Innovex International, Inc. 10-Q

Item 1A. Risk Factors. In addition to the risk factors set forth below, you should carefully consider the factors discussed in "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2023, as amended by Form 10-K/A filed with the SEC on July 8, 2024 and Form 10-K/A (Amendment No. 2) filed with the SEC on August 1, 2024, our Quarterly Report on Form 10-Q for the period ended March 31, 2024, filed with the SEC on July 8, 2024, and under the headings "Risk Factors—Risks Relating to the Combined Company" and "Risk Factors—Risks Relating to Innovex" in the Form S-4. The risks described below and in those documents are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Legacy Innovex has identified material weaknesses in Legacy Innovex's internal control over financial reporting which, if not corrected, could affect the reliability of our financial statements and have other adverse consequences. Additional material weaknesses in internal controls over financial reporting may be identified, which may not be remedied in a timely manner. Legacy Innovex identified material weaknesses in its internal control over financial reporting during the year ended December 31, 2023. A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Legacy Innovex did not design and maintain effective controls related to the accounting for income taxes at a sufficient level of precision or rigor to prepare, review and reconcile the income tax provision, related income tax assets and liabilities and corresponding valuation allowance and the income tax disclosures in Legacy Innovex’s consolidated financial statements. In addition, Legacy Innovex did not design and maintain effective controls related to the review of the accounting for income taxes as a result of its failure to employ personnel with adequate expertise to identify and evaluate complex income tax accounting matters. These findings resulted in material weaknesses in Legacy Innovex’s internal control over financial reporting during the year ended December 31, 2023. The material weaknesses described above resulted in audit adjustments to deferred tax assets and liabilities, the income tax valuation allowance and related disclosures as of and for the year ended December 31, 2023. Legacy Innovex has taken steps towards remediating these material weaknesses primarily by designing and implementing additional internal controls, including those related to (i) the preparation and review of the income tax provision, related income tax assets and liabilities and corresponding valuation allowance, and the income tax disclosures in Legacy Innovex’s consolidated financial statements to ensure the mathematical accuracy and completeness of information underlying the income tax provision conclusions are sufficient to timely identify potential misstatements, and (ii) the employment of personnel with adequate expertise to identify and evaluate complex income tax accounting matters. Although Legacy Innovex has been in the process of remedial action to address the internal control deficiencies that led to the material weaknesses, Legacy Innovex was not able to fully remediate these deficiencies in 2023 and is unable to assure that the measures it has taken to date and it expects to take in the future will be sufficient to remediate the material weaknesses it identified or avoid the identification of additional material weaknesses in the future. Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully. Legacy Innovex cannot assure that it has identified all, or that it will not in the future have additional, material weaknesses. If the material weaknesses are not remediated, any future material weaknesses related to financial reporting are identified or there are difficulties in implementing or improving internal controls or a failure to develop and maintain effective internal control over financial reporting, then our reputation and operating results could be harmed, we could fail to meet its reporting obligations or it may have a restatement of its financial statements. Ineffective internal control over financial reporting could also cause investors to lose confidence in our reported financial information, which would harm our business and likely have a negative effect on the trading price of our shares of common stock. Our indebtedness and liquidity needs could restrict its operations and make us more vulnerable to adverse economic conditions. Our existing and future indebtedness, whether incurred in connection with acquisitions, operations or otherwise, and limited access to liquidity may adversely affect our operations and limit its growth, and we may have difficulty making debt service payments on such indebtedness as payments become due. Our level of indebtedness may affect its operations in several ways, including the following: • increasing our vulnerability to general adverse economic and industry conditions; 36 • the covenants that are contained in the agreements governing our indebtedness could limit its ability to borrow funds, dispose of assets, pay dividends and make certain investments; • our debt covenants could also affect its flexibility in planning for, and reacting to, changes in the economy and in its industry; • any failure to comply with the financial or other debt covenants, including covenants that impose requirements to maintain certain financial ratios, could result in an event of default, which could result in some or all of our indebtedness becoming immediately due and payable; • our level of debt could impair its ability to obtain additional financing, or obtain additional financing on favorable terms, in the future for working capital, capital expenditures, acquisitions or other general corporate purposes; and • our business may not generate sufficient cash flow from operations to enable us to meet its obligations under our indebtedness. Restrictions in our debt agreements and any future financing agreements may limit our ability to finance future operations, meet capital needs or capitalize on potential acquisitions and other business opportunities. The operating and financial restrictions and covenants in existing and future debt agreements could restrict our ability to finance future operations, meet capital needs or expand or pursue its business activities. For example, our debt agreements restrict or limit our ability to: • grant liens; • incur additional indebtedness; • engage in a merger, consolidation or dissolution; • enter into transactions with affiliates; • sell or otherwise dispose of assets, businesses and operations; • substantially change the nature of our business; and • make acquisitions, capital expenditures or other investments and make dividends or repurchase our stock. Furthermore, our debt agreements contain certain other operating and financial covenants, including the obligation to satisfy a certain fixed charge coverage ratio and a leverage ratio. Our ability to comply with the covenants and restrictions contained in our debt agreements may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in our debt agreements, all or a significant portion of our indebtedness may become immediately due and payable, and our lenders’ commitment to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Our Credit Facility is secured by liens on substantially all of our assets and certain of our future subsidiaries and guarantees from certain of our future subsidiaries, and any acceleration of our debt obligations could result in a foreclosure on the collateral securing such debt. Our debt agreements also require us to make mandatory prepayments in certain circumstances, including a requirement to make a prepayment of the term loans with a certain percentage of our excess cash flow each year. This excess cash flow payment, and other future required prepayments, will reduce our cash available for investment in our business. Any subsequent replacement of our debt agreements or any new indebtedness could have similar or greater restrictions. Please see “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Agreement.” An increase in interest rates would increase the cost of servicing our indebtedness and could reduce its profitability, decrease its liquidity and impact its solvency. A number of our existing debt agreements provide for, and our future debt agreements may provide for, debt incurred thereunder to bear interest at variable rates. As a result, increases in interest rates could increase the cost of servicing such indebtedness and materially reduce our profitability and cash flows. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None, except as reported in our Current Report on Form 8-K filed with the SEC on September 9, 2024. Item 3. Defaults Upon Senior Securities None. 37 Item 4. Mine Safety Disclosures Not Applicable.