Drilling Tools International (DTI) - 2024 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section outlines the risks and uncertainties associated with forward-looking statements in the report - The report contains forward-looking statements regarding future expectations, hopes, beliefs, intentions, or strategies, which are subject to various risks and uncertainties[3] - Key risks include demand for products/services influenced by oil and gas activity, ability to retain customers and skilled workers, sourcing tools at reasonable cost, regulatory impacts, and geopolitical conflicts (Russia-Ukraine, Israel-Hamas)[3][4] - Actual results may differ materially from forward-looking statements due to competitive and rapidly changing environments, and the company disclaims any obligation to update these statements[4][5] PART I. FINANCIAL INFORMATION This part presents the company's unaudited financial statements, management's analysis, and market risk disclosures Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the company's unaudited condensed consolidated financial statements and accompanying notes for the period ended June 30, 2024 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets Summary | Metric | June 30, 2024 (Unaudited) ($ thousands) | December 31, 2023 (Audited) ($ thousands) | | :--- | :--- | :--- | | Total Assets | 166,874 | 132,498 | | Total Liabilities | 74,074 | 43,808 | | Total Shareholders' Equity | 92,800 | 88,690 | | Goodwill | 3,076 | — | | Intangible assets, net | 7,962 | 216 | | Current maturities of long-term debt | 5,000 | — | | Long-term debt | 19,167 | — | - Total assets increased by $34.4 million, driven by significant increases in intangible assets and the recognition of goodwill, primarily due to the CTG acquisition[8] - Total liabilities increased by $30.2 million, largely due to the introduction of current maturities of long-term debt and new long-term debt, reflecting recent financing activities[8] Condensed Consolidated Statements of Income and Comprehensive Income Condensed Consolidated Statements of Income and Comprehensive Income Summary | Metric (in thousands) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total revenue, net | $37,533 | $37,908 | $74,507 | $78,707 | | Income from operations | $2,235 | $6,624 | $7,365 | $16,239 | | Net income | $365 | $937 | $3,492 | $6,638 | | Basic earnings per share | $0.01 | $0.07 | $0.12 | $0.49 | | Diluted earnings per share | $0.01 | $0.05 | $0.12 | $0.33 | - Net income decreased significantly for both the three-month period (61.0% YoY) and the six-month period (47.4% YoY), primarily due to higher operating costs and other expenses[10] - Total revenue saw a slight decrease of 1.0% for the three months ended June 30, 2024, and a 5.3% decrease for the six months ended June 30, 2024, compared to the prior year periods[10] Condensed Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Shareholders' Equity Condensed Consolidated Statements of Changes in Shareholders' Equity Summary | Metric (in thousands) | December 31, 2023 | June 30, 2024 | | :--- | :--- | :--- | | Common Stock Shares Outstanding | 29,768,568 | 29,859,564 | | Additional Paid-In Capital | $95,218 | $96,536 | | Accumulated Deficit | $(6,306) | $(3,105) | | Total Shareholders' Equity | $88,690 | $92,800 | - Total shareholders' equity increased by $4.1 million from December 31, 2023, to June 30, 2024, driven by an increase in additional paid-in capital and a reduction in accumulated deficit[14] - The accumulated deficit improved from $(6,306)k at December 31, 2023, to $(3,105)k at June 30, 2024, reflecting positive net income during the period[14] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows Summary | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :--- | :--- | :--- | | Net cash flows from operating activities | $4,391 | $14,061 | | Net cash from investing activities | $(26,728) | $(13,388) | | Net cash from financing activities | $23,495 | $4,338 | | Net change in cash | $781 | $4,804 | | Cash at end of period | $6,784 | $7,156 | - Net cash from operating activities decreased by 68.8% YoY, primarily due to lower net income and changes in operating assets and liabilities[17] - Net cash used in investing activities increased by 99.6% YoY, largely driven by the acquisition of a business for $18.3 million and purchases of property, plant, and equipment[17] - Net cash from financing activities increased significantly by 441.7% YoY, primarily due to proceeds from a $25 million Term Loan in 2024[17] Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The company is a global oilfield services provider specializing in rental-focused tools for onshore and offshore horizontal and directional drilling operations[19] - On March 15, 2024, the company acquired Casing Technologies Group Limited (CTG) for approximately $20.9 million, expanding its global presence, intellectual property (over 60 patents), and product portfolio[21] - Revenue is primarily derived from tool rental services (accounted for as operating leases) and product sales (including charges for damaged/lost tools and made-to-order products)[29][30][34] Geographic Revenue Breakdown | Geographic Revenue (in millions) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | United States | $30.5 (81%) | $35.1 (92%) | $62.8 (84%) | $71.6 (91%) | | International Operations | $7.0 (19%) | $2.9 (8%) | $11.7 (16%) | $7.1 (9%) | - The company generated approximately 27% of its revenue from 2 customers for the six months ended June 30, 2024, indicating customer concentration[76] NOTE 2 – BUSINESS COMBINATION - The company acquired 100% of Casing Technologies Group Limited (CTG) on March 15, 2024, for a gross cash purchase consideration of approximately $20.9 million[83] - The acquisition of CTG, which owns Deep Casing Tools Limited, aims to expand geographical presence (especially in the Middle East), provide accretive earnings, and enhance the company's intellectual property portfolio with over 60 patents[83] Acquired Intangible Assets from CTG | Acquired Intangible Assets (in thousands) | Fair Value | Useful Life (in years) | | :--- | :--- | :--- | | Trade names | $819 | 15 | | Developed Technology | $3,269 | 20 | | Customer relationships | $3,977 | 20 | - Goodwill of $3,144k was recognized from the CTG acquisition, representing future benefits from enhanced services and competitive positioning[84][85] - From the acquisition date through June 30, 2024, CTG contributed $4.8 million in revenues and $0.7 million in net income to the company's consolidated results[87] NOTE 3 – INVESTMENTS – EQUITY SECURITIES Equity Securities Investment Summary | Metric (in thousands) | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Fair Value | $1,617 | $888 | | Unrealized Gain (6 months ended June 30) | $729 | $387 | - The fair value of investments in equity securities increased by 82.1% from December 31, 2023, to June 30, 2024[90] - Unrealized holding gains on equity securities for the six months ended June 30, 2024, increased by 88% compared to the same period in 2023, primarily due to favorable market valuations[90] NOTE 4 – BALANCE SHEET DETAILS - CURRENT ASSETS AND CURRENT LIABILITIES Net Inventories | Inventories, net (in thousands) | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Raw materials | $11,860 | $5,022 | | Finished goods | $2,874 | $16 | | Total inventories | $14,734 | $5,038 | | Allowance for obsolete inventory | $(125) | $(4) | | Inventories, net | $14,609 | $5,034 | - Net inventories increased significantly by 190.2% from December 31, 2023, to June 30, 2024, primarily driven by an increase in raw materials and finished goods[92] Accrued Expenses and Other Current Liabilities | Accrued Expenses and Other Current Liabilities (in thousands) | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Accrued compensation and related benefits | $3,024 | $4,999 | | Income tax payable | $2,220 | $1,586 | | Deferred revenue | — | $1,042 | | Total accrued expenses and other current liabilities | $7,719 | $10,579 | - Total accrued expenses and other current liabilities decreased by 27.0% from December 31, 2023, to June 30, 2024, mainly due to lower accrued compensation and the absence of deferred revenue[94] NOTE 5 – PROPERTY, PLANT AND EQUIPMENT, NET Net Property, Plant and Equipment | Property, Plant and Equipment, net (in thousands) | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Rental tools and equipment | $198,349 | $188,949 | | Total property, plant and equipment | $208,190 | $198,803 | | Less: accumulated depreciation | $(136,976) | $(133,003) | | Property, plant and equipment, net | $71,223 | $65,800 | - Net property, plant, and equipment increased by 8.2% from December 31, 2023, to June 30, 2024, primarily driven by an increase in rental tools and equipment[95] - Total depreciation expense for the six months ended June 30, 2024, was approximately $10.9 million, an increase from $9.7 million in the prior year period[96] - As of June 30, 2024, 93% of the company's net property, plant, and equipment was held within the U.S[96] NOTE 6 – INTANGIBLE ASSETS, NET Net Intangible Assets | Intangible Assets, net (in thousands) | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Trade name | $2,081 | $1,280 | | Developed Technology | $3,468 | $270 | | Customer Relationships | $3,890 | — | | Total intangible assets | $9,439 | $1,550 | | Intangible assets, net | $7,962 | $216 | - Net intangible assets increased substantially by 3586.1% from December 31, 2023, to June 30, 2024, primarily due to the acquisition of customer relationships and a significant increase in developed technology[97] - Total amortization expense for the six months ended June 30, 2024, was approximately $143 thousand, a notable increase from $24 thousand in the prior year period[97] NOTE 7 – REVOLVING CREDIT FACILITY AND TERM LOAN - On March 15, 2024, the company refinanced its credit facility, establishing an $80.0 million revolving line of credit and a $25.0 million Term Loan, both