Drilling Tools International Corp: Form 10-Q for the period ended Jun 30, 2025

The following discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes as of June 30, 2025, and for the three and six months ended June 30, 2025 and 2024, included elsewhere herein. For additional information pertaining to our business, including risk factors which should be considered before investing in our common stock, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2024. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. All dollar amounts are expressed in thousands of United States dollars (“$”), unless otherwise indicated. Capitalized terms used in this section, but not otherwise defined, have the meanings ascribed to them in the Report.

Overview

We are a global oilfield services company that designs, engineers, manufactures and provides a differentiated, rental-focused offering of tools for use in onshore and offshore horizontal and directional drilling operations, as well as other cutting-edge solutions across the well life cycle. We operate from 15 locations in North America and 11 international service and support centers in Europe, the Middle East, and Asia-Pacific.

Our revenues are derived from two sources: tool rental and product sales. Tool rental revenues are derived from the rental of tools used in bottom hole assemblies (“BHA”), various wellbore optimization tools, and tubular goods for drilling, workover, and completion operations. Additionally, tool rental revenue consists of the repair and inspection of such tools. Product sale revenues are derived from the sale of target depth technologies, the manufacturing and repair of tools for external customers, and tool recovery revenue. During the three months ended June 30, 2025 and 2024, we derived 83% and 75% of total revenues from tool rentals and 17% and 25% from product sales, respectively. During the six months ended June 30, 2025 and 2024, we derived 82% and 78% from tool rentals and 18% and 22% from product sales, respectively.

We operate out of 2 reporting segments, split by geography, consisting of the Western Hemisphere operations and the Eastern Hemisphere operations.

Market Factors

Demand for our services and products depends primarily upon the general level of activity in the oil and gas industry, including the number of active drilling rigs, the number of wells drilled, the depth and working pressure of these wells, the number of well completions, the level of well remediation activity, the volume of production and the corresponding capital spending by oil and natural gas companies. Oil and gas activity is in turn heavily influenced by, among other factors, investor sentiment, availability of capital and oil and gas prices locally and worldwide, which have historically been volatile.

Our 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. With the addition of Deep Casing Tools, we now sell tools to the end users for use in constructing their wells.

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 product line.

Recent Developments and Trends

Industry Update

In the first half of 2025, the oil and gas market witnessed a dynamic interplay of geopolitical tensions, shifting demand dynamics, and evolving geopolitical and economic factors. U.S. oil production reached record highs, averaging 13.5 million barrels per day, driven by the Permian Basin and offshore developments. However, this surge in supply coincided with an increasing surplus in global oil supply over demand, leading to downward pressure on prices. Crude oil prices experienced declines, specially WTI, whose quarterly average decreased from $78.41 per barrel to $64.63 per barrel from the fourth quarter of 2024 to the second quarter of 2025. Despite the high volatility in spot oil prices described above, our customers tend to be more focused on medium-term and long term commodity prices when making investment decisions due to the longer lead times for offshore projects.

In the first half of 2025, U.S. natural gas prices experienced a notable rebound following the record lows of 2024. The Henry Hub spot price averaged approximately $3.19 per million British thermal units (MMBtu) during the first quarter, or a 30% increase compared to the fourth quarter of 2024, reflecting seasonal increases due to heightened heating demand during colder-than-average weather in January. This uptick in demand is expected to outpace any expected growth in U.S. production, leading to a tightening of inventories and supporting higher prices through the remainder of 2025

Notwithstanding the significant commodity price volatility over the past several years, we have seen decreases both the Western and Eastern Hemisphere. During the three and six months ended June 30, 2025, the weekly average Western Hemisphere rig count, as reported by Baker Hughes was 832 and 881 rigs, respectively, compared to 897 and 946 rigs for the three and six months ended June 30, 2024. Additionally, during the three and six months ended June 30, 2025, the weekly average Eastern Hemisphere rig count, as reported by Baker Hughes was 714 and 719 rigs, respectively, compared to 764 and 760 rigs for the three and six months ended June 30, 2024. However, notwithstanding the impact of longer laterals, improved rig efficiencies have partially offset the impact of this reduction.

