On April 26, 2020 (or the Petition Date), Diamond Offshore Drilling, Inc. (or the Company) and certain of its direct and indirect subsidiaries (which we refer to, together with the Company, as the Debtors) filed voluntary petitions for relief under chapter 11 (or Chapter 11) of title 11 of the United States Code (or the Chapter 11 Cases) in the United States Bankruptcy Court for the Southern District of Texas (or the Bankruptcy Court). The Chapter 11 Cases are jointly administered under the caption In re Diamond Offshore Drilling, Inc., et al., Case No. 20-32307.

The Debtors filed motions with the Bankruptcy Court seeking authorization to continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the United States Bankruptcy Code (or the Bankruptcy Code) and orders of the Bankruptcy Court. To ensure their ability to continue operating in the ordinary course of business, the Debtors filed with the Bankruptcy Court a variety of motions seeking “first day” relief, including authority to continue using their cash management system, pay employee wages and benefits and pay certain vendors and suppliers in the ordinary course of business (or the First Day Motions), all of which were approved.

Pursuant to the First Day Motions, and subject to certain terms and dollar limits included therein, the Debtors were authorized to continue to use their unrestricted cash on hand, as well as all cash generated from daily operations, which is being used to continue the Debtors’ operations without interruption during the course of their restructuring. Also pursuant to the First Day Motions, the Debtors received Bankruptcy Court authorization to, among other things and subject to the terms and conditions set forth in the applicable orders, pay prepetition employee wages, salaries, health benefits and other employee obligations during their restructuring, pay certain claims relating to critical and other vendors, continue their cash management programs and insurance policies and continue to honor their current customer programs. The Debtors are authorized under the Bankruptcy Code to pay post-petition expenses incurred in the ordinary course of business without seeking Bankruptcy Court approval. Until a plan of reorganization is approved and effective, the Debtors will continue to manage their properties and operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.

Commencement of the Chapter 11 Cases automatically stayed most actions against the Debtors, including actions to collect indebtedness incurred prior to the Petition Date, actions to enforce pre-Petition Date contractual rights or remedies against the Debtors and actions to exercise control over the Debtors’ property. Subject to certain exceptions under the Bankruptcy Code, the commencement of the Chapter 11 Cases also automatically stayed the continuation of most legal proceedings or the filing of other actions against the Debtors or their property to recover on, collect, or secure a claim arising prior to the Petition Date or to exercise control over property of the Debtors’ bankruptcy estates, unless and until the Bankruptcy Court modifies or lifts the automatic stay as to any such claim. Notwithstanding the general application of the automatic stay described above, governmental authorities may determine to continue actions brought under their police and regulatory powers.

The U.S. Trustee for the Southern District of Texas filed a notice appointing an official committee of unsecured creditors on May 11, 2020, which was subsequently reconstituted on June 11, 2020 and September 14, 2020.

On May 27, 2020, the Bankruptcy Court approved a new key employee retention plan and a new non-executive incentive plan covering certain non-executive key employees. On June 23, 2020, the Bankruptcy Court approved a key employee incentive plan covering certain additional key employees, including our executive officers. Upon the participating employee’s acceptance of an award under the new compensation plans, all outstanding unvested incentive awards previously granted to the employee under our previously-existing incentive plans, consisting of restricted stock units (or RSUs), stock appreciation rights (or SARs) and/or cash incentive awards, were canceled.

As of September 30, 2020, the Debtors had not emerged from bankruptcy and no plan of reorganization or restructuring support agreement had been filed with the Bankruptcy Court. Negotiations between the various parties to the Chapter 11 Cases are ongoing. A plan of reorganization, if and when approved by the Bankruptcy Court, could materially change the amounts and classifications of assets and liabilities reported in the accompanying unaudited condensed consolidated financial statements.

During the first quarter of 2020, the business climate in which we operate experienced a significant adverse change, primarily as a result of the market impacts of the oil price war between Saudi Arabia and Russia and regulatory, market and commercial challenges that arose due to the COVID-19 pandemic and efforts to mitigate the spread of the virus, both of which resulted in a dramatic decline in oil prices. As a result of the filing of the Chapter 11 Cases, the principal and interest due under our outstanding senior notes and revolving credit facility became immediately due and payable and have been presented as “Liabilities subject to compromise” in our unaudited Condensed Consolidated Balance Sheets at September 30, 2020. However, any efforts to enforce such payment obligations with respect to our senior notes and revolving credit facility are automatically stayed as a result of the filing of the Chapter 11 Cases. We have projected that we will not have sufficient cash on hand or available liquidity to repay all such outstanding debt. For the nine months ended September 30, 2020, we reported a net loss of $1.1 billion, inclusive of a pre-tax $774.0 million impairment charge.

