Drilling Tools International Corp 10-Q for FY2025 Q1
Drilling Tools International Corp (DTI)
About this 10-Q
Drilling Tools International Corp filed this 10-Q on May 14, 2025, covering the quarter ended March 31, 2025 (FY2025 Q1).
Headline figures
Quarter ended March 31, 2025, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $42.88M
- up 16.0% from $36.97M a year earlier
- Net loss
- $1.67M
- compared with net income of $3.13M a year earlier
- Diluted EPS
- -$0.05
- compared with $0.11 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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:
(Exact Name of Registrant as Specified in its Charter)
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(I.R.S. Employer |
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 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
As of May 14, 2025, the registrant had
Table of Contents
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Page |
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1 |
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PART I. |
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Item 1. |
3 |
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3 |
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Condensed Consolidated Statements of Income (loss) and Comprehensive Income (loss) |
4 |
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Condensed Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Shareholders' Equity |
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6 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
7 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
33 |
Item 3. |
38 |
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Item 4. |
39 |
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PART II. |
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Item 1. |
41 |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
42 |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report on Form 10-Q (this “Report”) may constitute "forward-looking statements" for purposes of the federal securities laws. These forward-looking statements include, but are not limited to, statements regarding our and our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward‑looking. Forward-looking statements in this Report may include, for example, statements about:
Important factors that could cause actual results to differ materially from those contained in the forward‑looking statements include, but are not limited to:
1
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, |
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December 31, |
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(In thousands, except share data) |
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2025 |
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2024 |
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(Unaudited) |
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(Audited) |
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ASSETS |
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Current assets |
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Cash |
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$ |
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$ |
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Accounts receivable, net |
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Related party note receivable, current |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease right-of-use asset |
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Intangible assets, net |
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Goodwill, net |
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Deferred financing costs, net |
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Related party note receivable, less current portion |
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Deposits and other long-term assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and other current liabilities |
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Current portion of operating lease liabilities |
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Current maturities of long-term debt |
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Total current liabilities |
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Operating lease liabilities, less current portion |
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Revolving line of credit |
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Long-term debt, less current portion |
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Deferred tax liabilities, net |
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Total liabilities |
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(See Note 15) |
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Shareholders' equity |
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Common stock, $ |
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Additional paid-in-capital |
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Accumulated deficit |
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Accumulated other comprehensive loss |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
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Three Months Ended March 31, |
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(In thousands, except share and per share data) |
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2025 |
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2024 |
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Revenue, net: |
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Tool rental |
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$ |
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$ |
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Product sale |
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Total revenue, net |
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Operating costs and expenses: |
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Cost of tool rental revenue |
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Cost of product sale revenue |
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Selling, general, and administrative expense |
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Depreciation and amortization expense |
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Total operating costs and expenses |
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Operating income |
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Other expense, net: |
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Interest expense, net |
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Gain on sale of property |
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— |
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Loss on asset disposal |
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— |
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Gain (loss) on remeasurement of previously held equity interest |
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— |
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Goodwill impairment |
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— |
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Other income (expense), net |
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Total other expense, net |
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Income before income tax expense |
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Income tax benefit (expense) |
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Net income (loss) |
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$ |
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$ |
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Basic earnings per share |
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$ |
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Diluted earnings per share |
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$ |
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$ |
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Basic weighted-average common shares outstanding |
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Diluted weighted-average common shares outstanding |
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Comprehensive income: |
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Net income (loss) |
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$ |
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$ |
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Foreign currency translation adjustment, net of tax |
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Net comprehensive income (loss) |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
DRILLING TOOLS INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
(UNAUDITED)
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Common Stock |
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(In thousands, except share and per share data) |
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Shares |
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Amount |
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Additional |
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Accumulated |
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Accumulated |
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Total |
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BALANCE, December 31, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustment, net of tax |
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— |
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— |
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— |
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— |
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( |
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Net income |
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— |
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— |
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— |
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— |
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BALANCE, March 31, 2024 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Common Stock |
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(In thousands, except share and per share data) |
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Shares |
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Amount |
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Additional |
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Accumulated |
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Accumulated |
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Total |
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BALANCE, December 31, 2024 |
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$ |
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$ |
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$ |
( |
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$ |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Issuance of common stock related to business combination |
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— |
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Foreign currency translation adjustment, net of tax |
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— |
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— |
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— |
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— |
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Net income (loss) |
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— |
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— |
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— |
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( |
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— |
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BALANCE, March 31, 2025 |
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$ |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
DRILLING TOOLS INTERNATIONAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended March 31, |
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(In thousands) |
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2025 |
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2024 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
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$ |
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Adjustments to reconcile net income to net cash from operating activities: |
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Depreciation and amortization |
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Amortization of deferred financing costs |
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Non-cash lease expense |
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Unrealized gain on currency translation |
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Provision for excess and obsolete inventory |
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Provision for excess and obsolete property and equipment |
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Provision for credit losses |
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Deferred tax expense |
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Gain on sale of property |
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Loss on asset disposal |
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Unrealized loss (gain) on equity securities |
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Gross profit from sale of lost-in-hole equipment |
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Stock-based compensation expense |
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Interest income on related party note receivable |
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Goodwill impairment |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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Prepaid expenses and other current assets |
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Inventories, net |
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Operating lease liabilities |
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( |
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( |
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Accounts payable |
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( |
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( |
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Accrued expenses and other current liabilities |
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( |
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( |
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Net cash flows from operating activities |
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Cash flows from investing activities: |
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Acquisition of a business, net of cash acquired |
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( |
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Purchase of intangible assets |
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Proceeds from sale of property, plant, and equipment |
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Purchase of property, plant, and equipment |
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Proceeds from sale of lost-in-hole equipment |
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Net cash flows from investing activities |
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( |
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Cash flows from financing activities: |
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Payment of deferred financing costs |
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( |
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Proceeds from Term Loan |
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Repayment of Term Loan |
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( |
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Repayment of Promissory Note |
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( |
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Proceeds from revolving line of credit |
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Repayment on revolving line of credit |
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( |
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Net cash flows from financing activities |
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Effect of changes in foreign exchange rates |
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( |
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Net change in cash |
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Cash at beginning of period |
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Cash at end of period |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Refer to Note 18 for supplemental cash flow information.
6
NOTE 1 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Drilling Tools International Corporation, a Delaware corporation ("DTIC" or the "Company"), is a global oilfield services company that designs, engineers, manufactures and provides a differentiated, rental-focused offering of tools for use in onshore and offshore horizontal and directional drilling operations, as well as other cutting-edge solutions across the well life cycle.
On March 15, 2024 (the “CTG Acquisition Date”), the Company entered into a Share Purchase Agreement with Casing Technologies Group Limited (“CTG”), certain shareholders of CTG, and a representative of CTG. Pursuant to the terms of the Share Purchase Agreement, the Company acquired one hundred percent (
On March 6, 2024, the Company entered into an agreement and plan of merger by and among the Company, Superior Drilling Products, Inc., a Utah corporation (“SDPI”), DTI Merger Sub I, Inc., a Delaware corporation and directly wholly owned subsidiary of the Company (“Merger Sub I”), and Merger DTI Merger Sub II, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“Merger Sub II”), pursuant to which Merger Sub I merged with and into SDPI (the “First Merger”), with SDPI surviving as a wholly owned subsidiary of DTI and upon the effective time of the First Merger (the “First Effective Time”), SDPI, as the surviving corporation of the First Merger, merged with and into Merger Sub II (the “Second Merger,” and together with the First Merger, the “Merger”), with Merger Sub II surviving as a wholly owned subsidiary of the Company. In accordance with the terms of the Merger Agreement, the closing of the Merger occurred on July 31, 2024 (the “SDPI Closing Date” or “SDPI Closing”) for total consideration of $
On September 30, 2024, the Company’s wholly owned subsidiary, Drilling Tools International, Inc., entered into a Share Purchase Agreement with European Drilling Projects B.V. (“EDP”), and the sole shareholder of EDP, to acquire
On January 2, 2025, the Company’s wholly owned subsidiary, Drilling Tools International, Inc., completed the acquisition of
The Company’s United States (“U.S.”) operations have locations in Texas, Louisiana, Oklahoma, Pennsylvania, North Dakota, New Mexico, Utah, and Wyoming. The Company’s international operations are located in Canada, the United Kingdom, Europe, the Middle East, and Asia-Pacific. Operations outside the U.S. are subject to risks inherent in operating under different legal systems and various political and economic environments. Among the risks are changes in existing tax laws and possible limitations on foreign investment. The Company does not engage in hedging activities to mitigate its exposure to fluctuations in foreign currency exchange rates.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as set forth by the Financial Accounting Standards Board ("FASB") and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). References to US GAAP issued by the FASB in these notes to the accompanying unaudited condensed consolidated financial statements are to the FASB Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”).
Unaudited Financial Information
The accompanying unaudited condensed consolidated financial statements included in this quarterly report have been prepared in accordance with U.S. GAAP and, in the opinion of the Company, contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of its financial position as of March 31, 2025, and its results of operations for the three months
7
ended March 31, 2025 and 2024, and cash flows for the three months ended March 31, 2025 and 2024. The condensed consolidated balance sheet at December 31, 2024, was derived from the audited annual consolidated financial statements but does not contain all of the footnote disclosures from the annual consolidated financial statements.
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our Business Startups Act (“JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard, until such time the Company is no longer considered to be an emerging growth company. At times, the Company may elect to early adopt a new or revised standard. As such, the Company’s financial statements may not be comparable to companies that comply with public company effective dates.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses and the disclosure of contingent assets and liabilities in the Company’s unaudited condensed consolidated financial statements and accompanying notes as of the date of the unaudited condensed consolidated financial statements. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates. In the current macroeconomic and business environment, these estimates require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, these estimates may change materially in future periods.
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated on consolidation. Further, the basis of consolidation incorporates the financial statements of our foreign entities, Casing Technologies Group Limited and Titan Tools Services, which operates under UK Generally Accepted Accounting Principles ("UK GAAP"). Those financial statements are translated into U.S. GAAP for consolidation purposes. The translation process adheres to established accounting standards and guidelines to ensure consistency and comparability across our consolidated financial statements. This approach enables us to accurately reflect the financial position, results of operations, and cash flows of our consolidated operations.
Foreign Currency Translation and Transactions
The Company has determined that the functional and reporting currency for its operations across the globe is the functional currency of the Company’s international subsidiaries. Accordingly, all foreign balance sheet accounts have been translated into United States dollars using the rate of exchange at the respective balance sheet date. Components of the unaudited condensed consolidated statements of income and comprehensive income have been translated at the average rates during the reporting period. Translation gains and losses are recorded in accumulated other comprehensive loss as a component of stockholders’ equity. Gains or losses arising from currency exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in the unaudited condensed consolidated statements of income and comprehensive income.
Business Combinations
The Company applies the acquisition method of accounting for business combinations, which requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets and liabilities acquired. We account for
8
contingent assets and liabilities at fair value on the acquisition date, and record changes to fair value associated with these assets and liabilities as a period cost as incurred. We use established valuation techniques and engage reputable valuation specialists to assist us with these valuations. We use a reasonable measurement period to record any adjustment related to the opening balance sheet (generally, less than one year). After the measurement period, changes to the opening balance sheet can result in the recognition of income or expense as period costs. To the extent these items stem from contingencies that existed at the balance sheet date, but are contingent upon the realization of future events, the cost is charged to expense at the time the future event becomes known.
Revenue Recognition
The Company recognizes revenue in accordance with Topic 842 (which addresses lease accounting) and Topic 606 (which addresses revenue from contracts with customers). The Company derives its revenue from two revenue types, tool rental services and product sales.
Tool Rental Services
Tool rental services consist of rental services, inspection services, and repair services. Tool rental services are accounted for under Topic 842.
