DTI Drilling Tools International Corporation

On March 6, 2024, DTI, SDPI, Merger Sub I, and Merger Sub II entered into the Merger Agreement. In accordance with the terms of the Merger Agreement, the closing of the Merger occurred on July 31, 2024 (the “Closing Date” or the “Closing”). It was determined that July 31, 2024 also represented the “acquisition date,” as that term is used in Accounting Standards Codification 805, Business Combinations (“ASC 805”). The list below describes certain key events that occurred upon the Closing of the Merger:

Merger Sub I merged with and into SDPI, with SDPI surviving the First Merger and becoming a wholly owned subsidiary of DTI.

Following the First Effective Time of the First Merger, SDPI, the surviving company of the First Merger, merged with and into Merger Sub II, with Merger Sub II surviving the Second Merger as a wholly owned subsidiary of DTI.

Each unexercised SDPI Option, vested or unvested, held immediately prior to the First Effective Time, an Assumed SDPI Option, ceased to represent a right to acquire shares of SDPI Common Stock and was assumed by DTI and converted automatically into an option to purchase DTI Common Stock on the same terms and conditions as applied to such SDPI Option immediately prior to the First Effective Time, except that (i) the number of shares of DTI Common Stock subject to each Assumed SDPI Option was determined by multiplying the number of shares of SDPI Common Stock subject to such Assumed SDPI Option immediately prior to the First Effective Time by 0.313, the Option Exchange Ratio, rounded down to the nearest whole share, (ii) the per share exercise price of each Assumed SDPI Option was determined by dividing the per share exercise price of the Assumed SDPI Option immediately prior to the First Effective Time by the Option Exchange Ratio, and rounding such quotient up to the nearest whole cent, and (iii) the Assumed SDPI Option became fully vested immediately upon the First Effective Time.

Each outstanding share of SDPI Restricted Stock held immediately prior to the First Effective Time became fully vested and the restrictions lapsed.

As a result of the Merger, each share of SDPI Common Stock and SDPI Restricted Stock, issued and outstanding immediately prior to the First Effective Time of the First Merger, was converted into the right to receive, at the election of each holder of such share of SDPI Common Stock and SDPI Restricted Stock, and subject to proration in accordance with the Merger Agreement, either:

Cash Election Consideration of $1.00 per Cash Election Share, without interest, or

Stock Election Consideration, in which DTI Common Stock, par value $0.0001 was issued at a rate of 0.313 per Stock Election Share, or

The product of the Stock Election Multiplier and the Stock Election Shares (the Aggregate Stock Elections) exceeded the Maximum Share Amount, therefore, the proration provision per the Merger Agreement was applied and

all Cash Election Shares and No Election Shares were exchanged for the Cash Election Consideration, and

a portion of the Stock Election Shares of each holder thereof was exchanged for the Stock Election Consideration, with such portion being equal to the product obtained by multiplying the number of such holder’s Stock Election Shares by a fraction, the numerator of which was the Maximum Share Amount and the denominator of which was the Aggregate Stock Elections, with the remaining portion of such holder’s Stock Election Shares being exchanged for the Cash Election Consideration; as a result, a total of 4,845,132 shares of DTI Common Stock were issued to the holders of SDPI Common Stock.

On the Closing Date, DTI made the following cash payments in connection with the Closing:

$13.7 million was paid to former holders of SDPI Common Stock, which was comprised of (i) $0.4 million in payments to holders of Cash Election Shares, (ii) $4.3 million in payments to holders of No Election Shares, and (iii) $9.0 million in payments to holders of Stock Election Shares, which under the terms of the proration provision of the Merger Agreement, were required to be paid in cash,

$2.9 million of SDPI’s transaction costs were paid,

$2.3 million of SDPI’s debts were repaid,

$1.8 million was paid to former holders of SDPI Restricted Stock; upon Closing, all SDPI Restricted Stock became fully vested and all holders elected to settle their vested shares for Cash Election Consideration, and

$0.2 million of severance was paid to a former employee of SDPI.

