1、 UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549 FORM 10-K (Mark One)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31,2023OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF
2、 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)Delaware87-2488708(State or other jurisdiction ofincorporation or organization)(I.R.S.EmployerIdentification No.)3701 Briarpark Drive
3、Suite 150Houston,Texas77042(Address of principal executive offices)(Zip Code)Registrants telephone number,including area code:(832)742-8500 Securities registered pursuant to Section 12(b)of the Act:Title of each class TradingSymbol(s)Name of each exchange on which registeredCommon Stock,par value$0.
4、0001 per share DTI The Nasdaq Stock Market LLCSecurities registered pursuant to Section 12(g)of the Act:NoneIndicate by check mark if the Registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.YES NO Indicate by check mark if the Registrant is not required to file re
5、ports pursuant to Section 13 or 15(d)of the Act.YES NO 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 t
6、o 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 th
7、e 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 defin
8、itions 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
9、 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 has filed a report on and attestation to its ma
10、nagements assessment of the effectiveness of its internal control over financial reporting under Section 404(b)of the Sarbanes-Oxley Act(15 U.S.C.7262(b)by the registered public accounting firm that prepared or issued its audit report.If securities are registered pursuant to Section 12(b)of the Act,
11、indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-
12、based compensation received by any of the registrants executive officers during the relevant recovery period pursuant to 240.10D-1(b).Indicate by check mark whether the Registrant is a shell company(as defined in Rule 12b-2 of the Exchange Act).YES NO The aggregate market value of the voting and non
13、-voting common equity held by non-affiliates of the Registrant,based on the closing price of the shares of common stock on June 30,2023,was$128 million.The number of shares of Registrants Common Stock outstanding as of March 28,2024 was 29,768,568.DOCUMENTS INCORPORATED BY REFERENCEList hereunder th
14、e following documents if incorporated by reference and the Part of the Form 10-K(e.g.,Part I,Part II,etc.)into which the document is incorporated:(1)Any annual report to security holders;(2)Any proxy or information statement;and(3)Any prospectus filed pursuant to Rule 424(b)or(c)under the Securities
15、 Act of 1933.The listed documents should be clearly described for identification purposes(e.g.,annual report to security holders for fiscal year ended December 24,1980)2025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm1/100 2025/1/17 23:5510-Khttps:
16、/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm2/100 Table of Contents PagePART I Item 1.Business3Item 1A.Risk Factors9Item 1B.Unresolved Staff Comments27Item 1C.Cybersecurity27Item 2.Properties28Item 3.Legal Proceedings29Item 4.Mine Safety Disclosures29 PART II Item 5.M
17、arket for Registrants Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities30Item 6.Selected Financial Data30Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations31Item 7A.Quantitative and Qualitative Disclosures About Market Risk45
18、Item 8.Financial Statements and Supplementary Data46Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure85Item 9A.Controls and Procedures85Item 9B.Other Information86Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections86 PART III Item 10.
19、Directors,Executive Officers and Corporate Governance87Item 11.Executive Compensation87Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters87Item 13.Certain Relationships and Related Transactions,and Director Independence87Item 14.Principal Accountin
20、g Fees and Services87 PART IV Item 15.Exhibits,Financial Statement Schedules88Item 16.Form 10-K Summary88 i2025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm3/100 PART ICAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on F
21、orm 10-K contains and incorporates by reference estimates,projections,statements relating to our business plans,objectives,and expected operating results that are“forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995,Section 27A of the Securities Act o
22、f 1933,and Section 21E of the Securities Exchange Act of 1934.Forward-looking statements may appear throughout this report,including the following sections:“Business,”“Risk Factors,”and“Managements Discussion and Analysis of Financial Condition and Results of Operations.”These forward-looking statem
23、ents generally are identified by the words“may,”“believe,”“anticipate,”“expect,”“plan,”“predict,”“estimate,”“will be,”or other similar words and phrases.Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual resu
24、lts to differ materially.We describe risks and uncertainties that could cause actual results and events to differ materially in“Risk Factors”(Part I,Item 1A of this Form 10-K),“Managements Discussion and Analysis of Financial Condition and Results of Operation”(Part II,Item 7),and“Quantitative and Q
25、ualitative Disclosures about Market Risk”)(Part II,Item 7A).We undertake no obligation to update or publicly revise any forward-looking statements,whether because of new information,future events,or otherwise,except to the extent required by applicable law.Important factors that could cause actual r
26、esults to differ materially from those contained in the forwardlooking statements include,but are not limited to: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 contribu
27、te 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 repo
28、rting 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
29、benefits of acquisitions,and manage the resulting growth of our business;our ability to obtain new technology that may become prevalent in the OFS industry;potential liability for claims arising from damage or harm caused by the operation of our tools,or otherwise arising from the dangerous activiti
30、es 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 i
31、ncurred 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 IT systems,in particular customer order management portal and support system(
32、COMPASS),for the efficient operation of our business;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
33、weather conditions on our operations;12025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm4/100 our ability to comply with applicable laws,regulations and rules,including those related to the environment,greenhouse gases and climate change;our ability
34、 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 Common Stock;the fact that the price per share of Common Stock paid b
35、y certain Selling Stockholders is less than the price of such shares as of the date of this prospectus;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
36、 shares of Common Stock or other equity securities,including sales of shares of Common Stock that can be offered and sold pursuant to this prospectus;our ability to maintain the listing of the Common Stock on Nasdaq;the impact of industry or securities analysts changing their recommendation,or faili
37、ng to cover,the Common Stock;the impact of our status as a“controlled company;”and other risks and uncertainties described in this prospectus,including those under the section entitled“Risk Factors.”22025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.ht
38、m5/100 Item 1.Business.Unless the context otherwise requires,all references in this section to the“Company,”“DTIC,”“we,”“us,”or“our”refer to the business of Drilling Tools International Corporation and its consolidated subsidiaries following the consummation of the Merger(defined below),and to Drill
39、ing Tools International Holdings,Inc.and its consolidated subsidiaries prior to the consummation of the Merger.Our CompanyDrilling Tools International Corporation provides oilfield equipment and services to oil and natural gas sectors in North America,Europe,and the Middle East.We offer downhole too
40、l rentals,machining,and inspection services to support the global drilling and wellbore construction industry.Our primary products are bottom hole assembly components such as stabilizers,subs,non-magnetic and steel drill collars,hole openers,roller reamers,as well as drill pipe and drill pipe access
41、ories.In addition,we provide proprietary technology in our wellbore optimization business supplying the patented Drill-N-Ream(trademark)wellbore conditioning tool,and the patented RotoSteer(trademark),rotational steering tool for use in the extended reach horizontal drilling industry.We also offer a
42、 wide variety of ancillary equipment and handling tools to support our rental platform.Those tools include float valves,ring gauges,tool baskets,lift bail,lift subs,mud magnets,elevators,bracket and bail assemblies,slips,tongs,stabbing guides and safety clamps.We also offer a limited product line of
43、 blowout preventers and pressure control accessory equipment.We were founded in 1984 and we are headquartered in Houston,Texas.We operate from 16 locations in North America and maintain 4 international stocking points in Europe and the Middle East.Drilling and producing oil and gas is a complex ende
44、avor that requires tools of various shapes and sizes.Many of our customers rent these tools,as opposed to owning them,because of the many factors that affect which tools are needed for a specific task.Such factors include different formations,drilling methodologies,drilling engineer preferences,dril
45、ling depth and hole size.We believe that we are successful because we meet our customers wide demands by operating from multiple locations with over 65,000 tools in our fleet.We are led by an accomplished management team that has significant experience in the oil and gas industry and has worked toge
46、ther for much of the last decade.Since 2012,we have grown the business and strengthened our standing in the industry.Specifically,we have:Grown our revenue by 334%,from$35 million in 2012 to$152 million in 2023;Substantially increased our market share within North American land drilling,in which we
47、are the market leader,based on the percentage of active projects to which we supply tools,and regularly have active tool rentals on more than 50%of working locations;Expanded our footprint from three facilities to 16 locations in North America,allowing us to serve all major oil and gas producing bas
48、ins in North America land and offshore;Established four additional locations with international partners in Europe and the Middle East;Secured distribution rights for Drill-N-Ream,a patented specialty reaming tool that saves our customers time and money;Become the market leader in Gulf of Mexico (GO
49、M)deepwater drilling operation tool rentals,based on the percentage of active projects to which we supply tools,growing from serving only a single GOM project in 2012;Upgraded our customer base from one comprised primarily of independent directional service providers to one comprised of major divers
50、ified oilfield service companies(OSCs)and global E&P operators;Built a large sales and marketing organization focused on team selling;and Secured distribution rights for emerging technologies that fulfill the growing demand for longer horizontal lateral drilling.MergerOn June 20,2023(the Closing Dat
51、e),a merger transaction between Drilling Tools International Holdings,Inc.(DTIH),ROC Energy Acquisition Corp(ROC),and ROC Merger Sub,Inc.,a directly,wholly owned subsidiary of ROC(Merger Sub),was completed(the Merger”)pursuant to the initial merger agreement dated February 13,2023 and subsequent ame