Owned tool rentals represent the most significant revenue type and are governed by the Company’s standard rental contract. The Company accounts for such rentals as operating leases. The lease terms are included in the contracts, and the determination of whether the Company’s contracts contain leases generally does not require significant assumptions or judgments. The Company’s lease revenues do not include material amounts of variable payments. Owned tool rentals represent revenue from renting tools that the Company owns. The Company does not generally provide an option for the lessee to purchase the rented equipment at the end of the lease.
The Company recognizes revenues from renting tools on a straight-line basis. The Company’s rental contract periods are daily, monthly, or per well. As part of this straight-line methodology, when the equipment is returned, the Company recognizes as incremental revenue the excess, if any, between the amount the customer is contractually required to pay, which is based on the rental contract period applicable to the actual number of days the drilling tool was out on rent, over the cumulative amount of revenue recognized to date. In any given accounting period, the Company will have customers return the drilling tool and be contractually required to pay the Company more than the cumulative amount of revenue recognized to date under the straight-line methodology. Additionally, the Company has rental contracts that are based on usage, either on a per footage or per well basis. As these types of rental contracts primarily consist of variable lease payments, which are unknown at commencement, revenue is recognized when the changes in the factor on which the contingent lease payments are based occur. When the customer returns the rental equipment and the footage or usage becomes known, the Company recognizes revenue.
The Company records the amounts billed to customers in excess of recognizable revenue as deferred revenue on its unaudited condensed consolidated balance sheet.
As noted above, the Company is unsure of when the customer will return rented drilling tools. As such, the Company cannot provide a maturity analysis of future lease payments as it is unknown when the tool will be returned and what the customer will owe upon return of the tool. The Company’s drilling tools are generally rented for short periods of time (significantly less than a year). Lessees do not provide residual value guarantees on rented equipment.
The Company expects to derive significant future benefits from its drilling tools following the end of the rental term. The Company’s rentals are generally short-term in nature, and its tools are typically rented for the majority of the time that the Company owns them.
Product Sales
Product sales consist of charges for rented tools that are damaged beyond repair, charges for lost-in-hole, and charges for lost-in-transit while in the care, custody or control of the Company’s customers, and other charges for made to order product sales. Product sales are accounted for under Topic 606.
Revenue is recognized when control of promised goods or services is transferred to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for its arrangements with customers, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify
9
the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in the revenue standard. The transaction price is measured as consideration specified in a contract with a customer and excludes any sales incentives and taxes or other amounts collected on behalf of third parties. As each of the Company’s contracts with customers contain a single performance obligation to provide a product sale, the Company does not have any performance obligations requiring allocation of transaction prices.
The performance obligation for made to order product sales is satisfied and revenue is recognized at a point in time when control of the asset transfers to the customer, which typically occurs upon delivery of the product or when the product is made available to the customer for pickup at the Company’s shipping dock. Additionally, pursuant to the contractual terms with the Company’s customers, the customer must notify the Company of, and purchase from the Company, any rented tools that are damaged beyond repair, lost-in-hole, or lost-in-transit while in the care, custody or control of the Company’s customers. Revenue is recognized for these products at a point in time upon the customer’s notification to the Company of the occurrence of one of these noted events.
The Company does not have any revenue expected to be recognized in the future related to remaining performance obligations or contracts with variable consideration related to undelivered performance obligations. There was no revenue recognized in the current period from performance obligations satisfied in previous periods.
Contract Assets and Contract Liabilities
Contract assets represent the Company’s rights to consideration for work completed but not billed. As of March 31, 2025 and December 31, 2024, the Company had contract assets of $
Contract liabilities consist of fees invoiced or paid by the Company’s customers for which the associated services have not been performed and revenue has not been recognized based on the Company’s revenue recognition criteria described above. As of March 31, 2025 and December 31, 2024, the Company did
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company did
Accounts Receivable and Allowance for Credit Losses
The Company’s accounts receivable consists principally of uncollateralized amounts billed to customers. These receivables are generally due within 30 to 60 days of the period in which the corresponding sales or rentals occur and do not bear interest. They are recorded at net realizable value less an allowance for doubtful accounts and are classified as accounts receivable, net on the unaudited condensed consolidated balance sheets.
The Company considers both current conditions and reasonable and supportable forecasts of future conditions when evaluating expected credit losses for uncollectible receivable balances. In our determination of the allowance for credit losses, we pool receivables by days outstanding and apply an expected credit loss percentage to each pool. The expected credit loss percentage is determined using historical loss data adjusted for current conditions and forecasts of future economic conditions. Current conditions considered include predefined aging criteria, as well as specified events that indicate the balance due is not collectible. Reasonable and supportable forecasts used in determining the probability of future collection consider publicly available macroeconomic data and whether future credit losses are expected to differ from historical losses.
As of March 31, 2025 and December 31, 2024, the allowance for credit losses totaled $
Concentration of Credit Risk
10
The Company’s customer concentration may impact its overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions affecting the oil and gas industry.
During the three months ended March 31, 2025 and 2024, the Company generated approximately
During the three months ended three months ended March 31, 2025, the Company did not have any single vendor make up more than
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash. The Company maintains accounts in federally insured financial institutions in excess of federally insured limits. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which these deposits are held and of the money market funds in which these investments are made.
Inventories, net
Inventories are stated at the lower of cost or net realizable value. Cost is determined by using the specific identification method or the first-in-first-out ("FIFO") method, depending on the type of inventory. Inventory that is obsolete or in excess of forecasted usage is written down to its net realizable value based on assumptions regarding future demand and market conditions. Inventory write-downs are charged to cost of rental revenue and cost of product sale revenue within operating costs section of the unaudited condensed consolidated statements of income and comprehensive income and establish a new cost basis for the inventory. Inventory includes raw material and finished goods.
Property, Plant and Equipment, net
Property, plant and equipment purchased by the Company are recorded at cost less accumulated depreciation. Depreciation is recorded using the straight-line method based on the estimated useful lives of the depreciable property or, for leasehold improvements, the remaining term of the lease, whichever is shorter. Assets not yet placed in use are not depreciated.
Property, plant and equipment acquired as part of a business acquisition is recorded at acquisition date fair value with subsequent additions at cost.
The cost of refurbishments and renewals are capitalized when the value of the property, plant or equipment is enhanced for an extended period. Expenditures to maintain and repair property, plant and equipment, which do not improve or extend the life of the related assets, are charged to operations when incurred. When property, plant and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in operations.
Impairment of Long-lived Assets
Long-lived assets with finite lives include property, plant and equipment and acquired intangible assets. The Company evaluates long-lived assets, including acquired intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds these estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the assets exceeds the fair value of the asset or asset group.
For the three months ended March 31, 2025 and 2024, management determined that there were no triggering events necessitating impairment testing of property, plant, and equipment or intangible assets.
Leases
The Company adopted ASC 842, Leases (“ASC 842”) as of January 1, 2022 using the modified retrospective transition approach, with no restatement of prior periods or cumulative adjustments to retained earnings. Upon adoption, the Company elected the package of
11
transition practical expedients, which allowed it to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. The Company elected the use-of-hindsight to reassess lease term. The Company elected not to recognize leases with an initial term of 12 months or less within the unaudited condensed consolidated balance sheets and to recognize those lease payments on a straight-line basis in the unaudited condensed consolidated statements of income and comprehensive income over the lease term. The new lease accounting standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the practical expedient to not separate lease and non-lease components for all leases.
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and current operating lease liabilities and operating lease liabilities, net of current portion on the unaudited condensed consolidated balance sheets. The Company recognizes lease expense for its operating leases on a straight-line basis over the term of the lease.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from a lease. ROU assets and operating lease liabilities are recognized at the commencement date based on the present value of the future minimum lease payments over the lease term. Operating lease ROU assets also include the impact of any lease incentives. An amendment to a lease is assessed to determine if it represents a lease modification or a separate contract. Lease modifications are reassessed as of the effective date of the modification using an incremental borrowing rate based on the information available at the commencement date. For modified leases the Company also reassess the lease classification as of the effective date of the modification.
The interest rate used to determine the present value of the future lease payments is the Company’s incremental borrowing rate because the interest rate implicit in the Company’s leases is not readily determinable. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located.
The Company’s lease terms include periods under options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option in the measurement of its ROU assets and liabilities. The Company considers contractual-based factors such as the nature and terms of the renewal or termination, asset-based factors such as physical location of the asset and entity-based factors such as the importance of the leased asset to the Company’s operations to determine the lease term. The Company generally uses the base, non-cancelable, lease term when determining the ROU assets and lease liabilities. The right-of-use asset is tested for impairment in accordance with Accounting Standards Codification Topic 360, Property, Plant, and Equipment.
Lessor Accounting
Our leased equipment primarily consists of rental tools and equipment. Our agreements with our customers for rental equipment contain an operating lease component under ASC 842 because (i) there are identified assets, (ii) the customer has the right to obtain substantially all of the economic benefits from the use of the identified asset throughout the period of use and (iii) the customer directs the use of the identified assets throughout the period of use.
Our lease contract periods are daily, monthly, per well or based on footage. Lease revenue is recognized on a straight-line basis based on these rates. We do not provide an option for the lessee to purchase the rented tools at the end of the lease and the lessees do not provide residual value guarantees on the rented assets.
We recognized operating lease revenue within “Tool rental” on the unaudited condensed consolidated statements of income and comprehensive income.
Intangible Assets
Goodwill
Goodwill represents the excess of purchase price paid over the fair value of the net assets of acquired businesses. We evaluate Goodwill
12
at least annually for impairment. Goodwill is considered impaired if the carrying amount of the reporting unit exceeds its estimated fair value. To align with our change in reporting segments and reporting units referenced in Note 7 – Goodwill, the Company has changed its annual goodwill impairment assessment date from December 31 to October 31 starting in 2025. This change will not have a material impact on the annual assessment. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the goodwill impairment test. If the qualitative assessment indicates that it is more likely than not that the fair value of the reporting unit is less than its carrying amount or we elect not to perform a qualitative assessment, the quantitative assessment of goodwill test is performed. The goodwill impairment test is also performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If it is necessary to perform the quantitative assessment to determine if our goodwill is impaired, we will utilize a discounted cash flow analysis using management’s projections that are subject to various risks and uncertainties of revenues, expenses and cash flows as well as assumptions regarding discount rates, terminal value and control premiums. Estimates of future cash flows and fair value are highly subjective and inherently imprecise. These estimates can change materially from period to period based on many factors. Accordingly, if conditions change in the future, we may record impairment losses, which could be material to any particular reporting period. Refer to Note 7 - Goodwill for discussion around segment realignment and the Company's impairment analysis during the three months ended March 31, 2025.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy contains three levels:
Level 1 – Valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets.
Level 2 – Valuation inputs are quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets and other observable inputs directly or indirectly related to the assets or liabilities being measured.
Level 3 – Valuation inputs are unobservable and significant to the fair value measurement.
The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
In determining the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are measured and reported on a fair value basis. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3. The valuation of assets and liabilities recognized in business combinations are considered level 3 fair value measurements on the closing date of the acquisition. These assets and liabilities are not remeasured at each reporting period.
As of March 31, 2025 and December 31, 2024, the Company did
Fair value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable, and accounts payable. The carrying amount of such instruments approximates fair value due to their short-term nature. Additionally, the Company carries long-term debt at its amortized cost, which approximates fair value.
