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

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

Cayman Islands

98-1372204

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer		Smaller reporting company	☐
~~Non-accelerated filer~~	☒ ~~(Do not check if a smaller reporting company)~~	~~Smaller reporting company~~	☐
		Emerging growth company	☐

•

~~our small number of customers;~~

~~credit risks of our key customers and certain other third parties;~~

reduced expenditures by oil and ~~natural~~ gas exploration and production companies;

•

~~termination or renegotiation of our customer contracts;~~

general economic conditions and conditions in the oil and gas ~~industry;~~

industry, including the worldwide supply and demand for oil and gas, and expectations regarding future prices of oil and gas;

•

~~competition within our industry;~~

excess supply of drilling units worldwide;

•

~~limited mobility~~competition within our industry;

•

growing focus on climate change including regulatory, social and market efforts to address climate change, and its overall impact on the level of investments being directed to fossil fuel exploration and production companies, and their associated products or services;

•

our current level of indebtedness and the ability to repay existing, and incur additional, indebtedness in the near- and long-term;

•

epidemics, pandemics, global health crises, or other public health events and concerns, such as the spread and resulting impact of the COVID-19 pandemic and the effectiveness of associated vaccinations and treatments;

•

governmental, tax and environmental regulations and related actions and legal matters, including the actions taken by governments in response to the spread of COVID-19 and its highly contagious variants and sub-lineages, as well as the results and effects of legal proceedings and governmental audits, assessments and investigations;

•

volatility in the price of commodities due to actions taken by members of OPEC, OPEC+ and other, oil-exploring countries, with respect to oil production levels and announcements of potential changes in such levels, including the ability of members of OPEC+ to agree on and comply with announced supply limitations;

•

the potential for increased production from U.S. shale producers and non-OPEC countries driven by current oil prices, including the effect of such production rates on the overall global oil and gas supply, demand balance and commodity prices;

•

termination or renegotiation of our ~~drilling units between geographic regions;~~

customer contracts, and the invoking of force majeure clauses, including, but not limited to, as a result of the COVID-19 pandemic;

•

losses on impairment of long-lived assets;

•

any non-compliance with the U.S. Foreign Corrupt Practices Act, as amended, and any other anti-corruption laws;

•

the sufficiency of our internal controls;

•

operating hazards in the offshore drilling industry;

•

~~ability to obtain indemnity from customers;~~

~~adequacy of insurance coverage upon the occurrence of a catastrophic event;~~

~~governmental, tax and environmental regulation;~~

~~changes in legislation removing or increasing current applicable limitations of liability;~~

~~effects of new products and new technology on the market;~~

~~our substantial level of indebtedness;~~

~~our ability to incur additional indebtedness;~~

~~compliance with restrictions and covenants in our debt agreements;~~

~~identifying and completing acquisition opportunities;~~

~~levels of operating and maintenance costs;~~

~~our dependence on key personnel;~~

~~availability of workers and the related labor costs;~~

~~increased cost of obtaining supplies;~~

~~the sufficiency of our internal controls;~~

~~changes in tax laws, treaties or regulations;~~

operations in international markets, including geopolitical, ~~risk,~~global, regional or local economic and financial market risks and challenges, applicability of foreign laws, including foreign labor and employment laws, foreign tax and customs regimes, and foreign currency exchange rate risk;

•

political disturbances, geopolitical instability and tensions, or terrorist attacks, and associated changes in global trade policies and economic sanctions, including, but not limited to, Russia’s invasion of Ukraine in February 2022 and the resulting Russo-Ukrainian War;

•

adequacy of insurance coverage upon the occurrence of a catastrophic event;

•

effects of new products and new technology on the market;

•

the occurrence of cybersecurity incidents, attacks or other breaches to our information technology systems;

•

our small number of customers;

•

consolidation of our competitors and suppliers;

•

termination or renegotiation of vendor contracts;

•

changes in the status of pending, or the initiation of new litigation, claims or proceedings, including our ability to prevail in the defense of any ~~non-compliance~~appeal or counterclaim;

•

changes in legislation removing or increasing current applicable limitations of liability;

•

limited mobility of our drilling units between geographic regions;

•

levels of operating and maintenance costs;

•

our dependence on key personnel;

•

availability of workers and the related labor costs;

•

an increase in costs resulting from supply chain constraints, delays and impediments, including, but not limited to, increases in (i) the costs of obtaining supplies, (ii) labor costs, and (iii) freight, transportation and input costs, among others;

•

changes in tax laws, treaties or regulations;

•

credit risks of our key customers and other third parties we engage commercially;

•

compliance with ~~the U.S. Foreign Corrupt Practices Act~~restrictions and covenants in our debt agreements;

•

our ability to refinance our existing and any ~~other anti-corruption laws; and~~

future indebtedness;

•

our recent lack of overall profitability and whether we will generate material revenues or profits in the near- and long-term;

•

adverse macroeconomic conditions, including rising inflationary pressures and potential recessionary conditions, as well as actions taken by central banks and regulators across the world in an attempt to reduce, curtail and address such pressures and conditions;

•

our incorporation under the laws of the Cayman Islands and the limited rights to relief that may be available compared to U.S. ~~laws.~~

laws; and

•

our ability to identify and complete strategic and/or transformational transactions, including acquisitions, dispositions, joint ventures and mergers, as well as the impact that such transactions may have on our operations and financial condition.

Successor

Predecessor

Nine Months Ended September 30, 2017

Period from February 10, 2016 to September 30, 2016

Period from January 1, 2016 to February 10, 2016

CASH FLOWS FROM OPERATING ACTIVITIES

Net loss

$
(113,159
)

$
(106,288
)

$
(472,011
)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation expense

55,531

49,434

10,696

Amortization of debt financing costs

351

310

—

Amortization of debt discount

36,653

31,075

—

Amortization of contract value

3,095

—

—

PIK interest on the Convertible Notes

5,692

4,822

—

Reorganization items

—

—

430,210

Share-based compensation expense

2,882

76

—

Gain on bargain purchase

(1,910
)

—

—

Deferred income tax benefit

(3,489
)

(2,660
)

—

Loss on disposal of assets

191

634

—

Changes in operating assets and liabilities, net of businesses acquired:

Restricted cash

—

1,000

(1,000
)

Trade receivables

(15,253
)

53,405

(3,575
)

Inventory

1,531

(1,856
)

223

Prepaid expenses and other current assets

(1,685
)

(47
)

6,893

Other assets

5,947

(1,823
)

941

Accounts payable

10,899

2,136

(14,890
)

Accrued liabilities and other long-term liabilities

(4,688
)

(26,935
)

21,148

Net cash (used in) provided by operating activities

(17,412
)

3,283

(21,365
)

CASH FLOWS FROM INVESTING ACTIVITIES

Additions to property and equipment

(1,606
)

(10,107
)

116

Cash paid for Vantage 260 acquisition

(13,000
)

—

—

Net cash (used in) provided by investing activities

(14,606
)

(10,107
)

116

CASH FLOWS FROM FINANCING ACTIVITIES

Repayment of long-term debt

(1,072
)

(1,072
)

(7,000
)

Proceeds from issuance of 10% Second Lien Notes

—

—

75,000

Debt issuance costs

—

(51
)

(1,125
)

Net cash (used in) provided by financing activities

(1,072
)

(1,123
)

66,875

Net (decrease) increase in cash and cash equivalents

(33,090
)

(7,947
)

45,626

Cash and cash equivalents—beginning of period

231,727

249,046

203,420

Cash and cash equivalents—end of period

$
198,637

$
241,099

$
249,046

SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for:

Interest

$
12,575

$
10,134

$
1,568

Income taxes (net of refunds)

13,253

15,445

(1,864
)

Non-cash investing and financing transactions:

Payment of interest in kind on the Convertible Notes

$
3,780

$
2,911

$
—

Additional notes issued for backstop premium

—

—

1,125

1. Organization and Recent Events

Vantage Drilling International, ~~(the “Company” or “VDI”),~~ a Cayman Islands exempted company, together with its consolidated subsidiaries (collectively the “Company”), is an international offshore drilling company focused on operating a fleet of modern, high specification drilling units. Our principal business is to contract drilling units, related equipment and work crews, primarily on a dayrate basis to drill oil and ~~natural~~ gas wells for our customers. Through our fleet of drilling units, we are a provider of offshore contract drilling services to major, national and independent oil and ~~natural~~ gas companies, focused ~~primarily~~ on international markets. Additionally, for third-party owned drilling units, ~~owned by others,~~ we provide operations and marketing services for operating and stacked rigs, construction supervision services ~~while~~for rigs that are under construction, and preservation management services ~~when~~for rigs that are stacked.

~~On April 5, 2017, pursuant to~~Financing Transaction Uncertainty

The 9.25% First Lien Notes mature on November 15, 2023, and the Company is exploring a ~~purchase and sale agreement with~~potential refinancing of, or other transaction or series of transactions regarding, all or a ~~third party, we completed the purchase of a class 154-44C jackup rig and related multi-year drilling contract for $13.0 million. A down payment of $1.3 million was made in February 2017 upon execution~~portion of the ~~agreement~~9.25% First Lien Notes prior to such maturity date (in each case, a “Financing Transaction”). The Company has not committed to engage in any Financing Transaction as of the date hereof and the ~~remaining $11.7 million was paid at closing. The rig has been renamed~~pursuit of any such Financing Transaction is subject to prevailing market conditions, the ~~Vantage 260~~Company’s financial condition and the limitations applicable to such transactions under the Company’s existing financing agreements (including, as applicable, the consents and approvals the Company may need to obtain under the relevant documents). In ~~August 2017~~the event that the Company elects to pursue a Financing Transaction, there can be no assurance that any such transaction will be available on terms that are favorable or acceptable to the Company, if at all. Furthermore, the terms of any such Financing Transaction, which could, among other things, replace, modify, amend, restate, or amend and restate the terms, provisions and conditions under the 9.25% First Lien Notes and the related financing agreements, may vary significantly from those currently contained therein, and any modifications to the Company’s existing indebtedness may impose various additional restrictions and covenants on the Company, which could restrict or limit the Company’s ability to, among other things, make capital investments, respond quickly to market conditions, or otherwise take advantage of business opportunities. In addition, any changes by any rating agency to the Company’s credit rating, including any downgrades, could negatively impact the value and liquidity of the Company’s debt securities and require that the Company incur additional costs in connection with any Financing Transaction. The failure to consummate any Financing Transaction, including on terms that are favorable or acceptable to the Company, could have a material and adverse effect on the Company’s results of operations, business and financial condition.

Geopolitical and Market Instability Caused by the Ongoing Russo-Ukrainian War and Rising Inflation

The markets generally exhibited a strong recovery in global oil prices during 2021, a trend which was further exemplified during the first quarter of 2022, reaching $125.72 per barrel in March 2022; however, oil prices decreased during the third quarter of 2022, reaching $84.06 per barrel in September 2022. While our management anticipates oil and gas prices to remain elevated in the near-term as compared to prices exhibited during the last five years, price volatility is still expected to continue as a result of, among other factors, (i) adverse macroeconomic conditions, including rising inflationary pressures and potential recessionary conditions, (ii) changes in oil and gas inventories, (iii) global market demand, (iv) geopolitical instability, armed conflict and social unrest, including the Russo-Ukrainian War, the associated response undertaken by western nations, such as the implementation, expansion and renewal of broad sanctions, the potential for retaliatory actions on the part of Russia and the overall impact on OPEC+ countries’ ability to reach production targets in the near-term, (v) potential future disagreements among OPEC+ countries regarding the supply of oil, (vi) the potential for increased production and activity from U.S. shale producers and non-OPEC countries driven by the current oil prices, and (vii) the ongoing COVID-19 pandemic, including the transmission and presence of highly contagious and new variants and the pace of vaccine rollouts, and therefore, the Company cannot predict how long oil and gas prices will remain stable or further increase, if at all, or whether they could reverse course and materially decline.

In particular, the Russo-Ukrainian War has led to, and will likely continue to lead to, geopolitical instability, disruption and volatility in the markets in which we ~~substituted~~operate. While it is not possible at this time to predict or determine the ~~Sapphire Driller~~ultimate consequences of the conflict in Ukraine, which could include, among other things, additional and expanded sanctions, greater regional instability, embargoes, geopolitical shifts and other material and adverse effects on macroeconomic conditions, including rising inflationary pressures and potential recessionary conditions (and actions taken or being contemplated by central banks and regulators in an attempt to reduce, curtail and address such pressures and conditions), changes in energy policy, supply chains, financial markets and currency exchange rates, hydrocarbon price volatility in particular is likely to continue for the foreseeable future. To the extent the Russo-Ukrainian War and adverse macroeconomic conditions continue (or exacerbate), the implementation of further measures taken by governmental bodies and private actors, could have a ~~Baker Marine Pacific Class 375 jack-up rig~~lasting impact in the near- and long-term on the (i) operations and financial condition of our business and the businesses of our critical counterparties and (ii) the global economy.

While our management is actively monitoring the foregoing events and its associated financial impact on our business, it is uncertain at this time as to ~~fulfill~~ the ~~drilling contract.~~ full magnitude that volatile and uncertain oil and gas prices will ultimately have on our financial condition and future results of operations.

Share Purchase Agreement to Sell EDC to ADES Arabia Holding

On ~~October 19, 2017, we~~December 6, 2021, VHI, a wholly owned subsidiary of the Company, entered into a ~~purchase and sale agreement~~certain Share Purchase Agreement (the “EDC Purchase Agreement”) with ADES Arabia Holding (“ADES Arabia”), which wholly owns ADES, pursuant to which VHI agreed to sell ~~the~~ ~~Vantage 260~~ ~~for $5.1 million. The transaction, which is subject~~ to ~~customary closing conditions, is expected to close in the fourth quarter of 2017.~~

~~Restructuring Agreement and Emergence from Voluntary Reorganization under Chapter 11 Proceeding~~

On December 1, 2015, we and Vantage Drilling Company (“VDC”), our former parent company, entered into a restructuring support agreement (the “Restructuring Agreement”) with a majority of our secured creditors. Pursuant to the termsADES Arabia all of the ~~Restructuring Agreement,~~issued and outstanding equity of VHI’s wholly-owned subsidiary, EDC (the “EDC Sale”). EDC is the ~~Company agreed to pursue a pre-packaged plan of reorganization (the “Reorganization Plan”) under Chapter 11 of Title 11~~owner of the ~~United States Bankruptcy Code~~following jackup rigs, which are currently operating in Qatar: the Emerald Driller; the Sapphire Driller; and ~~VDC agreed to commence official liquidation proceedings~~the Aquamarine Driller. Each of these rigs was included within our Drilling Services segment for nine-months ended September 30, 2022. The EDC Purchase Agreement became effective on December 20, 2021 and the transactions contemplated under the laws of the Cayman Islands. On December 2, 2015, pursuant to the Restructuring Agreement, the Company acquired two subsidiaries responsible for the management of the Company from VDC in exchange for a $61.5 million promissory notesuch agreement closed on May 27, 2022 (the ~~“VDC Note”~~“EDC Closing Date”). ~~As this transaction involved a reorganization of entities under common control, it was reflected in~~On the consolidated financial statements, at carryover basis, on a retrospective basis. Effective with the Company’s emergence from bankruptcy on February 10, 2016 (the “Effective Date”), VDC’s former equity interest in the Company was cancelled. Immediately following that event, the VDC Note was converted into 655,094 new ordinary shares of the reorganized Company (the “New Shares”) in accordance with the terms thereof, in satisfaction of the obligation thereunder, which, including accrued interest, totaled approximately $62.6EDC Closing Date, VHI received $170.0 million as ~~of such date.~~

~~On December 3, 2015 (the “Petition Date”), the Company, certain of its subsidiaries~~purchase price consideration and ~~certain VDC subsidiaries who were guarantors of the Company’s pre-bankruptcy secured debt, filed the Reorganization Plan in the United States Bankruptcy Court for the District of Delaware (In re Vantage Drilling International (F/K/A Offshore Group Investment Limited), et al., Case No. 15-12422). On January 15, 2016, the District Court of Delaware confirmed the Company’s pre-packaged Reorganization Plan and the Company emerged from bankruptcy on the Effective Date.~~

Pursuant to the terms of the Reorganization Plan, the pre-bankruptcy term loans and senior notes were retired on the Effective Date by issuing to the debtholders 4,344,959 units in the reorganized Company (the “Units”). Each Unit of securities originally consisted of one New Share and $172.61 of principal of the Company’s 1%/12% Step-Up Senior Secured Third Lien Convertible Notes due 2030 (the “Convertible Notes”), subject to adjustment upon the payment of interest in kind (“PIK interest”) and certain cases of redemption or conversion of the Convertible Notes, as well as share splits, share dividends, consolidation or reclassification of the New Shares~~. The New Shares and the Convertible Notes are subject to the terms of an agreement that prohibits the New Shares and Convertible Notes from being traded separately.~~

~~The Convertible Notes are convertible into New Shares~~$30.0 million in certain ~~circumstances, at a conversion price (subject to adjustment in~~contract preparation expense reimbursement. In accordance with the terms of the ~~Indenture~~EDC Purchase Agreement, an additional $4.0 million of proceeds was retained in an escrow fund (the “Adjustment Escrow Fund”) as security for potential purchase price adjustments. During the ~~Convertible Notes) which was $95.60 as~~three months ending September 30, 2022, the entirety of the ~~issue date. The Indenture for~~Adjustment Escrow Fund was released to ADES Arabia and a payment of $1.3 million was paid by VHI to ADES Arabia to finalize the ~~Convertible Notes includes customary covenants that restrict, among other things,~~purchase price adjustments pursuant to the ~~granting~~EDC Purchase Agreement. As a result of ~~liens and customary events~~these transactions, VHI recognized a net gain of ~~default, including among other things, failure to issue securities upon conversion~~approximately $61.4 million.

Simultaneously with the EDC Sale, certain subsidiaries of the ~~Convertible Notes. As of September 30, 2017, taking~~Company and ADES entered into ~~account~~three separate support services agreements (collectively, the ~~payment of PIK interest on the Convertible Notes~~“EDC Support Services Agreements”), pursuant to ~~such date, each such Unit consisted of one New Share and $175.02 of principal of Convertible Notes.~~

~~Other significant elements~~which a subsidiary of the ~~Reorganization Plan included:~~Company agreed to provide, in exchange for customary fees and reimbursements, support services to EDC with respect to the Emerald Driller, Sapphire Driller and Aquamarine Driller for a three-year term.

~~Second Amended~~The Company and ~~Restated Credit~~ADES also entered into an agreement on December 6, 2021 (the “Collaboration Agreement”) to pursue a global strategic alliance in order to leverage both the EDC Support Services Agreements and ADVantage, the parties’ existing joint venture in Egypt. Pursuant to the Collaboration Agreement, the parties agreed to collaborate on exploring future commercial and operational opportunities.

While the Company continues to evaluate potential uses of the proceeds derived from the EDC Sale, the Company is limited in how it may deploy and utilize such proceeds as a result of the terms of the First Lien Indenture. In particular, the Company may only use the proceeds from the EDC Sale to repay, prepay or purchase our senior secured indebtedness (including the 9.25% First Lien Notes), acquire all or substantially all of the assets or capital stock of any other entity engaged in a similar or complementary business to the Company’s lines of business, or make capital expenditures or acquire non-current assets (including vessels and related assets) that are useful in such lines of business (including any deposit or installment payments with respect thereto as well as any expenditures related to the acquisition, construction or “ready for sea” costs of such vessels). ~~The Company’s pre-petition credit agreement was amended~~To the extent such proceeds are not so applied (or committed to ~~(i) replace~~be applied) within one year after receipt, the ~~$32.0 million revolving letter of credit commitment under its pre-petition facility with a new $32.0 million revolving letter of credit facility and (ii) repay~~Company will be required to offer to purchase the ~~$150 million of outstanding borrowings with (a) $7.0 million of cash and (b) the issuance of $143.0 million initial term loans (the “2016 Term Loan Facility”).~~

~~10% Senior Secured Second~~9.25% First Lien Notes~~. Holders~~ with such proceeds.

Tungsten Explorer Contract Award

On June 9, 2022, a subsidiary of the Company’s pre-petition term loans and senior notes claims were eligible to participate in a rights offering conducted by the Company for $75.0 million of the Company’s new 10% Senior Secured Second Lien Notes due 2020 (the “10% Second Lien Notes”). In connection with this rights offering, certain creditors entered into a

“backstop” agreement to purchase 10% Second Lien Notes if the offer was not fully subscribed. The premium paid to such creditors under the backstop agreement was approximately $2.2 million, which was paid $1.1 million in cash and $1.1 million in additional 10% Second Lien Notes, resulting in a total issued amount of $76.1 million of 10% Second Lien Notes and net cash proceeds to the Company of $73.9 million, after deducting the cash portion of the backstop premium.