maturing in March 2029[98] - The interest rate on the Credit Facility and Term Loan is based on SOFR or the bank's base lending rate plus an applicable margin, approximately 7.82% and 9.32% at June 30, 2024[99] - As of June 30, 2024, there were no amounts drawn against the revolving line of credit, and the company was in compliance with all restrictive covenants[99] - A contingent interest embedded derivative liability, related to a default rate feature, was assessed as negligible due to the remote likelihood of a non-credit default event[100][101] NOTE 8 – INCOME TAXES Income Tax (Expense)/Benefit | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Income tax (expense)/benefit | $82 | $(1,376) | $(854) | $(3,099) | - The company recorded an income tax benefit of $0.1 million for the three months ended June 30, 2024, a significant change from an expense of $1.4 million in the prior year period[102] - The effective tax rate for the six months ended June 30, 2024, was a provision of 19.6%, lower than the 31.8% provision in the prior year, primarily due to state taxes, foreign income taxes, and permanent differences[103] - There were no uncertain tax positions as of June 30, 2024, and December 31, 2023, and no change to the valuation allowance during the periods[104][105] NOTE 9 – STOCK-BASED COMPENSATION - The 2023 Omnibus Incentive Plan, adopted on June 20, 2023, allows for the issuance of shares up to 10% of outstanding common stock, with an automatic annual increase of 3%[107] Stock Option Activity | Stock Option Activity (as of June 30, 2024) | Shares | Weighted Average Exercise Price | | :--- | :--- | :--- | | OUTSTANDING, December 31, 2023 | 2,361,722 | $4.02 | | Granted | 2,600,000 | $3.02 | | Exercised | 68,470 | $3.72 | | OUTSTANDING, June 30, 2024 | 4,893,252 | $3.49 | | UNVESTED, June 30, 2024 | 2,600,000 | $3.02 | - Total unrecognized compensation expense related to stock options was $4.0 million as of June 30, 2024, and $0.3 million for Restricted Stock Units (RSUs)[111][112] - In May 2024, 143,000 RSUs were issued to Board members, with 74,440 vesting immediately[112] NOTE 10 – OTHER EXPENSES, NET Other Expense, Net | Other Expense, net (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Transaction fees | $(2,019) | $(1,803) | $(2,909) | $(3,499) | | HHLLC stock-based compensation | — | $(2,339) | — | $(2,339) | | Other expense, net | $(1,672) | $(4,382) | $(2,798) | $(6,035) | - Total other expense, net, decreased by 62% for the three months and 54% for the six months ended June 30, 2024, primarily due to the absence of HHLLC stock-based compensation and lower transaction costs compared to the prior year's merger-related expenses[113][114] NOTE 11 – RELATED PARTY TRANSACTIONS Related Party Transactions | Related Party Transaction (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Management fees to HHLLC | $0.2 | $0.3 | $0.4 | $0.5 | | Director fees | $0.2 | $0.1 | $0.3 | $0.1 | | Rent paid to Cree Investments, LLC | $13 | $13 | $26 | $26 | - Management fees paid to Hicks Holdings Operating LLC decreased for both the three-month and six-month periods in 2024 compared to 2023[115] - Director fees increased for both periods in 2024, reflecting higher compensation to Board members[116] NOTE 12 – LEASES Lease Cost | Lease Cost (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Operating Lease Cost | $1,588 | $1,532 | $3,041 | $3,050 | | Total Lease Cost | $1,697 | $1,616 | $3,273 | $3,202 | - Total lease cost increased slightly for both the three-month and six-month periods in 2024 compared to 2023[120][121] - As of June 30, 2024, the weighted-average remaining lease term was 7.19 years, with a weighted average discount rate of 7.35%[122] - Tool rental revenue for the six months ended June 30, 2024, was approximately $58.3 million, derived from short-term operating leases[123] NOTE 13 – EMPLOYEE BENEFITS - The company offers a 401(k) defined contribution plan with auto-enrollment at a 3% contribution after six months of service[125] - The employer match, reinstated on January 1, 2022, is 150% of the first 3% of employee contributions, not exceeding $2,000 per participant annually[125] - Total employee benefits expense for the six months ended June 30, 2024, was approximately $0.4 million, consistent with the prior year period[125] NOTE 14 – COMMITMENTS AND CONTINGENCIES - The company's material contractual obligations primarily arise from operating leases for various facilities and vehicles[126] - The company may be involved in legal proceedings and has indemnification obligations to third parties, though the maximum potential liability is undeterminable due to limited history[126][127] - A monthly management fee is paid to a shareholder, based on a percentage of the company's trailing twelve months' earnings before interest, taxes, and accumulated depreciation[128] NOTE 15 – EARNINGS PER SHARE Earnings Per Share | Earnings Per Share | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Basic EPS | $0.01 | $0.07 | $0.12 | $0.49 | | Diluted EPS | $0.01 | $0.05 | $0.12 | $0.33 | - Both basic and diluted EPS decreased significantly for the three and six months ended June 30, 2024, compared to the prior year periods, reflecting lower net income[131] - Potentially dilutive securities, specifically 140,135 time-based options, were excluded from diluted EPS computation for both periods as their effect was anti-dilutive[132] NOTE 16 – SUBSEQUENT EVENTS - On August 1, 2024, the company completed the acquisition of Superior Drilling Products, Inc. (SDPI)[134] - The merger consideration for SDPI included $14.9 million in cash and 4,845,132 shares of DTI common stock[134] - The initial accounting for the SDPI business combination is in process, and its impact on the consolidated financial statements cannot be estimated at this time[134] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial performance, market conditions, operational strategies, and liquidity Overview - The company is a global oilfield services provider, offering rental-focused tools for horizontal and directional drilling, operating from 16 North American and 10 international service centers[136] Financial Highlights | Metric (in millions) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $37.5 | $37.9 | $74.5 | $78.7 | | Net Income | $0.4 | $0.9 | $3.5 | $6.6 | - Future financial performance is expected to be driven by continued investment in oil and gas drilling following years of industry underinvestment[137] Market Factors - Demand for the company's services and products is primarily dependent on the general level of activity in the oil and gas industry, including drilling rigs, wells drilled, and capital spending by oil and natural gas companies[138] - Oil and gas activity is heavily influenced by investor sentiment, capital availability, and volatile oil and gas prices[138] - Tool rental revenues rely on drilling activity and market share, while product sales revenues depend on payments for lost/damaged tools and replacement needs[138][139] Recent Developments and Trends - Crude oil prices remained volatile in the first half of 2024 due to geopolitical tensions and supply concerns, with WTI at approximately $83.29 per barrel as of June 30, 2024[140] - Natural gas spot prices (Henry Hub) increased from $2.18/MMBtu in June 2023 to $2.53/MMBtu in June 2024, despite overall decreases in H1 2024 due to mild winter and increased production[142] - U.S. onshore drilling activity decreased in H1 2024, with the weekly average rig count at 592 rigs, down from 720 rigs in H1 2023[144] - The company is experiencing global inflationary impacts, leading to increased personnel costs and prices for goods and services, which are expected to continue rising and affect profitability[145] How We Evaluate Our Operations - The company uses revenue, net, and non-GAAP Adjusted EBITDA to routinely analyze and evaluate business performance[146] - Adjusted EBITDA is considered useful for identifying underlying business trends by excluding non-cash charges and non-core operating activities[146] - Beginning in Q1 2024, the company discontinued the presentation of Free Cash Flow to align with industry practices and enhance comparability with peers[147] Key Components of Results of Operations - Revenue is generated from tool rental services (operating leases, recognized straight-line or usage-based) and product sales (lost/damaged tools, made-to-order products)[150][151] - Tool rental and product sales revenue are expected to increase over time due to increased drilling activity, customer pricing, market share, and product replacement/acquisitions[151] - Costs and expenses include cost of revenue (direct/indirect expenses for tool rental and product sales), selling, general, and administrative (personnel, professional services, public company costs), and depreciation and amortization[152][153][157] - Operating expenses, particularly SG&A, are expected to increase in absolute dollars due to public company operations (compliance, IT, legal, accounting) and investments in sales and marketing[154][156] Results of Operations Comparison of the Three Months Ended June 30, 2024 and 2023 Q2 2024 vs Q2 2023 Operational Results | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | Change Amount | Change % | | :--- | :--- | :--- | :--- | :--- | | Total revenue, net | $37,533 | $37,908 | $(375) | (1)% | | Tool rental revenue | $28,328 | $29,002 | $(674) | (2)% | | Product sale revenue | $9,205 | $8,906 | $299 | 3% | | Cost of product sale revenue | $2,544 | $1,157 | $1,387 | 120% | | Selling, general, and administrative expense | $19,619 | $17,718 | $1,901 | 11% | | Depreciation and amortization expense | $5,681 | $4,717 | $964 | 20% | | Interest expense, net | $(811) | $(348) | $463 | 133% | | Other expense, net | $(1,672) | $(4,382) | $(2,710) | (62)% | - Tool rental revenue decreased by $0.7 million due to lower market activity in the Directional Tool Rentals (DTR) division, partially offset by growth in