UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended SeptemberJune 30, 20212022
☐ 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 Identification No ) |
1583 South 1700 East
Vernal, Utah 84078
(Address of principal executive offices)
435-789-0594
(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 ☒ 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 ☒ 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 ☒ 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 ☒
There were NovemberAugust 12, 2021.2022. shares of common stock, $0.001 par value, issued and outstanding as of
Superior Drilling Products, Inc.
FORM 10-Q
QUARTER ENDED SeptemberJune 30, 20212022
TABLE OF CONTENTS
2 |
PART I - FINANCIAL INFORMATION.
Item 1. Financial Statements
Superior Drilling Products, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, 2021 | December 31, 2020 | June 30, 2022 | December 31, 2021 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash | $ | 2,469,398 | $ | 1,961,441 | $ | 2,827,426 | $ | 2,822,100 | ||||||||
Accounts receivable, net | 2,046,073 | 1,345,622 | 2,799,480 | 2,871,932 | ||||||||||||
Prepaid expenses | 266,371 | 90,269 | 643,155 | 435,595 | ||||||||||||
Inventories | 1,067,738 | 1,020,008 | 1,324,724 | 1,174,635 | ||||||||||||
Asset held for sale | - | 40,000 | ||||||||||||||
Other current assets | 47,692 | 40,620 | 88,588 | 55,159 | ||||||||||||
Total current assets | 5,897,272 | 4,497,960 | 7,683,373 | 7,359,421 | ||||||||||||
Property, plant and equipment, net | 6,963,777 | 7,535,098 | 7,426,690 | 6,930,329 | ||||||||||||
Intangible assets, net | 277,778 | 819,444 | 152,778 | 236,111 | ||||||||||||
Right of use assets | 22,192 | 99,831 | ||||||||||||||
Right of use assets, net | 160,301 | 20,518 | ||||||||||||||
Other noncurrent assets | 65,880 | 87,490 | 110,519 | 65,880 | ||||||||||||
Total assets | $ | 13,226,899 | $ | 13,039,823 | $ | 15,533,661 | $ | 14,612,259 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 802,157 | $ | 430,014 | $ | 1,095,552 | $ | 1,139,091 | ||||||||
Accrued expenses | 1,887,693 | 1,091,519 | 853,194 | 467,462 | ||||||||||||
Income tax payable | 177,822 | 106,446 | 219,912 | 206,490 | ||||||||||||
Current portion of operating lease liability | 13,832 | 79,313 | 160,301 | 13,716 | ||||||||||||
Current portion of financial obligation | 63,561 | 61,691 | 70,025 | 65,678 | ||||||||||||
Current portion of long-term debt, net of discounts | 1,445,230 | 1,397,337 | 2,204,508 | 2,195,759 | ||||||||||||
Total current liabilities | 4,390,295 | 3,166,320 | 4,603,492 | 4,088,196 | ||||||||||||
Operating lease liability | 8,360 | 20,518 | ||||||||||||||
Long-term operating lease liability | - | 6,802 | ||||||||||||||
Long-term financial obligation, less current portion | 4,129,802 | 4,178,261 | 4,075,778 | 4,112,658 | ||||||||||||
Long-term debt, less current portion, net of discounts | 1,118,953 | 1,451,049 | 190,533 | 256,675 | ||||||||||||
Total liabilities | 9,647,410 | 8,816,148 | 8,869,803 | 8,464,331 | ||||||||||||
Commitments and contingencies (Note 11) | - | |||||||||||||||
Commitments and contingencies (Note 10) | - | |||||||||||||||
Shareholders’ equity | ||||||||||||||||
Common stock - $ | par value; shares authorized; and shares issued and outstanding26,430 | 25,762 | ||||||||||||||
Common stock - $ | par value; shares authorized; shares issued and outstanding, respectively28,235 | 28,235 | ||||||||||||||
Additional paid-in-capital | 41,149,551 | 40,619,620 | 43,493,802 | 43,071,201 | ||||||||||||
Accumulated deficit | (37,596,492 | ) | (36,421,707 | ) | (36,858,179 | ) | (36,951,508 | ) | ||||||||
Total shareholders’ equity | 3,579,489 | 4,223,675 | 6,663,858 | 6,147,928 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 13,226,899 | $ | 13,039,823 | $ | 15,533,661 | $ | 14,612,259 |
The accompanying notes are an integral part of these unaudited condensed consolidated condensed financial statements.
3 |
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
For the Three Months | For the Nine Months | For the Three Months | For the Six Months | |||||||||||||||||||||||||||||
Ended September 30, | Ended September 30, | Ended June 30, | Ended June 30, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||||||||||
Tool revenue | $ | 2,346,234 | $ | 1,190,929 | $ | 6,283,461 | $ | 6,147,280 | $ | 2,891,580 | $ | 2,273,464 | $ | 5,660,827 | $ | 3,937,227 | ||||||||||||||||
Contract services | 1,215,685 | 356,513 | 3,102,219 | 2,782,313 | 1,649,262 | 1,125,645 | 3,010,180 | 1,886,534 | ||||||||||||||||||||||||
Total Revenue | 3,561,919 | 1,547,442 | 9,385,680 | 8,929,593 | 4,540,842 | 3,399,109 | 8,671,007 | 5,823,761 | ||||||||||||||||||||||||
Operating costs and expenses | ||||||||||||||||||||||||||||||||
Cost of revenue | 1,441,943 | 870,655 | 3,841,713 | 4,284,716 | 2,116,096 | 1,224,179 | 3,883,995 | 2,399,772 | ||||||||||||||||||||||||
Selling, general and administrative expenses | 1,551,462 | 1,529,887 | 4,540,134 | 4,887,999 | 1,894,403 | 1,473,081 | 3,541,051 | 2,988,670 | ||||||||||||||||||||||||
Depreciation and amortization expense | 405,225 | 693,259 | 1,680,804 | 2,134,398 | 402,648 | 585,504 | 813,379 | 1,275,577 | ||||||||||||||||||||||||
Total operating costs and expenses | 3,398,630 | 3,093,801 | 10,062,651 | 11,307,113 | 4,413,147 | 3,282,764 | 8,238,425 | 6,664,019 | ||||||||||||||||||||||||
Operating income (loss) | 163,289 | (1,546,359 | ) | (676,971 | ) | (2,377,520 | ) | 127,695 | 116,345 | 432,582 | (840,258 | ) | ||||||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||||||||||
Interest income | 49 | 145 | 147 | 5,775 | 2,980 | 50 | 3,176 | 98 | ||||||||||||||||||||||||
Interest expense | (130,221 | ) | (126,482 | ) | (413,798 | ) | (450,210 | ) | (132,738 | ) | (145,521 | ) | (256,600 | ) | (283,577 | ) | ||||||||||||||||
Impairment on asset held for sale | - | - | - | (30,000 | ) | - | - | - | - | |||||||||||||||||||||||
Loan forgiveness | - | 41,403 | - | 41,403 | - | - | - | - | ||||||||||||||||||||||||
Gain (loss) on disposition of assets, net | - | - | (1,187 | ) | 142,234 | |||||||||||||||||||||||||||
