following receipt of the Shareholder Approval (defined below). In the absence of receipt of the Shareholder Approval, we will be entitled to pay interest in additional Notes (“PIK Notes”) for a period of 18 months. Following the Shareholder Approval, we will have the right at our option, to PIK interest under the Convertible Notes for the entire term of the Convertible Notes. Under the Indenture, we are required to submit two matters for stockholder approval (the “Shareholder Approval”): (i) in accordance with Section 312.03 of The New York Stock Exchange Listed Company Manual, issue shares of common stock upon conversion of the Notes, based on each of (a) an increase of the noteholder’s optional conversion rate for the Notes from 197.23866 shares of common stock per $1,000 principal amount of Notes to 221.72949 shares of Common Stock per $1,000 principal amount of Notes (i.e., representing decrease in the effective conversion price of $5.07 per share to $4.51 per share), (b) the issuance by us of up to $7.5 million of additional Notes, if and when issued by us, (c) the conversion of all Notes (including PIK Notes) without any

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limitation of the 75% Pre-Approval Conversion Ratio and (d) the issuance of shares of common stock upon conversion of Notes in connection with a Qualified Merger Conversion (as defined in the Indenture) to the extent the number of shares issuable upon such conversion would exceed the number of shares of common stock issuable at the otherwise then-current conversion rate; and (ii) an amendment to increase the number of shares of our common stock authorized under its certificate of incorporation to 250,000,000 shares (or such other amount as necessary to reserve for issuance upon conversion of all Notes at the lower Conversion Price, together with assumed PIK Notes prior to maturity). Under the Indenture, the conversion of the Convertible Notes prior to the Shareholder Approval is subject to a “Pre-Approval Conversion Ratio” of 75%.

Each noteholder has a right to convert our Notes for shares of ICD common stock at any time after issuance through maturity. Prior to receiving the Shareholder Approval (defined below), the conversion price is $5.07 per share. Upon receiving the Shareholder Approval, the conversion price will reduce to $4.51 per share. Interest on the Convertible Notes is due on March 31 and September 30 each year, beginning on September 30, 2022. Under the Indenture, a holder is not entitled to receive shares of our common stock upon conversion of any 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 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 Notes on the Issue Date, in such Holder’s Subscription Agreement. In lieu of any shares of common stock not delivered to a converting holder by operation of the Restricted Ownership Percentage limitation, we will deliver to such Holder Pre-Funded Warrants in respect of any equal number of shares of common stock. Such Pre-Funded Warrants will contain substantially similar Restricted Ownership Percentage terms.

The Indenture includes a mandatory redemption offer requirement (the “Mandatory Offer Requirement”). Beginning June 30, 2023, we are obligated to offer to redeem $5.0 million of Notes on a quarterly basis through December 31, 2023, and $3.5 million of Notes on a quarterly basis through March 31, 2025. The mandatory offer price is an amount in cash equal to the principal amount of such Note plus accrued and unpaid interest on such Note. The Indenture also includes an optional redemption right (the “Company Redemption Right”) that permits us to redeem on one or more occasions (i) during the period ending on September 18, 2022, up to $25.0 million aggregate principal of notes at a redemption price of 105% of par, plus accrued and unpaid interest, and (ii) during the period beginning September 19, 2022 and ending September 19, 2023, up to $25 million aggregate principal amount of notes at redemption price of 104% of par, plus accrued and unpaid interest. The Mandatory Offer Requirement is reduced by the amount of any Notes repurchased pursuant to our Redemption Right.

