美国
证券交易委员会
华盛顿特区 20549
表单
(标记一个)
根据1934年证券交易法第13或15(d)条款提交的季度报告 |
截至季度期
或
根据1934年证券交易法第13条或第15(d)条的过渡报告 |
过渡期从____到____
委员会档案编号:
(注册人准确名称如其章程所示)
(州或其他管辖区的 公司注册或组织) |
(美国国税局雇主 |
(主要执行办公室地址) |
(Zip Code) |
注册人的电话号码,包括区号: (
根据法案第12(b)节注册的证券:
每个类别的标题 |
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交易 标的(们) |
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注册的每个交易所的名称 |
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请勾选是否注册人(1)在过去12个月内(或在注册人被要求提交此类报告的更短期限内)已提交根据1934年证券交易法第13节或第15(d)节要求提交的所有报告,以及(2)在过去90天内是否受到此类提交要求的约束。
请通过勾选的方式指示注册人是否在过去12个月内(或在注册人被要求提交此类文件的较短期间内)根据S-t法规第405条(本章第232.405条)提交了所有需要提交的互动数据文件。
勾选以下选框,指示申报人是大型加速评估提交人、加速评估提交人、非加速评估提交人、小型报告公司或新兴成长型公司。关于“大型加速评估提交人”、“加速评估提交人”、“小型报告公司”和“新兴成长型公司”的定义,请参见《交易所法规》第12亿.2条。
大型加速报告人 |
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加速报告人 |
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小型报告公司 |
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新兴成长公司 |
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如果是新兴成长型企业,请勾选复选标记,表明注册者已选择不使用延长过渡期来符合根据证券交易法第13(a)条规定提供的任何新财务会计准则。
请勾选“是”,如果报告人是外壳公司(定义见证券交易法规则12b-2)。是
请勾选是否注册人已按照1934年证券交易法第12、13或15(d)条款提交所有必须提交的文件和报告,这些文件和报告是在法院确认的证券发行计划后提交的。 是
截至2024年11月14日,注册人已
目录
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页 |
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1 |
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第一部分。 |
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项目1. |
3 |
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3 |
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4 |
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5 |
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7 |
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8 |
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项目2. |
33 |
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项目3。 |
43 |
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项目4。 |
44 |
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第二部分。 |
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项目1. |
46 |
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项目1A。 |
46 |
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项目2. |
46 |
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项目3。 |
46 |
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项目4。 |
46 |
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第五项。 |
46 |
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第六项。 |
47 |
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48 |
关于前瞻性声明的警示说明
本报告(本“报告”)中的某些陈述可能构成根据联邦证券法的“前瞻性陈述”。这些前瞻性陈述包括但不限于关于我们及我们管理团队对未来的期望、希望、信念、意图或战略的陈述。此外,任何提及对未来事件或情况的预测、预报或其他描述的陈述,包括任何基本假设,都是前瞻性陈述。“预期”、“相信”、“继续”、“可能”、“估计”、“期望”、“打算”、“可能”、“可能”、“计划”、“可能的”、“潜在的”、“预测”、“项目”、“应该”、“将”、“会”以及类似的表达可能标识前瞻性陈述,但缺少这些词并不意味着某个陈述不是前瞻性的。本报告中的前瞻性陈述可能包括,例如,关于:
1
本报告中包含的前瞻性声明基于我们目前对未来发展及其对我们业务潜在影响的期望和信念。无法保证影响我们业务的未来发展将是我们所预期的。这些前瞻性声明涉及多种风险、不确定性(其中一些超出我们控制范围)或其他假设,可能导致实际结果或表现与这些前瞻性声明所表达或暗示的结果存在重大差异。这些风险和不确定性包括但不限于本报告第II部分第1A项中描述的因素。Risk Factors此外,我们在一个竞争非常激烈、变化迅速的环境中运营。新的风险和不确定性会不时出现,我们无法预测所有风险因素,也无法评估所有这些风险因素对我们业务的影响,或者任何因素或因素组合可能导致实际结果与任何前瞻性声明中包含的结果存在重大差异的程度。如果这些风险或不确定性之一或多个发生,或者任何假设被证明不正确,实际结果可能在重大方面与这些前瞻性声明中的预测存在差异。
本报告中我们所作出的前瞻性声明仅反映本报告日期的情况。除非在联邦证券法以及SEC的规则和规定下有要求,我们不承担任何义务去更新任何前瞻性声明,以反映声明作出后事件或情况的变化,或反映意外事件的发生。鉴于这些风险和不确定性,无法保证前瞻性声明所暗示的事件或结果确实会发生,因此您不应对这些前瞻性声明过于依赖。
2
第一部分—财务信息
项目 1. 基本报表.
合并资产负债表合并资产负债表
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九月三十日 |
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12月31日 |
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(以千为单位,除股票数据外) |
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2024 |
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2023 |
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(未经审计) |
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(已审计) |
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资产 |
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流动资产 |
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现金 |
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$ |
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$ |
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应收账款,净额 |
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关联方应收款项,流动 |
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存货,净额 |
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预付款项及其他流动资产 |
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投资 - 公允价值下的股权证券 |
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总流动资产 |
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物业、厂房及设备,净值 |
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经营租赁使用权资产 |
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无形资产,净值 |
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商誉 |
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递延融资成本,净额 |
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关联方应收票据,非流动资产 |
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存款及其他长期资产 |
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总资产 |
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$ |
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$ |
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负债和股东权益 |
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流动负债 |
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应付账款 |
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$ |
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$ |
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应计费用和其他流动负债 |
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循环信贷额度 |
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当前运营租赁负债部分 |
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长期债务的流动部分 |
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总流动负债 |
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经营租赁负债,扣除流动部分 |
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长期债务 |
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递延所得税负债,净额 |
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总负债 |
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(见附注15) |
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股东权益 |
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普通股,$ |
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新增已实收资本 |
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累计亏损 |
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( |
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累计其他综合损失 |
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( |
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总股东权益 |
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总负债和股东权益 |
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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
精炼合并财务报表收入和综合收入的项目
(未经审计)
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截至9月30日的三个月 |
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截至9月30日的九个月 |
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(单位为千,除股份和每股数据外) |
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2024 |
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2023 |
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2024 |
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2023 |
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营业收入,净值: |
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工具租赁 |
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$ |
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$ |
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$ |
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$ |
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产品销售 |
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总营业收入净额 |
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营业费用和开支: |
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工具租赁收入成本 |
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产品销售收入成本 |
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销售、一般和管理费用 |
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折旧和摊销费用 |
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总营业费用和支出 |
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营业收入 |
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其他费用,净额: |
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利息费用,净额 |
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( |
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( |
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出售资产的收益(损失) |
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对以前持有的股权利益的重新计量的收益(损失) |
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( |
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( |
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( |
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其他(费用) |
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( |
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( |
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( |
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( |
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总其他费用,净额 |
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( |
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( |
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( |
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( |
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税前利润 |
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所得税(费用)/收益 |
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( |
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( |
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( |
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净利润 |
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$ |
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$ |
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$ |
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$ |
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可赎回可转换优先股的累积分红 |
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可分配给普通股东的净利润 |
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$ |
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$ |
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$ |
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$ |
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基本每股收益 |
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$ |
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$ |
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$ |
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$ |
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摊薄后每股收益 |
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$ |
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$ |
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$ |
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$ |
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基本加权平均流通普通股数* |
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摊薄加权平均流通普通股数* |
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其他全面收益(损失): |
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净利润 |
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$ |
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$ |
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$ |
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$ |
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外币翻译调整,税后 |
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综合收益 |
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$ |
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$ |
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$ |
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$ |
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* 传统可赎回可转换优先股和传统普通股已被追溯重述,以反映合并的效果。
附注是这些未经审计的简明合并基本报表的组成部分。.