Loss on disposition of assets, net | (22,146 | ) | (11,187 | ) | (22,146 | ) | (1,187 | ) | ||||||||||||||||||||||||
Total other expense | (130,172 | ) | (84,934 | ) | (414,838 | ) | (290,798 | ) | (151,904 | ) | (156,658 | ) | (275,570 | ) | (284,666 | ) | ||||||||||||||||
Income (loss) before income taxes | 33,117 | (1,631,293 | ) | (1,091,809 | ) | (2,668,318 | ) | (24,209 | ) | (40,313 | ) | 157,012 | (1,124,924 | ) | ||||||||||||||||||
Income tax expense | (39,327 | ) | (99,979 | ) | (82,976 | ) | (106,414 | ) | (32,299 | ) | (26,468 | ) | (63,683 | ) | (43,649 | ) | ||||||||||||||||
Net loss | $ | (6,210 | ) | $ | (1,731,272 | ) | $ | (1,174,785 | ) | $ | (2,774,732 | ) | ||||||||||||||||||||
Net income (loss) | $ | (56,508 | ) | $ | (66,781 | ) | $ | 93,329 | $ | (1,168,573 | ) | |||||||||||||||||||||
Basic loss earnings per common share | $ | (0.00 | ) | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.11 | ) | ||||||||||||||||||||
Basic earnings (loss) per common share | $ | (0.00 | ) | $ | (0.00 | ) | $ | 0.00 | $ | (0.05 | ) | |||||||||||||||||||||
Basic weighted average common shares outstanding | 26,154,202 | 25,555,167 | 25,894,397 | 25,469,609 | 28,235,001 | 25,762,342 | 28,235,001 | 25,762,342 | ||||||||||||||||||||||||
Diluted loss per common share | $ | (0.00 | ) | $ | (0.07 | ) | $ | (0.05 | ) | $ | (0.11 | ) | ||||||||||||||||||||
Diluted earnings (loss) per common share | $ | (0.00 | ) | $ | (0.00 | ) | $ | 0.00 | $ | (0.05 | ) | |||||||||||||||||||||
Diluted weighted average common shares outstanding | 26,154,202 | 25,555,167 | 25,894,397 | 25,469,609 | 28,235,001 | 25,762,342 | 28,305,101 | 25,762,342 |
The accompanying notes are an integral part of these unaudited condensed consolidated condensed financial statements.
4 |
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)
Shares | Par Value | Capital | Deficit | Equity | ||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in | Accumulated | Total Shareholders’ | Common Stock | Additional Paid-in | Accumulated | Total Shareholders’ | |||||||||||||||||||||||||||||||||
Shares | Par Value | Capital | Deficit | Equity | Shares | Par Value | Capital | Deficit | Equity | |||||||||||||||||||||||||||||||
Balance - December 31, 2020 | 25,762,342 | $ | 25,762 | $ | 40,619,620 | $ | (36,421,707 | ) | $ | 4,223,675 | ||||||||||||||||||||||||||||||
Balance – December 31, 2021 | 28,235,001 | $ | 28,235 | $ | 43,071,201 | $ | (36,951,508 | ) | $ | 6,147,928 | ||||||||||||||||||||||||||||||
Stock-based compensation expense | - | - | 167,472 | - | 167,472 | - | - | 210,133 | - | 210,133 | ||||||||||||||||||||||||||||||
Stock-based compensation expense, shares | ||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | (1,101,793 | ) | (1,101,793 | ) | |||||||||||||||||||||||||||||||||
Net income | - | - | - | 149,837 | 149,837 | |||||||||||||||||||||||||||||||||||
Balance – March 31, 2021 | 25,762,342 | $ | 25,762 | $ | 40,787,092 | $ | (37,523,500 | ) | $ | 3,289,354 | ||||||||||||||||||||||||||||||
Balance – March 31, 2022 | $ | 28,235 | $ | 43,281,334 | $ | (36,801,671 | ) | $ | 6,507,898 | |||||||||||||||||||||||||||||||
Stock-based compensation expense | - | - | 167,033 | - | 167,033 | - | - | 212,468 | - | 212,468 | ||||||||||||||||||||||||||||||
Net loss | - | - | - | (66,781 | ) | (66,781 | ) | - | - | - | (56,508 | ) | (56,508 | ) | ||||||||||||||||||||||||||
Balance – June 30, 2021 | 25,762,342 | $ | 25,763 | $ | 40,954,125 | $ | (37,590,282 | ) | $ | 3,389,606 | ||||||||||||||||||||||||||||||
Balance – June 30, 2022 | 28,235,001 | $ | 28,235 | $ | 43,493,802 | $ | (36,858,179 | ) | $ | 6,663,858 | ||||||||||||||||||||||||||||||
Balance – December 31, 2020 | 25,762,342 | $ | 25,762 | $ | 40,619,620 | $ | (36,421,707 | ) | $ | 4,223,675 | ||||||||||||||||||||||||||||||
Stock-based compensation expense | 667,613 | 667 | 195,426 | - | 196,093 | - | - | 167,472 | - | 167,472 | ||||||||||||||||||||||||||||||
Net loss | - | - | - | (6,210 | ) | (6,210 | ) | - | - | - | (1,101,793 | ) | (1,101,793 | ) | ||||||||||||||||||||||||||
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 – March 31, 2021 | $ | 25,762 | $ | 40,787,092 | $ | (37,523,500 | ) | $ | 3,289,354 | |||||||||||||||||||||||||||||||
Balance | 25,434,776 | $ | 25,435 | $ | 40,281,375 | $ | (34,035,293 | ) | $ | 6,271,517 | $ | 25,762 | $ | 40,787,092 | $ | (37,523,500 | ) | $ | 3,289,354 | |||||||||||||||||||||
Stock-based compensation expense | 182,710 | 182 | 157,660 | - | 157,842 | - | - | 167,033 | - | 167,033 | ||||||||||||||||||||||||||||||
Net loss | - | - | - | (1,731,272 | ) | (1,731,272 | ) | - | - | - | (66,781 | ) | (66,781 | ) | ||||||||||||||||||||||||||
Net income (loss) | - | - | - | (1,731,272 | ) | (1,731,272 | ) | - | - | - | (66,781 | ) | (66,781 | ) | ||||||||||||||||||||||||||
Balance – September 30, 2020 | 25,617,486 | $ | 25,617 | $ | 40,439,035 | $ | (35,766,565 | ) | $ | 4,698,087 | ||||||||||||||||||||||||||||||
Balance – June 30, 2021 | 25,762,342 | $ | 25,762 | $ | 40,954,125 | $ | (37,590,281 | ) | $ | 3,389,606 | ||||||||||||||||||||||||||||||
Balance | 25,617,486 | $ | 25,617 | $ | 40,439,035 | $ | (35,766,565 | ) | $ | 4,698,087 | 25,762,342 | $ | 25,762 | $ | 40,954,125 | $ | (37,590,281 | ) | $ | 3,389,606 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5 |
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
2021 | 2020 | 2022 | 2021 | |||||||||||||
For the Nine Months | For the Six Months | |||||||||||||||
Ended September 30, | Ended June 30, | |||||||||||||||
2021 | 2020 | 2022 | 2021 | |||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||
Net loss | $ | (1,174,785 | ) | $ | (2,774,732 | ) | ||||||||||
Adjustments to reconcile net loss to net cash from operating activities: | ||||||||||||||||
Net income (loss) | $ | 93,329 | $ | (1,168,573 | ) | |||||||||||
Adjustments to reconcile Net income (loss) to net cash from operating activities: | ||||||||||||||||
Depreciation and amortization expense | 1,680,804 | 2,134,398 | 813,379 | 1,275,575 | ||||||||||||
Stock-based compensation expense | 530,595 | 369,843 | 422,601 | 334,505 | ||||||||||||
