UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X]☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 20202021
[ ]☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-36453
Superior Drilling Products, Inc.
(Exact name of registrant as specified in its charter)
Utah | 46-4341605 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer
|
1583 South 1700 East
Vernal, Utah84078
(Address of principal executive offices)
435-789-0594435-789-0594
(Issuer’s telephone number)
(Former name, address, and fiscal year, if changed since last report)
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
Title of each class: | Trading Symbol(s) | Name of each exchange on which registered: | ||
Common Stock, $0.001 par value | SDPI | NYSE American |
Securities Registered Pursuant to Section 12(g) of the Exchange Act: None
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 such shorter period that the Registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] ☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [X] ☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]☐ Accelerated filer [ ] ☐ Non-accelerated filer [ ] ☐ Smaller reporting company [X]☒ Emerging growth company [ ]☐
If an emerging growth company, indicate by 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] ☐ No [X] ☒
There were 25,617,486 shares of common stock, $0.001 par value, issued and outstanding as of November 6, 2020.12, 2021.
Superior Drilling Products, Inc.
FORM 10-Q
QUARTER ENDED September 30, 20202021
TABLE OF CONTENTS
2 |
PART I - FINANCIAL INFORMATION.
Superior Drilling Products, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, 2020 | December 31, 2019 | September 30, 2021 | December 31, 2020 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash | $ | 1,412,370 | $ | 1,217,014 | $ | 2,469,398 | $ | 1,961,441 | ||||||||
Accounts receivable, net | 1,441,783 | 3,850,509 | 2,046,073 | 1,345,622 | ||||||||||||
Prepaid expenses | 73,785 | 139,070 | 266,371 | 90,269 | ||||||||||||
Inventories | 943,870 | 924,032 | 1,067,738 | 1,020,008 | ||||||||||||
Asset held for sale | 40,000 | 252,704 | - | 40,000 | ||||||||||||
Other current assets | - | 252,178 | 47,692 | 40,620 | ||||||||||||
Total current assets | 3,911,808 | 6,635,507 | 5,897,272 | 4,497,960 | ||||||||||||
Property, plant and equipment, net | 7,859,200 | 8,045,692 | 6,963,777 | 7,535,098 | ||||||||||||
Intangible assets, net | 1,111,111 | 1,986,111 | 277,778 | 819,444 | ||||||||||||
Right of use assets | 146,450 | - | 22,192 | 99,831 | ||||||||||||
Deferred tax asset | 34,692 | - | ||||||||||||||
Other noncurrent assets | 83,114 | 93,619 | 65,880 | 87,490 | ||||||||||||
Total assets | $ | 13,146,375 | $ | 16,760,929 | $ | 13,226,899 | $ | 13,039,823 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 663,090 | $ | 945,414 | $ | 802,157 | $ | 430,014 | ||||||||
Accrued expenses | 843,197 | 683,832 | 1,887,693 | 1,091,519 | ||||||||||||
Customer deposits | - | 61,421 | ||||||||||||||
Income tax payable | 98,028 | 15,880 | 177,822 | 106,446 | ||||||||||||
Current portion of operating lease liability | 108,104 | - | 13,832 | 79,313 | ||||||||||||
Current portion of financial obligation | 63,561 | 61,691 | ||||||||||||||
Current portion of long-term debt, net of discounts | 4,760,252 | 4,102,543 | 1,445,230 | 1,397,337 | ||||||||||||
Total current liabilities | 6,472,671 | 5,809,090 | 4,390,295 | 3,166,320 | ||||||||||||
Operating lease liability | 38,346 | - | 8,360 | 20,518 | ||||||||||||
Long-term financial obligation, less current portion | 4,129,802 | 4,178,261 | ||||||||||||||
Long-term debt, less current portion, net of discounts | 1,937,271 | 3,848,863 | 1,118,953 | 1,451,049 | ||||||||||||
Total liabilities | 8,448,288 | 9,657,953 | 9,647,410 | 8,816,148 | ||||||||||||
Commitments and contingencies (Note 12) | ||||||||||||||||
Commitments and contingencies (Note 11) | - | |||||||||||||||
Shareholders’ equity | ||||||||||||||||
Common stock - $0.001 par value; 100,000,000 shares authorized; 25,434,776 and 25,418,126 shares issued and outstanding | 25,617 | 25,418 | ||||||||||||||
Common stock - $ | par value; shares authorized; and shares issued and outstanding26,430 | 25,762 | ||||||||||||||
Additional paid-in-capital | 40,439,035 | 40,069,391 | 41,149,551 | 40,619,620 | ||||||||||||
Accumulated deficit | (35,766,565 | ) | (32,991,833 | ) | (37,596,492 | ) | (36,421,707 | ) | ||||||||
Total shareholders’ equity | 4,698,087 | 7,102,976 | 3,579,489 | 4,223,675 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 13,146,375 | $ | 16,760,929 | $ | 13,226,899 | $ | 13,039,823 |
The accompanying notes are an integral part of these consolidated condensed financial statements.
3 |
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months | For the Nine Months | For the Three Months | For the Nine Months | |||||||||||||||||||||||||||||
Ended September 30, | Ended September 30, | Ended September 30, | Ended September 30, | |||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Tool revenue | $ | 1,190,929 | $ | 3,194,999 | $ | 6,147,280 | $ | 9,212,420 | $ | 2,346,234 | $ | 1,190,929 | $ | 6,283,461 | $ | 6,147,280 | ||||||||||||||||
Contract services | 356,513 | 1,881,216 | 2,782,313 | 5,443,583 | 1,215,685 | 356,513 | 3,102,219 | 2,782,313 | ||||||||||||||||||||||||
Total Revenue | 1,547,442 | 5,076,215 | 8,929,593 | 14,656,003 | 3,561,919 | 1,547,442 | 9,385,680 | 8,929,593 | ||||||||||||||||||||||||
Operating costs and expenses | ||||||||||||||||||||||||||||||||
Cost of revenue | 870,655 | 2,062,803 | 4,284,716 | 6,119,429 | 1,441,943 | 870,655 | 3,841,713 | 4,284,716 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 1,529,887 | 2,501,970 | 4,887,999 | 6,387,205 | 1,551,462 | 1,529,887 | 4,540,134 | 4,887,999 | ||||||||||||||||||||||||
Depreciation and amortization expense | 693,259 | 738,555 | 2,134,398 | 2,680,070 | 405,225 | 693,259 | 1,680,804 | 2,134,398 | ||||||||||||||||||||||||
Total operating costs and expenses | 3,093,801 | 5,303,328 | 11,307,113 | 15,186,704 | 3,398,630 | 3,093,801 | 10,062,651 | 11,307,113 | ||||||||||||||||||||||||
Operating loss | (1,546,359 | ) | (227,113 | ) | (2,377,520 | ) | (530,701 | ) | ||||||||||||||||||||||||
Operating income (loss) | 163,289 | (1,546,359 | ) | (676,971 | ) | (2,377,520 | ) | |||||||||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||||||||||
Interest income | 145 | 12,080 | 5,775 | 52,444 | 49 | 145 | 147 | 5,775 | ||||||||||||||||||||||||
Interest expense | (126,482 | ) | (196,582 | ) | (450,210 | ) | (590,805 | ) | (130,221 | ) | (126,482 | ) | (413,798 | ) | (450,210 | ) | ||||||||||||||||
Impairment on asset held for sale | - | (6,143 | ) | (30,000 | ) | (6,143 | ) | - | - | - | (30,000 | ) | ||||||||||||||||||||
Loan forgiveness | 41,403 | - | 41,403 | - | - | 41,403 | - | 41,403 | ||||||||||||||||||||||||
Gain on disposition of assets | - | - | 142,234 | 14,147 | ||||||||||||||||||||||||||||
Gain (loss) on disposition of assets, net | - | - | (1,187 | ) | 142,234 | |||||||||||||||||||||||||||
Total other expense | (84,934 | ) | (190,645 | ) | (290,798 | ) | (530,357 | ) | (130,172 | ) | (84,934 | ) | (414,838 | ) | (290,798 | ) | ||||||||||||||||
Loss before income taxes | (1,631,293 | ) | (417,758 | ) | (2,668,318 | ) | (1,061,058 | ) | ||||||||||||||||||||||||
Income (loss) before income taxes | 33,117 | (1,631,293 | ) | (1,091,809 | ) | (2,668,318 | ) | |||||||||||||||||||||||||
Income tax expense | (99,979 | ) | - | (106,414 | ) | - | (39,327 | ) | (99,979 | ) | (82,976 | ) | (106,414 | ) | ||||||||||||||||||
Net loss | $ | (1,731,272 | ) | $ | (417,758 | ) | $ | (2,774,732 | ) | $ | (1,061,058 | ) | $ | (6,210 | ) | $ | (1,731,272 | ) | $ | (1,174,785 | ) | $ | (2,774,732 | ) | ||||||||
Basic loss earnings per common share | $ | (0.07 | ) | $ | (0.02 | ) | $ | (0.11 | ) | $ | (0.04 | ) | $ | (0.00 | ) | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.11 | ) | ||||||||
Basic weighted average common shares outstanding | 25,555,167 | 25,074,466 | 25,469,609 | 25,042,577 | 26,154,202 | 25,555,167 | 25,894,397 | 25,469,609 | ||||||||||||||||||||||||
Diluted loss per common share | $ | (0.07 | ) | $ | (0.02 | ) | $ | (0.11 | ) | $ | (0.04 | ) | $ | (0.00 | ) | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.11 | ) | ||||||||
Diluted weighted average common shares outstanding | 25,555,167 | 25,074,466 | 25,469,609 | 25,042,577 | 26,154,202 | 25,555,167 | 25,894,397 | 25,469,609 |
The accompanying notes are an integral part of these consolidated condensed financial statements.