Premium Tools Division (PTD), Wellbore Optimization Tools (WOT), and the Deep Casing acquisition[161] - Cost of product sale revenue increased significantly by 120%, primarily due to additional costs from Deep Casing, while other expense, net, decreased by 62% due to lower merger-related transaction costs[164][165][168] Comparison of the Six Months Ended June 30, 2024 and 2023 H1 2024 vs H1 2023 Operational Results | Metric (in thousands) | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | Change Amount | Change % | | :--- | :--- | :--- | :--- | :--- | | Total revenue, net | $74,507 | $78,707 | $(4,200) | (5)% | | Tool rental revenue | $58,294 | $61,278 | $(2,984) | (5)% | | Product sale revenue | $16,213 | $17,429 | $(1,216) | (7)% | | Cost of product sale revenue | $4,080 | $2,460 | $1,620 | 66% | | Selling, general, and administrative expense | $37,560 | $34,447 | $3,113 | 9% | | Depreciation and amortization expense | $11,047 | $9,732 | $1,315 | 14% | | Interest expense, net | $(992) | $(922) | $(70) | (8)% | | Unrealized gain on equity securities | $729 | $387 | $342 | 88% | | Other expense, net | $(2,798) | $(6,035) | $3,237 | (54)% | - Total revenue decreased by $4.2 million, with tool rental revenue down 5% due to decreased DTR and PTD activity, and product sale revenue down 7% due to higher tool recovery events in 2023[170][171] - Cost of product sale revenue increased by 66% due to Deep Casing, while selling, general, and administrative expense rose 9% due to personnel and public company transition costs[173][174] - Other expense, net, decreased by 54% due to lower merger-related transaction costs in 2024, and unrealized gain on equity securities increased by 88% due to favorable market valuations[176][177] Liquidity and Capital Resources Non-GAAP Financial Measures - The company uses Adjusted EBITDA as a non-GAAP financial measure to evaluate core operating performance, excluding non-cash charges and non-recurring items[179][180] Adjusted EBITDA Reconciliation | Adjusted EBITDA (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $365 | $937 | $3,492 | $6,638 | | Adjusted EBITDA | $8,965 | $13,265 | $19,858 | $28,110 | - Adjusted EBITDA decreased by 32.4% for the three months and 29.4% for the six months ended June 30, 2024, compared to the prior year periods[181][182] Credit Facility Agreement - The company's primary sources of liquidity include cash on hand, cash flows from operating activities, and available borrowings under the Credit Facility Agreement[183] - The Credit Facility Agreement, detailed in Note 7, provides an $80.0 million revolving line of credit and a $25.0 million Term Loan[184] Capital Expenditures - Capital expenditures are regularly incurred to increase or maintain the rental tool fleet and equipment, extend asset useful lives, and upgrade computer hardware and software[185] - These expenditures are influenced by demand for services, recovery of lost/damaged tools, refurbishment schedules, operating cash flow, and expected rates of return[185] Contractual Obligations and Commitments - Material contractual obligations primarily arise from noncancelable operating lease agreements for facilities and vehicles, with further details provided in Note 14[186] Tax Obligations - The company utilizes federal net operating loss carryforwards to substantially reduce cash tax payments over the next several years[187] - There is a risk that forfeiture or faster depletion of these carryforwards could substantially increase cash tax obligations[187] Cash Flows Cash Flow Summary | Cash Flow Activity (in thousands) | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :--- | :--- | :--- | | Operating activities | $4,391 | $14,061 | | Investing activities | $(26,728) | $(13,388) | | Financing activities | $23,495 | $4,338 | - Net cash provided by operating activities decreased by 68.8% YoY, primarily due to lower net income and a $7.7 million cash outflow from changes in operating assets and liabilities[188][189] - Net cash used in investing activities increased by 99.6% YoY, driven by the $18.2 million CTG acquisition and $16.3 million in property, plant, and equipment purchases[191] - Net cash provided by financing activities increased by 441.7% YoY, mainly due to $25 million in proceeds from the Term Loan[192] Critical Accounting Policies and Estimates Business Combinations - The company accounts for business combinations using the acquisition method (ASC 805), allocating purchase consideration to acquired assets and assumed liabilities based on estimated fair values[195] - Significant estimates and assumptions are involved in valuing intangible assets (e.g., cash flows, revenue growth, asset lives, discount rates) and goodwill, which can materially impact financial statements[196][197] - A measurement period of up to one year is allowed to finalize the accounting for business combinations, during which provisional amounts may be adjusted[198] Recently Issued and Adopted Accounting Standards - A discussion of