Cost of Revenue
The Company recorded all operating costs associated with its product sales and tool rental revenue streams in cost of product sale revenue and cost of tool rental revenue, respectively, in the unaudited condensed consolidated statements of income and comprehensive income. All indirect operating costs, including labor, freight, contract labor and others, are included in selling, general, and
13
administrative expense in the unaudited condensed consolidated statements of income and comprehensive income.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires that the cost of awards of equity instruments offered in exchange for employee services, including employee stock options and restricted stock awards, be measured based on the grant- date fair value of the award. The Company determines the fair value of stock options granted using the Black-Scholes- Merton option-pricing model (“Black-Scholes model”) and recognizes the cost over the period during which an employee is required to provide service in exchange for the award, generally the vesting period, with forfeitures accounted for as they occur. For any stock options granted prior to the Company’s common stock being publicly traded on June 21, 2023, the Company estimated the fair value of its common stock as of the grant date and used these estimates as inputs into the Black-Scholes model. The Board considered numerous objective and subjective factors to determine the fair value of the Company’s common stock at each meeting in which awards were approved. The factors considered include, but were not limited to: (i) the results of contemporaneous independent third-party valuations of the Company’s common stock; (ii) the prices, rights, preferences, and privileges of the redeemable convertible preferred stock relative to those of its common stock; (iii) the lack of marketability of the Company’s common stock; (iv) actual operating and financial results; (v) current business conditions and projections; (vi) the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company, given prevailing market conditions; and (vii) precedent transactions involving the Company’s shares.
For restricted stock units, the grant date fair value is determined based on quoted market price for the Company's common stock as of the grant date and the grant date fair value of the awards are recognized as compensation cost as awards vest over the requisite service period.
Earnings Per Share
Basic earnings per share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted earnings is computed by adjusting net income (loss) to reallocate undistributed earnings based on the potential impact of dilutive securities. Diluted earnings is computed by dividing the diluted net income (loss) by the weighted-average number of common shares outstanding for the period, including potential dilutive common stock. For the purposes of this calculation, outstanding stock options and restricted stock units are considered potential dilutive common stock and are excluded from the computation of net loss per share if their effect is anti-dilutive.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the unaudited condensed consolidated financial statements and consist of taxes currently due plus deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the unaudited condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and liabilities.
The Company is subject to state income taxes in various jurisdictions.
The Company follows guidance issued by the FASB in accounting for uncertainty in income taxes. This guidance clarifies the accounting for income taxes by prescribing the minimum recognition threshold an income tax position is required to meet before being recognized in the unaudited condensed consolidated financial statements and applies to all income tax positions. Each income tax position is assessed using a two-step process. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits and upon examination by the taxing authorities. If the income tax position is expected to meet the more likely than not criteria, the benefit recorded in the unaudited condensed consolidated financial statements equals the largest amount that is greater than
14
The Company records income tax related interest and penalties, if applicable, as a component of the provision for income tax expense. However, there were
Operating Segments
Operating segments are identified as components of an enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker (“CODM”) in deciding resource allocation and assessing performance. The Company’s is the CODM. The Company’s CODM reviews financial information presented for each operating segment for the purposes of making operations decisions, allocating resources and evaluating financial performance.
In January 2025, coinciding with the closing of the Company’s acquisition of Titan Tools Services Limited, the Company has realigned its operations to support its strategic initiatives to expand its global operations and reach new markets, particularly in the Eastern Hemisphere. As a result, the Company realigned its reportable segments to correspond with changes to its operating model, management structure, and organizational responsibilities. Consequently, the Company has determined it operates in
Recent Accounting Pronouncements - Adoption of Segment Reporting Standard
In November 2023, FASB issued Accounting Standard Update (“ASU”) 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures, which includes requirements for more robust disclosures of significant segment expenses and information used in assessing segment performance on an annual and interim basis. The guidance also requires that a public entity that has a single reportable segment provide all the disclosures required by the guidance and all existing segment disclosures under the FASB Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting. This standard was effective for the Company’s annual period beginning January 1, 2024 and is effective for the Company's interim periods beginning January 1, 2025. The Company applied the standard retrospectively to all comparative periods. Effective with this Report, the Company adopted this ASU. Refer to Note 17 - Segment Information for the required segment disclosures.
Recent Accounting Pronouncements - Adoption of Income Taxes - Improvements to Income Tax Disclosures
In December 2023, FASB issued Accounting Standard Update (“ASU”) 2023-09, Income Taxes (Topic 740) – Improvements to Income Tax Disclosures, which requires enhanced income tax disclosures that reflect how operations and related tax risks, as well as how tax planning and operational opportunities, affect the tax rate and prospects for future cash flows. This standard is effective for the Company beginning January 1, 2025 with early adoption permitted. The Company is evaluating the effects of adopting this new accounting guidance on its disclosures but does not currently expect adoption will have a material impact on the Company’s consolidated financial statements. The Company does not intend to early adopt this ASU.
Recent Accounting Pronouncements - Accounting Standards Issued But Not Yet Effective
In November 2024, FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40), which requires disclosure of specific information about costs and expenses within relevant expense captions on the face of the income statement, qualitative descriptions for expense captions not specifically disaggregated quantitatively, and the total amount and definition of selling expenses for interim and annual reporting periods. This standard is effective for the Company’s annual reporting period beginning January 1, 2027 and interim reporting periods beginning January 1, 2028. Early adoption is permitted. The Company is currently evaluating the effects of adopting this new accounting guidance.
NOTE 2 – REVISIONS OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company identified certain errors in its previously issued December 31, 2023 audited consolidated financial statements related to the presentation between cost of tool rental revenue and cost of product sale revenue. Through management's review of classification within the consolidated statements of income and comprehensive income, the Company identified that the cost of revenue for the sale of accessories was historically presented within cost of tool rental revenue, as opposed to correctly presented within cost of product sale revenue, whereas the associated accessory revenue is presented in product sale revenue.
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Management evaluated these errors in accordance with SEC Staff Accounting Bulletin Number 99, Materiality (“SAB 99”), which is since codified in Accounting Standards Codification 250, Accounting Changes and Error Corrections (“ASC 250”). The Company performed a quantitative and qualitative assessment of the errors and determine that the errors did not have a material impact to previously issued financial statements. Management noted that the presentation errors identified resulted in a net zero impact to total operating costs and expenses, income from operations, or net income. Therefore, these immaterial errors have been corrected in the current period in accordance with the guidance under SAB 99 and ASC 250.
The audited consolidated financial statements presented herein for the three months ended March 31, 2024 have been revised to correct the errors described above in accordance with SEC SAB Topic 1.M, as codified in ASC 250.
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Three months ended March 31, 2024 |
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(In thousands) |
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As Previously Reported |
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Total Adjustment |
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As Revised |
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Cost of tool rental revenue |
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$ |
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$ |
( |
) |
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$ |
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Cost of product sale revenue |
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NOTE 3 – BUSINESS COMBINATIONS
Acquisition of CTG
On the CTG Acquisition Date, the Company’s wholly owned subsidiary, Drilling Tools International, Inc., entered into and consummated the Share Purchase Agreement with CTG, the shareholders of CTG, and a representative of CTG, to acquire 100 % of the shares of CTG for a gross cash purchase consideration of $20.9 million. CTG is incorporated in the United Kingdom and is the holding company of its wholly owned subsidiary, Deep Casing. Deep Casing specializes in the design, engineering, and manufacturing of a range of patented and innovative products for well construction, well completion, and casing installation processes for the global oil and gas sector. The CTG Acquisition allows the Company to further expand its geographical presence globally, especially in the Middle East, provides accretive earnings to consolidated results of operations, and expands the Company’s portfolio of intellectual property rights, through the acquisition of over 60 patents.
The CTG Acquisition has been accounted for as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”). Drilling Tools International, Inc. has been treated as the accounting acquirer. Accordingly, CTG’s tangible and identifiable intangible assets acquired and its liabilities assumed were recorded at their estimated fair values on the CTG Acquisition Date.
The allocation of the purchase is as follows:
Assets |
Preliminary March 15, 2024 |
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Measurement Period Adjustments |
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As adjusted March 15, 2024 |
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Cash |
$ |
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$ |
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$ |
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Accounts receivable, net |
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Inventories, net |
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Prepaid expenses and other current assets |
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Property, plant and equipment , net |
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Operating lease ROU asset |
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Intangible assets, net |
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Goodwill |
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Total assets acquired |
$ |
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$ |
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$ |
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Liabilities |
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Accounts payable |
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Accrued expenses and other current liabilities |
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( |
) |
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Current portion of operating lease liabilities |
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Operating lease liabilities, less current portion |
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Total liabilities assumed |
$ |
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$ |
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$ |
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Total consideration transferred |
$ |
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$ |
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$ |
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The excess of the purchase price over the fair values of the net identifiable tangible and intangible assets acquired has been assigned to goodwill. Goodwill represents the future benefits as a result of the acquisition that will enhance the services available to both new and existing customers and increase the Company’s competitive position. Goodwill will be evaluated for impairment at least annually. Goodwill attributable to the CTG Acquisition is not deductible for tax purposes.
During the year ended December 31, 2024, a measurement period adjustment was identified as it relates to assumed accrued liabilities. The total measurement period adjustment was $0.5 million. The measurement period adjustment impacted the goodwill recognized on March 15, 2024. As of March 31, 2024, the Company is complete with the process of allocating the purchase price and valuing the acquired assets and liabilities assumed.
The following table sets forth the amounts allocated to the identified intangible assets, the estimated useful lives of those intangible assets as of the CTG Acquisition Date, and the methodologies used to determine the fair values of those intangible assets ($ in thousands):
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Fair value |
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Useful life |
Fair value methodology |
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Intangible assets |
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Trade names |
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$ |
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Relief from royalty method |
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Developed Technology |
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Relief from royalty method |
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Customer relationships |
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Multi-period excess earnings method of the income approach |
||
Total intangible assets |
|
|
|
|
$ |
|
|
|
|
The intangible assets acquired are expected to be amortized over their useful lives on a straight-line basis.
Acquisition of Superior Drilling Products, Inc.
On March 6, 2024 , the Company entered into the Merger Agreement by and among the Company, SDPI, Merger Sub, Merger Sub II, pursuant to the First Merger, with SDPI surviving as a wholly owned subsidiary of DTI and upon the effective time of the First Merger, SDPI, as the surviving corporation of the First Merger, merged with and into Merger Sub II, with Merger Sub II surviving as a wholly owned subsidiary of the Company.
In accordance with the terms of the Merger Agreement, the closing of the Merger occurred on July 31, 2024 (the “SDPI Closing Date” or “SDPI Closing”) for total consideration of $47.9 million.
SDPI is an innovative drilling and completion tool technology company providing cost saving solutions that drive production efficiencies for the oil and natural gas drilling industry. In addition, SDPI is a manufacturer and refurbisher of polycrystalline diamond compact drill bits for leading oil field services companies. The acquisition furthers the Company's growth strategy as a premier provider of technologically differentiated solutions and services for the global oil & gas drilling industry. The SDPI acquisition allows the company to vertically integrate around our proven and successful Drill-N-Ream® tool, gain global rights to run this tool, continue the Vernal, UT bit repair business supporting major OEMs of PDC drill bits, and leverage their high-spec machine shop. In addition, we acquired over 30 patents and patents pending, the majority of which have been granted.
The acquisition of SDPI has been accounted for as a business combination in accordance with ASC 805, Business Combinations. The Company has been treated as the accounting acquirer. Accordingly, SDPI's tangible and identifiable intangible assets acquired and its liabilities assumed were recorded at their estimated fair values on the SDPI Closing Date. The purchase price allocation for the Merger is preliminary and subject to revision, primarily relating to information pertaining to inventory. Additional information that existed as of the SDPI Closing Date may become known during the remainder of the measurement period, which will not extend beyond one year from the SDPI Closing Date.
