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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission File Number: 001-41103

 

DRILLING TOOLS INTERNATIONAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

87-2488708

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

3701 Briarpark Drive

Suite 150

Houston, Texas

77042

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (832) 742-8500

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $0.0001 per share

 

DTI

 

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No

As of August 14, 2023, the registrant had 29,768,568 shares of common stock, $0.0001 par value per share, outstanding.

 


 

Table of Contents

 

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Income and Comprehensive Income

4

Condensed Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Shareholders' Equity

5

Condensed Consolidated Statements of Cash Flows

7

Notes to Condensed Unaudited Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

43

Item 4.

Controls and Procedures

43

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

44

Item 1A.

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

Item 3.

Defaults Upon Senior Securities

44

Item 4.

Mine Safety Disclosures

44

Item 5.

Other Information

44

Item 6.

Exhibits

45

Signatures

47

 

 


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Report may constitute "forward-looking statements" for purposes of the federal securities laws. These forward-looking statements include, but are not limited to, statements regarding our and our management team’s expectations, hopes, beliefs, intentions or strategies regarding the future. In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward‑looking. Forward-looking statements in this Report may include, for example, statements about:

the demand for our products and services, which is influenced by the general level activity in the oil and gas industry;
our ability to retain our customers, particularly those that contribute to a large portion of our revenue;
our ability to remain the sole North American distributor of the Drill-N-Ream;
our ability to employ and retain a sufficient number of skilled and qualified workers, including our key personnel;
the impact of our status as an emerging growth company and smaller reporting company;
our ability to source tools at reasonable cost;
our customers’ ability to obtain required permits or authorizations from applicable governmental agencies and other third parties;
our ability to market our services in a competitive industry;
our ability to execute, integrate and realize the benefits of acquisitions, and manage the resulting growth of our business;
our ability to obtain new technology that may become prevalent in the oilfield services industry;
potential liability for claims arising from damage or harm caused by the operation of our tools, or otherwise arising from the dangerous activities that are inherent in the oil and gas industry;
the impact of the COVID-19 pandemic;
application of oilfield anti-indemnity limitations enacted by certain states;
our ability to obtain additional capital;
the impact of restrictive covenants in the Credit Facility Agreement;
the impact of indebtedness incurred to execute our long-term growth strategy;
potential political, regulatory, economic and social disruptions in the countries in which we conduct business, including changes in tax laws or tax rates;
our dependence on our information technology systems, in particular Customer Order Management Portal and Support System, for the efficient operation of our business;

 

1


 

the impact of a change in relevant accounting principles, enforcement of existing or new regulations, and changes in policies, rules, regulations, and interpretations of accounting and financial reporting requirements;
the impact of adverse and unusual weather conditions on our operations;
our ability to comply with applicable laws, regulations and rules, including those related to the environment, greenhouse gases and climate change;
our ability to protect our intellectual property rights or trade secrets;
our ability to maintain an effective system of disclosure controls and internal control over financial reporting;
the potential for volatility in the market price of the DTIC Common Stock;
the impact of increased legal, accounting, administrative and other costs incurred as a public company, including the impact of possible shareholder litigation;
the potential for issuance of additional shares of DTIC Common Stock or other equity securities;
our ability to maintain the listing of the DTIC Common Stock on Nasdaq;
the impact of industry or securities analysts changing their recommendation, or failing to cover, the DTIC Common Stock;
the impact of our status as a “controlled company;” and
other risks and uncertainties described in this Report, including those under Part II, Item 1A. “Risk Factors.”

The forward-looking statements contained in this Report are based on our current expectations and beliefs concerning future developments and their potential effects on our business. There can be no assurance that future developments affecting our business will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described in this Report under Part II, Item 1A. “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the effect of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.

The forward-looking statements made by us in this Report speak only as of the date of this Report. Except to the extent required under the federal securities laws and rules and regulations of the SEC, we disclaim any obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In light of these risks and uncertainties, there is no assurance that the events or results suggested by the forward-looking statements will in fact occur, and you should not place undue reliance on these forward-looking statements.

