ROC ENERGY ACQUI(ROC) - 2025 Q2 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section provides a cautionary statement regarding forward-looking information, highlighting inherent risks and uncertainties that could cause actual results to differ materially from projections PART I—FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of comprehensive income (loss), statements of changes in shareholders' equity, and statements of cash flows, along with their accompanying notes, providing a detailed financial overview for the periods ended June 30, 2025 and December 31, 2024 Condensed Consolidated Balance Sheets The balance sheet shows the company's financial position, highlighting changes in assets, liabilities, and shareholders' equity between December 31, 2024, and June 30, 2025 Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Cash | $1,145 | $6,185 | | Accounts receivable, net | $41,557 | $39,606 | | Total current assets | $66,134 | $68,076 | | Total assets | $230,279 | $222,431 | | Total current liabilities | $32,047 | $30,963 | | Revolving line of credit | $33,140 | $27,142 | | Total liabilities | $107,757 | $102,472 | | Total shareholders' equity | $122,522 | $119,959 | Condensed Consolidated Statements of Comprehensive Income (Loss) The statements of comprehensive income (loss) detail the company's revenues, costs, and net income (loss) for the three and six months ended June 30, 2025, compared to the same periods in 2024, reflecting a shift from net income to net loss Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Total revenue, net | $39,421 | $37,533 | $82,301 | $74,507 | | Total costs and other deductions | $41,082 | $37,250 | $85,790 | $70,161 | | Net income (loss) | $(2,407) | $365 | $(4,076) | $3,492 | | Basic earnings (loss) per share | $(0.07) | $0.01 | $(0.11) | $0.12 | | Diluted earnings (loss) per share | $(0.07) | $0.01 | $(0.11) | $0.12 | | Net comprehensive income (loss) | $(208) | $467 | $(935) | $3,083 | Condensed Consolidated Statements of Changes in Shareholders' Equity This statement outlines the changes in shareholders' equity, including common stock, additional paid-in capital, accumulated deficit, and accumulated other comprehensive income (loss), from December 31, 2023, to June 30, 2025, reflecting impacts from stock-based compensation, business combinations, and net losses Condensed Consolidated Statements of Changes in Shareholders' Equity (in thousands) | Metric (in thousands) | Balance, Dec 31, 2024 | Stock-based compensation | Issuance of common stock related to business combination | Foreign currency translation adjustment, net of tax | Net loss | Purchase of treasury stock | Shares issued due to vesting of restricted stock units | Balance, June 30, 2025 | | :------------------------------------ | :-------------------- | :----------------------- | :------------------------------------------------------- | :------------------------------------------------ | :------- | :------------------------- | :------------------------------------------------ | :-------------------- | | Common Stock (Shares) | 34,704,696 | — | 888,041 | — | — | — | 68,560 | 35,661,297 | | Common Stock (Amount) | $3 | — | $1 | — | — | — | — | $4 | | Treasury Stock (Shares) | — | — | — | — | — | 202,611 | — | 202,611 | | Treasury Stock (Amount) | $— | — | — | — | — | $(608) | — | $(608) | | Additional Paid-In Capital | $125,415 | $541 | $2,922 | — | — | — | — | $129,520 | | Accumulated Deficit | $(3,582) | — | — | — | $(1,669) | — | — | $(7,657) | | Accumulated Other Comprehensive Income (loss) | $(1,877) | — | — | $942 | — | — | $2,199 | $1,264 | | Total Shareholders' Equity | $119,959 | $541 | $2,923 | $942 | $(1,669) | $(608) | $2,199 | $122,522 | Condensed Consolidated Statements of Cash Flows The cash flow statement details the sources and uses of cash across operating, investing, and financing activities for the six months ended June 30, 2025 and 2024, showing a net decrease in cash for 2025 compared to an increase in 2024 Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash flows from operating activities | $4,626 | $4,391 | | Net cash flows from investing activities | $(12,141) | $(26,728) | | Net cash flows from financing activities | $2,448 | $23,495 | | Effect of changes in foreign exchange rates | $27 | $(377) | | Net change in cash | $(5,040) | $781 | | Cash at end of period | $1,145 | $6,784 | Notes to Condensed Consolidated Financial Statements (Unaudited) These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering significant accounting policies, business combinations, balance sheet details, debt, taxes, stock-based compensation, related party transactions, leases, and segment information NOTE 1 – Summary of Significant Accounting Policies This note outlines the company's organizational structure, nature of operations, recent acquisitions (CTG, SDPI, EDP, Titan), basis of financial statement presentation, status as an emerging growth company, use of estimates, principles of consolidation, foreign currency translation, business combination accounting, revenue recognition policies for tool rental and product sales, and other key accounting policies - Drilling Tools International Corporation is a global oilfield services company specializing in rental tools for horizontal and directional drilling, with operations in North America, Europe, the Middle East, and Asia-Pacific[22][27] - The company completed several acquisitions: CTG (March 2024, $20.9 million, expanding IP and global presence), SDPI (July 2024, $47.9 million, vertical integration and global rights for Drill-N-Ream®), EDP (October 2024, $13.9 million, next-generation stabilizers), and Titan (January 2025, $10.8 million, wellbore construction rental items in UK, Europe, Africa)[23][24][25][26][101][106][110][115][116] - Revenue is primarily derived from tool rental services (operating leases, recognized straight-line or based on usage) and product sales (damaged/lost tools, made-to-order products, recognized at point of control transfer)[38][39][40][41][44][45][46] - The company changed its interim consolidated statements of comprehensive income (loss) presentation from a two-step format to a one-step format to simplify presentation and enhance comparability, with prior