Inflation and Increased Costs

We are experiencing the impacts of global inflation, both in increased personnel costs and the prices of goods and services required to operate our rigs and execute capital projects. While we are currently unable to estimate the ultimate impact of rising prices, we do expect that our costs will continue to rise in the near term and will impact our profitability.

Results of Operations

The following table set forth our results of operations for the periods presented (in thousands):

(1) Corporate and other includes stock compensation expense, monitoring expenses, and unallocated corporate expenses.

Comparison of the Three Months Ended June 30, 2025 and 2024

nm = not meaningful

Western Hemisphere

Western Hemisphere revenue was $37.6 million for the three months ended June 30, 2025, a increase of $2.0 million, or 6%, compared to the three months ended June 30, 2024. The increase in revenues was driven by the addition of our Diamond Products Division ("DPD") in August of 2024. The increase in Western Hemisphere segment income was insignificant despite the increase in revenue due to increases in personnel related costs.

Eastern Hemisphere

Eastern Hemisphere revenue was $6.1 million for the three months ended June 30, 2025, a increase of $1.9 million, or 46% compared to the three months ended June 30, 2024. The increase in revenues was driven by the recent acquisitions of tool rental businesses located within the Eastern Hemisphere. Eastern Hemisphere segment income was $45.3 thousand, a decrease of $0.9 million, or 95%, compared to three months ended June 30, 2024. The decrease was driven by increased headcount as a result of the acquisitions and an activity decline seen in the Middle Eastern market.

Corporate and other expenses

Corporate and other expenses was $3.6 million for the three months ended June 30, 2025, an decrease of $0.8 million, or 19%, compared to the three months ended June 30, 2025 and 2024. The decrease was primarily driven by the reallocation of certain corporate expenses as a result of the recent segment reorganization in January of 2025.

Depreciation and amortization expense

Depreciation and amortization expenses was $6.8 million for the three months ended June 30, 2025, an increase of $1.1 million, or 20%, compared to the three months ended June 30, 2025 and 2024. The increase corresponds with the increasing property, plant, and equipment and intangible asset balances as a result of acquisitions and capital expenditures.

Interest Expense, net

Interest expense, net was $1.3 million for the three months ended June 30, 2025, an increase of $0.5 million, or 65%, compared to the three months ended June 30, 2025 and 2024. The increase was primarily a result of interest on the term loan, entered into in March 2024, interest on amounts drawn on the credit facility, and interest on the promissory note, entered into in September 2024.

Other operating and non-operating expense, net

Other operating and non-operating expense, net was $1.9 million for the three months ended June 30, 2025, an increase of $0.2 million, or 14%, compared to the three months ended June 30, 2025 and 2024. The increase was primarily a result expenses incurred during the second quarter of 2025 related to software implementation costs and restructuring charges.

Comparison of the Six Months Ended June 30, 2025 and 2024

Western Hemisphere

Western Hemisphere revenue was $78.8 million for the six months ended June 30, 2025, an increase of $4.9 million, or 7%, compared to the six months ended June 30, 2024. The increase in revenues was driven by the addition of our Diamond Products Division ("DPD") in August of 2024. The increase in Western Hemisphere segment income was insignificant despite the increase in revenue due to increases in personnel related costs.

Eastern Hemisphere

Eastern Hemisphere revenue was $11.1 million for the six months ended June 30, 2025, an increase of $5.7 million, or 105% compared to the six months ended June 30, 2024. The increase in revenues was driven by the recent acquisitions of tool rental businesses located within the Eastern Hemisphere. Eastern Hemisphere segment loss was $0.1 million, a decrease of $1.5 million, or 111%, compared to six months ended June 30, 2024. The decrease was driven by increased headcount as a result of the acquisitions and an activity decline seen in the Middle Eastern market.

Corporate and other expenses

Corporate and other expenses was $7.0 million for the six months ended June 30, 2025, a decrease of $0.9 million, or 12%, compared to the six months ended June 30, 2024. The decrease was primarily driven by the reallocation of certain corporate expenses as a result of the recent segment reorganization in January of 2025.