recent accounting pronouncements is included in Note 1 – Summary of Significant Accounting Policies[199] JOBS Act Accounting Election - As an 'emerging growth company' under the JOBS Act, the company has irrevocably elected to take advantage of the extended transition period for complying with new or revised accounting standards[200] - This election allows the company to delay the adoption of certain accounting standards until private companies are required to comply[200] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to various market risks and the measures taken to manage them Credit risk - The company's financial instruments, primarily cash and accounts receivable, expose it to concentrations of credit risk[201] - Mitigation efforts include maintaining accounts with reputable financial institutions and monitoring customer credit quality with an allowance for doubtful accounts[201] Concentration risk - A discussion of concentration risk, particularly regarding customer concentration, is included in Note 1 – Summary of Significant Accounting Policies[202] Foreign currency risk - Foreign exchange risk arises from transactions denominated in currencies other than the U.S. dollar, primarily from operations in Canada[203] - The company has not entered into hedging arrangements to minimize foreign currency fluctuations, and the risk has not had a material effect on its business to date[203][204] Inflation Risk - The company expects to continue experiencing inflationary pressures on its cost structure, despite some moderation in overseas freight, transit times, raw material, and component costs[205] - Continued inflation and concerns about a possible recession could negatively impact oil demand and, consequently, demand for the company's goods and services[205] Cybersecurity Risk - The company employs a suite of cybersecurity controls, including technology solutions, regular system resiliency testing, and training sessions[206] - An incident response plan and team are in place to contain, mitigate, and remediate cybersecurity incidents, though these efforts do not guarantee full risk mitigation[206] Item 4. Controls and Procedures This section discusses the effectiveness of disclosure controls and identifies a material weakness and ongoing remediation efforts Evaluation of Disclosure Controls and Procedures - Management concluded that the company's disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2024[208] - This ineffectiveness is due to an un-remediated material weakness in internal control over financial reporting identified during the preparation and audit of the 2023 consolidated financial statements[209] - Identified material weaknesses include failures in promoting effective internal control, developing risk assessment controls, monitoring activities, and inadequate documentation of IT general controls and cybersecurity processes[210] Changes in Internal Control over Financial Reporting - There has been no change in the company's internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting[212] - The company is actively implementing a remediation plan, including hiring qualified staff, enhancing the IT environment, and senior management review, but there is no assurance these initiatives will have the intended effects[211] PART II. OTHER INFORMATION This part provides other required information, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings This section refers to Note 14 for information regarding legal proceedings and commitments - Information on legal proceedings and commitments and contingencies is incorporated by reference from Note 14 to the consolidated financial statements[214] Item 1A. Risk Factors This section states no material changes to previously disclosed risk factors - There have been no material changes to the risk factors described in the Annual Report on Form 10-K filed on March 28, 2024[215] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities or use of proceeds - None[215] Item 3. Defaults Upon Senior Securities This section reports no defaults upon senior securities - None[215] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable - Not applicable[215] Item 5. Other Information This section reports no adoption or modification of Rule 10b5-1 trading arrangements by directors or officers - During the three months ended June 30, 2024, none of the company's directors or officers adopted, terminated, or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement[216] Item 6. Exhibits This section lists exhibits filed as part of the report - The exhibits include merger agreements, corporate documents (e.g., Certificate of Incorporation, Bylaws), and certifications (e.g., Section 302 and 906 certifications)[216] Signatures This section contains the official signatures authorizing the report's submission - The report was signed on August 9, 2024, by David R. Johnson, Chief Financial Officer (Principal Financial and Accounting Officer) of Drilling Tools International Corporation[218]