4 |
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)
Common Stock | Additional Paid-in | Accumulated | Total Shareholders’ | |||||||||||||||||
Shares | Par Value | Capital | Deficit | Equity | ||||||||||||||||
Balance - December 31, 2020 | 25,762,342 | $ | 25,762 | $ | 40,619,620 | $ | (36,421,707 | ) | $ | 4,223,675 | ||||||||||
Stock-based compensation expense | - | - | 167,472 | - | 167,472 | |||||||||||||||
Stock-based compensation expense, shares | ||||||||||||||||||||
Net loss | - | - | - | (1,101,793 | ) | (1,101,793 | ) | |||||||||||||
Balance – March 31, 2021 | 25,762,342 | $ | 25,762 | $ | 40,787,092 | $ | (37,523,500 | ) | $ | 3,289,354 | ||||||||||
Stock-based compensation expense | - | - | 167,033 | - | 167,033 | |||||||||||||||
Net loss | - | - | - | (66,781 | ) | (66,781 | ) | |||||||||||||
Balance – June 30, 2021 | 25,762,342 | $ | 25,763 | $ | 40,954,125 | $ | (37,590,282 | ) | $ | 3,389,606 | ||||||||||
Stock-based compensation expense | 667,613 | 667 | 195,426 | - | 196,093 | |||||||||||||||
Net loss | - | - | - | (6,210 | ) | (6,210 | ) | |||||||||||||
Balance – September 30, 2021 | 26,429,955 | $ | 26,430 | $ | 41,149,551 | $ | (37,596,492 | ) | $ | 3,579,489 | ||||||||||
Balance - December 31, 2019 | 25,418,126 | $ | 25,418 | $ | 40,069,391 | $ | (32,991,833 | ) | $ | 7,102,976 | ||||||||||
Stock-based compensation expense | - | - | 106,996 | - | 106,996 | |||||||||||||||
Net income | - | - | - | 198,046 | 198,046 | |||||||||||||||
Balance – March 31, 2020 | 25,418,126 | $ | 25,418 | $ | 40,176,387 | $ | (32,793,787 | ) | $ | 7,408,018 | ||||||||||
Stock-based compensation expense | 16,650 | 17 | 104,988 | - | 105,005 | |||||||||||||||
Net loss | - | - | - | (1,241,506 | ) | (1,241,506 | ) | |||||||||||||
Balance – June 30, 2020 | 25,434,776 | $ | 25,435 | $ | 40,281,375 | $ | (34,035,293 | ) | $ | 6,271,517 | ||||||||||
Balance | 25,434,776 | $ | 25,435 | $ | 40,281,375 | $ | (34,035,293 | ) | $ | 6,271,517 | ||||||||||
Stock-based compensation expense | 182,710 | 182 | 157,660 | - | 157,842 | |||||||||||||||
Net loss | - | - | - | (1,731,272 | ) | (1,731,272 | ) | |||||||||||||
Net income (loss) | - | - | - | (1,731,272 | ) | (1,731,272 | ) | |||||||||||||
Balance – September 30, 2020 | 25,617,486 | $ | 25,617 | $ | 40,439,035 | $ | (35,766,565 | ) | $ | 4,698,087 | ||||||||||
Balance | 25,617,486 | $ | 25,617 | $ | 40,439,035 | $ | (35,766,565 | ) | $ | 4,698,087 |
The accompanying notes are an integral part of these consolidated financial statements.
5 |
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
2021 | 2020 | |||||||||||||||
For the Nine Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2020 | 2019 | 2021 | 2020 | |||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||
Net loss | $ | (2,774,732 | ) | $ | (1,061,058 | ) | $ | (1,174,785 | ) | $ | (2,774,732 | ) | ||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||||||||||
Adjustments to reconcile net loss to net cash from operating activities: | ||||||||||||||||
Depreciation and amortization expense | 2,134,398 | 2,680,070 | 1,680,804 | 2,134,398 | ||||||||||||
Share based compensation expense | 369,843 | 473,717 | ||||||||||||||
Stock-based compensation expense | 530,595 | 369,843 | ||||||||||||||
Impairment on asset held for sale | 30,000 | 6,143 | - | 30,000 | ||||||||||||
Gain on disposition of assets | (142,234 | ) | (14,147 | ) | ||||||||||||
(Gain) loss on disposition of assets, net | 1,187 | (142,234 | ) | |||||||||||||
Gain on forgiveness of loan | (41,403 | ) | - | - | (41,403 | ) | ||||||||||
Amortization of deferred loan costs | 13,894 | 10,561 | 13,893 | 13,894 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 2,408,726 | (1,825,347 | ) | (700,451 | ) | 2,408,726 | ||||||||||
Inventories | (942,831 | ) | (539,586 | ) | (551,189 | ) | (942,831 | ) | ||||||||
Prepaid expenses and other noncurrent assets | 327,968 | (39,998 | ) | (161,564 | ) | 327,968 | ||||||||||
Accounts payable, accrued expenses and income tax payable | (18,728 | ) | 1,531,085 | |||||||||||||
Other noncurrent assets | (34,692 | ) | - | |||||||||||||
Other long term liabilities | (61,421 | ) | - | |||||||||||||
Accounts payable and accrued expenses | 1,168,317 | (18,728 | ) | |||||||||||||
Income tax payable | 71,376 | (34,692 | ) | |||||||||||||
Other long-term liabilities | - | (61,421 | ) | |||||||||||||
Net Cash From Operating Activities | 1,268,788 | 1,221,440 | 878,183 | 1,268,788 | ||||||||||||
Cash Flows From Investing Activities | ||||||||||||||||
Purchases of property, plant and equipment | (154,475 | ) | (392,691 | ) | (75,541 | ) | (154,475 | ) | ||||||||
Proceeds from sale of fixed assets | 117,833 | - | 50,000 | 117,833 | ||||||||||||
Net Cash From Investing Activities | (36,642 | ) | (392,691 | ) | (25,541 | ) | (36,642 | ) | ||||||||
Cash Flows From Financing Activities | ||||||||||||||||
Principal payments on debt | (2,167,539 | ) | (3,813,443 | ) | (1,146,309 | ) | (2,167,539 | ) | ||||||||
Proceeds received from debt borrowings | 964,120 | 800,000 | - | 964,120 | ||||||||||||
Payments on revolving loan | (1,018,690 | ) | (735,019 | ) | (540,078 | ) | (1,018,690 | ) | ||||||||
Proceeds received on revolving loan | 1,185,319 | 1,517,005 | 1,341,702 | 1,185,319 | ||||||||||||
Debt issuance costs | - | (70,103 | ) | |||||||||||||
Net Cash From Financing Activities | (1,036,790 | ) | (2,301,560 | ) | (344,685 | ) | (1,036,790 | ) | ||||||||
Net Change in Cash | 195,356 | (1,472,811 | ) | 507,957 | 195,356 | |||||||||||
Cash at Beginning of Period | 1,217,014 | 4,264,767 | 1,961,441 | 1,217,014 | ||||||||||||
Cash at End of Period | $ | 1,412,370 | $ | 2,791,956 | $ | 2,469,398 | $ | 1,412,370 | ||||||||
Supplemental information: | ||||||||||||||||
Cash paid for Interest | $ | 460,640 | $ | 673,251 | $ | 410,598 | $ | 460,640 | ||||||||
Acquisition of equipment by issuance of note payable | $ | - | $ | 183,378 | ||||||||||||
Inventory converted to property, plant and equipment | $ | 922,993 | $ | 582,879 | $ | 513,558 | $ | 922,993 | ||||||||
Reduction of debt with sale of asset | $ | 211,667 | $ | - | $ | - | $ | 211,667 |
The accompanying notes are an integral part of these consolidated condensed financial statements.
6 |
Superior Drilling Products, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 20202021
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Superior Drilling Products, Inc. (the “Company”, “SDPI”, “we”, “our” or “us”) is an innovative drilling and completion tool technology company providing cost saving solutions that drive production efficiencies for the oil and natural gas drilling industry. Our headquarters and manufacturing operations are located in Vernal, Utah. Our drilling solutions include the patented Drill-N-Ream® well bore conditioning tool (“Drill-N-Ream tool”) and the patented Strider™ Drill String Oscillation System technology (“Strider technology” or “Strider”). In addition, the Company is a manufacturer and refurbisher of PDC (polycrystalline diamond compact) drill bits and other tools for a leading oil field services company.company and other customers including other oil field service companies and operators. We operate a state-of-the-art drill tool fabrication facility, where we manufacture solutions for the drilling industry, as well as customers’ custom products.products for other applications.
Our subsidiaries include (a) Superior Drilling Solutions, LLC (previously known as Superior Drilling Products, LLC), a Utah limited liability company (“SDS”), together with its wholly owned subsidiary Superior Design and Fabrication, LLC, a Utah limited liability company (“SDF”), (b) Extreme Technologies, LLC, a Utah limited liability company (“ET”), (c) Meier Properties Series, LLC, a Utah limited liability company (“MPS”), (d) Meier Leasing, LLC, a Utah limited liability company (“ML”), and (e) Hard Rock Solutions, LLC (“HR” or “Hard Rock”).
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Superior Drilling Products Inc. and all of its wholly-owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
Unaudited Interim Financial Presentation
These interim consolidated condensed financial statements for the three and nine months ended September 30, 20202021 and 2019,2020, and the related footnote disclosures included herein, are unaudited. However, in the opinion of management, these unaudited interim financial statements have been prepared on the same basis as the audited financial statements, and reflect all adjustments necessary to fairly state the results for such periods. The results of operations for the three and nine months ended September 30, 20202021 are not necessarily indicative of the results of operations expected for the year ended December 31, 2020.2021. These interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the years ended December 31, 20192020 and 20182019 and the notes thereto, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, filed with the Securities and Exchange Commission (the “SEC”).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant items subject to estimates and assumptions include the carrying amount and useful lives of property and equipment and intangible assets, impairment assessments, share-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.
7 |
COVID-19
Concentrations of Credit Risk
The COVID-19 pandemic-related reduction in energy demandCompany has two significant customers that represented 86% and the dramatic decline in commodity prices that began in the first quarter of 2020 continued to cause disruptions and volatility in the second and third quarters of 2020. Sharp declines in crude oil and natural gas production along with reduced demand for refined products due to the economic shutdown in the wake of the pandemic affected our business in the second quarter, and we expect will continue to do so in the near term. Further, significant uncertainty remains regarding the duration and extent of the impact of the pandemic on the energy industry. See Note 2 – Liquidity.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires assets and liabilities that arise from all leases to be recognized on the balance sheet for lessees and expanded financial statement disclosures for both lessees and lessors. We adopted the new standard effective January 1, 2020 and elected the modified retrospective transition method and as such, the comparative financial information will not be restated and will continue to be reported under the lease standard in effect during those periods. The adoption of this standard resulted in approximately $270,000 of additional assets and liabilities on our consolidated balance sheet representing the recognition of operating lease right-of-use assets and operating lease liabilities. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liability represents the Company’s obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception are not recorded on the condensed consolidated balance sheet and are expensed on a straight-line basis over the lease term in the condensed consolidated statement of operations. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes an estimate81% of its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company believes it could borrow on a collateralized basis the amount of the lease payments in the same currency,revenue for a similar term, in a similar economic environment. See Note 8 – Leases.
Significant Customers
For the nine months ended September 30, 2021 and 2020, respectively. These customers had approximately $1,081,000 and $432,000 in accounts receivable at September 30, 2021 and 2020, respectively.
The Company had two customersvendors that represented 81% 12% of our total revenue during the period. Forits purchases for the nine months ended September 30, 2019, two customers represented 94%2021. These vendors had approximately $176,000 in accounts payable at September 30, 2021 and purchases in the nine months of our total revenue during the period.