Impairment on asset held for sale | - | 30,000 | ||||||||||||||
(Gain) loss on disposition of assets, net | 1,187 | (142,234 | ) | |||||||||||||
Gain on forgiveness of loan | - | (41,403 | ) | |||||||||||||
Loss on disposition of assets, net | 22,146 | 1,187 | ||||||||||||||
Amortization of deferred loan costs | 13,893 | 13,894 | 9,262 | 9,262 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (700,451 | ) | 2,408,726 | 72,452 | (584,780 | ) | ||||||||||
Inventories | (551,189 | ) | (942,831 | ) | (149,223 | ) | (161,566 | ) | ||||||||
Prepaid expenses and other noncurrent assets | (161,564 | ) | 327,968 | |||||||||||||
Prepaid expenses and other assets | (285,628 | ) | (280,814 | ) | ||||||||||||
Accounts payable and accrued expenses | 1,168,317 | (18,728 | ) | 342,193 | 877,585 | |||||||||||
Income tax payable | 71,376 | (34,692 | ) | 13,422 | 32,149 | |||||||||||
Other long-term liabilities | - | (61,421 | ) | |||||||||||||
Net Cash From Operating Activities | 878,183 | 1,268,788 | 1,353,933 | 334,530 | ||||||||||||
Cash Flows From Investing Activities | ||||||||||||||||
Purchases of property, plant and equipment | (75,541 | ) | (154,475 | ) | (1,249,419 | ) | 54,780 | |||||||||
Proceeds from sale of fixed assets | 50,000 | 117,833 | - | 50,000 | ||||||||||||
Net Cash From Investing Activities | (25,541 | ) | (36,642 | ) | (1,249,419 | ) | 104,780 | |||||||||
Cash Flows From Financing Activities | ||||||||||||||||
Principal payments on debt | (1,146,309 | ) | (2,167,539 | ) | (281,487 | ) | (266,719 | ) | ||||||||
Proceeds received from debt borrowings | - | 964,120 | 182,318 | - | ||||||||||||
Payments on revolving loan | (540,078 | ) | (1,018,690 | ) | (553,650 | ) | (513,897 | ) | ||||||||
Proceeds received on revolving loan | 1,341,702 | 1,185,319 | 553,631 | 1,068,978 | ||||||||||||
Net Cash From Financing Activities | (344,685 | ) | (1,036,790 | ) | (99,188 | ) | 288,362 | |||||||||
Net Change in Cash | 507,957 | 195,356 | 5,326 | 727,672 | ||||||||||||
Cash at Beginning of Period | 1,961,441 | 1,217,014 | 2,822,100 | 1,961,441 | ||||||||||||
Cash at End of Period | $ | 2,469,398 | $ | 1,412,370 | $ | 2,827,426 | $ | 2,689,113 | ||||||||
Supplemental information: | ||||||||||||||||
Cash paid for Interest | $ | 410,598 | $ | 460,640 | $ | 247,952 | $ | 270,492 | ||||||||
Inventory converted to property, plant and equipment | $ | 513,558 | $ | 922,993 | ||||||||||||
Reduction of debt with sale of asset | $ | - | $ | 211,667 |
The accompanying notes are an integral part of these unaudited condensed consolidated condensed financial statements.
6 |
Superior Drilling Products, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
SeptemberJune 30, 20212022
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 and other customers including other oil field service companies and operators.company. 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 for other applications.products. Our headquarters and manufacturing operations are located in Vernal, Utah.
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-ownedwholly 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 unaudited interim consolidated condensed financial statements for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, and the related footnote disclosures included herein, are unaudited. However, in the opinion of management, these unaudited condensed consolidated 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 ninesix months ended SeptemberJune 30, 20212022 are not necessarily indicative of the results of operations expected for the year ended December 31, 2021.2022. These unaudited 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, 20202021 and 20192020 and the notes thereto, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,2021, filed with the Securities and Exchange Commission (the “SEC”).
Segment Reporting
We operate as a single operating segment, which reflects how we manage our business. We operate in North America and the Middle East. See note 9 for more on our geographical operational information.
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 |
Concentrations of Credit Risk
The Company has two significant customers that represented 86%89% and 81%87% of its revenue for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. These customers had approximately $1,081,0001,808,000 and $432,0001,229,000 in accounts receivable at SeptemberJune 30, 20212022 and 2020,2021, respectively.
The Company had two vendors that represented ninesix months ended SeptemberJune 30, 2021.2022. These vendors had approximately $ in accounts payable at SeptemberJune 30, 2022 and purchases in the six months of 2022 from these vendors totaled approximately $ . The Company had two vendors that represented % of its purchases for the six months ended June 30, 2021. This vendor had approximately $ in accounts payable at June 30, 2021 and purchases in the nine months of 2021 from these vendors totaled approximately $546,000. The Company had one vendor that represented 14% of its purchases for the ninesix months ended SeptemberJune 30, 2020. This vendor had approximately $218,000 in accounts payable at September 30, 2020 and purchases in the nine months ended September 30, 20202021 from this vendor totaled approximately $ . % of its purchases for the
ImpactRestatement of COVID-19the Unaudited Condensed Consolidated Financial Statements
The COVID-19 pandemic has impacted and may further impactpurpose of this restatement is to correct an error in the Company’s operations,previously issued financial statements for the six months ended June 30, 2021 in connection with the classification of $65,720 of inventory converted to property, plant and equipment reported within the operationsSupplemental Information section of the Company’s suppliersStatement of Cash Flows. The $65,720 in inventory converted to property, plant and vendors, as a resultequipment has now been re-classified to purchases of quarantines, facility closures,property, plant and travelequipment in the Cash Flows from Investing Activities section of the Statement of Cash Flows.