4
国际钻探工具公司
(未经审计)
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Redeemable Convertible Preferred Stock |
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Common Stock |
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Treasury 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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Shares |
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Amount |
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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, |
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$ |
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$ |
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( |
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$ |
( |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Retroactive application of Merger |
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( |
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— |
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( |
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( |
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( |
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- |
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— |
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— |
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Adjusted Balances, beginning of period* |
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— |
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— |
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( |
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( |
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Accretion of redeemable |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Foreign currency |
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— |
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— |
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— |
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— |
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— |
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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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— |
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— |
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— |
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— |
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BALANCE, March 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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$ |
( |
) |
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$ |
( |
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$ |
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Net exercise of DTIH stockholders stock options |
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— |
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— |
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— |
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- |
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— |
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— |
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— |
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Exchange of DTIH redeemable convertible preferred stock for DTIC Common Stock |
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( |
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( |
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— |
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— |
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— |
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— |
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Issuance of DTIC Common Stock to former holders of DTIH redeemable convertible preferred stock in connection with Exchange Agreements |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Merger, net of redemptions and transaction costs |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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( |
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Issuance of DTIC Common Stock in connection with the consummation of the PIPE Financing |
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— |
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— |
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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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— |
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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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— |
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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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— |
|
|
|
— |
|
|
|
— |
|
|
- |
|
|
|
|
|
- |
|
|
|
|
||||
BALANCE, June 30, 2023 |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
$ |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
Foreign currency |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Net income |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
BALANCE, September 30, 2023 |
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
$ |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
* Shares of legacy redeemable convertible preferred stock and legacy common stock have been retroactively restated to give effect to the Merger.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
(In thousands, except share and per share data) |
|
Shares |
|
|
|
Amount |
|
|
|
Additional |
|
|
Accumulated |
|
|
Accumulated |
|
|
Total |
|
|||||||
BALANCE, December 31, |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
Stock-based compensation |
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Foreign currency |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Net income |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
BALANCE, March 31, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|||||
Stock-based compensation |
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
||||
Exercise of stock options |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||||
Shares issued due to vesting of restricted stock units |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Foreign currency |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Net income |
|
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
||||
BALANCE, June 30, 2024 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|||||
Issuance of Common Stock related to business combination |
|
|
|
|
|
$ |
— |
|
|
|
$ |
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Accelerated vesting of substitute stock options |
|
|
— |
|
|
— |
|
|
— |
|
|
|
$ |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Stock-based compensation |
|
|
— |
|
|
— |
|
|
— |
|
|
|
$ |
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Foreign currency |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Net income |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|||
BALANCE, September 30, 2023 |
|
|
|
|
|
$ |
|
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
DRILLING TOOLS INTERNATIONAL CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
截至9月30日的九个月 |
|
|||||
(以千计) |
|
2024 |
|
|
2023 |
|
||
经营活动产生的现金流: |
|
|
|
|
|
|
||
净利润 |
|
$ |
|
|
$ |
|
||
调整净利润与经营活动产生的现金净额之间的差异: |
|
|
|
|
|
|
||
折旧和摊销 |
|
|
|
|
|
|
||
递延融资费用摊销 |
|
|
|
|
|
|
||
非现金租赁费用 |
|
|
|
|
|
|
||
过剩和过时库存的准备 |
|
|
|
|
|
|
||
过剩和过时财产及设备的准备金 |
|
|
|
|
|
|
||
信用损失准备金 |
|
|
|
|
|
|
||
递延所得税费用 |
|
|
( |
) |
|
|
|
|
财产销售收益 |
|
|
( |
) |
|
|
( |
) |
资产处置损失 |
|
|
|
|
|
|
||
利率掉期的已实现损失 |
|
|
|
|
|
|
||
权益证券的未实现收益 |
|
|
( |
) |
|
|
|
|
权益证券的已实现损失 |
|
|
|
|
|
— |
|
|
失落井设备销售毛利润 |
|
|
( |
) |
|
|
( |
) |
基于股票的补偿费用 |
|
|
|
|
|
|
||
经营资产和负债的变动: |
|
|
|
|
|
|
||
应收账款,净额 |
|
|
|
|
|
( |
) |
|
预付款项及其他流动资产 |
|
|
( |
) |
|
|
( |
) |
存货,净额 |
|
|
( |
) |
|
|
( |
) |
经营租赁负债 |
|
|
( |
) |
|
|
( |
) |
应付账款 |
|
|
( |
) |
|
|
( |
) |
应计费用和其他流动负债 |
|
|
( |
) |
|
|
|
|
来自运营活动的净现金流 |
|
|
|
|
|
|
||
投资活动的现金流: |
|
|
|
|
|
|
||
收购业务,扣除购得现金 |
|
|
( |
) |
|
|
|
|
出售股权证券的收益 |
|
|
|
|
|
|
||
物业、厂房和设备的销售收入 |
|
|
|
|
|
|
||
购买物业、厂房和设备 |
|
|
( |
) |
|
|
( |
) |
失落设备销售所得 |
|
|
|
|
|
|
||
投资活动产生的净现金 |
|
|
( |
) |
|
|
( |
) |
融资活动产生的现金流: |
|
|
|
|
|
|
||
合并和PIPE融资所得,扣除交易成本 |
|
|
|
|
|
|
||
递延融资成本的支付 |
|
|
( |
) |
|
|
( |
) |
循环信贷所得 |
|
|
|
|
|
|
||
循环信用额度的支付 |
|
|
( |
) |
|
|
( |
) |
定期贷款的收益 |
|
|
|
|
|
|
||
定期贷款偿还 |
|
|
( |
) |
|
|
|
|
与合并时支付给DTIH可赎回可转换优先股持有者以退还其DTI股票相关的款项 |
|
|
|
|
|
( |
) |
|
融资活动的净现金 |
|
|
|
|
|
|
||
汇率变动的影响 |
|
|
( |
) |
|
|
( |
) |
现金净变化 |
|
|
|
|
|
|
||
期初现金 |
|
|
|
|
|
|
||
期末现金 |
|
$ |
|
|
$ |
|
||
补充现金流信息: |
|
|
|
|
|
|
||
支付的利息 |
|
$ |
|
|
$ |
|
||
支付的所得税现金 |
|
$ |
|
|
$ |
|
||
非现金投资和融资活动: |
|
|
|
|
|
|
||
在CTG收购中假设的CTG负债公允价值 |
|
$ |
|
|
$ |
|
||
SDPI收购中承担的SDPI负债的公允价值 |
|
$ |
|
|
$ |
|
||
为租赁负债而获取的使用权资产 |
|
$ |
|
|
$ |
|
||
应收票据的非现金回收 |
|
$ |
|
|
$ |
|
||
期权的净行使 |
|
$ |
|
|
$ |
|
||
为支付税款而从期权行使中扣留的股票 |