The Indenture contains financial covenants, including a liquidity covenant of $10.0 million beginning September 30, 2022; a springing fixed charge coverage ratio covenant of 1.00 to 1.00 that is tested when availability under the Revolving ABL Credit Facility (defined below) is below $5.0 million at any time that the Convertible Notes are outstanding; and capital expenditure limits of $25.0 million during 2022 and $15.0 million during 2023 and 2024, subject to adjustment upward by $500,000 per year for each rig above 17 that operates during each year. In addition, capital expenditures are excluded from this covenant if funded from equity proceeds or relates to the reactivation of a rig so long as (i) we have a signed contract with a customer with respect to each such rig of at least one (1) year duration providing for early termination payments consistent with past practice equal to at least the expected margin on the contract, (ii) the expected margin on such rig contract will be equal to or exceed such reactivation capital expenditures, and (iii) the reactivation capital expenditures, rig contract and the expected margin calculation are approved by our board of directors. The Indenture also contains other customary affirmative and negative covenants, including limitations on indebtedness, liens, fundamental changes, asset dispositions, restricted payments, investments and transactions with affiliates. The Indenture also provides for customary events of default, including breaches of material covenants, defaults under the Revolving ABL Credit Facility or other material agreements for indebtedness, and a change of control. For a period of 18 months prior to maturity, we may elect to suspend the Convertible Debt covenant requirements by

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depositing cash and short-term treasuries with the Trustee in an amount equal to all amounts due to the noteholders including principal, premium (if any) and interest. We are in compliance with our covenants as of March 31, 2022.

Upon a Qualified Merger (defined below), we may elect to convert all, but not less than all, of the Convertible Notes at a Conversion Rate equal to our Conversion Rate on the date on which the relevant “Qualified Merger” is consummated (a “Qualified Merger Conversion”), so long as the “MOIC Condition” is satisfied with respect to such potential Qualified Merger Conversion. A “Qualified Merger” means a Common Stock Change Event consolidation, merger, combination or binding or statutory share exchange of the Company with a Qualified Acquirer; provided, if such event occurs prior to Shareholder Approval, the issuance of shares of our common stock upon conversion of Notes in connection with a Qualified Merger Conversion shall be subject to stockholder approval to the extent the conversion of Notes would exceed the number of shares of common stock issuable at the then-current Conversion Rate. 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 $350,000,000, and (iii) has a “public float” (as defined in Rule 12b-2 under the Securities Act of 1933) of at least $250,000,000 in each case, as determined by the calculation agent based on the last reported sale price of such common equity on date of the signing of the definitive agreement in respect of the relevant Common Stock Change Event. A “Common Stock Change Event” means the occurrence of any: (i) recapitalization, reclassification or change of our common stock (other than (x) changes solely resulting from a subdivision or combination of the common stock, (y) a change only in par value or from par value to no par value or no par value to par value and (z) stock splits and stock combinations that do not involve the issuance of any other series or class of securities); (ii) consolidation, merger, combination or binding or statutory share exchange involving us; (iii) sale, lease or other transfer of all or substantially all of the assets of ours and our Subsidiaries, taken as a whole, to any person; or (iv) other similar event, and, as a result of which, the common stock is converted into, or is exchanged for, or represents solely the right to receive, other securities, cash or other property, or any combination of the foregoing. A “Company Conversion Rate” means, in respect of any Qualified Merger, the greater of (a) the relevant Conversion Rate, (b) $1,000 divided by our Conversion VWAP, and (c) the lowest rate that would cause the MOIC Condition to be satisfied with respect to the related Qualified Merger Conversion. A “Company Conversion VWAP” means, in respect of any Qualified Merger, the average of daily VWAP over the five (5) VWAP Trading Days prior to the earlier of signing or public announcement (by any party, and whether formal or informal, including for the avoidance of doubt any media reports thereof) of a definitive agreement in respect of such Qualified Merger as calculated by the Calculation Agent. The “MOIC Condition” means, with respect to any potential Qualified Merger Conversion, MOIC is greater than or equal to the MOIC Required Level. The “MOIC Required Level” means (x) prior to us obtaining the Shareholder Approval, $1,450.00 or (y) after we obtain Shareholder Approval, $1,350.00. “MOIC” means, with respect to any potential Qualified Merger Conversion, an amount determined by the Calculation Agent equal to the aggregate return on a hypothetical Note with $1,000 face amount, issued on the Issue Date, from the Issue Date through the potential Qualified Merger Conversion Date, including (x) the aggregate amount of any cash interest paid on such hypothetical Note from the Issue Date through the potential Qualified Merger Conversion Date, (y) the aggregate fair market value of any Conversion Consideration that would be received by the Holder of such hypothetical Note on the relevant Qualified Merger Conversion Date and (z) the aggregate fair market value of any Conversion Consideration that would be received on the relevant Qualified Merger Conversion Date by the Holder of any PIK Notes issued in respect of (or the relevant increase in value of) such hypothetical Note.