In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality (“SAB 99”) and logistics restrictions. The extent to whichStaff Accounting Bulletin 108, Considering the COVID-19 pandemic will continue to impactEffects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), 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,Company has determined that the duration, spread, severity, and impact of adjustments relating to the COVID-19 pandemiccorrection of this accounting error are not material to previously issued annual audited and the success and speed of vaccination efforts both in the United States and globally, theunaudited interim financial statements.
The effects of the COVID-19 pandemicrestatement on the Company’s customers, suppliers,condensed consolidated statement of cash flows for the six months ended June 30, 2021 are as follows:
SCHEDULE OF RESTATEMENT OF CONSOLIDATED STATEMENT OF CASH FLOWS
June 30, 2021 | |||||||||
As Reported | As Restated | ||||||||
- | Net cash from operating activities | $ | 400,250 | $ | 334,530 | ||||
- | Net cash from investing activities | $ | 39,060 | $ | 104,780 |
There was no impact to net cash provided from financing activities within our consolidated statement of cash flows nor was there an impact on the net change in cash resulting from restatement. There was no effect from the restatement on the Company’s condensed consolidated balance sheet, condensed consolidated statement of operations and vendors andcondensed consolidated statement of shareholders’ equity for 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.six months ended June 30, 2021.
Uncertain Tax Matters
The Company believes it has appropriately accrued for the expected outcome of uncertain tax matters and 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
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 income tax payable and did not impact net income.
Recent Accounting Pronouncements
There are no recently issued accounting pronouncements that we have not yet adopted that we believe will have a material effect on our financial statements.
Income Tax Expense
The Company recorded income tax expense during the quartersix months ended June 30, 2022 and 2021 of $39,32763,683 and $43,649, respectively with income before income taxes of only $33,117157,012. and a loss before income taxes of $1,124,924, respectively. The reason Thethat the Company has income tax expense greater than income before income taxes is due to the Company having taxable income in a foreign tax jurisdiction. In the U.S. the Company is not subject to U.S. taxes due to having a taxable loss.loss.
8 |
NOTE 2.LIQUIDITY
We believe that our cash on hand, cash generated from operations and 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. 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. We cannot provide any assurance that financing will be available to us in the future on acceptable terms, if at all.
In 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 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-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.
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 85% 89% of our revenue is from North America and approximately 15%11% is from the Middle East for the three months ended SeptemberJune 30, 2021. 2022. For the ninesix months ended SeptemberJune 30, 2021,2022, approximately 86%90% of our revenue was from North America and approximately 14%10% was from the Middle East.
Revenue disaggregated by revenue source are as follows:
SCHEDULE OF REVENUE DISAGGREGATED BY REVENUE
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Tool Revenue: | ||||||||||||||||||||||||||||||||
Tool and product sales | 315,000 | 294,464 | $ | 1,470,000 | $ | 971,520 | $ | 627,200 | $ | 660,000 | $ | 1,291,500 | $ | 1,155,000 | ||||||||||||||||||
Tool rental | 521,228 | 254,574 | 1,318,135 | 1,716,210 | 519,724 | 460,453 | 904,874 | 796,906 | ||||||||||||||||||||||||
Other related revenue | 1,510,006 | 641,891 | 3,495,326 | 3,459,550 | 1,744,656 | 1,153,011 | 3,464,453 | 1,985,321 | ||||||||||||||||||||||||
Total Tool Revenue | 2,346,234 | 1,190,929 | 6,283,461 | 6,147,280 | 2,891,580 | 2,273,464 | 5,660,827 | 3,937,227 | ||||||||||||||||||||||||
Contract Services | 1,215,685 | 356,513 | 3,102,219 | 2,782,313 | 1,649,262 | 1,125,645 | 3,010,180 | 1,886,534 | ||||||||||||||||||||||||
Total Revenue | $ | 3,561,919 | $ | 1,547,442 | $ | 9,385,680 | $ | 8,929,593 | $ | 4,540,842 | $ | 3,399,109 | $ | 8,671,007 | $ | 5,823,761 |
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 Topic 606.
NOTE 4. 3.INVENTORIES
Inventories are comprised of the following:
SCHEDULE OF INVENTORIES
September 30, 2021 | December 31, 2020 | June 30, 2022 | December 31, 2021 | |||||||||||||
Raw material | $ | 568,904 | $ | 733,734 | $ | 1,017,672 | $ | 769,547 | ||||||||
Work in progress | 208,369 | 50,631 | 136,650 | 65,945 | ||||||||||||
Finished goods | 290,465 | 235,643 | 170,402 | 339,143 | ||||||||||||
Inventories, net | $ | 1,067,738 | $ | 1,020,008 | $ | 1,324,724 | $ | 1,174,635 |
NOTE 5.4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following:
SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT
September 30, 2021 | December 31, 2020 | June 30, 2022 | December 31, 2021 | |||||||||||||
Land | $ | 880,416 | $ | 880,416 | $ | 880,416 | $ | 880,416 | ||||||||
Buildings | 4,764,441 | 4,764,441 | 4,764,441 | 4,764,441 | ||||||||||||
Building improvements | 755,039 | 755,039 | 755,039 | 755,039 | ||||||||||||
Machinery and equipment | 11,859,879 | 11,298,642 | 12,946,080 | 12,207,497 | ||||||||||||
Office equipment, fixtures and software | 628,358 | 628,358 | 628,358 | 628,358 | ||||||||||||
Transportation assets | 265,760 | 265,760 | 265,760 | 265,760 | ||||||||||||
Property, plant and equipment, gross | 19,153,893 | 18,592,656 | 20,240,094 | 19,501,511 | ||||||||||||
Accumulated depreciation | (12,190,116 | ) | (11,057,558 | ) | (12,813,404 | ) | (12,571,182 | ) | ||||||||
Property, plant and equipment, net | $ | 6,963,777 | $ | 7,535,098 | $ | 7,426,690 | $ | 6,930,329 |
Middle East tools, no longer in service, were written down on June 30, 2022. The Company sold its airplane for a gainasset value of approximatelythe tools was $142,000510,836 in February 2020 and the Company sold its hangar for aaccumulated depreciation totaled $487,825. The net gain of(loss) was $10,000(23,012) in March 2021, both of which were in assets held for sale at the end of 2019. The increase in machinery and equipment was mostly the result of the Company’s increased rental tool fleet for the Middle East operations..
Depreciation expense related to property, plant and equipment for the three and nine months ended SeptemberJune 30, 2022 and 2021 was $363,558360,981 and $1,139,137377,171, respectively, and for the three and ninesix months ended SeptemberJune 30, 20202022 and 2021 was $401,592730,046 and $1,259,398775,577, respectively.