|
$ |
|
|
$ |
|
||
包括在应付账款和应计费用以及其他流动负债中的库存购买 |
|
$ |
|
|
$ |
|
||
包括在应付账款和应计费用以及其他流动负债中的物业和设备购买 |
|
$ |
|
|
$ |
|
||
非现金的董事和高管保险 |
|
$ |
|
|
$ |
|
||
非现金的合并融资 |
|
$ |
|
|
$ |
|
||
在合并中将DTIH可赎回可转换优先股交换为DTIC普通股 |
|
$ |
|
|
$ |
|
||
根据交换协议向DTIH可赎回可转换优先股的前持有人发行DTIC普通股 |
|
$ |
|
|
$ |
|
||
可赎回可转换优先股按赎回价值逐年累积 |
|
$ |
|
|
$ |
|
附带的注释是这些未经审计的简明合并基本报表不可或缺的一部分.
7
注释 1 — SIGNIFI 摘要CanT 会计政策
运营的组织和性质
Drilling Tools International Corporation是特拉华州的一家公司(“DTIC” 或 “公司”),是一家全球油田服务公司,设计、设计、制造和提供差异化的、以租赁为中心的工具,用于陆上和海上水平和定向钻探作业,以及其他贯穿油井生命周期的尖端解决方案。
2024年3月15日(“CTG收购日期”),我们与Casing Technologies集团有限公司(“CTG”)、CTG的某些股东和CTG的一位代表签订了股票购买协议(“股份购买协议”)。根据股票购买协议的条款,公司百分之百收购了(
2024年3月6日,公司与犹他州的一家公司Superior Drilling Products, Inc.(“SDPI”)、特拉华州的一家公司兼该公司的直接全资子公司DTI Merger Sub I, Inc.(“Merger Sub I”)以及特拉华州有限责任公司兼该公司的全资子公司Merger DTI Merger Sub II, LLC及其相互之间签订了协议和合并计划(“合并协议”)(“合并协议”)ComaPany(“Merger Sub II”),根据该协议,Merger Sub I与SDPI合并并入SDPI(“首次合并”),SDPI作为全资子公司幸存在DTI和第一次合并生效之时(“首次生效时间”),SDPI作为第一次合并的幸存公司,与Merger Sub II合并(“第二次合并”,与第一次合并一起称为 “合并”),Merger Sub II作为公司的全资子公司继续存在。根据合并协议的条款,合并于2024年7月31日(“SDPI截止日期” 或 “SDPI收盘日期”)结束,总对价为美元
该公司的美国(“美国”)业务在德克萨斯州、加利福尼亚州、路易斯安那州、俄克拉荷马州、宾夕法尼亚州、北达科他州、新墨西哥州、犹他州和怀俄明州设有办事处。该公司的国际业务位于加拿大、英国、德国、阿拉伯联合酋长国、沙特阿拉伯、科威特、阿曼、马来西亚和澳大利亚。在美国境外的业务面临在不同的法律制度和不同的政治和经济环境下运营所固有的风险。风险包括现行税法的变化和对外国投资的可能限制。公司不从事套期保值活动以减少其受外币汇率波动的影响。
演示基础
随附的未经审计的简明合并财务报表由公司根据财务会计准则委员会(“FASB”)规定的美国普遍接受的会计原则(“美国公认会计原则”)以及美国证券交易委员会(“SEC”)的规章制度编制。财务会计准则委员会在随附的未经审计的简明合并财务报表附注中提及的美国公认会计原则是指财务会计准则编纂(“ASC”)和会计准则更新(“ASU”)。
未经审计的中期财务信息
本季度报告中随附的未经审计的中期简明合并财务报表是根据美国公认会计原则编制的,公司认为,其中包含所有调整,仅包括正常的经常性调整,这是公允列报其截至2024年9月30日的财务状况、截至2024年9月30日和2023年9月30日的三个月和九个月的经营业绩以及截至2024年9月30日和2023年9月30日的九个月的现金流所必需的。截至2023年12月31日的简明合并资产负债表,源自经审计的年度财务报表,但不包含年度财务报表的所有脚注披露。
新兴成长型公司
部分 《Jumpstart Our Business Startups法》(“JOBS法”)第102(b)(1)条规定,在要求私营公司(即那些尚未宣布生效的《证券法》注册声明或没有根据经修订的1934年《证券交易法》注册的一类证券的公司)遵守新的或修订后的财务会计准则之前,新兴成长型公司无需遵守新的或修订后的财务会计准则。《乔布斯法案》规定,公司可以
8
选择 公司已选择不退出该扩展过渡期,这意味着当发布或修订标准并且对公众公司或私营公司的适用日期不同的情况下,公司作为一家新兴成长型公司,可以在私营公司采用新或修订标准的同时采用该新或修订标准,直到公司不再被视为新兴成长型公司。有时,公司可能会选择提前采用新或修订标准。因此,公司在财务报表中可能与那些遵循公共公司生效日期的公司不可比较。
估计的使用
准备未经过审计的简明合并财务报表以符合美国公认会计原则(GAAP)要求管理层做出估计和假设,这些估计和假设影响公司未经过审计的简明合并财务报表及附注中所报告的资产和负债、营业收入和费用,以及或有资产和负债的披露。这些估计和假设基于当前事实、历史经验和认为在此情况下合理的各种其他因素,其结果构成了判断资产和负债账面价值及记录不易从其他来源显现的费用的基础。实际结果可能与这些估计有实质性和不利的差异。在当前受俄乌和以色列-哈马斯冲突和通货膨胀压力影响的宏观经济和业务环境中,这些估计需要增加判断,并且具有更高的变动性和波动性。随着事件的不断发展和更多信息的可用,这些估计在未来期间可能会发生重大变化。
合并原则
所附的未经审计的简化合并基本报表包括公司的账户及其全资子公司的账户。所有的公司内部账户和交易在合并时已被消除。此外,合并的基础包含我们外国实体Casing Technologies Group Limited的财务报表,该实体根据英国公认会计原则("英国GAAP")运营。这些财务报表为合并目的而翻译为美国公认会计原则("U.S. GAAP")。翻译过程遵循既定的会计标准和指南,以确保我们合并财务报表的一致性和可比性。这种方法使我们能够准确反映合并业务的财务状况、经营结果和现金流量。
外汇翻译和交易
公司已确定,其在全球业务的功能性和报告货币为公司国际子公司的功能货币。因此,所有外国资产负债表账户已使用各自资产负债表日期的汇率换算为美元。未经审计的简化合并损益及全面收益表的各个组成部分已按报告期内的平均汇率换算。翻译产生的收益或损失记录在累计其他综合损失中,作为股东权益的一个组成部分。因交易汇率波动而产生的收益或损失包括在未经审计的简化合并损益及全面收益表中。至2024年和2023年9月30日结束的三个月和九个月,包含在未经审计的简化合并损益及全面收益表中的交易净收益和损失是微不足道的。
收入确认
公司根据主题842(处理租赁会计)和主题606(处理客户合同的营业收入)确认营业收入。公司从两种营业收入类型中获得收入,工具租赁服务和产品销售。
工具租赁服务
工具租赁服务包括租赁服务、检查服务和维修服务。工具租赁服务的营业收入依照主题842进行会计处理。
自有工具租赁是最重要的营业收入类型,受公司标准租赁合同的管辖。公司将这些租赁视为经营租赁。租赁条款已包含在合同中,确定公司合同是否包含租赁通常不需要重大假设或判断。公司的租赁营业收入
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不要包括可变付款的实质金额。拥有的工具租赁代表公司拥有的租赁工具的营业收入。公司通常不提供承租人在租约结束时购买租赁设备的选项。
公司以直线法确认工具租赁的营业收入。公司的租赁合同按天、按月或按井计费。作为这一直线法的部分,当设备归还时,公司确认所需支付金额与至今已确认的累计营业收入之间的差额(如有)作为增量营业收入,客户合同要求支付的金额是基于实际租赁天数适用的租赁合同期。在任何一个会计期间,公司都会有客户归还钻井工具,并在合同上需要支付超过截至目前已确认的累计营业收入。此外,公司还有基于使用的租赁合同,按线性或按井计费。这些类型的租赁合同主要由开始时未知的可变租金构成,当基于可变租金的因素发生变化时确认营业收入。当客户归还租赁设备且使用量变得明显时,公司确认营业收入。
公司将超出可识别营业收入的应收款项记录为未确认收入,在其未经审计的合并资产负债表中列示。
如上所述,公司不确定客户何时将租赁的钻井工具归还。因此,公司不知道客户在归还工具时将欠公司多少,也无法提供未来租赁付款的到期分析。公司的钻井工具一般租赁时间较短(远低于一年)。承租人不提供租赁设备的残值担保。
公司预计在租赁期结束后,能够从其钻探工具中获得显著的未来收益。公司的租赁通常是短期性质,工具通常在公司拥有的时间内大部分时间处于出租状态。
产品销售
产品销售包括因租用工具而造成的超出维修范围的损坏费用、遗失在钻孔中的费用和在客户的照管、监护或控制下遗失的费用、钻头制造和翻新费用,以及其他定制产品销售的费用。产品销售按照主题606进行会计处理。
营业收入在承诺的商品或服务的控制权转移给客户时确认,其金额反映实体期望为这些商品或服务所应得的对价。为了判断与客户的收入确认,公司执行以下五个步骤:(i) 确定与客户的合同;(ii) 确定合同中的履约义务;(iii) 判断交易价格;(iv) 将交易价格分配给合同中的履约义务;(v) 在实体满足履约义务时确认收入。公司在获得双方的批准和承诺时会对合同进行会计处理,双方的权利被识别,付款条款被识别,合同具有商业实质,并且对价的可收回性是可能的。履约义务是合同中向客户转移独特商品或服务的承诺,是收入标准中的会计单位。交易价格是指合同中规定的对价,不包括任何销售激励、税收或为第三方代收的其他金额。由于公司与客户的每个合同都包含一个提供产品销售的单一履约义务,因此公司没有任何需要分配交易价格的履约义务。
定制产品销售及钻头制造和翻新所提供的履约义务在资产控制权转移给客户时满足,并在此时确认营业收入,通常这一过程发生在产品交付时或当产品在公司的装运码头可以供客户自取时。此外,根据与公司客户的合同条款,客户必须通知公司,并从公司购买在公司客户的保管、控制或照料下损坏无法修复、丢失在孔内或在运输途中丢失的任何租赁工具。这些产品在客户通知公司发生上述事件时确认营业收入。
公司未来没有预计与未交付履约义务相关的剩余履约义务或可变对价相关的合同中确认的营业收入。在当前期间内,没有确认来自以前期间履行履约义务的营业收入。
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按地理位置划分的营业收入
产生的营业收入集中在美国。截止2024年9月30日的三个月和九个月内,在美国产生的营业收入为 $
合同资产和合同负债
合同资产代表公司已完成但尚未开票的工作的对价权利。截至2024年9月30日和2023年12月31日,公司拥有合同资产 $
合同负债包括公司客户已开具或支付的费用,但相应的服务尚未提供,因此根据上述公司的营收确认标准尚未确认营业收入。截止至2024年9月30日和2023年12月31日,公司没有
现金及现金等价物
公司将所有原始到期三个月或更短时间内购买的高度流动投资视为现金等价物。公司没有
应收账款,净额
公司的应收账款主要由未担保的应收客户款项组成。这些应收款通常在对应销售或租赁发生后的30到60天内到期,并且不计利息。它们按净可实现价值记录,扣除信用损失准备,并在未经审计的压缩合并资产负债表上列为应收账款,净额。
信用损失准备金
公司在评估不可收回应收余额的预期信用损失时,会考虑当前状况和合理且可支持的未来状况预测。在我们确定信用损失准备时,我们按应收账款的逾期天数进行分组,并对每组应用预期信用损失百分比。预期信用损失百分比是根据调整了当前状况和未来经济状况预测的历史损失数据来确定的。考虑的当前状况包括预定义的逾期标准以及指示到期余额不可收回的特定事件。用于确定未来收回概率的合理且可支持的预测考虑了公开获取的宏观经济数据,以及未来信用损失是否预期会与历史损失有所不同。
截至2024年9月30日和2023年12月31日,信用损失准备总额为 $
商业组合
公司采用收购会计方法进行业务合并,这需要我们利用估计和判断将为收购支付的购买价格分配到所收购的资产和负债的公允价值。我们在收购日期以公允价值对或有资产和负债进行会计处理,并将与这些资产和负债相关的公允价值变动记录为发生时的期间费用。我们使用既定的估值技术并聘请信誉良好的估值专家来协助我们进行这些估值。我们使用合理的计量期来记录与开盘资产负债表相关的任何调整(通常少于一年)。在计量期结束后,开盘资产负债表的变动可能导致收入或费用作为期间费用的确认。在这些项目源于资产负债表日存在的或有事项,但依赖于未来事件的实现时,该费用在未来事件被确认时计入费用。
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库存,净额
存货按成本或可变现净值中较低者列报。根据库存的类型,使用特定的识别方法或先进先出(“FIFO”)方法确定成本。根据对未来需求和市场状况的假设,过时或超过预测使用量的库存将减记为其可实现的净价值。库存减记记入未经审计的简明合并收益表和综合收益表的运营成本部分中的租金收入成本和产品销售成本收入,并为库存建立新的成本基础。库存包括原材料和制成品。
财产、厂房和设备,净额
公司购买的不动产、厂房和设备按成本减去累计折旧值入账。折旧是根据折旧财产的估计使用寿命或租赁权益改善的剩余租期(以较短者为准)使用直线法记录折旧。尚未使用的资产不折旧。
作为业务收购的一部分购置的不动产、厂房和设备按收购日的公允价值入账,随后增加的按成本计算。
当不动产、厂房或设备的价值在很长一段时间内得到提高时,翻新和更新费用即被资本化。不动产、厂房和设备的维护和维修支出不会改善或延长相关资产的使用寿命,在发生时记作业务费用。当财产、厂房和设备报废或以其他方式处置时,相关成本和累计折旧将从账户中扣除,由此产生的任何损益都计入业务。
租约
该公司采用了ASC 842, 租约 (“ASC 842”)自2022年1月1日起使用修改后的追溯过渡方法,不重报前期或累计调整留存收益。通过后,公司选择了一揽子过渡切实可行的权宜之计,这使其能够延续先前得出的结论,这些结论涉及任何到期或现有合同是否是或包含租赁、任何到期或现有租约的租赁分类以及现有租赁的初始直接成本。该公司选择了事后看来重新评估租赁期限。公司选择不在未经审计的简明合并资产负债表中确认初始期限为12个月或更短的租赁,并在未经审计的简明合并收益表和租赁期内综合收益表中以直线方式确认这些租赁付款。新的租赁会计准则还为实体的持续会计提供了实用的权宜之计。该公司选择了切实可行的权宜之计,即不将所有租赁的租赁和非租赁部分分开。
公司从一开始就确定一项安排是否为租赁。经营租赁包含在经营租赁使用权(“ROU”)资产、流动经营租赁负债和经营租赁负债中,扣除未经审计的简明合并资产负债表中的流动部分。公司在租赁期限内按直线方式确认其运营租赁的租赁费用。
ROU资产代表公司在租赁期内使用标的资产的权利,租赁负债代表公司支付租赁产生的租赁款项的义务。ROU资产和经营租赁负债在开始之日根据租赁期内未来最低租赁付款的现值进行确认。经营租赁ROU资产还包括任何租赁激励措施的影响。对租约的修订进行评估,以确定其是租赁修改还是单独的合同。自修改生效之日起,租赁修改将根据开始之日获得的信息,使用递增借款利率进行重新评估。对于修改后的租约,公司还会重新评估自修改生效之日起的租赁分类。
用于确定未来租赁付款现值的利率是公司的增量借款利率,因为公司租赁中隐含的利率不容易确定。据估计,增量借款利率在抵押基础上以及租赁资产所在的经济环境中接近利率,条件和付款方式相似。
公司的租赁条款包括延长或终止租约期权下的期限,前提是可以合理确定公司将在衡量其投资回报率资产和负债时行使该期权。公司会考虑基于合同的因素,例如续订或终止的性质和条款、基于资产的因素(例如资产的实际位置)以及基于实体的因素
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such as the importance of the leased asset to the Company’s operations to determine the lease term. The Company generally uses the base, noncancelable, 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
Intangible assets with finite useful lives include customer relationships, trade name, patents, non-compete agreements and a supply agreement. These intangible assets are amortized either on a straight-line basis over the asset’s estimated useful life or on a basis that reflects the pattern in which the economic benefits of the intangible are realized.
Goodwill
Goodwill represents the excess of purchase price paid over the fair value of the net assets of acquired businesses. We evaluate Goodwill at least annually for impairment. Goodwill is considered impaired if the carrying amount of the reporting unit exceeds its estimated fair value. We conduct our annual assessment of the recoverability of goodwill as of December 31 of each year. 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.
Accounting for 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 and nine months ended September 30, 2024 and 2023, management determined that there were no triggering events necessitating impairment testing of property, plant, and equipment or intangible assets.
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Investments - Equity Securities
Equity securities are stated at fair value. Unrealized gains and losses are reflected in the unaudited condensed consolidated statements of income and comprehensive income. The Company periodically reviews the securities for other than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the three months ended September 30, 2024, the Company settled all investments in equity securities for a realized loss of $
Redeemable Convertible Preferred Stock
Prior to the closing of the Merger, there were outstanding shares of DTIH Series A redeemable convertible preferred stock ("Redeemable Convertible Preferred Stock"), which was classified outside of permanent equity in mezzanine equity on the unaudited condensed consolidated balance sheets as it was redeemable on a fixed date.