Significant Vendors
We2021 from these vendors totaled approximately $546,000. The Company had one vendor that represented 13.9%14% of ourits purchases for the nine months ended September 30, 2020. TheThis vendor had approximately $72,000$218,000 in accounts payable at September 30, 2020 and purchases in the nine months ofended September 30, 2020 from this vendor totaled approximately $554,000. We had one vendor that represented 12%$772,000.
Impact of our purchasesCOVID-19
The COVID-19 pandemic has impacted and may further impact the Company’s operations, and the operations of the Company’s suppliers and vendors, as a result of quarantines, facility closures, and travel and logistics restrictions. The extent to which the COVID-19 pandemic will continue to impact the Company’s business, financial condition and results of operations will depend on future developments, which are highly uncertain and depend on, among other things, the duration, spread, severity, and impact of the COVID-19 pandemic and the success and speed of vaccination efforts both in the United States and globally, the effects of the COVID-19 pandemic on the Company’s customers, suppliers, and vendors and the remedial actions and stimulus measures adopted by local and federal governments, and to what extent normal economic and operating conditions can resume. Therefore, the Company cannot reasonably estimate future impacts of the COVID-19 pandemic at this time.
Uncertain Tax Matters
The Company believes it has appropriately accrued for the nine months ended September 30, 2019. This vendor had approximately $218,000 in accounts payable at September 30, 2019expected outcome of uncertain tax matters and purchases during the nine months of 2019 from this vendor totaled approximately $772,000.believes such liabilities represent a reasonable provision for taxes ultimately expected to be paid; however, these liabilities may need to be adjusted as new information becomes known and as tax examinations continue to progress, or as settlements or litigations occur.
Reclassifications
Reclassifications
Certain prior year amounts have been reclassified to the balance sheet to conform to the current year presentation. The reclassifications were within accounts payable and accrued expensesincome tax payable and did not impact net income.
Recently Issued
Recent Accounting StandardsPronouncements
In June 2016, the FASBThere are no recently issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, and requires the use of a new forward-looking expected loss modelaccounting pronouncements that will result in the earlier recognition of allowances for losses. Early adoption is permitted and entities must adopt the amendment using a modified retrospective approach to the first reporting period in which the guidance is effective. For smaller reporting companies, as provided by Accounting Standards Update 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022. The adoption of ASU 2016-13 is currentlywe have not expected toyet adopted that we believe will have a material effect on our consolidated financial statements.
In December 2019,Income Tax Expense
The Company recorded income tax expense during the FASB issued ASU No. 2019-12, Income Taxes (“Topic 740”) - Simplifying the Accounting for Income Taxes. ASU 2019-12quarter of $39,327 with income before income taxes of only $33,117. The reason The Company has income tax expense greater than income before income taxes is intended to simplify accounting for income taxes. It removes certain exceptionsdue to the general principlesCompany having taxable income in Topic 740 and amends existing guidancea foreign tax jurisdiction. In the U.S. the Company is not subject to improve consistent application. ASU 2019-12 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2020. The adoption of ASU 2019-12 is currently not expectedU.S. taxes due to havehaving a material effect on our consolidated financial statements.taxable loss.
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NOTE 2. LIQUIDITY
The significant decline in oil demand due to COVID-19, the instability of oil prices caused by geopolitical issues and production levels, and the limited availability of storage capacity, have together resulted in our customers announcing significant reductions to their capital expenditure budgets for 2020. Demand for our products and services has been severely impacted as a result, and management expects this to continue for the duration of 2020 and potentially beyond; however, we are currently unable to estimate the full impact to our business, how long this significant drop in demand will last or the depth of the decline.
In an effort to offset the reduction in revenue resulting from the weakened macroeconomic environment, we have implemented certain cost reduction measures during 2020. These measures included, but were not limited to, the following:
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We have also entered into amended agreements with certain of our customers, reduced our planned capital expenditures for 2020 and decided to defer further investment in new technology development, including our Strider technology, for the foreseeable future. Management is working diligently with vendors to achieve amended price concessions and terms of our payables. We believe the U.S. onshore activity for the remainder of 2020 will remain at depressed levels and continue to be constrained.
We are working to minimize the decline in revenue by adding additional revenue streams and maintaining cost containment measures in order to be cash flow positive.We believe that our borrowing capacity,cash on hand, cash generated from operations and the proceeds of the Paycheck Protection Program (“PPP”) loan (see Note 9 – Long-Term Debt)our borrowing capacity under our current credit facility will be sufficient to fund our operations for the next 12 months. To enhance liquidity, our operational and financial strategies include managing our operating costs, accelerating collections of international receivables, and reducing working capital requirements and restructuring our debt.requirements. If we are unable to do this, we may not be able to, among other things, (i) maintain our revised general and administrative spending levels; (ii) fund certain obligations as they become due; and (iii) respond to competitive pressures or unanticipated capital requirements. COVID-19 has also led to a significant disruption in the equity and debt capital markets, which could hinder our ability to raise new capital or obtain financing on acceptable terms. We cannot provide any assurance that financing will be available to us in the future on acceptable terms, if at all.
Additionally, in JulyIn 2020, the Company filed a Form S-3 Shelf Registration that will allow the Company to offer and sell, from time to time, up to $20,000,000$20,000,000 of securities. We believe maintaining an active Shelf Registration provides additional financial flexibility to access the capital markets. In October 2021, the Company completed an equity offering of shares of common stock at a price of $ per share. Net proceeds from the equity offering were $1,739,103 (See Note 13 – Subsequent Events).
Also in 2020, the Company received notification from the NYSE American to the Company indicating that, as a result of the Company’s stockholders’ equity of $4.7 million as of September 30, 2020, and reported losses for each of the last five fiscal years, the Company was not in compliance with the stockholders’ equity standards for continued listing on the NYSE American. On January 28, 2021, the Company received notice that the NYSE American had accepted the Company’s plan that was submitted on December 18, 2020, to regain compliance with the continued listing standards of the NYSE American.
NYSE American Regulations staff will review the Company periodically for compliance with the initiatives outlined in the plan. If the Company does not make progress consistent with the plan during the plan period, NYSE Regulation staff may initiate delisting proceedings as appropriate. The Company’s first quarterly plan update was submitted to the NYSE American in April 2021 and was subsequently approved by the NYSE compliance committee on May 21, 2021. On August 16, 2021, the Company submitted its second quarterly plan update which was approved by the NYSE on September 10, 2021.
NOTE 3. REVENUE
Our revenue is derived from short termshort-term contracts. Revenue is recognized when we satisfy a performance obligation by transferring control of the promised goods or services to our customers at a point in time, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. We also assess our customer’s ability and intention to pay, which is based on a variety of factors including our customer’s historical payment experience and financial condition. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 days.
Revenue generally does not include right of return or other significant post-delivery obligations. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We elected to treat shipping and handling costs as a fulfillment cost instead of as a separate performance obligation. We recognize the cost for shipping and handling when incurred as an expense in cost of sales.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer under Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts with customers contain a single performance obligation to provide agreed-upon products or services. For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. In accordance with Topic 606, we do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
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All of our contracts are less than one year in duration. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Disaggregation of Revenue
Approximately 83% 85% of our revenue wasis from the United StatesNorth America and approximately 17% was15% is from the Middle East for the ninethree months ended September 30, 2020.2021. For the nine months ended September 30, 2019,2021, approximately 95%86% of our revenue was from the United StatesNorth America and approximately 5%14% was from the Middle East.
Tool Revenue
Tool and Product Sales: Revenue for tool and product sales is recognized upon shipment of tools or products to the customer. Shipping and handling costs related to tool and product sales are recorded gross as a component of both the sales price and cost of the product sold.
Tool Rental: Tool rental revenue is recognized upon completion of the customer’s job for which the tool was rented. While the duration of the rents vary by job and number of runs, these rents are generally less than one month. The rental agreements are typically based on the price per run or footage drilled and do not have any minimum rental payments or term.
Other Related Revenue: We receive revenue from the repair of tools upon delivery of the repaired tool to the customer. We earn royalty commission revenue when our customer invoices their customer for the use of our tools.
Contract Services
Drill Bit Manufacturing and Refurbishment: We recognize revenue for our PDC drill bit services upon transfer of control, which we have determined to be upon shipment. Shipping and handling costs related to refurbishing services are paid directly by the customer at the time of shipment.
Revenue disaggregated by revenue source are as follows:
Nine months ended September 30, | ||||||||
2020 | 2019 | |||||||
Tool Revenue: | ||||||||
Tool and product sales | $ | 971,520 | $ | 3,358,119 | ||||
Tool rental | 1,716,210 | 755,720 | ||||||
Other related revenue | 3,459,550 | 5,098,581 | ||||||
Total Tool Revenue | 6,147,280 | 9,212,420 | ||||||
Contract Services | 2,782,313 | 5,443,583 | ||||||
Total Revenue | $ | 8,929,593 | $ | 14,656,003 |
SCHEDULE OF REVENUE DISAGGREGATED BY REVENUE
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Tool Revenue: | ||||||||||||||||
Tool and product sales | 315,000 | 294,464 | $ | 1,470,000 | $ | 971,520 | ||||||||||
Tool rental | 521,228 | 254,574 | 1,318,135 | 1,716,210 | ||||||||||||
Other related revenue | 1,510,006 | 641,891 | 3,495,326 | 3,459,550 | ||||||||||||
Total Tool Revenue | 2,346,234 | 1,190,929 | 6,283,461 | 6,147,280 | ||||||||||||
Contract Services | 1,215,685 | 356,513 | 3,102,219 | 2,782,313 | ||||||||||||
Total Revenue | $ | 3,561,919 | $ | 1,547,442 | $ | 9,385,680 | $ | 8,929,593 |
Contract Costs
We do not incur any material costs of obtaining contracts.
Contract Balances
Under our sales contracts, we invoice customers after our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under ASCTopic 606.