NOTE 6.5. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
SCHEDULE OF INTANGIBLE ASSETS
September 30, 2021 | December 31, 2020 | June 30, 2022 | December 31, 2021 | |||||||||||||
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 | ||||||||||||
Intangible assets, gross | 14,900,000 | 14,900,000 | 14,900,000 | 14,900,000 | ||||||||||||
Accumulated amortization | (14,622,222 | ) | (14,080,556 | ) | (14,747,222 | ) | (14,663,889 | ) | ||||||||
Intangible assets, net | $ | 277,778 | $ | 819,444 | $ | 152,778 | $ | 236,111 |
Amortization expense related to intangible assets for the three and nine months ended SeptemberJune 30, 2022 and 2021 was $41,667 and $541,667208,333, respectively, and for the three and ninesix months ended SeptemberJune 30, 20202022 and 2021 was $291,66783,333 and $875,000500,000, respectively. Full amortization was realized for the Company’s patent at the end of April 2021. This decreases the 2021 expense compared to 2020.
NOTE 7.6. 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’ sTronco’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, which reduced the related party note receivable balance to $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 if and when consideration or paymentsupon receiving repayment of the loan are madenote or interest in the future.other income. 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%2% per annum. Interest only is due December 31, 2021,The note matures with a balloon payment of all unpaid interest and principal due upon maturity on December 31, 2022. The Tronco note balance, including accrued interest, as of June 30, 2022 was approximately $6,816,000 and as of December 31, 2021 was approximately $6,749,000. The Company continues to hold 8,267,860 shares of the Company’s stock as collateral.
NOTE 8.7. LONG-TERM DEBT (check with Drew on this heading)
Long-termTotal debt is comprised of the following:
SCHEDULE OF LONG-TERM DEBT INSTRUMENTS
September 30, 2021 | December 31, 2020 | June 30, 2022 | December 31, 2021 | |||||||||||||
Hard Rock Note | $ | 750,000 | $ | 1,500,000 | $ | 750,000 | $ | 750,000 | ||||||||
Credit Agreement | 1,390,881 | 825,366 | 1,154,769 | 1,312,194 | ||||||||||||
Machinery loans | 386,144 | 466,448 | 299,927 | 357,963 | ||||||||||||
Transportation loans | 37,158 | 56,572 | 26,217 | 32,277 | ||||||||||||
2,564,183 | 2,848,386 | |||||||||||||||
Insurance financing | 164,128 | - | ||||||||||||||
Long term debt, Total | 2,395,041 | 2,452,434 | ||||||||||||||
Less: | ||||||||||||||||
Current portion | (1,445,230 | ) | (1,397,337 | ) | (2,204,508 | ) | (2,195,759 | ) | ||||||||
Long-term debt, net | $ | 1,118,953 | $ | 1,451,049 | $ | 190,533 | $ | 256,675 |
Hard Rock Note
In 2014, the Company purchased all of the interests of Hard Rock Solutions, LLC (“Hard Rock”). Consideration consisted of $12.5 million paid in cash at closing and a $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 Hard Rock Note has a remaining balance of $750,000 as of SeptemberJune 30, 2021,2022, accrues interest at 8.00%8.00% per annum and is due in full byfully payable and will be paid on or before October 5, 2022. In October 2021,.The Company paid an interest payment on the Company made a paymentnote on July 5, 2022 of $15,12314,959 related to accrued interest. Under the amended terms of the Hard Rock Note, we are required to make the following additional payments: accrued interest on January 5, April 5, July 5 and October 5 in 2022; with the remaining balance of principal and 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 $89,754 in interest payments related to the Hard Rock Note..
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 credit facility, which includes a $1,000,000 term loan (the “Term Loan”) and a $3,500,000 revolverline of credit (the “Revolving Loan”“LOC”). 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.
As of SeptemberJune 30, 2021,2022, we had approximately $416,662167,000 outstanding on the Term Loan and approximately $1,000,4621,000,000 outstanding on the Revolving Loan.LOC. Amounts outstanding under the Revolving LoanLOC 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, 2021, may not exceed $1,000,000, which is based on a calculation applying 85% of accounts receivable and 50% of inventory.
The Credit Agreement contains various restrictive covenants that, among other things, limit or restrict the ability of the Companyborrowers 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 LoanLOC is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause. At SeptemberAs of June 30, 2021,2022, we were in compliance with the covenants in the Credit Agreement.
The interest rate for the Term Loan and the Revolving LoanLOC is prime plus 2%2%. At SeptemberAs of June 30, 2021,2022, the interest rate for the Term Loan was 8.85%10.35%, which includes a 3.6%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 under the LOC are less than $1,000,000,$1,000,000, we still pay interest as if we had borrowed $1,000,000$1,000,000.. At September As of June 30, 2021,2022, we had approximately $12,0009,900 of accrued interest. The obligations of the Company under the Credit 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 or intellectual property, or aircraft.property. A collateral management fee is payable monthly on the used portion of the Revolving LoanLOC 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.
NOTE 9.8. FINANCING OBLIGATION
On December 7, 2020, the Company entered into a sale agreement (the “Sale Agreement”). Pursuant to the terms of the Sale Agreement,sale agreement, the Company sold land and property related to the Company’s headquarters and manufacturing facility in Vernal, Utah (the “Property”) for a purchase price of $4,448,500. Concurrent with the sale of the 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 annual rent increases of 1.5%1.5%. Under the Lease Agreement, the Company has an option to extend the term of the lease andand/or to repurchase the Property. Due to the repurchase option, the Company accountedwas unable to account for the transaction as a financing transaction and nottransfer as a sale under ASC Topic 842, Leases., and as such is a failed sale-leaseback that is accounted for as a financing transaction. The Company did not record the transaction as a failed sale-leaseback.
TheAs a result of the agreement, the Company 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 of 6.0%6.0%. At the conclusion of the fifteen-year lease period, the financing obligation residual willis estimated to be $2,160,2422,188,710, which will correspondcorresponds to the carrying value of the property. The Company paidbalance of the financing obligation as of June 30, 2022 and December 31, 2021 was $25,9504,145,803 of principal in 2020 that was prorated for the month of December.and $4,178,336, respectively.
