10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2022

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

For the transition period from to

Commission File Number: 333-159299

VANTAGE DRILLING INTERNATIONAL

(Exact name of Registrant as specified in its charter)

Cayman Islands

98-1372204

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

c/o Vantage Energy Services, Inc.

777 Post Oak Boulevard, Suite 440

Houston, TX 77056

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (281) 404-4700

Securities registered pursuant to Section 12(b) of the Act:


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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

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


Large accelerated filer		Accelerated filer	
Non-accelerated filer		Smaller reporting company	☐
		Emerging growth company	☐

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

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

The number of Vantage Drilling International Ordinary Shares outstanding as of November 1, 2022 is 13,115,026 shares.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  No 

TABLE OF CONTENTS


		Page
SAFE HARBOR STATEMENT		3
PART I—FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)	7
	Consolidated Balance Sheets	7
	Consolidated Statement of Operations	8
	Consolidated Statement of Shareholders’ Equity	9
	Consolidated Statement of Cash Flows	10
	Notes to Unaudited Consolidated Financial Statements	11
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4	Controls and Procedures	39
PART II—OTHER INFORMATION
Item 1	Legal Proceedings	39
Item 6	Exhibits	40
SIGNATURES		42

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements are included throughout this Quarterly Report, including under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” When used, statements which are not historical in nature, including those containing words such as “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “would,” “will,” “future” and similar expressions are intended to identify forward-looking statements in this Quarterly Report.

These forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements.

Among the factors that could cause actual results to differ materially are the risks and uncertainties described under “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 30, 2022, “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report, and the following:

•

reduced expenditures by oil and gas exploration and production companies;

•

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

•

excess supply of drilling units worldwide;

•

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 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;

•

operations in international markets, including geopolitical, 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 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 restrictions and covenants in our debt agreements;

•

our ability to refinance our existing and any 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; 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.

Many of these factors are beyond our ability to control or predict. Any, or a combination of these factors, could materially affect our future financial condition or results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

In addition, each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements. We may not update these forward-looking statements, even if our situation changes in the future. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in filings we may make with the SEC, which may be obtained by contacting us or the SEC. These filings are also available through our website at www.vantagedrilling.com or through the SEC’s Electronic Data Gathering and Analysis Retrieval system (EDGAR) at www.sec.gov. The contents of our website are not part of this Quarterly Report.

Unless the context indicates otherwise, all references to the “Company,” “Vantage Drilling International,” “we,” “our” or “us” refer to Vantage Drilling International and its consolidated subsidiaries. References to “VDI” refer to Vantage Drilling International, a Cayman Islands exempted company and the group parent company.

GLOSSARY OF TERMS

The following terms used in this Quarterly Report have the following meanings, unless specified elsewhere in this Quarterly Report:


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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Vantage Drilling International

Consolidated Balance Sheets

(In thousands, except share and par value information)

(Unaudited)


	September 30, 2022			December 31, 2021

ASSETS
Current assets
Cash and cash equivalents	$	243,581		$	73,343
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		13,880			18,309
Total current assets		382,720			285,497
Property and equipment
Property and equipment		645,619			645,622
Accumulated depreciation		(298,263	)		(266,018	)
Property and equipment, net		347,356			379,604
Operating lease ROU assets		1,754			2,450
Other assets		18,661			31,843
Total assets	$	750,491		$	699,394

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable	$	45,178		$	31,420
Other current liabilities		68,435			31,533
Liabilities held for sale		—			6,720
Total current liabilities		113,613			69,673
Long–term debt, net of discount and financing costs of $1,913 and $3,142, respectively		348,087			346,858
Other long-term liabilities		9,333			17,012
Commitments and contingencies (see Note 8)
Shareholders' equity
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		633,845			633,847
Accumulated deficit		(356,789	)		(369,792	)
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

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

Vantage Drilling International

Consolidated Statement of Operations

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Revenue
Contract drilling services	$	34,092		$	42,982		$	121,749		$	92,362
Management fees		4,442			690			8,385			1,285
Reimbursables and other		32,424			9,179			72,393			14,971
Total revenue		70,958			52,851			202,527			108,618
Operating costs and expenses
Operating costs		66,429			45,369			169,767			106,782
General and administrative		4,253			4,593			17,745			15,055
Depreciation		11,022			14,137			33,404			42,423
Gain on EDC Sale		(632	)		—			(61,413	)		—
Total operating costs and expenses		81,072			64,099			159,503			164,260
(Loss) income from operations		(10,114	)		(11,248	)		43,024			(55,642	)
Other (expense) income
Interest income		17			8			28			118
Interest expense and other financing charges		(8,504	)		(8,508	)		(25,511	)		(25,529	)
Other, net		(363	)		(1,108	)		(2,149	)		(1,901	)
Total other expense		(8,850	)		(9,608	)		(27,632	)		(27,312	)
(Loss) income before income taxes		(18,964	)		(20,856	)		15,392			(82,954	)
Income tax provision		1,566			881			1,783			3,763
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	)

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

Vantage Drilling International

Consolidated Statement of Shareholders’ Equity

(In thousands)

(Unaudited)


	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

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

Vantage Drilling International

Consolidated Statement of Cash Flows

(In thousands)

(Unaudited)


	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		—			—

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

VANTAGE DRILLING INTERNATIONAL

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Recent Events

Vantage Drilling International, 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 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 gas companies, focused on international markets. Additionally, for third-party owned drilling units, we provide operations and marketing services for operating and stacked rigs, construction supervision services for rigs that are under construction, and preservation management services for rigs that are stacked.