NOTE 4. INVENTORIES
Inventories are comprised of the following:
SCHEDULE OF INVENTORIES
September 30, 2020 | December 31, 2019 | September 30, 2021 | December 31, 2020 | |||||||||||||
Raw material | $ | 809,958 | $ | 800,662 | $ | 568,904 | $ | 733,734 | ||||||||
Work in progress | 36,229 | 75,235 | 208,369 | 50,631 | ||||||||||||
Finished goods | 97,683 | 48,135 | 290,465 | 235,643 | ||||||||||||
$ | 943,870 | $ | 924,032 | |||||||||||||
Inventories, net | $ | 1,067,738 | $ | 1,020,008 |
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following:
SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT
September 30, 2020 | December 31, 2019 | September 30, 2021 | December 31, 2020 | |||||||||||||
Land | $ | 880,416 | $ | 880,416 | $ | 880,416 | $ | 880,416 | ||||||||
Buildings | 4,764,441 | 4,758,832 | 4,764,441 | 4,764,441 | ||||||||||||
Building improvements | 755,039 | 755,039 | 755,039 | 755,039 | ||||||||||||
Machinery and equipment | 11,232,415 | 10,343,486 | 11,859,879 | 11,298,642 | ||||||||||||
Office equipment, fixtures and software | 628,358 | 615,357 | 628,358 | 628,358 | ||||||||||||
Transportation assets | 350,871 | 350,871 | 265,760 | 265,760 | ||||||||||||
18,611,540 | 17,704,001 | |||||||||||||||
Property, plant and equipment, gross | 19,153,893 | 18,592,656 | ||||||||||||||
Accumulated depreciation | (10,752,340 | ) | (9,658,309 | ) | (12,190,116 | ) | (11,057,558 | ) | ||||||||
$ | 7,859,200 | $ | 8,045,692 | |||||||||||||
Property, plant and equipment, net | $ | 6,963,777 | $ | 7,535,098 |
In 2019, the Company decided to sell the Company airplane and related hangar. Accordingly, these assets were reported as assets held for sale on our balance sheet as of December 31, 2019 at their carrying value, which was lower than the expected fair value less costs to sell. In February 2020, theThe Company sold theits airplane for a gain of approximately $142,000. The$142,000 in February 2020 and the Company recordedsold its hangar for a $30,000 impairment related to the hangargain of $10,000 in March 20202021, both of which were in assets held for sale at the end of 2019. The increase in machinery and expects a saleequipment was mostly the result of the hangar to be completed inCompany’s increased rental tool fleet for the next 12 months.Middle East operations.
Depreciation expense related to property, plant and equipment for the three and nine months ended September 30, 20202021 was $401,592$363,558 and $1,259,398,$1,139,137, respectively and for the three and nine months ended September 30, 20192020 was $446,888$401,592 and $1,271,737,$1,259,398, respectively.
NOTE 6. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
SCHEDULE OF INTANGIBLE ASSETS
September 30, 2020 | December 31, 2019 | September 30, 2021 | December 31, 2020 | |||||||||||||
Developed technology | $ | 7,000,000 | $ | 7,000,000 | $ | 7,000,000 | $ | 7,000,000 | ||||||||
Customer contracts | 6,400,000 | 6,400,000 | 6,400,000 | 6,400,000 | ||||||||||||
Trademarks | 1,500,000 | 1,500,000 | 1,500,000 | 1,500,000 | ||||||||||||
14,900,000 | 14,900,000 | |||||||||||||||
Intangible assets, gross | 14,900,000 | 14,900,000 | ||||||||||||||
Accumulated amortization | (13,788,889 | ) | (12,913,889 | ) | (14,622,222 | ) | (14,080,556 | ) | ||||||||
$ | 1,111,111 | $ | 1,986,111 | |||||||||||||
Intangible assets, net | $ | 277,778 | $ | 819,444 |
Amortization expense related to intangible assets for the three and nine months ended September 30, 20202021 was $291,667$41,667 and $875,000,$541,667, respectively, and for the three and nine months ended September 30, 20192020 was $291,667$291,667 and $1,408,333,$875,000, respectively.
Annually, and more often as necessary, we will perform an evaluation Full amortization was realized for the Company’s patent at the end of our intangible assets for indications of impairment. If indications exist, we will perform an evaluation ofApril 2021. This decreases the fair value of the intangible assets and, if necessary, record an impairment charge. As of September 30, 2020, the Company reviewed the net balance of the intangible assets and determined no impairment was needed.2021 expense compared to 2020.
NOTE 7. RELATED PARTY NOTE RECEIVABLE
In January 2014, we entered into a Note Purchase and Sale Agreement under which we agreed to purchase a loan made to Tronco Energy Corporation (“Tronco”), a party related to us through common control, in order to take over the legal position as Tronco’ s senior secured lender. Tronco is an entity owned by Troy and Annette Meier. Effective August 2017, the Company fully reserved the related party note receivable of $6,979,043,$6,979,043, which reduced the related party note receivable balance to $0.$0. The Company continues to hold the 8,267,860 shares of the Company’s common stock as collateral. The Company will record a recovery of the loan upon receiving repaymentif and when consideration or payments of the note or interestloan are made in other income.the future. On July 7, 2020, the Company entered into an amended and restated loan agreement and note with Tronco changing the payment terms on the note. As amended, the interest rate on the note is fixed at 2% per annum. Interest only is due December 31, 2021, and 2022, with a balloon payment of all unpaid interest and principal due upon maturity on December 31, 2022.
NOTE 8. LEASES
The Company determines whether a contract is a lease, or contains a lease, at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. The Company discounts lease payments based on an estimate of its incremental borrowing rate as the Company’s leases do not provide a readily determinable implicit rate.
The Company leases certain facilities in Texas, Utah and Dubai under long-term operating leases with lease terms of one year to two years. Effective January 1, 2020, the Company adopted the provision of ASC 842 Leases.
The table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheet as of September 30, 2020:
Classification on Balance Sheet | September 30, 2020 | |||||
Assets | ||||||
Operating lease assets | Operating lease right of use assets | $ | 146,450 | |||
Total lease assets | $ | 146,450 | ||||
Liabilities | ||||||
Current liabilities | ||||||
Operating lease liability | Current operating lease liability | $ | 108,104 | |||
Noncurrrent liabilities | ||||||
Operating lease liability | Long-term operating lease liability | 38,346 | ||||
Total lease liability | $ | 146,450 |
The lease expense and the cash paid under operating leases for the three and nine months ended September 30, 2020 was $26,827 and $141,817, respectively. At September 30, 2020, the weighted average remaining lease terms were 1.84 years and the weighted average discount rate was 7.25%.
The following is the aggregate future lease payments for operating leases as of September 30, 2020:
2020 (remaining) | $ | 26,827 | ||
2021 | 90,042 | |||
2022 | 23,304 | |||
2023 | 16,104 | |||
Total undiscounted lease payments | 156,277 | |||
Less: effects of discounting | (9,827 | ) | ||
Present value of lease payments | $ | 146,450 |
NOTE 9. LONG-TERM DEBT
Long-term debt is comprised of the following:
SCHEDULE OF LONG-TERM DEBT INSTRUMENTS
September 30, 2020 | December 31, 2019 | September 30, 2021 | December 31, 2020 | |||||||||||||
Real estate loans | $ | 2,681,373 | $ | 2,938,191 | ||||||||||||
Hard Rock Note | 1,500,000 | 3,000,000 | $ | 750,000 | $ | 1,500,000 | ||||||||||
Credit Agreement | 1,065,146 | 1,134,626 | 1,390,881 | 825,366 | ||||||||||||
Machinery loans | 495,635 | 580,185 | 386,144 | 466,448 | ||||||||||||
PPP Loan | 891,600 | - | ||||||||||||||
Transportation loans | 63,769 | 298,404 | 37,158 | 56,572 | ||||||||||||
6,697,523 | 7,951,406 | 2,564,183 | 2,848,386 | |||||||||||||
Less: | ||||||||||||||||
Current portion | 4,760,252 | (4,102,542 | ) | (1,445,230 | ) | (1,397,337 | ) | |||||||||
Long-term debt, net | $ | 1,937,271 | $ | 3,848,864 | $ | 1,118,953 | $ | 1,451,049 |
Real Estate Loans
On February 1, 2019, we signed a loan agreement for $3,129,861 refinancing our commercial bank loan which is secured by the land and buildings at our Vernal, Utah campus. We paid $1,000,000 towards the previous loan that was scheduled to mature on February 15, 2019, upon refinancing. The loan requires monthly payments of approximately $43,000, including principal and interest at 7.25%, and is secured by the land and buildings at our Vernal, Utah Campus. A balloon payment of approximately $2,500,000 is due upon maturity on February 15, 2021.
Hard Rock Note
In 2014, the Company purchased all of the interests of Hard Rock.Rock Solutions, LLC (“Hard Rock”). Consideration consisted of $12.5$12.5 million paid in cash at closing and a $12.5$12.5 million seller’s note (the “Hard Rock Note”). The Hard Rock Note and subsequent amendments are secured by all of the patents, patents pending, other patent rights, and trademarks transferred to Hard Rock.
The Company paid $803,630Hard Rock Note has a remaining balance of principal$750,000 as of September 30, 2021, accrues interest at 8.00% per annum and accrued interest on Januaryis due in full by October 5, 2020, and $790,223 of principal and accrued interest on April 5, 2020.2022. In April 2020,October 2021, the Company amended and restated the Hard Rock Note. made a payment of $15,123 related to accrued interest. Under the amended terms of the Hard Rock Note, we are required to make principal payments of $750,000 plusthe following additional payments: accrued interest on January 5, April 5, July 5 2021 and October 5 2022. Interest accrues at a ratein 2022; with the remaining balance of 8% per annum. The Company paid $29,759 ofprincipal and accrued interest on July 5, 2020 and $30,247 of accrued interest on October 5, 2020. Accrued interest only payments will also be due on the fifth day of January, April and October 2021 and January, April and July 2022. The remaining principal balance of the Hard Rock Note is $1,500,000.due on October 5, 2022. For the nine months ended September 30, 2021, the Company has made a total of $89,754 in interest payments related to the Hard Rock Note.
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Credit Agreement
In February 2019, the Company entered into a Loan and Security Agreement (the “Credit Agreement”) with Austin Financial Services, Inc. (“AFS”). The Credit Agreement provides a $4,500,000$4,500,000 credit facility, which includes a $1,000,000$1,000,000 term loan (the “Term Loan”) and a $3,500,000$3,500,000 revolver (the “Revolving Loan”). As of September 30, 2020, $359,916 was2021, we had $416,662 outstanding on the Term Loan and $1,000,462 outstanding on the Revolving Loan. Amounts outstanding under the Revolving Loan at any time may not exceed the sum of: (a) up to 85% of accounts receivable or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect (less a dilution reserve as determined by AFS in its sole good faith discretion), plus (b) the lesser of (i) up to 50% of inventory or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect, or (ii) the inventory sublimit, minus (c) the borrowing base reserve as may be determined from time to time by AFS.Amounts outstanding on the Revolving Loan as of September 30, 2020,2021, may not exceed $511,791,$1,000,000, which is based on a calculation applying 85% of accounts receivable and 50% of inventory. A collateral management fee is payable monthly on the used portion of the Revolving Loan and Term Loan. Even if our borrowings are less than $1,000,000, we still pay interest as if we had borrowed $1,000,000. At September 30, 2020, we had approximately $9,456 of accrued interest.
The Credit Agreement contains various restrictive covenants that, among other things, limit or restrict the ability of the borrowersCompany to incur additional indebtedness; incur additional liens; make dividends and other restricted payments; make investments; engage in mergers, acquisitions and dispositions; make optional prepayments of other indebtedness; engage in transactions with affiliates; and enter into restrictive agreements. The Credit Agreement does not include any financial covenants. If an event of default occurs, the lenders are entitled to accelerate the advances made thereunder and exercise rights against the collateral. Borrowing under the Revolving Loan is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause. At September 30, 2020,2021, we were in compliance with the covenants in the Credit Agreement.