52、ndment to the merger agreement dated June 5,2023 collectively,(the Merger Agreement).In connection with the closing of the Merger,ROC changed its name to Drilling Tools International Corporation.The common stock of DTIC(Common Stock or the DTIC Common Stock)commenced trading on the Nasdaq Stock Mark
53、et LLC(Nasdaq)under the symbol DTI on June 21,2023.See Note 3-Merger for further discussion of the Merger.Operating Activities32025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm6/100 Our operating activities are divided into four divisions:Direction
54、al Tool Rentals(DTR)Our DTR division is a leading provider of downhole tools to directional drilling and upstream energy customers in both land and offshore markets,based on the percentage of active rigs to which we supply tools in the geographies in which we are active.DTR maintains a fleet of over
55、 25,000 tools and accounted for approximately 61%of our 2023 revenue.DTR rents drill collars,stabilizers,sub-assemblies and other tools used in horizontal and directional drilling of oil and natural gas.We charge our customers a day rate,monthly rate or per-well rate,and customers are required to co
56、mpensate us for lost or damaged tools.DTR operates ten full-service locations and additional stocking points in key locations.DTR is our core division and operates in all markets which we serve.Premium Tools Division(PTD)PTD rents drill pipe,drill collars,kellys,pup joints,work strings,blowout preve
57、nters and production tubing to drilling operators across the United States.PTD accounted for approximately 19%of our 2023 revenue.PTDs fleet of drill pipe includes approximately 1,000,000 feet of drill pipe and tubing in diameters ranging from 3.5-inch to 5.5-inch with premium connection licenses fr
58、om qualified suppliers.We typically rent drill pipe under long term contracts under which the customer is responsible for tools lost or damaged tools while in its possession.This division operates two full-service locations and one stocking point.Wellbore Optimization Tools(WOT)WOT distributes Drill
59、-N-Ream,the leading wellbore conditioning tool,based on the percentage of active rigs that are candidates for wellbore conditioning where Drill-N-Ream is deployed and used in horizontal and directional drilling.WOT accounted for approximately 17%of our 2023 revenue.Drill-N-Ream is manufactured by Su
60、perior Drilling Products Inc.(SDPI),which holds the applicable patent.Pursuant to a periodically reviewed pricing agreement with SDPI,we purchase Drill-N-Ream units to rent to our customers and in turn pay SDPI a royalty based on the revenue we derive from such rentals.We have been the sole North Am
61、erican distributor of Drill-N-Ream since 2016.Drill-N-Ream conditions the wellbore during the drilling process,making it easier to back out of the hole once drilling is finished and clean the wellbore during the drilling process.This tool saves customers time and money by enabling operators to exten
62、d the length of their wellbore at a lower cost.We generally charge customers on a per foot basis and the customer is typically responsible for tools that are lost or damaged while in its possession.WOT is also launching emerging products that we believe will deliver added value to our customers.A sp
63、ecialized group of salespeople and service personnel regularly visit drill sites to support our customers in their use of our tools.Other Products&Services,including Downhole Inspection Solutions&Downhole Machining Solutions(Other Products&Services)DTIs Other Products and Services division includes
64、Downhole Inspection Solutions&Downhole Machining Solutions and primarily provides inspection and machining services to our DTR,PTD and WOT divisions and a few select customers.Other Products&Services accounted for approximately 3%(net of eliminations)of our 2023 revenue.Other Products and Services e
65、nables us to manage the maintenance and repair of our tools,which in turn empowers us to maximize their uptime.Our IndustryThe Role of Rental Tool Companies in the Production of Oil and GasWellbore construction is a critical stage in the production of oil and gas.Wellbore construction is comprised o
66、f drilling the wellbore,logging the target producing formation to determine if commercial amounts of hydrocarbons exist,installing casing,cementing casing and performing completion procedures to prepare the well for production.Even after wellbore construction is complete,production products and serv
67、ices are needed over the wells full life cycle.Oil and gas companies typically hire a drilling contractor with an appropriate drilling rig to begin wellbore construction.However,drilling contractors generally do not have all the necessary tools to complete the project,and instead focus their busines
68、s on the rig and its main components and rarely rent tools on behalf of oil and gas operators.Instead,oil and gas companies prefer to procure the products and services involved in drilling and subsequent procedures on a temporary basis from entities operating in the oil field services(OFS)industry.T
69、his enables them to obtain the best quality,service,and pricing value directly from the service and equipment suppliers.As a result,upon completion of the well,the oil and gas operator does not hold assets that it no longer needs.The tools provided by rental tool companies vary from select bottom ho
70、le assembly components,drill string tools,pressure control devices and a wide variety of specialty items.Rental tool companies purchase assets and rent them to their oil and gas operator customers,who in turn use these tools to complete their respective projects.Rental tool companies typically charg
71、e daily rental fees,but fees also can be structured as hourly,footage,weekly,or monthly charges.Rental tool companies also bill customers for repair charges if tools are damaged beyond normal wear and tear.In addition,if the tools are lost in the well,or damaged beyond repair,the customer is charged
72、 a replacement fee.Rental tool companies ability to charge such fees are particularly important in light of the acceleration of drilling rates,as such acceleration has led to an increase in the number of damaged or lost-in-hole tools.We believe 42025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/d
73、ata/1884516/000095017024037792/dti-20231231.htm7/100 that this commercial arrangement has been standard practice in the industry for over 70 years.Given the cyclical nature of the oil and gas industry,commercial terms will be more favorable to rental tool companies when oil and gas industry activity
74、 is higher.Oil and Gas Drilling Activity Rental tool companies financial and operating results are tied to the level of oil and gas drilling activity in their respective regions of operation,which,in our case,are generally the United States and Canada.Historically,the level of activity was measured
75、by the number of active drilling rigs.As of December 31,2023,the weekly average U.S.and Canadian onshore rig count as reported by Baker Hughes was 667 and 176,respectively.These figures have increased by 249 rigs,or 59%,in the United States and by 88 rigs,or 100%,in Canada since the average weekly l
76、ows of 2020.Despite a reduction in the rig count since the highs of 2012,a rig can now accomplish more than one could have in the past.Drilling rigs now operate faster and drill longer wells,resulting in more efficient production than ever before.Accordingly,we believe that well count and feet drill
77、ed are better indicators of the level of oil and gas drilling activity.Our StrategyWe intend to(i)maximize the profitability of our core rental tool business,(ii)commercialize new high-value rental tools that make the drilling process more efficient(iii)extend our reach into other segments of a well
78、s lifecycle,such as completion and production and(iv)expand geographically.We intend to execute our strategy through the following:Increase sales to E&P operators E&P operators are the most profitable and financially robust renters of oil and gas drilling tools.As a result,in 2014,we began to expand
79、 our customer base by targeting these companies.We have subsequently grown the percentage of our revenue derived from E&P operators from less than 10%in 2014 to over 47%in 2023.We believe that we can continue increasing the amount of business we do with E&P operators through persistent selling effor
80、ts,excellent customer service and strategically expanding our rental tool fleet with differentiated new tools.We believe that we can eventually generate in excess of 50%of our revenue from E&P operators while maintaining our leading position with OSC customers.We strive to maintain business relation
81、ships and brand recognition with both E&P operators,drilling contractors,and service companies.Some E&P operators have implemented a strategy to go directly to suppliers and de-bundle directional drilling service providers in order to get the tools they want and extract value from that de-bundling p
82、rocess.By ensuring we have a business path to both the E&P operators and the directional drilling service companies,we believe we are in a position to win business regardless of the commercial profile of the end user.Maximize the uptime of our rental tool fleet We only earn a return from tools that
83、are being rented.Accordingly,we strive to minimize the number of tools that are unused or awaiting repair.We intend to do so by leveraging DTIs Customer Order Management Portal and Support System(COMPASS),which empowers us to transfer tools from facilities where they are under-utilized to those wher
84、e they are in greatest demand.COMPASS also enables us to stock the optimal number of a particular tool,such that we have enough inventory to meet all customer needs without having excess inventory and thereby stranding capital.See“Our Competitive Strengths COMPASS inventory management system.”Our in
85、spection,machining and robotic capabilities also allow us to maximize the uptime of our rental tool fleet because we can control these critical functions and return our rental tools to service.Further professionalize the organization Historically,rental tool companies success was largely tied to the
86、ir ability to provide customers with ancillary benefits and perks,such as golf outings and meals.While safety standards existed,compliance therewith was not typically audited.Moreover,operating facilities were unimpressive and rarely visited by customers,rental tools were worn and inexact,and qualit
87、y audits were uncommon.Today,however,safety and quality standards are far more exacting.Accordingly,rental tool companies must be professional,transparent and sophisticated.As the oil and gas industry professionalizes,all segments of the industry are increasingly evaluated based on a strict set of c
88、riteria that includes safety,ability to fulfill tool orders,the presence of repeatable and verifiable processes and procedures,billing accuracy and“one-stop shop”capabilities.While rental tool companies must maintain relationships with customers,they must also have auditable and repeatable processes
89、 to win business.We have transformed our business in light of the new normal,allocating resources to ensure we meet our customers high expectations.We believe that many of our competitors have not made this transition.We intend to press this advantage by continuing to professionalize our workforce a
90、nd processes,thereby widening the gap between us and our competitors.Execute accretive mergers and acquisition We have a demonstrated track record of successfully integrating acquired businesses.Because of our industry reputation,we are frequently presented with acquisition opportunities.However,giv