Financing Transaction Uncertainty

The 9.25% First Lien Notes mature on November 15, 2023, and the Company is exploring a potential refinancing of, or other transaction or series of transactions regarding, all or a portion of the 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 pursuit of any such Financing Transaction is subject to prevailing market conditions, the 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 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 operate. While it is not possible at this time to predict or determine the 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 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 the 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 December 6, 2021, VHI, a wholly owned subsidiary of the Company, entered into a 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 to ADES Arabia all of the issued and outstanding equity of VHI’s wholly-owned subsidiary, EDC (the “EDC Sale”). EDC is the owner of the following jackup rigs, which are currently operating in Qatar: the Emerald Driller; the Sapphire Driller; and 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 such agreement closed on May 27, 2022 (the “EDC Closing Date”). On the EDC Closing Date, VHI received $170.0 million as purchase price consideration and $30.0 million in certain contract preparation expense reimbursement. In accordance with the terms of the 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 three months ending September 30, 2022, the entirety of the 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 purchase price adjustments pursuant to the EDC Purchase Agreement. As a result of these transactions, VHI recognized a net gain of approximately $61.4 million.

Simultaneously with the EDC Sale, certain subsidiaries of the Company and ADES entered into three separate support services agreements (collectively, 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.

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.

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). To the extent such proceeds are not so applied (or committed to be applied) within one year after receipt, the Company will be required to offer to purchase the 9.25% First Lien Notes with such proceeds.

Tungsten Explorer Contract Award

On June 9, 2022, a subsidiary of VDI entered into a drilling services contract with a subsidiary of TotalEnergies (the “TotalEnergies Contract”) in respect of VDI’s ultra-deepwater drillship, the Tungsten Explorer. The TotalEnergies Contract contains a minimum term of 225 days. The Tungsten Explorer is currently operating in 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 certain countries, including those where we maintain significant operations and derive material revenue, implementing quarantine, testing and vaccination requirements. These governmental reactions to the 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 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 our industry, and the world at large, will need to continue to operate in, and further adapt, to the current environment for the foreseeable future.

2. Basis of Presentation and Significant Accounting Policies

Basis of Consolidation: The accompanying interim consolidated financial information as of September 30, 2022, and for the three and nine months ended September 30, 2022 and 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 VIEs (as discussed 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 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 U.S. 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 statement. Our Consolidated Balance Sheet at December 31, 2021 is derived from our December 31, 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, 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 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.

ADVantage is a joint venture company formed to operate deepwater drilling rigs in Egypt. We determined that ADVantage met the criteria of 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 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 benefits that could be potentially significant to the VIE. As a result, we consolidate ADVantage in our consolidated financial statements, we eliminate intercompany transactions and we present the interests that are not owned by us as “Noncontrolling interests” in our Consolidated Balance Sheets. The carrying amount associated with ADVantage was as follows:


	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

As ADVantage is a majority owned subsidiary of the 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 secured by a first priority lien on all of the assets of ADVantage, subject to certain exceptions. Creditors’ recourse against ADVantage for liabilities of ADVantage is limited to the assets of ADVantage.

See “Note 9. Supplemental Financial Information” of these “Notes to Unaudited Consolidated Financial Statements” for additional information regarding related party transactions associated with this joint venture.

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.

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.

Materials and Supplies: Consists of materials, spare parts, consumables and related supplies for our drilling rigs. We record these materials and supplies at their average cost.

Property and Equipment: Consists of our drilling rigs, furniture and fixtures, computer equipment and capitalized costs for 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 years on 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 gas exploration, development and production expenditures. Oil and 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 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 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. As of September 30, 2022, no triggering event has occurred to indicate that the carrying value of our drilling rigs may not be recoverable.

Interest costs and the amortization of debt financing costs related to the 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 reported periods.

Debt Financing Costs: Costs incurred with financing debt 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 Sheets as a direct deduction from the carrying amount of 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 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.

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:

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.

3. Revenue from Contracts with Customers

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 the VDC 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

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.

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”, 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.

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.

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 as of September 30, 2022, and our results of operations for the three and nine months ended September 30, 2022 and 2021. 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, 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.

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 equipment and work crews, primarily on a dayrate basis, to drill oil and gas wells for our customers. Through our fleet of drilling units, we provide offshore contract drilling services to major, national and independent oil and gas companies, focused on international markets. Additionally, for third-party owned drilling units, we provide operations and marketing services for operating and stacked rigs, construction supervision services for rigs that are under construction and preservation management services for rigs that are stacked.

The following table sets forth certain current information concerning our offshore drilling fleet as of November 1, 2022:


Name	Year Built	Water Depth Rating (feet)		Drilling Depth Capacity (feet)		Location	Status
Owned Rigs:
Jackups
Topaz Driller	2009		375		30,000	Egypt	Operating
Soehanah	2007		375		30,000	Indonesia	Operating
Drillships (1)
Platinum Explorer	2010		12,000		40,000	India	Operating
Tungsten Explorer	2013		12,000		40,000	Cyprus	Operating
Managed Rigs:
Drillships
Polaris	2008		10,000		37,500	High Seas	Mobilizing
Aquarius	2008		10,000		35,000	Spain	Reactivating
Capella	2008		10,000		37,500	Labuan	Warm stacked
Supported Rigs:
Jackups
Emerald Driller	2008		375		30,000	Qatar	Operating
Sapphire Driller	2009		375		30,000	Qatar	Operating
Aquamarine Driller	2009		375		30,000	Qatar	Operating

(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.