These conditions and events raise substantial doubt over our ability to continue as a going concern for twelve months after the date our financial statements are issued. Financial information in this report has been prepared on the basis that we will continue as a going concern, which presumes that we will be able to realize our assets and discharge our liabilities in the normal course of business as they come due. Financial information in this report does not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary if we were unable to realize our assets and settle our liabilities as a going concern in the normal course of operations. Such adjustments could be material.

Our long-term liquidity requirements and the adequacy of capital resources are difficult to predict at this time. Although we anticipate that the Chapter 11 Cases will help address our liquidity concerns, as of September 30, 2020, we do not have a plan of reorganization in place. Additionally, the approval of a plan of reorganization is not within our control and uncertainty remains over the Bankruptcy Court's approval of a plan of reorganization. As such, due to the absence of a plan of reorganization and lack of clarity regarding emergence from bankruptcy, we have concluded that substantial doubt continues to exist about our ability to continue as a going concern.

We have prepared our unaudited condensed consolidated financial statements as if we were a going concern and in accordance with FASB Accounting Standards Codification Topic No. 852 – Reorganizations, or ASC 852.

Prepetition Restructuring Charges. We have reported legal and other professional advisor fees incurred in relation to the Chapter 11 Cases, but prior to the Petition Date, as “Restructuring and separation costs” in our unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020. See Note 11 for a discussion of other costs included in “Restructuring and separation costs.”

Reorganization Items. Expenditures, gains and losses that are realized or incurred by the Debtors subsequent to the Petition Date and as a direct result of the Chapter 11 Cases are reported as “Reorganization items, net” in our unaudited Condensed Consolidated Statements of Operations. These costs include legal and other professional advisory service fees pertaining to the Chapter 11 Cases and all adjustments made to the carrying amount of certain prepetition liabilities reflecting claims expected to be allowed by the Bankruptcy Court.

The following table provides information about reorganization items incurred during the three- and nine-month periods ended September 30, 2020, subsequent to the Petition Date (in thousands):

	Three Months Ended			Nine Months Ended
	September 30, 2020
Professional fees	$	18,634		$	39,293
Write-off of debt issuance costs		—			27,552
Net gain on settlement with certain unsecured vendors		(9,971	)		(4,205	)
Total reorganization items, net	$	8,663		$	62,640

Payments of $23.8 million related to professional fees and vendor cancellation costs have been presented as cash outflows from operating activities in our unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020. See Note 5.

Liabilities Subject to Compromise. We have reported prepetition unsecured and under-secured obligations that may be impacted by the Chapter 11 Cases as “Liabilities subject to compromise” in our unaudited Condensed Consolidated Balance Sheets at September 30, 2020. ASC 852 requires prepetition liabilities that are subject to compromise to be reported at the amounts expected to be allowed by the Bankruptcy Court. The amounts currently reported as liabilities subject to compromise are preliminary and may be subject to future adjustment depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation or other events. These amounts represent our best estimate of allowed claims that will be resolved as part of the bankruptcy proceedings but may be ultimately settled for a lesser amount. We will continue to evaluate these liabilities throughout the Chapter 11 Cases and adjust amounts as necessary. Such adjustments may be material.

Liabilities subject to compromise at September 30, 2020 consist of the following (in thousands):

	September 30,
	2020
Debt subject to compromise:
Borrowings under credit facility	$	436,000
3.45% Senior Notes due 2023		250,000
7.875% Senior Notes due 2025		500,000
5.70% Senior Notes due 2039		500,000
4.875% Senior Notes due 2043		750,000
Lease liabilities		140,580
Accrued interest		47,636
Accounts payable		19,912
Other accrued liabilities		5,306
Other liabilities		4,221
Total liabilities subject to compromise	$	2,653,655

Upon filing of the Chapter 11 Cases on April 26, 2020, we ceased accruing interest on our senior unsecured debt and borrowings under our credit facility. As a result, we did not record $28.3 million and $48.5 million of contractual interest expense related to our senior notes for the three and nine months ended September 30, 2020, respectively, and $9.5 million and $13.9 million of contractual interest expense related to borrowings under our credit facility for the three- and nine-month periods ended September 30, 2020, respectively.