The Reorganization Plan allowed the Company to continue business operations during the court proceedings and maintain all operating assets and agreements. The Company had adequate liquidity prior to the filing and did not have to seek any debtor-in-possession financing. All trade payables, credits, wages and other related obligations were unimpaired by the Reorganization Plan.

~~Other Events:~~ ~~In July 2015, we became aware that Hamylton Padilha, the Brazilian agent VDC used in the contracting of the~~ ~~Titanium Explorer~~ ~~drillship to Petroleo Brasileiro S.A. (“Petrobras”), had~~VDI entered into a ~~plea arrangement~~drilling services contract with a subsidiary of TotalEnergies (the “TotalEnergies Contract”) in respect of VDI’s ultra-deepwater drillship, the ~~Brazilian authorities~~Tungsten Explorer. The TotalEnergies Contract contains a minimum term of 225 days. The Tungsten Explorer is currently operating in ~~connection~~the Mediterranean where it is drilling the second well of a two-well campaign, and the Company anticipates that it will mobilize to West Africa during the fourth quarter of 2022 (or potentially later).

Ongoing Impact of the COVID-19 Pandemic

The global spread of COVID-19, including its highly contagious variants and sub-lineages, continues to pose significant risks and challenges worldwide, and has caused and continues to cause widespread illness and significant loss of life, leading governments across the world to impose and re-impose severely stringent and extensive limitations on movement and human interaction, with ~~his role in facilitating the payment of bribes to former Petrobras executives. Among other things, Mr. Padilha provided information~~certain countries, including those where we maintain significant operations and derive material revenue, implementing quarantine, testing and vaccination requirements. These governmental reactions to the Brazilian authorities of an alleged bribery scheme between former Petrobras executives and Mr. Hsin-Chi Su, who was, at the time of the alleged bribery scheme, a member of the Board of Directors and a significant shareholder of our former parent company, VDC. When we learned of Mr. Padilha’s plea agreement and the allegations, we voluntarily contacted the U.S. Department of Justice (“DOJ”) and the ~~Securities and Exchange Commission (the “SEC”)~~ ~~to advise them of these developments,~~COVID-19 pandemic, as well as changes to and extensions of such approaches, have led to, and continue to result in, uncertain and volatile economic activity worldwide, including within the ~~fact~~oil and gas industry and the regions and countries in which we operate.

While the Company has previously managed, and continues to actively manage, the business in an attempt to mitigate any ongoing and material impact from the spread of COVID-19, management anticipates that ~~we had engaged outside counsel~~our industry, and the world at large, will need to ~~conduct an internal investigation of the allegations. Since disclosing this matter~~continue to operate in, and further adapt, to the DOJ and SEC, we have cooperated fully in their investigation of these allegations. In connection with such cooperation, we advised both agencies that in early 2010, we engaged outside counsel to investigate a report of alleged improper payments to customs and immigration officials in Asia. That investigation was concluded in 2011, and we determined at that time that no disclosure was warranted; however, in an abundance of caution, we providedcurrent environment for the results of this investigation to the DOJ and SEC in light of the allegations in the Petrobras matter. In August 2017, we received a letter from the DOJ acknowledging our full cooperation in the DOJ’s investigation into the Company concerning the possible violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) in the Petrobras matter and indicating that the DOJ has closed such investigation without any action. Although the DOJ’s investigation into this matter has closed, we cannot predict the outcome of the SEC’s investigation, which remains open, and if the SEC determines that violations of the FCPA have occurred, the Company could be subject to civil and criminal sanctions, including monetary penalties, as well as additional requirements or changes to our business practices and compliance programs, any or all of which could have a material adverse effect on our business and financial condition. Additionally, if we become subject to any judgment, decree, order, governmental penalty or fine, this may constitute an event of default under the terms of our secured debt agreements and, following notice from the requisite lenders and/or noteholders, as applicable, result in our outstanding debt under the 2016 Term Loan Facility and 10% Second Lien Notes becoming immediately due and payable at par, and our outstanding debt under Convertible Notes becoming immediately due and payable at the make-whole amount specified in the indenture governing the Convertible Notes.foreseeable future.

2. Basis of Presentation and Significant Accounting Policies

Basis of Consolidation: The accompanying interim consolidated financial information as of September 30, ~~2017,~~2022, and for the three and nine months ended September 30, ~~2017, for the three months ended September 30, 2016, for the period from February 10, 2016 to September 30, 2016~~2022 and ~~for the period from January 1, 2016 to February 10, 2016~~2021, has been prepared without audit, pursuant to the rules and regulations of the SEC, and includes our accounts and those of our majority owned subsidiaries and ~~variable interest entities (“VIEs”)~~VIEs (as discussed ~~below.~~below). All significant intercompany transactions and accounts have been eliminated. They reflect all adjustments which are, in the opinion of management, necessary for a

fair ~~presentation~~statement of the financial position and results of operations for the interim periods, on a basis consistent with the annual audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with ~~generally accepted accounting principles in the United States of America (“~~U.S. ~~GAAP”)~~GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to provide for fair ~~presentation. The consolidated balance sheet~~statement. Our Consolidated Balance Sheet at December 31, ~~2016~~2021 is derived from our December 31, ~~2016~~2021 audited consolidated financial statements. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2021, which was filed with the SEC on March 30, 2022. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. Certain previously reported amounts have been reclassified to conform to the current period presentation.

~~In connection with our bankruptcy filing, we were subject to the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 852~~ ~~Reorganizations~~ (“ASC 852”). All expenses, realized gains and losses and provisions for losses directly associated with the bankruptcy proceedings were classified as “reorganization items” in the consolidated statements of operations. Certain pre-petition liabilities subject to Chapter 11 proceedings were considered as Liabilities Subject To Compromise (“LSTC”) on the Petition Date and just prior to our emergence from bankruptcy on the Effective Date. The LSTC classification distinguished such liabilities from the liabilities that were not expected to be compromised and liabilities incurred post-petition.

ASC 852 requires that subsequent to the Petition Date, expenses, realized gains and losses and provisions for losses that can be directly associated with the reorganization of the business be reported separately as reorganization items in the consolidated statements of operations. We were required to distinguish pre-petition liabilities subject to compromise from those that were not and

post-petition liabilities in our balance sheet. Liabilities that were subject to compromise were reported at the amounts expected to be allowed by the Bankruptcy Court, even if they were settled for lesser amounts as a result of the Reorganization Plan.

Upon emergence from bankruptcy on the Effective Date, we adopted fresh-start accounting in accordance with ASC 852, which resulted in the Company becoming a new entity for financial reporting purposes. Upon adoption of fresh-start accounting, our assets and liabilities were recorded at their fair values as of the Effective Date. The Effective Date fair values of our assets and liabilities differed materially from the recorded values of our assets and liabilities as reflected in our historical consolidated balance sheets. The effects of the Reorganization Plan and the application of fresh-start accounting were reflected in our consolidated financial statements as of February 10, 2016 and the related adjustments thereto were recorded in our consolidated statements of operations as reorganization items for the period January 1, 2016 to February 10, 2016.

As a result, our consolidated balance sheets and consolidated statement of operations subsequent to the Effective Date will not be comparable to our consolidated balance sheets and statements of operations prior to the Effective Date. Our consolidated financial statements and related notes are presented with a black line division which delineates the lack of comparability between amounts presented on or after February 10, 2016 and dates prior. Our financial results for future periods following the application of fresh-start accounting will be different from historical trends and the differences may be material.

References to “Successor” relate to the Company on and subsequent to the Effective Date. References to “Predecessor” refer to the Company prior to the Effective Date. The consolidated financial statements of the Successor have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business.

In addition to the consolidation of our majority owned subsidiaries, we also consolidate VIEs when we are determined to be the primary beneficiary of a VIE. Determination of the primary beneficiary of a VIE is based on whether an entity has (1) the power to direct activities that most significantly impact the economic performance of the VIE and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our determination of the primary beneficiary of a VIE considers all relationships between us and the VIE. ~~Certain subsidiaries~~

ADVantage is a joint venture company formed to operate deepwater drilling rigs in Egypt. We determined that ADVantage met the criteria of ~~VDC, who were guarantors of our pre-petition debt~~a VIE for accounting purposes because its equity at risk was insufficient to permit it to carry on its activities without additional subordinated financial support from us. We also determined that we are the primary beneficiary for accounting purposes since we are entitled to use ADVantage for deepwater drilling contract opportunities rejected by ADES, and ~~part~~have the (a) power to direct the operating activities associated with the deepwater drilling rigs, which are the activities that most significantly impact the entity’s economic performance, and (b) obligation to absorb losses or the right to receive a majority of the ~~Reorganization Plan, became our subsidiaries upon emergence from bankruptcy on~~benefits that could be potentially significant to the ~~Effective Date. We consolidated these entities~~VIE. As a result, we consolidate ADVantage in our ~~Predecessor~~ consolidated financial statements, ~~because~~ we ~~determined~~eliminate intercompany transactions and we present the interests that ~~they were VIEs and that we were the primary beneficiary.~~ are not owned by us as “Noncontrolling interests” in our Consolidated Balance Sheets. The ~~following table summarizes the net effect of consolidating these entities on our Predecessor consolidated statement of operations.~~

carrying amount associated with ADVantage was as follows:

Predecessor

Period from January 1, 2016 to February 10, 2016

(unaudited, in thousands)

Revenue

$
1,219

Operating costs and expenses

1,240

Income before taxes

22

Income tax provision

991

Net income (loss) attributable to noncontrolling interests

(969
)


	September 30, 2022		December 31, 2021
(unaudited, in thousands)
Current assets	$	21,805	$	8,099
Non-current assets		1,203		212
Current liabilities		5,687		2,838
Non-current liabilities		12,470		1,859
Net carrying amount	$	4,851	$	3,614

~~Cash and Cash Equivalents:~~ ~~Includes deposits with financial institutions as well as short-term money market instruments with maturities of three months or less when purchased.~~

~~Inventory:~~ ~~Consists of materials, consumables, spare parts and related supplies for our drilling rigs and~~As ADVantage is ~~carried at the lower of average cost or market.~~

~~Property and Equipment:~~ ~~Consists~~a majority owned subsidiary of the ~~costs of our drilling rigs, furniture and fixtures, computer equipment and capitalized costs for computer software. Drilling rigs~~Company, it serves as a guarantor under the First Lien Indenture relating to the 9.25% First Lien Notes. The 9.25% First Lien Notes are ~~depreciated~~secured by a first priority lien on ~~a component basis over estimated useful lives ranging from five to thirty-five years on a straight-line basis as~~all of the ~~date placed in service. Other~~ assets ~~are depreciated upon placement in service over estimated useful lives ranging from three~~of ADVantage, subject to ~~seven years on a straight-line basis. When assets are sold, retired or otherwise disposed~~certain exceptions. Creditors’ recourse against ADVantage for liabilities of ~~the cost and related accumulated depreciation are removed from the accounts and a gain or loss~~ADVantage is ~~recognized.~~

~~Interest costs and the amortization of debt financing costs related~~limited to the ~~financings~~assets of ~~our drilling rigs are capitalized as part~~ADVantage.

See “Note 9. Supplemental Financial Information” of ~~the cost while they are under construction and prior~~these “Notes to ~~the commencement of each vessel’s first contract. We did not capitalize any interest~~Unaudited Consolidated Financial Statements” for ~~the reported periods.~~

~~Intangible assets:~~ ~~In connection with our acquisition of the~~ ~~Vantage 260~~ ~~and~~additional information regarding related multi-year drilling contract, the Company recorded an identifiable intangible asset of $12.6 million for the fair value of the acquired favorable drilling contract. The resulting intangible asset is being amortized on a straight-line basis over the term of the drilling contract. We recognized approximately $1.5 million and $3.1 million of amortization expense for intangible assets for the three and nine months ended September 30, 2017, respectively.

~~Expected future intangible asset amortization as of September 30, 2017 is as follows:~~

(in thousands)

Fiscal year:

Remaining 2017
$
1,591

2018

6,311

2019

1,643

Thereafter

-

Total
$
9,545

~~Debt Financing Costs:~~ Costs incurred with debt financings are deferred and amortized over the term of the related financing facility on a straight-line basis which approximates the interest method. Debt issuance costs related to a recognized debt liability are presented in the consolidated balance sheet as a direct deduction from the carrying amount of that debt liability.

~~Revenue:~~ ~~Revenue is recognized as services are performed based on contracted dayrates and the number of operating days during the period.~~

In connection with a customer contract, we may receive lump-sum fees for the mobilization of equipment and personnel or the demobilization of equipment and personnel upon completion. Mobilization fees received and costs incurred to mobilize a rig from one geographic market to another are deferred and recognized on a straight-line basis over the term of such contract, excluding any option periods. Costs incurred to mobilize a rig without a contract are expensed as incurred. Fees or lump-sum payments received for capital improvements to rigs are deferred and amortized to income over the term of the related drilling contract. The costs of such capital improvements are capitalized and depreciated over the useful lives of the assets. Upon completion of drilling contracts, any demobilization fees received are recorded as revenue. We record reimbursements from customers for rebillable costs and expenses as revenue and the related direct costs as operating expenses.

~~Rig and Equipment Certifications:~~ We are required to obtain regulatory certifications to operate our drilling rigs and certain specified equipment and must maintain such certifications through periodic inspections and surveys. The costsparty transactions associated with ~~these certifications, including drydock costs, are deferred and amortized over the corresponding certification periods.~~this joint venture.

~~Income Taxes:~~ Income taxes are provided for based upon the tax laws and rates in effect in the countries in which operations are conducted and income is earned. Deferred income tax assets and liabilities are computed for differences between the financial statement basis and tax basis of assets and liabilities that will result in future taxable or deductible amounts and are based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. We recognize interest and penalties related to income taxes as a component of income tax expense.

~~Concentrations of Credit Risk:~~ Financial instruments that potentially subject us to a significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. We maintain deposits in federally insured financial institutions in excess of federally insured limits. We monitor the credit ratings and our concentration of risk with these financial institutions on a continuing basis to safeguard our cash deposits. We have a limited number of key customers, who are primarily large international oil and gas operators, national oil companies and other international oil and gas companies. Our contracts provide for monthly billings as services are performed and we monitor compliance with contract payment terms on an ongoing basis. Outstanding receivables beyond payment terms are promptly investigated and discussed with the specific customer. We do not have an allowance for doubtful accounts on our trade receivables as of September 30, 2017 or December 31, 2016.

Use of Estimates: The preparation of financial statements in accordance with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to property and equipment, income taxes, insurance, employee benefits and contingent liabilities. Actual results could differ from these estimates.

~~Fair Value~~Cash and Cash Equivalents: Includes deposits with financial institutions as well as short-term money market instruments with maturities of ~~Financial Instruments:~~ ~~The fair value~~three months or less when purchased.

Materials and Supplies: Consists of ~~our short-term financial assets~~materials, spare parts, consumables and ~~liabilities approximates the carrying amounts represented in the consolidated balance sheet principally due to the short-term nature or floating rate nature of these~~

instruments. At September 30, 2017, the fair value of the 2016 Term Loan Facility, the 10% Second Lien Notes and the Convertible Notes was approximately $142.3 million, $73.1 million and $808.2 million, respectively, based on quoted market prices in a less active market, a Level 2 measurement.

~~Recent Accounting Standards:~~ ~~In May 2014, the~~ ~~FASB~~ ~~issued~~ ~~ASU~~ ~~No. 2014-09,~~ ~~Revenue from Contracts with Customers. ASU No. 2014-09 supersedes most of the existing revenue recognition requirements in U.S. GAAP, including industry-specific guidance.~~ The ASU is based on the principle that revenue is recognized when an entity transfers promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchangerelated supplies for ~~those goods or services.~~ The new standard also requires significant additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, using either a full or a modified retrospective application approach. We plan to adopt ASU 2014-09 effective January 1, 2018 using the modified retrospective approach whereby we will record the cumulative effect of applying the new standard to all outstanding contracts as of January 1, 2018 as an adjustment to opening retained earnings.

~~When applying the new standard, we currently plan to account for the integrated services provided within~~ our drilling ~~contracts as a single performance obligation composed of a series of distinct time increments, which will be satisfied over time.~~rigs. We ~~will determine the total transaction price for each individual contract by estimating both fixed~~record these materials and ~~variable consideration expected to be earned over the term of the contract. Consideration that does not relate to a distinct good or service, such as mobilization~~supplies at their average cost.

Property and demobilization revenue, will be allocated across the single performance obligation and recognized ratably each period over the term of the contract. All other components of consideration within a contract, including the dayrate revenue, will continue to be recognized in the period when the services are performed. We expect our revenue recognition under ASU 2014-09 to differ from our current revenue recognition pattern only as it relates to demobilization revenue. Demobilization revenue, which is currently recognized upon completion of a drilling contract, will be estimated at contract commencement and recognized over the term of the contract under the new guidance. Additionally, we currently expect that the cumulative effect adjustment to opening retained earnings required by the modified retrospective adoption approach will not be significant as it will primarily consist of the impact of the timing difference related to recognition of demobilization revenue for affected contracts. Not all drilling contracts include a demobilization provision. Our adoption of ASU No, 2014-09, ~~and the ultimate effect on our consolidated financial statements,~~ ~~is subject to potential change as we continue to evaluate application of the accounting standard.~~

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842): Amendments to the FASB Accounting Standards Codification~~, to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2018, and early adoption is permitted. A modified retrospective approach is required. We expect to adopt ASU 2016-02 on January 1, 2019. Under the updated accounting standards, we have concluded that our drilling contracts contain a lease component, and our adoption, therefore, will require that we separately recognize revenues associated with the leaseEquipment: Consists of our drilling rigs, furniture and the provision of contract drilling services. Our adoption of ASU No. 2016-02, and the ultimate effect on our consolidated financial statements, will be based on an evaluation of the contract-specific facts and circumstances, and such effect could result in differences in the timing of our revenue recognition relative to current accounting standards. With respect to leases whereby we are the lessee we expect to recognize lease liabilities and corresponding “right of use” assets. We are continuing to evaluate the requirements with regard to arrangements under which we are either the lessor or lessee, to determine the effect such requirements may have on our consolidated statements of financial position, operations and cash flows and on the disclosures contained in our notes to consolidated financial statements.

~~In August 2016, the FASB issued ASU No. 2016-15,~~ ~~Classification of Certain Cash Receipts and Cash Payments,~~ ~~which addresses the classification and presentation of eight specific cash flow issues that currently result in diverse practice.~~ ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017 utilizing a retrospective transition approach. Early adoption is permitted, provided that all amendments are adopted in the same period. We are currently evaluating the provisions of ASU 2016-15 but do not expect the standard update to have a significant impact on the presentation of cash receipts and cash payments within our consolidated statements of cash flows.

~~In October 2016, the FASB issued ASU No. 2016-16,~~ ~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory~~, which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transaction occurs as opposed to deferring tax consequences and amortizing them into future periods. This update is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. A modified retrospective approach with a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption is required. We have not completed an evaluation of ASU No. 2016-16 and have not yet determined the impact, if any, on our financial statements and related disclosures.

~~In January 2017, the FASB issued ASU No. 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business~~, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU No. 2017-01 is effective for financial

~~statements issued for fiscal years beginning after December 15, 2017 utilizing a prospective basis on or after the effective date. Early adoption is permitted. We~~ ~~are currently evaluating the provisions~~ ~~of ASU~~ ~~No.~~ ~~2017-01 but do not expect the standard update to have a significant impact, if any, on our financial statements and related disclosures.~~

~~3. Acquisitions~~

On April 5, 2017, pursuant to a purchase and sale agreement with a third party, we completed the purchase of a class 154-44C jackup rig and related multi-year drilling contract for $13.0 million. A down payment of $1.3 million was made in February 2017 upon execution of the agreement and the remaining $11.7 million was paid at closing. The rig has been renamed the ~~Vantage 260. In August 2017 we substituted the~~ ~~Sapphire Driller, a Baker Marine Pacific Class 375 jack-up rig to fulfill the contract. The~~ ~~Vantage 260~~ is currently classified as held for sale. We accounted for the acquisition as a business combination in accordance with accounting guidance which requires, among other things, that we allocate the purchase price to the assets acquired and liabilities assumed based on their fair values as of the acquisition date. The following table provides the estimated fair values of the assets acquired and liabilities assumed.