Recent Developments

Financing Transaction Uncertainty

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 operate. While it is not possible at this time to predict or determine the ultimate consequences of Russo-Ukrainian War, 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), and material 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 other adverse macroeconomic conditions continue (or exacerbate), the implementation of further measures taken by governmental bodies and private actors, could have a 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 the 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 December 6, 2021, VHI, a wholly owned subsidiary of the Company, entered into a 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 to ADES Arabia all of the issued and outstanding equity of VHI’s wholly-owned subsidiary, EDC (the “EDC Sale”). EDC is the owner of the following jackup rigs, which are currently operating in Qatar: the Emerald Driller; the Sapphire Driller; and the Aquamarine Driller. Each of these rigs was included within our Drilling Services segment for the nine months ended September 30, 2022. The EDC Purchase Agreement became effective on December 20, 2021 and the transactions contemplated under such agreement closed on May 27, 2022 (the “EDC Closing Date”). On the EDC Closing Date, VHI received $170.0 million as purchase price consideration and $30.0 million in certain contract preparation expense reimbursement. In accordance with the terms of the 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 three months ending September 30, 2022, the entirety of the 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 purchase price adjustments pursuant to the EDC Purchase Agreement. As a result of these transactions, VHI recognized a net gain of approximately $61.4 million.

Simultaneously with the EDC Sale, certain subsidiaries of the Company and ADES entered into three separate support services agreements (collectively, the “ADES Support Services Agreements”), pursuant to which a subsidiary of the Company agreed to provide, in exchange for customary fees and reimbursement, support services to EDC with respect to the Emerald Driller, Sapphire Driller and Aquamarine Driller for a three-year term.

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 ADES 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 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). To the extent such proceeds are not so applied (or committed to be applied) within one year after receipt, the Company will be required to offer to purchase the 9.25% First Lien Notes with such proceeds.

Tungsten Explorer Contract Award

Ongoing Impact of the COVID-19 Pandemic

Business Outlook

Expectations about future oil and gas prices have historically been a key driver of demand for our services. Since 2021, global oil prices have experienced a robust recovery resulting in the strongest annual performance (on a price per barrel basis) since 2012, with Brent crude oil 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. The relatively elevated prices exhibited recently are due to, among other factors, the (i) OPEC+ countries’ agreement since last year to reduce production by almost 10 million barrels per day, representing approximately 10% of the world's output compared with demand for approximately 96 million barrels a day, and their recent agreement to boost production, but only in measured steps, (ii) development, efficacy, availability and utilization of vaccines for COVID-19, (iii) the reopening of global economies, (iv) injection of substantial government monetary and fiscal stimulus and (v) the ongoing energy supply crisis driven by a shortage of fuel within recovering economies and anticipated extreme weather across Europe and northeast Asia, along with years of under investment in oil reserve replacement, all of which has been exacerbated by the global turmoil, and political and market instability caused by the Russo-Ukrainian War.

Notwithstanding the elevated oil prices during the last 18 months, market volatility and uncertainty largely remain, and the oil and gas industry continues to be materially impacted and shaped by external factors which have influenced its overall development and recovery, including global macroeconomic challenges resulting from inflationary pressures and potential recessionary conditions, as

well as geopolitical and market instability caused by the Russo-Ukrainian War. In response to these challenges, OPEC+ agreed on October 5, 2022 to a production cut of two million barrels per day, an amount which constitutes approximately 2.0% of overall global oil production. While the U.S. intends to release additional barrels from its strategic oil reserve in response to these production cuts, the actions taken by OPEC+ could contribute to, among other things, greater inflationary pressures and sharp price increases to oil and gas in the near-term. Moreover, the Russo-Ukrainian War has caused, and could continue to cause for the foreseeable future, significant instability, disruption, uncertainty and volatility in the hydrocarbon industry and the global markets at large. Further geopolitical developments could occur, including a possible agreement relating to Iran’s nuclear deal and the subsequent suspension of U.S. sanctions in Iran (which could result in, among other things, the influx of Iranian crude oil into the global markets), any of which could significantly impact our business and operations. With higher crude oil prices there is the potential for increased production from U.S. shale producers and non-OPEC countries, which could lead to significant increase in the overall global oil and gas supply, and result in reduced commodity prices.

In addition, the opening of economies, supply chain bottlenecks occurring throughout the world and across various industries, and the injection of significant levels of governmental monetary and fiscal stimulus to avoid a recession during the peak of the COVID-19 pandemic, have collectively contributed to the highest level of inflation in decades across the U.S., the United Kingdom, Europe and the global community at large. In the U.S., for example, the Consumer Price Index reached a 40-year high in June 2022, and such rates are expected to increase in the near-term. Therefore, our operations could be materially and adversely impacted by global inflation, including in the form of increases in personnel costs and the prices of goods and services required to operate our rigs. Given that we enter into fixed dayrate contracts that have contractual terms with minimal adjustments to account for rising inflation, the majority (if not all) of these costs will be borne by us. While we are currently unable to estimate the ultimate impact of inflation and the associated rising prices of goods and services, our costs could rise in the near-term and materially impact our profitability and overall financial condition.