The preliminary allocation of the purchase is as follows (in thousands):
17
Assets acquired: |
|
|
|
Cash |
$ |
|
|
Accounts receivable, net |
|
|
|
Related party note receivable, current |
|
|
|
Inventories, net |
|
|
|
Prepaid expenses and other current assets |
|
|
|
Property, plant and equipment, net |
|
|
|
Related party note receivable, noncurrent |
|
|
|
Operating lease right-of-use asset |
|
|
|
Intangible assets, net |
|
|
|
Deposits and other long-term assets |
|
|
|
Total assets acquired |
|
|
|
Liabilities assumed: |
|
|
|
Accounts payable |
|
|
|
Current portion of operating lease liabilities |
|
|
|
Accrued expenses and other current liabilities |
|
|
|
Deferred tax liabilities, net |
|
|
|
Deferred income |
|
|
|
Operating lease liabilities, less current portion |
|
|
|
Total liabilities assumed |
|
|
|
Total identifiable net assets |
|
|
|
Goodwill |
|
|
|
Total net assets acquired and goodwill |
$ |
|
|
The excess of the fair value of the consideration transferred and the fair value of DTI’s previously held investment in SDPI over the fair values of the net identifiable tangible and intangible assets acquired has been assigned to goodwill. Goodwill represents the future benefits as a result of the acquisition that will enhance the services available to both new and existing customers and increase the Company’s competitive position. Goodwill will be evaluated for impairment at least annually. Goodwill attributable to the acquisition of SDPI is not deductible for tax purposes.
The following table sets forth the amounts allocated to the identified intangible assets, the estimated useful lives of those intangible assets as of the SDPI Closing Date, and the methodologies used to determine the fair values of those intangible assets ($ in thousands):
|
|
|
Fair value |
|
Useful life |
|
Fair value methodology |
||
|
|
|
|
|
|
|
|
||
Customer relationships |
|
|
$ |
|
|
|
Multi-period Excess Earnings Method |
||
Developed technology |
|
|
|
|
|
|
Relief-From-Royalty Method |
||
Trade names |
|
|
|
|
|
|
Relief-From-Royalty Method |
||
Backlog |
|
|
|
|
|
|
Multi-period Excess Earnings Method |
||
Total intangible assets |
|
|
$ |
|
|
|
|
||
The intangible assets acquired are expected to be amortized over their useful lives on a straight-line basis.
Acquisition of European Drilling Projects B.V.
On September 30, 2024, the Company’s wholly owned subsidiary, Drilling Tools International, Inc., entered the Share Purchase Agreement with European Drilling Projects B.V. (“EDP”), and the sole shareholder of EDP, to acquire 100 % of the shares of EDP. European Drilling Products is a global provider of next-generation stabilizers, specialty reamers, and wellbore optimization technology for the drilling industry. EDP designs and manufactures bespoke drilling equipment tailored to address specific industry challenges. The integration of EDP's expertise aligns seamlessly with DTI's international growth strategy and commitment to technological differentiation.
In accordance with the terms of the Merger Agreement, the closing of the acquisition occurred on October 3, 2024 (the “EDP Closing Date” or “EDP Closing”) for total consideration of $13.9 million, including a Promissory Note payable to parent company of EDP for $5.2 million. On April 22, 2025, the First Amendment to the Promissory Note was entered into, reducing the balance owed on the Promissory Note by $0.3 million. The conditions that resulted in the amendment existed as of the balance sheet date. Since the amendment was signed prior to the report date, the impact of the amendment is reflected in the condensed balance sheet as of March 31, 2024. Refer to Note 19 - Subsequent Events for further information. As the amendment was signed within a year of the acquisition date of September 30, 2024 and related to additional information about matters which existed as of the acquisition date , the Company
18
accounted for the amendment as a measurement period adjustment. Please refer to the table below for the impact of the reduction. Additionally, refer to Note 8 - Long-Term Debt for further information regarding the Promissory Note.
The acquisition of EDP has been accounted for as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”). Drilling Tools International, Inc. has been treated as the accounting acquirer. Accordingly, EDP’s tangible and identifiable intangible assets acquired, and its liabilities assumed were recorded at their estimated fair values on the EDP Closing Date. The purchase price allocation for the Merger is preliminary and subject to revision. Additional information that existed as of the EDP Closing Date may become known during the remainder of the measurement period, which will not extend beyond one year from the EDP Closing Date.
The preliminary allocation of the purchase is as follows (in thousands):
|
Preliminary September 30, 2024 |
|
|
Measurement Period Adjustments |
|
|
As adjusted September 30, 2024 |
|
|||
Assets acquired: |
|
|
|
|
|
|
|
|
|||
Cash |
$ |
|
|
|
|
|
$ |
|
|||
Accounts receivable, net |
|
|
|
|
|
|
|
|
|||
Accrued Revenue |
|
|
|
|
|
|
|
|
|||
Other current assets |
|
|
|
|
|
|
|
|
|||
Property, plant and equipment, net |
|
|
|
|
|
|
|
|
|||
Operating lease right-of-use asset |
|
|
|
|
|
|
|
|
|||
Deferred tax assets |
|
|
|
|
( |
) |
|
|
|
||
Intangible assets, net |
|
|
|
|
|
|
|
|
|||
Total assets acquired |
|
|
|
|
( |
) |
|
|
|
||
Liabilities assumed: |
|
|
|
|
|
|
|
|
|||
Accounts payable |
|
|
|
|
|
|
|
|
|||
Other current liabilities |
|
|
|
|
|
|
|
|
|||
Debt, noncurrent |
|
|
|
|
|
|
|
|
|||
Operating lease liabilities, less current portion |
|
|
|
|
|
|
|
|
|||
Deferred tax liabilities, net |
|
|
|
|
|
|
|
|
|||
Total liabilities assumed |
|
|
|
|
|
|
|
|
|||
Total identifiable net assets |
|
|
|
|
( |
) |
|
|
|
||
Goodwill |
|
|
|
|
|
|
|
|
|||
Total net assets acquired and goodwill |
$ |
|
|
$ |
( |
) |
|
$ |
|
||
The excess of the fair value of the consideration transferred over the fair values of the net identifiable tangible and intangible assets acquired has been assigned to goodwill. Goodwill represents the future benefits of acquiring EDP as the acquisition not only enhances DTI's competitive edge, but also reinforces its position as a leader in providing innovative drilling solutions to the global oil and gas industry. Goodwill will be evaluated for impairment at least annually. Goodwill attributable to the acquisition of EDP is not deductible for tax purposes.
During the three months ended March 31, 2025, a measurement period adjustment was identified as it relates to the consideration transferred and the recognition of deferred tax assets and liabilities. The total measurement period adjustment was $1.7 million. The measurement period adjustment impacted the goodwill recognized on September 30, 2024. As of March 31, 2025, the Company is substantially complete with the process of allocating the purchase price and valuing the acquired assets and liabilities assumed.
The following table sets forth the amounts allocated to the identified intangible assets, the estimated useful lives of those intangible assets as of the EDP Closing Date, and the methodologies used to determine the fair values of those intangible assets (in thousands):
|
Fair value |
|
|
Useful life |
|
|
Fair value methodology |
|||
Customer relationships |
$ |
|
|
|
|
|
Multi-period Excess Earnings Method |
|||
Developed technology |
|
|
|
|
|
|
Relief-From-Royalty Method |
|||
Trade names |
|
|
|
|
|
|
Relief-From-Royalty Method |
|||
Total intangible assets |
$ |
|
|
|
|
|
|
|
||
The intangible assets acquired are expected to be amortized over their useful lives on a straight-line basis.
Titan Tools Group Limited
19
On January 2, 2025, the Company’s wholly owned subsidiary, Drilling Tools International, Inc., completed the acquisition of 100 % of the shares of Titan Tools Group Limited (“Titan”). Titan is a full-service, down-hole tool rental company for land and offshore operations focused on wellbore construction rental items for both traditional hydrocarbon extraction and geothermal industries. Titan's primary operations are located in the United Kingdom, Europe, and Africa.
In accordance with the terms of the acquisition, the closing of the acquisition occurred on January 2, 2025 (the “Titan Closing Date” or “Titan Closing”) for total consideration of $10.8 million. The consideration for the acquisition of $10.8 million is comprised of the following items (in thousands):
Cash paid to Titan shareholders |
$ |
|
|
Titan transaction costs to be paid by DTI |
|
|
|
Closing date equity consideration(1) |
|
|
|
Effective settlement of preexisting relationship between DTI and Titan (2) |
|
|
|
Fair value of consideration transferred |
$ |
|
(1) Represents the value, as of the Titan Closing Date, of the DTI common stock transferred as purchase consideration.
(2) Represents the effective settlement of DTI’s accounts receivable from Titan and DTI’s accounts payable to Titan as Titan and DTI were customers of each other prior to the Titan Closing.
The acquisition of Titan has been accounted for as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”). Drilling Tools International, Inc. has been treated as the accounting acquirer. Accordingly, Titan’s tangible and identifiable intangible assets acquired, and its liabilities assumed were recorded at their estimated fair values on the Titan Closing Date. The purchase price allocation for the acquisition is preliminary and subject to revision. Additional information that existed as of the Titan Closing Date may become known during the remainder of the measurement period, which will not extend beyond one year from the Titan Closing Date.
The preliminary allocation of the purchase is as follows (in thousands):
Assets acquired: |
|
|
|
Cash |
$ |
|
|
Accounts receivable, net |
|
|
|
Inventory |
|
|
|
Other current assets |
|
|
|
Property, plant and equipment, net |
|
|
|
Operating lease right-of-use asset |
|
|
|
Intangible assets, net |
|
|
|
Total assets acquired |
|
|
|
Liabilities assumed: |
|
|
|
Accounts payable |
|
|
|
Operating lease liabilities, current |
|
|
|
Other current liabilities |
|
|
|
Operating lease liabilities, less current portion |
|
|
|
Deferred tax liabilities, net |
|
|
|
Total liabilities assumed |
|
|
|
Total identifiable net assets |
|
|
|
Goodwill |
|
|
|
Total net assets acquired and goodwill |
$ |
|
|
The excess of the fair value of the consideration transferred over the fair values of the net identifiable tangible and intangible assets acquired has been assigned to goodwill. Goodwill represents the future benefits of acquiring Titan as the acquisition not only enhances DTI's competitive edge, but also reinforces its position as a leader in providing innovative drilling solutions to the global oil and gas
20
industry. Goodwill will be evaluated for impairment at least annually. Goodwill attributable to the acquisition of Titan is not deductible for tax purposes.
The following table sets forth the amounts allocated to the identified intangible assets, the estimated useful lives of those intangible assets as of the Titan Closing Date, and the methodologies used to determine the fair values of those intangible assets (in thousands):
|
|
|
|
|
Fair value |
|
Useful life |
Fair value methodology |
|
Customer Relationship |
|
|
|
|
$ |
|
Multi-period Excess Earnings Method |
||
Total intangible assets |
|
|
|
|
$ |
|
|
|
|
The intangible assets acquired are expected to be amortized over their useful lives on a straight-line basis.
The Company incurred acquisition-related costs of $0.3 million during the three months ended March 31, 2025, which is included in other expense, net in the consolidated statements of income and comprehensive income.
The Company’s consolidated statements of income and comprehensive income for the three months ended March 31, 2025, include Titan’s revenues of $2.6 million and net income of $0.1 million from the Titan Closing Date to March 31, 2025.