Subsequent to June 30, 2024, DTI borrowed $18.0 million in cash under its revolving line of credit to pay a portion of the Merger Consideration. The borrowing incurs interest at a variable rate indexed to the Secured Overnight Financing Rate (“SOFR”) plus a 2.5% margin pursuant to the terms of the revolving line of credit.

Subsequent to June 30, 2024, DTI recorded a net reduction of $0.1 million in its accounts payable to SDPI.

the accompanying notes to the unaudited pro forma condensed combined financial information;

the historical unaudited financial statements of DTI as of and for the six months ended June 30, 2024 and 2023, and the related notes included elsewhere in the DTI Report on Form 10-Q filed with the SEC on August 9, 2024;

the historical audited financial statements of DTI as of and for the years ended December 31, 2023 and 2022, and the related notes included elsewhere in the DTI Report on Form 10-K filed with the SEC on March 28, 2024;

the historical unaudited financial statements of SDPI as of and for the six months ended June 30, 2024, and the related notes included elsewhere in Amendment No. 1 to Form S-4 filed by DTI with the Securities and Exchange Commission on June 24, 2024;¹

the historical audited financial statements of SDPI as of and for the years ended December 31, 2023 and 2022, and the related notes included elsewhere in this Current Report on Form 8-K/A

other information relating to DTI and SDPI contained in Amendment No. 1 to Form S-4 filed by DTI with the Securities and Exchange Commission on June 24, 2024, including the Merger Agreement and the description of certain terms thereof set forth in the section entitled “The Merger Agreement” and the sections entitled “Management’s Discussion and Analysis” and “SDPI’s Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Historical unaudited financial statements of SDPI as of and for the six months ended June 30, 2024 containing notes (i.e., “footnotes”) have not been prepared. However, the historical unaudited balance sheet of SDPI as of June 30, 2024 and the historical unaudited statement of operations of SDPI for the six months ended June 30, 2024 are contained herein as columns within the unaudited pro forma condensed combined balance sheet as of June 30, 2024 and the unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2024, respectively.

ASSETS

Current assets

Cash

Accounts receivable, net

Inventories, net

Prepaid expenses and other current assets

Related party note receivable, current

Investments - equity securities, at fair value

Total current assets

Property, plant and equipment, net

Operating lease right-of-use assets

Related party note receivable, less current portion

Intangible assets, net

Goodwill

Deferred tax asset

Deferred financing costs, net

Deposits and other long-term assets

Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable

Accrued expenses and other current liabilities

Current portion of operating lease liabilities

Current maturities of long-term debt

Current portion of financial obligation

Revolving line of credit

Total current liabilities

Operating lease liabilities, less current portion

Long-term debt

Deferred tax liabilities, net

Long-term financial obligation, less current portion

Deferred income

Total liabilities

Commitments and contingencies

Stockholders’ equity

Common stock, $ 0.0001 par value, shares authorized 500,000,000 as of June 30, 2024 and December 31, 2023, 29,859,564 shares issued and outstanding as of June 30, 2024 and 29,768,568 shares issued and outstanding as of December 31, 2023

Additional paid-in-capital

Accumulated deficit

Accumulated other comprehensive loss

Total stockholders’ equity

Total liabilities and stockholders’ equity

Revenue, net:

Tool rental

Product sale

Total revenue, net

Operating costs and expenses:

Cost of tool rental revenue

Cost of product sale revenue

Selling, general, and administrative expense

Depreciation and amortization expense

Total operating costs and expenses

Income from operations

Other (expense) income, net:

Interest expense, net

Gain (loss) on sale of property

Unrealized gain on investments in equity securities

Other expense, net

Total other expense, net

Income (loss) before income tax expense

Income tax expense

Net income (loss)

Basic earnings (net loss) per share

Diluted earnings (net loss) per share

Basic weighted-average common shares outstanding

Diluted weighted-average common shares outstanding

Revenue, net:

Tool rental

Product sale

Total revenue, net

Operating costs and expenses:

Cost of tool rental revenue

Cost of product sale revenue

Selling, general, and administrative expense

Depreciation and amortization expense

Total operating costs and expenses

Income (loss) from operations

Other (expense) income, net:

Interest expense, net

Recovery of related party note receivable

Gain on sale of property

Loss on extinguishment of debt

Loss on asset disposal

Unrealized loss on equity securities

Other (expense) income, net

Total other (expense) income, net

Income (loss) before income tax (expense) benefit

Income tax (expense)/benefit

Net income (loss)

Basic earnings per share

Diluted earnings per share

Basic weighted-average common shares outstanding

Diluted weighted-average common shares outstanding

Basis of Pro Forma Presentation

Consideration Transferred and Preliminary Purchase Price Allocation for the Merger

Cash paid to holders of SDPI Common Stock⁽¹⁾

Cash payment of SDPI transaction costs

Cash repayment of SDPI debt

Cash payment to holders of SDPI Restricted Stock

Cash severance payment to former SDPI employee⁽²⁾

Fair value of DTI Common Stock issued in exchange for outstanding SDPI Common Stock⁽³⁾

Fair value of replacement awards issued to holders of SDPI Options

Effective settlement of preexisting relationship between DTI and SDPI⁽⁴⁾

Fair value of consideration transferred

Represents cash consideration paid to holders of SDPI Common Stock, which consisted of (i) payment of $0.4 million to holders of SDPI Common Stock who elected to receive Cash Election Consideration of $1.00 per share of SDPI Common Stock held; (ii) payment of $4.3 million to SDPI stockholders who did not make an election to receive either Cash Election Consideration or Stock Election Consideration and, therefore, pursuant to the terms of the Merger Agreement, automatically received Cash Election Consideration of $1.00 per share of SDPI Common Stock held; and (iii) payment of $9.0 million to holders of SDPI Common Stock whereby the Stock Election Shares exceeded the Maximum Share Amount, which triggered the proration provision described in the Merger Agreement.

Represents a severance payment made in accordance with the terms of an employment agreement between SDPI and an employee that was entered into prior to contemplation of the Merger Agreement. The agreement contained a provision whereby a change in control event would trigger a severance payment, and it was determined that the Closing of the Merger triggered the requirement for such a payment to be made. Upon the Closing, DTI made paid the severance payment on SDPI’s behalf.

Represents the fair value of the shares of DTI Common Stock issued to holders of SDPI Common Stock as Merger Consideration. Holders of SDPI Common Stock received 4,845,132 shares of DTI’s Common Stock with an aggregate fair value of $27.7 million, which was calculated using the quoted market price of DTI Common Stock of $5.72 per share on the Closing Date.

Represents the effective settlement of DTI’s accounts payable to SDPI as DTI was a customer of SDPI’s prior to Closing.

Assets acquired:

Cash

Accounts receivable, net

Related party note receivable, current

Inventories, net

Prepaid expenses and other current assets

Property, plant and equipment, net

Related party note receivable, noncurrent

Operating lease right-of-use asset

Intangible assets, net

Deposits and other long-term assets

Total assets acquired

Liabilities assumed:

Accounts payable

Current portion of operating lease liabilities

Accrued expenses and other current liabilities

Deferred tax liabilities, net

Deferred income

Operating lease liabilities, less current portion

Total liabilities assumed

Total identifiable net assets

Goodwill

Total net assets acquired and goodwill

Fair value of consideration transferred

Fair value of DTI’s investment in SDPI that was acquired and held prior to Closing

Total fair value consideration transferred and fair value of DTI’s investment in SDPI that was acquired and held prior to Closing

Note that the goodwill recorded on the unaudited pro forma condensed combined balance sheet differs from the preliminary purchase price allocation table as the preliminary purchase price allocation table does not include the pro forma impact of DTI’s assumption of SDPI’s net deferred tax liability and current income taxes payable, which is offset against goodwill through a transaction accounting adjustment.

Fair value methodology

Customer relationships

Multi-period Excess Earnings Method

Developed technology

Relief-From-Royalty Method

Trade names

Relief-From-Royalty Method

Backlog

Multi-period Excess Earnings Method

Total intangible assets

Adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2024

Reflects an $18.0 million increase to cash from drawdowns on the DTI revolving line of credit to pay a portion of the Merger Consideration.