(in thousands)

Total cash consideration
$
13,000

Purchase price allocation:

Drilling contract value

12,640

Rig equipment to be sold (net of disposal costs)

2,050

Drillpipe assets

700

Severance liabilities assumed

(480
)

Net assets acquired

14,910

Bargain purchase gain
$
1,910

Under accounting guidance, a bargain purchase gain results from an acquisition if the fair value of the purchase consideration paid in connection with such acquisition is less than the net fair value of the assets acquired and liabilities assumed. We recorded a bargain purchase gain of approximately $1.9 million related to the acquisition in the nine months ending September 30, 2017. We believe that we were able to negotiate a bargain purchase price as a result of our operational presence in West Africa and the seller’s liquidation.

~~Pro forma results of operations related to the acquisition have not been presented because they are not material to our consolidated statement of operations.~~

~~4. Reorganization Items~~

~~Reorganization items represent amounts incurred subsequent to the Petition Date as a direct result of the filing of the Reorganization Plan and are comprised of the following:~~

Successor

Predecessor

Three Months Ended September 30,

Nine Months Ended September 30, 2017

Period from February 10, 2016 to September 30, 2016

Period from January 1, 2016 to February 10, 2016

2017

2016

(unaudited, in thousands)

Professional fees

$
—

$
(35
)

$
—

$
606

$
22,712

Net gain on settlement of LSTC

—

—

—

—

(1,630,025
)
Fresh-start adjustments

—

—

—

—

2,060,232

$
—

$
(35
)

$
—

$
606

$
452,919

For the nine months ended September 30, 2017, and for the periods from February 10, 2016 to September 30, 2016 and from January 1, 2016 to February 10, 2016, cash payments for reorganization items totaled $208,000, $15.9 million and $7.3 million, respectively.

~~5. Debt~~

~~Our debt was composed of the following:~~

September 30, 2017

December 31, 2016

(unaudited, in thousands)

2016 Term Loan Facility

$
140,497

$
141,570

10% Second Lien Notes, net of financing costs of $1,522 and $1,873

74,604

74,252

Convertible Notes, net of discount of $67,042 and $103,695

693,413

652,980

908,514

868,802

Less current maturities of long-term debt

4,430

1,430

Long-term debt, net

$
904,084

$
867,372

~~Second Amended and Restated Credit Agreement.~~ The Company entered into the 2016 Term Loan Facility providing for (i) a $32.0 million revolving letter of credit facility to replace the Company’s existing $32.0 million revolving letter of credit commitment under its pre-petition credit facility and (ii) $143.0 million of term loans into which the claims of the lenders under the Company’s pre-petition credit facility were converted. The lenders under the Company’s pre-petition credit facility also received $7.0 million of cash under the Reorganization Plan. The obligations under the 2016 Term Loan Facility are guaranteed by substantially all of the Company’s subsidiaries, subject to limited exceptions, and secured on a first priority basis by substantially all of the Company’s and the guarantors’ assets, including ship mortgages on all vessels, assignments of related earnings and insurance and pledges of the capital stock of all guarantors, in each case, subject to certain exceptions. We have issued $19.3 million in letters of credit as of September 30, 2017.

The maturity date of the term loans and commitments established under the 2016 Term Loan Facility is December 31, 2019. Interest is payable on the unpaid principal amount of each term loan under the 2016 Term Loan Facility at LIBOR plus 6.5%, with a LIBOR floor of 0.5%. The term loans are currently bearing interest at 7.7%. The 2016 Term Loan Facility has quarterly scheduled debt maturities of $357,500 which commenced in March 2016.

~~Fees are payable on the outstanding face amount of letters of credit at a rate per annum equal to 5.5% pursuant to the terms of the 2016 Term Loan Facility.~~

The 2016 Term Loan Facility includes customary representations and warranties, mandatory prepayments, affirmative and negative covenants and events of default, including covenants that, among other things, restrict the granting of liens, the incurrence of indebtedness, the making of investments and capital expenditures, the sale or other conveyance of assets, including vessels, transactions with affiliates, prepayments of certain debt and the operation of vessels. The 2016 Term Loan Facility also requires that the Company maintain $75.0 million of available cash (defined to include unrestricted cash and cash equivalents plus undrawn commitments).

~~10% Senior Secured Second Lien Notes.~~ The Company engaged in a rights offering for $75.0 million of new 10% Second Lien Notes for certain holders of its secured debt claims. In connection with this rights offering, certain creditors entered into a “backstop” agreement to purchase 10% Second Lien Notes if the offer was not fully subscribed. The premium paid to such creditors under the backstop agreement was approximately $2.2 million, which was paid $1.1 million in cash and $1.1 million in additional 10% Second Lien Notes, resulting in a total issued amount of $76.1 million of 10% Second Lien Notes, and in net cash proceeds of approximately $73.9 million after deducting the cash portion of the backstop premium.

The 10% Second Lien Notes were issued at par and are fully and unconditionally guaranteed (except for customary release provisions), on a senior secured basis, by all of the subsidiaries of the Company. The 10% Second Lien Notes mature on December 31, 2020, and bear interest from the date of their issuance at the rate of 10% per year. Interest on outstanding 10% Second Lien Notes is payable semi-annually in arrears, which commenced on June 30, 2016. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months. The 10% Second Lien Notes rank behind the 2016 Term Loan Facility as to collateral.

The Indenture for the 10% Second Lien Notes includes customary covenants and events of default, including covenants that, among other things, restrict the granting of liens, restrict the making of investments, restrict the incurrence of indebtedness and the conveyance of vessels, limit transactions with affiliates, and require that the Company provide periodic financial reports.

~~1%/12% Step-Up Senior Secured Third Lien Convertible Notes.~~ The Company issued 4,344,959 New Shares and $750.0 million of the Convertible Notes to certain creditors holding approximately $2.5 billion of pre-petition secured debt claims. The New Shares issued to the creditors and the Convertible Notes may only be traded together and not separately. The Convertible Notes mature on December 31, 2030 and are convertible into New Shares, in certain circumstances, at a conversion price (subject to adjustment in accordance with the terms of the Indenture for the Convertible Notes) which was $95.60 as of the issue date. The Indenture for the Convertible Notes includes customary covenants that restrict, among other things, the granting of liens and customary events of default, including among other things, failure to issue securities upon conversion of the Convertible Notes. As of September 30, 2017, taking into account the payment of PIK interest on the Convertible Notes to such date, each such unit of securities was comprised of one New Share and $175.02 of principal of Convertible Notes. As of September 30, 2017, we would be required to issue approximately 8.0 million New Shares if the Convertible Notes were converted.

In connection with the adoption of fresh-start accounting, the Convertible Notes were recorded at an estimated fair value of approximately $603.1 million. The difference between face value and the fair value at date of issuance of the Convertible Notes was recorded as a debt discount and is being amortized to interest expense over the expected life of the Convertible Notes using the effective interest rate method.

Interest on the Convertible Notes is payable semi-annually in arrears commencing June 30, 2016 as a payment in kind, either through an increase in the outstanding principal amount of the Convertible Notes or, if the Company is unable to increase such principal amount, by the issuance of additional Convertible Notes. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months at a rate of 1% per annum for the first four years and then increasing to 12% per annum until maturity.

The Company’s obligations under the Convertible Notes are fully and unconditionally guaranteed (except for customary release provisions), on a senior secured basis, by all of the subsidiaries of the Company, and the obligations of the Company and guarantors are secured by liens on substantially all of their respective assets. The guarantees by the Company’s subsidiaries of the Convertible Notes are joint and several. The Company has no independent assets or operations apart from the assets and operations of its wholly-owned subsidiaries. In addition, there are no significant restrictions on the Company’s or any subsidiary guarantor’s ability to obtain funds from its subsidiaries by dividend or loan. The Indenture for the Convertible Notes includes customary covenants that restrict the granting of liens and customary events of default, including, among other things, failure to issue securities upon conversion of the Convertible Notes. In addition, the Indenture, and the applicable Collateral Agreements, provide that any capital stock and other securities of any of the guarantors will be excluded from the collateral to the extent the pledge of such capital stock or other securities to secure the Convertible Notes would cause such guarantor to be required to file separate financial statements with the SEC pursuant to Rule 3-16 of Regulation S-X (as in effect from time to time).

The Convertible Notes will convert only (a) prior to the third anniversary of the issue date (February 10, 2016), (i) upon the instruction of holders of a majority in principal amount of the Convertible Notes or (ii) upon the full and final resolution of all potential Investigation Claims (as defined below), as determined in good faith by the board of directors of the Company (the “Board”) (which determination shall require the affirmative vote of a supermajority of the non-management directors), and (b) from and after February 10, 2019 through their maturity date of December 31, 2030, upon the approval of the Board (which approval shall require the affirmative vote of a supermajority of the non-management directors). For these purposes, (i) “supermajority of the non-management directors” means five affirmative votes of non-management directors assuming six non-management directors eligible to vote and, in all other circumstances, the affirmative vote of at least 75% of the non-management directors eligible to vote and (ii) “Investigation Claim” means any claim held by a United States or Brazilian governmental unit and arising from or related to the procurement of that certain Agreement for the Provision of Drilling Services, dated as of February 4, 2009, by and between Petrobras Venezuela Investments & Services B.V. and Vantage Deepwater Company, as amended, modified, supplemented, or novated from time to time.

In the event of a change in control, the holders of our Convertible Notes have the right to require us to repurchase all or any part of the Convertible Notes at a price equal to 101% of their principal amount. We assessed the prepayment requirements and concluded that this feature met the criteria to be considered an embedded derivative and must be bifurcated and separately valued at fair value due to the discount on the Convertible Notes at issuance. We considered the probabilities of a change of control occurring and determined that the derivative had a de minimis value at February 10, 2016 and December 31, 2016, respectively.

Upon the occurrence of specified change of control events or certain losses of our vessels in the agreements governing our 10% Second Lien Notes, Convertible Notes or 2016 Term Loan Facility, we will be required to offer to repurchase or repay all (or in the case of events of losses of vessels, an amount up to the amount of proceeds received from such event of loss) of such outstanding debt under such debt agreements at the prices and upon the terms set forth in the applicable agreements. In addition, in connection with certain asset sales, we will be required to offer to repurchase or repay such outstanding debt as set forth in the applicable debt agreements. In addition, in connection with their investigation, if the SEC determines that violations of the FCPA have occurred, the Company could be subject to civil and criminal sanctions, including monetary penalties, and if we become subject to any judgment, decree, order, governmental penalty or fine, this may constitute an event of default under the terms of our secured debt agreements and, following notice from the requisite lenders and/or noteholders, as applicable, result in our outstanding debt under the 2016 Term Loan Facility and 10% Second Lien Notes becoming immediately due and payable at par, and our outstanding debt under Convertible Notes becoming immediately due and payable at the make-whole amount specified in the indenture governing the Convertible Notes.

~~6. Shareholders’ Equity~~

We have 50,000,000 authorized ordinary shares, par value $0.001 per share. Upon emergence from bankruptcy, we issued 5,000,053 ordinary shares in connection with the settlement of LSTC and the VDC Note. As of September 30, 2017, 5,000,053 ordinary shares were issued and outstanding.

On August 9, 2016, the Company adopted the Amended and Restated 2016 Management Incentive Plan (the “2016 Amended MIP”) to align the interests of participants with those of the shareholders by providing incentive compensation opportunities tied to the performance of the Company’s equity securities. Pursuant to the 2016 Amended MIP, the Compensation Committee may grant to employees, directors and consultants stock options, restricted stock, restricted stock units or other awards.

During the nine months ended September 30, 2017, we granted to employees 29,008 time-based restricted stock units (“TBGs”) and 67,685 performance-based restricted stock units (“PBGs”) under our 2016 Amended MIP. In March 2017, four directors were granted 415 TBGs each, or a total of 1,660 TBGs. The TBGs vest annually, ratably over four years; however, accelerated vesting is provided for in the event of a qualified liquidity event as defined in the 2016 Amended MIP (a “QLE”). Otherwise, the settlement of any vested TBGs occurs upon the seventh anniversary of the Effective Date. The PBGs contain vesting eligibility provisions tied to the earlier of a QLE or seven years from the Effective Date. Upon the occurrence of a vesting eligibility event, the number of PBGs that actually vest will be dependent on the achievement of pre-determined Total Enterprise Value (“TEV”) targets specified in the grants.

~~Both the TBGs and PBGs are classified as liabilities consistent with the classification of the underlying securities and under the provisions of ASC 718~~ ~~Compensation – Stock Compensation~~ are remeasured at each reporting period until settled. Share based compensation expense is recognized over the requisite service period until settled. We recognized approximately $1.2 million and $76,000 of share-based compensation expense for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and for the period from February 10, 2016 to September 30, 2016, we recognized $2.9 million and $76,000, respectively of share-based compensation expense. In the nine months ended September 30, 2017, 11,237 of previously granted TBGs vested.

Share based compensation expense for PBGs will be recognized when it is probable that the TEV targets will be met. Once it is probable the performance condition will be met, compensation expense based on the fair value of the PBGs at the balance sheet date will be recognized for the service period completed. For the quarter ended September 30, 2017, we concluded that it was not probable that the TEV performance condition would be met and therefore, no share based compensation expense was recognized for PBGs.

~~7. Income Taxes~~

We are a Cayman Islands entity. The Cayman Islands does not impose corporate income taxes. Consequently, we have calculated income taxes based on the laws and tax rates in effect in the countries in which operations are conducted, or in which we and our subsidiaries are considered resident for income tax purposes. We operate in multiple countries under different legal forms. As a result, we are subject to the jurisdiction of numerous domestic and foreign tax authorities, as well as to tax agreements and treaties among these governments. Tax rates vary between jurisdictions, as does the tax base to which the rates are applied. Taxes may be levied based on net profit before taxes or gross revenues. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Our income tax expense may vary substantially from one period to another as a result of changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions, rig movements or our level of operations or profitability in each tax jurisdiction. Furthermore, our income taxes are generally dependent upon the results of our operations and, when we generate significant revenues in jurisdictions where the income tax liability is based on gross revenues or asset values, there is no correlation between our operating results and the income tax expense. Furthermore, in some jurisdictions we do not pay taxes or receive benefits for certain income and expense items, including interest expense, loss on extinguishment of debt and write-off of development costs.

Deferred income tax assets and liabilities are recorded for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. We provide for deferred taxes on temporary differences between the financial statements and tax bases of assets and liabilities using the enacted tax rates, which are expected to apply to taxable income when the temporary differences are expected to reverse. Deferred tax assets are also provided for certain tax credit carryforwards. A valuation allowance is established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

In certain jurisdictions, we are taxed under preferential tax regimes, which may require our compliance with specified requirements to sustain the tax benefits. We believe we are in compliance with the specified requirements and will continue to make

all reasonable efforts to comply; however, our ability to meet the requirements of the preferential tax regimes may be affected by changes in laws, our business operations and other factors affecting our company and industry, many of which are beyond our control.

Our periodic tax returns are subject to examination by taxing authorities in the jurisdictions in which we operate in accordance with the normal statute of limitations in the applicable jurisdiction. These examinations may result in assessments of additional taxes that are resolved with the authorities or through the courts. Resolution of these matters involves uncertainties and there are no assurances as to the outcome. Our tax years 2010 and forward remain open to examination in many of our jurisdictions and we are currently involved in several tax examinations in jurisdictions where we are operating or have previously operated. As information becomes available during the course of these examinations, we may increase or decrease our estimates of tax assessments and accruals.

~~8. Commitments and Contingencies~~

We are subject to litigation, claims and disputes in the ordinary course of business, some of which may not be covered by insurance. There is an inherent risk in any litigation or dispute and no assurance can be given as to the outcome of any claims.

In July 2015, we became aware of media reports that Hamylton Padilha, the Brazilian agent VDC used in the contracting of the Titanium Explorer drillship to Petrobras, had entered into a plea arrangement with the Brazilian authorities in connection with his role in facilitating the payment of bribes to former Petrobras executives. Among other things, Mr. Padilha provided information to the Brazilian authorities of an alleged bribery scheme between former Petrobras executives and Nobu Su, who was, at the time of the alleged bribery scheme, a member of the Board of Directors and a significant shareholder of our former parent company, VDC. When we learned of Mr. Padilha’s plea agreement and the allegations, we voluntarily contacted the DOJ and the SEC to advise them of these developments, as well as the fact that we had engaged outside counsel to conduct an internal investigation of the allegations. Since disclosing this matter to the DOJ and SEC, we have cooperated fully in their investigation of these allegations. In connection with such cooperation, we advised both agencies that in early 2010, we engaged outside counsel to investigate a report of alleged improper payments to customs and immigration officials in Asia. That investigation was concluded in 2011, and we determined at that time that no disclosure was warranted; however, in an abundance of caution, we provided the results of this investigation to the DOJ and SEC in light of the allegations in the Petrobras matter. In August 2017, we received a letter from the DOJ acknowledging our full cooperation in the DOJ’s investigation into the Company concerning the possible violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) in the Petrobras matter and indicating that the DOJ has closed such investigation without any action. Although the DOJ’s investigation into this matter has closed, we cannot predict the outcome of the SEC’s investigation, which remains open, and if the SEC determines that violations of the FCPA have occurred, the Company could be subject to civil and criminal sanctions, including monetary penalties, as well as additional requirements or changes to our business practices and compliance programs, any or all of which could have a material adverse effect on our business and financial condition. Additionally, if we become subject to any judgment, decree, order, governmental penalty or fine, this may constitute an event of default under the terms of our secured debt agreements and, following notice from the requisite lenders and/or noteholders, as applicable, result in our outstanding debt under the 2016 Term Loan Facility and 10% Second Lien Notes becoming immediately due and payable at par, and our outstanding debt under Convertible Notes becoming immediately due and payable at the make-whole amount specified in the indenture governing the Convertible Notes.

In connection with our bankruptcy cases, two appeals were filed relating to the confirmation of the Reorganization Plan. Specifically, on January 29, 2016, Hsin Chi Su and F3 Capital filed two appeals before the United States District Court for the District of Delaware seeking a reversal of (i) the Court’s determination that Hsin Chi Su and F3 Capital did not have standing to appear and be heard in the bankruptcy cases, which was made on the record at a hearing held on January 14, 2016, and (ii) the Court’s Findings of Fact, Conclusions of Law, and Order (I) Approving the Debtors’ (A) Disclosure Statement Pursuant to Sections 1125 and 1126(b) of the Bankruptcy Code, (B) Solicitation of Votes and Voting Procedures, and (C) Forms of Ballots, and (II) Confirming the Amended Joint Prepackaged Chapter 11 Plan of Offshore Group Investment Limited and its Affiliated Debtors [Docket No. 188], which was entered on January 15, 2016. The appeals were consolidated on June 14, 2016. We cannot predict with certainty the ultimate outcome of any such appeals. An adverse outcome could negatively affect our business, results of operations and financial condition.

On August 31, 2015, VDC received notice from Petrobras America, Inc. (“PAI”) and Petrobras Venezuela Investments & Services B.V. (“PVIS”) stating that PAI and PVIS were terminating the Agreement for the Provision of Drilling Services dated February 4, 2009 (the “Drilling Contract”). The Drilling Contract was initially entered into between PVIS and Vantage Deepwater Company, one of our wholly-owned indirect subsidiaries, and was later novated by PVIS to PAI and by Vantage Deepwater Company to Vantage Deepwater Drilling, Inc., another of our wholly-owned indirect subsidiaries. The notice stated that PAI and PVIS were terminating the Drilling Contract because Vantage had allegedly breached its obligations under the agreement. Under the terms of the Drilling Contract we initiated arbitration proceedings before the American Arbitration Association on August 31, 2015, challenging PVIS and PAI’s wrongful attempt to terminate the Drilling Contract. Vantage has maintained that it complied with all of its obligations under the Drilling Contract and that PVIS and PAI’s attempt to terminate the agreement is both improper and a breach of the Drilling Contract.

In the ongoing arbitration proceeding, the hearing on the merits has concluded and the parties have exchanged post-hearing briefs. Vantage has asserted claims against PAI and PVIS for declaratory relief and monetary damages based on breach of contract. Vantage has also asserted a claim against Petroleo Brasileiro S.A. (“PBP”) to enforce a guaranty provided by PBP. The Petrobras entities (PVIS, PAI and PBP) have asserted that the Drilling Contract is void as illegally procured, that PVIS and PBP are not proper parties to the arbitration, and that PAI and PVIS properly terminated the contract. PAI has further counterclaimed for attorneys’ fees and costs alleging that Vantage failed to negotiate in good faith before commencing arbitration proceedings and is seeking disgorgement damages of approximately $102 million. We are vigorously pursuing our claims in the arbitration and deny that any of the claims or defenses asserted by the Petrobras entities have merit.