Furthermore, central banks and regulators across the world have raised, and it is anticipated that they will likely continue to raise, interest rates in an attempt to gain control over and reduce inflation in their respective jurisdictions. In the U.S., for example, in September 2022 the Federal Reserve issued its fifth consecutive rate increase over the past calendar year. Such efforts being undertaken by central banks and regulators could tip the global economy into a recession, which could materially and adversely impact demand for oil and gas and, in the process, demand for our services.

As a result of such volatility, disruption, instability and uncertainty, operators have faced, and will generally continue to face, difficulties when attempting to definitively plan their capital budget programs for the near- and long- term.

Backlog

The following table reflects a summary of our contract backlog coverage of days contracted and related revenue as of September 30, 2022 based on information available as of that date:


	Percentage of Days Contracted			Revenues Contracted (in thousands)
	2022	2023	Beyond	2022		2023		Beyond
Backlog
Jackups	100%	43%	0%	$	7,520	$	14,878	$	—
Drillships	71%	76%	0%	$	20,783	$	125,221	$	—
Managed Rigs - fees (2)	53%	31%	0%	$	1,819	$	2,260	$	—
Supported Rigs - fees	100%	100%	70%	$	828	$	2,628	$	1,430
Contract value for managed rigs
Managed Rigs - contracted (1)	24%	32%	0%	$	10,676	$	58,224	$	—

(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.

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:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Jackups
Rigs available		2			5			2			5
Available days (1)		184			460			546			1,365
Utilization (2)		51.3	%		98.7	%		68.1	%		56.9	%
Average daily revenues (3)	$	72,386		$	82,975		$	69,372		$	89,250
Deepwater
Rigs available		2			2			2			2
Available days (1)		184			184			546			546
Utilization (2)		96.7	%		28.5	%		95.6	%		42.4	%
Average daily revenues (3)	$	155,393		$	101,128		$	157,701		$	99,907
Held for Sale (4)
Rigs available		0			0			3			0
Available days (1)		0			0			438			0
Utilization (2)	N/A			N/A				43.6	%	N/A
Average daily revenues (3)	N/A			N/A			$	73,142		N/A

(1)

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

(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.

(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.

For the Three Months Ended September 30, 2022 and 2021

Net loss attributable to shareholders for the Current Quarter was $20.2 million, or $1.54 per basic share, on operating revenues of $71.0 million, compared to net loss attributable to shareholders for the Comparable Quarter of $21.7 million, or $1.66 per basic share, on operating revenues of $52.9 million.

The following table is an analysis of our operating results for the three months ended September 30, 2022 and 2021:


	Three Months Ended September 30,						Change
	2022			2021			$			%
(unaudited, in thousands)
Consolidated:
Revenues
Contract drilling services	$	34,092		$	42,982		$	(8,890	)		-21	%
Management fees		4,442			690			3,752			544	%
Reimbursables and other		32,424			9,179			23,245			253	%
Total revenues		70,958			52,851			18,107			34	%
Operating costs and expenses:
Operating costs		66,429			45,369			21,060			46	%
General and administrative		4,253			4,593			(340	)		-7	%
Depreciation		11,022			14,137			(3,115	)		-22	%
Gain on EDC Sale		(632	)		—			(632	)	**
Total operating costs and expenses		81,072			64,099			16,973			26	%
Loss from operations		(10,114	)		(11,248	)		1,134			-10	%
Other (expense) income
Interest income		17			8			9			113	%
Interest expense and financing charges		(8,504	)		(8,508	)		4			0	%
Other, net		(363	)		(1,108	)		745			-67	%
Total other expense		(8,850	)		(9,608	)		758			-8	%
Loss before income taxes		(18,964	)		(20,856	)		1,892			-9	%
Income tax provision		1,566			881			685			78	%
Net loss		(20,530	)		(21,737	)		1,207			-6	%
Net loss attributable to noncontrolling interests		(332	)		(10	)		(322	)	n/m
Net loss attributable to shareholders	$	(20,198	)	$	(21,727	)	$	1,529			-7	%

Drilling Services:
Revenue
Contract drilling services	$	34,092		$	42,982		$	(8,890	)		-21	%
Management fees		—			—			—		**
Reimbursables and other		7,380			5,482			1,898			35	%
Total revenue		41,472			48,464			(6,992	)		-14	%
Operating costs and expenses:
Operating costs		40,192			41,235			(1,043	)		-3	%
General and administrative		—			—			—		**
Depreciation		10,631			13,718			(3,087	)		-23	%
Gain on EDC sale		—			—			—		**
Total operating costs and expenses		50,823			54,953			(4,130	)		-8	%
Loss from operations		(9,351	)		(6,489	)		(2,862	)		44	%

Managed Services:
Revenue
Contract drilling services	$	—		$	—		$	—		**
Management fees		4,442			690			3,752			544	%
Reimbursables and other		25,044			3,697			21,347			577	%
Total revenue		29,486			4,387			25,099			572	%
Operating costs and expenses:
Operating costs		26,236			4,134			22,102			535	%
General and administrative		—			—			—		**
Depreciation		—			—			—		**
Gain on EDC sale		—			—			—		**
Total operating costs and expenses		26,236			4,134			22,102			535	%
Income from operations		3,250			253			2,997		n/m
n/m = not meaningful

Consolidated Revenue: Total revenue increased $18.1 million due primarily to an increase in operating activities in the Current Quarter as discussed below.