periods retrospectively revised[30][31] - As an emerging growth company, DTIC has elected to use the extended transition period for complying with new or revised financial accounting standards, meaning it adopts new standards at the same time as private companies[32] - Effective January 1, 2025, the company realigned its reportable segments into two geographical segments: Eastern Hemisphere and Western Hemisphere, to support global expansion[90] NOTE 2 – Revisions of Previously Issued Financial Statements The company identified and corrected immaterial errors in its December 31, 2023, audited consolidated financial statements related to the classification of accessory sales costs between 'cost of tool rental revenue' and 'cost of product sale revenue', with these revisions having no impact on total costs or net income - Immaterial errors in classification of accessory sales costs were identified and corrected in previously issued financial statements for December 31, 2023, and the three and six months ended June 30, 2024[96][97][98] - The reclassification resulted in a net zero impact to total costs and other deductions or net income[97] Revisions to Cost of Revenue (in thousands) | Metric (in thousands) | As Previously Reported (3 months ended June 30, 2024) | Total Adjustment | As Revised (3 months ended June 30, 2024) | | :-------------------------- | :---------------------------------------------------- | :--------------- | :---------------------------------------- | | Cost of tool rental revenue | $7,454 | $(456) | $6,998 | | Cost of product sale revenue | $2,544 | $456 | $3,000 | | | As Previously Reported (6 months ended June 30, 2024) | Total Adjustment | As Revised (6 months ended June 30, 2024) | | Cost of tool rental revenue | $14,455 | $(973) | $13,482 | | Cost of product sale revenue | $4,080 | $973 | $5,053 | NOTE 3 – Business Combinations This note details the acquisitions of CTG, SDPI, EDP, and Titan, outlining the strategic rationale, total consideration, and preliminary purchase price allocations for each, including the recognition of goodwill and intangible assets - Acquisition of CTG (March 15, 2024) for $20.9 million, expanding global presence, intellectual property (over 60 patents), and accretive earnings, with goodwill of $3.144 million recognized[101][103] - Acquisition of Superior Drilling Products, Inc. (SDPI) (July 31, 2024) for $47.9 million, aimed at vertical integration, global rights for Drill-N-Ream® tool, and acquiring over 30 patents, with goodwill of $7.718 million recognized[105][106][108] - Acquisition of European Drilling Projects B.V. (EDP) (October 3, 2024) for $13.9 million, enhancing next-generation stabilizers and wellbore optimization technology, with goodwill of $3.186 million recognized and a measurement period adjustment of $1.7 million identified in H1 2025[110][111][113][114] - Acquisition of Titan Tools Group Limited (Titan) (January 2, 2025) for $10.8 million, expanding full-service down-hole tool rental in the UK, Europe, and Africa, with goodwill of $2.335 million recognized[115][116][119] Titan Acquisition Intangible Assets (in thousands) | Intangible Asset | Fair value (in thousands) | Useful life (in years) | Fair value methodology | | :----------------- | :------------------------ | :--------------------- | :--------------------- | | Customer Relationship | $2,671 | 25 | Multi-period Excess Earnings Method | - Titan contributed $3.0 million in revenue and $0.6 million in net income for the three months ended June 30, 2025, and $5.6 million in revenue and $0.7 million in net income for the six months ended June 30, 2025[123] Supplemental Pro Forma Financial Results (in thousands) | Metric | Three months ended June 30, 2025 (in thousands) | Three months ended June 30, 2024 (in thousands) | Six months ended June 30, 2025 (in thousands) | Six months ended June 30, 2024 (in thousands) | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Pro forma revenue | $39,421 | $36,468 | $82,301 | $79,476 | | Pro forma net loss | $(2,407) | $(1,103) | $(4,076) | $(1,234) | NOTE 4 – Balance Sheet Details - Current Assets and Current Liabilities This note provides a breakdown of key current asset and liability accounts, including inventories, prepaid expenses, other current assets, and accrued expenses and other current liabilities, showing changes between December 31, 2024, and June 30, 2025 Inventories (in thousands) | Component | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :---------------- | :----------------------------- | :------------------------------- | | Raw materials | $13,368 | $12,777 | | Work in progress | $966 | $1,828 | | Finished goods | $3,945 | $2,897 | | Total inventories | $18,279 | $17,502 | Prepaid Expenses and Other Current Assets (in thousands) | Component | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Deposits on inventory | $1,087 | $551 | | Prepaid income tax | $— | $1,293 | | Prepaid insurance | $1,479 | $957 | | Income tax receivable | $855 | $— | | Total | $4,245 | $3,874 | Accrued Expenses and Other Current Liabilities (in thousands) | Component | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | | Accrued compensation and related benefits | $4,291 | $4,497 | | Accrued insurance | $1,137 | $645 | | Income tax payable | $669 | $459 | | Total | $9,927 | $7,864 | NOTE 5 – Property, Plant and Equipment, Net This note details the components of property, plant, and equipment, net, including rental tools, buildings, and office equipment, and their accumulated depreciation, showing an increase in net value from December 31, 2024, to June 30, 2025, primarily due to acquisitions and capital expenditures Property, Plant and Equipment, Net (in thousands) | Component | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :---------------------------------------------------- | :----------------------------- | :------------------------------- | | Rental tools and equipment | $213,878 | $205,939 | | Total property, plant and equipment | $224,988 | $216,234 | | Less: accumulated deprecation | $(148,780) | $(142,203) | | Property, plant and equipment, net (excluding construction in progress) | $76,208 | $74,031 | | Construction in progress | $3,102 | $1,540 | | Property, plant and equipment, net | $79,310 | $75,571 | - Total depreciation expense for the three months ended June 30, 2025, was approximately $6.2 million (vs $5.6 million in 2024), and for the six months ended June 30, 2025, was approximately $12.3 million (vs $10.9 million in 2024)[130] NOTE 6 – Intangible Assets, Net This note provides a breakdown of intangible assets, net, including trade names, developed technology, customer relationships, and patents, along with their accumulated amortization and estimated useful lives, showing an increase in net value from December 31, 2024, to June 30, 2025 Intangible Assets, Net (in thousands) | Component | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------- | :----------------------------- | :------------------------------- | | Trade name | $4,048 | $3,184 | | Developed technology | $16,100 | $15,438 | | Customer relationships | $24,313 | $21,081 | | Patents | $13 | $11 | | Total intangible assets | $44,474 | $39,714 | | Less: accumulated amortization | $(3,808) | $(2,482) | | Intangible assets, net | $40,666 | $37,232 | - Weighted-average remaining amortization periods are 12.2 years for trade names, 15.1 years for developed technology, 19.9 years for customer relationships, and 12.9 years for patents[131] - Total amortization expense for the three months ended June 30, 2025, was approximately $0.6 million (vs $0.1 million in 2024), and for the six months ended June 30, 2025, was approximately $1.3 million (vs $0.1 million in 2024)[131] Estimated Future Amortization Expense (in thousands) | Year | Amount (in thousands) | | :--- | :-------------------- | | 2026 | $2,531 | | 2027 | $2,531 | | 2028 | $2,531 | | 2029 | $2,531 | | 2030 | $2,531 | | Thereafter | $28,011 | | Total | $40,666 | NOTE 7 – Goodwill This note details the changes in goodwill, including additions from business combinations, measurement period adjustments, and a significant impairment loss recognized due to a segment realignment Change in Carrying Amount of Goodwill (in thousands) | Metric | Total (in thousands) | | :-------------------------------- | :------------------- | | Net balance as of December 31, 2024 | $12,147 | | Additions due to business combinations | $2,335 | | Measurement period adjustments | $1,670 | | Impairments | $(1,901) | | Foreign currency translation | $453 | | Net balance as of June 30, 2025 | $14,704 | - On January 1, 2025, the company realigned its reportable segments into Eastern Hemisphere and Western Hemisphere, splitting into four reporting units, which triggered a goodwill impairment test[133] - A non-cash goodwill impairment loss of $1.9 million was recognized during the six months ended June 30, 2025, related to the Diamond Products and Deep Casing reporting units, as their estimated fair values were lower than carrying values[134] - The annual goodwill impairment assessment date has been changed from December 31 to October 31, starting in 2025, to align with the segment realignment[71] NOTE 8 – Long Term Debt This note details the company's long-term debt, including the refinanced revolving credit facility and term loan, and a promissory note related to an acquisition, outlining interest rates, collateral, and future maturities - On March 15, 2024, the company refinanced its revolving credit facility, increasing it to $80.0 million and adding a $25.0 million term loan, both maturing in March 2029[136] - Interest rates are based on SOFR or the bank's base lending rate plus applicable margin (approximately 6.78% and 8.30% at June 30, 2025), with the facility collateralized by substantially all company assets[137] - As of June 30, 2025, $33.1 million was drawn against the revolving line of credit[138] - An unsecured Promissory Note of $5.2 million was issued for the EDP acquisition, reduced by $0.3 million in April 2025, bearing 8% interest and maturing in December 2029, with a remaining balance of $4.6 million as of June 30, 2025[139] Future Maturities of Long-Term Debt (in thousands) | Year | Amount (in thousands) | | :--- | :-------------------- | | 2025 | $2,965 | | 2026 | $5,988 | | 2027 | $6,069 | | 2028 | $6,157 | | 2029 | $35,737 | | Total | $56,916 | - The Credit Facility Agreement includes a contingent interest embedded derivative liability (Default Rate Derivative) that would reset interest rates upon default, with its fair value negligible as of June 30, 2025, and December 31, 2024, due to the remote likelihood of a non-credit default event[141][142][143] NOTE 9 – Income Taxes This note details the company's income tax expense and effective tax rates, highlighting the impact of state taxes, foreign income taxes, and permanent differences, and discusses the ongoing evaluation of tax impacts from the Titan Acquisition - Income tax expense was $0.7 million for Q2 2025 (vs benefit of $0.1 million in Q2 2024) and $0.6 million for H1 2025 (vs expense of $0.9 million in H1 2024)[144] - Effective tax rates for H1 2025 and H1 2024 were provisions of 16.8% and 19.6%, respectively, differing from the 21.0% Federal Statutory rate due to state taxes, foreign income taxes, and permanent differences[145] - The company is still evaluating the tax impact of the Titan Acquisition, including transaction costs and deferred tax assets/liabilities[147] - The recently enacted One Big Beautiful Bill Act (OBBBA) in the U.S. is not expected to have a material impact on the consolidated financial statements[148] NOTE 10 – Stock-Based Compensation This note describes the company's stock-based compensation plans, including stock options and restricted stock units (RSUs), detailing their valuation, activity, and recognized compensation expenses - The 2023 Omnibus Incentive Plan allows for issuance of common stock up to 10% of outstanding shares, increasing annually by 3%, with 1,045,226 shares available as of June 30, 2025[149] Stock Option Activity (Six Months Ended June 30, 2025) | Metric | Shares | Weighted Average Exercise Price | | :-------------------------- | :------- | :------------------------------ | | OUTSTANDING, Dec 31, 2024 | 4,963,626 | $3.50 | | OUTSTANDING, June 30, 2025 | 4,963,626 | $3.50 | | UNVESTED, June 30, 2025 | 1,656,666 | $3.02 | | EXERCISABLE, June 30, 2025 | 3,306,960 | $2.93 | - Stock-based compensation expense for stock options was $0.4 million for Q2 2025 (vs $0.4 million in Q2 2024) and $0.8 million for H1 2025 (vs $0.6 million in H1 2024), with unrecognized expense totaling $2.4 million to be recognized over 1.6 years[152] Restricted Stock Units (RSUs) Activity (Six Months Ended June 30, 2025) | Metric | Shares | Weighted Average Exercise Price | | :-------------------------- | :------- | :------------------------------ | | UNVESTED, Dec 31, 2024 | 68,560 | $3.23 | | Granted | 1,052,451 | $3.16 | | Vested | (68,560) | $3.23 | | UNVESTED, June 30, 2025 | 1,052,451 | $3.16 | - Stock-based compensation expense for RSUs was $0.3 million for Q2 2025 (vs $0.4 million in Q2 2024) and $0.4 million for H1 2025 (vs $0.4 million in H1 2024), with unrecognized expense totaling $3.0 million to be recognized over 3.3 years[154][155] NOTE 11 – Other Operating and Non-Operating Expenses, Net This note details the components of other operating and non-operating expenses, net, including transaction fees, foreign currency losses, restructuring charges, and software implementation costs, showing an increase in these expenses for both the three and six months ended June 30, 2025, compared to 2024 Other Operating and Non-Operating Expenses, Net (in thousands) | Component | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Transaction fees | $215 | $2,019 | $947 | $2,909 | | Unrealized loss on foreign currency | $421 | $— | $586 | $— | | Restructuring charges | $629 | $— | $998 | $— | | Software implementation | $316 | $— | $448 | $— | | Interest income | $(103) | $(323) | $(201) | $(76) | | Total | $1,912 | $1,672 | $3,846 | $2,798 | NOTE 12 – Related Party Transactions This note discloses transactions with related parties, including management fees paid to a shareholder, director fees, and a related party note receivable from an entity owned by company employees - Management fees paid to Hicks Holdings Operating LLC (a shareholder) were approximately $0.2 million for Q2 2025 (vs $0.2 million in Q2 2024) and $0.4 million for H1 2025 (vs $0.4 million in H1 2024)[157] - Director fees paid to Board members were approximately $0.1 million for Q2 2025 (vs $0.2 million in Q2 2024) and $0.2 million for H1 2025 (vs $0.3 million in H1 2024)[158] - A related party note receivable from Tronco Energy Corporation (owned by employees) had a carrying value of $5.4 million as of June 30, 2025, with annual payments of $1.3 million commencing on the first anniversary of the July 31, 2024, closing date[159][160] NOTE 13 – Leases This note provides details on the company's operating leases for facilities and vehicles, including lease terms, costs, and future undiscounted cash flows, and also discusses lessor accounting for tool rental revenue - The company leases facilities and vehicles under noncancelable operating lease agreements with remaining terms ranging from 1 month to 14 years, with options to extend up to 5 years[161] Lease Expense (in thousands) | Component | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $1,737 | $1,588 | $3,476 | $3,041 | | Short-term lease cost | $31 | $35 | $63 | $70 | | Variable lease cost | $110 | $74 | $219 | $162 | | Total Lease Cost | $1,879 | $1,697 | $3,758 | $3,273 | Supplemental Balance Sheet Information Related to Leases | Metric | June 30, 2025 | June 30, 2024 | | :-------------------------------- | :------------ | :------------ | | Weighted-average remaining lease term (in years) | 6.89 | 7.19 | | Weighted average discount rate | 7.95% | 7.35% | Future Undiscounted Cash Flows for Lease Liabilities (in thousands) | Year | Amount (in thousands) | | :--------- | :-------------------- | | 2025 | $2,916 | | 2026 | $5,499 | | 2027 | $4,417 | | 2028 | $3,695 | | 2029 | $3,077 | | Thereafter | $10,773 | | Total lease payments | $30,378 | | Less: imputed interest | $(7,165) | | Present value of lease liabilities | $23,213 | - Tool rental revenue was approximately $32.8 million for Q2 2025 (vs $28.3 million in Q2 2024) and $67.3 million for H1 2025 (vs $58.3 million in H1 2024)[163] NOTE 14 – Employee Benefits This note outlines the company's defined contribution savings plans, including employer contributions and matching percentages, and reports the total expense incurred for these benefits - The company sponsors defined contribution savings plans, making contributions and/or matching employee contributions up to certain limits[164] - Total employee benefits expense was approximately $0.3 million for Q2 2025 (vs $0.2 million in Q2 2024) and $0.6 million for H1 2025 (vs $0.4 million in H1 2024)[164] NOTE 15 – Commitments and Contingencies This note addresses the company's material contractual obligations from operating leases, potential legal proceedings, and indemnification agreements, noting the difficulty in determining maximum liability for indemnification - Material contractual obligations arise from operating leases for facilities and vehicles[165] - The company may be involved in various legal proceedings and subject to third-party infringement claims in the ordinary course of business[166] - The company agrees to indemnify third parties (customers, lessors) for certain losses, but the maximum potential liability is undeterminable due to limited history and unique circumstances[167] - A monthly management fee is paid to a shareholder, based on a percentage of trailing twelve months' earnings before interest, taxes, and accumulated depreciation[168] NOTE 16 – Earnings Per Share This note provides the computation of basic and diluted earnings per share, detailing the weighted-average common shares outstanding and the impact of potentially dilutive securities Basic and Diluted Earnings Per Share (in thousands, except share and per share data) | Metric | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :---------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) (in thousands) | $(2,407) | $365 | $(4,076) | $3,492 | | Weighted-average common shares used in computing earnings per share — basic | 35,573,749 | 29,816,202 | 35,583,139 | 29,792,385 | | Weighted-average common shares outstanding — diluted | 35,573,749 | 30,873,436 | 35,583,139 | 30,321,002 | | Earnings (loss) per share — basic | $(0.07) | $0.01 | $(0.11) | $0.12 | | Earnings (loss) per share — diluted | $(0.07) | $0.01 | $(0.11) | $0.12 | Potentially Dilutive Securities Excluded from Diluted EPS (Anti-Dilutive Effect) | Metric | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Performance-based options outstanding | 534,063 | — | 534,063 | — | | Time-based options outstanding | 4,429,563 | 140,135 | 4,396,855 | 140,135 | | Time-based restricted stock units outstanding | 1,052,451 | — | 1,052,451 | — | | Total | 4,963,626 | 140,135 | 4,930,918 | 140,135 | NOTE 17 – Segment Information This note provides financial information by the company's two operating segments, Western Hemisphere and Eastern Hemisphere, detailing revenue, cost of sales, selling, general, and administrative expenses, and segment income, along with capital expenditures and segment assets - The company operates in two geographical segments: Western Hemisphere and Eastern Hemisphere, with performance assessed using Segment EBITDA[171][172] Segment Revenue and Income (Three Months Ended June 30, in thousands) | Metric | Western Hemisphere (2025, in thousands) | Eastern Hemisphere (2025, in thousands) | Total (2025, in thousands) | Western Hemisphere (2024, in thousands) | Eastern Hemisphere (2024, in thousands) | Total (2024, in thousands) | | :-------------------------- | :------------------------ | :------------------------ | :----------- | :------------------------ | :------------------------ | :----------- | | Tool Rental | $29,794 | $5,333 | $35,128 | $29,952 | $569 | $30,521 | | Product Sales | $7,791 | $754 | $8,545 | $5,604 | $3,613 | $9,217 | | Total Revenue | $37,585 | $6,087 | $43,672 | $35,556 | $4,182 | $39,738 | | Segment income | $12,106 | $45 | $12,151 | $11,498 | $912 | $12,409 | Segment Revenue and Income (Six Months Ended June 30, in thousands) | Metric | Western Hemisphere (2025, in thousands) | Eastern Hemisphere (2025, in thousands) | Total (2025, in thousands) | Western Hemisphere (2024, in thousands) | Eastern Hemisphere (2024, in thousands) | Total (2024, in thousands) | | :-------------------------- | :------------------------ | :------------------------ | :----------- | :------------------------ | :------------------------ | :----------- | | Tool Rental | $62,456 | $9,858 | $72,314 | $62,054 | $992 | $63,047 | | Product Sales | $16,325 | $1,281 | $17,606 | $11,808 | $4,436 | $16,244 | | Total Revenue | $78,781 | $11,139 | $89,920 | $73,863 | $5,429 | $79,291 | | Segment income (loss) | $25,682 | $(143) | $25,539 | $25,011 | $1,330 | $26,342 | Segment Capital Expenditures and Assets (in thousands) | Metric | June 30, 2025 (in thousands) | June 30, 2024 (in thousands) | | :-------------------- | :----------------------------- | :----------------------------- | | Capital Expenditures: | | | | Western Hemisphere | $9,964 | $16,177 | | Eastern Hemisphere | $2,630 | $135 | | Total capital expenditures | $12,594 | $16,312 | | Segment Assets: | | | | Western Hemisphere | $154,445 | $135,324 | | Eastern Hemisphere | $68,689 | $22,157 | | Total segment assets | $223,134 | $157,481 | NOTE 18 – Supplemental Cash Flows This note provides supplemental cash flow information, detailing non-cash investing and financing activities, including measurement period adjustments, ROU assets obtained, liabilities assumed in business combinations, and purchases of inventory and property included in accounts payable Supplemental Cash Flow Information (Six Months Ended June 30, in thousands) | Item | 2025 (in thousands) | 2024 (in thousands) | | :---------------------------------------------------------------------------------------------------- | :------------------ | :------------------ | | Cash paid for interest | $2,381 | $660 | | Cash paid for income taxes | $1,227 | $256 | | Measurement period adjustment related to EDP Acquisition | $1,671 | $— | | ROU assets obtained in exchange for lease liabilities | $1,548 | $5,054 | | Fair value of Titan liabilities assumed in Titan Acquisition | $4,045 | $— | | Non-cash consideration in Titan Acquisition | $4,597 | $— | | Purchases of inventory included in accounts payable and accrued expenses and other current liabilities | $1,128 | $5,082 | | Purchases of property and equipment included in accounts payable and accrued expenses and other current liabilities | $866 | $1,402 | NOTE 19 – Share Repurchases This note details the company's share repurchase program, including the authorized amount, shares repurchased during the period, and the remaining authorization - On May 13, 2025, the company announced a share repurchase program for up to $10.0 million in aggregate value, active until December 31, 2025[181] - During the three months ended June 30, 2025, the company repurchased 202,611 shares for an aggregate of $0.6 million[182] Shares Repurchased (Three Months Ended June 30, 2025) | Period | Total number of shares of Common Stock Purchases | Average price paid per share of Common Stock | Aggregate purchase price of Common Stock repurchases (in thousands) | Number of remaining shares authorized for purchase | | :------------------------ | :----------------------------------------------- | :------------------------------------------- | :------------------------------------------- | :----------------------------------------------- | | April 1, 2025 - April 30, 2025 | — | — | — | 10,000,000 | | May 1, 2025 - May 31, 2025 | 61,528 | $2.60 | $160 | 9,839,880 | | June 1, 2025 - June 30, 2025 | 141,083 | $3.17 | $448 | 9,392,339 | | Total | 202,611 | $3.00 | $608 | 9,392,339 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including an overview of its business, market factors, recent developments, detailed analysis of financial performance by segment, non-GAAP financial measures, liquidity, capital resources, and critical accounting policies Consolidated Results of Operations (in thousands) | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | $ Change (in thousands) | % Change | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | $ Change (in thousands) | % Change | | :------------------------------------ | :------------------------------- | :------------------------------- | :------- | :------- | :----------------------------- | :----------------------------- | :------- | :------- | | Total revenue, net | $39,421 | $37,533 | $1,888 | 5% | $82,301 | $74,507 | $7,794 | 