Pursuant to the terms of the Restructuring Agreement, the Company agreed to the Reorganization Plan and VDC agreed to commence official liquidation proceedings under the laws of the Cayman Islands. On December 2, 2015, pursuant to the Restructuring Agreement, the Company acquired two subsidiaries responsible for the management of the Company from VDC in exchange for the VDC Note. In connection with our separation from our former parent company, we and the Joint Official Liquidators, appointed to oversee the liquidation of VDC, are in discussions regarding the settlement of certain intercompany receivables and payables as between the Company and its subsidiaries, on the one hand, and VDC and its subsidiaries on the other. While we continue to believe that our position regarding the settlement of such amounts is correct, we cannot predict the ultimate outcome of this matter should legal proceedings between the parties transpire.

~~9. Supplemental Financial Information~~

~~Prepaid Expenses and Other Current Assets~~

~~Prepaid expenses and other current assets consisted of the following:~~

September 30, 2017

December 31, 2016

(unaudited, in thousands)

Prepaid insurance

$
209

$
782

Sales tax receivable

7,269

7,129

Income tax receivable

1,267

1,025

Other receivables

135

74

Assets held for sale

2,050

—

Other

5,228

3,413

$
16,158

$
12,423

~~Property and Equipment, net~~

~~Property and equipment, net, consisted of the following:~~

September 30, 2017

December 31, 2016

(unaudited, in thousands)

Drilling equipment

$
882,897

$
880,267

Assets under construction

1,487

2,138

Office and technology equipment

18,778

18,764

Leasehold improvements

1,165

1,072

904,327

902,241

Accumulated depreciation

(123,215
)

(67,713
)
Property and equipment, net

$
781,112

$
834,528

~~Other Assets~~

~~Other assets consisted of the following:~~

September 30, 2017

December 31, 2016

(unaudited, in thousands)

Contract value, net

$
9,545

$
—

Performance bond collateral

—

3,197

Deferred certification costs

4,004

4,885

Deferred mobilization costs

2,387

4,194

Deferred income taxes

5,329

2,237

Deposits

1,119

1,181

$
22,384

$
15,694

~~Accrued Liabilities~~

~~Accrued liabilities consisted of the following:~~

September 30, 2017

December 31, 2016

(unaudited, in thousands)

Interest

$
3,925

$
104

Compensation

9,718

11,289

Income taxes payable

4,521

5,008

Other

1,909

2,047

$
20,073

$
18,448

~~Transactions with Former Parent Company~~

~~The Company's Consolidated Statement of Operations included the following transactions with VDC for the periods indicated:~~

~~The following table summarizes the balances payable to VDC included in the Company's Consolidated Balance Sheet as of the periods indicated:~~

September 30, 2017

December 31, 2016

(unaudited, in thousands)

Accounts payable to related parties, net

$
17,278

$
17,278

$
17,278

$
17,278

~~10. Business Segment and Significant Customer Information~~

We aggregate our contract drilling operations into one reportable segment even though we provide contract drilling services with different types of rigs, including jackup rigs and drillships, and in different geographic regions. Our operations are dependent on the global oil and gas industry and our rigs are relocated based on demand for our services and customer requirements. Our customers consist primarily of large international oil and gas companies, national or government-controlled oil and gas companies and other international exploration and production companies.

Additionally, for drilling units owned by others, we provide construction supervision services while under construction and preservation management services when stacked. In September 2013, we signed an agreement to supervise and manage the construction of two ultra-deepwater drillships for a third party. In January 2017, we signed an agreement to manage the preservation of two ultra-deepwater drillships for a third party. Our management business represented approximately 0.6%, 0.8%, 2.5%, 3.1% , 3.2%, of our total revenue for the three and nine months ended September 30, 2017, for the three months ended September 30, 2016,

~~for the period from February 10, 2016 to September 30, 2016 and for the period from January 1, 2016 to February 10, 2016, respectively.~~

For the three and nine months ended September 30, 2017 and 2016, all of our revenue was from countries outside of the United States. Consequently, we are exposed to the risk of changes in economic, political and social conditions inherent in foreign operations. Four customers accounted for approximately 47%, 22%, 11% and 10% of consolidated revenue for the three months ended September 30, 2017. For the nine months ended September 30, 2017, four customers accounted for approximately 53%, 14%, 14% and 11% of consolidated revenue. For the three months ended September 30, 2016, two customers accounted for approximately 66% and 19% of consolidated revenue. Three customers accounted for approximately 56%, 19% and 15% of consolidated revenue for the period from February 10, 2016 to September 30, 2016. Three customers accounted for approximately 58%, 18% and 14% of consolidated revenue for the period from January 1, 2016 to February 10, 2016.

~~Our revenue by country was as follows:~~

Successor

Predecessor

Three Months Ended September 30,

Nine Months Ended September 30, 2017

Period from February 10, 2016 to September 30, 2016

Period from January 1, 2016 to February 10, 2016

2017

2016

(unaudited, in thousands)

Congo

$
39,830

$
26,385

$
102,517

$
65,664

$
13,769

Malaysia

6,460

7,783

20,965

22,743

3,319

Indonesia

—

—

—

18,062

4,214

Qatar

5,882

—

17,574

—

—

Other countries (a)

5,524

5,774

11,952

11,770

2,238

Total revenues

$
57,696

$
39,942

$
153,008

$
118,239

$
23,540

~~(a)~~

~~Other countries represent countries in which we operate that individually had operating revenues representing less than 10% of total revenues earned.~~

~~Our property and equipment, net by country was as follows:~~

September 30, 2017

December 31, 2016

(unaudited, in thousands)

Congo

$
261,672

$
277,305

Malaysia

264,647

280,689

South Africa

183,634

196,473

Other countries (a)

71,159

80,061

Total property and equipment

$
781,112

$
834,528

~~(a)~~

~~Other countries represent countries in which we individually had property and equipment, net, representing less than 10% of total property and equipment, net.~~

A substantial portion of our assets are mobile drilling units. Asset locations at the end of the period are not necessarily indicative of the geographic distribution of the revenues generated by such assets during the periods.

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

The following discussion is intended to assist you in understanding our financial position at September 30, 2017 and our results of operations for the three and nine months ended September 30, 2017, for the three months ended September 30, 2016 and for the periods from February 10, 2016 to September 30, 2016 (the “Successor Period”) and from January 1, 2016 to February 10, 2016 (the “Predecessor Period”). The Successor Period and the Predecessor Period referred to in the results of operations are two distinct reporting periods as a result of our emergence from bankruptcy on February 10, 2016. The discussion should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods. Certain previously reported amounts have been reclassified to conform to the current year presentation.

~~Overview~~

~~We are an international offshore drilling company focused on operating a fleet of modern, high specification drilling units. Our principal business is to contract drilling units, related~~fixtures, computer equipment and work crews, primarily on a dayrate basis to drill oil and natural gas wells for our customers. Through our fleet of drilling units, we are a provider of offshore contract drilling services to major, national and independent oil and natural gas companies, focused primarily on international markets. Additionally, for drilling units owned by others, we provide construction supervision services while under construction, preservation management services when stacked and operations and marketing services for operating rigs.

~~The following table sets forth certain current information concerning our offshore drilling fleet as of October 20, 2017.~~

Name

Year Built

Water Depth
Rating (feet)

Drilling Depth
Capacity
(feet)

Status
Jackups

Emerald Driller

2008

375

30,000

Operating
Sapphire Driller

2009

375

30,000

Operating
Aquamarine Driller

2009

375

30,000

Operating
Topaz Driller

2009

375

30,000

Operating
Vantage 260 (1)

1979

250

20,000

Held for sale
Drillships (2)

Platinum Explorer

2010

12,000

40,000

Mobilizing
Titanium Explorer

2012

12,000

40,000

Warm Stacked
Tungsten Explorer

2013

12,000

40,000

Operating

~~(1) The~~ ~~Vantage 260~~ ~~is designed for 250 feet water depths but is currently outfitted for 150 feet water depth.~~

~~(2) The drillships are designed to drill in up to 12,000 feet of water and are currently equipped to drill in 10,000 feet of water.~~

~~Reorganization~~

~~On the Petition Date, we filed a reorganization plan in the United States Bankruptcy Court for the District of Delaware (In re Vantage Drilling International (F/K/A Offshore Group Investment Limited), et al., Case No. 15-12422). On January 15, 2016, the District Court of Delaware confirmed the Company’s pre-packaged reorganization plan and we emerged from bankruptcy effective on the Effective Date.~~

Pursuant to the terms of the Reorganization Plan, the pre-bankruptcy term loans and senior notes were retired on the Effective Date by issuing to the debtholders 4,344,959 Units in the reorganized Company. Each Unit of securities originally consisted of one New Share and $172.61 of principal of the Convertible Notes, subject to adjustment upon the payment of PIK interest and certain cases of redemption or conversion of the Convertible Notes, as well as share splits, share dividends, consolidation or reclassification of the New Shares. ~~The New Shares and the Convertible Notes are subject to the terms of an agreement that prohibits the New Shares and Convertible Notes from being traded separately.~~

The Convertible Notes are convertible into New Shares in certain circumstances, at a conversion price (subject to adjustment in accordance with the terms of the Indenture for the Convertible Notes) which was $95.60 as of the issue date. The Indenture for the Convertible Notes includes customary covenants that restrict, among other things, the granting of liens and customary events of default, including among other things, failure to issue securities upon conversion of the Convertible Notes. As of September 30, 2017, taking into account the payment of PIK interest on the Convertible Notes to such date, each such Unit consisted of one New Share and $175.02 of principal of Convertible Notes.

~~Other significant elements of the Reorganization Plan included:~~

~~Second Amended and Restated Credit Agreement~~. The Company’s pre-petition credit agreement was amended to (i) replace the $32.0 million revolving letter of credit commitment under its pre-petition facility with a new $32.0 million revolving letter of credit

~~facility and (ii) repay the $150 million of outstanding borrowings under its pre-petition facility with (a) $7.0 million of cash and (b) the issuance of $143.0 million initial term loans.~~

~~10% Senior Secured Second Lien Notes.~~ Holders of the Company’s pre-petition secured debt claims were eligible to participate in a rights offering conducted by the Company for $75.0 million of the Company’s 10% Second Lien Notes. In connection with this rights offering, certain creditors entered into a “backstop” agreement to purchase 10% Second Lien Notes if the offer was not fully subscribed. The premium paid to such creditors under the backstop agreement was approximately $2.2 million, paid $1.1 million in cash and $1.1 million in additional 10% Second Lien Notes, resulting in a total issued amount of $76.1 million of 10% Second Lien Notes, and in net cash proceeds of $73.9 million, after deducting the cash portion of the backstop premium.

~~VDC Note.~~ Effective with the Company’s emergence from bankruptcy, VDC’s former equity interest in the Company was cancelled. Immediately following that event, the VDC Note was converted into 655,094 New Shares in accordance with the terms thereof, in satisfaction of the obligation thereunder, which, including accrued interest, totaled approximately $62.6 million as of such date.

The Reorganization Plan allowed the Company to maintain all operating assets and agreements. All trade payables, credits, wages and other related obligations were unimpaired by the Reorganization Plan.

Upon emergence from bankruptcy on the Effective Date, we adopted fresh-start accounting in accordance with ASC 852, which resulted in the Company becoming a new entity for financial reporting purposes. Upon adoption of fresh-start accounting, our assets and liabilities were recorded at their fair values as of the Effective Date. The Effective Date fair values of our assets and liabilities differed materially from the recorded values of our assets and liabilities as reflected in our historical consolidated balance sheets. The effects of the Reorganization Plan and the application of fresh-start accounting are reflected in our consolidated balance sheet as of December 31, 2016 and the related adjustments thereto were recorded in our consolidated statements of operations as reorganization items.

~~Business Outlook~~

Expectations about future oil and natural gas prices have historically been a key driver of demand for our services. The International Energy Agency (the “Agency”), in their October 2017 Oil Market Report, estimates that average demand will increase by approximately 1.6 million barrels per day or 1.6% in 2017 from 96.6 million barrels per day to 98.2 million barrels per day. The Agency forecasts a slightly lower growth in demand of 1.4 million barrels per day for 2018, when global demand is estimated to reach 99.6 million barrels per day. While this represents favorable growth in demand, it has not been enough to fully offset surplus production and high inventories remain, which continue to depress oil prices. Continuing uncertainty around the viability and length of reductions in production agreed to by the Organization of Petroleum Exporting Countries (“OPEC”) and the incremental production capacity in non-OPEC countries, including growing production from the U.S. shale activity, continue to contribute to an uncertain oil price environment.

As a result of the persistence of reduced oil prices since 2014, exploration and development companies have significantly reduced capital expenditures during this period and historically low levels of spending are expected for 2017 and 2018. Recent analyst surveys of exploration and production spending indicate that oil and gas companies continue to reduce capital expenditures and we expect that the offshore drilling programs of operators will remain curtailed until higher, sustainable crude oil prices are achieved. Accordingly, we anticipate that our industry will experience depressed market conditions through 2017 and 2018.

In addition to the reduction in demand for drilling rigs, the additional supply of newbuild rigs is further depressing the market. There are currently 97 jackups and 31 deepwater floaters on order at shipyards per Bassoe Offshore A.S. with scheduled deliveries extending out to April 2021. While 25 jackups and 12 deepwater floaters are scheduled for delivery through December 31, 2017, it is unclear when these drilling rigs will actually be delivered as many rig deliveries have already been deferred to later dates and some rig orders have been canceled. In response to the oversupply of drilling rigs, a number of competitors are removing older, less efficient rigs from their fleets by either cold stacking the drilling rigs or taking them permanently out of service.

Since June 2014, 101 rigs, with an average age of approximately 36 years, have been announced for recycling according to Bassoe Offshore AS. Of these 101 rigs, 69 are semisubmersibles, 15 are drillships and 17 are jackups. We expect drilling rig cold stacking, scrapping and conversion to non-drilling use to continue during 2017 and 2018. While we believe this is an important element in bringing the supply of drilling rigs back into balance with demand, we do not anticipate that it will be sufficient to materially improve market conditions in 2017 or in 2018.

~~The following table reflects a summary of our contract drilling backlog coverage of days contracted and related revenue as of September 30, 2017 forward (based on information available at that time).~~

Percentage of Days Contracted

Revenues Contracted
(in thousands)

2017

2018

2017

2018

Beyond

Jackups

100%

40%

$
22,944

$
40,146

$
7,727

Drillships

55%

61%

$
38,825

$
124,186

$
67,727

~~In June 2017, our ultra-deepwater drillship, the~~ ~~Platinum Explorer, received a letter of award for a three year contract from Oil and Natural Gas Company. The~~ ~~Platinum Explorer~~ ~~is currently mobilizing to India for planned commencement of operations in the fourth quarter of 2017.~~

~~Results of Operations~~

Operating results for our contract drilling services are dependent on three primary metrics: available days, rig utilization and dayrates. The following table sets forth this selected operational information for the periods indicated.

Successor

Predecessor

Three Months Ended September 30,

Nine Months Ended September 30, 2017

Period from February 10, 2016 to September 30, 2016

Period from January 1, 2016 to February 10, 2016

2017

2016

Jackups

Rigs available (at end of period)

4

4

4

4

4

Available days (1)

439

368

1,250

936

160

Utilization (2)

93.8
%

25.6
%

76.4
%

43.4
%

53.6
%

Average daily revenues (3)

$
63,263

$
112,205

$
64,269

$
94,794

$
88,347

Deepwater

Rigs available

3

3

3

3

3

Available days (1)

276

276

819

702

120

Utilization (2)

33.3
%

33.1
%

33.2
%

33.2
%

33.3
%

Average daily revenues (3)

$
280,191

$
265,000

$
281,040

$
262,271

$
332,715

~~(1)~~

~~Available days are the total number of rig calendar days in the period. Rigs are removed upon classification as held for sale and no longer eligible to earn revenue.~~

~~(2)~~

Utilization is calculated as a percentage of the actual number of revenue earning days divided by the available days in the period. A revenue earning day is defined as a day for which a rig earns dayrate after commencement of operations.

~~(3)~~

Average daily revenues are based on contract drilling revenues divided by revenue earning days. Average daily revenue will differ from average contract dayrate due to billing adjustments for any non-productive time, mobilization fees and demobilization fees.

~~For the Three Months Ended September 30, 2017 and 2016~~

Net loss for the three months ended September 30, 2017 (the “Current Quarter”) was $40.1 million, or $8.01 per basic and diluted share, on operating revenues of $57.7 million, compared to net loss for the three months ended September 30, 2016 (the “Comparable Quarter”) of $41.5 million, or $8.31 per basic and diluted share, on operating revenues of $39.9 million.

~~The following table is an analysis of our operating results for the three months ended September 30, 2017 and 2016.~~

Three Months Ended September 30,

Change

2017

2016

$

%
(unaudited, in thousands)

Revenues

Contract drilling services

$
51,831

$
34,755

$
17,076

49
%

Management fees

342

993

(651
)

-66
%

Reimbursables

5,523

4,194

1,329

32
%

Total revenues

57,696

39,942

17,754

44
%

Operating costs and expenses

Operating costs

49,848

30,983

18,865

61
%

General and administrative

6,949

10,128

(3,179
)

-31
%

Depreciation

18,538

18,977

(439
)

-2
%

Total operating costs and expenses

75,335

60,088

15,247

25
%

Loss from operations

(17,639
)

(20,146
)

2,507

-12
%

Other income (expense)

Interest income

231

11

220

**

Interest expense and financing charges

(19,258
)

(18,722
)

(536
)

3
%

Other, net

858

669

189

28
%

Reorganization items

-

35

(35
)

-100
%

Total other expense

(18,169
)

(18,007
)

(162
)

1
%

Loss before income taxes

(35,808
)

(38,153
)

2,345

-6
%

Income tax provision

4,260

3,373

887

26
%

Net loss

$
(40,068
)

$
(41,526
)

$
1,458

-4
%

** Not a meaningful percentage.

~~Revenue:~~ Total revenue increased 44% and contract drilling revenue increased 49% for the Current Quarter as compared to the Comparable Quarter. The increase in contract drilling revenue in the Current Quarter was primarily due to improved utilization on our jackup fleet, with an aggregate of 317 incremental revenue-earning days, including 71 additional days attributable to the addition of the ~~Vantage 260, contributing $5.5 million in increased revenue. Increased average dayrates and revenue efficiencies on the~~ ~~Tungsten Explorer~~ ~~contributed an incremental $1.6 million contract drilling revenue in the Current Quarter.~~

Management fees and reimbursable revenue for the Current Quarter were $0.3 million and $5.5 million, respectively, as compared to $1.0 million and $4.2 million, respectively, in the Comparable Quarter. The decrease in management fees was primarily due to the completion of the construction of a managed drillship in 2016. The increase in reimbursable revenue was primarily a result of the increases in jackup utilization.

~~Operating costs:~~ ~~Operating~~capitalized costs for the Current Quarter increased 61% as compared to the Comparable Quarter. Jackup utilization changes resulted in an incremental $11.6 million, including $1.6 million for non-cash amortization of the contract value acquired with the ~~Vantage 260. Deepwater operating costs increased $7.3 million due primarily to incremental costs for the reactivation of the~~ ~~Platinum Explorer~~ ~~for an upcoming contract in India.~~

~~General and administrative expenses:~~ Decreases in general and administrative expenses for the Current Quarter as compared to the Comparable Quarter were primarily due to a $1.4 million decrease in legal expenses associated with our internal FCPA investigation and the Petrobras arbitration. Additionally, the Comparable Quarter included accrued severance costs in connection with the resignations of former executives.

~~Depreciation expense:~~ ~~Depreciation expense for the Current Quarter was consistent with the Comparable Quarter.~~

~~Interest expense and other financing charges:~~ Interest expense for the Current Quarter was consistent with the Comparable Quarter. Interest expense includes non-cash discount accretion, payment-in-kind interest and deferred financing costs totaling approximately $14.3 million and $14.1 million for the Current Quarter and for the Comparable Quarter, respectively.

~~Other, net:~~ Our functional currency is the U.S. dollar; however a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than the U.S. dollar. These transactions are remeasured in U.S. dollars

based on a combination of both current and historical exchange rates. Net foreign currency exchange gains of $0.9 million and $0.7 million were included in other, net, for the Current Quarter and the Comparable Quarter, respectively.