Upon the closing of the Merger, all of the Redeemable Convertible Preferred Stock was canceled in exchange for DTIC common stock and the right to receive cash. Accordingly, there was
Preferred Stock
As of the closing of the Merger, the Board of Directors (the "Board") has expressly granted authority to issue shares of preferred stock, in one or more series, and to fix for each such series such voting powers, full or limited, and such designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as shall be stated and expressed in the resolution or resolutions adopted by the Board providing for the issue of such series and as may be permitted by the Delaware General Corporation Law. The number of authorized shares of preferred stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, without a separate vote of the holders of the preferred stock, or any series thereof, unless a vote of any such holders is required pursuant to any preferred stock designation.
The Board has t issued any shares of any classes or series of preferred stock as of September 30, 2024, and through the date these financial statements were available to be issued.
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 administrative expense in the unaudited condensed consolidated statements of income and comprehensive income.
Stock-Based Compensation
The Company recognizes stock-based compensation expenses over the requisite service period. The Company historically granted stock-based compensation awards with performance based vesting conditions. These options all vested upon the closing of the Merger with ROC. Subsequent to the closing of the merger with ROC, the Company’s stock-based compensation awards granted are subject to service based and performance based vesting conditions. Pursuant to ASC 718-10-35-8, the Company recognizes compensation cost for stock awards with only service conditions that have a graded vesting schedule on a straight-line basis over the service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards. 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, net of estimated forfeitures. 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 the 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.
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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 Redeemable Convertible Preferred Stock are considered potential dilutive common stock and are excluded from the computation of net loss per share if their effect is anti-dilutive.
The Redeemable Convertible Preferred Stock did not contractually entitle its holders to participate in profits or losses. As such, it was not treated as a participating security in periods of net income or net loss.
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
The Company records income tax related interest and penalties, if applicable, as a component of the provision for income tax expense. However, there were
Derivative Financial Instruments
From time to time, the Company may enter into derivative instruments to manage exposure to interest rate fluctuations. During 2016, the Company entered into an interest swap agreement with respect to amounts outstanding under its revolving line of credit.
The Company’s interest rate swap is a pay-fixed, receive-variable interest rate swap based on SOFR swap rate. The SOFR swap rate is observable at commonly quoted intervals for the full term of the swap and therefore is considered a Level 2 item. For interest rate swaps in an asset position, the credit standing of the counterparty is analyzed and factored into the fair value measurement of the asset. The impact of the Company’s creditworthiness has also been factored into the fair value measurement of the interest rate swap in a liability position. For the three and nine months ended September 30, 2024 the application of valuation techniques applied to similar assets and liabilities has been consistent.
This arrangement was designed to manage exposure to interest rate fluctuations by effectively exchanging existing obligations to pay interest based on floating rates for obligations to pay interest based on a fixed rate. These derivatives are marked-to-market at the end of each quarter and the realized/unrealized gain or loss is recorded as interest expense.
The interest swap agreement was settled on
15
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.
Asset and liabilities measured at fair value on a recurring basis are summarized as follows (in thousands):
|
|
Assets at Fair Value as of September 30, 2024 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Investments, equity securities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total assets at fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
Assets at Fair Value as of December 31, 2023 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Investments, equity securities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total assets at fair value |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
As of September 30, 2024, the Company did
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily 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.
16
Concentration of Credit Risk and Other Risks and Uncertainties
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 September 30, 2024 and 2023, the Company generated approximately
During the three months ended September 30, 2024, the Company had 2 vendors that represented approximately
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.
Operating Segment
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 Chief Executive Officer and Chief Financial Officer work together as the CODM. The Company’s CODM reviews financial information presented on a consolidated basis for the purposes of making operations decisions, allocating resources and evaluating financial performance. Consequently, the Company has determined it operates in
Accounting Standards Issued But Not Yet Effective
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.
In November 2023, FASB issued ASU 2023-07, Segment Reporting (Topic 280) – Improvements to Reportable Segment Disclosures, which includes requirements for more robust disclosures of significant segment expenses and measures of a segment’s profit and loss used in assessing performance. This standard is effective for the Company’s annual period beginning January 1, 2024 and interim periods beginning January 1, 2025 with early adoption permitted. The Company is still evaluating the effects of adopting this new accounting guidance on its disclosures.
17
NOTE 2 – 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
The £
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 preliminary allocation of the purchase is as follows:
Assets |
Preliminary March 15, 2024 |
|
|
Measurement Period Adjustments |
|
|
As adjusted March 15, 2024 |
|
|||
Cash |
$ |
|
|
|
|
|
$ |
|
|||
Accounts receivable, net |
|
|
|
|
|
|
|
|
|||
Inventories, net |
|
|
|
|
|
|
|
|
|||
Prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
|||
Property, plant and equipment , net |
|
|
|
|
|
|
|
|
|||
Operating lease ROU asset |
|
|
|
|
|
|
|
|
|||
Intangible assets, net |
|
|
|
|
|
|
|
|
|||
Goodwill |
|
|
|
|
|
|
|
||||
Total assets acquired |
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|||
Liabilities |
|
|
|
|
|
|
|
|
|||
Accounts payable |
|
|
|
|
|
|
|
|
|||
Accrued expenses and other current liabilities |
|
( |
) |
|
|
|
|
|
|
||
Current portion of operating lease liabilities |
|
|
|
|
|
|
|
|
|||
Operating lease liabilities, less current portion |
|
|
|
|
|
|
|
|
|||
Total liabilities assumed |
$ |
|
|
$ |
|
|
$ |
|
|||
Total consideration transferred |
$ |
|
|
$ |
|
|
$ |
|
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 three months ended June 30, 2024, a measurement period adjustment was identified as it relates to assumed accrued liabilities. The total measurement period adjustment was $
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):
18
|
|
|
|
|
Fair value |
|
Useful life |
Fair value methodology |
|
Intangible assets |
|
|
|
|
|
|
|
|
|
Trade names |
|
|
|
|
$ |
|
Relief from royalty method |
||
Developed Technology |
|
|
|
|
|
|
Relief from royalty method |
||
Customer relationships |
|
|
|
|
|
|
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.
The Company incurred acquisition-related costs of $
The Company’s condensed consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2024 include CTG’s revenues of $
Supplemental Pro Forma Information
The unaudited supplemental pro forma financial results below for the three and nine months ended September 30, 2024 and 2023, combine the consolidated results of the Company and CTG, giving effect to the CTG Acquisition as if it had been completed on January 1, 2023. 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, 2023, or any other date.
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
(in thousands) |
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Pro forma revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Pro forma net income |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
The unaudited supplemental pro forma financial information in the table above contains material nonrecurring pro forma adjustments to remove interest expense on CTG's debt as it is assumed that the business combination occurred and the debt was paid off on January 1, 2023.
Acquisition of Superior Drilling Products, Inc.
On
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 $
Cash paid to holders of SDPI Common Stock(1) |
$ |
|
|
Cash payment of SDPI transaction costs |
|
|
|
Cash repayment of SDPI debt |
|
|
|
Cash payment to holders of SDPI Restricted Stock |
|
|
|
Cash severance payment to former SDPI employee(2) |
|
|
|
Fair value of DTI Common Stock issued in exchange for outstanding SDPI Common Stock(3) |
|
|
|
Fair value of replacement awards issued to holders of SDPI Options |
|
|
|
Effective settlement of preexisting relationship between DTI and SDPI(4) |
|
( |
) |
Fair value of consideration transferred |
$ |
|
(1) Represents cash consideration paid to holders of SDPI common stock, which consisted of (i) payment of $
19
receive either cash election consideration or stock election consideration and, therefore, pursuant to the terms of the Merger Agreement, automatically received the cash election consideration of $
(2) Represents a severance payment made in accordance with the terms of an employment agreement between SDPI and an employee that was entered into prior to contemplation of the Merger Agreement. The agreement contained a provision whereby a change in control event would trigger a severance payment, and it was determined that the closing of the Merger triggered the requirement for such a payment to be made. Upon the SDPI Closing, DTI paid the severance payment on SDPI’s behalf.
(3) Represents the fair value of the shares of DTI common stock issued to holders of SDPI common stock as consideration for the Merger. Holders of SDPI common stock received
(4) Represents the effective settlement of DTI’s accounts payable to SDPI as DTI was a customer of SDPI's prior to the SDPI Closing.
The Company previously held an equity interest in SDPI that was acquired and held prior to the SDPI Closing Date. The Company’s previously held interest was remeasured to its fair value of $
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
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):
20
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 following table presents a preliminary reconciliation of the fair value of consideration transferred and the fair value of DTI’s investment in SDPI that was acquired and held prior to Closing which is included in the calculation of goodwill (in thousands):
Fair value of consideration transferred |
$ |
|
|
Fair value of DTI's investment in SDPI that was acquired and held prior to Closing |
|
|
|
Total fair value consideration transferred and fair value of DTI's investment in SDPI that was acquired and held prior to Closing |
$ |
|
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.
The Company incurred acquisition-related costs of $
The Company’s condensed consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2024 include SDPI's revenues of $
Supplemental Pro Forma Information
The unaudited supplemental pro forma financial results below for the three and nine months ended September 30, 2024 and 2023, combine the consolidated results of the Company and SDPI, giving effect to the Merger as if it had been completed on January 1,
21
2023. The unaudited supplemental pro forma financial results to not give effect to the impact of the CTG Acquisition. 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, 2023, or any other date.
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
(in thousands) |
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Pro forma revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Pro forma net income/(loss) |
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
The unaudited supplemental pro forma financial information in the table above contains material nonrecurring pro forma adjustments to (i) record acquisition-related costs incurred by the Company prior to the SDPI Closing Date in the amount of $
NOTE 3 – REVISION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company identified certain errors in its previously issued September 30, 2023 interim unaudited condensed 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.