Supplemental Pro Forma Information (unaudited)
The unaudited supplemental pro forma financial results below for the three months ended March 31, 2025 and 2024, combine the consolidated results of the Company, SDPI and CTG, giving effect to the mergers as if they had been completed on January 1, 2023. The unaudited supplemental pro forma financial results to not give effect to the impact of the Titan or EDP Acquisition as these were not considered significant individually or in the aggregate. This unaudited supplemental pro forma financial information is presented for informational purposes only and is not indicative of future operations or results had the acquisition been completed as of January 1, 2024, or any other date.
|
Three months ended March 31, |
|
|||||
(in thousands) |
2025 |
|
|
2024 |
|
||
Pro forma revenue |
$ |
|
|
$ |
|
||
Pro forma net income |
$ |
( |
) |
|
$ |
( |
) |
NOTE 4 – BALANCE SHEET DETAILS - CURRENT ASSETS AND CURRENT LIABILITIES
Inventories, net
The following table shows the components of inventory (in thousands):
|
|
March 31, 2025 |
|
|
December 31, 2024 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in progress |
|
|
|
|
|
|
||
Finished goods |
|
|
|
|
|
|
||
Total inventories |
|
|
|
|
|
|
||
Allowance for obsolete inventory |
|
|
( |
) |
|
|
( |
) |
Inventories, net |
|
$ |
|
|
$ |
|
||
21
Prepaid expenses and other current assets
The following table shows the components of prepaid expenses and other current assets (in thousands):
|
|
March 31, 2025 |
|
|
December 31, 2024 |
|
||
Prepaid expenses: |
|
|
|
|
|
|
||
Deposits on inventory |
|
$ |
|
|
$ |
|
||
Prepaid income tax |
|
|
|
|
|
|
||
Prepaid insurance |
|
|
|
|
|
|
||
Prepaid rent |
|
|
|
|
|
|
||
Prepaid equipment |
|
|
|
|
|
|
||
Prepaid other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Accrued expenses and other current liabilities
The following table shows the components of accrued expenses and other current liabilities (in thousands):
|
|
March 31, 2025 |
|
|
December 31, 2024 |
|
||
Accrued expenses: |
|
|
|
|
|
|
||
Accrued compensation and related benefits |
|
$ |
|
|
$ |
|
||
Accrued insurance |
|
|
|
|
|
|
||
Accrued professional services |
|
|
|
|
|
|
||
Accrued interest |
|
|
|
|
|
|
||
Accrued property taxes |
|
|
|
|
|
|
||
Accrued monitoring fees |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Other current liabilities: |
|
|
|
|
|
|
||
Income tax payable |
|
$ |
|
|
$ |
|
||
Sales tax payable |
|
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
|
||
Total accrued expenses and other current liabilities |
|
$ |
|
|
$ |
|
||
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET
The following table shows the component of property, plant and equipment, net (in thousands):
|
|
Estimated Useful |
|
March 31, 2025 |
|
|
December 31, 2024 |
|
||
Rental tools and equipment |
|
|
$ |
|
|
$ |
|
|||
Buildings and improvements |
|
|
|
|
|
|
|
|||
Office furniture, fixtures and equipment |
|
|
|
|
|
|
|
|||
Transportation and equipment |
|
|
|
|
|
|
|
|||
Total property, plant and equipment |
|
|
|
|
|
|
|
|
||
Less: accumulated deprecation |
|
|
|
|
( |
) |
|
|
( |
) |
Property, plant and equipment, net (excluding construction in progress) |
|
|
|
|
|
|
|
|
||
Construction in progress |
|
|
|
|
|
|
|
|
||
Property, plant and equipment, net |
|
|
|
$ |
|
|
$ |
|
||
Total depreciation expense for the three months ended March 31, 2025 and 2024 was approximately $
22
NOTE 6 – INTANGIBLE ASSETS, NET
The following table shows the components of intangible assets, net (in thousands):
|
|
Useful Lives (in Years) |
|
March 31, 2025 |
|
|
December 31, 2024 |
|
||
Trade name |
|
|
$ |
|
|
$ |
|
|||
Developed Technology |
|
|
|
|
|
|
|
|||
Customer Relationships |
|
|
|
|
|
|
|
|||
Patents |
|
|
|
|
|
|
|
|||
Total intangible assets |
|
|
|
|
|
|
|
|
||
Less: accumulated amortization |
|
|
|
|
( |
) |
|
|
( |
) |
Intangible assets, net |
|
|
|
$ |
|
|
$ |
|
||
Total amortization expense for the three months ended March 31, 2025 and 2024 was approximately $
NOTE 7 - GOODWILL
The change in carrying amount of goodwill for the years ended December 31, 2024 was as follows (in thousands):
|
|
Total |
|
|
Net balance as of December 31, 2024 |
|
$ |
|
|
Additions due to business combinations |
|
|
|
|
Measurement period adjustments |
|
|
|
|
Impairments |
|
|
( |
) |
Foreign currency translation |
|
|
|
|
Net balance as of March 31, 2025 |
|
$ |
|
|
Change in Reporting Units and Goodwill Impairment
On January 1, 2025, the Company realigned its reportable segments to correspond with changes to its operating model, management structure, and organizational responsibilities. We bifurcated results into
NOTE 8 – DEBT
In December 2015, the Company entered into a credit facility with PNC Bank, National Association (the "Credit Facility"). The facility provided for a revolving line of credit with a maximum borrowing amount totaling $
On March 15, 2024, the Company refinanced its revolving credit facility (the “Refinancing”) by entering into a Second Amended and Restated Revolving Credit, Term Loan and Security and Guaranty Agreement (the “Credit Facility”) with certain of the Company’s subsidiaries and PNC Bank, National Association as lender and as agent. Pursuant to the terms of the Credit Facility, the Company will be provided a revolving line of credit in a principal amount up to $
23
generated each fiscal year commencing with the year ended December 31, 2024, as defined in the Credit Facility. Based on the calculation for Excess Cash Flows laid forth in the agreement, no payment was owed in April 2025.
For the three months ended March 31, 2025, the interest on the Revolving Line of Credit and Term Loan was based on the Secured Overnight Financing Rate ("SOFR") or the bank’s base lending rate plus applicable margin (approximately
As of March 31, 2025, there was $
In connection with acquisition of EDP, the Company issued an unsecured Promissory Note to the former parent company of EDP, totaling $
As of March 31, 2025, the future maturities of long-term debt consisted of the following (in thousands):
2025 |
|
$ |
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
2029 |
|
|
|
|
Total long term debt |
|
$ |
|
Contingent Interest Embedded Derivative Liability
Under the Credit Facility Agreement, the interest rate will reset (the 'Default Rate') upon the event of a default and an additional
The Default Rate Derivative is treated as a liability, initially measured at fair value with subsequent changes in fair value recorded in earnings. Management has assessed the probability of occurrence for a non-credit default event and determined the likelihood of a referenced event to be remote. Therefore, the estimated fair value of the Default Rate Derivative was negligible as of March 31, 2025 and December 31, 2024 and therefore no amounts were recorded as of March 31, 2025 or December 31, 2024.
24
NOTE 9 – INCOME TAXES
The Company recorded income tax benefit of $
The income tax expense/benefit for the three months ended March 31, 2025 and 2024 was calculated using a discrete approach. This methodology was used because changes in the Company's results of operations and acquisitions can materially impact the estimated annual effective tax rate. The Company’s effective tax rate for the three months ended March 31, 2025 and 2024 were provisions of
The Company records deferred tax assets and liabilities for the future tax benefit or expense that will result from differences between the carrying value of its assets for income tax purposes and for financial reporting purposes, as well as for operating loss and tax credit carryovers. A valuation allowance is recorded to bring the net deferred tax assets to a level that is more likely than not to be realized in the foreseeable future. This level will be estimated based on a number of factors, especially the amount of net deferred tax assets of the Company that are actually expected to be realized, for tax purposes, in the foreseeable future. There was
The Company is still evaluating the tax impact of the Titan Acquisition, including the impact of the transaction costs. Additionally, the Company continues to evaluate the deferred tax assets and liabilities and corresponding valuation allowance in connection with the Titan Acquisition.
NOTE 10 – STOCK-BASED COMPENSATION
On June 20, 2023, the Company adopted the Drilling Tools International Corporation 2023 Omnibus Incentive Plan (the 2023 Plan). The 2023 Plan became effective on the closing of the Merger, which also occurred on . The 2023 Plan provides for the issuance of shares of Common Stock up to ten percent (
The fair value of each stock option award is estimated on the date of grant using a Black-Scholes option valuation model. Expected volatilities are based on comparable public company data. The Company uses future estimated employee termination and forfeiture rates of the options within the valuation model. The expected term of options granted is derived using the “plain vanilla” method due to the lack of history and volume of option activity at the Company. The risk-free rate is based on the approximate U.S. Treasury yield rate in effect at the time of grant. The Company’s calculation of share price involves the use of different valuation techniques, including a combination of an income and market approach. The Company used the quoted market price as of the grant date as an input into the Black-Scholes model.
The following table summarizes options outstanding as well as activity for the three months ended March 31, 2025:
25
|
|
Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Life (in Years) |
|
|
Aggregate Intrinsic Value |
|
||||
OUTSTANDING, December 31, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Exercised |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Forfeited |
|
|
|
|
$ |
|
|
|
— |
|
|
|
— |
|
||
OUTSTANDING, March 31, 2025 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
UNVESTED, March 31, 2025 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
EXERCISABLE, March 31, 2025 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
During the three months ended March 31, 2025 and 2024, there was $
Restricted Stock Units
In May 2024, the Company issued an aggregate
During three months ended March 31, 2025, the Company recognized $
NOTE 11 – OTHER EXPENSES, NET
The following table shows the components of other expenses, net for the three months ended March 31, 2025 and 2024 (in thousands):
|
|
Three Months Ended March 31, 2025 |
|
|
Three Months Ended March 31, 2024 |
|
||
Transaction fees |
|
$ |
( |
) |
|
$ |
( |
) |
Other, net |
|
|
( |
) |
|
|
( |
) |
Software Implementation |
|
|
( |
) |
|
|
— |
|
Interest income |
|
|
|
|
|
|
||
Other expense, net |
|
$ |
( |
) |
|
$ |
( |
) |
26
NOTE 12 – RELATED PARTY TRANSACTIONS
Management fees
For the three months ended March 31, 2025 and 2024, management fees paid to Hicks Holdings Operating LLC, a shareholder of the Company, were approximately $
Director fees
For the three months ended March 31, 2025 and 2024, director fees paid to Board of Directors were approximately $
Leases
For the three months ended March 31, 2025 and 2024, the Company paid rent expense to Cree Investments, LLC, a shareholder of the Company, of approximately
Related Party Note Receivable
On July 31, 2024 ("Closing Date"), the Company entered into the Sixth Amendment and Restated Promissory Note with Tronco Energy Corporation ("Tronco"), an entity owned by employees of the Company. Pursuant to the Sixth Amendment and Restated Promissory Note, Tronco will make payments to the Company of $
NOTE 13 – LEASES
For the three months ended March 31, 2025 and 2024, the components of the Company’s lease expense were as follows (in thousands):
|
|
Three months ended March 31, 2025 |
|
|
Three months ended March 31, 2024 |
|
||
Operating Lease Cost |
|
$ |
|
|
$ |
|
||
Short-term Lease Cost |
|
|
|
|
|
|
||
Variable Lease Cost |
|
|
|
|
|
|
||
Total Lease Cost |
|
$ |
|
|
$ |
|
||
Supplemental balance sheet information related to leases was as follows (in thousands):
|
|
Three months ended March 31, 2025 |
|
|
Three months ended March 31, 2024 |
|
||
Weighted-average remaining lease term (in years) |
|
|
|
|
|
|
||
Weighted average discount rate |
|
|
% |
|
|
% |
||
27
Future undiscounted cash flows for each of the next five years and thereafter and reconciliation to the lease liabilities recognized on the unaudited condensed consolidated balance sheet as of March 31, 2025 were as follows (in thousands):
|
|
|
|
|
2025 |
|
$ |
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
2029 |
|
|
|
|
Thereafter |
|
|
|
|
Total lease payments |
|
$ |
|
|
Less: imputed interest |
|
|
( |
) |
Present value of lease liabilities |
|
$ |
|
|
The Company leases downhole drilling tools to companies in the oil and natural gas industry. Such leases are accounted for in accordance with ASC 842. For the three months ended March 31, 2025 and 2024, tool rental revenue for leases of downhole drilling tools was approximately $
NOTE 14 – EMPLOYEE BENEFITS
NOTE 15 – COMMITMENTS AND CONTINGENCIES
The Company maintains operating leases for various facilities and vehicles. See Note 13 - Leases, for further information.