91、en our capital limitations in recent years,we have not been able to proceed with many of these transactions.From 2010 to 2016,significant capital flowed into the OFS sector,led by energy-focused private equity firms that typically have investment horizons of ten years or less.Although many of these
92、investments are now more than ten years old,the private equity firms 52025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm8/100 have no clear path to achieving liquidity since little new capital is entering the energy industry.We believe we have compe
93、lling accretive acquisition opportunities,the purchase price consideration for which can be shares of Common Stock.Given their relationships in the industry,the members of our management team can source attractive acquisition targets.We intend to focus our acquisition activity on the downhole rental
94、 tool sector,including companies that rent or sell drilling motors and their components,specialty downhole tools that provide added value,power sections that transmit power transmission to the drill bit,and products that support the downhole pumping operations used in production.We believe that an a
95、bility to provide these products will further embed us with our customers,and acquired companies would benefit from our customer relationships,facilities,salesforce and industry reputation.Nonetheless,we intend to extend our participation into the completion and production portion of a wells lifecyc
96、le.Because the owners of many companies in our target sectors have limited options to realize liquidity,we believe we can attain attractive purchase prices that are highly accretive to our valuation metrics.Partner with leading drilling tool producers We intend to differentiate ourselves from our co
97、mpetitors by partnering with leading drilling tool producers,thereby empowering us to rent value-added tools to which our competitors do not have access.We have a track record of partnering with drilling tool producers to achieve mutually beneficial results.For example,we are party to a distribution
98、 agreement with SDPI,which holds the patent to Drill-N-Ream.SDPI launched the tool in 2012,but experienced slowing sales by 2015 and 2016.We leveraged our industry relationships to secure distribution rights for Drill-N-Ream in May 2016.As a signal of our commitment to the product and relationship w
99、ith SDPI,we hired all the related personnel and launched a North American commercial strategy.Our Wellbore Optimization team has over 25 employees trained and dedicated to selling and servicing the Drill-N-Ream.We have a unique“field first”approach whereby we provide service to the field foreman and
100、 wellsite superintendents,and communicate with the city sales team to provide performance data and feedback to the clients in corporate offices.We developed a Technical Services department with mechanical and petroleum engineers to support the value proposition of our core products and products like
101、 Drill-N-Ream.Because of our efforts,Drill-N-Ream is now the market leader in wellbore conditioning.See“Risk Factors Risks Related to Our Business Termination of,or failure to comply with,the terms of our non-exclusive distribution agreement with SDPI could have a material adverse effect on our busi
102、ness.”If we are unable to fully protect our intellectual property rights or trade secrets,we may suffer a loss in revenue or any competitive advantage or market share we hold,or we may incur costs in litigation defending intellectual property rights.”Similarly,we have entered into an exclusive distr
103、ibution agreement with CT Energy Services(CTES),a Canadian firm that developed the HydroClutch.This tool,which we have rebranded as RotoSteer,allows drillers to use an alternative method of horizontal well drilling.By using RotoSteer,customers can enhance levels of performance with the traditional m
104、ethods of horizontal well drilling,and lower cost with significantly lower risk.We finalized an agreement with CTES in the third quarter of 2022 and have established a fleet of 12 RotoSteer tools in inventory.On February 6,2023,we completed a purchase of a motor shop and downhole motor product line
105、that will support our RotoSteer offering.We are now able to service our fleet of RotoSteer tools.We have 36 RotoSteer tools in our fleet that are ready to be deployed as of December 31,2023.We believe that our RotoSteer tool business has the potential to achieve a commanding market share in the Unit
106、ed States in the next three to five years.We believe that there is an opportunity to expand our RotoSteer offering into the international market.Expand international operations We intend to expand our international footprint,including by acquiring identified targets.While we intend to maintain and g
107、row our current North American business,we intend to increase,in the next five years,the percentage of our revenue and income derived from outside of North America.To successfully implement this strategy,we will need to make several strategic acquisitions and invest additional capital.Our Competitiv
108、e StrengthsTo implement the strategies discussed above,we plan to leverage the following competitive strengths:Experienced management team with significant industry experience We are led by oil and gas industry veterans with experience spanning many decades,industry cycles and segments of the oil an
109、d gas industry.Our President and Chief Executive Officer(CEO),Wayne Prejean,began his career in 1979 as an entry-level service technician on an offshore drilling platform in the GOM,providing monitoring equipment for producing wells.In 1981,he joined a new firm providing guidance and survey tools fo
110、r directional drilling services.Throughout the 1980s,Mr.Prejean became a directional drilling operator,supervisor and manager,using novel techniques in the nascent horizontal and directional drilling processes.Mr.Prejean spent the next 20 years in senior management roles,developing and growing numer
111、ous successful companies in multiple sectors of the industry.Mr.Prejean became our CEO in 2013.Mr.Prejeans industry expertise,paired with that of the other members of our management team,is a significant strength.Every member of the management team has worked at a major OSC.Accordingly,our team unde
112、rstands corporate structure,internal processes and the needs of our customers.As a result,the management team helps us become an integral part of our customers operations.Many members of our management team have worked together over the past ten years and have helped us transform from a small,entrep
113、reneurial company with few processes and procedures,less sophisticated customers and few operating locations into a professional 62025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm9/100 company serving leading OSCs and E&P operators from 16 location
114、s in North America and 4 international stocking points in Europe and the Middle East.Large fleet of rental tools meeting our customers needs We operate and maintain a large rental tool fleet that is dispersed across most of the oil and gas producing regions of the U.S.and Canada.Our fleet is signifi
115、cantly concentrated in the Permian Basin,one of the worlds most prolific oil and gas fields.We have recently expanded into Europe and the Middle East via partnerships with existing suppliers.The tools that make up a bottom hole assembly and a drill string vary widely due to the differing nature of o
116、il and gas formations,hole sizes,wellbore design,connections and drilling engineer preferences.Therefore,it is not efficient for even the largest diversified OSCs,such as Baker Hughes Company,Phoenix Technology Services LP,and SLB(formerly Schlumberger Limited),to maintain their own rental tool flee
117、t.Furthermore,high-quality customers expect rental tool companies to meet all their tool needs.Thus,without a sizeable rental tool fleet,smaller providers cannot secure large contracts covering multiple geographic locations.The sheer number of tool variations and the substantial cost to replicate a
118、rental tool fleet serve as barriers to entry for new competitors in the downhole rental tool industry.Master Service Agreements with leading customers We have over 325 master service agreements(MSAs)with leading OSCs and E&P operators as of December 31,2023.An MSA is necessary to do business with ma
119、ny of our customers.Obtaining an MSA requires both time and a relationship with the customer.Additionally,to enter into MSAs with its customers,a rental tool company must demonstrate a record of safety,repeatable processes and procedures and,in some cases,industry certifications such as API(American
120、 Petroleum Institute)and ISO(International Organization for Standards).A rental tool company must also satisfy numerous site and job specific quality criteria.We possess all certifications that are required by our customers,have a robust quality assurance department and regularly satisfy customer au
121、dits.Many smaller rental tool providers cannot meet the stringent requirements set out by world-leading OSCs and E&P operators.Wide distribution network In 2012 we had three facilities.We have since grown our physical footprint significantly,and now operate from 16 locations in North America,includi
122、ng five facilities in the Permian Basin(two in Midland,Texas,two in Odessa,Texas and one in Carlsbad,New Mexico).Our ability to support customers across all of North America is critical to winning business because our customers operate across the continent.Most of these facilities operate 24 hours p
123、er day,365 days per year,and many are equipped with machining and welding capabilities to facilitate in-house tool repair,which maximizes turnaround time and minimizes downtime.In addition to our North American facilities,we have 4 international stocking points in Europe and the Middle East.We can m
124、eet many of our customers rental tool needs in every location in which they operate.COMPASS inventory management system In 2016,we began designing COMPASS,a proprietary inventory and order management system.COMPASS enables customers to place orders online using a streamlined interface similar to the
125、“Add to Cart”function provided by many online retailers.Every tool available for rental on COMPASS is accompanied by a description,a photograph and all relevant connection,size and raw material information.Customers can create a custom basket,thereby allowing them to more efficiently place repeat or
126、ders.COMPASS provides customers with full transparency on tool orders and account status with all-day instant access and customized automated scheduling reports.We believe that none of our competitors are making a similar technological transition.COMPASS has helped us maximize fleet utilization.Spec
127、ifically,COMPASS generates reports that enable facility managers to identify slow-moving or under-utilized tools and to“right size”the rental tool fleet at each location.Thus,instead of buying a new tool when needed at a busy facility,the tool can be moved from a facility where it is not currently b
128、eing utilized.Awareness of an assets use enables us to increase rental tool utilization and maximize return on capital.Large,talented salesforce with deep customer relationships Our salespeople specialize in a particular tool type(e.g.,drilling tools,wellbore optimization tools and drill pipe)and su
129、pport all locations where our customers operate.Our salespeople are divided into two teams:city-sales and field-sales.The city-sales team focuses its efforts on customers corporate offices,striving to establish and maintain long-term relationships that can culminate in multi-year first call supply a
130、greements with detailed pricing arrangements.The field-sales team focuses its efforts on customers drilling rigs and field offices.The field-sales team seeks to fulfill customers needs that are specific to ongoing or soon-to-launch projects.Whether a member of our city-sales team or our field-sales