~~Income tax expense:~~ ~~Income tax expense increased in the Current Quarter as compared to the Comparable Quarter due to an increase in revenue in the Current Quarter and the impact of the annualized effective tax rate.~~

~~For the Nine months ended September 30, 2017 and the Successor and Predecessor Periods~~

Net loss for the nine months ended September 30, 2017 (the “Current Period”) was $113.2 million, or $22.63 per basic and diluted share, on operating revenues of $153.0 million and net loss for the Successor Period was $106.3 million, or $21.26 per basic and diluted share, on operating revenues of $118.2 million. Net loss attributable to VDI for the Predecessor Period was $471.0 million, on operating revenues of $23.5 million.

~~The following table is an analysis of our operating results for the Current Period, the Successor Period and the Predecessor Period.~~

Successor

Predecessor

Nine Months Ended September 30, 2017

Period from February 10, 2016 to September 30, 2016

Period from January 1, 2016 to February 10, 2016

(unaudited, in thousands)

Revenues

Contract drilling services

$
137,672

$
99,715

$
20,891

Management fees

1,148

3,664

752

Reimbursables

14,188

14,860

1,897

Total revenues

153,008

118,239

23,540

Operating costs and expenses

Operating costs

119,030

93,387

25,213

General and administrative

29,929

27,991

2,558

Depreciation

55,531

49,434

10,696

Total operating costs and expenses

204,490

170,812

38,467

Loss from operations

(51,482
)

(52,573
)

(14,927
)

Other income (expense)

Interest income

587

26

3

Interest expense and financing charges

(57,180
)

(48,144
)

(1,728
)

Other, net

2,073

987

(69
)

Reorganization items

-

(606
)

(452,919
)

Bargain purchase gain

1,910

-

-

Total other expense

(52,610
)

(47,737
)

(454,713
)

Loss before income taxes

(104,092
)

(100,310
)

(469,640
)

Income tax provision

9,067

5,978

2,371

Net loss

(113,159
)

(106,288
)

(472,011
)

Net loss attributable to noncontrolling interests

-

-

(969
)

Net loss attributable to VDI

$
(113,159
)

$
(106,288
)

$
(471,042
)

~~Revenue:~~ ~~During the Current Period jackup utilization averaged 76% with both the~~ ~~Emerald Driller~~ ~~and the~~ ~~Aquamarine Driller~~ working throughout and the remaining three jackups working a combined additional 410 days generating a combined average daily revenue of $64,268 across the jackup fleet. During the Successor Period, only the ~~Aquamarine Driller~~ worked the entire period with the remaining three jackups working a combined additional 175 days at a combined average daily revenue of $94,794. In the Predecessor period of January 1, 2016 to February 10, 2016, our jackups had an aggregate 86 revenue earning days at average daily revenue of approximately $88,347.

~~Deepwater utilization for the Current Period, for the Successor Period and for the Predecessor Period averaged 33% as only the~~ ~~Tungsten Explorer~~ ~~worked throughout all periods. Neither of our other two ultra-deepwater drillships worked during the reported periods as the~~ ~~Platinum Explorer~~ ~~completed its initial 5-year contract during the fourth quarter of 2015 and the~~ ~~Titanium Explorer~~ ~~drilling contract was cancelled by the operator in August 2015.~~

Management fees for the Current Period, the Successor Period and the Predecessor Period averaged approximately $4,206 per day, $15,658 per day and $18,810 per day, respectively. Reimbursable revenue for the Current Period and the Successor Period was $14.2 million and $14.9 million, respectively, with six rigs working part of the Current Period and four working for part of the Successor Period.~~Reimbursable revenue for the Predecessor Period was $1.9 million when three rigs worked for the entire period.~~

~~Operating costs:~~ Operating costs for the Current Period were approximately $119.0 million, including $8.2 million of reimbursable costs. Operating costs for the Successor Period were approximately $93.4 million, including $11.9 million of reimbursable costs. ~~For the Predecessor Period, operating costs were $25.2 million, including $1.4 million of reimbursable costs. Operating costs in the respective periods were dependent on the operational status of the~~ ~~rigs.~~

~~General and administrative expenses:~~ General and administrative expenses for the Current Period and the Successor Period were $29.9 million and $28.0 million, respectively, including $10.9 million and $6.8 million, respectively, in legal expenses associated with our internal FCPA investigation and the Petrobras arbitration. Similar charges incurred in the Predecessor Period totaled $531,000.

~~Depreciation expense:~~ For the Predecessor Period, depreciation expense was based on the historical cost basis of our property and equipment. Upon our emergence from bankruptcy, we applied the provisions of fresh-start accounting and revalued our property and equipment to fair value which resulted in a significant decrease in those values. Depreciation expense for the Current Period and the Successor Period is based on the reduced asset values of property and equipment as a result of the adoption of fresh-start accounting.

~~Interest expense and other financing charges:~~ Interest expense for the Current Period and for the Successor Period is calculated on the debt that was issued in connection with our emergence from bankruptcy on February 10, 2016. Interest expense for the Predecessor Period was calculated on the old credit agreement as provided for in the Reorganization Plan and on the VDC Note issued in connection with the Reorganization Plan. Interest expense for the Current Period and for the Successor Period includes approximately $42.7 million and $36.2 million of non-cash payment in kind interest and deferred financing costs, respectively.

~~Reorganization items:~~ In the Predecessor Period, we incurred $22.7 million of post-petition professional fees associated with the bankruptcy cases. Additionally, we incurred non-cash charges of $2.06 billion in fresh-start accounting adjustments, offset by a $1.63 billion non-cash gain on settlement of LSTC. During the Successor Period we incurred $606,000 in professional fee expenses in connection with our bankruptcy cases.

~~Bargain purchase gain:~~ We recorded a bargain purchase gain of $1.9 million during the Current Period related to our Vantage 260 acquisition. The gain on bargain purchase resulted from the excess of the net fair value of the assets acquired and liabilities assumed in the acquisition over the purchase price. We believe that we were able to negotiate a bargain purchase price as a result of our operational presence in West Africa and the seller’s liquidation.

~~Other, net:~~ Net foreign currency exchange gains included in other, net for the Current Period and the Successor Period were $2.3 million and $1.0 million, respectively. Foreign currency exchange gains or losses included in other, net in the Predecessor Period were insignificant.

~~Income tax expense:~~ Our estimated annualized effective tax rate for the Current Period was negative 8.8% based on estimated annualized loss before income taxes excluding income tax discrete items. Our estimated annualized effective tax rates for the Successor Period and the Predecessor Period were negative 9.4% based on estimated annualized loss or profit before income taxes in the respective periods, excluding income tax discrete items. For all periods, we had a loss before income taxes resulting in negative tax rates. Our income taxes are generally dependent upon the results of our operations and the local income taxes in the jurisdictions in which we operate. In some jurisdictions we do not pay taxes or receive benefits for certain income and expense items, including interest expense, loss on extinguishment of debt and reorganization expenses.

~~Liquidity and Capital Resources~~

As of September 30, 2017, we had working capital of approximately $233.9 million, including approximately $198.6 million of cash available for general corporate purposes. Scheduled principal debt maturities and interest payments through December 31, 2018 are approximately $31.1 million. We anticipate expenditures through December 31, 2018 for sustaining capital expenditures on our rig fleet, capital spares, information technology and other general corporate projects to be approximately $3.1 million to $3.8 million. As our rigs obtain new contracts, we could incur reactivation and mobilization costs for these rigs, as well as customer requested equipment upgrades. These costs could be significant and may not be fully recoverable from the customer. Additionally, we anticipate expenditures for maintenance and repairs and equipment certifications on our rigs in preparation for future contracts. Through December 31, 2018, we anticipate incremental expenditures for fleet reactivation, special periodic surveys and major repair and maintenance expenditures to be approximately $15.8 million to $19.4 million. As of September 30, 2017 we had $12.7 million available for the issuance of letters of credit under our revolving letter of credit facility.

~~In February 2017, we executed a purchase and sale agreement with a third party to acquire the~~ ~~Vantage 260~~ jackup rig and related multi-year drilling contract for $13.0 million. A down payment of $1.3 million was made upon execution of the agreement and the remaining $11.7 million was paid upon closing on April 5, 2017.

~~The table below includes a summary of our cash flow information for periods indicated.~~

Successor

Predecessor

(unaudited, in thousands)

Nine Months Ended September 30, 2017

Period from February 10, 2016 to September 30, 2016

Period from January 1, 2016 to February 10, 2016

Cash flows provided by (used in):

Operating activities

$
(17,412
)

$
3,283

$
(21,365
)

Investing activities

(14,606
)

(10,107
)

116

Financing activities

(1,072
)

(1,123
)

66,875

Changes in cash flows from operating activities are driven by changes in net income (see discussion of changes in net income in “Results of Operations” above) during the periods. Changes in cash flows used in investing activities are dependent upon our level of capital expenditures, which varies based on the timing of projects. Cash used for the acquisition of the ~~Vantage 260~~ totaled $13.0 million in the nine months ended September 30, 2017. In the Predecessor Period from January 1, 2016 to February 10, 2016, we received proceeds of $73.9 million, net of debt issuance costs of $2.3 million, from the issuance of the 10% Second Lien Notes. Additionally, we made a $7.0 million payment on our pre-petition credit agreement.

~~The significant elements of our post-petition debt are described in “Note 5. Debt”~~ ~~to our consolidated financial statements included elsewhere in this report.~~

We enter into operating leases in the normal course of business for office space, housing, vehicles and specified operating equipment. Some of these leases contain options that would cause our future cash payments to change if we exercised those options.

~~We are subject to litigation, claims and disputes in the ordinary course of business, some of which may not be covered by insurance. Information regarding our legal proceedings is set forth in “Note 8. Commitments and Contingencies”~~ to our consolidated financial statements included elsewhere in this report. There is an inherent risk in any litigation or dispute and no assurance can be given as to the outcome of any claims. We do not believe the ultimate resolution of any existing litigation, claims or disputes will have a material adverse effect on our financial position, results of operations or cash flows.

~~Critical Accounting Policies and Accounting Estimates~~

The preparation of financial statements and related disclosures in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. While management believes current estimates are appropriate and reasonable, actual results could materially differ from those estimates. We have identified the policies below as critical to our business operations and the understanding of our financial operations.

~~Fresh-start Accounting:~~ Effective with our bankruptcy filing on December 3, 2015, we were subject to the requirements of ASC 852. All expenses, realized gains and losses and provisions for losses directly associated with the bankruptcy proceedings were classified as “reorganization items” in the consolidated statements of operations. Certain pre-petition liabilities subject to Chapter 11 proceedings were considered LSTC on the Petition Date and just prior to our emergence from bankruptcy on the Effective Date. The LSTC classification distinguished such liabilities from the liabilities that were not expected to be compromised and liabilities incurred post-petition.

Upon emergence from bankruptcy, we adopted fresh-start accounting, which resulted in the Company becoming a new entity for financial reporting purposes. Upon adoption of fresh-start accounting, our assets and liabilities were recorded at their fair values as of the Effective Date. The Effective Date fair values of our assets and liabilities differed materially from the recorded values of our assets and liabilities as reflected in our historical consolidated balance sheets. The effects of the Reorganization Plan and the application of fresh-start accounting are reflected in our consolidated balance sheet as of December 31, 2016 and the related adjustments thereto were recorded in our consolidated statement of operations as reorganization items for the period January 1, 2016 to February 10, 2016.

~~Property and Equipment:~~ Our long-lived assets, primarily consisting of the values of our drilling rigs, are the most significant amount of our total assets. We make judgments with regard to the carrying value of these assets, including amounts capitalized, componentization, depreciation and amortization methods, salvage values and estimated useful lives.computer software. Drilling rigs are depreciated on a component basis over estimated useful lives ranging from five to 35 years on a straight-line basis as of the date placed in service. Other assets are depreciated upon placement in service over estimated useful lives ranging from three to seven yearson a straight-line basis. When assets are sold, retired or otherwise disposed of, the cost and related accumulated depreciation are removed from our Consolidated Balance Sheets and the resulting gain or loss is included in “Operating costs” or “General and administrative” expenses on the Consolidated Statement of Operations, depending on the nature of the asset. For the nine months ended September 30, 2022, we recognized a net gain of approximately $1.6 million related to the sale or retirement of assets. In the nine months ended September 30, 2021, we recognized a net gain of approximately $2.7 million related to the sale or retirement of assets. The gain/loss related to the sale or retirement of assets for the three months ended September 30, 2022 and 2021 was immaterial.

We evaluate the realization of property and equipment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss on our property and equipment exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Any impairment loss recognized would be computed as the excess of the asset’s carrying value over the estimated fair value. Estimates of future cash flows require us to make long-term forecasts of our future revenues and operating costs with regard to the assets subject to review. Our business, including the utilization rates and dayrates we receive for our drilling rigs, depends on the level of our customers’ expenditures for oil and ~~natural~~ gas exploration, development and production expenditures. Oil and ~~natural~~ gas prices and customers’ expectations of potential changes in these prices, the general outlook for worldwide economic growth, political and social stability in the major oil and ~~natural~~ gas producing basins of the world, availability of credit and changes in governmental laws and regulations, among many other factors, significantly affect our customers’ levels of expenditures. Sustained declines in or persistent depressed levels of oil and ~~natural~~ gas prices, worldwide rig counts and utilization, reduced access to credit markets, reduced or depressed sale prices of comparably equipped jackups and drillships and any other significant adverse economic news could require us to evaluate the realization of our drilling rigs. In connection with our adoption of fresh-start accounting upon our emergence from bankruptcy on February 10, 2016, an adjustment of $2.0 billion was recorded to decrease the net book value of our drilling rigs to estimated fair value. As of September 30, ~~2017,~~2022, no triggering event has occurred to indicate that the ~~current~~ carrying value of our drilling rigs may not be recoverable.

~~Revenue:~~ ~~Revenue is recognized as services are performed based on contracted dayrates~~Interest costs and the ~~number~~amortization of ~~operating days during~~debt financing costs related to the ~~period.~~

~~In connection with a customer contract, we may receive lump-sum fees~~financings of our drilling rigs are capitalized as part of the cost while they are under construction and prior to the commencement of each vessel’s first contract. We did not capitalize any interest for the ~~mobilization of equipment and personnel. Mobilization fees and costs~~reported periods.

Debt Financing Costs: Costs incurred ~~to mobilize a rig from one geographic market to another~~with financing debt are deferred and recognized on a straight-line basis over the term of such contract, excluding any option periods. Costs incurred to mobilize a rig without a contract are expensed as incurred. Fees or lump-sum payments received for capital improvements to rigs are deferred and amortized ~~to income~~ over the term of the related ~~drilling contract. The~~financing facility on a straight-line basis, which approximates the interest method. Debt issuance costs related to a recognized debt liability are presented in the Consolidated Balance Sheets as a direct deduction from the carrying amount of ~~such capital improvements are capitalized and depreciated over the useful lives of the assets. We had no deferred revenues under drilling contracts at September 30, 2017 or December 31, 2016.~~that debt liability.

Rig and Equipment Certifications: We are required to obtain regulatory certifications to operate our drilling rigs and certain specified equipment, and must maintain such certifications through periodic inspections and surveys. The costs associated with these certifications, including drydock costs, are deferred and amortized over the corresponding certification periods.

Revenue Recognition: See “Note 3. Revenue from Contracts with Customers” of these “Notes to Unaudited Consolidated Financial Statements” for further information.

Income Taxes: Income taxes ~~have been~~are provided for based upon the tax laws and rates in effect in the countries in which our operations are conducted and income is earned. Deferred income tax assets and liabilities are computed for differences between the financial statement basis and tax basis of assets and liabilities that will result in future taxable or tax deductible amounts and are based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. We do not establish deferred tax liabilities for certain of our foreign earnings that we intend to indefinitely reinvest to finance foreign activities. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. We recognize interest and penalties related to income taxes as a component of income tax expense.

Concentrations of Credit Risk: Financial instruments that potentially subject us to a significant concentration of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable. We maintain deposits in federally insured financial institutions in excess of federally insured limits. We monitor the credit ratings and our concentration of risk with these financial institutions on a continuing basis to safeguard our cash deposits. We have a limited number of key customers, who are primarily large international oil and gas operators, national oil companies and other international oil and gas companies. Our contracts provide for monthly billings as services are performed and we monitor compliance with contract payment terms on an ongoing basis. Payment terms on customer invoices typically range from 30 to 45 days. Outstanding receivables beyond payment terms are promptly investigated and discussed with the specific customer.

~~Recent~~Credit Losses – Accounts Receivable: The allowance for credit losses is based on the Company’s assessment of the collectability of customer accounts. Current estimates of expected credit losses consider factors such as the historical experience and credit quality of our customers. The Company considers historical loss information as the most reasonable basis on which to determine expected credit losses unless current or forecasted future conditions for customers (or customer groups) indicate that risk characteristics have changed. We also considered the impact of the COVID-19 pandemic and the associated oil price and market share volatility on our allowance for credit losses. The allowance for credit losses on our trade receivables was $5.0 million as of each of September 30, 2022 and December 31, 2021, respectively.This amount represents a customer’s decision not to pay us for days impacted by what we believe were force majeure and other similar events for which we would still be entitled to receive payment under the applicable contract. We disagree with the customer's decision and are currently evaluating our remedies, if any, under the applicable contract.

Earnings (loss) per Share: We compute basic and diluted EPS in accordance with the two-class method. We include restricted stock units granted to employees and directors that contain non-forfeitable rights to dividends as such grants are considered participating securities. Basic earnings (loss) per share are based on the weighted average number of Ordinary Shares outstanding during the applicable period. Diluted EPS are computed based on the weighted average number of Ordinary Shares and ordinary share equivalents outstanding in the applicable period, as if all potentially dilutive securities were converted into Ordinary Shares (using the treasury stock method).

The following is a reconciliation of the number of shares used for the basic and diluted EPS computations:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(unaudited, in thousands)
Weighted average Ordinary Shares outstanding for basic EPS		13,115		13,115		13,115		13,115
Restricted share equity awards		—		—		215		—
Adjusted weighted average Ordinary Shares outstanding for diluted EPS		13,115		13,115		13,330		13,115

The following sets forth the number of shares excluded from diluted EPS computations due to their antidilutive effect:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(unaudited, in thousands)
Restricted share equity awards		221		218		—		218
Future potentially dilutive Ordinary Shares excluded from diluted EPS		221		218		—		218

Functional Currency: We consider USD to be the functional currency for all of our operations since the majority of our revenues and expenditures are denominated in USD, which limits our exposure to currency exchange rate fluctuations. We recognize currency exchange rate gains and losses in “Other, net” in our Consolidated Statement of Operations. For the three and nine months ended September 30, 2022, we recognized a net loss of approximately $0.4 million and $2.1 million, respectively, related to currency exchange rates. For the three and nine months ended September 30, 2021, we recognized a net loss of approximately $1.1 million and $1.9 million, respectively, related to currency exchange rates.

Fair Value of Financial Instruments: The fair value of our short-term financial assets and liabilities approximates the carrying amounts represented in our Consolidated Balance Sheets principally due to the short-term nature or floating rate nature of these instruments. As of September 30, 2022, the fair value of the 9.25% First Lien Notes was approximately $342.2 million based on quoted market prices in a less active market, a Level 2 measurement.

Share-based Compensation:TBGs granted under the 2016 Amended MIP vest annually, ratably over four years; however, accelerated vesting is provided for in the event of a QLE. Otherwise, the settlement of any vested TBGs occurs upon the seventh anniversary of the date as defined in the individual award letter.PBGs granted under the 2016 Amended MIP contain vesting eligibility provisions tied to the earlier of a QLE or seven years from the Effective Date. Upon the occurrence of a vesting eligibility event, the number of PBGs that actually vest will be dependent on the achievement of pre-determined TEV targets specified in the grants.

Both the TBGs and PBGs were classified as liabilities consistent with the classification of the underlying securities prior to the Conversion. Following the Conversion, outstanding TBGs and PBGs were subject to modification accounting and were re-classified as equity awards. Under the provisions of ASC 718 Compensation – Stock Compensation share-based compensation expense is recognized over the requisite service period from the grant date to the fourth year vest date for TBGs. For PBGs, expense will be recognized when it is probable that the TEV targets will be met. Once it is probable the performance condition will be met, compensation expense based on the fair value of the PBGs at the conversion date of the Convertible Notes will be recognized for the service period completed to the seventh anniversary of the Effective Date for PBGs.