 

2


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

June 30,

 

 

December 31,

 

(In thousands, except share data)

 

2023

 

 

2022

 

 

 

(Unaudited)

 

 

(Audited)

 

ASSETS

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash

 

$

7,156

 

 

$

2,352

 

Accounts receivable, net

 

 

30,357

 

 

 

28,998

 

Inventories, net

 

 

5,929

 

 

 

3,281

 

Prepaid expenses and other current assets

 

 

6,804

 

 

 

4,381

 

Investments - equity securities, at fair value

 

 

1,530

 

 

 

1,143

 

Total current assets

 

 

51,776

 

 

 

40,155

 

Property, plant and equipment, net

 

 

64,450

 

 

 

44,154

 

Operating lease right-of-use asset

 

 

20,397

 

 

 

20,037

 

Intangible assets, net

 

 

239

 

 

 

263

 

Deferred financing costs, net

 

 

472

 

 

 

226

 

Deposits and other long-term assets

 

 

963

 

 

 

383

 

Total assets

 

$

138,297

 

 

$

105,218

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
   SHAREHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

19,530

 

 

$

7,281

 

Accrued expenses and other current liabilities

 

 

12,629

 

 

 

7,299

 

Current portion of operating lease liabilities

 

 

3,836

 

 

 

3,311

 

Revolving line of credit

 

 

 

 

 

18,349

 

Total current liabilities

 

 

35,995

 

 

 

36,240

 

Operating lease liabilities, less current portion

 

 

16,622

 

 

 

16,691

 

Deferred tax liabilities, net

 

 

5,193

 

 

 

3,185

 

Total liabilities

 

 

57,810

 

 

 

56,116

 

Commitments and contingencies (See Note 14)

 

 

 

 

 

 

Redeemable convertible preferred stock

 

 

 

 

 

 

Series A redeemable convertible preferred stock*, par value $0.01;
nil shares and 30,000,000 shares authorized at June 30, 2023 and December 31, 2022, respectively; nil shares and 6,719,641 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

 

 

 

 

 

17,878

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

Common stock*, par value $0.0001; 500,000,000 shares and 65,000,000 shares authorized at June 30, 2023 and December 31, 2022, respectively;
29,768,568 shares and 11,951,137 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

 

 

3

 

 

 

1

 

Preferred stock, par value $0.0001; 10,000,000 and nil shares authorized at June 30, 2023 and December 31, 2022, respectively; nil shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively

 

 

 

 

 

 

Additional paid-in-capital

 

 

95,218

 

 

 

52,388

 

Accumulated deficit

 

 

(14,416

)

 

 

(21,054

)

Less treasury stock, at cost; nil shares at June 30, 2023 and December 31, 2022

 

 

 

 

 

 

Accumulated other comprehensive loss

 

 

(318

)

 

 

(111

)

Total shareholders' equity

 

 

80,487

 

 

 

31,224

 

Total liabilities, redeemable convertible preferred stock and shareholders' equity

 

$

138,297

 

 

$

105,218

 

* 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.

 

3


 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(UNAUDITED)

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

(In thousands, except share and per share data)

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenue, net:

 

 

 

 

 

 

 

 

 

 

 

 

Tool rental

 

$

29,002

 

 

$

23,024

 

 

$

61,278

 

 

$

43,440

 

Product sale

 

 

8,906

 

 

 

7,348

 

 

 

17,429

 

 

 

12,909

 

Total revenue, net

 

 

37,908

 

 

 

30,372

 

 

 

78,707

 

 

 

56,349

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of tool rental revenue

 

 

7,692

 

 

 

6,678

 

 

 

15,829

 

 

 

12,992

 

Cost of product sale revenue

 

 

1,157

 

 

 

1,262

 

 

 

2,460

 

 

 

2,413

 

Selling, general, and administrative expense

 

 

17,718

 

 

 

9,498

 

 

 

34,447

 

 

 

21,732

 

Depreciation and amortization expense

 

 

4,717

 

 

 

4,886

 

 

 

9,732

 

 

 

9,962

 

Total operating costs and expenses

 

 

31,284

 

 

 

22,324

 

 

 

62,468

 

 

 

47,099

 

Operating income

 

 

6,624

 

 

 

8,048

 

 

 

16,239

 

 

 

9,250

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

(348

)

 

 

(213

)

 

 

(922

)

 

 

4

 

Gain (loss) on sale of property

 

 

(1

)

 

 

-

 

 

 

68

 

 

 

5

 

Unrealized gain (loss) on equity securities

 

 

420

 

 

 

(87

)

 

 

387

 

 

 

323

 

Other expense, net

 

 

(4,382

)

 

 

(23

)

 

 

(6,035

)

 

 

(95

)

Total other (expense) income, net

 

 

(4,311

)

 

 

(323

)

 

 

(6,502

)

 

 

237

 

Income before income tax (expense) benefit

 

 

2,313

 

 

 

7,725

 

 

 

9,737

 

 

 

9,487

 

Income tax expense

 

 

(1,376

)

 

 

(1,791

)

 

 

(3,099

)

 

 

(2,220

)

Net income

 

$

937

 

 

$

5,934

 

 

$

6,638

 

 

$

7,267

 

Accumulated dividends on redeemable convertible preferred stock

 

 

 

 

 

295

 

 

 

314

 

 

 

589

 

Net income available to common shareholders

 

$

937

 

 

$

5,639

 

