Drilling Tools International Corp

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. Management is responsible for establishing and maintaining adequate internal control over financial reporting.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures in effect as of December 31, 2023, the end of the period covered by this Report, using the Internal Control Integrated Framework (“ICIF”) by COSO. Management selected the ICIF framework for its evaluation as it is a control framework recognized by the SEC and the Public Company Accounting Oversight Board that is free from bias, permits reasonably consistent qualitative and quantitative measurement of our internal controls, is sufficiently complete so that relevant controls are not omitted and is relevant to an evaluation of internal controls over financial reporting. As a result of management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2023, or as of the date of the filing of this Report.

Our disclosure controls and procedures were not effective as of December 31, 2023, or as of the date of filing of this Report, because all findings in connection with our preparation and the audit of our consolidated financial statements as of and for the year ended December 31, 2022 have not been fully remediated despite ongoing projects and improvements made in the current quarter. As a result, we were not able to rely upon the disclosure controls and procedures that were in place as of December 31, 2023, or as of the date of this filing, and we continue to have a material weakness in our internal control over financial reporting. This material weakness is described in more detail below.

Prior to the Merger, we had been a private company with limited accounting personnel and other resources with which to address our internal control over financial reporting. In connection with our preparation and the audit of our consolidated financial statements as of and for the year ended December 31, 2022, we identified the following deficiencies in the design or operation of our internal controls to be a material weakness:

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Failure to promote effective internal control over financial reporting throughout the Company’s management structure;

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Failure to develop effective risk assessment controls to identify financial reporting risks and reacting to changes in the operating environment that could have a material effect on financial reporting;

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Ineffective monitoring activities to assess the operation of internal control over financial reporting; and

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Inadequate documentation and monitoring of information technology (“IT”) general controls and cyber-security processes within the Company’s IT environment, including access controls and segregation of duties between key IT functions.

Implementation of Controls:

We are in the process of implementing a risk assessment process and measures designed to improve our internal control over financial reporting and remediate the control deficiencies that led to the material weakness. We have undertaken the following initiatives:

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Training and awareness - hiring more qualified staff and increasing resources with sufficient knowledge and experience to strengthen financial reporting.

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IT systems and security - implementing software and procedures to enhance our Company’s IT environment.

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Risk assessment and evaluation - devoting proper time by senior management to perform comprehensive review of procedures to assess risks and enforce effective accountability. Additionally, during the fiscal year, we engaged the services of an external specialist with expertise in internal controls and financial reporting. The external specialist was engaged to assist in the implementation and enhancement of our internal controls and to provide additional expertise to ensure the effectiveness of our control environment. The engagement with the external specialist included a comprehensive review of our existing controls, identification of areas for improvement, and the development of recommendations for strengthening our controls framework.

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Segregation of duties - continued efforts to strengthen segregation of duties to prevent and detect errors or fraud in financial reporting processes.

Ongoing Improvement Efforts

Recognizing the dynamic nature of our business environment, we are dedicated to ongoing improvement in our internal control framework. Future steps include:

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Periodic Assessments - conducting periodic assessments to validate the effectiveness of our internal control framework.

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Process Optimization - identifying and implementing opportunities for process optimization to enhance the overall efficiency and effectiveness of internal controls.

The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.

Changes in Internal Control over Financial Reporting

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.