Drilling Services Revenue: Contract drilling revenue decreased $8.9 million for the Current Quarter as compared to the Comparable Quarter. The decrease in contract drilling revenue was primarily the result of the EDC Sale (as discussed in “Recent Developments - Share Purchase Agreement to Sell EDC to ADES Arabia Holding”) as well as the Topaz Driller operating fewer days during the Current Quarter due to routine maintenance. These decreases were offset by the Tungsten Explorer operating during the Current Quarter compared to the rig preparing for reactivation during the Comparable Quarter. Reimbursables and other revenue increased $1.9 million in the Current Quarter as compared to the Comparable Quarter primarily as a result of the Tungsten Explorer operating during the Current Quarter compared to the rig preparing for reactivation during the Comparable Quarter, which was offset by decreases in reimbursables as a result of the EDC Sale (as discussed immediately above).

Managed Services Revenue: Management fees increased $3.8 million in the Current Quarter as compared to the Comparable Quarter primarily due to the Capella operating during the Current Quarter, which we began managing in March 2022. The increase in Reimbursables and other revenue for the Current Quarter as compared to the Comparable Quarter is primarily as a result of the management of the deepwater floaters owned by Aquadrill.

Consolidated Operating Costs: Total operating costs increased 46% due primarily to an increase in operating activities in the Current Quarter as discussed below.

Drilling Services Operating costs: Drilling Services operating costs decreased 3% in the Current Quarter as compared to the Comparable Quarter primarily as the result of the EDC Sale (as discussed in “Recent Developments - Share Purchase Agreement to Sell EDC to ADES Arabia Holding”) partially offset by increases in operating costs on the Tungsten Explorer (as discussed in Drilling Services Revenue above).

Managed Services Operating costs: The increase in Managed Services operating costs in the Current Quarter as compared to the Comparable Quarter is the result of management of certain deepwater floaters (as discussed in Managed Services Revenue above).

General and administrative expenses: Decreases in general and administrative expenses for the Current Quarter as compared to the Comparable Quarter were primarily due to decreases in labor costs, which was offset by increases in professional fees. Non-cash share-based compensation expense for the Current Quarter and Comparable Quarter was immaterial.

Depreciation expense: Depreciation expense is primarily related to rigs owned by us included in our Drilling Services segment. The Managed Services segment does not currently own depreciable assets. Depreciation expense for the Current Quarter decreased 22% as compared to the Comparable Quarter, due primarily to a decrease in depreciation expense related to the three jackup rigs that were classified as held for sale on December 20, 2021 and subsequently sold in connection with the EDC Sale (which closed on May 27, 2022).

Gain on EDC Sale: During the Current Quarter, we recorded a net gain of approximately $0.6 million related to final purchase price adjustments arising under the EDC Purchase Agreement. See “Share Purchase Agreement to Sell EDC to ADES Arabia Holding” in Recent Development in this Part I, Item 2 for additional details.

Interest income: Increases in interest income for the Current Quarter as compared to the Comparable Quarter were due primarily to higher interest rates earned during the Current Quarter.

Interest expense and financing charges: Interest expense and financing charges includes non-cash deferred financing costs totaling approximately $0.4 million for each of the Current Quarter and the Comparable Quarter.

Other, net: Our functional currency is USD; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than USD. These transactions are re-measured in USD based on a combination of both current and historical exchange rates. Net foreign currency exchange loss of approximately $0.4 million and $1.1 million was included in “other, net,” for the Current Quarter and Comparable Quarter, respectively.

Income tax provision: Our annualized effective tax rate for the Current Quarter is negative 12.04% based on estimated annualized ordinary loss before income taxes excluding income tax discrete items. Our annualized effective tax rate for the Comparable Quarter was negative 8.01%, based on estimated annualized loss before income taxes excluding income tax discrete items.

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 and disposal gains or losses. In other jurisdictions, we recognize income taxes on a net income basis or a deemed profit basis.

For the Nine Months Ended September 30, 2022 and 2021

Net income attributable to shareholders for the Current Period was $13.0 million, or $0.99 per basic share, on operating revenues of $202.5 million, compared to net loss attributable to shareholders for the Comparable Period of $86.7 million, or $6.61 per basic share, on operating revenues of $108.6 million.

The following table is an analysis of our operating results for the nine months ended September 30, 2022 and 2021:


	Nine Months Ended September 30,						Change
	2022			2021			$			%
(unaudited, in thousands)
Consolidated:
Revenues
Contract drilling services	$	121,749		$	92,362		$	29,387			32	%
Management fees		8,385			1,285			7,100			553	%
Reimbursables and other		72,393			14,971			57,422			384	%
Total revenues		202,527			108,618			93,909			86	%
Operating costs and expenses:
Operating costs		169,767			106,782			62,985			59	%
General and administrative		17,745			15,055			2,690			18	%
Depreciation		33,404			42,423			(9,019	)		-21	%
Gain on EDC Sale		(61,413	)		—			(61,413	)	**
Total operating costs and expenses		159,503			164,260			(4,757	)		-3	%
Income (loss) from operations		43,024			(55,642	)		98,666			-177	%
Other (expense) income
Interest income		28			118			(90	)		-76	%
Interest expense and financing charges		(25,511	)		(25,529	)		18			0	%
Other, net		(2,149	)		(1,901	)		(248	)		13	%
Total other expense		(27,632	)		(27,312	)		(320	)		1	%
Income (loss) before income taxes		15,392			(82,954	)		98,346			-119	%
Income tax provision		1,783			3,763			(1,980	)		-53	%
Net income (loss)		13,609			(86,717	)		100,326			-116	%
Net income (loss) attributable to noncontrolling interests		606			(41	)		647		n/m
Net income (loss) attributable to shareholders	$	13,003		$	(86,676	)	$	99,679			-115	%