Noncontrolling Interest:

Noncontrolling interests represent the equity investments of the minority owner in ADVantage, a joint venture with ADES that we consolidate in our financial statements.

Recently Adopted Accounting Standards:~~See~~

No new accounting standards were adopted during the nine-month period ended September 30, 2022.

Recently Issued Accounting Standards:

There have been no new accounting pronouncements not yet effective that have significance, or potential significance, with respect to our consolidated financial statements.

The activities that primarily drive the revenue earned in our drilling contracts with customers include (i) providing our drilling rig, work crews, related equipment and services necessary to operate the rig, (ii) delivering the drilling rig by mobilizing to (and demobilizing from) the drill site, and (iii) performing pre-operating activities, including rig preparation activities and/or equipment modifications required for the contract.

The integrated drilling services that we perform under each drilling contract represent a single performance obligation satisfied over time and comprised of a series of distinct time increments, or service periods. We have elected to exclude from the transaction price measurement all taxes assessed by a governmental authority.

Dayrate Revenue. Our drilling contracts generally provide for payment on a dayrate basis, with higher rates for periods when the drilling unit is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The dayrate billed to the customer is determined based on varying rates applicable to the specific activities performed on an hourly basis. Such dayrate consideration is allocated to the distinct hourly increment it relates to within the contract term and therefore, recognized as we perform the daily drilling services.

For rigs owned by a third-party that we manage or support, the contracts generally provide for a fixed fee based on various factors, including the status of the rig or a specific duration. In addition, we may earn a marketing fee based on a percentage of the effective dayrate of a drilling contract secured on behalf of the third-party and a variable management fee of the gross margin associated with managing an operating rig.

Amortizable Revenue. In connection with certain contracts, we receive lump-sum fees or similar compensation for (i) the mobilization of equipment and personnel prior to the commencement of drilling services, (ii) the demobilization of equipment and personnel upon contract completion, and (iii) postponement fees in consideration for the postponement of a contract until a later date. These activities are not considered to be distinct within the context of the contract and therefore, the associated revenue is allocated to the overall single performance obligation.

Mobilization fees received prior to the commencement of drilling operations are recorded as a contract liability and amortized on a straight‑line basis over the initial contract period. Demobilization fees expected to be received upon contract completion are estimated at contract inception and recognized on a straight-line basis over the initial contract term, with an offset to an accretive contract asset. In many contracts, demobilization fees are contingent upon the occurrence or non-occurrence of a future event and the estimate for such revenue may therefore be constrained. In such cases, this may result in cumulative-effect adjustments to demobilization revenues upon changes in our estimates of future events during the contract term. Postponement fees received that are contingent upon the occurrence or non-occurrence of a future event are recognized on a straight-line basis over the contract term.Fees received for the mobilization or demobilization of equipment and personnel are included in “Contract drilling services” in our Consolidated Statement of Operations.

Capital Upgrade/Contract Preparation Revenue. In connection with certain contracts, we receive lump-sum fees or similar compensation for requested capital upgrades to our drilling rigs or for other contract preparation work. These activities are not considered to be distinct within the context of the contract and therefore, fees received are recorded as a contract liability and amortized to contract drilling revenues on a straight-line basis over the initial contract term.

Revenues Related to Reimbursable Expenses. We generally receive reimbursements from our customers for the purchase of supplies, equipment, personnel services and other services provided at their request in accordance with a drilling contract or other agreement. We are generally considered a principal in such transactions and therefore, recognize reimbursable revenues and the corresponding costs as we provide the customer‑requested goods and services.

Disaggregation of Revenue

The following tables present our revenue disaggregated by revenue source for the periods indicated:


	Three Months Ended September 30, 2022								Three Months Ended September 30, 2021
	Jackups		Deepwater		Managed		Consolidated		Jackups		Deepwater		Managed		Consolidated
(unaudited, in thousands)
Dayrate revenue	$	6,271	$	26,833	$	4,442	$	37,546	$	32,596	$	5,307	$	690	$	38,593
Amortized revenue		562		806		—		1,368		5,079		—		—		5,079
Reimbursable revenue		1,936		5,064		25,044		32,044		4,905		577		3,697		9,179
Total revenue	$	8,769	$	32,703	$	29,486	$	70,958	$	42,580	$	5,884	$	4,387	$	52,851

	Nine Months Ended September 30, 2022								Nine Months Ended September 30, 2021
	Jackups		Deepwater		Managed		Consolidated		Jackups		Deepwater		Managed		Consolidated
(unaudited, in thousands)
Dayrate revenue	$	37,565	$	77,133	$	8,385	$	123,083	$	58,967	$	23,102	$	1,285	$	83,354
Amortized revenue		2,221		5,210		—		7,431		10,293		—		—		10,293
Reimbursable revenue		6,087		11,215		54,711		72,013		9,627		909		4,435		14,971
Total revenue	$	45,873	$	93,558	$	63,096	$	202,527	$	78,887	$	24,011	$	5,720	$	108,618

Dayrate revenue and amortized revenue for “Jackups” and “Deepwater” are included within “Contract drilling services” in our Consolidated Statement of Operations. Dayrate revenue for “Managed” is included within “Management fees” in our Consolidated Statement of Operations. All other revenue are included within “Reimbursables and other” in our Consolidated Statement of Operations.

Accounts Receivable, Contract Liabilities and Contract Costs

Accounts receivable are recognized when the right to consideration becomes unconditional based upon contractual billing schedules. Payment terms on customer invoices typically range from 30 to 45 days.

We recognize contract liabilities, recorded in other “Other current liabilities” and “Other long-term liabilities”, for prepayments received from customers and for deferred revenue received for mobilization, contract preparation and capital upgrades.

Certain direct and incremental costs incurred for contract preparation, initial mobilization and modifications of contracted rigs represent contract fulfillment costs as they relate directly to a contract, enhance resources that will be used to satisfy our performance obligations in the future and are expected to be recovered. These costs are deferred as a current or noncurrent asset depending on the length of the initial contract term and are amortized on a straight-line basis to operating costs as services are rendered over the initial term of the related drilling contract. Costs incurred for capital upgrades are capitalized and depreciated over the useful life of the asset.

Costs incurred for the demobilization of rigs at contract completion are recognized as incurred during the demobilization process. Costs incurred to mobilize a rig without a contract are expensed as incurred.

The following table provides information about contract cost assets and contract revenue liabilities from contracts with customers:


	September 30, 2022		December 31, 2021
(unaudited, in thousands)
Current contract cost assets	$	202	$	1,405
Noncurrent contract cost assets		4,115		6,832
Noncurrent contract cost assets - held for sale		—		4,196
Current contract revenue assets		—		1,903
Current contract revenue liabilities		37,255		12,311
Noncurrent contract revenue liabilities		1,145		1,893

Significant changes in contract cost assets and contract revenue liabilities during the nine months ended September 30, 2022 are as follows:


	Contract Cost Assets			Contract Revenue Assets			Contract Revenues
(unaudited, in thousands)
Balance as of December 31, 2021	$	12,433		$	1,903		$	14,204
Increase (decrease) due to contractual changes		(329	)		—			76,512
Decrease due to recognition of revenue		(7,787	)		(1,903	)		(52,316	)
Balance as of September 30, 2022 (1)	$	4,317		$	—		$	38,400

(1)

We expect to recognize contract revenues of approximately $37.3 million during the remaining three months of 2022 and $1.1 million thereafter arising primarily from unsatisfied performance obligations existing as of September 30, 2022.

We have elected to utilize an optional exemption that permits us to exclude disclosure of the estimated transaction price related to the variable portion of unsatisfied performance obligations at the end of the reporting period, as our transaction price is based on a single performance obligation consisting of a series of distinct hourly increments, the variability of which will be resolved at the time the future services are rendered.

4. Leases

We have operating leases expiring at various dates, principally for office space, onshore storage yards and certain operating equipment. Additionally, we sublease certain office space to third parties. We determine if an arrangement is a lease at inception. Operating leases with an initial term greater than 12 months are included in “Operating lease ROU assets”, “Other current liabilities”, and “Other long-term liabilities” on our Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made prior to or at the commencement date and is reduced by lease incentives received and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, which are generally not accounted for separately. Certain of our leases include provisions for variable payments. These variable payments are not included in the calculation of lease liability and ROU assets.

The components of lease expense for the periods indicated were as follows:


		Three Months Ended September 30,						Nine Months Ended September 30,
(unaudited, in thousands)	Classification in the Consolidated Statement of Operations	2022			2021			2022			2021
Operating lease cost(1)	Operating costs	$	236		$	408		$	804		$	2,023
Operating lease cost(1)	General and administrative		375			152			852			455
Sublease income	Operating costs		—			(121	)		—			(363	)
Sublease income	General and administrative		(228	)		(62	)		(635	)		(186	)
Total operating lease cost		$	383		$	377		$	1,021		$	1,929

(1) Short-term lease costs were approximately$0.2 million during the nine months ended September 30, 2022, and $0.1 million and $0.3 million during the three and nine months ended September 30, 2021, respectively. Short-term lease costs during the three months ended September 30, 2022 was immaterial. Operating cash flows used for operating leases approximates lease expense.


(unaudited, in thousands)	Classification in the Consolidated Balance Sheets	September 30, 2022		December 31, 2021
Assets:
Operating lease assets	Operating lease ROU assets	$	1,754	$	2,450
	Operating lease ROU assets - Held for sale		—		197
Total leased assets		$	1,754	$	2,647
Liabilities:
Current operating	Other current liabilities	$	1,786	$	1,710
	Other current liabilities - Held for sale		—		103
Noncurrent operating	Other long-term liabilities		94		969
	Other long-term liabilities - Held for sale		—		93
Total lease liabilities		$	1,880	$	2,875

As of September 30, 2022, maturities of lease liabilities were as follows:


(unaudited, in thousands)	Operating Leases
Remaining three months of 2022	$	521
2023		1,444
2024		—
2025		—
2026		—
Total future lease payments	$	1,965
Less imputed interest		(85	)
Present value of lease obligations	$	1,880

The weighted average discount rate was 9.25% as of both September 30, 2022 and December 31, 2021. The weighted average remaining lease term for operating leases was 1.03 years and 1.56 years as of September 30, 2022 and December 31, 2021, respectively. ROU assets and lease liabilities recorded for leases commencing during the three and nine months ended September 30, 2022 was $0.7 million and $0.8 million, respectively.

5. Debt

Our debt was composed of the following as of the dates indicated:


	September 30, 2022		December 31, 2021
(unaudited, in thousands)
9.25% First Lien Notes, net of financing costs of $1,913 and $3,142, respectively	$	348,087	$	346,858
Less current maturities of long-term debt		—		—
Long-term debt, net	$	348,087	$	346,858

9.25% First Lien Notes. On November 30, 2018, the Company issued $350.0 million in aggregate principal amount of 9.25% First Lien Notes in a private placement. The 9.25% First Lien Notes were issued at par and are fully guaranteed on a senior secured basis by the Company’s direct and indirect subsidiaries, and are secured by a first priority lien on substantially all of the assets of the Company and its subsidiaries, in each case subject to certain exceptions. The 9.25% First Lien Notes are subject to first payment priority in favor of holders of up to $50.0 million of future super-priority debt and are subject to both mandatory and optional redemption provisions.

The 9.25% First Lien Notes mature on November 15, 2023 and bear interest from the date of their issuance at the rate of 9.25% per year. Interest is computed on the basis of a 360-day year comprised of twelve 30-day months and is payable semi-annually in arrears,

commencing on May 15, 2019. Failure to refinance the 9.25% First Lien Notes before their maturity date could have a material and adverse effect on the Company’s financial condition and may affect our ability to continue as a going concern.

The First Lien Indenture includes customary covenants and events of default, including covenants that, among other things, restrict the granting of liens, restrict the making of investments, restrict the incurrence of indebtedness and the conveyance of vessels, limit transactions with affiliates, and require that the Company provide periodic financial reports.

The net proceeds from the issuance were used (i) to repay all obligations under the formerly existing 2016 Term Loan Facility and to terminate the credit agreement governing such facility, (ii) to redeem all the then-outstanding 10% Second Lien Notes, (iii) to fund the remaining amounts to be paid in connection with the purchase of the Soehanah jackup rig, (iv) to pay fees and expenses related to the foregoing and to the offering of the 9.25% First Lien Notes, and (v) for general corporate purposes.

Concurrently with the issuance of the 9.25% First Lien Notes, we entered into a letter of credit facility to replace the letter of credit facility formerly existing under the 2016 Term Loan Facility. The facility has a capacity of $50.0 million, with all outstanding letters of credit being cash collateralized. We have issued $0.1 million in letters of credit under this facility as of September 30, 2022.

6. Shareholders’ Equity

Stock Issuance

VDI has 50,000,000 authorized Ordinary Shares. Upon emergence from bankruptcy on the Effective Date, VDI issued 5,000,053 Ordinary Shares in connection with the settlement of Liabilities Subject to Compromise in accordance with the Reorganization Plan and theVDC Note. On December 4, 2019, VDI issued an additional 8,114,977 Ordinary Shares to convert all of the outstanding Convertible Notes. As of September 30, 2022, 13,115,026 Ordinary Shares were issued and outstanding.

Share-based Compensation

On August 9, 2016, the Company adopted the 2016 Amended MIP to align the interests of participants with those of the Company’s shareholders by providing incentive compensation opportunities tied to the performance of the Company’s equity securities. Pursuant to the 2016 Amended MIP, the Compensation Committee may grant to employees, directors and consultants stock options, restricted stock, restricted stock units or other awards.

No awards were granted to employees or directors during the nine months ended September 30, 2022 and 2021. During the nine months ended September 30, 2022, 1,564 of previously-granted TBGs vested.

Both the TBGs and PBGs are classified as equity awards. For the nine months ended September 30, 2022, share-based compensation expense related to the TBGs was immaterial. For the nine months ended September 30, 2021, we recognized share-based compensation expense related to the TBGs of approximately $0.4 million. As of September 30, 2022, we concluded that it was not probable that the TEV performance condition would be met and therefore, no share-based compensation expense was recognized for PBGs.

Pursuant to the 2016 Amended MIP and the terms of the applicable unit awards, participants holding restricted stock units are contractually entitled to receive all dividends or other distributions that are paid to VDI’s stockholders, provided that any such dividends will be subject to the same vesting requirements of the underlying units. Dividend payments accrue to outstanding awards (both vested and unvested) in the form of “Dividend Equivalents” equal to the dividend per share underlying the applicable award under the 2016 Amended MIP. As a result of a special cash distribution paid to shareholders of record on December 17, 2019, $5.3 million has been recorded in “Other current liabilities” and $3.5 million has been recorded in “Other long-term liabilities” in our Consolidated Balance Sheets at September 30, 2022 to be paid upon settlement of the TBGs.

7. Income Taxes

VDI is a Cayman Islands company operating in multiple countries through its subsidiaries. The Cayman Islands do not impose corporate income taxes. Consequently, we have calculated income taxes based on the laws and tax rates in effect in the countries in which operations are conducted, or in which we and our subsidiaries are considered resident for income tax purposes. Our income taxes are generally dependent upon the results of our operations and when we generate significant revenues in jurisdictions where the income tax liability is based on gross revenues or asset values, there is no correlation to the net operating results and the income tax expense. Furthermore, in some jurisdictions we do not pay taxes, pay taxes at lower rates or receive benefits for certain income and expense items, including interest expense, loss on extinguishment of debt, gains or losses on disposal or transfer of assets, reorganization expenses and write-off of development costs.

On January 22, 2020, VDI filed the Tax Election with the IRS to be treated as a partnership, rather than a corporation, for U.S. federal income tax purposes, with an effective date retroactive to December 9, 2019. As a result, U.S. Holders are required to take into account their allocable share of items of income, gain, loss deduction and credit of VDI for each taxable year of VDI ending with or within the U.S. Holder’s taxable year, regardless of whether any distribution has been or will be received from VDI. Each item generally

will have the same character and source (either U.S. or foreign) as though the U.S. Holder had realized the item directly. VDI’s change in tax status did not have a material impact on our consolidated financial statements as of September 30, 2022.

Deferred income tax assets and liabilities are recorded for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. We provide for deferred taxes on temporary differences between the financial statements and tax bases of assets and liabilities using the enacted tax rates which are expected to apply to taxable income when the temporary differences are expected to reverse. Deferred tax assets are also provided for certain tax losses and tax credit carryforwards. A valuation allowance is established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized. We do not establish deferred tax liabilities for certain of our foreign earnings that we intend to indefinitely reinvest to finance foreign activities.

In certain jurisdictions we are taxed under preferential tax regimes, which may require our compliance with specified requirements to sustain the tax benefits. We believe we are in compliance with the specified requirements and will continue to make all reasonable efforts to comply; however, our ability to meet the requirements of the preferential tax regimes may be affected by changes in laws or administrative practices, our business operations and other factors affecting the Company and industry, many of which are beyond our control.

Our periodic tax returns are subject to examination by taxing authorities in the jurisdictions in which we operate in accordance with the normal statute of limitations in the applicable jurisdiction. These examinations may result in assessments of additional taxes that are resolved with the authorities or through the courts. Resolution of these matters involves uncertainties and there are no assurances as to the outcome. Our tax years from 2012 onward remain open to examination in many of our jurisdictions and we are currently involved in several tax examinations in jurisdictions where we are operating or have previously operated. As information becomes available during the course of these examinations, we may increase or decrease our estimates of tax assessments and accruals.

8. Commitments and Contingencies

Brazil Improbity Action

On April 27, 2018, the Company was added as an additional defendant in a legal proceeding (the “Improbity Action”), initiated by the Brazilian Federal Prosecutor against certain individuals, including an executive of Petrobras and two political lobbyists, in connection with the contracting of the Titanium Explorer drillship to Petrobras under the Drilling Contract, with the Brazilian Government and Petrobras as plaintiffs. Vantage is alleged to have been involved in and benefitted from the purported bribery scheme at Petrobras through Hamylton Padilha, the Brazilian agent our former parent company, VDC, used in the contracting of the Titanium Explorer drillship to Petrobras, and Mr. Hsin-Chi Su, a former member of VDC’s board of directors and a significant shareholder of VDC. We first became aware of the legal proceeding on July 19, 2018 as it was previously under seal. On March 22, 2019, we were formally served in the United States, and we filed our preliminary statement of defense with the 11th Federal court of the Judicial Branch of Curitiba, State of Parana, Brazil (the “Brazilian Federal Court”) on April 12, 2019 in response. On August 20, 2020, the Brazilian Federal Court dismissed our preliminary statement of defense. On October 5, 2020, we subsequently filed a motion to clarify with the Brazilian Federal Court requesting the reconsideration of certain aspects of the decision dismissing our preliminary statement of defense. Our motion to clarify was denied on December 14, 2020, and on February 10, 2021 we filed an interlocutory appeal to the 4th Circuit of the Federal Court of Appeals in Porto Alegre, State of Rio Grande do Sul, Brazil (the “Brazilian Appellate Court”), the appellate court hearing appeals in the “Car Wash” cases, seeking to reverse the Brazilian Federal Court’s denial of our preliminary defense. On April 15, 2021, the Brazilian authorities served us indirectly through the U.S. Department of Justice agreeing to formally send us documents related to the Improbity Action. On May 13, 2021, the Brazilian Appellate Court’s reporting judge for our matter granted our request for preliminary relief and ordered an immediate stay of the Improbity Action as it applies to the Company until the judgment (on the merits) of the interlocutory appeal is rendered by the full three judge panel of the Brazilian Appellate Court. Proceedings with regard to the interlocutory appeal commenced on August 30, 2022 and remain pending. We will be obligated to file a statement of defense in the matter if the decision to stay the Improbity Action is later reversed. The Company understands that the Improbity Action, is a civil action and is part of the Brazilian Federal Prosecutor’s larger “Car Wash” investigation into money laundering and corruption allegations in Brazil. Separately, on October 26, 2021, Federal Law no. 14,230/2021 (the “New Administrative Improbity Law”) was enacted, amending the original Brazilian improbity legal framework almost in its entirety. The Company believes that the developments arising from the enactment of the New Administrative Improbity Law render the case against it moot, and in February 2022, the Company requested the application of the New Administrative Improbity Law to the Improbity Action proceeding and, accordingly, the dismissal of the Improbity Action against the Company. The Company submitted arguments and a ruling on the impact of the New Administrative Improbity Law on the Improbity Action remains pending. The Company cannot predict the ultimate outcome of this proceeding, or whether a favorable outcome in this proceeding would apply retroactively to dismiss the current Improbity Action.