The interest rate for the Term Loan and the Revolving Loan is prime plus 2%. At September 30, 2020,2021, the interest rate for the Term Loan was 8.85%, which includes a 3.6% management fee rate. The effective interest rate for the Revolving Loan for the quarter ending September 30, 2021 was 9.78%. Even if our borrowings are less than $1,000,000, we still pay interest as if we had borrowed $1,000,000. At September 30, 2021, we had approximately $12,000 of accrued interest. The obligations of the Company under the agreementCredit Agreement are secured by a security interest in substantially all of the tangible and intangible assets of the borrowers,Company, other than any assets owned by the Company that constitute real property (and fixtures affixed to such real property), certain excluded equipment, intellectual property, or aircraft. A collateral management fee is payable monthly on the used portion of the Revolving Loan and Term Loan. The Credit Agreement matures on February 20, 2023, subject to early termination pursuant to the terms of the agreement or extension as may be agreed by the parties.
Paycheck Protection ProgramNOTE 9. FINANCING OBLIGATION
On April 21,December 7, 2020, the Company received loan proceeds of $891,600 underentered into a promissory note from its existing commercial banksale agreement (the “PPP Loan”“Sale Agreement”). The PPP, established as partPursuant to the terms of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.
The application for these funds requiredSale Agreement, the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Some of the uncertaintiessold land and property related to the Company’s operations that are directly related to COVID-19 include, but are not limited to,headquarters and manufacturing facility in Vernal, Utah (the “Property”) for a purchase price of $4,448,500. Concurrent with the severitysale of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations on operations or mandates to provide products or services), impacts on the supply chain, and the effect on customer demand or changes to operations. In addition, the health of the Company’s workforce, and its ability to meet staffing needs to continue to build, repair and distribute drilling tools, and other critical functions, are uncertain and is vital to its operations.
The PPP Loan certification further requires Property, the Company entered into a fifteen-year lease agreement (the “Lease Agreement”), whereby the Company will lease back the Property at an annual rate of $311,395 with payments made monthly, subject to take into account our current business activity and our ability to access other sourcesannual rent increases of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to1.5%. Under the business. The Company had approximately $341,000 of available credit under the CreditLease Agreement, as of April 21, 2020. Further, the Company has a limited market capitalization andan option to extend the Company’s shares have limited trading volume and as a result, the Company believes it met and continues to meet the certification requirements.
The term of the Company’s PPP Loan is two years. lease and to repurchase the Property. Due to the repurchase option, the Company accounted for the transaction as a financing transaction and not as a sale under ASC Topic 842, Leases.
The annualCompany received cash of $1,622,106, retired real estate debt of $2,638,773 and recorded a financing obligation liability of $4,260,879 related to the transaction. There was no gain recorded since sale accounting was precluded. The financing obligation has an implied interest rate onof 6.0%. At the PPP Loan is 1% and no paymentsconclusion of the fifteen-year lease period, the financing obligation residual will be $2,160,242, which will correspond to the carrying value of the property. The Company paid $25,950 of principal or interest are due duringin 2020 that was prorated for the six-month period beginning on the datemonth of the PPP Loan.December.
The financing obligation is summarized below:
SCHEDULE OF FINANCING OBLIGATION
September 30, 2021 | December 31, 2020 | |||||||
Finance obligations for sale-leaseback transactions | $ | 4,193,363 | $ | 4,239,952 | ||||
Current principal portion of finance obligation | (63,561 | ) | (61,691 | ) | ||||
Non-current portion of finance obligation | $ | 4,129,802 | $ | 4,178,261 |
NOTE 10. TOTAL EQUITY
A summary of changes in total equity for the nine months ended September 30, 2020 and 2019 is presented below:
Common Stock | Additional Paid-in | Accumulated | Total Shareholders | |||||||||||||||||
Shares | Par Value | Capital | Deficit | Equity | ||||||||||||||||
Balance - December 31, 2019 | 25,418,126 | $ | 25,418 | $ | 40,069,391 | $ | (32,991,833 | ) | $ | 7,102,976 | ||||||||||
Stock-based compensation expense | 199,360 | 199 | 369,644 | - | 369,843 | |||||||||||||||
Net loss | - | - | - | (2,774,732 | ) | (2,774,732 | ) | |||||||||||||
Balance - September 30, 2020 | 25,617,486 | $ | 25,617 | $ | 40,439,035 | $ | (35,766,565 | ) | $ | 4,698,087 |
Common Stock | Additional Paid-in | Accumulated | Total Shareholders | |||||||||||||||||
Shares | Par Value | Capital | Deficit | Equity | ||||||||||||||||
Balance - December 31, 2018 | 25,018,098 | $ | 25,018 | $ | 39,440,611 | $ | (32,055,410 | ) | $ | 7,410,219 | ||||||||||
Stock-based compensation expense | 79,652 | 80 | 473,637 | - | 473,717 | |||||||||||||||
Net loss | - | - | - | (1,061,058 | ) | (1,061,058 | ) | |||||||||||||
Balance - September 30, 2019 | 25,097,750 | $ | 25,098 | $ | 39,914,248 | $ | (33,116,468 | ) | $ | 6,822,878 |
On August 7, 2020, the Board of Directors recommended and the Company’s shareholders approved an additional 2,543,448 shares of the Company’s common stock to be added to the 2015 Incentive Plan. Subject to adjustment as provided in the 2015 Incentive Plan, the maximum aggregate number of shares of the Company’ s common stock that may be issued with respect to awards under the 2015 Incentive Plan is 5,536,353.
Also on August 7, 2020, the Board of Directors granted 259,765 restricted stock units to Troy Meier, Chairman and Chief Executive Officer, 199,219 restricted stock units to Annette Meier, President and Chief Operating Officer, 140,625 restricted stock units to Chris Cashion, Chief Financial Officer, and 87,891 restricted stock units to each of the three independent members of the Board of Directors. In addition, the Board of Directors authorized 675,000 restricted stock units to be granted to employees of the company other than Mr. and Mrs. Meier and Mr. Cashion. These restricted stock units will vest over three years from the date of grant.
NOTE 11. 10. GEOGRAPHICAL OPERATIONS INFORMATION
The following summarizes revenue by geographic location:
SCHEDULE OF REVENUE AND PROPERTY, PLANT AND EQUIPMENT BY GEOGRAPHIC LOCATION
Three months ending September 30, | Nine months ending September 30, | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||
North America | $ | 1,118,404 | $ | 4,787,693 | $ | 7,387,847 | $ | 13,957,666 | $ | 3,040,691 | $ | 1,118,404 | $ | 8,073,945 | $ | 7,387,847 | ||||||||||||||||
Middle East | $ | 429,038 | $ | 288,522 | $ | 1,541,746 | $ | 698,337 | $ | 521,228 | $ | 429,038 | $ | 1,311,735 | $ | 1,541,746 | ||||||||||||||||
$ | 1,547,442 | $ | 5,076,215 | $ | 8,929,593 | $ | 14,956,003 | $ | 3,561,919 | $ | 1,547,442 | $ | 9,385,680 | $ | 8,929,593 |
The following summarizes net property, plant and equipment by geographic location:
September 30, 2020 | December 31, 2019 | September 30, 2021 | December 31, 2020 | |||||||||||||
Property, plant and equipment, net: | ||||||||||||||||
North America | $ | 6,600,808 | $ | 7,160,646 | $ | 5,590,486 | $ | 6,008,431 | ||||||||
Middle East | 1,258,392 | 885,046 | 1,373,291 | 1,526,667 | ||||||||||||
$ | 7,859,200 | $ | 8,045,692 | $ | 6,963,777 | $ | 7,535,098 |
NOTE 12. 11. COMMITMENTS AND CONTINGENCIES
We are subject to litigation that arises from time to time in the ordinary course of our business activities. In February 2019, the Company filed a patent infringement lawsuit in the United States District Court for the Western District of Louisiana Lafayette Division asserting Stabil Drill Specialties, LLC (“Stabil Drill”) infringed on our patent that covers the Company’s well bore conditioning tool, the Drill-N-Ream. The lawsuit was subsequently moved from Louisiana to the United States District Court for the Southern District of Texas, Houston Division. Additionally, on May 20, 2019, Extreme Technologies, LLC sued Short Bit & Tool Co. and Lot William Short, Jr. (“Defendants”) in the Northern District of Texas-Dallas Division. Extreme sued for patent infringement based on the same patents discussed in the Stabil Drill litigation. On December 23, 2019, the Court stayed Extreme’s patent infringement claim against Defendants pending resolution of the Southern District of Texas Stabil Drill case. The court ordered the Company to serve discovery requests upon Stabil Drill and gave Stabil Drill deadlines to respond and produce documents and permit product inspection. Stabil Drill filed a motion for summary judgement and the Company responded and cross-moved for patent infringement. The parties are awaiting the judge’s decision.non-infringement. On October 1, 2020, Superior Energy Services, Stabil Drill’s parent company, filed for bankruptcy, which may resultresulted in a delaybrief, automatic stay of the litigation. Superior Energy Services announced on February 2, 2021 that it successfully completed its financial restructuring and emerged from Chapter 11 bankruptcy. On March 9, 2021, the Court lifted the automatic bankruptcy stay. On May 12, 2021, the Court denied Stabil Drill’s non-infringement summary judgment motion. The parties are preparing this case for trial and expect a jury trial setting in the resolution of this litigation. We cannot predict the outcome of this matter, but our legal costs could have a material effect on our financial position or results of operations in future periods.2022. We are not currently involved in any other litigation which management believes could have a material effect on our financial position or results of operations.
NOTE 12. SHAREHOLDERS’ EQUITY
On August 9, 2021, the Board of Directors granted 434,641 restricted stock units to Troy Meier, Chairman and Chief Executive Officer, granted 333,333 restricted stock units to Annette Meier, President and Chief Operating Officer, granted 156,863 restricted stock units to Chris Cashion, Chief Financial Officer, and 98,039 restricted stock units to each of the three independent members of the Board of Directors. Stock price is based on the average price of the common stock on the date of the grant. In addition, the Board of Directors authorized 250,000 restricted stock units and stock options to be granted to employees of the Company other than Mr. and Mrs. Meier and Mr. Cashion. The 250,000 restricted stock units were to be granted to employees subject to a Board approved performance based bonus plan. The plan was never developed and implemented nor communicated to the employees. These restricted stock units will vest over three years.