 

$

6,324

 

 

$

6,678

 

Basic earnings per share

 

$

0.07

 

 

$

0.47

 

 

$

0.49

 

 

$

0.56

 

Diluted earnings per share

 

$

0.05

 

 

$

0.30

 

 

$

0.33

 

 

$

0.37

 

Basic weighted-average common shares outstanding

 

 

13,910,670

 

 

 

11,951,123

 

 

 

12,936,310

 

 

 

11,951,123

 

Diluted weighted-average common shares outstanding

 

 

20,746,976

 

 

 

19,677,493

 

 

 

20,217,648

 

 

 

19,677,493

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

937

 

 

$

5,934

 

 

$

6,638

 

 

$

7,267

 

Foreign currency translation adjustment, net of tax

 

 

(207

)

 

 

13

 

 

 

(207

)

 

 

(62

)

Net comprehensive income

 

$

730

 

 

$

5,947

 

 

$

6,431

 

 

$

7,205

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4


 

DRILLING TOOLS INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY

(UNAUDITED)

 

 

Redeemable Convertible Preferred Stock

 

 

 

Common Stock

 

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except share and per share data)

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Accumulated
Deficit

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total
Shareholders'
Equity

 

BALANCE, December 31,
   2021

 

 

20,370,377

 

 

$

16,689

 

 

 

 

53,175,028

 

 

$

532

 

 

 

(811,156

)

 

$

(933

)

 

$

53,979

 

 

$

(42,134

)

 

$

(284

)

 

$

11,160

 

Retroactive application of Merger

 

 

(13,650,736

)

 

 

-

 

 

 

 

(41,223,891

)

 

 

(531

)

 

 

811,156

 

 

 

933

 

 

 

(402

)

 

 

-

 

 

 

-

 

 

 

-

 

Adjusted Balances, beginning of period*

 

 

6,719,641

 

 

 

16,689

 

 

 

 

11,951,137

 

 

 

1

 

 

 

 

 

 

 

 

 

53,577

 

 

 

(42,134

)

 

 

(284

)

 

 

11,160

 

Accretion of redeemable
   convertible preferred
   stock to redemption
   value

 

 

-

 

 

 

294

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(294

)

 

 

-

 

 

 

-

 

 

 

(294

)

Foreign currency
   translation adjustment,
   net of tax

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(75

)

 

 

(75

)

Net income

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,333

 

 

 

-

 

 

 

1,333

 

BALANCE, March 31, 2022

 

 

6,719,641

 

 

$

16,983

 

 

 

 

11,951,137

 

 

$

1

 

 

 

 

 

$

 

 

$

53,283

 

 

$

(40,801

)

 

$

(359

)

 

$

12,124

 

Accretion of redeemable
   convertible preferred
   stock to redemption
   value

 

 

-

 

 

 

295

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(295

)

 

 

-

 

 

 

-

 

 

 

(295

)

Foreign currency
   translation adjustment,
   net of tax

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

13

 

 

 

13

 

Net income

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,934

 

 

 

-

 

 

 

5,934

 

BALANCE, June 30, 2022

 

 

6,719,641

 

 

$

17,278

 

 

 

 

11,951,137

 

 

$

1

 

 

 

 

 

$

 

 

$

52,988

 

 

$

(34,867

)

 

$

(346

)

 

$

17,776

 

* Shares of legacy redeemable convertible preferred stock and legacy common stock have been retroactively restated to give effect to the Merger.

 

5


 

 

 

Redeemable Convertible Preferred Stock

 

 

 

Common Stock

 

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except share and per share data)

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional
Paid-In
Capital

 

 

Accumulated
Deficit

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Total
Shareholders'
Equity

 

BALANCE, December 31,
   2022

 

 

20,370,377

 

 

$

17,878

 

 

 

 

53,175,028

 

 

$

532

 

 

 

(811,156

)

 

$

(933

)

 

$

52,790

 

 

$

(21,054

)

 

$

(111

)

 

$

31,224

 

Retroactive application of Merger

 

 

(13,650,736

)

 

 

-

 

 

 

 

(41,223,891

)

 

 

(531

)

 

 

811,156

 

 

 

933

 

 

 

(402

)

 

 

-

 

 

 

-

 

 

 

-

 

Adjusted Balances, beginning of period*

 

 

6,719,641

 

 

 

17,878

 

 

 

 

11,951,137

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

52,388

 

 

 

(21,054

)

 

 

(111

)

 

 

31,224

 

Accretion of redeemable
   convertible preferred
   stock to redemption
   value

 

 

-

 

 

 

314

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(314

)

 

 

-

 

 

 

-

 

 

 

(314

)

Foreign currency
   translation adjustment,
   net of tax

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net income

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,701