The damages claimed in the proceeding are in the amount of BRL 102.8 million or approximately $19.6 million (changes in the USD amounts result from foreign exchange rate fluctuations), together with a civil fine equal to three times that amount. The Company understands that the Brazilian Federal Court previously issued an order authorizing the seizure and freezing of the assets of the Company

and the other three defendants in the legal proceeding, as a precautionary measure, in the amount of approximately $78.5 million. The Company and the other three defendants are jointly and severally liable for this amount. The seizure order has not had an effect on the Company’s assets or operations, as the Company does not own any assets in Brazil, and does not currently intend to relocate any assets to Brazil. On February 13, 2019, the Company learned that the Brazilian Federal Prosecutor had previously requested mutual legal assistance from the DOJ pursuant to the United Nations Convention against Corruption of 2003 to obtain a freezing order against the Company’s U.S. assets in the approximate amount of $78.5 million.

On April 12, 2019, the Company filed an interlocutory appeal with the Brazilian Appellate Court to stay the seizure and freezing order of the Brazilian Federal Court.

On May 20, 2019, the Company announced that the Brazilian Appellate Court's reporting judge ruled in favor of the Company’s appeal to stay the seizure and freezing order of the Brazilian Federal Court. The foregoing ruling is still subject to confirmation by a three-judge panel, and is subject to appeal, and the Company can offer no assurances that the stay will be confirmed or as to the outcome of any appeal thereof. The Company communicated the Brazilian Appellate Court’s ruling to the DOJ and has asked the Brazilian Federal Court to do the same. On July 18, 2019, the Company announced that the Brazilian Government made a filing with the Brazilian Federal Court reporting that the DOJ has advised the Brazilian Ministry of Justice that it would not be possible for the DOJ to comply with the mutual assistance request in respect of the asset freeze order. The Company also announced that it learned from the Brazilian Ministry of Justice that the DOJ’s response to the request for mutual assistance stated that no legal grounds existed for implementing the requested asset freeze, and that the DOJ was returning the request without taking action and considers the matter concluded.

The Company has defended, and intends to continue to vigorously defend, against the allegations made in the Improbity Action and oppose and defend against any attempts to seize the Company's assets. However, we can neither predict the ultimate outcome of this matter nor that there will not be further developments in the “Car Wash” investigation or in any other ongoing investigation or related proceeding that could adversely affect us. At this time, we are not able to determine the likelihood of loss, if any, arising from this matter.

9. Supplemental Financial Information

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following as of the dates indicated:


	September 30, 2022		December 31, 2021
(unaudited, in thousands)
Sales tax receivable	$	4,436	$	8,445
Other receivables		284		234
Income tax receivable		544		1,423
Prepaid insurance		751		257
Current deferred contract costs		202		1,405
Current contract asset		—		1,903
Other		7,663		4,642
	$	13,880	$	18,309

Assets Held for Sale

Assets held for sale consisted of the following as of the dates indicated:


	September 30, 2022		December 31, 2021
(unaudited, in thousands)
Trade receivables, net	$	—	$	7,306
Materials and supplies		—		13,510
Prepaid expenses and other current assets		—		3,768
Property & equipment, net		—		87,441
Noncurrent deferred contract costs		—		4,196
Operating lease ROU asset		—		197
Other noncurrent assets		—		699
	$	—	$	117,117

Property and Equipment, net

Property and equipment, net, consisted of the following as of the dates indicated:


	September 30, 2022			December 31, 2021
(unaudited, in thousands)
Drilling equipment	$	624,605		$	626,546
Assets under construction		2,085			148
Office and technology equipment		18,406			18,405
Leasehold improvements		523			523
		645,619			645,622
Accumulated depreciation		(298,263	)		(266,018	)
Property and equipment, net	$	347,356		$	379,604

Other Assets

Other assets consisted of the following as of the dates indicated:


	September 30, 2022		December 31, 2021
(unaudited, in thousands)
Noncurrent restricted cash	$	3,589	$	15,644
Deferred certification costs		3,679		5,199
Noncurrent deferred contract costs		4,115		6,832
Deferred income taxes		1,576		1,776
Other noncurrent assets		5,702		2,392
	$	18,661	$	31,843

Other Current Liabilities

Other current liabilities consisted of the following as of the dates indicated:


	September 30, 2022		December 31, 2021
(unaudited, in thousands)
Interest	$	12,229	$	4,136
Compensation (1)		7,482		7,040
2016 MIP - Dividend equivalent (2)		5,277		—
Income taxes payable		3,747		5,589
Current deferred revenue		37,255		12,311
Current portion of operating lease liabilities		1,786		1,710
Other		659		747
	$	68,435	$	31,533

(1) Includes $2.3 million as of December 31, 2021 related to cash awards granted to certain key employees of the Company pursuant to underlying award agreements and issued under the 2016 Amended MIP. The final payout of this cash award was made in June 2022.

(2) “Dividend equivalents” on vested TBGs are payable upon settlement of the applicable award.

Liabilities Held for Sale

Liabilities held for sale consisted of the following as of the dates indicated:


	September 30, 2022		December 31, 2021
(unaudited, in thousands)
Accounts payable	$	—	$	4,140
Compensation		—		464
Income taxes payable		—		716
Current portion of operating lease liabilities		—		103
Deferred income taxes		—		1,190
Noncurrent operating lease liabilities		—		93
Other		—		14
	$	—	$	6,720

Other Long-term Liabilities

Other Long-term liabilities consisted of the following as of the dates indicated:


	September 30, 2022		December 31, 2021
(unaudited, in thousands)
2016 MIP - Dividend equivalent (1)	$	3,521	$	8,735
Noncurrent deferred revenue		1,145		1,893
Noncurrent operating lease liabilities		94		969
Other non-current liabilities		4,573		5,415
	$	9,333	$	17,012

(1) “Dividend equivalents” on vested TBGs are payable upon settlement of the applicable award.

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same amounts shown in the Consolidated Statement of Cash Flows as of the dates indicated:


	September 30, 2022		December 31, 2021
(unaudited, in thousands)
Cash and cash equivalents	$	243,581	$	73,343
Restricted cash		15,123		1,621
Restricted cash included within Other Assets		3,589		15,644
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows	$	262,293	$	90,608

Restricted cash represents cash held by banks as collateralizing letters of credit.

Related Party Transactions

The Company does not currently have any reportable transactions with entities that meet the definition of related parties as specifically defined by ASC 850 Related Party Disclosures. The Company does have recurring transactions and collaboration agreements in the ordinary course of business with ADES, as described in “Note 1. Organization and Recent Events” and “Note 2. Basis of Presentation and Significant Accounting ~~Policies”~~Policies”, and Aquadrill LLC, as described below.

ADES

In conjunction with the establishment of ADVantage, the Company entered into a series of agreements with ADES, including: (i) a Secondment Agreement; (ii) a Manpower Agreement; and (iii) a Supply Services Agreement. Pursuant to these agreements, the Company, largely through its seconded employees, has agreed to provide various services to ADES and ADES has agreed in turn to provide various services to ADVantage.

On December 6, 2021, we entered into the EDC Purchase Agreement to sell to ADES Arabia all of the issued and outstanding equity of EDC, which owns the Emerald Driller, Sapphire Driller and Aquamarine Driller. The transactions contemplated by the EDC Purchase Agreement closed on the EDC Closing Date. Simultaneously with the EDC Sale, certain subsidiaries of the Company and ADES entered into the EDC Support Services Agreements, pursuant to which a subsidiary of the Company agreed to provide, in exchange for customary fees and reimbursements, support services to EDC with respect to the Emerald Driller, Sapphire Driller and Aquamarine Driller for a three-year term. Fees earned as a result of these agreements are included in “Management fees” and “Reimbursable and other” in our Consolidated Statement of Operations within the Managed Services segment as reported in “Note 10. Business Segment and Significant Customer Information.” For additional information regarding the EDC Purchase Agreement and the transactions contemplated thereunder, please see “Share Purchase Agreement to Sell EDC to ADES Arabia Holding” under “Note 1. Organization and Recent Events” of these Notes to Unaudited Financial Statements.

On September 22, 2022, three wholly owned subsidiaries of VHI entered into several related agreements with Advanced Energy Services, S.A.E., a subsidiary of ADES (“ADES SAE” and together with ADES Arabia, the “ADES Group”), including a (i) secondment agreement; (ii) a services agreement; and (iii) a bareboat charter agreement, in each case to support a drilling campaign that will utilize the Topaz Driller jackup (collectively, the “ADES Ancillary Agreements”). These contracts generally provide for: (a) reimbursement of loaned employee personnel costs plus a service fee; (b) a fixed fee based on days the rig is drilling; (c) a variable fee based on a percentage of gross margin generated on a monthly basis; and (d) reimbursement for purchases of supplies, equipment and personnel services, and other services provided at the request of ADES SAE. Fees earned as a result of these agreements are included in “Reimbursable and other” in our Consolidated Statement of Operations within the Drilling Services segment as reported in “Note 10. Business Segment and Significant Customer Information.”

For the three and nine months ended September 30, 2022, we recognized revenue of $2.5 million and $2.9 million, respectively from the ADES Group in connection with the ADES Ancillary Agreements. As of September 30, 2022 and December 31, 2021, accounts receivable from the ADES Group totaled approximately $6.5 million and $0.5 million, respectively, included in “Trade receivables” on the Consolidated Balance Sheets. As of September 30, 2022 and December 31, 2021, accounts payable to the ADES Group totaled approximately $4.4 million and $2.1 million, respectively, included in “Accounts payable” on the Consolidated Balance Sheets.

The Company and ADES also entered into an agreement on December 6, 2021 (the “Collaboration Agreement”) to pursue a global strategic alliance in order to leverage both the EDC Support Services Agreements and ADVantage, the parties’ existing joint venture in Egypt. Pursuant to the Collaboration Agreement, the parties agreed to collaborate on exploring future commercial and operational opportunities.

Aquadrill

VHI previously entered into Framework Agreements and related Management and Marketing Agreements, as amended, on March 16, 2021 with Aquadrill, pursuant to which certain subsidiaries of VHI agreed to provide operating, management and marketing services to Aquadrill and its subsidiaries (the “Aquadrill Entities”). Fees earned as a result of these agreements are included in “Management fees” and “Reimbursable and other” in our Consolidated Statement of Operations within the Managed Services segment as reported in “Note 10. Business Segment and Significant Customer Information.” For the three and nine months ended September 30, 2022, we recognized revenue of $22.1 million and $52.2 million, respectively, and for the three and nine months ended September 30, 2021, we recognized revenue of $4.4 million and $5.7 million, respectively. Two of our shareholders that own a significant portion of our Ordinary shares also own an interest in Aquadrill.

10. Business Segment and Significant Customer Information

Our operations are dependent on the global oil and gas industry, and our rigs are relocated based on demand for our services and customer requirements. Our customers consist primarily of large international oil and gas companies, national or government-controlled oil and gas companies, and other international exploration and production companies. As the result of an increase in activity related to operating, management and marketing services for rigs owned by third-parties, the Company has two reportable segments: (1) “Drilling Services,” which includes activities related to owned jackup rigs and drillships; and (2) “Managed Services,” which consists of activities related to rigs owned by third parties that we manage or support. The chief operating decision maker evaluates the performance of our reportable segments using adjusted operating income (loss), which is a segment performance measure, because this financial measure reflects our ongoing profitability and performance. Adjusted operating income (loss) is defined as segment income (loss) from operations plus depreciation. General and administrative expenses, other (expense) income, and income taxes are not allocated to the operating segments for purposes of measuring segment income (loss) from operations and are included in “Unallocated” in the table below. There are no intersegment revenues. Our segment results for the periods indicated were as follows:


	Three Months Ended September 30, 2022
	Drilling Services			Managed Services		Unallocated			Consolidated
(unaudited, in thousands)
Revenue
Contract drilling services	$	34,092		$	—	$	—		$	34,092
Management fees		—			4,442		—			4,442
Reimbursables and other		7,380			25,044		—			32,424
Total revenue		41,472			29,486		—			70,958
Operating costs and expenses
Operating costs		40,192			26,236		1			66,429
General and administrative		—			—		4,253			4,253
Depreciation		10,631			—		391			11,022
Gain on EDC Sale		—			—		(632	)		(632	)
Total operating costs and expenses		50,823			26,236		4,013			81,072
(Loss) income from operations		(9,351	)		3,250		(4,013	)		(10,114	)
Other (expense) income
Interest income		—			—		17			17
Interest expense and financing charges		—			—		(8,504	)		(8,504	)
Other, net		—			—		(363	)		(363	)
Total other expense		—			—		(8,850	)		(8,850	)
(Loss) income before income taxes	$	(9,351	)	$	3,250	$	(12,863	)	$	(18,964	)

Reconciliation of (loss) income from operations to segment adjusted operating income:	Drilling Services			Managed Services
(Loss) income from operations	$	(9,351	)	$	3,250
Depreciation		10,631			—
Segment adjusted operating income	$	1,280		$	3,250


	Three Months Ended September 30, 2021
(unaudited, in thousands)	Drilling Services			Managed Services		Unallocated			Consolidated
Revenue
Contract drilling services	$	42,982		$	—	$	—		$	42,982
Management fees		—			690		—			690
Reimbursables and other		5,482			3,697		—			9,179
Total revenue		48,464			4,387		—			52,851
Operating costs and expenses
Operating costs		41,235			4,134		—			45,369
General and administrative		—			—		4,593			4,593
Depreciation		13,718			—		419			14,137
Gain on EDC Sale		—			—		—			—
Total operating costs and expenses		54,953			4,134		5,012			64,099
(Loss) income from operations		(6,489	)		253		(5,012	)		(11,248	)
Other (expense) income
Interest income		—			—		8			8
Interest expense and financing charges		—			—		(8,508	)		(8,508	)
Other, net		—			—		(1,108	)		(1,108	)
Total other expense		—			—		(9,608	)		(9,608	)
(Loss) income before income taxes	$	(6,489	)	$	253	$	(14,620	)	$	(20,856	)

Reconciliation of (loss) income from operations to segment adjusted operating income:	Drilling Services			Managed Services
(Loss) income from operations	$	(6,489	)	$	253
Depreciation		13,718			—
Segment adjusted operating income	$	7,229		$	253


	Nine Months Ended September 30, 2022
	Drilling Services			Managed Services		Unallocated			Consolidated
(unaudited, in thousands)
Revenue
Contract drilling services	$	121,749		$	—	$	—		$	121,749
Management fees		—			8,385		—			8,385
Reimbursables and other		17,682			54,711		—			72,393
Total revenue		139,431			63,096		—			202,527
Operating costs and expenses
Operating costs		112,794			56,972		1			169,767
General and administrative		—			—		17,745			17,745
Depreciation		32,182			—		1,222			33,404
Gain on EDC Sale		—			—		(61,413	)		(61,413	)
Total operating costs and expenses		144,976			56,972		(42,445	)		159,503
(Loss) income from operations		(5,545	)		6,124		42,445			43,024
Other (expense) income
Interest income		—			—		28			28
Interest expense and financing charges		—			—		(25,511	)		(25,511	)
Other, net		—			—		(2,149	)		(2,149	)
Total other expense		—			—		(27,632	)		(27,632	)
(Loss) income before income taxes	$	(5,545	)	$	6,124	$	14,813		$	15,392

Reconciliation of (loss) income from operations to segment adjusted operating income:	Drilling Services			Managed Services
(Loss) income from operations	$	(5,545	)	$	6,124
Depreciation		32,182			—
Segment adjusted operating income	$	26,637		$	6,124


	Nine Months Ended September 30, 2021
	Drilling Services			Managed Services		Unallocated			Consolidated
(unaudited, in thousands)
Revenue
Contract drilling services	$	92,362		$	—	$	—		$	92,362
Management fees		—			1,285		—			1,285
Reimbursables and other		10,536			4,435		—			14,971
Total revenue		102,898			5,720		—			108,618
Operating costs and expenses
Operating costs		101,459			5,323		—			106,782
General and administrative		—			—		15,055			15,055
Depreciation		41,185			—		1,238			42,423
Gain on EDC Sale		—			—		—			—
Total operating costs and expenses		142,644			5,323		16,293			164,260
(Loss) income from operations		(39,746	)		397		(16,293	)		(55,642	)
Other (expense) income
Interest income		—			—		118			118
Interest expense and financing charges		—			—		(25,529	)		(25,529	)
Other, net		—			—		(1,901	)		(1,901	)
Total other expense		—			—		(27,312	)		(27,312	)
(Loss) income before income taxes	$	(39,746	)	$	397	$	(43,605	)	$	(82,954	)

Reconciliation of (loss) income from operations to segment adjusted operating income:	Drilling Services			Managed Services
(Loss) income from operations	$	(39,746	)	$	397
Depreciation		41,185			—
Segment adjusted operating income	$	1,439		$	397

Our revenue by country and segment was as follows for the periods indicated (revenue of less than 10% are included in “Other countries”):


		Three months ended September 30,				Nine months ended September 30,
Country	Segment	2022		2021		2022		2021
(unaudited, in thousands)
UAE	Managed Services	$	21,320	$	—	$	49,286	$	—
India	Drilling Services and Managed Services		13,683		5,884		40,202		24,036
Egypt	Drilling Services		—		—		27,034		—
Cyprus	Drilling Services		18,867		—		26,349		—
Indonesia	Drilling Services and Managed Services		13,265		5,591		22,071		—
Montenegro	Drilling Services		—		14,887		—		31,193
Qatar	Drilling Services		—		7,932		—		22,826
Equatorial Guinea	Drilling Services		—		8,474		—		—
Malaysia	Drilling Services		—		5,692		—		—
Other countries (1)	Drilling Services and Managed Services		3,823		4,391		37,585		30,563
Total revenues		$	70,958	$	52,851	$	202,527	$	108,618

(1) “Other countries” represent countries in which we operate that individually had operating revenues representing less than 10% of total revenues earned.

For the three and nine months ended September 30, 2022 and 2021, a substantial amount of our revenue was derived from countries outside of the United States. Revenue with customers that contributed 10% or more of revenue for the periods indicated were as follows:


		Three months ended September 30,						Nine months ended September 30,
(unaudited)	Segment	2022			2021			2022			2021
Customer 1	Managed Services		31	%		0	%		26	%		0	%
Customer 2	Drilling Services and Managed Services		19	%		11	%		20	%		22	%
Customer 3	Drilling Services		0	%		0	%		13	%		0	%
Customer 4	Drilling Services		33	%		28	%		13	%		29	%
Customer 5	Drilling Services		0	%		14	%		0	%		12	%
Customer 6	Drilling Services		0	%		16	%		0	%		0	%
Customer 7	Drilling Services		0	%		11	%		0	%		0	%
Customer 8	Drilling Services		0	%		11	%		0	%		0	%

Information related to the Company’s “Total Assets” as reported on the Consolidated Balance Sheets is not available by reportable segment; however, a substantial portion of our assets are mobile drilling units included in the Drilling Services segment. Asset locations at the end of the period are not necessarily indicative of the geographic distribution of the revenues generated by such assets during the periods. Our property and equipment, net by country, was as follows as of the dates indicated (property and equipment of less than 10% are included in “Other countries”):


	September 30, 2022		December 31, 2021
(unaudited, in thousands)
Cyprus	$	161,348	$	—
Egypt		—		173,187
India		85,102		96,583
Indonesia		59,734		63,581
Other countries (1)		41,172		46,253
Total property and equipment	$	347,356	$	379,604

(1) “Other countries” represent countries in which we individually had property and equipment, net, representing less than 10% of total property and equipment, net.

(1)

The drillships are designed to drill in up to 12,000 feet of water and are currently equipped to drill in 10,000 feet of water.

(1)

The amounts consist of contract backlog attributable to customer drilling contracts secured for rigs managed by us.

(2)

The amounts consist of a fixed management fee paid to us pursuant to the applicable Management Agreement and a marketing fee paid to us pursuant to the applicable Marketing Agreement. The amounts exclude any variable fee payable to us pursuant to the applicable Management Agreement.

(1)

Available days are the total number of rig calendar days in the period.

(2)

(3)

(4)

Each of these rigs were classified as held for sale on our Consolidated Balance Sheets during the Current Period and at December 31, 2021, up to the date of the EDC Closing Date. See “Recent Developments - Share Purchase Agreement to Sell EDC to ADES Arabia Holding” in this Part I, Item 2 for additional information.