NOTE 13. SUBSEQUENT EVENTS
On October 19, 2021, the Company completed an equity offering of 261,000 in total offering costs. Net proceeds from the equity offering were approximately $1,700,000. shares of our common stock to certain institutional investors, at a purchase price of $ per share. The Company paid approximately $
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Introduction
The following discussion and analysis was prepared to supplement information contained in the accompanying financial statements and is intended to provide certain details regarding our financial condition as of September 30, 2020,2021, and our results of operations for the three and nine months ended September 30, 20202021 and 2019.2020. It should be read in conjunction with the unaudited financial statements and notes thereto contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”) as well as our audited financial statements for the years ended December 31, 20192020 and 2018,2019, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, which was filed with the Securities and Exchange Commission (the “SEC”).
Unless the context requires otherwise, references to the “Company” or to “we,” “us,” or “our” and other similar terms are to Superior Drilling Products, Inc. and all of its subsidiaries.
Forward -Forward- Looking Statements
This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements contained in all parts of this document that are not historical facts are forward-looking statements that involve risks and uncertainties that are beyond the control of the Company. You can identify the Company’s forward-looking statements by the words “anticipate,” “estimate,” “expect,” “may,” “project,” “believe” and similar expressions, or by the Company’s discussion of strategies or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurances can be given that these expectations will prove to be correct. These forward-looking statements include the following types of information and statements as they relate to the Company:
● | future operations, financial results, business plans, cash flow and cash requirements; | |
● | scheduled, budgeted and other future capital expenditures; | |
● | working capital requirements; | |
● | the availability of expected sources of liquidity; | |
● | the introduction into the market of the Company’s future products; | |
● | the market for the Company’s existing and future products; | |
● | the opportunity to diversify the markets served by the Company or products provided within the existing oil and gas industry as a result of receiving the ISO-9001 certification; | |
● | the Company’s ability to develop new applications for its technologies; | |
● | the exploration, development and production activities of the Company’s customers; | |
● | compliance with present and future environmental regulations and costs associated with environmentally related penalties, capital expenditures, remedial actions and proceedings; | |
● | effects of potential legal proceedings; and | |
● | changes in customers’ future product and service requirements that may not be cost effective or within the Company’s capabilities. |
These statements are based on assumptions and analyses in consideration of the Company’s experience and perception of historical trends, current conditions, expected future developments and other factors the Company believes were appropriate in the circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements.
While it is not possible to identify all factors, the Company continues to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed under “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, our subsequent filings with the SEC,2020 and the following:
● | the volatility of oil and natural gas prices; | |
● | the cyclical nature of the oil and gas industry; | |
● | availability of financing, flexibility in restructuring existing debt and access to capital markets; | |
● | our reliance on significant customers; | |
● | consolidation within our customers’ industries; | |
● | competitive products and pricing pressures; | |
● | our ability to develop and commercialize new and/or innovative drilling and completion tool technologies; | |
● | our ability to diversify products/services provided to customers and markets in which we operate; | |
● | the continued impact of COVID-19 on domestic and global economic conditions and the future impact of such conditions on the oil and gas industry and the demand for our services; | |
● | ||
fluctuations in our operating results; | ||
● | our dependence on key personnel; | |
● | costs of raw materials; | |
● | our dependence on third party suppliers; | |
● | unforeseen risks in our manufacturing processes; | |
● | the need for skilled workers; | |
● | our ability to successfully manage our growth strategy; | |
● | unanticipated risks associated with, and our ability to integrate, acquisitions; | |
● | current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries; | |
● | the potential impact of major health crises on our business and results of operations; | |
● | terrorist threats or acts, war and civil disturbances; | |
● | our ability to protect our intellectual property; | |
● | impact of environmental matters, including future environmental regulations; | |
● | implementing and complying with safety policies; | |
● | breaches of security in our information systems and other cybersecurity risks; | |
● | related party transactions with our founders; and | |
● | risks associated with our common stock. |
Many of such factors are beyond the Company’s ability to control or predict. Any of the factors, or a combination of these factors, could materially affect the Company’s future results of operations and the ultimate accuracy of the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. Every forward-looking statement speaks only as of the date of the particular statement, and the Company undertakes no obligation to publicly update or revise any forward-looking statement.
Executive Summary
We innovate, design, engineer, manufacture, sell, and repair drilling and completion tools in the United States, Canada, and the Middle East and Eastern Europe.East.
We currently have three basic operations:
● | Our PDC drill bit and other tool refurbishing and manufacturing service, | |
● | Our emerging technologies business that manufactures the Drill-N-Ream tool, our innovative drill string enhancement tool, the Strider technology and other tools, and | |
● | Our new product development business that conducts our research and development, and designs our horizontal drill string enhancement tools, other down-hole drilling technologies, and drilling tool manufacturing technologies. |
Our strategy for growth is to expand ourthe global market penetration of our current drilldrilling tool technologysolutions and to leverage our expertise in drilldrilling tool technologytechnologies and precision machining in order to broaden our product offerings and solutions for the oil and gas industry, as well as other industries that require precision machining and quality. We believe through our patented technologies, as well as technologies under development, that we can offer the oil and gas industry the solutions it demands to improve drilling efficiencies and reduce production costs.
Recent Developments and Trends
Our business and operations have been adversely affected by and are expected to continue to be adversely affected by the COVID-19 pandemic. The COVID-19 pandemic greatly reducedhas caused and continues to cause disruption to the U.S. and global oil demand as social distancingeconomies, including the impact of government and travel restrictions were implemented acrosscompany actions to reduce the world. The timeline and potential magnitudespread of the COVID-19 outbreakvirus and its consequences are currently unknown. The continuation or amplification of this virus could continueconsumer behavior in response to more broadly affectthe same; and, although the United States and global economy, includingother countries have continued to roll out vaccinations, it is uncertain how quickly and effectively such vaccinations will be distributed or help to control the demand for oilspread of COVID-19 and gas.
Further disruptingits variants. We continue to actively monitor the oilimpacts and gas industry was the lifting by the Organizationpotential impacts of the Petroleum Exporting Countries (“OPEC”)COVID-19 pandemic in all aspects of our business. Although we are unable to predict the total impact of the COVID-19 pandemic on our business, results of operations, liquidity or capital resources at this time, we expect we may be negatively affected if the pandemic and related public health measures result in substantial manufacturing or supply curtailments. This resultedchain problems, disruptions in an increaselocal and global future economies, volatility in the global supplyfinancial markets, overall reductions in demand, delays in payment, restrictions on the shipment of oilour products, or other ramifications. Currently we are experiencing raw material delays and difficulties in an environment of rapidly contracting demand. Ashiring and retaining direct laborers. These current conditions are a result the price of oil declined significantly in April 2020 as storage capacity became limited.COVID-19.
Overall, the significant decline in oil demand due to COVID-19 coupled with a global over supply of oil drove down oil prices. This has resulted in our customers announcing significant reductions to their capital expenditure budgets for 2020. This is evidenced by the significant decline inThe total U.S. onshore rig counts from the beginning of the year. At the end of 2019, the U.S. onshore rig count as reported by Baker Hughes as of October 29, 2021 was 781 rigs. As544 rigs, an increase of September 30, 2020,248 rigs from a year ago, as well as an increase of 150 rigs from the U.S. onshore rig count was 266 rigs compared with 855 rigs as of September 30, 2019.December 31, 2020. We expect oil and gas related marketsNorth American onshore activity to continue to experience significant weakness for the remainder of 2020improve in 2021 and into 2021. Despite these current challenges,2022 compared with the oil and gas industryfourth quarter of 2020.
The Middle East market is beginninga softer market due to experience slight improvements including an increase in the numberCOVID-19 impact. Although this segment of active rigs in the U.S. from third quarter lows, and we expect additional rig count improvement to occur into year-end.
The reduction of the U.S. onshore rig count has negatively affected our results of operations as our business is highly dependent uponrebounding, the vibrancy of the oil and gas drilling operations in the U.S. In an effort to offset the reduction in revenue resulting from the weakened macroeconomic environment, we have implemented certain cost reduction measures during 2020. These measures included, but were not limitedimprovements are at a slower rate compared to the following:Company’s domestic market.
We have also entered into amended agreements with certain of our customers as discussed below in more detail, reduced our planned capital expenditures for 2020 and decided to defer further investment in new technology development, including our Strider technology, for the foreseeable future. Management is working diligently with vendors to achieve amended price concessions and terms of our payables. We believe the U.S. onshore activity for the remainder of 2020 will remain at depressed levels and continue to be constrained. We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, partners, suppliers, and stakeholders, or as required by federal, state, or local authorities.
We have placed a priority on protecting our employees during this pandemic while continuing to provide essential services to our customers. We operate under an emergency response plan specific to the global pandemic. This plan is reviewed and revised quarterly based on the latest federal and state government information provided, best practice, and consultation with local health departments. This plan includes disinfecting on a regular basis, the elimination of overlap between shifts, and a strict procedure for handling potential cases within the processes outlined in the Families First Coronavirus Response Act. Employees are also required to perform self-health evaluations at the start of every shift. These measures continue to act as a barrier to the spread of the virus on company property and among its employees. To date, these precautions have had an immaterial impact on the normal costs associated with our operations.
Effective April 1, 2020, the Company through its Hard Rock subsidiary entered into a First Amendment to Amended and Restated Distribution Agreement (the “DTI Amendment”) with Drilling Tools International, Inc. (“DTI”), amending the agreement between Hard Rock and DTI dated August 30, 2016. Under the DTI Amendment, all charges for repair rates the Company provides to DTI are reduced by 10%. These rate changes are applicable through September 30, 2020, unless extended on, or prior to, the expiration date by mutual written agreement. The Company hopes to extend the DTI Agreement prior to year-end 2020.
Effective May 1, 2020, we entered into a First Amendment to Vendor Agreement (the “Baker Hughes Amendment”) with Baker Hughes Oilfield Operations LLC (“Baker Hughes”), amending their existing Vendor Agreement dated April 1, 2018. Under the Baker Hughes Amendment, we may engage in other activity not related to or in competition with the business of Baker Hughes to the extent that such other activity shall not be considered a breach of the Vendor Agreement. Also, under the Baker Hughes Amendment, charges for repair rates that we provide to Baker Hughes are reduced by 10%. Lastly, Baker Hughes agreed to remove the exclusivity restrictions that prevented us from providing drill bit repair for other entities, which broadens our market opportunity.