Litigation
From time to time, the Company may become involved in various legal proceedings in the ordinary course of its business and may be subject to third-party infringement claims. Such proceedings can be costly, time consuming, and unpredictable, and, therefore, no assurance can be given that the final outcome of such proceedings will not materially impact our consolidated financial condition or results of operations. Estimated losses are accrued for these proceedings when the loss is probably and can be estimated. While we maintain insurance coverage that we believe is adequate to mitigate the risks of such proceedings, no assurance can be given that the amount or scope of existing insurance coverage will be sufficient to cover losses arising from such matters. The current liability for the estimated losses associated with these proceedings is not material to our consolidated financial condition and those estimated losses are not expected to have a material impact on our results of operations.
In the normal course of business, the Company may agree to indemnify third parties with whom it enters into contractual relationships, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third-party claims that the Company’s products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim.
Management Fee
The Company is required to pay a monthly management fee to a shareholder. The fee is based upon a percentage of the Company’s trailing twelve months, earnings before interest, taxes and accumulated depreciation amount, as defined in the management agreement. See Note 12 – Related Party Transactions, for further information.
28
NOTE 16 – EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed using the weighted-average number of common shares outstanding for the period plus dilutive potential common shares, including performance share awards, using the treasury stock method. Performance share awards are included based on the number of shares that would be issued as if the end of the reporting period was the end of the performance period and the result was dilutive.
The following table sets forth the computation of the Company’s basic and diluted earnings per share for the three months ended March 31, 2025 and 2024 (in thousands except share and per share data):
|
|
Three months ended March 31, |
|
|||||
|
|
2025 |
|
|
2024 |
|
||
Numerator: |
|
|
|
|
|
|
||
Net income |
|
$ |
( |
) |
|
$ |
|
|
Less: Redeemable Convertible Preferred Stock dividends |
|
|
|
|
|
|
||
Net income attributable to common shareholders — basic |
|
$ |
( |
) |
|
$ |
|
|
Add: Redeemable Convertible Preferred Stock dividends |
|
|
|
|
|
|
||
Net income attributable to common shareholders — diluted |
|
$ |
( |
) |
|
$ |
|
|
Denominator |
|
|
|
|
|
|
||
Weighted-average common shares used in computing |
|
|
|
|
|
|
||
Weighted-average effect of potentially dilutive securities: |
|
|
|
|
|
|
||
Effect of potentially dilutive time-based stock options |
|
|
|
|
|
|
||
Effect of potentially dilutive performance-based stock options |
|
|
|
|
|
|
||
Effect of potentially dilutive restricted stock units |
|
|
|
|
|
|
||
Weighted-average common shares outstanding — diluted |
|
|
|
|
|
|
||
Earnings per share — basic |
|
$ |
( |
) |
|
$ |
|
|
Earnings per share — diluted |
|
$ |
( |
) |
|
$ |
|
|
As of March 31, 2025 and March 31, 2024, the Company’s potentially dilutive securities consisted of options to purchase common stock. Based on the amounts outstanding for the three months ended March 31, 2025 and 2024, the Company excluded the following potential common shares from the computation of diluted earnings per share because including them would have had an anti-dilutive effect. The options excluded from the diluted earnings per share calculations were as follows:
|
|
Three months ended March 31, |
|
|||||
|
|
2025 |
|
|
2024 |
|
||
Time-based options outstanding |
|
|
|
|
|
|
||
Performance-based options outstanding |
|
|
|
|
|
|
||
Total |
|
|
|
|
|
|
||
NOTE 17 – SEGMENT INFORMATION
Prior to the acquisition of Titan, we operated as a single operating segment which reflected how our business was managed. Upon completion of the acquisition, the Company split into
Financial information by segment for the three months ended March 31, 2025 and 2024 is summarized below:
29
|
|
For The Three Months Ended March 31, 2025 |
|
|||||||||
|
|
Western Hemisphere |
|
|
Eastern Hemisphere |
|
|
Total |
|
|||
Tool Rental |
|
|
|
|
|
|
|
|
|
|||
Product Sales |
|
|
|
|
|
|
|
|
|
|||
Total Revenue |
|
|
|
|
|
|
|
|
|
|||
Reconciliation of revenue |
|
|
|
|
|
|
|
|
|
|||
Elimination of intersegment revenue |
|
|
|
|
|
|
|
|
( |
) |
||
Total Consolidated Revenue |
|
|
|
|
|
|
|
|
|
|||
Less:(1) |
|
|
|
|
|
|
|
|
|
|||
Cost of Tool Rental |
|
|
|
|
|
|
|
|
|
|||
Cost of Product Sales |
|
|
|
|
|
|
|
|
|
|||
Total Cost of Sales |
|
|
|
|
|
|
|
|
|
|||
Reconciliation of cost of revenue |
|
|
|
|
|
|
|
|
|
|||
Elimination of intersegment cost of revenue |
|
|
|
|
|
|
|
|
( |
) |
||
Total consolidated cost of revenue |
|
|
|
|
|
|
|
|
|
|||
Selling, general, administrative expenses |
|
|
|
|
|
|
|
|
|
|||
Segment EBITDA |
|
|
|
|
|
( |
) |
|
|
|
||
Reconciliation of segment profit |
|
|
|
|
|
|
|
|
|
|||
Corporate expenses(2) |
|
|
|
|
|
|
|
|
|
|||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|||
Stock Option Expense |
|
|
|
|
|
|
|
|
|
|||
Monitoring fees |
|
|
|
|
|
|
|
|
|
|||
Total operating income |
|
|
|
|
|
|
|
|
|
|||
Transaction expenses |
|
|
|
|
|
|
|
|
|
|||
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|||
Other expenses |
|
|
|
|
|
|
|
|
|
|||
Consolidated income before taxes |
|
|
|
|
|
|
|
|
( |
) |
||
|
|
For The Three Months Ended March 31, 2024 |
|
|||||||||
|
|
Western Hemisphere |
|
|
Eastern Hemisphere |
|
|
Total |
|
|||
Tool Rental |
|
|
|
|
|
|
|
|
|
|||
Product Sales |
|
|
|
|
|
|
|
|
|
|||
Total Revenue |
|
|
|
|
|
|
|
|
|
|||
Reconciliation of revenue |
|
|
|
|
|
|
|
|
|
|||
Elimination of intersegment revenue |
|
|
|
|
|
|
|
|
( |
) |
||
Total Consolidated Revenue |
|
|
|
|
|
|
|
|
|
|||
Less:(1) |
|
|
|
|
|
|
|
|
|
|||
Cost of Tool Rental |
|
|
|
|
|
|
|
|
|
|||
Cost of Product Sales |
|
|
|
|
|
|
|
|
|
|||
Total Cost of Sales |
|
|
|
|
|
|
|
|
|
|||
Reconciliation of cost of revenue |
|
|
|
|
|
|
|
|
|
|||
Elimination of intersegment cost of revenue |
|
|
|
|
|
|
|
|
( |
) |
||
Total consolidated cost of revenue |
|
|
|
|
|
|
|
|
|
|||
Selling, general, administrative expenses |
|
|
|
|
|
|
|
|
|
|||
Segment profit |
|
|
|
|
|
|
|
|
|
|||
Reconciliation of segment profit |
|
|
|
|
|
|
|
|
|
|||
Corporate expenses(2) |
|
|
|
|
|
|
|
|
|
|||
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|||
Stock Option Expense |
|
|
|
|
|
|
|
|
|
|||
Monitoring fees |
|
|
|
|
|
|
|
|
|
|||
Total operating income |
|
|
|
|
|
|
|
|
|
|||
Transaction expenses |
|
|
|
|
|
|
|
|
|
|||
Other expenses |
|
|
|
|
|
|
|
|
|
|||
Consolidated income before taxes |
|
|
|
|
|
|
|
|
|
|||
(1) The significant expense categories and amounts align with the segment-level information that is regularly provided to the chief operating decision maker
(2) Comprised primarily of expenses not allocated to our general and administrative segments.
30
Additional financial information by operating segment for the three months ended March 31, 2025 and 2024 is summarized below:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2025 |
|
|
2024 |
|
||
Capital Expenditures |
|
|
|
|
|
|
||
Western Hemisphere |
|
$ |
|
|
$ |
|
||
Eastern Hemisphere |
|
|
|
|
|
|
||
Total capital expenditures |
|
|
|
|
|
|
||
Segment Assets(2): |
|
|
|
|
|
|
||
Western Hemisphere |
|
$ |
|
|
$ |
|
||
Eastern Hemisphere |
|
|
|
|
|
|
||
Total segment assets |
|
|
|
|
|
|
||
Corporate and other(1) |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
(1) Corporate assets consist of cash, related party note receivables, and deferred financing costs
(2) The goodwill allocated to the
NOTE 18 – SUPPLEMENTAL CASH FLOWS
Cash flows related to income taxes, interest, leases, inventory purchases and capital expenditures included in accounts payable, assumed liabilities acquired in a business combination and other non-cash investing and financing activities were as follows:
|
|
Three Months Ended March 31, |
|
|||||
|
|
2025 |
|
|
2024 |
|
||
Supplemental cash flow information: |
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
Cash paid for income taxes |
|
|
|
|
|
|
||
Non-cash investing and financing activities: |
|
|
|
|
|
|
||
Measurement period adjustment related to EDP Acquisition |
|
|
|
|
|
|
||
ROU assets obtained in exchange for lease liabilities |
|
|
|
|
|
|
||
Fair value of CTG liabilities assumed in CTG Acquisition |
|
|
|
|
|
|
||
Fair value of Titan liabilities assumed in Titan Acquisition |
|
|
|
|
|
|
||
Purchases of inventory included in accounts payable and accrued expenses and other current liabilities |
|
|
|
|
|
|
||
Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities |
|
|
|
|
|
|
||
Non-cash directors and officers insurance |
|
|
|
|
|
|
||
Deferred financing fees included in accounts payable |
|
|
|
|
|
|
||
NOTE 19 – SUBSEQUENT EVENTS
First Amendment to the Promissory Note
On April 22, 2025, the Company amended its Promissory Note payable to the parent company of EDP by entering into the First Amendment to the Promissory Note dated October 2, 2024. The Promissory Note’s principal balance of $
Share Repurchase Plan
On May 13, 2025, our Board of Directors unanimously approved a share repurchase program authorizing the Company to repurchase up to $
31
Issuance of Restricted Stock Units
On May 13, 2025, the Company issued an aggregate
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of March 31, 2025, and for the three months ended March 31, 2025 and 2024, included elsewhere herein. For additional information pertaining to our business, including risk factors which should be considered before investing in our common stock, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. All dollar amounts are expressed in thousands of United States dollars (“$”), unless otherwise indicated. Capitalized terms used in this section, but not otherwise defined, have the meanings ascribed to them in the Report.
Overview
We are a global oilfield services company that designs, engineers, manufactures and provides a differentiated, rental-focused offering of tools for use in onshore and offshore horizontal and directional drilling operations, as well as other cutting-edge solutions across the well life cycle. We operate from 15 locations in North America and 11 international service and support centers in Europe, the Middle East, and Asia-Pacific.
Our revenues are derived from two sources: tool rental and product sales. Tool rental revenues are derived from the rental of tools used in bottom hole assemblies (“BHA”), various wellbore optimization tools, and tubular goods for drilling, workover, and completion operations. Additionally, tool rental revenue consists of the repair and inspection of such tools. Product sale revenues are derived from the sale of target depth technologies, the manufacturing and repair of tools for external customers, and tool recovery revenue. During the three months ending March 31, 2025, we derived 81% of total revenues from tool rentals and 19% from product sales. During the three months ending March 31, 2024, we derived 81% from tool rentals and 19% from product sales.