4.8

Registration Rights Agreement among Vantage Drilling International, Vantage Drilling Company and the joint official liquidators of Vantage Drilling Company, dated as of April 26, 2017

10-K/A

333-212081

10.1

05/01/17
12.1

Statement re Computation of Earnings to Fixed Charges

X

31.1

Certification of Principal Executive Officer Pursuant to Section 302

X

31.2

Certification of Principal Financial and Accounting Officer Pursuant to Section 302

X

32.1**

Certification of Principal Executive Officer Pursuant to Section 906

32.2**

Certification of Principal Financial and Accounting Officer Pursuant to Section 906

101.INS

— XBRL Instance Document

X

101.SCH

— XBRL Schema Document

X

101.CAL

— XBRL Calculation Document

X

101.DEF

— XBRL Definition Linkbase Document

X

101.LAB

— XBRL Label Linkbase Document

X

101.PRE

— XBRL Presentation Linkbase Document

X

** These exhibits are furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.


	VANTAGE DRILLING INTERNATIONAL

Date: November ~~7, 2017~~10, 2022	By:	/s/ ~~THOMAS J. CIMINO~~ DOUGLAS E. STEWART
		~~Thomas J. Cimino~~Douglas E. Stewart
		Chief Financial Officer, General Counsel and Corporate Secretary
		(Principal Financial ~~and Accounting~~ Officer)


Title of each class	Trading Symbol	Name of each exchange on which registered
N/A	N/A	N/A


		Page
SAFE HARBOR STATEMENT		3
PART I—FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)		~~Financial~~ ~~Statements~~	57
	Consolidated Balance ~~Sheet~~Sheets	57
	Consolidated Statement of Operations	68
	Consolidated Statement of Shareholders’ Equity	9
	Consolidated Statement of Cash Flows	710
	Notes to Unaudited Consolidated Financial Statements	811
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2128
Item 3	Quantitative and Qualitative Disclosures About Market Risk	2839
Item 4	Controls and Procedures	39
PART II—OTHER INFORMATION
Item 1	Legal Proceedings	39
Item 6	Exhibits	40
~~Item 4~~SIGNATURES			~~Controls and Procedures~~	29
~~PART II—OTHER INFORMATION~~
~~Item 1~~	~~Legal Proceedings~~	29
~~Item 6~~	~~Exhibits~~	30
~~SIGNATURES~~		3242


	Nine Months Ended September 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	13,609		$	(86,717	)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation expense		33,404			42,423
Amortization of debt financing costs		1,229			1,229
Share-based compensation expense		61			366
Deferred income tax expense		301			357
Gain on disposal of assets		(1,600	)		(2,710	)
Gain on EDC Sale		(61,413	)		—
Changes in operating assets and liabilities:
Trade receivables, net		(50,289	)		(11,451	)
Materials and supplies		(2,218	)		(2,084	)
Prepaid expenses and other current assets		2,680			762
Other assets		(23,222	)		(4,207	)
Accounts payable		31,873			4,310
Other current liabilities and other long-term liabilities		33,624			13,243
Net cash used in operating activities		(21,961	)		(44,479	)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment		(8,154	)		(3,232	)
Net proceeds from EDC Sale		198,700			—
Net proceeds from sale of assets		3,100			—
Net proceeds from sale of Titanium Explorer		—			13,557
Net cash provided by investing activities		193,646			10,325
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities		—			—
Net increase (decrease) in unrestricted and restricted cash and cash equivalents		171,685			(34,154	)
Unrestricted and restricted cash and cash equivalents—beginning of period		90,608			154,487
Unrestricted and restricted cash and cash equivalents—end of period	$	262,293		$	120,333
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest	$	16,266		$	16,197
Income taxes (net of refunds)		2,481			2,350
Non-cash investing and financing transactions:
Accrued additions to property and equipment		—			—


Abbreviation/Acronym		Definition
10% Second Lien Notes		The Company's 10% Senior Secured Second Lien Notes due 2020
2016 Amended MIP		The Company's Amended and Restated 2016 Management Incentive Plan
2016 Term Loan Facility		The Company's initial term loans in place in connection with the Reorganization Plan
9.25% First Lien Notes		The Company's 9.25% Senior Secured First Lien Notes due November 15, 2023
ADES		ADES International Holding Ltd, an offshore and onshore provider of oil and gas drilling and production services in the Middle East, India and Africa
ADVantage		ADVantage Drilling Services SAE, a joint venture owned 51% by the Company and 49% by ADES
ASC		Accounting Standards Codification
Board of Directors		The Company's board of directors
Comparable Period		The nine months ended September 30, 2021
Comparable Quarter		The three months ended September 30, 2021
Conversion		The conversion of all of the Convertible Notes into Ordinary Shares
Convertible Notes		The Company's 1%/12% Step-Up Senior Secured Third Lien Convertible Notes due 2030
COVID-19		Coronavirus disease 2019, a strain of coronavirus caused by SARS-CoV-2
Current Period		The nine months ended September 30, 2022
Current Quarter		The three months ended September 30, 2022
DOJ		U.S. Department of Justice
EDC		Emerald Driller Company
Effective Date		February 10, 2016, the date the Company emerged from bankruptcy
EPS		Earnings per share
Exchange Act		Securities Exchange Act of 1934, as amended
First Lien Indenture		First Lien Indenture, dated as of November 30, 2018, by and between Vantage Drilling International and U.S. Bank National Association
IRS		U.S. Internal Revenue Service
OPEC		The Organization of the Petroleum Exporting Countries
OPEC+		The Organization of the Petroleum Exporting Countries plus 10 non-OPEC nations
Ordinary Shares		The Company's ordinary shares, par value $0.001 per share
PBGs		Performance-based restricted stock units
QLE		A qualified liquidity event as defined in the 2016 Amended MIP
Reorganization Plan		The Company's pre-packaged plan of reorganization under Chapter 11 of Title 11 of the U.S. Bankruptcy Code
ROU		Right-of-use
Russo-Ukrainian War		The ongoing war resulting from Russia's invasion of Ukraine in February 2022
SEC		Securities and Exchange Commission
Securities Act		Securities Act of 1933, as amended
Tax Election		Tax election filed with the IRS on January 22, 2020, to allow VDI to be treated as a partnership, rather than a corporation, for U.S. federal income tax purposes, with an effective date retroactive to December 9, 2019
TBGs		Time-based restricted stock units
TEV		Total enterprise value
U.S.		United States of America
U.S. GAAP		Accounting principles generally accepted in the United States of America
U.S. Holder		A beneficial owner of the Ordinary Shares that is, for U.S. federal income tax purposes, (i) a citizen or individual resident of the United States, (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) that was organized under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of its source or (iv) a trust, if a U.S. court can exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or such trust has a valid election in effect under applicable treasury regulations to be treated as a U.S. person for U.S. federal income tax purposes
USD or $		U.S. Dollar
VDC		Vantage Drilling Company, the Company's former parent company
VDC Note		A $61.5 million promissory note issued by the Company in favor of VDC
VDI		Vantage Drilling International


VHI		Vantage Holdings International, a subsidiary of VDI
VIE		Variable interest entity


							September 30, 2022			December 31, 2021
	September 30, 2017			December 31, 2016
ASSETS
Current assets
Cash and cash equivalents	$	198,637		$	231,727		$	243,581		$	73,343
Trade receivables		36,103			20,850
Inventory		43,675			45,206
Restricted cash								15,123			1,621
Trade receivables, net of allowance for credit losses of $5.0 million, each period								70,823			37,527
Materials and supplies								39,313			37,580
Assets held for sale								—			117,117
Prepaid expenses and other current assets		16,158			12,423			13,880			18,309
Total current assets		294,573			310,206			382,720			285,497
Property and equipment
Property and equipment		904,327			902,241			645,619			645,622
Accumulated depreciation		(123,215	)		(67,713	)		(298,263	)		(266,018	)
Property and equipment, net		781,112			834,528			347,356			379,604
Operating lease ROU assets								1,754			2,450
Other assets		22,384			15,694			18,661			31,843
Total assets	$	1,098,069		$	1,160,428		$	750,491		$	699,394

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable	$	46,182		$	35,283		$	45,178		$	31,420
Accrued liabilities		20,073			18,448
Current maturities of long-term debt		4,430			1,430
Other current liabilities								68,435			31,533
Liabilities held for sale								—			6,720
Total current liabilities		70,685			55,161			113,613			69,673
Long–term debt, net of discount and financing costs of $68,564 and $105,568		904,084			867,372
Long–term debt, net of discount and financing costs of $1,913 and $3,142, respectively								348,087			346,858
Other long-term liabilities		9,899			11,335			9,333			17,012
Commitments and contingencies (Note 8)
Commitments and contingencies (see Note 8)
Shareholders' equity
Ordinary shares, $0.001 par value, 50 million shares authorized; 5,000,053 shares issued and outstanding		5			5
Ordinary shares, $0.001 par value, 50 million shares authorized; 13,115,026 shares issued and outstanding, each period								13			13
Additional paid-in capital		373,972			373,972			633,845			633,847
Accumulated deficit		(260,576	)		(147,417	)		(356,789	)		(369,792	)
Total shareholders' equity		113,401			226,560
Total liabilities and shareholders’ equity	$	1,098,069		$	1,160,428
Controlling interest shareholders' equity								277,069			264,068
Noncontrolling interests								2,389			1,783
Total equity								279,458			265,851
Total liabilities and shareholders' equity							$	750,491		$	699,394

	Successor												Predecessor
	Three Months Ended September 30,						Nine Months Ended September 30, 2017			Period from February 10, 2016 to September 30, 2016			Period from January 1, 2016 to February 10, 2016			Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			Nine Months Ended September 30, 2017			Period from February 10, 2016 to September 30, 2016			Period from January 1, 2016 to February 10, 2016			2022			2021			2022			2021
Revenue
Contract drilling services	$	51,831		$	34,755		$	137,672		$	99,715		$	20,891		$	34,092		$	42,982		$	121,749		$	92,362
Management fees		342			993			1,148			3,664			752			4,442			690			8,385			1,285
Reimbursables		5,523			4,194			14,188			14,860			1,897
Reimbursables and other																	32,424			9,179			72,393			14,971
Total revenue		57,696			39,942			153,008			118,239			23,540			70,958			52,851			202,527			108,618
Operating costs and expenses
Operating costs		49,848			30,983			119,030			93,387			25,213			66,429			45,369			169,767			106,782
General and administrative		6,949			10,128			29,929			27,991			2,558			4,253			4,593			17,745			15,055
Depreciation		18,538			18,977			55,531			49,434			10,696			11,022			14,137			33,404			42,423
Gain on EDC Sale																	(632	)		—			(61,413	)		—
Total operating costs and expenses		75,335			60,088			204,490			170,812			38,467			81,072			64,099			159,503			164,260
Loss from operations		(17,639	)		(20,146	)		(51,482	)		(52,573	)		(14,927	)
Other income (expense)
(Loss) income from operations																	(10,114	)		(11,248	)		43,024			(55,642	)
Other (expense) income
Interest income		231			11			587			26			3			17			8			28			118
Interest expense and other financing charges (contractual interest of $23,219 for the period from January 1, 2016 to February 10, 2016)		(19,258	)		(18,722	)		(57,180	)		(48,144	)		(1,728	)
Interest expense and other financing charges																	(8,504	)		(8,508	)		(25,511	)		(25,529	)
Other, net		858			669			2,073			987			(69	)		(363	)		(1,108	)		(2,149	)		(1,901	)
Reorganization items		—			35			—			(606	)		(452,919	)
Bargain purchase gain		—			—			1,910			—			—
Total other expense		(18,169	)		(18,007	)		(52,610	)		(47,737	)		(454,713	)		(8,850	)		(9,608	)		(27,632	)		(27,312	)
Loss before income taxes		(35,808	)		(38,153	)		(104,092	)		(100,310	)		(469,640	)
(Loss) income before income taxes																	(18,964	)		(20,856	)		15,392			(82,954	)
Income tax provision		4,260			3,373			9,067			5,978			2,371			1,566			881			1,783			3,763
Net loss		(40,068	)		(41,526	)		(113,159	)		(106,288	)		(472,011	)
Net loss attributable to noncontrolling interests		—			—			—			—			(969	)
Net loss attributable to VDI	$	(40,068	)	$	(41,526	)	$	(113,159	)	$	(106,288	)	$	(471,042	)
Net loss per share, basic and diluted	$	(8.01	)	$	(8.31	)	$	(22.63	)	$	(21.26	)	N/A
Weighted average successor ordinary shares outstanding, basic and diluted		5,000			5,000			5,000			5,000		N/A
Net (loss) income																	(20,530	)		(21,737	)		13,609			(86,717	)
Net (loss) income attributable to noncontrolling interests																	(332	)		(10	)		606			(41	)
Net (loss) income attributable to shareholders																$	(20,198	)	$	(21,727	)	$	13,003		$	(86,676	)
(Loss) earnings per share
Basic																$	(1.54	)	$	(1.66	)	$	0.99		$	(6.61	)
Diluted																$	(1.54	)	$	(1.66	)	$	0.98		$	(6.61	)


	Nine-Month Period Ended September 30, 2021
	Ordinary Shares
	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Non-Controlling Interests			Total Equity
Balance January 1, 2021		13,115	$	13	$	634,181		$	(259,655	)	$	1,206		$	375,745
Share-based compensation		—		—		306			—			—			306
Share-based compensation - dividend equivalents		—		—		(760	)		—			—			(760	)
Net loss		—		—		—			(35,984	)		(13	)		(35,997	)
Balance March 31, 2021		13,115	$	13	$	633,727		$	(295,639	)	$	1,193		$	339,294
Share-based compensation		—		—		31			—			—			31
Net loss		—		—		—			(28,965	)		(18	)		(28,983	)
Balance June 30, 2021		13,115	$	13	$	633,758		$	(324,604	)	$	1,175		$	310,342
Share-based compensation		—		—		29			—			—			29
Share-based compensation - dividend equivalents		—		—		30			—			—			30
Contributions from holders of noncontrolling interests		—		—		—			—			691			691
Net loss		—		—		—			(21,727	)		(10	)		(21,737	)
Balance September 30, 2021		13,115	$	13	$	633,817		$	(346,331	)	$	1,856		$	289,355


	Nine-Month Period Ended September 30, 2022
	Ordinary Shares
	Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Non-Controlling Interests			Total Equity
Balance January 1, 2022		13,115	$	13	$	633,847		$	(369,792	)	$	1,783		$	265,851
Share-based compensation		—		—		26			—			—			26
Share-based compensation - dividend equivalents		—		—		(63	)		—			—			(63	)
Net (loss) income		—		—		—			(14,898	)		706			(14,192	)
Balance March 31, 2022		13,115	$	13	$	633,810		$	(384,690	)	$	2,489		$	251,622
Share-based compensation		—		—		18			—			—			18
Net income		—		—		—			48,099			232			48,331
Balance June 30, 2022		13,115	$	13	$	633,828		$	(336,591	)	$	2,721		$	299,971
Share-based compensation		—		—		17			—			—			17
Net loss		—		—		—			(20,198	)		(332	)		(20,530	)
Balance September 30, 2022		13,115	$	13	$	633,845		$	(356,789	)	$	2,389		$	279,458

(in thousands)
Fiscal year:
Remaining 2017	$	1,591
2018		6,311
2019		1,643
Thereafter		-
Total	$	9,545

(in thousands)
Total cash consideration	$	13,000

Purchase price allocation:
Drilling contract value		12,640
Rig equipment to be sold (net of disposal costs)		2,050
Drillpipe assets		700
Severance liabilities assumed		(480	)
Net assets acquired		14,910

Bargain purchase gain	$	1,910

	September 30, 2017		December 31, 2016
(unaudited, in thousands)
2016 Term Loan Facility	$	140,497	$	141,570
10% Second Lien Notes, net of financing costs of $1,522 and $1,873		74,604		74,252
Convertible Notes, net of discount of $67,042 and $103,695		693,413		652,980
		908,514		868,802
Less current maturities of long-term debt		4,430		1,430
Long-term debt, net	$	904,084	$	867,372

Name	Year Built		Water Depth Rating (feet)		Drilling Depth Capacity (feet)		Status
Jackups
Emerald Driller		2008		375		30,000	Operating
Sapphire Driller		2009		375		30,000	Operating
Aquamarine Driller		2009		375		30,000	Operating
Topaz Driller		2009		375		30,000	Operating
Vantage 260 (1)		1979		250		20,000	Held for sale
Drillships (2)
Platinum Explorer		2010		12,000		40,000	Mobilizing
Titanium Explorer		2012		12,000		40,000	Warm Stacked
Tungsten Explorer		2013		12,000		40,000	Operating

	Percentage of Days Contracted				Revenues Contracted (in thousands)
	2017		2018		2017		2018		Beyond
Jackups		100%		40%	$	22,944	$	40,146	$	7,727
Drillships		55%		61%	$	38,825	$	124,186	$	67,727

	Three Months Ended September 30,						Change
	2017			2016			$			%
(unaudited, in thousands)
Revenues
Contract drilling services	$	51,831		$	34,755		$	17,076			49	%
Management fees		342			993			(651	)		-66	%
Reimbursables		5,523			4,194			1,329			32	%
Total revenues		57,696			39,942			17,754			44	%
Operating costs and expenses
Operating costs		49,848			30,983			18,865			61	%
General and administrative		6,949			10,128			(3,179	)		-31	%
Depreciation		18,538			18,977			(439	)		-2	%
Total operating costs and expenses		75,335			60,088			15,247			25	%
Loss from operations		(17,639	)		(20,146	)		2,507			-12	%
Other income (expense)
Interest income		231			11			220		**
Interest expense and financing charges		(19,258	)		(18,722	)		(536	)		3	%
Other, net		858			669			189			28	%
Reorganization items		-			35			(35	)		-100	%
Total other expense		(18,169	)		(18,007	)		(162	)		1	%
Loss before income taxes		(35,808	)		(38,153	)		2,345			-6	%
Income tax provision		4,260			3,373			887			26	%
Net loss	$	(40,068	)	$	(41,526	)	$	1,458			-4	%


			Incorporated by Reference
Exhibit Number	Exhibit Description	Filed Herewith	Form	File Number	Exhibit	Filing Date
2.1	Joint Prepackaged Chapter 11 Plan of Offshore Group Investment Limited and its Affiliated Debtors, dated December 1, 2015, which is Exhibit A to the Disclosure Statement		T-3	022-29012	99.T3E.1	12/02/15
2.2	Share Purchase Agreement, dated December 6, 2021, by and between Vantage Holdings International and ADES Arabia Holding		10-K	333-159299-15	2.2	03/30/22
3.1A	Certificate of Incorporation of the Company		S-4	333-170841	3.3	11/24/10
3.1B	Fourth Amended and Restated Memorandum and Articles of Incorporation of the Company		8-K	333-159299-15	3.1	03/08/19
4.1	First Lien Indenture, dated as of November 30, 2018, by and between Vantage Drilling International, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and first lien collateral agent		8-K	333-159299-15	4.1	12/04/18
4.2	First Supplemental Indenture by and between Vantage Drilling International, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and first lien collateral agent, dated January 24, 2019		10-K	333-159299-15	4.4	03/10/20
4.3	Second Supplemental Indenture by and between Vantage Drilling International, the subsidiary guarantors party thereto and U.S. Bank National Association, as trustee and first lien collateral agent, dated February 13, 2019		10-K	333-159299-15	4.5	03/10/20
4.4	Shareholders Agreement dated as of February 10, 2016, by and among Offshore Group Investment Limited and the Shareholders (as defined therein)		8-K	333-159299-15	10.1	02/17/16
4.5	Amendment No. 1 to the Shareholders Agreement, dated as of February 10, 2016, by and among Offshore Group Investment Limited and the Shareholders (as defined therein)		8-K	333-159299-15	10.1	03/08/19
4.6	Registration Rights Agreement, dated as of February 10, 2016, by and among Offshore Group Investment Limited and each of the Holders (as defined therein) party thereto		8-K	333-159299-15	10.2	02/17/16
4.7	Amendment No. 1 to the Registration Rights Agreement, dated as of May 9, 2016, by and among Vantage Drilling International (f/k/a Offshore Group Investment Limited) and each of the Holders party thereto		10-Q	333-159299-15	10.3	5/13/16
4.8	Registration Rights Agreement among Vantage Drilling International, Vantage Drilling Company and the joint official liquidators of Vantage Drilling Company, dated as of April 26, 2017		10-K/A	333-212081	10.1	05/01/17
10.1	Agreement, dated June 20, 2019, among Vantage Deepwater Company, Vantage Deepwater Drilling, Inc., Petroleo Brasileiro S.A., Petrobras America, Inc. and Petrobras Venezuela Investments & Services, BV.		8-K	333-159299-15	10.1	06/24/19