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 unaudited condensed consolidated financial statements presented herein for the three and nine months ended September 30, 2023 have been revised to correct the errors described above in accordance with SEC SAB Topic 1.M, as codified in ASC 250.
|
|
Three months ended September 30, |
|
|||||||||
(In thousands, except share and per share data) |
|
As Previously Reported |
|
|
Total Adjustment |
|
|
As Revised |
|
|||
Cost of tool rental revenue |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Cost of product sale revenue |
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|||||||||
(In thousands, except share and per share data) |
|
As Previously Reported |
|
|
Total Adjustment |
|
|
As Revised |
|
|||
Cost of tool rental revenue |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Cost of product sale revenue |
|
|
|
|
|
|
|
|
|
NOTE 4 – INVESTMENTS – EQUITY SECURITIES
The following table shows the cost and fair value of the Company’s investments in equity securities (in thousands):
|
|
Cost |
|
|
Unrealized |
|
|
Fair Value |
|
|||
September 30, 2024 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
|
|
Cost |
|
|
Unrealized |
|
|
Fair Value |
|
|||
December 31, 2023 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
Unrealized holding losses on equity securities for the three months ended September 30, 2024 and 2023 were approximately $
22
approximately $
NOTE 5 – BALANCE SHEET DETAILS - CURRENT ASSETS AND CURRENT LIABILITIES
Inventories, net
The following table shows the components of inventory (in thousands):
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Raw materials |
|
$ |
|
|
$ |
|
||
Work in progress |
|
$ |
|
|
$ |
— |
|
|
Finished goods |
|
|
|
|
|
|
||
Total inventories |
|
|
|
|
|
|
||
Allowance for obsolete inventory |
|
|
( |
) |
|
|
( |
) |
Inventories, net |
|
$ |
|
|
$ |
|
Prepaid expenses and other current assets
The following table shows the components of prepaid expenses and other current assets (in thousands):
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Prepaid expenses: |
|
|
|
|
|
|
||
Deposits on inventory |
|
$ |
|
|
$ |
|
||
Prepaid income tax |
|
|
|
|
|
|
||
Prepaid insurance |
|
|
|
|
|
|
||
Prepaid rent |
|
|
|
|
|
|
||
Prepaid equipment |
|
|
|
|
|
|
||
Prepaid other |
|
|
|
|
|
|
||
Other current assets: |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
Accrued expenses and other current liabilities
The following table shows the components of accrued expenses and other current liabilities (in thousands):
|
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Accrued expenses: |
|
|
|
|
|
|
||
Accrued compensation and related benefits |
|
$ |
|
|
$ |
|
||
Accrued insurance |
|
|
|
|
|
|
||
Accrued transaction advisory fees |
|
|
|
|
|
|
||
Accrued professional services |
|
|
|
|
|
|
||
Accrued interest |
|
|
|
|
|
|
||
Accrued property taxes |
|
|
|
|
|
|
||
Accrued monitoring fees |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Other current liabilities: |
|
|
|
|
|
|
||
Income tax payable |
|
|
|
|
|
|
||
Sales tax payable |
|
|
|
|
|
|
||
Unbilled lost-in-hole revenue |
|
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
|
||
Total accrued expenses and other current liabilities |
|
$ |
|
|
$ |
|
23
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET
The following table shows the component of property, plant and equipment, net (in thousands):
|
|
Estimated Useful |
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
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 September 30, 2024 and 2023 was approximately $
Property, plant and equipment, net, is concentrated within the United States. As of September 30, 2024 and December 31, 2023, property, plant and equipment, net held within the United States was $
NOTE 7 – INTANGIBLE ASSETS, NET
The following table shows the components of intangible assets, net (in thousands):
|
|
Useful Lives (in Years) |
|
September 30, 2024 |
|
|
December 31, 2023 |
|
||
Trade name |
|
|
$ |
|
|
$ |
|
|||
Developed Technology |
|
|
|
|
|
|
|
|||
Customer Relationships |
|
|
|
|
|
|
|
|||
Total intangible assets |
|
|
|
|
|
|
|
|
||
Less: accumulated amortization |
|
|
|
|
( |
) |
|
|
( |
) |
Intangible assets, net |
|
|
|
$ |
|
|
$ |
|
Total amortization expense for the three months ended September 30, 2024 and 2023 was approximately $
NOTE 8 – REVOLVING CREDIT FACILITY AND TERM LOAN
In December 2015, the Company entered into a credit facility with PNC Bank, National Association (the "Existing 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 $
24
principal amount of $
For the three and nine months ended September 30, 2024, the interest on the amount drawn on the Credit Facility and the outstanding Term Loan balance are based on the Secured Overnight Financing Rate ("SOFR") or the bank’s base lending rate plus applicable margin (approximately
As of September 30, 2024, the Company has drawn $
The Company is subject to various restrictive covenants associated with these borrowings including, but not limited to, a fixed charge ratio and a minimum amount of undrawn availability. As of September 30, 2024, the Company was in compliance with all restrictive covenants.
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 September 30, 2024 and December 31, 2023 and therefore no amounts were recorded as of September 30, 2024 or December 31, 2023.
NOTE 9 – INCOME TAXES
The Company recorded an income tax benefit and expense on the unaudited condensed consolidated statements of income and comprehensive income of $
The income tax expense for the six months ended June 30, 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 nine months ended September, 2024 and 2023 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 CTG and SDPI 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 CTG Acquisition.
25
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. The 2023 Plan provides for the issuance of shares of Common Stock up to ten percent (
Stock Options
In connection with the Merger, all outstanding options to purchase shares of DTIH common stock were canceled and exchanged for options to purchase shares of DTIC Common Stock ("Company Options"). The number of Company Options issued and the associated exercise prices were adjusted using the Common Exchange Ratio used for the Merger. As a result of the Merger, the Company issued options to purchase a total of
The fair value of each stock option award is estimated on the date of grant using a Black-Scholes 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. For any grants of stock options subsequent to the Company being publicly traded, the Company will use the quoted market price as of the grant date as an input into the Black-Scholes model.
During the three and nine months ended September 30, 2023, there were
During the nine months ended September 30, 2023, the Company recognized $
During the nine months ended September 30, 2023, the Company recognized $
The following table summarizes our stock option activity for the nine months ended September 30, 2024:
26
|
|
Shares |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Life (in Years) |
|
|
Aggregate Intrinsic Value |
|
||||
OUTSTANDING, December 31, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Granted |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Exercised |
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
||
Forfeited |
|
|
|
|
$ |
|
|
|
— |
|
|
|
— |
|
||
OUTSTANDING, September 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
UNVESTED, September 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
EXERCISABLE, September 30, 2024 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
During the three months ended September 30, 2024, the Company recognized $
Restricted Stock Units
In May 2024, the Company issued an aggregate
During the three and nine months ended September 30, 2024, the Company recognized $
NOTE 11 – OTHER EXPENSES, NET
The following table shows the components of other expenses, net for the three months ended September 30, 2024 and 2023 (in thousands):
|
|
Three months ended September 30, 2024 |
|
|
Three months ended September 30, 2023 |
|
||
Transaction fees |
|
$ |
( |
) |
|
$ |
( |
) |
HHLLC stock-based compensation |
|
|
|
|
|
|
||
Interest income |
|
|
|
|
|
|
||
Other, net |
|
|
( |
) |
|
|
( |
) |
Other expense, net |
|
$ |
( |
) |
|
$ |
( |
) |
27
The following table shows the components of other expenses, net for the nine months ended September 30, 2024 and 2023 (in thousands):
|
|
Nine Months Ended September 30, 2024 |
|
|
Nine Months Ended September 30, 2023 |
|
||
Transaction fees |
|
$ |
( |
) |
|
$ |
( |
) |
HHLLC stock-based compensation |
|
|
|
|
|
( |
) |
|
Other, net |
|
|
( |
) |
|
|
( |
) |
Interest income |
|
|
|
|
|
|
||
Other expense, net |
|
$ |
( |
) |
|
$ |
( |
) |
NOTE 12 – RELATED PARTY TRANSACTIONS
Management fees
For the three months ended September 30, 2024 and 2023, management fees paid to Hicks Holdings Operating LLC ("HHLLC"), a shareholder of the Company, were approximately $
Director fees
For the three months ended September 30, 2024 and 2023, director fees paid to Board were approximately $
Leases
For the three months ended September 30, 2024 and 2023, the Company paid rent to Cree Investments, LLC, a shareholder of the Company, of approximately $
Promissory Notes
Upon consummation of the Merger, the Company issued shares of DTIC Common Stock in connection with the PIPE Financing to payoff convertible promissory notes which were issued to an affiliate of the ROC Sponsor on December 6, 2022 and March 2, 2023. The notes did not bear interest and were in the amounts of $
Working Capital Loan
Prior to the Merger, ROC paid the remaining outstanding principal amount owed to an affiliate of the ROC Sponsor in the amount of $
Sale of trucks
During the three months ended September 30, 2024, the Company sold
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
28
For the three and nine months ended September 30, 2024, the components of the Company’s lease expense were as follows (in thousands):
|
|
Three months ended September 30, 2024 |
|
|
Three months ended September 30, 2023 |
|
||
Operating Lease Cost |
|
$ |
|
|
$ |
|
||
Short-term Lease Cost |
|
|
|
|
|
|
||
Variable Lease Cost |
|
|
|
|
|
|
||
Sublease Income |
|
|
|
|
|
|
||
Total Lease Cost |
|
$ |
|
|
$ |
|
|
|
Nine months ended September 30, 2024 |
|
|
Nine months ended September 30, 2023 |
|
||
Operating Lease Cost |
|
$ |
|
|
$ |
|
||
Short-term Lease Cost |
|
|
|
|
|
|
||
Variable Lease Cost |
|
|
|
|
|
|
||
Sublease Income |
|
|
|
|
|
( |
) |
|
Total Lease Cost |
|
$ |
|
|
$ |
|
Supplemental balance sheet information related to leases was as follows (in thousands):
|
|
Nine months ended September 30, 2024 |
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years) |
|
|
|
|
Weighted average discount rate |
|
|
% |
|
|
Nine months ended |
|
|
|
|
September 30, 2024 |
|
|
Cash paid for amounts included in the measurement of lease liabilities |
|
|
|
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 September 30, 2024 were as follows (in thousands):
|
|
|
|
|
2024 |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
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 and nine months ended September 30, 2024, tool rental revenue was approximately $
29
NOTE 14 – EMPLOYEE BENEFITS
The Company has a defined contribution plan that complies with Section 401(k) of the Internal Revenue Code.
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.
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 (refer to Note 11 – Related Parties Transactions).
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.
30
The following table sets forth the computation of the Company’s basic and diluted net earnings per share for the three and nine months ended September 30, 2024 and 2023 (in thousands except share and per share data):
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
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 |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Effect of potentially dilutive redeemable convertible |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average common shares outstanding — diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Earnings per share — basic |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Earnings per share — diluted |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
As of September 30, 2024, the Company’s potentially dilutive securities consisted of options to purchase common stock. Based on the amounts outstanding as of the three and nine months ended September 30, 2024 and 2023, the Company excluded the following potential common shares from the computation of diluted net income per share because including them would have had an anti-dilutive effect:
|
|
Three months ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Time-based options outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
|
|
|
|
|
|
|
|
|
|
31
NOTE 16 – SUBSEQUENT EVENTS
Acquisition of European Drilling Projects B.V
On October 3, 2024, the Company announced the closing of the acquisition of European Drilling Projects B.V ("EDP"), a private company with limited liability, registered in the Dutch Commercial Register. EDP is a global provider of next-generation stabilizers, specialty reamers, and wellbore optimization technology for the drilling industry. The integration of EDP’s expertise aligns with the Company's international growth strategy and commitment to technological differentiation. The acquisition of EDP aims to reinforces the Company's position as a leader in providing innovative drilling solutions to the global oil and gas industry.