10% | | Total segment income | $12,151 | $12,409 | $(258) | nm | $25,539 | $26,342 | $(803) | -3% | | Corporate and other expenses | $3,649 | $4,494 | $(845) | -19% | $7,012 | $7,930 | $(918) | -12% | | Depreciation and amortization expense | $6,830 | $5,681 | $1,149 | 20% | $13,552 | $11,047 | $2,505 | 23% | | Interest expense, net | $1,336 | $811 | $525 | 65% | $2,645 | $992 | $1,653 | 167% | | Goodwill impairment | $— | $— | $— | nm | $1,901 | $— | $1,901 | nm | | Other operating and non-operating costs, net | $1,912 | $1,671 | $241 | 14% | $3,846 | $2,798 | $1,048 | 37% | | Net income (loss) | $(2,407) | $365 | $(2,773) | -759% | $(4,076) | $3,492 | $(7,568) | -217% | Overview The company is a global oilfield services provider, specializing in rental tools for horizontal and directional drilling, operating from 15 North American and 11 international locations, with revenues primarily from tool rental (82-83%) and product sales (17-18%), segmented into Western and Eastern Hemisphere operations - The company is a global oilfield services provider, offering rental-focused tools for onshore and offshore horizontal and directional drilling, with 15 North American and 11 international service centers[184] - Revenues are derived from tool rental (83% in Q2 2025, 75% in Q2 2024; 82% in H1 2025, 78% in H1 2024) and product sales (17% in Q2 2025, 25% in Q2 2024; 18% in H1 2025, 22% in H1 2024)[185] - Operations are split into two reporting segments: Western Hemisphere and Eastern Hemisphere[186] Market Factors Demand for the company's services and products is heavily influenced by the general activity level in the oil and gas industry, including drilling rig counts, well completions, and commodity prices, which have historically been volatile - Demand is primarily dependent on oil and gas industry activity, such as active drilling rigs, wells drilled, well completions, and capital spending by oil and gas companies[187] - Tool rental revenues rely on drilling activity and market share, while product sales depend on payments for lost/damaged tools, replacement needs, and competitive pricing[188][189] Recent Developments and Trends The oil and gas market in the first half of 2025 saw record U.S. oil production but downward pressure on crude oil prices due to global supply surplus, while U.S. natural gas prices rebounded, driven by seasonal demand, and rig counts decreased in both Western and Eastern Hemispheres, though improved rig efficiencies partially offset this, with the company also facing impacts from global inflation, leading to increased personnel and operational costs - U.S. oil production reached record highs (13.5 million barrels per day) in H1 2025, but a global supply surplus led to downward pressure on crude oil prices (WTI quarterly average decreased from $78.41 to $64.63 per barrel)[191] - U.S. natural gas prices rebounded in H1 2025, with Henry Hub spot price averaging $3.19 per MMBtu in Q1, a 30% increase from Q4 2024, driven by heightened heating demand[192] Weekly Average Rig Count (Baker Hughes) | Hemisphere | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Western Hemisphere | 832 | 897 | 881 | 946 | | Eastern Hemisphere | 714 | 764 | 719 | 760 | - The company is experiencing global inflation, leading to increased personnel costs and prices for goods and services, which are expected to impact profitability in the near term[193] Results of Operations The company experienced a 5% increase in total revenue for Q2 2025 and a 10% increase for H1 2025, primarily driven by acquisitions in the Eastern Hemisphere and the Diamond Products Division in the Western Hemisphere, however, net income shifted to a significant net loss due to increased costs, including depreciation, interest, goodwill impairment, and other operating expenses Comparison of the Three Months Ended June 30, 2025 and 2024 For Q2 2025, Western Hemisphere revenue increased by 6% due to the Diamond Products Division, while Eastern Hemisphere revenue surged by 46% from recent acquisitions, however, Eastern Hemisphere segment income decreased by 95% due to increased headcount and market decline, and overall, depreciation, interest, and other operating expenses rose significantly - Western Hemisphere revenue increased by $2.0 million (6%) to $37.6 million, driven by the Diamond Products Division acquisition[195] - Eastern Hemisphere revenue increased by $1.9 million (46%) to $6.1 million, primarily due to recent acquisitions of tool rental businesses[196] - Eastern Hemisphere segment income decreased by $0.9 million (95%) to $45.3 thousand, attributed to increased headcount from acquisitions and a decline in the Middle Eastern market[196] - Depreciation and amortization expense increased by $1.1 million (20%) to $6.8 million, reflecting growth in property, plant, equipment, and intangible assets from acquisitions[198] - Interest expense, net, increased by $0.5 million (65%) to $1.3 million, mainly due to the term loan and promissory note from 2024 acquisitions[199] - Other operating and non-operating expense, net, increased by $0.2 million (14%) to $1.9 million, driven by software implementation costs and restructuring charges[200] Comparison of the Six Months Ended June 30, 2025 and 2024 For H1 2025, Western Hemisphere revenue grew 7% from the Diamond Products Division, and Eastern Hemisphere revenue more than doubled (105%) due to acquisitions, however, Eastern Hemisphere segment income turned into a loss, and overall costs, including depreciation, interest, goodwill impairment, and other operating expenses, significantly increased, leading to a substantial net loss - Western Hemisphere revenue increased by $4.9 million (7%) to $78.8 million, driven by the Diamond Products Division acquisition[201] - Eastern Hemisphere revenue increased by $5.7 million (105%) to $11.1 million, primarily due to recent acquisitions of tool rental businesses[202] - Eastern Hemisphere segment income shifted to a loss of $0.1 million, a decrease of $1.5 million (111%), due to increased headcount from acquisitions and a decline in the Middle Eastern market[202][203] - Depreciation and amortization expenses increased by $2.5 million (23%) to $13.5 million, reflecting growth in property, plant, equipment, and intangible