We operate out of 2 reporting segments, split by geography, consisting of the Western Hemisphere operations and the Eastern Hemisphere operations.
Market Factors
Demand for our services and products depends primarily upon the general level of activity in the oil and gas industry, including the number of active drilling rigs, the number of wells drilled, the depth and working pressure of these wells, the number of well completions, the level of well remediation activity, the volume of production and the corresponding capital spending by oil and natural gas companies. Oil and gas activity is in turn heavily influenced by, among other factors, investor sentiment, availability of capital and oil and gas prices locally and worldwide, which have historically been volatile.
Our product sales revenues are primarily dependent on oil and gas companies paying for tools that are lost or damaged in their drilling programs as well as the customers need to replace aging or consumable products and our ability to provide competitive pricing. With the addition of Deep Casing Tools, we now sell tools to the end users for use in constructing their wells.
Our product sales revenues are primarily dependent on oil and gas companies paying for tools that are lost or damaged in their drilling programs as well as the customers need to replace aging or consumable products and our ability to provide competitive pricing.
All of these factors may be influenced by the oil and gas region in which our customers are operating. While these factors may lead to differing revenues, we have generally been able to forecast our product needs and anticipated revenue levels based on historic trends in a given region and with a specific customer.
Recent Developments and Trends
Industry Update
In the first quarter of 2025, the oil and gas market witnessed a dynamic interplay of geopolitical tensions, shifting demand dynamics, and evolving geopolitical and economic factors. U.S. oil production reached record highs, averaging 13.5 million barrels per day, driven by the Permian Basin and offshore developments. However, this surge in supply coincided with an increasing surplus in global oil supply over demand, leading to downward pressure on prices. Crude oil prices experienced declines, specially WTI, whose quarterly average decreased from $78.41 per barrel to $71.84 per barrel from the fourth quarter of 2024 to the first quarter of 2025. Despite the high volatility in spot oil prices described above, our customers tend to be more focused on medium-term and long term commodity prices when making investment decisions due to the longer lead times for offshore projects.
33
In the first quarter of 2025, U.S. natural gas prices experienced a notable rebound following the record lows of 2024. The Henry Hub spot price averaged approximately $4.15 per million British thermal units (MMBtu) during the first quarter, or a 70% increase compared to the fourth quarter of 2024, reflecting seasonal increases due to heightened heating demand during colder-than-average weather in January. This uptick in demand is expected to outpace any expected growth in U.S. production, leading to a tightening of inventories and supporting higher prices through the remainder of 2025
Notwithstanding the significant commodity price volatility over the past several years, we have seen decreases both the Western and Eastern Hemisphere. During the three months ended March 31, 2025, the weekly average Western Hemisphere rig count, as reported by Baker Hughes, was 930 compared to 995 for the three months ended March 31, 2024. Additionally, during the three months ended March 31, 2025, the weekly average Eastern Hemisphere rig count, as reported by Baker Hughes, was 757 compared to 725 for the three months ended March 31, 2024. However, notwithstanding the impact of longer laterals, improved rig efficiencies have partially offset the impact of this reduction.
Inflation and Increased Costs
We are experiencing the impacts of global inflation, both in increased personnel costs and the prices of goods and services required to operate our rigs and execute capital projects. While we are currently unable to estimate the ultimate impact of rising prices, we do expect that our costs will continue to rise in the near term and will impact our profitability.
Results of Operations
We have two operating segments consisting of the Western Hemisphere and Eastern Hemisphere. Our results of operations are evaluated by the Chief Executive Officer on a consolidated basis as well as at the segment level. The performance of our operating segments is primarily evaluated based on segment operating income (in addition to other measures), which is defined as income before taxes and before interest expense, net, other income (expense), net and corporate and other expenses not allocated to the operating segments.
Comparison of the Three Months Ended March 31, 2025 and 2024
|
|
Three Months Ended March 31, |
|
|
|
|
||||||||||
|
|
2025 |
|
|
2024 |
|
|
$ Change |
|
|
% Change |
|
||||
Revenue, net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Western Hemisphere |
|
$ |
41,196 |
|
|
$ |
38,307 |
|
|
$ |
2,889 |
|
|
|
8 |
% |
Eastern Hemisphere |
|
|
5,052 |
|
|
|
1,247 |
|
|
|
3,805 |
|
|
|
305 |
% |
Intersegment Revenue |
|
|
(3,368 |
) |
|
|
(2,580 |
) |
|
|
(788 |
) |
|
|
31 |
% |
Total revenue, net |
|
|
42,880 |
|
|
|
36,974 |
|
|
|
5,906 |
|
|
|
16 |
% |
Operating income/(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Western Hemisphere |
|
|
13,576 |
|
|
|
13,514 |
|
|
|
62 |
|
|
nm |
|
|
Eastern Hemisphere |
|
|
(188 |
) |
|
|
419 |
|
|
|
(607 |
) |
|
|
-145 |
% |
Total segment operating income |
|
|
13,388 |
|
|
|
13,932 |
|
|
|
(544 |
) |
|
|
-4 |
% |
Corporate and other expenses |
|
|
(10,085 |
) |
|
|
(8,802 |
) |
|
|
(1,283 |
) |
|
|
15 |
% |
Total operating income |
|
|
3,303 |
|
|
|
5,130 |
|
|
|
(1,827 |
) |
|
|
-36 |
% |
Interest expense, net |
|
|
(1,309 |
) |
|
|
(182 |
) |
|
|
(1,127 |
) |
|
|
619 |
% |
Gain on sale of property |
|
|
13 |
|
|
|
— |
|
|
|
13 |
|
|
nm |
|
|
Loss on asset disposal |
|
|
— |
|
|
|
(9 |
) |
|
|
9 |
|
|
nm |
|
|
Unrealized gain (loss) on equity securities |
|
|
— |
|
|
|
249 |
|
|
|
(249 |
) |
|
nm |
|
|
Goodwill impairment |
|
|
(1,901 |
) |
|
|
— |
|
|
|
(1,901 |
) |
|
nm |
|
|
Other income (expense), net |
|
|
(1,934 |
) |
|
|
(1,125 |
) |
|
|
(809 |
) |
|
|
72 |
% |
Total other expense, net |
|
|
(5,131 |
) |
|
|
(1,067 |
) |
|
|
(4,064 |
) |
|
|
381 |
% |
Income before income taxes |
|
|
(1,828 |
) |
|
|
4,063 |
|
|
|
(5,891 |
) |
|
|
-145 |
% |
Income tax benefit (expense) |
|
|
159 |
|
|
|
(937 |
) |
|
|
1,096 |
|
|
nm |
|
|
Net income (loss) |
|
$ |
(1,669 |
) |
|
$ |
3,126 |
|
|
|
(4,795 |
) |
|
|
-153 |
% |
nm = not meaningful
Western Hemisphere
34
Western Hemisphere revenue was $41.2 million for the three months ended March 31, 2025, an increase of $2.9 million, or 8%, compared to the three months ended March 31, 2024. The increase in revenues was driven by the addition of our Diamond Products Division ("DPD") in August of 2024. The increase in Western Hemisphere operating income was not meaningful quarter over quarter due to higher personal related costs as a result of acquisitions.
Eastern Hemisphere
Eastern Hemisphere revenue was $5.1 million for the three months ended March 31, 2025, an increase of $3.8 million, or 305%, compared to the three months ended March 31, 2024. The increase was primarily a result of acquisitions to rental businesses located within the Eastern Hemisphere. Eastern Hemisphere operating loss was $0.2 million for the three months ended March 31, 2025, a decrease of $0.6 million, or 145% compared to the three months ended March 31, 2024. The decrease was driven by increased headcount as a result of the acquisitions and an activity decline seen in the Middle Eastern market.
Corporate and Other
Corporate and other represents various expenses not directly attributable to our segments as well as expenses not used in the measurement of segment profitability. Corporate and other expenses for the three months ended March 31, 2025 were $10.1 million, an increase of $1.3 million or 15%, compared to the three months ended March 31, 2024. The increase was primarily attributable to increased depreciation expense as a result of acquired property, plant, and equipment balances.
Interest expense, net
Interest expense net was $1.3 million for the three months ended March 31, 2025, an increase of $1.1 million, or 619%, compared to the three months ended March 31, 2024. The increase was primarily a result of interest on the term loan, entered into in March 2024, interest on amounts drawn on the credit facility, and interest on the promissory note, entered into in September 2024.
Other income (expense), net
Other income (expense), net represents various one time and non-recurring expenses Other income (expense), net was $1.9 million for the three months ended March 31, 2025, an increase of $0.8 million, or 72%, compared to three months ended March 31, 2024. This increase was driven by software implementation costs and additional transaction costs incurred during the three months ended March 31, 2025.
Non-GAAP Financial Measures
To supplement our unaudited interim consolidated financial statements, which are prepared and presented in accordance with U.S GAAP, we use certain non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. These non-GAAP financial measures, which may be different than similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP.
We use the non-GAAP financial measure Adjusted EBITDA, which is defined as net income (loss); excluding interest income; interest expense; other income (expense), net; income tax benefit (expense); depreciation and amortization; and certain other non-cash or non-recurring items impacting net income (loss) from time to time. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in Adjusted EBITDA.
This non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are a number of limitations related to the use of these non-GAAP financial measures compared to the closest comparable GAAP measure. Some of these limitations are that:
35
The following tables present a reconciliation of Adjusted EBITDA to net income (loss) for the three months ended March 31, 2025 and 2024 (non-recurring transaction expenses recorded to other (income) expense are presented separately within Adjusted EBITDA):
|
|
Three Months Ended March 31, |
|
|||||
(In thousands) |
|
2025 |
|
|
2024 |
|
||
Net income (loss) |
|
$ |
(1,669 |
) |
|
$ |
3,126 |
|
Add (deduct): |
|
|
|
|
|
|
||
Income tax expense |
|
|
(159 |
) |
|
|
937 |
|
Depreciation and amortization |
|
|
6,722 |
|
|
|
5,365 |
|
Interest expense, net |
|
|
1,309 |
|
|
|
182 |
|
Stock option expense |
|
|
541 |
|
|
|
208 |
|
Management fees |
|
|
188 |
|
|
|
188 |
|
Gain on sale of property |
|
|
(14 |
) |
|
|
— |
|
Loss on asset disposal |
|
|
— |
|
|
|
9 |
|
Unrealized (gain) loss on equity securities |
|
|
— |
|
|
|
(249 |
) |
Goodwill impairment |
|
|
1,901 |
|
|
|
|
|
Transaction expense |
|
|
732 |
|
|
|
889 |
|
Other expense, net |
|
|
1,203 |
|
|
|
236 |
|
Adjusted EBITDA |
|
$ |
10,754 |
|
|
$ |
10,891 |
|
Liquidity and Capital Resources
At March 31, 2025, we had $2.8 million of cash and cash equivalents. Our primary sources of liquidity and capital resources are cash on hand, cash flows generated by operating activities, the term loan, and, if necessary, borrowings under the Credit Facility Agreement. We may use additional cash generated to execute strategic acquisitions or for general corporate purposes. We believe that our existing cash on hand, cash generated from operations and available borrowings under the Credit Facility Agreement will be sufficient for at least the next 12 months to meet working capital requirements and anticipated capital expenditures.
Credit Facility Agreement
Reference is made to the disclosure set forth under the heading “Revolving Credit Facility” in Note 8, Revolving Credit Facility, of the notes to the unaudited condensed consolidated financial statements included elsewhere in this Report (the ”Interim Financial Statements").