The acquisition will be accounted for as a business combination under the acquisition method of accounting pursuant to ASC 805. The initial accounting for the business combination is in process, which includes a valuation analysis to value the assets and liabilities assumed as a result of the transaction. As such, the impact on the condensed consolidated financial statements cannot be estimated at this time.
Acquisition of Titan Tools Group Limited
On October 31, 2024, the Company announced the signing of a definitive agreement to acquire Titan Tools Services Ltd., a United Kingdom based downhole tool rental company (“Titan Tools”). The acquisition of Titan Tools is expected to close in the first quarter of 2025, subject to customary closing conditions and regulatory approvals. The initial accounting for this acquisition is in process, which includes conducting a valuation analysis to value the assets and liabilities being acquired as a result of the transaction. As a result, the impact on the condensed consolidated financial statements cannot be estimated at this time.
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 September 30, 2024, and for the three months ended June 30, 2024 and 2023, 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, 2023. 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 (“U.S.”) 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 now operate from 16 service and support centers across North America and maintains 11 international service and support centers across the Europe, Middle East, and Africa ("EMEA") regions and Asia-Pacific ("APAC") regions.
Our business model primarily centers on revenue generated from tool rentals and product sales. We generated revenue from total tool rentals and product sales of $40.1 million and $38.1 million for the three months ended September 30, 2024 and 2023, respectively, and had net income of $0.9 million and $4.3 million for those same periods. Additionally, we generated revenue from tool rentals and product sales of $114.6 million and $116.8 million for the nine months ended September 30, 2024 and 2023, respectively, and had net income of $4.4 million and $10.9 million for those same periods, respectively. As of September 30, 2024, we had cash and cash equivalents of $12.0 million, and an accumulated deficit of $2.2 million.
We believe our future financial performance will be driven by continued investment in oil and gas drilling following years of industry underinvestment.
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 tool rental revenues are primarily dependent on drilling activity and our ability to gain or maintain market share with a sustainable pricing model.
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 half of 2024, the oil and gas market witnessed a dynamic interplay of geopolitical tensions, supply concerns, and global demand fluctuations. Crude oil prices remained volatile, with benchmarks such as Brent and WTI experiencing fluctuations driven by a multitude of factors. Geopolitical tensions in key oil-producing regions, such as the Middle East, continued to influence market sentiment, leading to sporadic spikes in prices. Additionally, concerns over supply disruptions, particularly amidst conflicts and geopolitical uncertainties, added to the market’s unease. As the global market for crude oil has continued its recovery, technical recessions, specifically in China, have slowed progress and created fluctuations in global demand. As of September 30, 2024, the WTI oil price was approximately $68.75 per barrel.
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. These forward prices
33
experienced far less volatility in 2022 and 2023 and have maintained levels in 2024 which are highly constructive for offshore project demand.
Prices for natural gas have decreased somewhat throughout the first half of 2024 relative to the fourth quarter of 2023 in the U.S. due to several factors, including a mild winter in key consuming regions and increased production and availability, both of which led to an oversupply in the market. Additionally, constrained storage capacity and delivery delays resulted in uncertainty around liquified natural gas exports in the U.S.
Henry Hub natural gas spot prices have decreased from an average of $2.64 per one million British Thermal Units (“MMBtu”) in September 2023 to $2.28 per MMBtu in September 2024.
The ongoing conflict in Ukraine and the evolving Israel-Hamas conflict have caused uncertainty in the oil and natural gas markets, and the financial markets, both globally and in the U.S. Such uncertainty already has and could continue to cause stock price volatility and supply chain disruptions as well as higher oil and natural gas prices. These could result in higher inflation worldwide, impact consumer spending and negatively impact demand for our goods and services. Moreover, additional interest rate increases by the U.S. Federal Reserve to combat inflation could further increase the probability of a recession.
Notwithstanding the significant commodity price volatility over the past several years, we have seen decreases in drilling activity in the Western Hemisphere. Conversely, Eastern Hemisphere drilling activity has increased year over year. During the three and nine months ended September 30, 2024, the monthly average Western Hemisphere rig count was 947 and 946 rigs, respectively, compared to 1,007 and 1,062 rigs for the three and nine months ended September 30, 2023, respectively. During the three and nine months ended September 30, 2024, the monthly average Eastern Hemisphere rig count was 736 and 752 rigs, respectively, compared to 739 and 725 rigs for the three and nine months ended September 30, 2023, respectively. However, notwithstanding the impact of longer laterals, improved rig efficiencies have partially offset the impact of this reduction.
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.
How We Evaluate Our Operations
We use a number of financial and operational measures to routinely analyze and evaluate the performance of our business, including revenue, net and non-GAAP measures Adjusted EBITDA and Free Cash Flow.
Revenue, net
We analyze our performance by comparing actual monthly revenue to revenue trends and revenue forecasts by product line as well as tool activity trends for each month. Our revenue is primarily derived from tool rental and product sales.
Adjusted EBITDA
We regularly evaluate our financial performance using Adjusted EBITDA. Our management believes Adjusted EBITDA is a useful financial performance measure as it excludes non-cash charges and other transactions not related to our core operating activities and allows more meaningful analysis of the trends and performance of our core operations.
Free Cash Flow
Beginning in the first quarter of fiscal year 2024, we revised our presentation of non-GAAP measures to exclude the presentation of free cash flow in alignment with industry practices and to enhance comparability with our peers. The Company has determined that GAAP disclosures regarding the Company’s liquidity and capital resources, in the form provided in the Company’s recent periodic reports and without further enhancement through the inclusion of non-GAAP free cash flow information, provide investors with sufficient information on the Company’s cash available for investments, acquisitions, and working capital requirements.
Please refer to the section titled “Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial performance measure calculated and presented in accordance with GAAP and a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable liquidity measure calculated and presented in accordance with U.S GAAP.
34
Key Components of Results of Operations
The discussion below relating to significant line items from our interim unaudited consolidated statements of income and comprehensive income are based on available information and represent our analysis of significant changes or events that impact the comparability of the reported amount. Where appropriate, we have identified specific events and changes that affect comparability or trends and, where reasonably practicable, we have quantified the impact of such items.
Revenue, net
We currently generate our revenue, net from tool rental services and product sales. Tool rental services consist of rental services, inspection services, and repair services is accounted for in accordance Topic 842. We recognize revenues from renting tools on a straight-line basis. Our rental contract periods are daily, monthly, per well, or based on footage. As part of this straight-line methodology, when the equipment is returned, we recognize 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.
The rental tool recovery component of product sales revenue is recognized when a tool is deemed to be lost-in-hole, damaged-beyond-repair, or lost-in-transit while in the care, custody, or control of the customer. Other made to order product sales revenue is recognized when the product is made available to the customer for pickup at our shipping dock.
We expect our tool rental services revenue to increase over time as a function of an increase in drilling activity, customer pricing, and market share.
We expect that product sales revenue will increase as aged and consumable products will continue to be replaced in order to maintain or increase capacity. Additionally, product sale focused acquisitions are expected to further increase product sale revenue.
Costs and Expenses
Our costs and expenses consist of cost of revenue, selling, general, and administrative expense, and depreciation and amortization expense.
Cost of Revenue
Our cost of revenue consists primarily of all direct and indirect expenses related to providing our tool rental services offering and delivering our product sales, including personnel-related expenses and costs associated with maintaining the facilities.
We expect our total cost of tool rental revenue and our total cost of product sale revenue to increase in absolute dollars in future periods, corresponding to our anticipated growth in revenue and employee headcount to support our customers and to maintain the manufacturing, operations and field service team with some expected cost inflation.
We expect that gross margins will continue to improve slightly as we leverage our existing cost structure to support an increase in our business activity. In addition, we expect that customer price increases will help offset cost inflation.
Selling, General and Administrative
General and administrative expenses consist primarily of personnel-related expenses, including salaries, benefits and stock-based compensation for personnel and outside professional services expenses including legal, audit and accounting services, insurance, other administrative expenses and allocated facility costs for our administrative functions.
We expect our operating expenses to increase in absolute dollars for the foreseeable future as a result of operating as a public company. In particular, we expect our legal, accounting, tax, personnel-related expenses and directors’ and officers’ insurance costs reported within general and administrative expense to increase as we establish more comprehensive compliance and governance functions, increased security and IT compliance, review internal controls over financial reporting in accordance with the Sarbanes-Oxley Act of 2002, as amended, and prepare and distribute periodic reports as required by the rules and regulations of the U.S. Securities and Exchange Commission. As a result, our historical results of operations may not be indicative of our results of operations in future periods.
Selling expenses consist primarily of personnel-related expenses, including salaries, benefits and stock-based compensation for personnel, direct advertising, marketing and promotional material costs, sales commission expense, consulting fees and allocated facility costs for our sales and marketing functions.
35
We intend to increase investments in our sales and marketing organization to drive additional revenue, expand our global customer base, and broaden our brand awareness. We expect our sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future.
Depreciation and amortization expense
Depreciation and amortization expense relates to the consumption of our property and equipment, which consists of rental tools, shop equipment, computer equipment, furniture and fixtures and leasehold improvements, and the amortization of our intangible assets mainly related to customer relationships, software and partnerships.
Other income (expense), net
Our other income (expense), net is primarily comprised of interest income (expense), gain on sale of property, unrealized gain (loss) on securities, and other miscellaneous income and expense unrelated to our core operations.
Results of Operations
The following table set forth our results of operations for the periods presented (in thousands):
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Revenue, net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Tool rental |
|
$ |
28,116 |
|
|
$ |
29,361 |
|
|
$ |
86,410 |
|
|
$ |
90,639 |
|
Product sale |
|
|
11,977 |
|
|
|
8,777 |
|
|
|
28,190 |
|
|
|
26,206 |
|
Total revenue, net |
|
|
40,093 |
|
|
|
38,138 |
|
|
|
114,600 |
|
|
|
116,845 |
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cost of tool rental revenue |
|
|
4,076 |
|
|
|
7,337 |
|
|
|
17,558 |
|
|
|
21,578 |
|
Cost of product sale revenue |
|
|
5,726 |
|
|
|
1,814 |
|
|
|
10,779 |
|
|
|
5,862 |
|
Selling, general, and administrative expense |
|
|
19,855 |
|
|
|
16,552 |
|
|
|
57,415 |
|
|
|
50,999 |
|
Depreciation and amortization expense |
|
|
6,185 |
|
|
|
5,303 |
|
|
|
17,232 |
|
|
|
15,035 |
|
Total costs and expenses |
|
|
35,842 |
|
|
|
31,006 |
|
|
|
102,984 |
|
|
|
93,474 |
|
Operating Income |
|
|
4,251 |
|
|
|
7,132 |
|
|
|
11,616 |
|
|
|
23,371 |
|
Other expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense, net |
|
|
(1,038 |
) |
|
|
(73 |
) |
|
|
(2,030 |
) |
|
|
(995 |
) |
Gain (loss) on sale of property |
|
|
19 |
|
|
|
— |
|
|
|
61 |
|
|
|
68 |
|
Gain (loss) on remeasurement of previously held equity interest |
|
|
(361 |
) |
|
|
(535 |
) |
|
|
368 |
|
|
|
(148 |
) |
Other income (expense), net |
|
|
(2,443 |
) |
|
|
(135 |
) |
|
|
(5,241 |
) |
|
|
(6,170 |
) |
Total other expense, net |
|
|
(3,823 |
) |
|
|
(743 |
) |
|
|
(6,842 |
) |
|
|
(7,245 |
) |
Income before income taxes |
|
|
428 |
|
|
|
6,389 |
|
|
|
4,774 |
|
|
|
16,126 |
|
Income tax expense |
|
|
439 |
|
|
|
(2,102 |
) |
|
|
(415 |
) |
|
|
(5,201 |
) |
Net income |
|
$ |
867 |
|
|
$ |
4,287 |
|
|
$ |
4,359 |
|
|
$ |
10,925 |
|
Comparison of the Three Months Ended September 30, 2024 and 2023
Revenue, net
Our revenue, net consists of tool rental and product sale revenues.