Reflects a net decrease of $0.1 million to the DTI accounts payable balance, reflecting intercompany accounts payable activity between DTI and SDPI subsequent to June 30, 2024 through the Closing Date.

Reflects the recognition of stock-based compensation for certain unvested SDPI Options and units of SDPI Restricted Stock that were subject to accelerated vesting upon the Closing of the Merger.

Reflects the total Merger Consideration of $47.9 million, consisting of (i) cash consideration paid to holders of SDPI Common Stock of $13.7 million, (ii) SDPI transaction costs paid by DTI of $2.9 million, (iii) payment by DTI of certain outstanding SDPI debt in the amount of $2.3 million, (iv) cash consideration paid to holders of SDPI Restricted Stock of $1.8 million, (v) $0.2 million of severance payment made in accordance with the terms of an employment agreement between SDPI and an employee that was entered into prior to contemplation of the Merger Agreement, (vi) shares of DTI Common Stock issued to holders of SDPI Common Stock as Merger Consideration with a fair value of $27.7 million, (vii) the $0.1 million fair value of the Assumed SDPI Options, and (viii) $0.8 million of a reduction to consideration transferred due to the effective settlement of DTI’s accounts payable to SDPI as DTI was a customer of SDPI’s prior to Closing. Additionally, reflects the removal of the $1.2 million fair value of DTI’s previously held equity interest in SDPI. The fair value of DTI’s previously held equity interest in SDPI was included in the measurement of goodwill on the Closing Date.

Cash paid to holders of SDPI Common Stock

Cash payment of SDPI transaction costs

Cash repayment of SDPI debt

Cash payment to holders of SDPI Restricted Stock

Cash severance payment to former SDPI employee

Cash

Fair value of DTI Common Stock issued in exchange for outstanding SDPI Common Stock

Fair value of replacement awards issued to holders of SDPI Options

Additional paid-in-capital

Common stock, $ 0.0001 par value

Effective settlement of preexisting relationship between DTI and SDPI

Accounts payable

Fair value of consideration transferred

Investments - equity securities, at fair value

Goodwill⁽¹⁾

Represents the impact to the measurement of goodwill on the Closing Date from the fair value of the consideration transferred and the fair value of DTI’s previously held equity interest in SDPI, as of the Closing Date. Refer to the section above titled, “Preliminary Purchase Price Allocation for the Merger” for further information on the measurement of goodwill on the Closing Date.

Reflects $0.6 million of DTI transaction costs paid on the Closing Date. Additionally, this entry reflects $16 thousand of additional transaction related costs incurred in connection with the Closing but unpaid as of the Closing Date.

Reflects the elimination of SDPI’s historical equity balances, inclusive of transaction accounting adjustments impacting SDPI’s equity.

Remeasurement of the equity interest DTI held in SDPI prior to the Closing Date to its fair value at the Closing Date. DTI owned 1,244,100 shares of SDPI Common Stock, or 4% of the total outstanding SDPI Common Stock, immediately prior to the Closing of the Merger.

Reflects the preliminary purchase price allocation adjustments to the estimated fair values of the assets acquired and liabilities assumed by DTI in the Merger. The fair values of the tangible assets are based on a combination of market and cost approaches. The fair values of the identifiable intangible assets are based on the income approach. Refer to the section above titled, “Preliminary Purchase Price Allocation for the Merger” for further information on the methodology for preliminary estimates of fair values. This adjustment reflects the removal of certain SDPI debt and SDPI accrued transaction costs as DTI paid cash to settle these liabilities on SDPI’s behalf on the Closing Date. This adjustment also reflects the removal of SDPI’s accounts receivable from DTI as these accounts receivable were effectively settled on the Closing Date. The cash payments to settle the debt and accrued transaction costs increased consideration transferred and are reflected in Note 3(b) and the effective settlement of DTI’s accounts payable to SDPI decreased consideration transferred and is also reflected in Note 3(b).