assets from acquisitions[205] - Interest expense, net, increased by $1.7 million (167%) to $2.6 million, mainly due to the term loan and promissory note from 2024 acquisitions[206] - Other operating and non-operating expense, net, increased by $1.1 million (37%) to $3.8 million, driven by software implementation costs and restructuring charges[207] Non-GAAP Financial Measures The company uses Adjusted EBITDA as a non-GAAP financial measure to evaluate core operating performance, excluding interest, taxes, depreciation, amortization, and certain non-cash or non-recurring items, which helps identify underlying business trends but has limitations compared to GAAP net income - Adjusted EBITDA is used as a non-GAAP financial measure to understand core operating performance, excluding interest income/expense, other operating/non-operating expense, income tax, depreciation, amortization, and certain non-cash/non-recurring items[209] Adjusted EBITDA Reconciliation to Net Income (Loss) (in thousands) | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $(2,407) | $365 | $(4,076) | $3,492 | | Income tax expense (benefit) | $746 | $(82) | $587 | $854 | | Depreciation and amortization | $6,830 | $5,681 | $13,552 | $11,047 | | Interest expense, net | $1,336 | $811 | $2,645 | $992 | | Stock option expense | $642 | $855 | $1,183 | $1,064 | | Management fees | $188 | $187 | $375 | $375 | | Goodwill impairment | $— | $— | $1,901 | $— | | Transaction expense | $215 | $2,020 | $947 | $2,909 | | Adjusted EBITDA | $9,332 | $8,965 | $20,085 | $19,858 | Liquidity and Capital Resources The company's liquidity primarily comes from cash on hand, operating cash flows, and borrowings under its Credit Facility Agreement, and it expects these sources to be sufficient for the next 12 months, with capital expenditures focused on maintaining and expanding its rental tool fleet, funded partly by rental tool recovery sales - As of June 30, 2025, cash and cash equivalents totaled $1.1 million[212] - Primary liquidity sources are cash on hand, operating cash flows, and borrowings under the Credit Facility Agreement, which are expected to be sufficient for the next 12 months[212] - Capital expenditures are incurred to increase/maintain rental tool fleet, extend useful life, and acquire/upgrade computer hardware/software, with funding partly from rental tool recovery sales[214][215] - The company has federal net operating loss carryforwards expected to substantially reduce cash tax payments over several years[217] Cash Flows (Six Months Ended June 30, in thousands) | Activity | 2025 (in thousands) | 2024 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Net cash provided by operating activities | $4,626 | $4,391 | | Net cash used in investing activities | $(12,141) | $(26,728) | | Net cash provided by financing activities | $2,448 | $23,495 | | Net increase (decrease) in cash and cash equivalents | $(5,040) | $781 | - Net cash from operating activities was $4.6 million in H1 2025 (vs $4.4 million in H1 2024), driven by a net loss offset by non-cash adjustments[219] - Net cash used in investing activities was $12.1 million in H1 2025 (vs $26.7 million in H1 2024), primarily due to purchases of property, plant, and equipment, intangible assets, and the Titan acquisition, partially offset by rental tool recovery sales[220][221] - Net cash from financing activities was $2.4 million in H1 2025 (vs $23.5 million in H1 2024), resulting from net debt increases offset by treasury stock purchases[222] Critical Accounting Policies and Estimates The preparation of financial statements requires significant management estimates and assumptions, which are based on historical experience and current facts, and actual results may differ materially, with changes in these estimates due to unforeseen events potentially impacting financial position or results of operations - Financial statements require management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenue, expenses, and contingent assets/liabilities[223] - Estimates are based on historical experience and current facts, but actual results may differ significantly, and changes due to unforeseen events could materially impact financial position or results[223] Recently Issued and Adopted Accounting Standards This section refers to Note 1 for a discussion of recent accounting pronouncements, including the adoption of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes), and the evaluation of ASU 2024-03 (Expense Disaggregation) - Refer to Note 1 for details on recently issued and adopted accounting pronouncements[225] JOBS Act Accounting Election As an emerging growth company, the company has irrevocably elected to use the extended transition period under the JOBS Act for complying with new or revised accounting standards, delaying adoption until private companies are required to comply, which allows for reduced disclosure requirements until it ceases to be an emerging growth company - As an 'emerging growth company' under the JOBS Act, the company has irrevocably elected to use the extended transition period for complying with new or revised accounting standards, adopting them at the same time as private companies[226] - This status allows for reduced disclosure and other requirements until the company ceases to be an emerging growth company, which occurs based on revenue, debt, or filer status thresholds[226] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to various market risks, including credit risk, concentration risk, foreign currency risk, inflation risk, and cybersecurity risk, and the measures taken to manage them Credit Risk The company's credit risk primarily stems from cash and cash equivalents held with major financial institutions and accounts receivable from customers, and it monitors credit quality and maintains an allowance for doubtful accounts - Credit risk is concentrated in cash and cash equivalents (held with major financial institutions) and accounts receivable[227] - The company monitors customer credit quality and maintains an allowance for doubtful accounts[227] Concentration Risk The company's customer concentration can impact its credit risk, as these entities may be similarly affected by economic conditions in the oil and