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Tool rental |
|
$ |
28,116 |
|
|
$ |
29,361 |
|
|
$ |
(1,245 |
) |
|
|
(4 |
)% |
Product sale |
|
$ |
11,977 |
|
|
$ |
8,777 |
|
|
$ |
3,200 |
|
|
|
36 |
% |
Tool rental revenue decreased $1.2 million, or (4)%, to $28.1 million for the three months ended September 30, 2024 as compared to $29.4 million for the three months ended September 30, 2023. The decrease was primarily driven by decreased market activity in relation to our Directional Tool Rentals (“DTR”) division, the revenue of which decreased $2.5 million. The decrease was partially offset by an increase in our Premium Tools Division ("PTD"), the revenue of which increased $0.4 million and an increase at our Wellbore Optizimation Tools ("WOT") division, revenue of which increased $0.6 million.
36
Product sale revenue increased $3.2 million, or 36%, to $12.0 million for the three months ended September 30, 2024 as compared to $8.8 million for the three months ended September 30, 2023. The increase by additional product sales as it relates to Deep Casing ("DCT") which was acquired in March 2024 and the Diamond Products Division ("DPD"), which was acquired in August 2024. This increase was partially offset by lower tool recovery revenue for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023.
Costs and Expenses
Cost of revenue
Our cost of revenue consists of cost of tool rental revenue and cost of product sale revenue.
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Cost of tool rental revenue |
|
$ |
4,076 |
|
|
$ |
7,337 |
|
|
$ |
(3,261 |
) |
|
|
(44 |
)% |
Cost of product sale revenue |
|
$ |
5,726 |
|
|
$ |
1,814 |
|
|
$ |
3,912 |
|
|
|
216 |
% |
Cost of tool rental revenue decreased $3.3 million, or (44)%, to $4.1 million for the three months ended September 30, 2024 as compared to $7.3 million for the for the three months ended September 30, 2023. The decrease in cost of tool rental revenue was primarily driven by a decrease in labor and repairs cost due to the decrease in rental activity.
Cost of product sale revenue increased $3.9 million, or 216%, to $5.7 million for the three months ended September 30, 2024 as compared to $1.8 million for the for the three months ended September 30, 2023. The increase in cost of product sale revenue was primarily driven by additional cost of product sales from Deep Casing and DPD, offset by a decrease in cost of product sales associated with tool recovery.
Selling, General, and Administrative Expense
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Selling, general, and administrative expense |
|
$ |
19,855 |
|
|
$ |
16,552 |
|
|
$ |
3,303 |
|
|
|
20 |
% |
Selling, general, and administrative expense increased $3.3 million, or 20%, to $19.9 million for the three months ended September 30, 2024 as compared to $16.6 million for the three months ended September 30, 2023. This increase was primarily driven by an increase in personnel related fees and other costs associated with the public company transition. No other driver of this increase was significant.
Depreciation and Amortization expense
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Depreciation and amortization expense |
|
$ |
6,185 |
|
|
$ |
5,303 |
|
|
$ |
882 |
|
|
|
17 |
% |
Depreciation and amortization expenses increased $0.9 million, or 17%, to $6.2 million for the three months ended September 30, 2024 as compared to $5.3 million for the three months ended September 30, 2023. The increase was primarily due an increase in depreciation expense resulting from a higher property, plant and equipment balance as of September 30, 2024.
Other expense, net
Interest Expense, net
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Interest expense, net |
|
$ |
(1,038 |
) |
|
$ |
(73 |
) |
|
$ |
965 |
|
|
|
1,322 |
% |
37
Interest expense increased $965 thousand, or 1322%, to $1.0 million for the three months ended September 30, 2024 as compared to $0.1 million for the three months ended September 30, 2023. The increase was primarily due to an increase in interest expense on the term loan entered into in March 2024 and the Credit Facility, which was drawn on during three months ended September 30, 2024.
Other Expense, net
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Other expense, net |
|
$ |
(2,443 |
) |
|
$ |
(135 |
) |
|
$ |
(2,308 |
) |
|
|
(1,709.6 |
%) |
Other expense for the three months ended September 30, 2024 was $2.4 million, a increase of $2.3 million, or (1710)%, compared to the three months ended September 30, 2023. The increase was primarily due to increased transaction costs related to the completion of the acquisition of SDPI during the third quarter of 2024.
Comparison of the Nine Months Ended September 30, 2024 and 2023
Revenue, net
Our revenue, net consists of tool rental and product sale revenues.
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Tool rental |
|
$ |
86,410 |
|
|
$ |
90,639 |
|
|
$ |
(4,229 |
) |
|
|
(5 |
)% |
Product sale |
|
$ |
28,190 |
|
|
$ |
26,206 |
|
|
$ |
1,984 |
|
|
|
8 |
% |
Tool rental revenue decreased $4.2 million, or (5)%, to $86.4 million for the nine months ended September 30, 2024 as compared to $90.6 million for the nine months ended September 30, 2023. The decrease was primarily driven by decreased market activity across certain divisions, especially in relation to our DTR division, the revenue of which decreased $8.0 million and our PTD division, the revenue of which decreased $0.9 million. These decreases were offset by increases at our WOT division, the revenue of which increased by $2.3 million and DCT, the revenue of which increased $0.6 million.
Product sale revenue decreased $2.0 million, or 8%, to $28.2 million for the nine months ended September 30, 2024 as compared to $26.2 million for the nine months ended September 30, 2023. The decrease was primarily driven by higher than average rental tool recovery events in the nine months ended September 30, 2023, partially offset by additional product sales at DCT and DPD for the nine months ended September 30, 2024.
Costs and Expenses
Cost of revenue
Our cost of revenue consists of cost of tool rental revenue and cost of product sale revenue.
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Cost of tool rental revenue |
|
$ |
17,558 |
|
|
$ |
21,578 |
|
|
$ |
(4,020 |
) |
|
|
(19 |
)% |
Cost of product sale revenue |
|
$ |
10,779 |
|
|
$ |
5,862 |
|
|
$ |
4,917 |
|
|
|
84 |
% |
Cost of tool rental revenue decreased $4.0 million, or (19)%, to $17.6 million for the nine months ended September 30, 2024 as compared to $21.6 million for the for the nine months ended September 30, 2023. The decrease in cost of tool rental revenue was primarily driven by a decrease in sub rental, accessory, and repair cost due to the decrease in rental activity.
Cost of product sale revenue increased $4.9 million, or 84%, to $10.8 million for the nine months ended September 30, 2024 as compared to $5.9 million for the for the nine months ended September 30, 2023. The increase in cost of product sale revenue was primarily driven by additional cost of product sales from DCT and DPD, offset by a decrease in cost of product sales associated with tool recovery.
38
Selling, General, and Administrative Expense
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Selling, general, and administrative expense |
|
$ |
57,415 |
|
|
$ |
50,999 |
|
|
$ |
6,416 |
|
|
|
13 |
% |
Selling, general, and administrative expense increased $6.4 million, or 13%, to $57.4 million for the nine months ended September 30, 2024 as compared to $51.0 million for the nine months ended September 30, 2023. This increase was primarily driven by an increase in personnel related fees and other costs associated with the public company transition. No other driver of this increase was significant.
Depreciation and Amortization expense
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Depreciation and amortization expense |
|
$ |
17,232 |
|
|
$ |
15,035 |
|
|
$ |
2,197 |
|
|
|
15 |
% |
Depreciation and amortization expenses increased $2.2 million, or 15%, to $17.2 million for the nine months ended September 30, 2024 as compared to $15.0 million for the nine months ended September 30, 2023. The increase was primarily due to an increase in depreciation expense resulting from a higher property, plant and equipment balance as of September 30, 2024.
Other (expense) income
Interest Expense, net
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Interest expense, net |
|
$ |
(2,030 |
) |
|
$ |
(995 |
) |
|
$ |
(1,035 |
) |
|
|
(104 |
)% |
For the nine months ended September 30, 2024 we had interest expense of $2.0 million as compared to interest expense of $1.0 million for the nine months ended September 30, 2023. This change of $1.0 million or 104%. The increase was primarily due to an increase in interest expense on the term loan entered into in March 2024 and the Credit Facility, which was drawn on during three months ended September 30, 2024.
Other Expense
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
(In thousands) |
|
2024 |
|
|
2023 |
|
|
Amount |
|
|
% |
|
||||
Other expense, net |
|
$ |
(5,241 |
) |
|
$ |
(6,170 |
) |
|
$ |
929 |
|
|
|
(15 |
)% |
Other expense for the nine months ended September 30, 2024 was $5.2 million, a decrease of $0.9 million, or (15)%, compared to the nine months ended September 30, 2023. The decrease was primarily due to increased transaction costs related to the completion of the merger with ROC Energy Acquisition in June 2023 and compared to transaction costs incurred during the nine months ended September 30, 2024.
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.