Drilling Services:
Revenue
Contract drilling services	$	121,749		$	92,362		$	29,387			32	%
Management fees		—			—			—		**
Reimbursables and other		17,682			10,536			7,146			68	%
Total revenue		139,431			102,898			36,533			36	%
Operating costs and expenses:
Operating costs		112,794			101,459			11,335			11	%
General and administrative		—			—			—		**
Depreciation		32,182			41,185			(9,003	)		-22	%
Gain on EDC sale		—			—			—		**
Total operating costs and expenses		144,976			142,644			2,332			2	%
Loss from operations		(5,545	)		(39,746	)		34,201			-86	%

Managed Services:
Revenue
Contract drilling services	$	—		$	—		$	—		**
Management fees		8,385			1,285			7,100			553	%
Reimbursables and other		54,711			4,435			50,276		n/m
Total revenue		63,096			5,720			57,376		n/m
Operating costs and expenses:
Operating costs		56,972			5,323			51,649			970	%
General and administrative		—			—			—		**
Depreciation		—			—			—		**
Gain on EDC sale		—			—			—		**
Total operating costs and expenses		56,972			5,323			51,649			970	%
Income from operations		6,124			397			5,727		n/m
n/m = not meaningful

Consolidated Revenue: Total revenue increased $93.9 million due primarily to an increase in operating activities in the Current Period as discussed below.

Drilling Services Revenue: Contract drilling revenue increased $29.4 million for the Current Period as compared to the Comparable Period. The increase in our contract drilling revenue was primarily the result of the Tungsten Explorer operating during the Current Period compared to the rig being warm stacked during the Comparable Period. This increase was offset by lower contract drilling revenue for the three jackup rigs included in the EDC Sale (as discussed in “Recent Developments - Share Purchase Agreement to Sell EDC to ADES Arabia Holding”) and the Topaz Driller operating fewer days during the Current Period due to routine maintenance. Reimbursables and other revenue increased $7.1 million in the Current Period as compared to the Comparable Period primarily as a result of the changes in drilling contracts (as discussed immediately above).

Managed Services Revenue: Management fees increased $7.1 million in the Current Period as compared to the Comparable Period primarily due to the Capella operating during the Current Period, which we began managing this in March 2022. The increase in Reimbursables and other revenue for the Current Period as compared to the Comparable Period is primarily as a result of the management of the deepwater floaters owned by Aquadrill, which we began managing in late March 2021.

Consolidated Operating Costs: Total operating costs increased 59% due primarily to an increase in operating activities in the Current Period as discussed below.

Drilling Services Operating costs: Drilling Services operating costs increased 11% in the Current Period as compared to the Comparable Period primarily as a result of changes to certain of our drilling contracts (as discussed in Drilling Services Revenue above). This increase was partially offset by the sale of various assets during the Current Period and the recognition of a net gain of approximately $1.9 million related to the sale of these assets. The Comparable Period includes the sale of the Titanium Explorer and the recognition of a net gain of approximately $2.8 million related to the sale of the asset.

Managed Services Operating costs: The increase in Managed Services operating costs in the Current Period as compared to the Comparable Period is the result the management of certain deepwater floaters (as discussed in “Managed Services Revenue” above).

General and administrative expenses: Increases in general and administrative expenses for the Current Period as compared to the Comparable Period were primarily due to increased labor costs and professional fees. General and administrative expenses for the Comparable Period included approximately $0.3 million for non-cash share-based compensation expense. Non-cash share-based compensation expense for the Current Period was immaterial.

Depreciation expense: Depreciation expense is primarily related to rigs owned by us included in our Drilling Services segment. The Managed Services segment does not currently own depreciable assets. Depreciation expense for the Current Period decreased 21% as compared to the Comparable Period, due primarily to a decrease in depreciation expense on the three jackup rigs that were classified as held for sale on December 20, 2021 and subsequently sold in connection with the EDC Sale (which closed on May 27, 2022).

Gain on EDC Sale: During the Current Period, we recorded a net gain of approximately $61.4 million related to the EDC Sale. See “Share Purchase Agreement to Sell EDC to ADES Arabia Holding” in Recent Developments in this Part I, Item 2 for additional details.

Interest income: Decreases in interest income for the Current Period as compared to the Comparable Period were due primarily to lower cash investments during the Current Period partially offset by higher interest rates.

Interest expense and financing charges: Interest expense and financing charges includes non-cash deferred financing costs totaling approximately $1.2 million for each of the Current Period and Comparable Period, respectively.

Other, net: Our functional currency is USD; however, a portion of the revenues earned and expenses incurred by certain of our subsidiaries are denominated in currencies other than USD. These transactions are re-measured in USD based on a combination of both current and historical exchange rates. Net foreign currency exchange loss of approximately $2.1 million and $1.9 million was included in “other, net,” for the Current Period and Comparable Period, respectively.

Income tax provision: Our annualized effective tax rate for the Current Period is negative 12.04% based on estimated annualized ordinary loss before income taxes excluding income tax discrete items. Our annualized effective tax rate for the Comparable Period was negative 8.01%, based on estimated annualized loss before income taxes excluding income tax discrete items.