The financing obligation is summarized below:
SCHEDULE OF FINANCING OBLIGATION
September 30, 2021 | December 31, 2020 | June 30, 2022 | December 31, 2021 | |||||||||||||
Finance obligations for sale-leaseback transactions | $ | 4,193,363 | $ | 4,239,952 | $ | 4,145,803 | $ | 4,178,336 | ||||||||
Current principal portion of finance obligation | (63,561 | ) | (61,691 | ) | (70,025 | ) | (65,678 | ) | ||||||||
Non-current portion of finance obligation | $ | 4,129,802 | $ | 4,178,261 | $ | 4,075,778 | $ | 4,112,658 |
NOTE 10.9. GEOGRAPHICAL OPERATIONS INFORMATION
The following summarizes revenue by geographic location:
SCHEDULE OF REVENUE AND PROPERTY, PLANT AND EQUIPMENT BY GEOGRAPHIC LOCATION
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||
North America | $ | 3,040,691 | $ | 1,118,404 | $ | 8,073,945 | $ | 7,387,847 | $ | 4,021,118 | $ | 2,941,056 | $ | 7,766,133 | $ | 5,033,255 | ||||||||||||||||
Middle East | $ | 521,228 | $ | 429,038 | $ | 1,311,735 | $ | 1,541,746 | $ | 519,724 | $ | 458,053 | $ | 904,874 | $ | 790,506 | ||||||||||||||||
$ | 3,561,919 | $ | 1,547,442 | $ | 9,385,680 | $ | 8,929,593 | |||||||||||||||||||||||||
Revenues | $ | 4,540,842 | $ | 3,399,109 | $ | 8,671,007 | $ | 5,823,761 |
The following summarizes net property, plant and equipment by geographic location:
SCHEDULE OF NET PROPERTY, PLANT AND EQUIPMENT BY GEOGRAPHIC LOCATION
September 30, 2021 | December 31, 2020 | June 30, 2022 | December 31, 2021 | |||||||||||||
Property, plant and equipment, net: | ||||||||||||||||
North America | $ | 5,590,486 | $ | 6,008,431 | $ | 5,369,729 | $ | 5,762,066 | ||||||||
Middle East | 1,373,291 | 1,526,667 | 2,056,961 | 1,168,263 | ||||||||||||
$ | 6,963,777 | $ | 7,535,098 | |||||||||||||
Property, plant and equipment, net | $ | 7,426,690 | $ | 6,930,329 |
NOTE 11.10. 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 that Stabil Drill Specialties, LLCLLC’s (“Stabil Drill”) infringedSmoothbore Eccentric Reamer infringes the patents of Extreme Technologies, LLC (one of our subsidiaries) on our patent that covers the Company’spatented Drill-N-Ream well bore conditioning tool, the Drill-N-Ream.tool. 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 suedDivision for patent infringement based ontheir work manufacturing the same patents discussed in theSmoothbore Eccentric Reamer for Stabil Drill litigation. On December 23, 2019, the CourtDrill. The Dallas lawsuit is 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 for non-infringement.first-filed, Houston suit. On October 1, 2020, Superior Energy Services, Stabil Drill’s parent company, filed for bankruptcy, which resulted in a brief, 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.bankruptcy, but this bankruptcy did not affect Extreme Technologies claims against Stabil Drill. On March 9, 2021, the Court lifted the automatic bankruptcy stay. Onstay, and on May 12, 2021, the Court denied Stabil Drill’s non-infringementmotion for summary judgment motion.of non-infringement. The parties are preparing this case for trial and expect a jury trial setting in 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.mid-2023.
NOTE 12.11. SHAREHOLDERS’ EQUITY
On August 9,The Company is authorized to issue shares of common stock, par value $ . As of June 30, 2022 and December 31, 2021, the Boardnumber of Directors grantedcommon shares issued and outstanding was .
333,333 restricted stock units to Annette Meier, President and Chief Operating Officer, granted
156,863The Company did
NOTE 13.12. SUBSEQUENT EVENTS
On March 22, 2022, the Company entered into an agreement with Mazak to purchase a new CNC machine for $956,000. A down payment of $286,800 was used to secure the asset. The machine was received on April 14, 2022 and final acceptance was completed on July 1, 2022. The Company financed the remaining balance of $669,200 with payments of $12,783 starting on August 1, 2022.
On October 19, 2021,August 9, 2022, the Board of Directors approved restricted stock units to Troy Meier, Chairman and Chief Executive Officer, Annette Meier, President and Chief Operating Officer, Chris Cashion, Chief Financial Officer, and to each of the three independent members of the Board of Directors. The grant date for these units is effective the filing date of the Form S-8 registration statement. The registration effective date of the filing is August 12, 2022. The restricted stock units awarded to Troy Meier is 332,500, the restricted stock units awarded to Annette Meier is 255,000, the restricted stock units awarded to Chris Cashion is 120,000 and the restricted stock units awarded to each of the three independent members of the Board of Directors is 75,000. In addition, the Board of Directors authorized stock options and restricted stock units to be granted to employees of the Company completed an equity offering ofother than Mr. and Mrs. Meier and Mr. Cashion. These stock options and restricted stock units will vest over shares of our common stock to certain institutional investors, at a purchase price of $ per share. The Company paid approximately $261,000 in total offering costs. Net proceeds from the equity offering were approximately $1,700,000three years.
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 SeptemberJune 30, 2021,2022, and our results of operations for the three and ninesix months ended SeptemberJune 30, 20212022 and 2020.2021. 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, 20202021 and 2019,2020, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,2021, 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- 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. TheseThe forward-looking statements include the following typescontained in or incorporated by reference into this Form 10-K are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of informationrisks and statements as they relate to the Company:uncertainties that are beyond our control, including:
● | the continued impact of COVID-19 or other public health concerns on domestic and global economic conditions and the future | |
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, 2020 and the following:
● | the volatility of oil and natural gas prices; | |
● | the cyclical nature of the oil and gas | |
● | availability of financing | |
● | 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; | |
● | fluctuations in our operating results; | |
● | our dependence on key personnel; | |
● | costs and availability of raw materials; |
14 |
● | 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 | |
● | the potential impact of the coronavirus, variants of the coronavirus or other major health crises on our business and results of | |
● | 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 suchthese factors are beyond the Company’sour ability to control or predict. AnyThese factors are not intended to represent a complete list of the general or specific factors or a combination of these factors, could materiallythat may affect the Company’s future results of operationsus. The events in Ukraine, Russia, and the ultimate accuracy ofsurrounding areas may result in political instability and may add a potential risk.
In addition, management’s assumptions about future events may prove to be inaccurate. All readers are cautioned that the forward-looking statements. Management cautions against putting undue reliancestatements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or that the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements or projecting any future results baseddue to factors described in “Item 1A. Risk Factors” in our annual report on suchform 10-K for the year ended December 31, 2021 and in our subsequent SEC filings. All forward-looking statements or present or prior earnings levels. Every forward-looking statement speaksspeak only as of the date of the particular statement, and the Company undertakes no obligationthey are made. We do not intend to publicly update or revise any forward-looking statement.statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Executive Summary
We innovate, design, engineer, manufacture, sell, and repair drilling and completion tools in the United States, Canada, and the Middle East.