131、team,each salesperson focuses on providing customers the right tools when and where those tools are needed.CustomersOur customer base is comprised of:(i)diversified OSCs account for approximately 50%of 2023 revenue,including but not limited to Baker Hughes Company,Halliburton Company,Phoenix Energy,
132、and SLB(formerly Schlumberger);(ii)E&P operators account for approximately 47%of 2023 revenue,included but not limited to ConocoPhillips,EOG Resources Inc.,Occidental Petroleum Corporation,Pioneer Energy Services Corp.;and(iii)oil and gas equipment manufacturers account for approximately 3%of 2023 r
133、evenue,included but not limited to Liberty Lift Solutions and National Oilwell Varco.72025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm10/100 Conducting business with top tier customers requires world class service quality,safety and auditable work
134、 processes.These operating requirements are contained in MSAs with our clients.Obtaining MSAs can be difficult and time-consuming.We believe this creates a barrier to entry for smaller,less competent providers and provides us an industry advantage.Employees and Employee SafetyWe have 394 employees a
135、nd contractors,all of whom were full-time.Our workforce includes over 29 sales professionals who are divided between city-sales and field-sales teams.Keeping our workforce safe and healthy is a key priority,and management is committed to ensuring our employees return home safely after each shift.In
136、2018,we implemented“Safety Now,”a rigorous safety program that is part of DTIs Safe,Inspired,Productive incentive program(“SIP”).SIP has helped reduce our total recordable incident rate from 2.3 in 2018 to 1.23 in 2023,which is lower than the industry average.The success of SIP is necessary for us t
137、o do business with many of our customers,including Baker Hughes Company,EOG Resources Inc.,Occidental Petroleum Corporation and SLB.PropertiesWe operate from 16 locations in North America and maintain 4 international stocking points in Europe and the Middle East,as shown below:Government Regulation
138、and Environmental,Health and Safety MeasuresOur business is significantly affected by federal,state and local laws and other regulations.These regulations primarily impact the operation of our facilities.The laws and regulations relate to,among other things:worker safety standards;the protection of
139、the environment;and waste management,with respect to both fluids and solids.82025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm11/100 Our internal environmental group monitors our compliance with applicable laws and regulations.We also engage third
140、parties to review our compliance with such.We cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings in the future.We also cannot predict whether additional laws and regulations will be ado
141、pted,including changes in regulatory oversight,increase of federal,state or local taxes,increase of inspection costs,or the effect such changes may have on us,our business or our financial condition.CompetitionWe believe that there are a limited number of competitors in the oil and gas drilling rent
142、al tools industry.It is our view that we enjoy a competitive advantage with respect to these competitors due to our large relevant tool inventory,strong management team and significant scale.Corporate InformationOur operations date to the founding of Directional Rentals,Inc.in 1984.Its name was chan
143、ged to“Drilling Tools International,Inc.”in 2014,and it is a wholly owned subsidiary of DTIH.As a result of the Business Combination,DTIH became a wholly owned subsidiary of ROC.In connection with the Business Combination,ROC changed its name to“Drilling Tools International Corporation”.Our website
144、address is .The information found on our website is not part of this or any other report we file with,or furnish to,the SEC and is expressly not incorporated by reference into this document.Our Annual Reports on Form 10-K,Quarterly Reports on Form 10-Q,Current Reports on Form 8-K,proxy statements,an
145、d any amendments to these reports filed or furnished pursuant to Section 13(a)or 15(d)of the Securities Exchange Act of 1934 are available on our website,free of charge,as soon as reasonably practicable after such reports are filed with,or furnished to,the SEC.Alternatively,you may access these repo
146、rts at the SECs website at www.sec.gov.Item 1A.Risk Factors.Risks Related to Our BusinessDemand for our products and services depends on oil and gas industry activity and customer expenditure levels,which are directly affected by trends in the demand for,and price of,crude oil and natural gas as wel
147、l as the availability of capital.Demand for our products and services depends primarily upon the general level of activity in the oil and gas industry,including the number of drilling rigs in operation,the number of oil and gas wells being drilled,the depth and drilling conditions of these wells,the
148、 volume of production,the number of well completions and the cumulative feet drilled,the level of well remediation activity,and the corresponding capital spending by oil and gas companies.Oil and gas activity is in turn heavily influenced by,among other factors,current and anticipated oil and natura
149、l gas prices locally and worldwide.Historically,such prices have been volatile,and declines,whether actual or anticipated,thereof could negatively affect the level of oil and gas activity and related capital spending.Decreases in oil and gas activity and related capital spending could,in turn,advers
150、ely affect demand for our products and services and,in certain instances,result in the cancellation,modification or curtailing of demand for our services and the ability of our customers to pay us for our products and services.These factors could have an adverse effect on our business,results of ope
151、rations,financial condition and cash flows.Factors affecting the prices of oil and natural gas include,but are not limited to,the following:demand for hydrocarbons,which is affected by worldwide population growth,economic growth rates and general economic and business conditions;available excess pro
152、duction capacity within the Organization of Petroleum Exporting Countries(“OPEC”)and the level of oil and gas production by non-OPEC countries;oil and gas inventory levels,production capacity and investment levels;the continued development of shale plays which may influence worldwide supply;transpor
153、tation differentials associated with reduced capacity in and out of the storage hub in Cushing,Oklahoma;costs of exploring for,producing and delivering oil and natural gas;political and economic uncertainty and geopolitical unrest;oil refining activity and shifts in end-customer preferences toward f
154、uel efficiency and increased transition to electric vehicles;92025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm12/100 conservation measures and technological advances affecting energy consumption;government initiatives to address greenhouse gas emi
155、ssions and climate change,including incentives to promote alternative energy sources;potential acceleration of the commercial development of alternative energy sources and adjacent products,such as wind,solar,geothermal,tidal,fuel cells and biofuels;access to capital and credit markets and investors
156、 focus on shareholder returns,which may affect our customers activity levels and spending for our products and services;changes in laws and regulations related to hydraulic fracturing activities,saltwater disposal or oil and gas drilling,particularly on public properties;changes in environmental law
157、s and regulations,including those relating to the use of coal in power plants,as such laws and regulations can impact the demand for natural gas;adverse weather conditions,changes in weather patterns and natural disasters,including those related to climate change;supply disruptions in key oil produc
158、ing regions;terrorist attacks and armed conflicts,including the current conflict between Russia-Ukraine and Israel-Hamas,which could cause temporary price increases,thereby dampening demand;and global pandemicsThe oil and gas industry is cyclical and has historically experienced periodic downturns.T
159、hese downturns have been characterized by diminished demand for our products and services and downward pressure on the prices we charge.These downturns generally cause many E&P companies to reduce their capital budgets and drilling activity.Any future downturn or expected downturn could result in a
160、significant decline in demand for OFS and adversely affect our business,results of operations and cash flows.Customer expenditure levels could also drop if our customers face difficulty in accessing capital.If commodity prices drop,our customers may face liquidity constraints and the deterioration o
161、f their respective credit worthiness.Moreover,our customers may have limited viable financing alternatives in light of unfavorable lending and investment policies held by financial institutions associated with concerns about environmental impacts of the oil and gas industry or its products.Similarly
162、,certain institutional investors have divested themselves of investments in this industry.If any of our customers experience any of these challenges,they may reduce spending,which could adversely affect our business,results of operations and cash flows.Growth in U.S.drilling activity,and our ability
163、 to benefit from such growth,could be adversely affected by any significant constraints in equipment,labor or takeaway capacity in the regions in which we operate.Growth in U.S.drilling activity may be impacted by,among other things,the availability and cost of drilling equipment,pipeline capacity,a
164、nd material and labor shortages.Significant growth in drilling activity could strain availability of the equipment,materials and labor required to drill and complete a well,together with the ability to move the produced oil and natural gas to market.Should significant constraints develop that materi
165、ally impact the efficiency and economics of oil and gas producers,growth in U.S.drilling activity could be adversely affected.This would have an adverse impact on the demand for the products we sell and rent,which could have a material adverse effect on our business,results of operations and cash fl
166、ows.We depend on a relatively small number of customers in a single industry.The loss of an important customer could adversely affect our business,results of operations and financial condition.Our customers are primarily diversified OFS companies and E&P operators.Historically,we have been dependent
167、 on a relatively small number of customers for our revenues.During the years ended December 31,2023 and 2022,28.2%and 27.6%,respectively,of our total revenue was earned from our two largest customers.Our business,results of operations and financial condition could be materially adversely affected if
168、 an important customer ceases to engage us for our services on favorable terms,or at all,or fails to pay or delays paying us significant amounts of our outstanding receivables.We have operated under a first call supply agreement with our largest customer since 2013.We and this customer have agreed t
169、o multiple extensions of this agreement,the most recent of which extends the agreement until February 28,2025.However,if we are unable to successfully negotiate extensions in the future,then our ability to do business with this customer may be greatly reduced.Moreover,the supply agreements that we h