We early adopted ASU 2020-06 as of January 1, 2022 and concluded the Convertible Notes are accounted for as debt, with embedded features. As a consequence of the embedded features, the Convertible Notes give rise to a derivative liability. See Embedded Derivative Liability. The debt terms of the Convertible Notes, of which affiliates of our prior Term Loan Facility are 50.1% noteholders, were determined to be substantially different terms from the Term Loan Facility and therefore required to be accounted for as an extinguishment of the Term Loan Facility.  Accordingly, we recognized a loss on the extinguishment of debt of approximately $46.3 million during the quarter ended March 31, 2022. This is a non-cash expense primarily associated with the recognition of unamortized debt issuance costs, non-cash fees settled in shares to the affiliates of our prior Term Loan Facility and the fair value of the embedded derivatives. We recorded a derivative liability of $75.7 million at the time of the issuance and a debt discount of $37.8 million. Issuance costs consisting of cash fees of $6.8 million and a non-cash structuring fee settled in shares of $2.3 million along with the debt discount are recorded as a direct deduction from the Convertible Notes in the consolidated balance sheet. The debt discount is amortized to interest expense using the effective interest rate method over the term of the Convertible Notes. The effective interest rate for the Convertible Notes as of March 31, 2022 is 15.0%. For the period ended March

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31, 2022, the contractual interest expense was $0.9 million, the amortization of the debt discount was $0.2 million and the amortization of the issuance costs was $0.2 million.

Embedded Derivative Liability

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

As of March 31, 2022, the carrying amount of this embedded derivative included in our consolidated balance sheet was $77.6 million. The fair value of this derivative is estimated using Level 3 inputs in the fair value hierarchy on a recurring basis. Refer to Note 5 “Financial Instruments and Fair Value Measurements.”

Term Loan Facility

On October 1, 2018, we entered into a term loan Credit Agreement (the “Term Loan Credit Agreement”) for an initial term loan in an aggregate principal amount of $130.0 million, (the “Term Loan Facility”) and (b) a delayed draw term loan facility in an aggregate principal amount of up to $15.0 million (the “DDTL Facility”, and together with the Term Loan Facility, the “Term Facilities”). The Term Facilities had a maturity date of October 1, 2023, but were repaid in their entirety on March 18, 2022 with proceeds from the issuance of the Convertible Notes.

At our election, interest under the Term Loan Facility was determined by reference at our option to either (i) a “base rate” equal to the higher of (a) the federal funds effective rate plus 0.05%, (b) the London Interbank Offered Rate (“LIBOR”) with an interest period of one month, plus 1.0%, and (c) the rate of interest as publicly quoted from time to time by the Wall Street Journal as the “prime rate” in the United States, plus an applicable margin of 6.5%, or (ii) a “LIBOR rate” equal to LIBOR with an interest period of one month, plus an applicable margin of 7.5%.