Deprecation and amortization expenses

Deprecation and amortization expenses was $13.5 million for the six months ended June 30, 2025, an increase of $2.5 million, or 23%, compared to the six months ended June 30, 2024. The increase corresponds with the increasing property, plant, and equipment and intangible asset balances as a result of acquisitions and capital expenditures.

Interest Expense, net

Interest expense, net was $2.6 million for the six months ended June 30, 2025, an increase of $1.7 million, or 167%, compared to the six months ended June 30, 2024. The increase was primarily a result of interest on the term loan, entered into in March 2024, interest on amounts drawn on the credit facility, and interest on the promissory note, entered into in September 2024.

Other operating and non-operating expense, net

Other operating and non-operating expense, net was $3.8 million for the six months ended June 30, 2025, an increase of $1.1 million, or 37%, compared to the six months ended June 30, 2024. The increase was primarily a result expenses incurred during the first six months of 2025 related to software implementation costs and restructuring charges.

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 operating and non-operating expense, net, net; income tax benefit (expense); depreciation and amortization; and certain other non-cash or non-recurring items impacting net income (loss) from time to time. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in Adjusted EBITDA.

This non-GAAP financial measure 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:

• Adjusted EBITDA excludes certain recurring, non-cash charges such as depreciation of fixed assets and amortization of acquired intangible assets and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;
• Adjusted EBITDA excludes income tax benefit (expense).

The following tables present a reconciliation of Adjusted EBITDA to net income (loss) for the three and six months ended June 30, 2025 and 2024 (non-recurring transaction expenses recorded to other (income) expense are presented separately within Adjusted EBITDA):

(In thousands)

(In thousands)

Liquidity and Capital Resources

At June 30, 2025, we had $1.1 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 8 – Long Term Debt, of the notes to Interim Financial Statements.

Capital Expenditures

Our capital expenditure relates to capital additions or improvements that add to our rental or repair capacity or extend the useful life of our drilling tools and related infrastructure. Also, our capital expenditures replace tools that are lost or damaged by a customer and these are funded by a rental tool recovery sale amount from the customer. We regularly incur capital expenditures on an on-going basis in order to (i) increase or maintain our rental tool fleet and equipment, (ii) extend the useful life of our rental tools and equipment and (iii)

acquire or upgrade computer hardware and software. The amount of our capital expenditures is influenced by, among other things, demand for our services, recovery of lost or damaged tools, schedules for refurbishing our various rental tools and equipment, cash flow generated by our operations, expected rates of return and cash required for other purposes.

Contractual Obligations and Commitments

Our material contractual obligations arise from leases of facilities and vehicles under noncancelable operating leases agreements. See Note 15 - Commitments and Contingencies, of the notes to the Interim Financial Statements.

Tax Obligations

We currently have available federal net operating loss carryforwards to offset our federal taxable income, and we expect that these carryforwards will substantially reduce our cash tax payments over the next several years. If we forfeit these carryforwards for any reason or deplete them faster than anticipated, our cash tax obligations could increase substantially. For additional information, see Note 9 - Income Taxes, of the notes to the Interim Condensed Consolidated Financial Statements.

Cash Flows

The following table sets forth our cash flows for the period indicated:

(In thousands)

Cash Flows Provided by Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2025 was $4.6 million, the driver being a net loss of $4.0 million and a decrease in net working capital of $4.8 million offset by non-cash adjustments of $13.5 million. We will continue to evaluate our capital requirements for both short-term and long-term liquidity needs, which could be affected by various risks and uncertainties, including, but not limited to, the effects of the current inflationary environment, rising interest rates, and other risks detailed in the section of this Report entitled “Risk Factors.”

Net cash provided by operating activities for the six months ended June 30, 2024 was $4.4 million, the driver being net income of $3.5 million, including non-cash charges of $8.6 million, offset by a decrease in net working capital of $7.7 million.