170、ave entered into with our other customers are also of limited duration and require periodic extensions.Similarly,a failure to agree to such extensions may hinder our ability to do business with these customers.102025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti
171、-20231231.htm13/100 Additionally,the E&P industry is characterized by frequent consolidation activity.Changes in ownership of our customers may result in the loss of,or reduction in,business from those customers.Moreover,customers may use their size and purchasing power to seek economies of scale an
172、d pricing concessions.Consolidation may also result in reduced capital spending by some of our customers,which may lead to a decreased demand for our services and equipment.We cannot assure you that we will be able to maintain our level of sales to a customer that has consolidated or replace that re
173、venue with increased business activity with other customers.As a result,the acquisition of one or more of our primary customers may have a significant negative impact on our business,results of operations,financial condition or cash flows.We are unable to predict what effect consolidations in the in
174、dustry may have on price,capital spending by our customers,our market share and selling strategies,our competitive position,our ability to retain customers or our ability to negotiate favorable agreements with our customers.Termination of,or failure to comply with,the terms of our non-exclusive dist
175、ribution agreement with SDPI could have a material adverse effect on our business.In 2016,we entered into an exclusive distribution agreement with SDPI with respect to the Drill-N-Ream.In 2017,SDPI determined that we did not meet defined market share goals,and as a result our distribution rights wit
176、h respect to the Drill-N-Ream are no longer contractually exclusive.Accordingly,SDPI could choose to distribute the Drill-N-Ream through other companies who will then compete with us in this space.These risks could be exacerbated if SDPI were to enter into an exclusive distribution agreement with,or
177、 sell the intellectual property rights to the Drill-N-Ream to,one of our competitors,or if one of our competitors were to acquire SDPI.While we remain the Drill-N-Reams sole North American distributor,we cannot guarantee that this will remain the case.Our inability to remain the sole North American
178、distributor of the Drill-N-Ream could have a material adverse effect on our business,results of operations and cash flows.We may be unable to employ a sufficient number of skilled and qualified workers to sustain or expand our current operations.The delivery of our products and services requires per
179、sonnel with specialized skills and experience.Our ability to be productive and profitable will depend upon our ability to attract and retain skilled workers.In addition,our ability to expand our operations depends in part on our ability to increase the size of our skilled labor force.The demand for
180、skilled workers is high,and the cost to attract and retain qualified personnel has increased.During industry downturns,skilled workers may leave the industry,reducing the availability of qualified workers when conditions improve.In addition,a significant increase in the wages paid by competing emplo
181、yers both within and outside of our industry could result in increases in the wage rates that we must pay.Throughout 2021 and 2022,our expenses related to salaries and wages increased materially,especially those expenses related to certain key oil and gas producing regions,as we sought to meet incre
182、asing customer demand.During the year ended December 31,2023,we experienced similar increases.If we are not able to employ and retain skilled workers,our ability to respond quickly to customer demands or strong market conditions may inhibit our growth,which could have a material adverse effect on ou
183、r business,results of operations and cash flows.Our business depends on the continuing services of certain of our key managers and employees.We depend on key personnel.The loss of key personnel could adversely impact our business if we are unable to implement our strategy and successfully manage our
184、 business in their absence.The loss of qualified employees or an inability to retain and motivate additional highly-skilled employees required for the operation and expansion of our business could hinder our ability to successfully maintain and expand our market share.Equity interests in us are a su
185、bstantial portion of the net worth of our executive officers and several of our other senior managers.As a result,those executive officers and senior managers may have less incentive to remain employed by us if they were to sell their equity interests.After terminating their employment with us,some
186、of them may become employed by our competitors.We are an emerging growth company and smaller reporting company and as such are subject to various risks unique only to emerging growth companies and smaller reporting companies,including but not limited to,no requirement to provide an assessment of the
187、 effectiveness of internal controls over financial reporting.We are an“emerging growth company”as defined in the Jumpstart Out Business Startups Act of 2012(JOBS Act).We will remain an emerging growth company until the earlier of(i)December 31,2026,the last day of the fiscal year following the fifth
188、 anniversary of the date of the ROC initial public offering;(ii)the last day of the fiscal year in which we have total annual gross revenues of$1.235 billion or more;(iii)the date on which we have issued more than$1.0 billion in nonconvertible debt during the previous three years;or(iv)the date on w
189、hich we are deemed to be a large accelerated filer under applicable Securities and Exchange Commission(SEC)rules.112025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm14/100 We expect that we will remain an emerging growth company for the foreseeable
190、future but cannot retain our emerging growth company status indefinitely and will no longer qualify as an emerging growth company on or before December 31,2026.References herein to“emerging growth company”have the meaning associated with it in the JOBS Act.For so long as we remain an emerging growth
191、 company,we are permitted and intend to rely on exemptions from specified disclosure requirements that are applicable to other public companies that are not emerging growth companies.These exemptions include:being permitted to provide only two years of audited financial statements,in addition to any
192、 required unaudited interim financial statements,with correspondingly reduced“Managements Discussion and Analysis of Financial Condition and Results of Operations”disclosure;not being required to comply with the requirement of auditor attestation of our internal controls over financial reporting;not
193、 being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board(PCAOB)regarding mandatory audit firm rotation or a supplement to the auditors report providing additional information about the audit and the financial statements;reduced disclosure ob
194、ligations regarding executive compensation;and not being required to hold a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.Additionally,as an emerging growth company and smaller reporting company our status as such
195、 carries various unique risks such as the risk that our financial statements may not be comparable to those of other public companies,and the risk that we will not be required to provide an assessment of the effectiveness of our internal controls over financial reporting until our second annual repo
196、rt following our initial public offering.For as long as we continue to be an emerging growth company,we expect that we will take advantage of the reduced disclosure obligations available to us as a result of that classification.We have taken advantage of certain of those reduced reporting burdens in
197、 these financial statements.Accordingly,the information contained herein may be different than the information you receive from other public companies in which you hold stock.An emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B)of the Securiti
198、es Act for complying with new or revised accounting standards.This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.We have elected to avail ourselves of this extended transition period and,as a r
199、esult,we will not be required to adopt new or revised accounting standards on the dates on which adoption of such standards is required for other public reporting companies.We are also a“smaller reporting company”as defined in Rule 12b-2 of the Exchange Act,and have elected to take advantage of cert
200、ain of the scaled disclosure available for smaller reporting companies.The lack of availability of the tools we purchase to rent to our customers and inflation may increase our cost of operations beyond what we can recover through price increases.Our ability to source tools,such as drill collars,sta
201、bilizers,crossover subs,wellbore conditioning tools,drill pipe,hevi-wate drill pipe and tubing,at reasonable cost is critical to our ability to successfully compete.Due to a shortage of steel caused primarily by production disruptions during the COVID-19 pandemic and increased demand as economies re
202、bounded,steel and assembled component prices have been and continue to be elevated.Our business and results of operations may be adversely affected by our inability to manage rising costs and the availability of the tools that we rent to our customers.Additionally,freight costs,specifically ocean fr
203、eight costs,have risen significantly due to a number of factors including,but not limited to,a scarcity of shipping containers,congested seaports,a shortage of commercial drivers,capacity constraints on vessels or lockdowns in certain markets.We cannot assure you that we will be able to continue to
204、purchase and move these tools on a timely basis or at commercially viable prices,nor can we be certain of the impact of changes to tariffs and future legislation that may impact trade with China or other countries.Should our current suppliers be unable to provide the necessary tools or otherwise fai
205、l to deliver such tools timely and in the quantities required,resulting delays in the provision of rentals to our customers could have a material adverse effect on our business,results of operations and cash flows.The United States has recently experienced the highest inflation in decades primarily
206、due to supply-chain issues,a shortage of labor and a build-up of demand for goods and services.The most noticeable adverse impact to our business has been increased freight,materials and vehicle-related costs as well as higher salaries and wages.To date,we do not believe that inflation has had a mat
207、erial impact on our financial condition or results of operations because we have been able to increase the prices we receive from our 122025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm15/100 customers.We cannot be sure how long elevated inflation
208、rates will continue.We cannot be confident that all costs will return to the lower levels experienced in prior years even as the rate of inflation abates.Our business and results of operations may be adversely affected by these rising costs to the extent we are unable to recoup them from our custome
209、rs.Delays in obtaining,or inability to obtain or renew,permits or authorizations by our customers for their operations could impair our business.Our customers are required to obtain permits or authorizations from one or more governmental agencies or other third parties to perform drilling and comple
210、tion activities,including hydraulic fracturing.Such permits or approvals are typically required by state agencies but can also be required by federal and local governmental agencies or other third parties.The requirements for such permits or authorizations vary depending on the location where such d