39
This non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with U.S. GAAP. There are a number of limitations related to the use of this non-GAAP financial measures compared to the closest comparable U.S.GAAP measure. Some of these limitations are that:
The following tables present a reconciliation of Adjusted EBITDA to net income (loss) for the three and nine months ended September 30, 2024 and 2023 (non-recurring transaction expenses recorded to other (income) expense are presented separately within Adjusted EBITDA):
|
|
Three Months Ended September 30, |
|
|||||
(In thousands) |
|
2024 |
|
|
2023 |
|
||
Net income (loss) |
|
$ |
867 |
|
|
$ |
4,287 |
|
Add (deduct): |
|
|
|
|
|
|
||
Income tax expense/(benefit) |
|
|
(439 |
) |
|
|
2,102 |
|
Depreciation and amortization |
|
|
6,185 |
|
|
|
5,303 |
|
Interest expense, net |
|
|
1,038 |
|
|
|
73 |
|
Stock option expense |
|
|
508 |
|
|
|
— |
|
Management fees |
|
|
188 |
|
|
|
295 |
|
Loss (gain) on sale of property |
|
|
(19 |
) |
|
|
— |
|
Gain (loss) on remeasurement of previously held equity interest |
|
|
361 |
|
|
|
535 |
|
Transaction expense |
|
|
1,857 |
|
|
|
124 |
|
Other expense, net |
|
|
579 |
|
|
|
10 |
|
Adjusted EBITDA |
|
$ |
11,125 |
|
|
$ |
12,729 |
|
|
|
Nine Months Ended September 30, |
|
|||||
(In thousands) |
|
2024 |
|
|
2023 |
|
||
Net income (loss) |
|
$ |
4,359 |
|
|
$ |
10,925 |
|
Add (deduct): |
|
|
|
|
|
|
||
Income tax expense |
|
|
415 |
|
|
|
5,201 |
|
Depreciation and amortization |
|
|
17,232 |
|
|
|
15,035 |
|
Interest expense, net |
|
|
2,030 |
|
|
|
995 |
|
Stock option expense |
|
|
1,572 |
|
|
|
1,661 |
|
Management fees |
|
|
563 |
|
|
|
773 |
|
Loss (gain) on sale of property |
|
|
(61 |
) |
|
|
(68 |
) |
Unrealized (gain) loss on equity securities |
|
|
(368 |
) |
|
|
148 |
|
Transaction expense |
|
|
4,766 |
|
|
|
5,963 |
|
Other expense, net |
|
|
475 |
|
|
|
207 |
|
Adjusted EBITDA |
|
$ |
30,982 |
|
|
$ |
40,840 |
|
Liquidity and Capital Resources
At September 30, 2024, we had $12.0 million of cash and cash equivalents. Our primary sources of liquidity and capital resources are cash on hand, cash flows generated by operating activities 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 7 – Revolving Credit Facility, of the notes to the unaudited condensed consolidated financial statements included elsewhere in this Report (the ”Interim Financial Statements).
40
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 noncancelable operating leases agreements. See Note 14, 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 8, Income Taxes, of the notes to the Interim Financial Statements.
Cash Flows
The following table sets forth our cash flows for the period indicated:
|
|
Nine Months Ended September 30, |
|
|||||
(In thousands) |
|
2024 |
|
|
2023 |
|
||
Net cash (used in) provided by: |
|
|
|
|
|
|
||
Operating activities |
|
$ |
9,723 |
|
|
$ |
17,484 |
|
Investing activities |
|
|
(46,132 |
) |
|
|
(20,027 |
) |
Financing activities |
|
|
43,360 |
|
|
|
4,297 |
|
Effect of changes in foreign exchange rate |
|
|
(993 |
) |
|
|
(117 |
) |
Net increase (decrease) in cash and cash equivalents |
|
$ |
5,958 |
|
|
$ |
1,637 |
|
Cash Flows (Used In) Provided by Operating Activities
Net cash provided by operating activities for the nine months ended September 30, 2024 was $9.7 million resulting from our net income of $4.4 million, adjusted for non-cash charges of $21.1 million in depreciation and amortization, including non-cash lease expense and deferred financing costs, $1.6 million of stock-based compensation expense, and $0.3 million in provisions for excess and obsolete property, plant, and equipment and credit losses. This was partially offset by a $7.3 million gain on rental tool recovery sales, $1.3 million in deferred tax expense, and $8.6 million in net changes from operating assets and liabilities. The $8.6 million in cash used in operating assets and liabilities is primarily due to a $0.6 million cash outflow in prepaid expenses due to the timing of payments, a $2.9 million cash outflow in inventory, $3.4 million cash outflow in operating lease liabilities, and a $3.7 million cash outflow related to accounts payable and accrued expenses. These outflows were offset by a $2.1 million cash inflow related to accounts receivables. 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 nine months ended September 30, 2023 was $17.5 million resulting from our net income of $10.9 million, adjusted for non-cash charges of $18.5 million in depreciation and amortization, including amortization of right of use assets and deferred financing costs, $4.0 million of stock-based compensation expense as a result of the Merger, $0.5 million of bad debt expense and $3.7 million in deferred tax expense. This was partially offset by a $14.0 million gain on rental tool recovery sales and $6.7 million in net changes from operating assets and liabilities. The $6.7million in cash used in operating assets and liabilities is primarily due to a $0.5 million cash outflow in accounts receivable associated with an increase in sales and higher revenues during the first nine months of 2023 compared to the first nine months of 2022, a $3.3 million cash outflow from operating lease liabilities as we increase right-of-use assets on hand and a $2.9 million cash outflow from inventories due to purchased inventory related to our attempt to reduce risk and uncertainties in our supply chain. This was partially offset by a $0.1 million cash inflow in accounts payable and accrued expenses due to differences in the timing of disbursements. We will continue to evaluate our capital requirements for both
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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.”
Cash Flows (Used In) Provided by Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2024 was $46.1 million. Purchases of property, plant, and equipment of $19.6 million and business acquisitions of $38.6 million were partially offset by proceeds from rental tool recovery sales of $10.9 million and proceeds from the sale of equity securities of $1.2 million.
Net cash used in investing activities for the nine months ended September 30, 2023 was $20.0 million. Purchases of property, plant, and equipment of $36.7 million were partially offset by proceeds from rental tool recovery sales of $16.6 million and proceeds from sale of property of $0.1 million.
Cash Flows (Used In) Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2024 was $43.4 million resulting from proceeds from the term loan of $25 million and proceeds from the revolving line of credit of $30.1 million offset by $0.7 million in payments of deferred financing costs and $10.9 million in repayments of the Term Loan and the revolving line of credit.
Net cash provided by financing activities for the nine months ended September 30, 2023 was $4.3 million resulting from proceeds from the Merger and PIPE Financing, net of transaction costs, of $23.1 million, partially offset by a net decrease in amounts outstanding under the Credit Facility Agreement of $18.3 million, payments of deferred financing costs of $0.3 million and payments to holders of DTIH convertible preferred stock in connection with the Merger of $0.2 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.
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, 2023 (the "Annual Report"). In addition to the critical accounting policies and estimates disclosed in our Annual Report, accounting for Business Combinations was identified as a new critical accounting policy and estimate in the nine months ended September 30, 2024.
Business Combinations
We account for business combinations using the acquisition method of accounting in accordance with ASC 805, Business Combinations. On the acquisition date for a business combination, we allocate the total purchase consideration for the acquisition to the assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. Additionally, we identify and attribute fair values and estimated lives to acquired intangible assets. We identify an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when it can be separately sold, transferred, licensed, rented, or exchanged. We recognize goodwill, if any, in the amount by which the aggregate fair value of the total purchase consideration exceeds the aggregate fair value of the net assets (including intangible assets) acquired.
In determining the fair values of assets acquired (including intangible assets) and liabilities assumed, we utilize a variety of methods. Each asset acquired and liability assumed is measured at fair value from the perspective of a market participant. The methods used to estimate the fair values of intangible assets incorporate significant estimates and assumptions regarding the estimates a market participant would make in order to evaluate an asset, including, but not limited to, a market participant’s use of the asset as well as forecasts for cash flows, revenue growth, asset lives, customer attrition rates, royalty rates, income tax rates, and discount rates.
We believe that the estimated fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions that a market participant would use. While we use our best estimates and assumptions to value assets acquired and liabilities assumed
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at the acquisition date, our estimates are inherently uncertain and subject to refinement. The use of different assumptions related to these uncertain factors at acquisition could result in material changes to the amounts initially recorded at acquisition, which could have a material impact on our condensed consolidated financial statements. When appropriate, we engage third-party valuation specialists to assist in determining the fair values of assets acquired and liabilities assumed.
If the initial accounting for a business combination has not been completed by the end of the reporting period in which the business combination occurs, provisional amounts are reported to present information about facts and circumstances that existed as of the acquisition date. We must complete the accounting for each business combination during its measurement period, which cannot exceed one year from the acquisition date. Adjustments made during the measurement period could have a material impact on our condensed consolidated financial statements.
Costs that are directly attributable to business combinations are expensed as incurred within other expenses, net, on the condensed consolidated statements of income and comprehensive income. The results of operations of acquisitions are included in the consolidated financial statements from the date of acquisition.
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 $1.07 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
A discussion of concentration risk is included in 1 – Summary of Significant Accounting Policies, to the Interim Financial Statements included elsewhere in this report.
Foreign currency risk
Our customers are primarily located in the United States and Canada. 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 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
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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
We expect we will continue to experience inflationary pressures on our cost structure for the foreseeable future. However, tightness in overseas freight and transit times have eased. Additionally, raw material and component costs are moderating due in part to a strengthening U.S. dollar and weakening steel demand. Nonetheless, we cannot be confident that transit times or input prices will return to the lower levels experienced in prior years. Continued inflation and looming concerns regarding a possible recession weigh on the outlook for oil demand which could in turn negatively impact demand for our goods and services.
Cybersecurity Risk
We have a suite of controls including 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 reputational 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 Securities Exchange Act of 1934, as amended (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 June 30, 2024, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. 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 June 30, 2024, or as of the date of the filing of this Report.
Our disclosure controls and procedures were not effective as of September 30, 2024, or as of the date of filing of this Report, 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, 2023 have not been fully remediated despite ongoing projects and improvements made in the current quarter. As a result, we were not able to rely upon the disclosure controls and procedures that were in place as of September 30, 2024, or as of the date of this filing, 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 the Merger, 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 the following deficiencies in the design or operation of our internal controls to be a material weakness:
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We are in the process of implementing a risk assessment process and measures designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weakness, including (1) hiring more qualified staff and increasing resources with sufficient knowledge and experience to strengthen financial reporting, (2) implementing software and procedures to enhance our Company’s IT environment and (3) devoting proper time by senior management to perform comprehensive review of procedures to assess risks and enforce effective accountability. The process of designing and implementing 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
During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
See Part I, Item 1, Note 14 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 28, 2024, 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 to the risk factors that appear in the Annual Report as of the date of this Quarterly 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 three months ended September 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act)
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Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Report.
Exhibit Number |
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Description |
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2.1† |
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2.2 |
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3.1 |
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3.2 |
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31.1* |
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31.2* |
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32.1* |
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32.2* |
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101.INS* |
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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* |
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Inline XBRL Taxonomy Extension Schema Document |
104* |
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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.
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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.
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Drilling Tools International Corporation |
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Date: November 14, 2024 |
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By: |
/s/ David R. Johnson |
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David R. Johnson |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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