Cash Flows Used In Investing Activities

Net cash used in investing activities for the six months ended June 30, 2025 was $12.1 million resulting from purchases of property, plant, and equipment of $12.6 million, purchases of intangible assets of $1.1 million, and the acquisition of Titan for $5.6 million, partially offset by proceeds from rental tool recovery sales of $7.1 million.

Net cash used in investing activities for the six months ended June 30, 2024 was $26.7 million, resulting from purchases of property, plant, and equipment of $16.3 million and the acquisition of Deep Casing Tools for $18.2 million were partially offset by proceeds from rental tool recovery sales of $7.8 million.

Cash Flows Provided By Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2025 was $2.4 million, resulting from net debt increases of $3.1 million offset by purchases of treasury stock of $0.6 million.

Net cash provided by financing activities for the six months ended June 30, 2024 was $23.5 million, resulting from net debt increases of $24.2 million offset by the payment of debt issuance costs of $0.7 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, 2024.

Recently Issued and Adopted Accounting Standards

A discussion of recent accounting pronouncements is included in Note 1 – Summary of Significant Accounting Policies, of the notes to the Interim Condensed Consolidated 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.

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, of the notes to the Interim Condensed Consolidated Financial Statements included elsewhere in this report.

Foreign currency risk

Our customers are primarily located in the United States, Canada, and across the Eastern Hemisphere. 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 to minimize the impact of these fluctuations in the exchange rates. We will periodically reassess our approach to manage our risk relating to fluctuations in currency rates.

We do not believe that foreign currency risk had a material effect on our business, financial condition, or results of operations during the periods presented.

Inflation Risk

Rising international tariffs, including any tariffs applied to goods traded between the U.S. and China, the U.S. and Mexico and the U.S. and Canada, could materially and adversely affect our business and results of operations. The U.S. government has previously and now again recently imposed tariffs on certain foreign goods from a variety of countries and regions that it perceives as engaging in unfair trade practices. Foreign governments have imposed, and may impose in the future, retaliatory tariffs on goods that their countries import from the U.S. Such changes can make it difficult or costly for us to do business in, or import our products from, those countries.

With certain tariff exclusions ending and with any new tariffs, it could further negatively impact global trade and economic conditions in many of the regions where we do business. It may also adversely impact demand for our products in certain locations. It may be time-consuming and costly for us to modify our business operations to adapt to or comply with such tariffs. If we become unable to recover a substantial portion of any increased tariff related costs, the recent or increased international tariffs could materially and adversely affect our business, financial condition and results of operations.

Cybersecurity Risk

We 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 reputation risks. There is no assurance that these efforts will fully mitigate cybersecurity risk and mitigation efforts are not an assurance that no cybersecurity incidents will occur.

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 of June 30, 2025, the Company’s disclosure controls and procedures were deemed ineffective by management, including the Chief Executive Officer and Chief Financial Officer. This conclusion stems from the continued presence of a material weakness in internal control over financial reporting, originally identified during the audits of the 2022 and 2023 financial statements. Despite ongoing remediation efforts and improvements made throughout 2024 and 2025, the Company has not fully addressed all prior audit findings and therefore cannot rely on its disclosure controls as of the reporting date.

The material weakness relates to ineffective monitoring activities to assess the operation of internal control over financial reporting. While progress has been made, such as implementing a control testing plan based on applicable reporting frameworks, further improvements are needed. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.

Changes in Internal Control over Financial Reporting

On March 15, 2024, we acquired Deep Casing Tools. As the acquisition date has exceeded one year, we are now required to assess internal controls over financial reporting. Additionally, on January 2, 2025, we completed the acquisition of Titan Tools. We are permitted to omit an assessment of an acquired business' internal control over financial reporting from our assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition. Accordingly, we have excluded the internal control over financial reporting of Titan Tools from management's assessment of internal control over financial reporting as of June 30, 2025.

Our Annual Report filed with the SEC on March 14, 2025, describes important risk factors that could cause our business, financial condition, results of operations and growth prospects to differ materially from those indicated or suggested by forward-looking statements made in this Report or presented elsewhere by management from time to time. There have been no material changes 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.