211、rilling and completion activities will be conducted.As with most permitting and authorization processes,there is a degree of uncertainty as to whether a permit will be granted,the time it will take for a permit or approval to be issued and the conditions which may be imposed in connection with the g
212、ranting of the permit.In some jurisdictions,certain regulatory authorities have delayed or suspended the issuance of permits or authorizations while the potential environmental impacts associated with issuing such permits can be studied and appropriate mitigation measures evaluated.In Texas,rural wa
213、ter districts have begun to impose restrictions on water use and may require permits for water used in drilling and completion activities.In addition,in January 2021,President Biden indefinitely suspended new oil and natural gas leases on public lands or in offshore waters pending completion of a co
214、mprehensive review and reconsideration of federal oil and gas permitting and leasing practices.Although the moratorium was enjoined nationwide in June 2021,and again in August 2022 after the U.S.Court of Appeals for the Fifth Circuit vacated the June 2021 injunction,the Biden Administration may take
215、 further actions to limit new oil and natural gas leases.In November 2021,the Department of the Interior completed its review and issued a report on the federal oil and gas leasing program.The Department of the Interiors report recommends several changes to federal leasing practices,including change
216、s to royalty payments,bidding and bonding requirements.The effects of this report or other initiatives to reform the federal leasing process could result in additional restrictions or limitations on the issuance of federal leases and permits for drilling on public lands.Permitting,authorization or r
217、enewal delays,the inability to obtain new permits or the revocation of current permits could impact our customers operations and cause a loss of revenue and potentially have a materially adverse effect on our business,results of operations and cash flows.Competition within the oil and gas drilling t
218、ool rental industry may adversely affect our ability to market our services.The oil and gas drilling tool rental tool industry is highly competitive and fragmented.The number of rental tool companies active in a given market may exceed the corresponding demand therefor,which could result in active p
219、rice competition.Some oil and gas drilling companies prioritize rental prices when choosing to contract with a rental tool company,which may further increase competition based primarily on price.In addition,adverse market conditions lower demand for drilling equipment,which results in excess equipme
220、nt and lower utilization rates.If market conditions in our operating areas deteriorate from current levels or if adverse market conditions persist,the prices we are able to charge and utilization rates may decline.Moreover,our customers may choose to purchase some or all of the tools that they typic
221、ally rent from us,thereby reducing the volume of business that we conduct with such customers.Any significant future increase in overall market capacity for the rental equipment or services that we offer could adversely affect our business,results of operations and cash flows.We may fail to fully ex
222、ecute,integrate,or realize the benefits expected from acquisitions,which may require significant management attention,disrupt our business and adversely affect our results of operations.As part of our business strategy and to remain competitive,we continually evaluate acquiring or making investments
223、 in complementary companies,products or technologies.We may not be able to find suitable acquisition candidates or complete such acquisitions on favorable terms.We may incur significant expenses,divert employee and management time and attention from other business-related tasks and our organic strat
224、egy and incur other unanticipated complications while engaging with potential target companies where no transaction is eventually completed.If we do complete acquisitions,we may not ultimately strengthen our competitive position or achieve our goals or expected growth,and any acquisitions we complet
225、e could be viewed negatively by our customers,or we could experience unexpected competition from market participants.Any integration process may require significant time and resources.We may not be able to manage the process successfully and may experience a decline in our profitability as we incur
226、expenses prior to fully realizing the benefits of the acquisition.We could also expend significant cash and incur acquisition related costs and other unanticipated liabilities associated with the acquisition,the product or the technology,such as contractual obligations,potential security vulnerabili
227、ties of the acquired company and its products and services and potential intellectual property infringement.In addition,any acquired technology or 132025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm16/100 product may not comply with legal or regula
228、tory requirements and may expose us to regulatory risk and require us to make additional investments to make them compliant.We may not successfully evaluate or utilize the acquired technology or personnel,or accurately forecast the financial impact of an acquisition transaction,including accounting
229、charges and tax liabilities.We could become subject to legal claims following an acquisition or fail to accurately forecast the potential impact of any claims.Any of these issues could have a material adverse impact on our business and results of operations.New technology may cause us to become less
230、 competitive.New technology that enhances the functionality,performance reliability and design of downhole drilling tools currently on the market may become prevalent in the OFS industry.We may face difficulty obtaining these new tools for the purpose of renting them to our customers.Although we bel
231、ieve our fleet of rental equipment currently gives us a competitive advantage,if competitors develop fleets that are more technically advanced than ours,we may lose market share or be placed at a competitive disadvantage.Further,we may face competitive pressure to acquire certain new tools at a subs
232、tantial cost.Some of our competitors have greater financial,technical and personnel resources that may allow them to enjoy various competitive advantages in the acquisition of new tools.We cannot be certain that we will be able to continue to acquire new tools or convert our existing tools to meet n
233、ew performance requirements.Such an inability may have a material adverse effect on our business,results of operations and cash flows,including a reduction in the value of assets,and the rates that may be charged for their rental.We rent tools used in the drilling of oil and gas wells.This equipment
234、 may subject us to liability,including claims for personal injury,property damage and environmental contamination,or reputational harm if it fails to perform to specifications.We rent tools used in oil and gas exploration,development and production.Some of these tools are designed to operate in high
235、-temperature and/or high-pressure environments,and some tools are designed for use in hydraulic fracturing operations.Because of applications to which our tools are exposed,particularly those involving high pressure environments,a failure of such tools,or a failure of our customers to maintain or op
236、erate the tools properly,could cause damage to the tools,damage to the property of customers and others,personal injury and environmental contamination and could lead to a variety of claims against us or reputational harm that could have an adverse effect on our business,results of operations and ca
237、sh flows.We indemnify our customers against certain claims and liabilities resulting or arising from our provision of goods or services to them.In addition,we rely on customer indemnifications,generally,and third-party insurance as part of our risk mitigation strategy.However,our insurance may not b
238、e adequate to cover our liabilities.In addition,our customers may be unable to satisfy indemnification claims against them.Further,insurance companies may refuse to honor their policies,or insurance may not generally be available in the future,or if available,premiums may not be commercially justifi
239、able.We could incur substantial liabilities and damages that are either not covered by insurance or that are in excess of policy limits,or incur liability at a time when we are not able to obtain liability insurance.Such potential liabilities could have a material adverse effect on our business,resu
240、lts of operations and cash flows.Our operations,and those of our customers,are subject to hazards inherent in the oil and gas industry,which could expose us,and our customers,to substantial liability and cause us to lose substantial revenue.Risks inherent in our industry include the risks of equipme
241、nt defects,installation errors,the presence of multiple contractors at the wellsite over which we have no control,vehicle accidents,fires,explosions,blowouts,surface cratering,uncontrollable flows of gas or well fluids,pipe or pipeline failures,abnormally pressured formations and various environment
242、al hazards such as oil spills and releases of,and exposure to,hazardous substances.For example,our operations are subject to risks associated with hydraulic fracturing,including any mishandling,surface spillage or potential underground migration of fracturing fluids,including chemical additives.Both
243、 we and our customers are subject to these risks.The occurrence of any of these events could result in substantial losses to us or to our customers due to injury or loss of life,severe damage to or destruction of property,natural resources and equipment,pollution or other environmental damage,clean-
244、up responsibilities,regulatory investigations and penalties,suspension of operations and repairs required to resume operations.The cost of managing such risks may be significant.The frequency and severity of such incidents will affect operating costs,insurability and relationships with customers,emp
245、loyees and regulators.Should these risks materialize for us,our customers may elect not to rent our tools or utilize our services if they view our environmental or safety record as unacceptable,which could cause us to lose customers and substantial revenues.Should these risks materialize for our cus
246、tomers,they may also suffer similar negative consequences with respect to their own customers and clients.If 142025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm17/100 this were to happen,our customers may no longer be in a position to do business w
247、ith us,thereby adversely affecting our business,results of operations and cash flows.Our insurance may not be adequate to cover all losses or liabilities we may suffer.Also,insurance may no longer be available to us,or its availability may be at premium levels that do not justify its purchase.The oc
248、currence of a significant uninsured claim,a claim in excess of the insurance coverage limits maintained by us or a claim at a time when we are not able to obtain liability insurance could have a material adverse effect on our ability to conduct normal business operations and on our business,results
249、of operations,financial condition and cash flows.In addition,we may not be able to secure additional insurance or bonding that might be required by new governmental regulations.This may cause us to restrict our operations,which might severely impact our business,results of operations and cash flows.