CONSOLIDATED RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2020 Compared2021Compared with the Three and Nine Months Ended September 30, 20192020
The following table represents summary consolidated operating results for the periods indicated:
Three-Months Ended September 30, | Nine-Months Ended September 30, | Three-Months Ended September 30, | Nine-Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tool revenue | 1,191 | 77 | % | 3,195 | 65 | % | 6,147 | 69 | % | 9,212 | 63 | % | 2,346 | 66 | % | 1,191 | 77 | % | 6,284 | 67 | % | 6,147 | 69 | % | ||||||||||||||||||||||||||||||||||||||||
Contract services | 357 | 23 | % | 1,881 | 37 | % | 2,782 | 31 | % | 5,444 | 37 | % | 1,216 | 34 | % | 356 | 23 | % | 3,102 | 33 | % | 2,782 | 31 | % | ||||||||||||||||||||||||||||||||||||||||
Total Revenue | $ | 1,547 | 100 | % | $ | 5,076 | 100 | % | 8,929 | 100 | % | 14,656 | 100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | $ | 3,562 | 100 | % | $ | 1,547 | 100 | % | 9,386 | 100 | % | 8,929 | 100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Operating costs and expenses | 3,094 | 200 | % | 5,303 | 104 | % | 11,307 | 127 | % | 15,187 | 104 | % | 3,399 | 95 | % | 3,094 | 200 | % | 10,063 | 107 | % | 11,307 | 127 | % | ||||||||||||||||||||||||||||||||||||||||
Loss from operations | (1,546 | ) | (100 | )% | (227 | ) | (4 | )% | (2,378 | ) | (27 | )% | (531 | ) | (4 | )% | ||||||||||||||||||||||||||||||||||||||||||||||||
Operating income (loss) | 163 | 5 | % | (1,546 | ) | (100 | )% | (677 | ) | (7 | )% | (2,378 | ) | (27 | )% | |||||||||||||||||||||||||||||||||||||||||||||||||
Other expense | (85 | ) | (5 | )% | (191 | ) | (4 | )% | (291 | ) | (3 | )% | (530 | ) | (4 | )% | (130 | ) | (4 | )% | (85 | ) | (5 | )% | (415 | ) | (4 | )% | (291 | ) | (3 | )% | ||||||||||||||||||||||||||||||||
Income tax expense | (100 | ) | (6 | )% | - | - | (106 | ) | (1 | )% | - | - | (39 | ) | (1 | )% | (100 | ) | (6 | )% | (83 | ) | (1 | )% | (106 | ) | (1 | )% | ||||||||||||||||||||||||||||||||||||
Net loss | $ | (1,731 | ) | (111 | )% | $ | (418 | ) | (8 | )% | (2,775 | ) | (31 | )% | (1,061 | ) | (7 | )% | ||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | (6 | ) | 0 | % | $ | (1,731 | ) | (111 | )% | (1,175 | ) | (12 | )% | (2,775 | ) | (31 | )% |
Material changes of certain items in our statements of operations included in our financial statements for the comparative periods are discussed below. Comparisons are to the prior-year period unless stated otherwise.
Three Months Ended September 30, 20202021 Compared with the Three Months Ended September 30, 20192020
Revenue. Our revenue decreasedincreased approximately $3,529,000$2,014,000 or 70%130%. The revenue decline was driven primarily by a 73% decrease in the U.S. land rig count resulting from the global impact of the COVID-19 pandemic, which was partially offset by a $141,000, or 49% increase, in International revenue to $429,000. The Company’s U.S. revenue declined 77%, from reduced drill bit repair and tool sales reflecting the dramatic slowdown in the U.S. drilling activity in the quarter. Contract services revenue decreased approximately $1,525,000, or 81%, to $357,000. Tool revenue was $1,191,000, down 65%increased $1,155,000 or $2,004,000,97% from the prior-year period reflectingwhile contract services increased $859,000 or 241%. The increase in revenue was due to increased demand from continued growth in the positive impactnumber of Internationalend users and percentage of rigs using our Drill-N-Ream tool combined with an improvement in market conditions and increased drilling activity.
Operating Costs and Expenses. Total operating costs and expenses increased approximately $272,000 for the September 30, 2021 three-month period.
● | Cost of revenue increased approximately $571,000 due to higher volume. As a percentage of revenue, cost of revenue was 40% and 56% of revenue for the three months ended September 30, 2021 and 2020, respectively. The decline in the cost of revenue as a percent of revenue was the result of strong operating leverage from higher volume. | |
● | Selling, general and administrative expenses increased approximately $21,000 due to an increase in long-term equity compensation expense. | |
● | Depreciation and amortization expense decreased approximately $288,000, or 41%, to $405,000. The decrease was primarily a result of fully amortizing a portion of the Company’s intangible assets and fully depreciating manufacturing center equipment. |
Other Expense. Other expense primarily consists of interest expense and interest income.
● | Interest expense for the three months ended September 30, 2021 and 2020 was approximately $130,000 and $126,000, respectively. |
Income Tax Expense. The decrease in income tax expense from the prior year is due to a year-to-date foreign income tax adjustment in 2020.
Nine Months Ended September 30, 2021 Compared with the Nine Months Ended September 30, 2020
Revenue. Our revenue increased approximately $457,000 or 5% to $9,386,000. Tool revenue was $6,283,000, an increase of 2% or $137,000, from the prior-year period. Contract services increased approximately $320,000, or 12%, to $3,102,000.
Operating Costs and Expenses. Total operating costs and expenses decreased approximately $2,210,000$1,277,000 for the 2020 three-monthSeptember 30, 2021 nine-month period.
● | Cost of revenue decreased approximately | |
● | Selling, general and administrative expenses decreased approximately | |
● | Depreciation and amortization expense decreased approximately |
Other Income (Expenses). Other income and expense primarily consists of interest income, interest expense, loan forgiveness and gain/loss on disposition of assets.
Nine Months Ended September 30, 2020 Compared with the Nine Months Ended September 30, 2019
Revenue. Our revenue decreased approximately $5,726,000 or 39% to $8,930,000. The decrease is a result of the COVID-19 pandemic induced decrease in the demand of oil and gas leading to a reduction in drilling activity in the United States. Partially offsetting this decline was an increase of $843,000, or more than double, in International revenue to $1,542,000.
Tool revenue was $6,147,000, down 33% or $3,065,000, from the prior-year period. Contract services revenue decreased approximately $2,661,000, or 49%, to $2,782,000.
Operating Costs and Expenses. Total operating costs and expenses decreased approximately $3,880,000 for the 2020 nine-month period.
Other Income (Expenses)Expense.. Other income and expense primarily consists of interest income,expense, interest expense, loan forgivenessincome, and gain/loss on dispositionsale of assets.
● | ||
Interest expense for the nine months ended September 30, | ||
● | The Company |
Income Tax Expense. The decrease in income tax expense from the prior year is due to a foreign income tax adjustments in 2020.
Liquidity and Capital Resources
At September 30, 2020,2021, we had a working capital deficit of approximately $2,600,000.$1,500,000. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. Our operational and financial strategies include loweringmanaging our operating costs and capital spending to match revenue trends, accelerating collections of international receivables, and managing our working capital and debt to enhance liquidity. We will continue to work to grow revenue and manage costs to minimize negative net cash flow in 2020. If we are unable to do this,continue generating positive cash flow, we may not be able to, among other things, (i) maintain our current general and administrative spending levels; (ii) fund certain obligations as they become due; and (iii) respond to competitive pressures or unanticipated capital requirements. We cannot provide any assurance that financing will be available to us in the future on acceptable terms. However, on October 19, 2021, the Company completed an equity offering of 1,739,131 shares of our common stock to certain institutional investors, at a purchase price of $1.15 per share. The Company paid approximately $261,000 in total offering costs. Net proceeds from the equity offering were approximately $1,700,000.
In addition, the significant decline in demand for oil demand due to the impacts of COVID-19 on the global economy, the instability of oil prices caused by geopolitical issues and over supply have resulted in the announcements by our customers and end users of our tools and technology of significant reductions to their capital expenditure budgets. Our expectation is that demand for our products and services willmay continue to be severely impacted for the duration of 2020in 2021 and potentially beyond; however, we are currently unable to estimate the full impact to our business, how long this significant drop in demand will last or the depth of the decline. We have also reduced ourminimal planned capital expenditures for 2020 and we have decided to defer further investment in new technology development, including our Strider technology.the remainder of 2021 of $600,000.
The Hard Rock Note hashad a remaining balance of $1,500,000$750,000 as of September 30, 2020,2021. It accrues interest at 8.00% per annum and is fully payable ondue in full by October 5, 2022. In October 2021, the Company made a payment of $15,123 related to accrued interest. Under the amended terms of the Hard Rock Note, we are required to make the following remaining payments: accrued interest on January 5, April 5, July 5 and October 5 in 2021 and 2022; plus $750,000 in principal on July 5, 2021 with the remaining balance of principal and accrued interest on the Hard Rock Note due on October 5, 2022.
Our commercial bank loan is secured by our Vernal, Utah campus. The loan requires monthly payments For the nine months ended September 30, 2021, the Company has made a total of approximately $43,000, including$839,754 in principal and interest at 7.25%, and a balloon payment of $2,500,000 is due upon maturity on February 15, 2021. We have been in active discussions regardingpayments related to the extension of this loan.Hard Rock Note.
Our Credit Agreement is comprised of $1,000,000 Term Loan and $3,500,000 Revolving Loan. As of September 30, 2020,2021, we had $749,998$416,662 outstanding on the Term Loan and $359,916$1,000,462 outstanding on the Revolving Loan. Amounts outstanding under the Revolving Loan at any time may not exceed the sum of: (a) up to 85% of accounts receivable or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect (less a dilution reserve as determined by AFS in its sole good faith discretion), plus (b) the lesser of (i) up to 50% of inventory or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect, or (ii) the inventory sublimit, minus (c) the borrowing base reserve as may be determined from time to time by AFS. Amounts outstanding on the Revolving Loan as of September 30, 2020,2021, may not exceed $511,791,$1,000,000, which is based on a calculation applying 85% of accounts receivable and 50% of inventory. A collateral management fee is payable monthly on the used portion of the Revolving Loan and Term Loan. If our borrowings are less than $1,000,000, we still pay interest as if we had borrowed $1,000,000. At September 30, 2020,2021, we had approximately $9,456$12,000 of accrued interest.
The interest rate for the Term Loan and the Revolving Loan is prime plus 2%. At September 30, 2020,2021, the interest rate for the Term Loan was 8.85%, which includes a 3.6% management fee rate. The effective interest rate for the Revolving Loan for the quarter ending September 30, 2021 was 9.78%. The obligations of the Company under the agreement are secured by a security interest in substantially all of the tangible and intangible assets of the Company, other than any assets owned by the Company that constitute real property (and fixtures affixed to such real property), certain excluded equipment, intellectual property, or aircraft. The Credit Agreement matures on February 20, 2023.
Cash Flows
Nine Months Ended September 30, 20202021 Compared with the Nine Months Ended September 30, 20192020
Net cash provided by operating activities was $1,268,788approximately $878,000 and $1,221,440$1,269,000 for the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021, the Company had approximately $1,175,000 of net loss, approximately $1,168,000 increase in accounts payable and 2019, respectively. The primary reason for the improvement was due to a $4,234,073accrued expenses, depreciation and amortization expense of approximately $1,681,000, which were offset by an approximately $700,000 decrease in accounts receivable. For the nine months ended September 30, 2020, the Company had approximately $2,775,000 of net loss, an approximately $2,409,000 increase in accounts receivable, and depreciation and amortization expense of approximately $2,134,000.