gas industry, with further details referenced in Note 1 - Customer concentration can affect overall credit risk, as major customers are susceptible to similar economic conditions in the oil and gas industry[54][55] - During Q2 2025 and Q2 2024, two customers accounted for approximately 25% of total revenue, and for H1 2025 and H1 2024, two customers accounted for approximately 27% of total revenue[56] - Amounts due from these customers in accounts receivable were approximately $6.7 million at June 30, 2025, and $5.4 million at December 31, 2024[56] Foreign Currency Risk Foreign exchange risk arises from transactions in non-U.S. dollar currencies, particularly as the company expands internationally, and while a majority of sales are in USD and CAD, international expansion could increase exposure, with the company currently not using hedging arrangements - Foreign exchange risk stems from transactions in currencies other than the U.S. dollar, especially with international expansion[229] - A majority of sales are in USD and CAD, but international growth may increase exposure to foreign exchange rate fluctuations[229] - The company has not entered into hedging arrangements to mitigate foreign currency risk and will periodically reassess its approach[230] Inflation Risk Rising international tariffs and new tariffs could negatively impact global trade, economic conditions, and demand for the company's products, potentially increasing costs and adversely affecting business if not recoverable - Rising international tariffs (e.g., between U.S. and China, Mexico, Canada) could materially and adversely affect business and results of operations[231] - New tariffs could negatively impact global trade, economic conditions, and product demand, making it costly to adapt business operations, and unrecovered increased tariff costs could materially affect financial performance[232] Cybersecurity Risk The company employs various controls, including technology solutions, regular testing, and training, to mitigate cybersecurity risks, and an incident response plan is in place, but there is no assurance that these efforts will fully prevent cybersecurity incidents - The company uses technology hardware/software, regular testing (penetration, disaster recovery), and training to manage cybersecurity risks[233] - An incident response plan and team are established to contain, mitigate, and remediate cybersecurity incidents[233] - Despite mitigation efforts, there is no assurance that cybersecurity risks will be fully prevented[233] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were ineffective as of June 30, 2025, due to a material weakness in internal control over financial reporting related to ineffective monitoring activities, with remediation efforts ongoing, and the assessment of acquired businesses' internal controls phased - As of June 30, 2025, the company's disclosure controls and procedures were deemed ineffective due to a material weakness in internal control over financial reporting[235] - The material weakness relates to ineffective monitoring activities to assess the operation of internal control over financial reporting, despite ongoing remediation efforts[236] - The internal control over financial reporting of Titan Tools (acquired January 2, 2025) has been excluded from management's assessment as permitted for up to one year post-acquisition[237][238] PART II. OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity security sales, defaults, mine safety, other information, exhibits, and signatures Item 1. Legal Proceedings This section refers to Note 15 for information regarding the company's legal proceedings, commitments, and contingencies - Information on legal proceedings is incorporated by reference from Note 15 to the consolidated financial statements[240] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2024 - No material changes to the risk factors described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2024, have occurred[241] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase program, including the authorization, shares repurchased during the quarter, and the remaining authorized amount - On May 13, 2025, the company announced a share repurchase program to buy back up to $10.0 million of common stock from non-affiliates, active until December 31, 2025[181][242] Shares Repurchased (Three Months Ended June 30, 2025) | Period | Total number of shares of Common Stock Purchases | Average price paid per share of Common Stock | Aggregate purchase price of Common Stock repurchases (in thousands) | Number of remaining shares authorized for purchase | | :------------------------ | :----------------------------------------------- | :------------------------------------------- | :------------------------------------------- | :----------------------------------------------- | | April 1, 2025 - April 30, 2025 | — | — | — | 10,000,000 | | May 1, 2025 - May 31, 2025 | 61,528 | $2.60 | $160 | 9,839,880 | | June 1, 2025 - June 30, 2025 | 141,083 | $3.17 | $448 | 9,392,339 | | Total | 202,611 | $3.00 | $608 | 9,392,339 | Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[244] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[245] Item 5. Other Information This section discloses that Michael Domino, President of the Directional Tool Rentals Division, adopted a pre-arranged stock trading plan (Rule 10b5-1) on May 16, 2025, to sell 125,000 shares of common stock over 15 months - Michael Domino, President of Directional Tool Rentals Division, adopted a Rule 10b5-1 trading plan on May 16, 2025[246][247] - The plan allows for the sale of 125,000 shares of common stock over a 15-month duration[247] Item 6. Exhibits This section lists the exhibits filed as part of, or incorporated by reference into, the report, including certifications, XBRL documents, and other required filings - The report includes various exhibits such as certifications of principal executive and financial officers, and Inline XBRL documents[248][250] Signatures This section contains the required signatures, confirming the due authorization and filing of the report - The report is duly signed by David R. Johnson, Chief Financial Officer, on behalf of Drilling Tools International Corporation[252][253]