Reflects adjustments to the tax asset and the tax liability balances associated with the incremental differences in the book and tax bases created from the Transaction Accounting Adjustments. Deferred taxes are established based on a statutory tax rate based on jurisdictions where income is generated. The effective tax rate of DTI following the Merger could be significantly different (either higher or lower) depending on post-acquisition activities. This determination is preliminary and subject to change based upon the final determination of the fair value of the identifiable intangible assets and tangible assets and liabilities.

Adjustments to the Unaudited Pro Forma Condensed Combined Statement of Operations for the Six Months Ended June 30, 2024 and adjustments to the Unaudited Pro Forma Condensed Combined Statement of Income for the Year Ended December 31, 2023

Reflects the interest expense associated with the $18.0 million drawdowns on the DTI revolving line of credit at a variable interest rate indexed to SOFR, plus a 2.5% margin applied on top of the SOFR rate pursuant to the terms of the revolving line of credit.

Reflects the elimination of intercompany transactions between DTI and SDPI.

Reflects stock-based compensation for the recognition of expense associated with the accelerated vesting of certain SDPI Options and shares of SDPI Restricted Stock that are subject to accelerated vesting pursuant to the terms of the original grant agreements upon the Closing of the Merger. The remaining unamortized compensation expense was recognized immediately upon Closing of the Merger.

To reverse historical interest expense associated with an office building lease that was originally classified as a finance lease in the historical SDPI financial statements. On the Closing Date, an amendment to the lease agreement was signed, which resulted in the derecognition of the finance lease and recognition of the lease as an operating lease. Additionally, this entry reflects the lease expense under the operating lease.

To reverse the historical expense for SDPI’s directors’ and officers’ insurance policy, which was cancelled on the Closing Date.

To adjust bonus expense for bonus withholdings from certain SDPI officers serving as guarantors on a related party note receivable. The bonus withholding was used to settle the unpaid accrued interest on the note receivable which was due on the Closing Date.

Reflects the recognition of amortization expense of the acquired intangible assets from the Merger based on the preliminary estimates of the fair values of the acquired intangible assets.

Reflects the elimination of historical SDPI depreciation expense and the recognition of depreciation expense based on the preliminary estimates of the fair values of the property, plant, and equipment acquired in the Merger.

Reflects the elimination of historical interest and amortization expense incurred on certain SDPI debt that was repaid by DTI on the Closing Date. This repayment of SDPI debt by DTI was included in total consideration transferred. See Note 3(b).

Reflects the reversal of historical factoring arrangement fees paid by SDPI pursuant to a factoring agreement between SDPI and a third party. The factoring agreement was settled on the Closing Date.

To reflect (i) the reversal of historical unrealized gains on DTI’s previously held equity interest in SDPI for the six months ended June 30, 2024, and (ii) the recognition of the unrealized loss on DTI’s previously held equity interest in SDPI based on the fair value of the equity interest on the Closing Date and reversal of unrealized losses on DTI’s previously held equity interest in SDPI for the year ended December 31, 2023.

Reflects the estimated DTI transaction costs that were incurred subsequent to June 30, 2024, but prior to the Closing Date, for advisory, legal and other professional fees in connection with the Merger.

Reflects changes primarily in preliminary estimates of deferred taxes as a result of the Merger. These estimates are preliminary as adjustments to deferred taxes could change due to further refinement of the statutory income tax rates used to measure deferred taxes and changes in the estimates of the fair values of the assets acquired and liabilities assumed.

The pro forma basic earnings per share for the year ended December 31, 2023 is calculated using the historical basic weighted-average shares of DTI Common Stock outstanding, adjusted for additional shares issued to holders of SDPI Common Stock upon the Closing of the Merger. The pro forma diluted earnings per share for the year ended December 31, 2023, is calculated using the historical diluted weighted-average shares of DTI Common Stock outstanding, adjusted for additional shares issued to holders of SDPI Common Stock upon the Closing of the Merger, with consideration given to the potentially dilutive impact of outstanding SDPI Options which were exchanged for options to purchase DTI Common Stock on the Closing Date. The calculation of the pro forma basic net loss per share is equivalent to the calculation of the pro forma diluted net loss per share for the six months ended June 30, 2024 as all of the potentially dilutive securities were excluded from the diluted net loss per share calculation because their inclusion would have had an anti-dilutive effect.