Unaudited condensed combined financial statements of the Debtors are set forth below. These financial statements exclude the financial statements of the non-Debtor subsidiaries. Transactions and balances of receivables and payables between the Debtors have been eliminated in consolidation. Amounts payable to the non-Debtor subsidiaries are reported in the unaudited condensed consolidated balance sheet of the Debtors.

DIAMOND OFFSHORE DRILLING, INC. AND CERTAIN SUBSIDIARIES PARTY TO THE BANKRUPTCY CASES (DEBTOR-IN-POSSESSION)

	September 30,
	2020
ASSETS
Current assets:
Cash and cash equivalents	$	407,222
Restricted cash		25,692
Accounts receivable		128,480
Less: allowance for credit losses		(175	)
Accounts receivable, net		128,305
Prepaid expenses and other current assets		49,577
Assets held for sale		1,000
Total current assets		611,796
Drilling and other property and equipment, net of
accumulated depreciation		4,232,543
Investments in non-debtor subsidiaries		2,458,447
Noncurrent deferred tax assets, net		31,356
Other assets		192,094
Total assets	$	7,526,236
LIABILITIES AND DEBTORS’ EQUITY
Current liabilities:
Accounts payable	$	28,993
Accrued liabilities		114,935
Taxes payable		26,062
Amounts payable to non-debtor subsidiaries		1,043,326
Total current liabilities		1,213,316
Note payable to non-debtor subsidiary		328,000
Other liabilities		45,157
Total liabilities not subject to compromise		1,586,473
Liabilities subject to compromise		2,653,655
Total debtors’ equity		3,286,108
Total liabilities and debtors’ equity	$	7,526,236

DIAMOND OFFSHORE DRILLING, INC. AND CERTAIN SUBSIDIARIES PARTY TO THE BANKRUPTCY CASES (DEBTOR-IN-POSSESSION)

	Nine Months Ended
	September 30,
	2020
Revenues:
Contract drilling	$	460,877
Revenues related to reimbursable expenses		29,806
Total revenues		490,683
Operating expenses:
Contract drilling, excluding depreciation		415,613
Reimbursable expenses		28,020
Depreciation		242,480
General and administrative		41,497
Impairment of assets		774,028
Restructuring and separation costs		15,383
Gain on disposition of assets		(3,989	)
Total operating expenses		1,513,032
Operating loss		(1,022,349	)
Other income (expense):
Interest income		502
Interest expense, net of amounts capitalized		(50,155	)
Foreign currency transaction gain		591
Reorganization items, net		(62,640	)
Other, net		(499	)
Loss before income tax benefit		(1,134,550	)
Income tax benefit		27,117
Net loss	$	(1,107,433	)

DIAMOND OFFSHORE DRILLING, INC. AND CERTAIN SUBSIDIARIES PARTY TO THE BANKRUPTCY CASES (DEBTOR-IN-POSSESSION)

	Nine Months Ended
	September 30,
	2020
Operating activities:
Net loss	$	(1,107,433	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		242,480
Loss on impairment of assets		774,028
Reorganization items, net		22,107
Gain on disposition of assets		(3,989	)
Deferred tax provision		(16,846	)
Stock-based compensation expense		5,637
Contract liabilities, net		13,595
Contract assets, net		2,762
Deferred contract costs, net		(8,085	)
Long-term employee remuneration programs		(5,079	)
Noncurrent collateral deposits		(18,262	)
Other assets, noncurrent		(8,756	)
Other		3,013
Changes in operating assets and liabilities:
Accounts receivable		68,908
Prepaid expenses and other current assets		15,022
Accounts payable and accrued liabilities		1,439
Taxes payable		(15,462	)
Due to non-debtor subsidiaries		47,111
Net cash provided by operating activities		12,190
Investing activities:
Capital expenditures		(156,885	)
Capital contribution to non-debtor subsidiary		(5,724	)
Proceeds from disposition of assets, net of disposal costs		5,235
Net cash used in investing activities		(157,374	)
Financing activities:
Borrowings under credit facility		436,000
Net cash provided by financing activities		436,000
Net change in cash, cash equivalents and restricted cash		290,816
Cash, cash equivalents and restricted cash, beginning of period		142,098
Cash, cash equivalents and restricted cash, end of period	$	432,914