Liquidity and Capital Resources

The prolonged low contract dayrate environment caused by the spread of COVID-19, the resulting decline in global economic activity and the oil price and market share volatility began to reduce our liquidity and capital resources in the second quarter of 2020 through much of 2021. Moreover, the global events that transpired in 2020 and 2021 had significant and adverse consequences for general financial, business and economic conditions, as well as for the financial, business and economic position of our business and the business of our customers and suppliers. While global economic activity has shown signs of recovery during portions of 2021 and 2022, global inflationary pressures (including the actions taken by central banks and regulators across the world in an attempt to reduce, curtail and address such pressures and conditions), the Russo-Ukrainian War and other macroeconomic conditions could trigger a global recession and, in the process, materially and adversely impact our ability to derive cash flows from our operations and access capital funding sources from third parties in the near- and long-term.

We experienced, and could experience further delays in the collection of certain accounts receivables due to logistical obstacles resulting from the COVID-19 pandemic, such as office closures, as well as other impacts to our long-term liquidity. Ongoing and additional governmental measures, such as widespread lock downs, nightly curfews, territorial entry restrictions and mandates, could impact our ability to operate in locations where such restrictions and requirements are in place, including those locations where we derive material revenue. In addition, the Russo-Ukrainian War, as well as the resulting impact of ongoing and expanded sanctions imposed by western nations, could adversely impact the global oil and gas markets for the foreseeable future and, in the process, our ability to access additional capital funding sources. During these uncertain times, we have sought, and continue to seek, measures to reduce our operating costs and preserve cash. We could implement further cost reduction measures and alter our general financial strategy in the near- and long-term.

Sources and Uses of Liquidity

Our anticipated cash flow needs, both in the short- and long-term, may include, among others: (i) normal recurring operating expenses; (ii) planned and discretionary capital expenditures; (iii) repayments of interest; and (iv) certain contractual cash obligations and commitments. We may, from time to time, redeem, repurchase or otherwise acquire our outstanding 9.25% First Lien Notes through open market purchases, tender offers or pursuant to the terms of such securities.

We currently expect to fund our cash flow needs with cash generated by our operations, cash on hand or proceeds from sales of assets. As of September 30, 2022, we believe we maintain adequate cash reserves and are continuously managing our actual cash flow and cash forecasts. Accordingly, management believes that we have adequate liquidity to fund our operations for the twelve months following the date our Consolidated Financial Statements are issued and therefore, have been prepared under the going concern assumption.

Under the First Lien Indenture, we are required to apply the proceeds derived 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). To the extent such proceeds are not so applied (or committed to be applied) within one year after receipt, the Company will be required to offer to purchase the 9.25% First Lien Notes with such proceeds.

The 9.25% First Lien Notes mature on November 15, 2023. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, including in order to satisfy our obligations under the 9.25% First Lien Notes, we anticipate that they will be obtained through incurrence of additional indebtedness, additional equity financings, sales of assets or a combination of these potential sources of funds. However, there can be no assurance that we will be able to obtain additional funds on terms acceptable to us, on a timely basis or at all. The failure to obtain sufficient funds on acceptable terms when needed, including the ability to refinance any portion of the 9.25% First Lien Notes, could have a material and adverse effect on the results of operations, and financial condition. If we are unable to fund capital expenditures with our cash flow from operations or sales of non-strategic assets, we may be required to either incur additional borrowings or raise capital through the sale of debt or equity securities. Our ability to access the capital markets may be limited by our financial condition at the time, by certain restrictive covenants under the agreements governing our credit agreement and notes, by changes in laws and regulations or interpretation thereof and by adverse market conditions resulting from, among other things, general economic conditions and contingencies and uncertainties that are beyond our control. For example, the Russo-Ukrainian War, and the resulting impact of continued and expanded sanctions imposed by western nations against Russia, Russian-backed separatist regions in Ukraine, certain banks, companies, government officials, and other individuals in Russia and Belarus, could adversely impact the global oil and gas markets for the foreseeable future and, in the process, our ability to access additional capital funding sources. The failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the results of operations, and financial condition.

As of September 30, 2022, we had working capital of approximately $269.1 million, including approximately $243.6 million of cash available for general corporate purposes, as described in the discussion above, in accordance with our First Lien Indenture. Scheduled debt service consists of interest payments through September 30, 2023 of approximately $32.4 million. We anticipate capital expenditures through September 30, 2023 to be between approximately $7.3 million and $8.9 million. As our rigs obtain new contracts, we could incur reactivation and mobilization costs for these rigs, as well as additional customer requested equipment upgrades. These costs could be significant and may not be fully recoverable from the customer. Based on our expected levels of activity, incremental expenditures through September 30, 2023 for special periodic surveys, major repair and maintenance expenditures and equipment re-certifications are anticipated to be between approximately $19.8 million and $24.2 million. As of September 30, 2022, we had approximately $49.9 million available for the issuance of letters of credit under our cash collateralized letter of credit facility.

The following table includes a summary of our cash flow information for the periods indicated:


		Nine Months Ended September 30,
(unaudited, in thousands)		2022			2021
Cash flows (used in) provided by:
	Operating activities	$	(21,961	)	$	(44,479	)
	Investing activities		193,646			10,325
	Financing activities		—			—

Changes in cash flows from operating activities are driven by changes in net loss during the relevant periods (see the discussion of changes in net loss above in “Results of Operations” of this Part I, Item 2).