We currently have three basic operations:
● | Our | |
● | Our PDC drill bit and other tool refurbishing and manufacturing service, and 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 the global market penetration of our current drilling tool solutions and to leverage our expertise in drilling tool technologies 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
Currently we are experiencing raw material delays and difficulties in hiring and retaining direct laborers. The COVID-19 pandemic has caused and continues to cause disruption to the U.S. and global economies, including the impactand various critical supply chains, as a result of government and company actions to reduce the spread of the virus and consumer behavior in response to the same; and, although the United States and other countries have continued to roll out vaccinations, it is uncertain how quickly and effectively such vaccinations will be distributed or help to control the spread of COVID-19 and its variants. We continue to actively monitor the impacts and potential impacts of the 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 chain problems, disruptions in local and global future economies, volatility in the global financial markets, overall reductions in demand, delays in payment, restrictions on the shipment of our products, or other ramifications. Currently we are experiencing raw material delays and difficulties in hiring and retaining direct laborers. These current conditions are a result of COVID-19.
16 |
The Russia – Ukraine conflict is a global concern. The Company does not have any direct exposure to Russia or Ukraine through its operations, employee base, investments or sanctions. The Company does not receive goods or services sourced from those countries, does not anticipate any disruption in its supply chain and has no business relationships, connections to or assets in Russia, Belarus or Ukraine. No impairments to assets have been made due to the conflict. The global oil industry has been impacted by this situation, but the Company’s operations and business in the Middle East has not been disrupted to date. The increase in oil producing activities in the United States has benefitted the Company’s operations. We are unable at this time to know the full ramifications of the Russia – Ukraine conflict and its effects on our business.
The total U.S. rig count as reported by Baker Hughes as of October 29, 2021July 1, 2022 was 544750 rigs, an increase of 248compared with 586 rigs from a year ago, as well as an increase of 150 rigs from the rig count as of December 31, 2020.2021. We expect North American onshore activity to continue to improve in 2021 and intothroughout 2022 compared with the fourth quarter of 2020.2021.
The Middle East market is a softer market due to the COVID-19 impact.actions taken by governments in that region to address COVID-19. Although this segment of our business is rebounding, the improvements are at a slower rate compared towith the Company’s domestic market.
On May 18, 2022 the New York Stock Exchange American LLC (“NYSE”) notified the Company that it was back in compliance with all the continued listing standards and has resolved the continued listing items previously referenced in the NYSE letters dated November 18, 2020 and May 20, 2021.
2022 Outlook and Guidance
The Company’s expectations for 2022 are as follows:
Revenue: $22 million to $25 million
SG&A: $7.0 million to $7.3 million
Adjusted EBITDA: $6 million to $8 million
The full year 2022 expectations reflects the impact from the sale of the $3.8 million stage one MENA DNR fleet to Bin Zayed Petroleum in the third quarter of 2022. The Company expects third quarter 2022 revenue will be $8 million to $9 million and Adjusted EBITDA to range between $3.5 million to$4.0 million.
CONSOLIDATED RESULTS OF OPERATIONS
Three and NineSix Months Ended SeptemberJune 30, 2021Compared2022 Compared with the Three and NineSix Months Ended SeptemberJune 30, 20202021
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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands) | 2021 | 2020 | 2021 | 2020 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tool revenue | 2,346 | 66 | % | 1,191 | 77 | % | 6,284 | 67 | % | 6,147 | 69 | % | 2,892 | 64 | % | 2,273 | 67 | % | 5,661 | 65 | % | 3,937 | 68 | % | ||||||||||||||||||||||||||||||||||||||||
Contract services | 1,216 | 34 | % | 356 | 23 | % | 3,102 | 33 | % | 2,782 | 31 | % | 1,649 | 36 | % | 1,126 | 33 | % | 3,010 | 35 | % | 1,887 | 32 | % | ||||||||||||||||||||||||||||||||||||||||
Revenue | $ | 3,562 | 100 | % | $ | 1,547 | 100 | % | 9,386 | 100 | % | 8,929 | 100 | % | $ | 4,541 | 100 | % | $ | 3,399 | 100 | % | 8,671 | 100 | % | 5,824 | 100 | % | ||||||||||||||||||||||||||||||||||||
Operating costs and expenses | 3,399 | 95 | % | 3,094 | 200 | % | 10,063 | 107 | % | 11,307 | 127 | % | 4,413 | 97 | % | 3,283 | 97 | % | 8,238 | 95 | % | 6,664 | 114 | % | ||||||||||||||||||||||||||||||||||||||||
Operating income (loss) | 163 | 5 | % | (1,546 | ) | (100 | )% | (677 | ) | (7 | )% | (2,378 | ) | (27 | )% | 128 | 3 | % | 116 | 3 | % | 433 | 5 | % | (840 | ) | (14 | )% | ||||||||||||||||||||||||||||||||||||
Other expense | (130 | ) | (4 | )% | (85 | ) | (5 | )% | (415 | ) | (4 | )% | (291 | ) | (3 | )% | (152 | ) | (3 | )% | (157 | ) | (4 | )% | (276 | ) | (3 | )% | (285 | ) | (5 | )% | ||||||||||||||||||||||||||||||||
Income tax expense | (39 | ) | (1 | )% | (100 | ) | (6 | )% | (83 | ) | (1 | )% | (106 | ) | (1 | )% | (32 | ) | (1 | )% | (26 | ) | (1 | )% | (64 | ) | (1 | )% | (44 | ) | (1 | )% | ||||||||||||||||||||||||||||||||
Net income (loss) | $ | (6 | ) | 0 | % | $ | (1,731 | ) | (111 | )% | (1,175 | ) | (12 | )% | (2,775 | ) | (31 | )% | $ | (56 | ) | (1 | )% | $ | (67 | ) | (2 | )% | 93 | 1 | % | (1,169 | ) | (20 | )% |
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.
17 |
Three Months Ended SeptemberJune 30, 20212022 Compared with the Three Months Ended SeptemberJune 30, 20202021
Revenue. Our revenue increased approximately $2,014,000$1,142,000 or 130%34%. Tool revenue increased $1,155,000$618,000 or 97%27% from the prior-year period while contract services increased $859,000$524,000 or 241%47%. The increase in revenue was due to increased demand from continued growth in the number of end 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$1,130,000 for the SeptemberJune 30, 20212022 three-month period.
● | Cost of revenue increased approximately | |
● | Selling, general and administrative expenses increased approximately | |
● | Depreciation and amortization expense decreased approximately |
Other Expense. Other expense primarily consists of interest expense and interest income.
● | Interest expense for the three months ended |
Income Tax Expense. The decreaseincrease in income tax expense from the prior year iswas due to a year-to-datehigher foreign income tax adjustmentas a result of the growth in 2020.international revenue.
NineSix Months Ended SeptemberJune 30, 20212022 Compared with the NineSix Months Ended SeptemberJune 30, 20202021
Revenue. Our revenue increased approximately $457,000$2,847,000 or 5%49% to $9,386,000.$8,671,000. Tool revenue was $6,283,000, an increase of 2%$5,661,000, up 27% or $137,000,$618,000, from the prior-year period. Contract services increased approximately $320,000,$524,000, or 12%47%, to $3,102,000.$3,010,000. The increase in revenue was due to increased demand from continued growth in the number of end 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 decreasedincreased approximately $1,277,000$1,574,000 for the SeptemberJune 30, 2021 nine-month2022 six month period.