Numerator:

Pro forma net loss—basic and diluted

Denominator:

Historical DTI weighted-average shares outstanding—basic

Assume January 1, 2023 issuance of shares of DTI Common Stock to holders of SDPI Common Stock pursuant to the Merger Agreement

Pro forma weighted-average shares outstanding—basic and diluted

Pro forma net loss per share—basic and diluted

DTI time-based options outstanding

DTI performance-based options outstanding

SDPI Options exchanged for DTI options upon Closing of the Merger⁽¹⁾

Total

The 91,054 SDPI Options were calculated by multiplying each SDPI Option that was outstanding immediately prior to the Closing of the Merger by the Option Exchange Ratio of 0.313 so that each such SDPI Option is considered exchanged for an option to purchase 0.313 shares of DTI Common Stock and so that the exercise price of each exchanged option is adjusted to equal the exercise price of the SDPI Option it was exchanged for divided by the Option Exchange Ratio of 0.313.

Numerator:

Pro forma net income

Less: Redeemable convertible preferred stock dividends

Pro forma net income attributable to common stockholders—basic

Add: Redeemable convertible preferred stock dividends

Pro forma net income attributable to common stockholders—diluted

Denominator:

Historical DTI weighted-average shares outstanding—basic

Assume January 1, 2023 issuance of shares of DTI Common Stock to holders of SDPI Common Stock pursuant to the Merger Agreement

Pro forma weighted-average shares outstanding—basic

Historical DTI weighted-average shares outstanding—diluted

Assume January 1, 2023 issuance of shares of DTI Common Stock to holders of SDPI Common Stock pursuant to the Merger Agreement

Effect of potentially dilutive SDPI Options exchanged for DTI options upon the Closing of the Merger⁽¹⁾

Pro forma weighted-average shares outstanding—diluted

Pro forma earnings per share—basic

Pro forma earnings per share—diluted

The 7,056 shares is calculated by A) multiplying each SDPI Option to purchase SDPI Common Stock that was both “in-the-money” and outstanding immediately prior to the Closing of the Merger by the Option Exchange Ratio of 0.313 so that each such SDPI Option is considered exchanged for an option to purchase 0.313 shares of DTI Common Stock and so that the exercise price of each exchanged option is adjusted to equal the exercise price of the SDPI Option it was exchanged for divided by the Option Exchange Ratio of 0.313, and B) by then applying the treasury stock method for calculating diluted earnings per share for the exchanged options.

DTI time-based options outstanding⁽¹⁾

SDPI Options exchanged for DTI options upon Closing of the Merger⁽²⁾

Total

This amount represents the DTI time-based options that would not have had a dilutive effect as they were “out-of-the-money” during all four quarters of the year ended December 31, 2023.

The 46,634 SDPI Options were calculated by A) multiplying each SDPI Option to purchase SDPI Common Stock that was both “out-of-the-money” during all four quarters of the year ended December 31, 2023 and outstanding immediately prior to the Closing of the Merger by the Option Exchange Ratio of 0.313 so that each such SDPI Option is considered exchanged for an option to purchase 0.313 shares of DTI Common Stock and so that the exercise price of each exchanged option is adjusted to equal the exercise price of the SDPI Option it was exchanged for divided by the Option Exchange Ratio of 0.313, and B) by then applying the treasury stock method for calculating diluted earnings per share to the exchanged options. As these SDPI Options were “out-of-the-money” during all four quarters of the year ended December 31, 2023 they were not included in the diluted earnings per share calculation because their inclusion would not have had a dilutive effect.

Adjustments to conform to DTI’s presentation

Drilling Tools International Corporation

Historical Consolidated Statement of Income

Line Items

Superior Drilling Products, Inc.

Historical Consolidated Statement of

Operations Line Items

Revenue, net:

Tool rental

Product sale

Total revenue, net

Operating cost and expenses:

Cost of tool rental revenue

Cost of product sale revenue

Selling, general, and administrative expense

Depreciation and amortization expense