Cash flows from investing activities in the Current Period include net proceeds of $198.7 million derived from the EDC Sale and $3.1 million derived from the sale of various assets. The Comparable Period include net proceeds of $13.6 million from the sale of the Titanium Explorer.

The significant elements of the 9.25% First Lien Notes are described in “Note 5. Debt” of the “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 2.

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.

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. Information regarding our legal proceedings is set forth in “Note 8. Commitments and Contingencies” of the “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 2.

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 unaudited 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. Our significant accounting policies are included in “Note 2. Basis of Presentation and Significant Accounting Policies” of the “Notes to the Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report. These policies, along with our underlying judgments and assumptions made in their application, have a significant impact on our consolidated financial statements. While management believes current estimates are appropriate and reasonable, actual results could materially differ from those estimates. We have discussed the development, selection and disclosure of such policies and estimates with the audit committee of the Board of Directors.

Our critical accounting policies are those related to property and equipment, impairment of long-lived assets and income taxes. For a discussion of the critical accounting policies and estimates that we use in the preparation of our consolidated financial statements, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” in Part II of our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on March 30, 2022. During the Current Quarter, there were no material changes to the judgments, assumptions or policies upon which our critical accounting estimates are based.

Recent Accounting Pronouncements: See “Note 2. Basis of Presentation and Significant Accounting Policies” of the “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report for further information. The information discussed therein is incorporated by reference in its entirety into this Part I, Item 2.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our rigs operate in various international locations and thus are sometimes subject to foreign exchange risk. We may from time to time also be exposed to certain commodity price risk, equity price risk and risks related to other market driven rates or prices. We do not enter into derivatives or other financial instruments for trading or speculative purposes. The significant decline in worldwide exploration and production spending as a result of reduced oil prices since 2014, the continual spread and exacerbation of the COVID-19 pandemic, including as a result of its highly transmittable variants and sub-lineages, geopolitical instability caused by the Russo-Ukrainian War, the ongoing oil price and market share volatility, and rising inflationary pressures and potential recessionary conditions have each negatively impacted the offshore contract drilling business at large (as discussed in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report).

Interest Rate Risk: As of September 30, 2022, we had no variable rate debt outstanding.

Foreign Currency Exchange Rate Risk: Our functional currency is the USD, which is consistent with the oil and gas industry. However, outside the U.S., a portion of our expenses are incurred in local currencies. Therefore, when the USD weakens (strengthens) in relation to the currencies of the countries in which we operate, our expenses reported in USD will increase (decrease). A substantial majority of our revenues are received in USD, our functional currency; however, in certain countries in which we operate, local laws or contracts may require us to receive some portion (or the entirety) of the payment in the local currency. We are exposed to foreign currency exchange risk to the extent the amount of our monetary assets denominated in the foreign currency differs from our obligations in that foreign currency. In order to mitigate the effect of exchange rate risk, we attempt to limit foreign currency holdings to the extent they are needed to pay liabilities in the local currency. To further manage our exposure to fluctuations in currency exchange rates, foreign exchange derivative instruments, specifically foreign exchange forward contracts, or spot purchases, may be used. A foreign exchange forward contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent USD payment equal to the value of such exchange. We do not enter into derivative transactions for speculative purposes. As of September 30, 2022, we did not have any open foreign exchange derivative contracts or material foreign currency exposure risk.

Item 4. Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we voluntarily file or submit to the SEC is recorded, processed, summarized, and reported within the time periods required by our debt agreements.

We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on that evaluation, such officers have concluded that the design and operation of these disclosure controls and procedures were effective as of September 30, 2022 to provide reasonable assurance that information required to be disclosed on our reports filed or submitted under the Exchange Act was (1) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (2) recorded, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

While the majority of our office and management personnel are currently working under a hybrid schedule, with certain days working remotely and other days working in the office due to the spread of the COVID-19 pandemic, we have not as of the date of this Quarterly Report experienced any material impact on our internal controls over financial reporting. Our management continues to monitor and assess the current situation as it relates to our internal controls over financial reporting in order to minimize the impact, if any, to their design and operating effectiveness.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding the Company’s legal proceedings is set forth in “Note 8. Commitments and Contingencies” of the “Notes to Unaudited Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report. The information discussed therein is incorporated by reference into this Part II, Item 1.

Item 6. Exhibits


			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

10.2

Second Amended and Restated Employment and Non-Competition Agreement between Offshore Group Investment Limited and Linda J. Ibrahim, dated February 10, 2016

10-Q

333-159299-15 

10.2

08/12/21

10.3

Form of Third Amendment to Employment Agreement between Vantage Drilling International and each Executive (as defined therein)

10-Q

333-159299-15 

10.3

08/12/22

10.4

Form of Support Service Agreement, dated May 27, 2022 by and between Vantage Driller III Co, Vantage Drilling International and Emerald Driller Company

10-Q

333-159299-15 

10.4

08/12/22

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

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

X

101.SCH

Inline XBRL Taxonomy Extension Schema

X

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

X

101.DEF

Inline XBRL Taxonomy Extension Definition Inline Linkbase

X

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

X

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

X

104

Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL 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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	VANTAGE DRILLING INTERNATIONAL

Date: November 10, 2022	By:	/s/ DOUGLAS E. STEWART
		Douglas E. Stewart
		Chief Financial Officer, General Counsel and Corporate Secretary
		(Principal Financial Officer)