In June 2020, we revised the Term Loan Credit Agreement to elect to pay accrued and unpaid interest, solely during one three-consecutive-month period immediately following such notice, in-kind (the “PIK Amount”). We agreed to pay an additional amount equal to 0.75% of the aggregate principal amount of the loans under the Term Loan Credit Agreement plus all PIK Amounts, if any, that were added to such principal amount being repaid or prepaid on either the maturity date or upon the occurrence of an acceleration of obligations under the Term Loan Credit Agreement. As such, the additional amount, approximately $1.0 million, was recorded as a direct deduction from the face amount of the Term Loan Facility and as a long-term payable on our consolidated balance sheets while the Term Loan remained outstanding. The additional amount was amortized as interest expense over the term of the Term Loan Facility. On April 1, 2021, we elected to pay in-kind the $2.8 million, interest payment due under our Term Loan, which increased our Term Loan balance accordingly. In September 2021, we amended our Term Loan Credit Agreement and elected to pay in-kind the $3.1 million October 1, 2021 interest payment which reduced the amount of the Term Loan Accordion by the PIK amount. On December 30, 2021, we amended our Term Loan Credit Agreement and elected to pay in-kind the $3.2 million January 3, 2022 interest payment which reduced the Term Loan Accordion by a corresponding amount.

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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 October 1, 2023.

At our election, interest under the Revolving ABL Credit Facility is determined by reference at our option to either (i) a “base rate” equal to the higher of (a) the federal funds effective rate plus 0.05%, (b) LIBOR with an interest period of one month, plus 1.0%, and (c) the prime rate of Wells Fargo, plus in each case, an applicable base rate margin ranging from 1.0% to 1.5% based on quarterly availability, or (ii) a revolving loan rate equal to LIBOR for the applicable interest period plus an applicable LIBOR margin ranging from 2.0% to 2.5% based on quarterly availability. We also pay, on a quarterly basis, a commitment fee of 0.375% (or 0.25% at any time when revolver usage is greater than 50% of the maximum credit) per annum on the unused portion of the Revolving ABL Credit Facility commitment.

The Revolving ABL Credit Facility contains a springing fixed charge coverage ratio covenant of 1.00 to 1.00 that is tested when availability is less than 10% of the maximum credit. The Revolving ABL Credit Facility also contains other customary affirmative and negative covenants, including limitations on indebtedness, liens, fundamental changes, asset dispositions, restricted payments, investments and transactions with affiliates. The Revolving ABL Credit Facility also provides for customary events of default, including breaches of material covenants, defaults under the Term Loan Credit Agreement or other material agreements for indebtedness, and a change of control. We are in compliance with our financial covenants as of March 31, 2022.

The obligations under the Revolving ABL Credit Facility are secured by a first priority lien on Priority Collateral, which includes all accounts receivable and deposit accounts, and a second priority lien on the Term Priority Collateral, and are unconditionally guaranteed by all of our current and future direct and indirect subsidiaries. As of March 31, 2022, the weighted-average interest rate on our borrowings was 14.53%. At March 31, 2022, the borrowing base under our Revolving ABL Credit Facility was $20.1 million, and we had $12.0 million of availability remaining of our $40.0 million commitment on that date.

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

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9.Stock-Based Compensation

Prior to June 2019, we issued common stock-based awards to employees and non-employee directors under our 2012 Long-Term Incentive Plan adopted in March 2012 (the “2012 Plan”). In June 2019, we adopted the 2019 Omnibus Incentive Plan (the “2019 Plan”) providing for common stock-based awards to employees and non-employee directors. The 2019 Plan permits the granting of various types of awards, including stock options, restricted stock, restricted stock unit awards, and stock appreciation rights (“SARs”), and up to 275,000 shares were authorized for issuance. Restricted stock and restricted stock units may be granted for no consideration other than prior and future services. The purchase price per share for stock options may not be less than the market price of the underlying stock on the date of grant. As of March 31, 2022, approximately 60,683 shares were available for future awards under the 2019 Plan. In connection with the adoption of the 2019 Plan, no further awards will be made under the 2012 Plan. Our policy is to account for forfeitures of share-based compensation awards as they occur.

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

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