Net cash used in investing activities was $36,642approximately $26,000 for the nine months ended September 30, 20202021 and related to property, plant and equipment purchases for tools to support international expansion, which was offset by the sale of the Company airplane. Net cash used in investing activities was $392,691$37,000 for the nine months ended September 30, 2019, and related to property, plant and equipment purchases mostly for tools to support international expansion.2020.
Net cash used in financing activities was $1,036,790 and $2,301,560approximately $345,000 for the nine months ended September 30, 2020 and 2019, respectively. Principal payments on debt were offset by proceeds of debt borrowings2021. Net cash used in both periods.financing activities was approximately $1,037,000 for the nine months ended September 30, 2020.
Critical Accounting Policies
The discussion of our financial condition and results of operations is based upon our consolidated condensed financial statements, which have been prepared in accordance with U.S. GAAP. During the preparation of our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those discussed below. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. While we believe that the estimates and assumptions used in the preparation of our consolidated condensed financial statements are appropriate, actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated condensed financial statements. Our estimates and assumptions are evaluated periodically and adjusted when necessary. The more significant estimates affecting amounts reported in our consolidated condensed financial statements include, but are not limited to: stock based compensation, determining the allowance for doubtful accounts, valuation of inventories, recoverability of long-lived assets, useful lives used in calculating depreciation and amortization, and valuation of intangible assets.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2020.2021.
Changes in Internal Controls over Financial Reporting
None
Internal Controls and Procedures
This quarterly report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the Company’ s registered public accounting firm due to a transaction period established by the rules of the SECSecurities and Exchange Commission for newly public companies. Under these rules, we will not be required to include an attestation report for so for as long as we are a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.
We are subject to litigation that arises from time to time in the ordinary course of our business activities. In February 2019, the Company filed a patent infringement lawsuit in the United States District Court for the Western District of Louisiana Lafayette Division asserting Stabil Drill Specialties, LLC (“Stabil Drill”) infringed on our patent that covers the Company’s well bore conditioning tool, the Drill-N-Ream. The lawsuit was subsequently moved from Louisiana to the United States District Court for the Southern District of Texas, Houston Division. Additionally, on May 20, 2019, Extreme Technologies, LLC sued Short Bit & Tool Co. and Lot William Short, Jr. (“Defendants”) in the Northern District of Texas - Dallas Division. Extreme sued for patent infringement based on the same patents discussed in the Stabil Drill litigation. On December 23, 2019, the Court stayed Extreme’s patent infringement claim against Defendants pending resolution of the Southern District of Texas Stabil Drill case. The court ordered the Company to serve discovery requests upon Stabil Drill and gave Stabil Drill deadlines to respond and produce documents and permit product inspection. Stabil Drill filed a motion for summary judgement and the Company responded and cross-moved for patent infringement. The parties are awaiting the judge’s decision.non-infringement. On October 1, 2020, Superior Energy Services, Stabil Drill’s parent company, filed for bankruptcy, which may resultresulted in a delaybrief, automatic stay of the litigation. Superior Energy Services announced on February 2, 2021 that it successfully completed its financial restructuring and emerged from Chapter 11 bankruptcy. On March 9, 2021, the Court lifted the automatic bankruptcy stay. On May 12, 2021, the Court denied Stabil Drill’s non-infringement summary judgment motion. The parties are preparing this case for trial and expect a jury trial setting in the resolution of this litigation. We cannot predict the outcome of this matter, but our legal costs could have a material effect on our financial position or results of operations in future periods.2022. We are not currently involved in any other litigation which management believes could have a material effect on our financial position or results of operations.
As of the date of this filing, the Company remains subject to the risk factors previously disclosed in Part I, Item 1A “Risk Factors” in our 20192020 Annual Report on Form 10-K. The risk factors below updates or expands upon those risk factors.
The outbreak of the recent coronavirus (“COVID-19”) has had, and is expected to continue to have, depending on the duration of the pandemic, a significant impact on our business, financial condition and results of operations due to its effect on the oil and gas industry.
The impact of COVID-19 and measures to prevent its spread are expected to continue to impact our results, operations, cash flows and liquidity.
We expect the impact of these disruptions, including the extent of their adverse impact on our financial and operational results, will be dictated by the length of time that such disruptions continue.
Demand for our products and services is declining as our customers continue to revise their capital budgets downwards and swiftly adjust their operations in response to lower commodity prices. Our customers may not be unable to meet existing payment or other obligations to us. To address the situation, we have been forced to take several actions, including reductions in salaries for officers and fees for independent directors, a reduction in our total workforce and the indefinite postponement of the development of new technology by us and elimination of any activity not necessary to conduct our business. Such a further spread or outbreak could also negatively impact the business and operations of third party service providers who perform critical services for our business
Given the uncertainty around the extent and timing of the potential future spread or mitigation of COVID-19 and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact on our future results of operations, cash flows or financial condition.
We may be unable to maintain adequate liquidity and make payments on our debt.
At September 30, 2020,2021, we had working capital deficit of approximately $2,600,000.$1,500,000. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. Our operational and financial strategies include lowering our operating costs and capital spending to match revenue trends, accelerating collections of international receivables, and managing our working capital and debt to enhance liquidity. Subsequent to the end of the quarter on October 19, 2021, the Company completed an equity offering of 1,739,131 shares of our common stock to certain institutional investors, at a purchase price of $1.15 per share. The Company paid approximately $261,000 in total offering costs. Net proceeds from the equity offering were approximately $1,700,000.
While we believe that our borrowing capacity and cash generated from operations and our borrowing capacity under our current credit facility will be sufficient to fund our operations for the next twelve months, our operational and financial strategies include managing our operating costs, working capital and debt to enhance liquidity. We will continue to work to grow revenue and review additional cost containment measures.measures in order to be cash flow positive in 2021. If we are unable to do this, we may not be able to, among other things, (i) maintain our current general and administrative spending levels; (ii) fund certain obligations as they become due; and (iii) respond to competitive pressures or unanticipated capital requirements. We cannot provide any assurance that financing will be available to us in the future on acceptable terms.
On May 6, 2020, certain subsidiaries of the Company amended and restated the Hardoutstanding note (the “Hard Rock NoteNote”) with the seller in theour acquisition of Hard Rock Solutions, LLC. As amended, the Hard Rock Note accrues interest at 8.00% per annum and matures and is now fully payable on October 5, 2022. Under the amended terms of the Hard Rock Note, we are required to make the following payments: accrued interest on each January 5, April 5, July 5, and October 5 January 5, and April 5 in 2021 and 2022; and $750,000 (plus accrued interest) on July 5, 2021 with the remaining principal balance of principal and$750,000 plus accrued interest on the Hard Rock Note due on October 5, 2022. For the nine months ended September 30, 2021, the Company has made a total of $839,754 in principal and interest payments related to the Hard Rock Note. If we are unable to make the payments required, we could lose our rights to market the Drill-N-Ream.
Our Credit Agreement is comprised of $1,000,000 Term Loan and $3,500,000 Revolving Loan. As of September 30, 2020,2021, we had $749,998$416,662 outstanding on the Term Loan and $359,916$1,000,462 outstanding on the Revolving Loan. If we are unable to make required payments under the Credit Agreement, we would be in default thereunder, which would permit the holders of the indebtedness to accelerate the maturity thereof, unless we are able to obtain, on a timely basis, a necessary waiver or amendment. Any waiver or amendment may require us to revise the terms of the Credit Agreement which could increase the cost of our borrowings, require the payment of additional fees, and adversely impact the results of our operations. Upon the occurrence of any event of default that is not waived, the lenders could elect to exercise any of their available remedies, which include the right to not lend any additional amounts or, in the event we have outstanding indebtedness under the Credit Agreement, to declare any outstanding indebtedness, together which any accrued interest and other fees, to be immediately due and payable. If we are unable to repay the outstanding indebtedness, if any, under the Credit Agreement when due, the lenders would be permitted to proceed against their collateral, and this could have a material adverse effect on our business and financial condition.
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Our level of indebtedness could adversely affect our future ability to raise additional capital to fund growth, limit our ability to react to changes in our business or our industry and place us at a competitive disadvantage.
We are required to make a payment on the Hard Rock Note of $750,000 (plus accrued interest) in October 2022. In addition, we are required to make monthly payments of approximately $46,000 on our other indebtedness.
Our level of debt and debt service requirements could have important consequences. For example, it could (i) result in a foreclosure upon our key assets, (ii) increase our vulnerability to general adverse economic and industry conditions, (iii) limit our ability to fund future capital expenditures and working capital, to engage in future acquisitions or development activities, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a substantial portion of our cash flow from operations to payments on our debt, (iv) increase our cost of borrowing, (v) restrict us from making strategic acquisitions or causing us to make non-strategic divestitures, (vi) limit our flexibility in planning for, or reacting to, changes in our business or industry in which we operate, placing us at a competitive disadvantage compared with our competitors who are less leveraged and (vii) impair our ability to obtain additional financing in the future.
Our customer base is concentrated and the loss of, or nonperformance by, one or more of our significant customers, or our failure to expand our channels to market and further commercialize could cause our revenue to decline substantially.
We have two large customers that currently comprise 86% of our total revenue. It is likely that we will continue to derive a portion of our revenue from a relatively small number of customers in the future. If a major customer decided not to continue to use our services or significantly reduces its drilling plans, or if we are unable to expand our channels to market or further commercialize, our revenue would decline and our operating results and financial condition could be harmed. In addition, we are subject to credit risk due to the concentration of our customer base. Any increase in the nonpayment of and nonperformance by our counterparties, either as a result of changes in financial and economic conditions or otherwise, could have a material effect on our business, results of operations and financial condition and could adversely affect our liquidity.
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The exhibits listed below are filed as part of this report:
Exhibit No. | Description | |
31.1* | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for G. Troy Meier. | |
31.2* | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Christopher D. Cashion. | |
32.1** | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for G. Troy Meier.** | |
32.2** | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Christopher D. Cashion.** | |
101.INS * | Inline XBRL Instance | |
101.XSD * | Inline XBRL Schema | |
101.CAL * | Inline XBRL Calculation | |
101.DEF * | Inline XBRL Definition | |
101.LAB * | Inline XBRL Label | |
101.PRE * | Inline XBRL Presentation | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
** Furnished herewith.
* Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SUPERIOR DRILLING PRODUCTS, INC. | ||
November | By: | /s/ G. TROY MEIER |
G. Troy Meier, Chief Executive Officer | ||
(Principal Executive Officer) | ||
November | By: | /s/ CHRISTOPHER CASHION |
Christopher Cashion, Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) |