Capital Expenditures
Our capital expenditure relates to capital additions or improvements that add to our rental or repair capacity or extend the useful life of our drilling tools and related infrastructure. Also, our capital expenditures replace tools that are lost or damaged by a customer and these are funded by a rental tool recovery sale amount from the customer. We regularly incur capital expenditures on an on-going basis in order to (i) increase or maintain our rental tool fleet and equipment, (ii) extend the useful life of our rental tools and equipment and (iii) acquire or upgrade computer hardware and software. The amount of our capital expenditures is influenced by, among other things, demand for our services, recovery of lost or damaged tools, schedules for refurbishing our various rental tools and equipment, cash flow generated by our operations, expected rates of return and cash required for other purposes.
Contractual Obligations and Commitments
Our material contractual obligations arise from leases of facilities and vehicles under non-cancelable operating leases agreements. See Note 15, Commitments and contingencies, of the notes to the Interim Financial Statements.
Tax Obligations
We currently have available federal net operating loss carryforwards to offset our federal taxable income, and we expect that these carryforwards will substantially reduce our cash tax payments over the next several years. If we forfeit these carryforwards for any reason or deplete them faster than anticipated, our cash tax obligations could increase substantially. For additional information, see Note 9, Income Taxes, of the notes to the Interim Financial Statements.
36
Cash Flows
The following table sets forth our cash flows for the period indicated:
|
|
Three Months Ended March 31, |
|
|||||
(In thousands) |
|
2025 |
|
|
2024 |
|
||
Net cash (used in) provided by: |
|
|
|
|
|
|
||
Operating activities |
|
$ |
2,431 |
|
|
$ |
3,312 |
|
Investing activities |
|
|
(7,280 |
) |
|
|
(19,585 |
) |
Financing activities |
|
|
1,392 |
|
|
|
24,611 |
|
Effect of changes in foreign exchange rate |
|
|
61 |
|
|
|
(291 |
) |
Net increase (decrease) in cash and cash equivalents |
|
$ |
(3,396 |
) |
|
$ |
8,047 |
|
Cash Flows (Used In) Provided by Operating Activities
Net cash provided by operating activities for the three months ended March 31, 2025 was $2.4 million, the driver being a net loss of $1.7 million offset by non-cash charges of $7.2 million and a decrease in net working capital of $3.1 million. We will continue to evaluate our capital requirements for both short-term and long-term liquidity needs, which could be affected by various risks and uncertainties, including, but not limited to, the effects of the current inflationary environment, rising interest rates, and other risks detailed in the section of this Report entitled “Risk Factors.”
Net cash provided by operating activities for the three months ended March 31, 2024 was $3.3 million, the driver being net income of $3.1 million, including non-cash charges of $3.9 million, offset by a decrease in net working capital of $3.7 million.
Cash Flows (Used In) Provided by Investing Activities
Net cash used in investing activities for the three months ended March 31, 2025 was $7.3 million. Purchases of property, plant, and equipment of $5.0 million, purchases of intangible assets of $0.7 million, and the acquisition of Titan for $5.6 million were partially offset by proceeds from rental tool recovery sales of $4.0 million.
Net cash used in investing activities for the three months ended March 31, 2024 was $19.6 million. Purchases of property, plant, and equipment of $6.2 million and the acquisition of Deep Casing Tools for $18.3 million were partially offset by proceeds from rental tool recovery sales of $5.0 million.
Cash Flows (Used In) Provided by Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2025 was $1.4 million resulting from net proceeds on from the revolving line of credit of $2.9 million, offset by payments on the term loan of $1.3 million and payments on the Promissory Note of $0.2 million.
Net cash used in financing activities for the three months ended March 31, 2024 was $24.6 million resulting from proceeds on the term loan on $25.0 million, offset by payments of deferred financing fees of $0.3 million.
Critical Accounting Policies and Estimates
The Interim Financial Statements included in this Report have been prepared in accordance with U.S. GAAP. The preparation of these Interim Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. We also make estimates and assumptions that affect the reported amounts and related disclosures for the periods presented. Our estimates are based on our historical experience and other factors that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ significantly. Additionally, changes in assumptions, estimates or assessments due to unforeseen events or other causes could have a material impact on our financial position or results of operations.
37
For a description of our critical accounting policies and estimates, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.
Recently Issued and Adopted Accounting Standards
A discussion of recent accounting pronouncements is included in Note 1, Summary of significant accounting policies, to the Interim Financial Statements included elsewhere in this report.
JOBS Act Accounting Election
In April 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this extended transition period and, as a result, we will not adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. In addition, as an emerging growth company, we may take advantage of certain reduced disclosure and other requirements that are otherwise applicable generally to public companies. DTI will take advantage of these exemptions until such earlier time that it is no longer an emerging growth company. DTI would cease to be an emerging growth company on the date that is the earliest of (i) the last day of the fiscal year following the fifth anniversary of the date of the completion of this offering (ii) the last day of the fiscal year in which its total annual gross revenue is equal to or more than $1.23 billion (iii) the date on which it has issued more than $1.0 billion in nonconvertible debt during the previous three years or (iv) the date on which it is deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Credit risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. We maintain cash and cash equivalents with major and reputable financial institutions. Deposits held with the financial institutions may exceed the amount of insurance provided by the Canadian Deposit Insurance Corporation and the Federal Deposit Insurance Corporation on such deposits but may be redeemed upon demand. We perform periodic evaluations of the relative credit standing of the financial institutions. With respect to accounts receivable, we monitor the credit quality of our customers as well as maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments.
Concentration risk
During the three months ended March 31, 2025 and 2024, 29.0% and 30.0%, respectively of our total revenue was earned from two customers. Amounts due from these customers included in accounts receivable at March 31, 2025 and December 31, 2024 were approximately $5.3 million and $5.4 million, respectively.
Foreign currency risk
Our customers are primarily located in the United States, Canada and throughout Europe and the Middle East. Therefore, foreign exchange risk exposures arise from transactions denominated in currencies other than the United States dollar, which is our functional and reporting currency. To date, a majority of our sales have been denominated in United States, British pound sterling ("GBP") and Canadian dollars. As we expand our presence in international markets, our results of operations and cash flows may increasingly be subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements to minimize the impact of these fluctuations in the exchange rates. We will periodically reassess our approach to manage our risk relating to fluctuations in currency rates.
We do not believe that foreign currency risk had a material effect on our business, financial condition, or results of operations during the periods presented.
Inflation Risk
Rising international tariffs, including any tariffs applied to goods traded between the U.S. and China, the U.S. and Mexico and the U.S. and Canada, could materially and adversely affect our business and results of operations. The U.S. government has previously and now again recently imposed tariffs on certain foreign goods from a variety of countries and regions that it perceives as engaging in unfair
38
trade practices. Foreign governments have imposed, and may impose in the future, retaliatory tariffs on goods that their countries import from the U.S. Such changes can make it difficult or costly for us to do business in, or import our products from, those countries.
With certain tariff exclusions ending and with any new tariffs, it could further negatively impact global trade and economic conditions in many of the regions where we do business. It may also adversely impact demand for our products in certain locations. It may be time-consuming and costly for us to modify our business operations to adapt to or comply with such tariffs. If we become unable to recover a substantial portion of any increased tariff related costs, the recent or increased international tariffs could materially and adversely affect our business, financial condition and results of operations.
Cybersecurity Risk
We continue to monitor technology hardware and software solutions, regular testing of the resiliency of our systems including penetration and disaster recovery testing as well as regular training sessions on cybersecurity risks and mitigation strategies. We have established an incident response plan and team to take steps it determines are appropriate to contain, mitigate and remediate a cybersecurity incident and to respond to the associated business, legal and reputation risks. There is no assurance that these efforts will fully mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur.
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 in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures in effect as of March 31, 2025, the end of the period covered by this Report. As a result of management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of March 31, 2025, or as of the date of the filing of this Report.
Our disclosure controls and procedures were not effective as of March 31, 2025 because all findings in connection with our preparation and the audit of our consolidated financial statements as of and for the year ended December 31, 2022 and December 31, 2023, have not been fully remediated despite ongoing projects and improvements made in the current year. As a result, we were not able to rely upon the disclosure controls and procedures that were in place as of March 31, 2025 and we continue to have a material weakness in our internal control over financial reporting. This material weakness is described in more detail below.
Prior to going public, we had been a private company with limited accounting personnel and other resources with which to address our internal control over financial reporting. In connection with our preparation and the audit of our consolidated financial statements as of and for the year ended December 31, 2023, we identified deficiencies in the design or operation of our internal controls to be a material weakness relating to inadequate documentation and monitoring of information technology (“IT”) general controls and cybersecurity processes within the Company’s IT environment, including access controls and segregation of duties between key IT functions.
We have made progress towards remediation of the remaining material weakness with the following steps:
Through the work performed in 2024, management has identified the below areas for improvement to fully remediate the fourth material weakness:
39
The process of maintaining effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.
Changes in Internal Control over Financial Reporting
On March 15, 2024, we acquired Deep Casing Tools. As the acquisition date has exceeded one year, we are now required to assess on the internal controls over financial reporting. Additionally, on January 2, 2025, we completed the acquisition of Titan Tools. We are permitted to omit an assessment of an acquired business' internal control over financial reporting from our assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition. Accordingly, we have excluded the internal control over financial reporting of Titan Tools from management's assessment of internal control over financial reporting as of March 31, 2025.
40
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
See Part I, Item 1, Note 15 to our consolidated financial statements entitled “Commitments and Contingencies,” which is incorporated in this item by reference.
Item 1A. Risk Factors.
Our Annual Report filed with the SEC on March 14, 2025, describes important risk factors that could cause our business, financial condition, results of operations and growth prospects to differ materially from those indicated or suggested by forward-looking statements made in this Report or presented elsewhere by management from time to time. There have been no material changes in the risk factors that appear in the Annual Report. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
During the year ended December 31, 2024, Michael Domino, President, Directional Tool Rentals Division and Thomas Patterson, Independent Director, each adopted a pre-arranged stock trading plan in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The trading plans are intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) and allow for the sale of a specified number of shares of the Company’s common stock over a designated period of time, subject to certain price, timing, and volume conditions.
The plans were adopted during an open trading window in accordance with the Company’s insider trading policy and are further described below:
Name/Title |
Date |
Type of Arrangement |
Nature of Arrangement |
Duration |
Aggregate number of shares |
Sale of Common Stock |
|||||
|
Sale of Common Stock
|
Mr. Domino’s plan expired on
During the three months ended March 31, 2025,
41
Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Report.
Exhibit Number |
|
Description |
31.1* |
|
|
31.2* |
|
|
32.1* |
|
|
32.2* |
|
|
|
|
|
101.INS* |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document |
104* |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
† Certain exhibits and schedules to this exhibit have been omitted in accordance with Regulation S-K Item 601(b)(2). We agree to furnish supplementally a copy of all omitted exhibits and schedules to the SEC upon its request.
# Indicates management contract or compensatory plan or arrangement.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
Drilling Tools International Corporation |
|
|
|
|
|
Date: May 14, 2025 |
|
By: |
/s/ David R. Johnson |
|
|
|
David R. Johnson |
|
|
|
Chief Financial Officer |
|
|
|
(Principal Financial and Accounting Officer) |
43
Exhibit 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, R. Wayne Prejean, certify that:
Date: May 14, 2025 |
|
By: |
/s/ R. Wayne Prejean |
|
|
|
R. Wayne Prejean |
|
|
|
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David R. Johnson, certify that:
Date: May 14, 2025 |
|
By: |
/s/ David R. Johnson |
|
|
|
David R. Johnson |
|
|
|
Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Drilling Tools International (the “Company”) on Form 10-Q for the period ending March 31, 2025 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
Date: May 14, 2025 |
|
By: |
/s/ R. Wayne Prejean |
|
|
|
R. Wayne Prejean |
|
|
|
Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Drilling Tools International Corporation (the “Company”) on Form 10-Q for the period ending March 31, 2025 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
Date: May 14, 2025 |
|
By: |
/s/ David R. Johnson |
|
|
|
David R. Johnson |
|
|
|
Chief Financial Officer |