250、Oilfield anti-indemnity provisions enacted by many states may restrict or prohibit a partys indemnification of us.We typically enter into agreements with our customers governing the provision of our services,which usually include certain indemnification provisions for losses resulting from operation
251、s.Such agreements may require each party to indemnify the other against certain claims regardless of the negligence or other fault of the indemnified party.However,many states place limitations on contractual indemnity agreements,particularly agreements that indemnify a party against the consequence
252、s of its own negligence.Furthermore,certain states,including Louisiana,New Mexico,Texas and Wyoming,have enacted statutes generally referred to as“oilfield anti-indemnity acts”expressly prohibiting certain indemnity agreements contained in or related to OFS agreements.Such oilfield anti-indemnity ac
253、ts may restrict or void a partys indemnification of us,which could have a material adverse effect on our business,results of operations and cash flows.Restrictive covenants in the Credit Facility Agreement could limit our growth and our ability to finance our operations,fund our capital needs,respon
254、d to changing conditions and engage in other business activities that may be in our best interests.The Amended and Restated Revolving Credit,Security and Guaranty Agreement among Drilling Tools International,Inc.,certain of its subsidiaries,DTIC and PNC Bank,National Association,dated June 20,2023(“
255、Credit Facility Agreement”)imposes operating and financial restrictions.These restrictions limit our ability to,among other things,subject to permitted exceptions:incur additional indebtedness;make investments or loans;create liens;consummate mergers and similar fundamental changes;declare and pay d
256、ividends and distributions;and enter into certain transactions with affiliates.The restrictions contained in the Credit Facility Agreement could:limit the ability to plan for,or react to,market conditions,to meet capital needs or otherwise to restrict our activities or business plan;andadversely aff
257、ect the ability to finance our operations or to engage in other business activities that would be in our interest.The Credit Facility Agreement requires compliance with a specified financial ratio.The ability to comply with this ratio may be affected by events beyond our control and,as a result,this
258、 ratio may not be met in circumstances when it is tested.This financial ratio restriction could limit the ability to obtain future financings,make needed capital expenditures,withstand a continued downturn in our business or a downturn in the economy in general or otherwise conduct necessary corpora
259、te activities.Declines in oil and natural gas prices,and therefore a reduction in our customers activity,could result in failure to meet one or more of the covenants under the Credit Facility Agreement which could require refinancing or amendment of such obligations resulting in the payment of conse
260、nt fees or higher interest rates,or require a capital raise at an inopportune time or on terms not favorable.A breach of any of these covenants or the inability to comply with the required financial ratios or financial condition tests could result in a default under the Credit Facility Agreement.A d
261、efault under the Credit Facility Agreement,if not cured or waived,could result in acceleration of all indebtedness outstanding thereunder.We may incur indebtedness to execute our long-term growth strategy,which may reduce our profitability.152025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/
262、1884516/000095017024037792/dti-20231231.htm18/100 Maintaining a relevant rental fleet requires significant capital.We may require additional capital in the future to maintain and refresh our fleet.For the years ended December 31,2023 and 2022,we spent$44 million,and$25 million,respectively,to purcha
263、se property,plant and equipment.Historically,we have financed these investments through cash flows from operations and external borrowings.These sources of capital may not be available to us in the future.If we are unable to fund capital expenditures for any reason,we may not be able to capture avai
264、lable growth opportunities or effectively maintain our existing assets and any such failure could have a material adverse effect on our business,results of operations and financial condition.If we incur additional indebtedness,our profitability may be reduced.Political,regulatory,economic and social
265、 disruptions in the countries in which we conduct business could adversely affect our business or results of operations.In addition to our facilities in the United States,we operate stocking points in Scotland and Germany and facilities in Canada and the United Arab Emirates.Additionally,we rent dow
266、nhole drilling tools in Ukraine to Ukraine-based directional drilling companies and drilling contractors through Denimex,which acts as our representative in Ukraine.Instability and unforeseen changes in any of the markets in which we conduct business could have an adverse effect on the demand for,or
267、 supply of,the products that we rent and the services that we provide,which in turn could have an adverse effect on our business,results of operations and cash flows.These factors include,but are not limited to:nationalization and expropriation;potentially burdensome taxation;inflationary and recess
268、ionary markets,including capital and equity markets;civil unrest,labor issues,political instability,natural disasters,terrorist attacks,cyber-terrorism,military activity and wars;outbreaks of pandemic or contagious diseases;supply disruptions in key oil producing countries;tariffs,trade restrictions
269、,trade protection measures or price controls;foreign ownership restrictions;import or export licensing requirements;restrictions on operations,trade practices,trade partners and investment decisions resulting from domestic and foreign laws and regulations;changes in,and the administration of,laws an
270、d regulations;inability to repatriate income or capital;reductions in availability of qualified personnel;development and implementation of new technologies;foreign currency fluctuations or currency restrictions;and fluctuations in the interest rate component of forward foreign currency rates.We may
271、 not be able to manage our growth successfully.The growth of our operations will depend upon our ability to expand our customer base in our existing markets and to enter new markets in a timely manner at reasonable costs,organically or through acquisitions.In order for us to recover expenses incurre
272、d in entering new markets and obtaining new customers,we must attract and retain customers on economic terms and for extended periods.Customer growth depends on several factors outside of our control,including economic and demographic conditions,such as population changes,job and income growth,housi
273、ng starts,new business formation and the overall level of economic activity.We may experience difficulty managing our growth,integrating new customers and employees,and complying with applicable regulations.Expanding our operations also may require continued development of our operating and financia
274、l controls and may place additional stress on our management and operational resources.We may be unable to manage our growth and development successfully.A failure of our information technology infrastructure and cyberattacks could adversely impact us.162025/1/17 23:5510-Khttps:/www.sec.gov/Archives
275、/edgar/data/1884516/000095017024037792/dti-20231231.htm19/100 We depend on our IT systems,in particular COMPASS,for the efficient operation of our business.Accordingly,we rely upon the capacity,reliability and security of our IT hardware and software infrastructure and our ability to expand and upda
276、te this infrastructure in response to our changing needs.Despite our implementation of security measures,our systems are vulnerable to damage from computer viruses,natural disasters,incursions by intruders or hackers,failures in hardware or software,power fluctuations,cyber terrorists and other simi
277、lar disruptions.Moreover,we cannot guarantee that COMPASS,or features thereof,are not the protected intellectual property of third parties.If this is the case,these third parties may seek to protect their respective intellectual property rights,thereby hindering,or completely eliminating,our ability
278、 to use COMPASS and leverage its benefits.Additionally,we rely on third parties to support the operation of our IT hardware and software infrastructure,and in certain instances,utilize web-based applications.We also provide proprietary and client data to certain third parties,and such third parties
279、may be the subject of IT failures or cyberattacks.The failure of our IT systems or those of our vendors or third parties to whom we disclose certain information to perform as anticipated for any reason or any significant breach of security could disrupt our business and result in numerous adverse co
280、nsequences,including reduced effectiveness and efficiency of operations,inappropriate disclosure of confidential and proprietary information,reputational harm,increased overhead costs and loss of important information,which could have a material adverse effect on our business and results of operatio
281、ns.In addition,we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.Our results of operations and financial condition could be negatively impacted by changes in accounting principles.The accounting for our business is
282、subject to change based on the evolution of our business model,interpretations of relevant accounting principles,enforcement of existing or new regulations,and changes in policies,rules,regulations,and interpretations of accounting and financial reporting requirements of the SEC or other regulatory
283、agencies.Adoption of a change in accounting principles or interpretations could have a significant effect on our reported results of operations and could affect the reporting of transactions completed before the adoption of such change.It is difficult to predict the impact of future changes to accou
284、nting principles and accounting policies over financial reporting,any of which could adversely affect our results of operations and financial condition and could require significant investment in systems and personnel.Adverse and unusual weather conditions may affect our operations.Our operations ma
285、y be materially affected by severe weather conditions in areas where we operate.Severe weather,such as hurricanes,high winds and seas,blizzards and extreme temperatures may cause evacuation of personnel,curtailment of services and suspension of operations,inability to deliver tools to customers in a
286、ccordance with contract schedules and loss of or damage to our tools and facilities.In addition,variations from normal weather patterns can have a significant impact on demand for oil and natural gas,thereby reducing demand for our tools and services.Risks Related to Legal and Regulatory MattersOur
287、operations require us to comply with various domestic and international regulations,violations of which could have a material adverse effect on our business,results of operations,financial condition and cash flows.We are exposed to a variety of federal,state,local and international laws and regulati
288、ons relating to matters such as environmental,workplace,health and safety,labor and employment,customs and tariffs,export and re-export controls,economic sanctions,currency exchange,bribery and corruption and taxation.These laws and regulations are complex,frequently change and have tended to become
289、 more stringent over time.They may be adopted,enacted,amended,enforced or interpreted in such a manner that the incremental cost of compliance could adversely impact our business,results of operations and cash flows.In addition to our U.S.operations,we operate stocking points in Scotland and Germany
290、 and facilities in Canada and the United Arab Emirates.Additionally,we rent downhole drilling tools in Ukraine to Ukraine-based directional drilling companies and drilling contractors through Denimex,which acts as our representative in Ukraine.Our operations outside of the United States require us t
291、o comply with numerous anti-bribery and anti-corruption regulations.The U.S.Foreign Corrupt Practices Act,among others,applies to us and our operations.Our policies,procedures and programs may not always protect us from reckless or criminal acts committed by our employees or agents,and severe crimin