● | Cost of revenue | |
● | Selling, general and administrative expenses | |
● | Depreciation and amortization expense decreased approximately |
Other Expense. Other expense primarily consists of interest expense, interest income, and gain/loss on sale of assets.
● | Interest expense for the | |
● | The Company recorded a loss of approximately |
Income Tax Expense. The decrease in incomeIncome tax expense increased by approximately $20,000 from the prior year is due to a foreignincreased income tax adjustmentsbefore taxes incurred in 2020.the six months ended June 30, 2022.
18 |
Liquidity and Capital Resources
At SeptemberAs of June 30, 2021,2022, we had working capital of approximately $1,500,000.$3,080,000. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. Our operational and financial strategies include managing our operating costs and capital spending to matchreflect revenue trends, accelerating collections of international receivables, and managingcontrolling our working capital and debt to enhance liquidity. We will continue to work to grow revenue and manage costs and expect to be cash flow positive in 2022. If we are unable to continue generating positive cash flow,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. However, on October 19, 2021,For the Company completed an equity offering of 1,739,131 shares ofsix-month period ended June 30, 2022, a positive cashflow funded 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 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 may continue to be impacted in 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 minimal planned capital expenditures for the remainder of 2021 of $600,000.requirements.
The Hard Rock Note had a remaining balance of $750,000 as of SeptemberJune 30, 2021. It2022, accrues interest at 8.00% per annum and is due in full by October 5, 2022. In October 2021, the Company made a payment of $15,123 related tofully payable with accrued interest. Under the amended terms of the Hard Rock Note, we are required to make the following payments: accrued interest on January 5, April 5, July 5 and October 5 in 2022; with the remaining balance of principal and 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.
Our Credit Agreement facilitated by Austin Financial Services (“AFS”) is comprised of $1,000,000$800,000 Term Loan and $3,500,000 Revolving Loan.Line of Credit (“LOC”). As of SeptemberJune 30, 2021,2022, we had $416,662approximately $167,000 outstanding on the Term Loan and $1,000,462approximately $1,000,000 outstanding on the Revolving Loan.LOC. Amounts outstanding under the Revolving LoanLOC 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, 2021, may not exceed $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 LoanLOC 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 SeptemberAs of June 30, 2021,2022, we had approximately $12,000$9,900 of accrued interest.interest combined between the two loans.
The interest rate for both the Term Loan and the Revolving LoanLOC is prime plus 2%. At September, which as of June 30, 2021, the interest rate for the Term Loan2022, was 8.85%10.35%, 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, 2023.2023, and the Company currently plans to refinance this credit facility.
19 |
Cash Flows
NineSix Months Ended SeptemberJune 30, 20212022 Compared with the NineSix Months Ended SeptemberJune 30, 20202021
Net cash provided by operating activities was approximately $878,000$1,354,000 and $1,269,000$335,000 for the ninesix months ended SeptemberJune 30, 20212022 and 2020,2021, respectively. For the ninesix months ended SeptemberJune 30, 2021,2022, the Company had approximately $1,175,000$93,000 of net loss,income, approximately $1,168,000$342,000 increase in accounts payable and accrued expenses, depreciation and amortization expense of approximately $1,681,000, which were offset by$813,000, stock-based compensation of $423,000 and an increase in accounts receivable of $72,000. Offsets occurred with decreases in prepaid expenses and other assets of approximately $700,000$286,000 and a decrease in accounts receivable. inventories of $150,000.
For the ninesix months ended SeptemberJune 30, 2020,2021, the Company had approximately $2,775,000$1,169,000 of net loss, an approximately $2,409,000 increase$585,000 decrease in accounts receivable, $162,000 decrease in inventories, and $281,000 decrease in prepaid expenses and other assets. Increases to cash provided by operating activities occurred with depreciation and amortization expense of approximately $2,134,000.$1,276,000, stock-based compensation expense of $335,000, increase in accounts payable and accrued expenses of $878,000 and an increase in income tax payable of $32,000.
Net cash used in investing activities was approximately $26,000$1,249,000 for the ninesix months ended SeptemberJune 30, 2022 and cash provided in investing activities was approximately $105,000 for the six months ended June 30, 2021 and $37,000 foras restated due to a change in accounting methods. The major cause was the nine months ended September 30, 2020.increase in the Company’s international tool fleet.
Net cash used in financing activities was approximately $345,000$99,000 for the ninesix months ended SeptemberJune 30, 2021.2022. Net cash used inprovided by financing activities was approximately $1,037,000$288,000 for the ninesix months ended SeptemberJune 30, 2020.2021 due to net proceeds from the line of credit.
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 basedstock-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 SeptemberJune 30, 2021.2022.
Changes in Internal Controls over Financial Reporting
NoneThere has been no change in our internal control over financial reporting that occurred during the six months of 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 Securities 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.
20 |
PART II
Item 1. Legal Proceedings
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 that Stabil Drill Specialties, LLCLLC’s (“Stabil Drill”) infringedSmoothbore Eccentric Reamer infringes the patents of Extreme Technologies, LLC (one of our subsidiaries) on our patent that covers the Company’spatented Drill-N-Ream well bore conditioning tool, the Drill-N-Ream.tool. 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 -Texas-Dallas Division for their work manufacturing the Smoothbore Eccentric Reamer for Stabil Drill. The Dallas Division. Extreme sued for patent infringement based on the same patents discussed in the Stabil Drill litigation. On December 23, 2019, the Courtlawsuit is 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 for non-infringement.first-filed, Houston suit. On October 1, 2020, Superior Energy Services, Stabil Drill’s parent company, filed for bankruptcy, which resulted in a brief, 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.bankruptcy, but this bankruptcy did not affect Extreme Technologies, LLC’s claims against Superior’s subsidiary Stabil Drill. On March 9, 2021, the Court lifted the automatic bankruptcy stay. Onstay, and on May 12, 2021, the Court denied Stabil Drill’s non-infringementmotion for summary judgment motion.of non-infringement. The parties are preparing this case for trial and expect a jury trial setting in 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.mid-2023.
Item 1A. Risk Factors
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 20202021 Annual Report on Form 10-K. The risk factors below updates or expands upon those risk factors.
We may be unable to maintain adequate liquidity and make payments on our debt.
At September 30, 2021, we had working capital of approximately $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, 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 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 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 outstanding note (the “Hard Rock Note”) with the seller in our 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 in 2022; with the remaining principal balance of $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, 2021, we had $416,662 outstanding on the Term Loan and $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.
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.
Item 6. Exhibits
The exhibits listed below are filed as part of this report:
** Furnished herewith.
* Filed herewith.
SIGNATURES
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. | ||
By: | /s/ G. TROY MEIER | |
G. Troy Meier, Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: | /s/ CHRISTOPHER CASHION | |
Christopher Cashion, Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) |