292、al or civil sanctions may be imposed as a result of violations of these laws.We are also subject to the risks that our employees and agents outside of the United States may fail to comply with applicable laws.In addition,we purchase tools for use in the United States,Canada,the United Kingdom,German
293、y,the United Arab Emirates and Ukraine for use in such countries.Most movement of these tools involves imports and exports.As a result,compliance with multiple trade sanctions,embargoes and import/export laws and regulations pose a constant challenge and risk to us since a portion of our business is
294、 conducted outside of the United States through our subsidiaries.Our failure to comply with these laws and regulations could materially affect our business,results of operations and cash flows.172025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm20/1
295、00 Compliance with environmental laws and regulations may adversely affect our business and results of operations.Environmental laws and regulations in the United States and foreign countries affect the services we provide and the equipment we rent and service,as well as the facilities we operate.Su
296、ch laws and regulations also impact the oil and gas industry more broadly,thereby impacting demand for our products and equipment.For example,we may be affected by such laws as the Resource Conservation and Recovery Act,the Comprehensive Environmental Response,Compensation,and Liability Act,the Clea
297、n Water Act,the Clean Air Act and the Occupational Safety and Health Act of 1970.Further,our customers may be subject to a range of laws and regulations governing hydraulic fracturing,drilling and greenhouse gas emissions.We are required to invest financial and managerial resources to comply with en
298、vironmental laws and regulations and believe that we will continue to be required to do so in the future.Failure to comply with these laws and regulations may result in the assessment of administrative,civil and criminal penalties,the imposition of remedial and mitigation obligations,and the issuanc
299、e of orders enjoining operations.These laws and regulations,as well as the finalizing of other new laws and regulations affecting our operations or the exploration and production and transportation of crude oil and natural gas by our customers,could adversely affect our business and operating result
300、s by increasing our costs of compliance,increasing the costs of compliance and costs of doing business for our customers,limiting the demand for our products and services,or restricting our operations.Increased regulation or a move away from the use of fossil fuels caused by additional regulation co
301、uld also reduce demand for our products and services.Existing or future laws and regulations related to greenhouse gases and climate change and related public and governmental initiatives and additional compliance obligations could have a material adverse effect on our business,results of operations
302、,prospects,and financial condition.Changes in environmental requirements related to greenhouse gas emissions,climate change,or alternative energy sources may negatively impact demand for our products and services.For example,oil and natural gas E&P may decline as a result of environmental requiremen
303、ts or laws,regulations and policies promoting the use of alternative forms of energy,including land use policies and other actions to restrict oil and gas leasing and permitting in response to environmental and climate change concerns.In January 2021,the Acting Secretary of the Department of the Int
304、erior issued an order suspending new leasing and drilling permits for fossil fuel production on federal lands and waters for 60 days.President Biden then issued an executive order indefinitely suspending new oil and natural gas leases on public lands or in offshore waters pending completion of a com
305、prehensive review and reconsideration of federal oil and gas permitting and leasing practices.Several states filed lawsuits challenging the suspension and in June 2021,a judge in the U.S.District Court for the Western District of Louisiana issued a nationwide temporary injunction blocking the suspen
306、sion.The Department of the Interior successfully appealed the U.S.District Courts ruling in August 2022,but the moratorium was again enjoined that month.However,the Biden Administration may take further actions to limit new oil and natural gas leases.Further,to the extent that the Department of Inte
307、riors report or other initiatives to reform federal leasing practices result in the development of additional restrictions on drilling,limitations on the availability of leases,or restrictions on the ability to obtain required permits,it could impact our customers opportunities and reduce demand for
308、 our products and services in the aforementioned areas.Federal,state and local agencies continue to evaluate climate-related legislation and other regulatory initiatives that would restrict emissions of greenhouse gases in areas in which we conduct business.For example,the United States Environmenta
309、l Protection Agency has proposed new methane emissions regulations for certain oil and gas facilities,while the Inflation Reduction Act of 2022 established a charge on methane emissions above certain limits from such facilities.Because our business depends on the level of activity in the oil and gas
310、 industry,existing or future laws and regulations related to greenhouse gases could have a negative impact on our business if such laws or regulations reduce demand for oil and natural gas.Likewise,such laws or regulations may result in additional compliance obligations with respect to the release,c
311、apture,sequestration and use of greenhouse gases.These additional obligations could increase our costs and have a material adverse effect on our business,results of operations,prospects and financial condition.Many of our customers utilize hydraulic fracturing in their operations.Environmental conce
312、rns have been raised regarding the potential impact of hydraulic fracturing on underground water supplies and seismic activity.These concerns have led to several regulatory and governmental initiatives in the United States to restrict the hydraulic fracturing process,which could have an adverse impa
313、ct on our customers production activities.Although we do not conduct hydraulic fracturing,increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition to oil and gas production activities using hydraulic fracturing techniques.In December 2021,the Texa
314、s Railroad Commission,which regulates the states oil and gas industry,suspended the use of deep wastewater disposal wells in four oil-producing counties in West Texas.The suspension is intended to mitigate earthquakes thought to be caused by the injection of waste fluids,including saltwater,that are
315、 a byproduct of hydraulic fracturing into disposal wells.The ban will require oil and gas production companies to find other options to handle the wastewater,which may include piping or trucking it longer distances to other locations not under the ban.The finalization of new laws or regulations at t
316、he federal,state,local or foreign level imposing reporting obligations on,or otherwise limiting,delaying or banning,the hydraulic fracturing process or 182025/1/17 23:5510-Khttps:/www.sec.gov/Archives/edgar/data/1884516/000095017024037792/dti-20231231.htm21/100 other processes on which hydraulic fra
317、cturing and subsequent hydrocarbon production relies,such as water disposal,could make it more difficult to complete oil and natural gas wells.Further,it could increase our customers costs of compliance and doing business,and otherwise adversely affect the hydraulic fracturing services they perform,
318、which could negatively impact demand for our products.Increasing attention by the public and government agencies to climate change and Environmental,Social and Governance(“ESG”)matters could also negatively impact demand for our products and services and the products of our oil and gas producing cus
319、tomers.In recent years,increasing attention has been given to corporate activities related to ESG in public discourse and the investment community.A number of advocacy groups,both domestically and internationally,have campaigned for governmental and private action to promote change at public compani
320、es related to ESG matters,including through the investment and voting practices of investment advisers,public pension funds,universities and other members of the investing community.These activities include increasing attention and demands for action related to climate change and energy rebalancing
321、matters,such as promoting the use of substitutes to fossil fuel products and encouraging the divestment of fossil fuel equities,as well as pressuring lenders and other financial services companies to limit or curtail activities with fossil fuel companies.If this were to continue,it could have a mate
322、rial adverse effect on the valuation of the Common Stock and our ability to access equity capital markets.In addition,our business could be impacted by initiatives to address greenhouse gases and climate change and incentives to conserve energy or use alternative energy sources.For example,the Infla
323、tion Reduction Act of 2022,signed into law by President Biden in August 2022,includes financial and other incentives to increase wind and solar electric generation and encourage consumers to use these alternative energy sources.Additional similar state or federal initiatives to incentivize a shift a
324、way from fossil fuels could reduce demand for hydrocarbons,thereby reducing demand for our products and services and negatively impacting our business.Changes in tax laws or tax rates,adverse positions taken by taxing authorities and tax audits could impact our operating results.We are subject to th
325、e jurisdiction of numerous domestic and foreign taxing authorities.Changes in tax laws or tax rates,the resolution of tax assessments or audits by various tax authorities could impact our operating results.In addition,we may periodically restructure our legal entity organization.If taxing authoritie
326、s were to disagree with our tax positions in connection with any such restructurings,our effective income tax rate could be impacted.The final determination of our income tax liabilities involves the interpretation of local tax laws,tax treaties and related authorities in each taxing jurisdiction,as
327、 well as the significant use of estimates and assumptions regarding future operations and results and the timing of income and expenses.We may be audited and receive tax assessments from taxing authorities that may result in assessment of additional taxes that are ultimately resolved with the author
328、ities or through the courts.We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law.Resolution of any tax matter involves uncertainties and there are no assurances that the outcomes will be favorable.If U.S.or foreign tax authorities ch
329、ange applicable tax laws,our overall taxes could increase,and our business,financial condition or results of operating may be adversely impacted.If we are unable to fully protect our intellectual property rights or trade secrets,we may suffer a loss in revenue or any competitive advantage or market
330、share we hold,or we may incur costs in litigation defending intellectual property rights.While we have some patents and others pending,we do not have patents relating to many of our key processes and technology.If we are not able to maintain the confidentiality of our trade secrets,or if our competi
331、tors are able to replicate our technology or services,our competitive advantage would be diminished.We also cannot provide any assurance that any patents we may obtain in the future would provide us with any significant commercial benefit or would allow us to prevent our competitors from employing c
332、omparable technologies or processes.We may initiate litigation from time to time to protect and enforce our intellectual property rights.In any such litigation,a defendant may assert that our intellectual property rights are invalid or unenforceable.Third parties from time to time may also initiate
333、litigation against us by asserting that our businesses infringe,impair,misappropriate,dilute or otherwise violate another partys intellectual property rights.We may not prevail in any such litigation,and our intellectual property rights may be found invalid or unenforceable or our products and services may be found to infringe,impair,misappropriate,dilute or otherwise violate the intellectual prop
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