UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Endedquarterly period ended March 31, 20222023

 

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ____________ to ____________

 

Commission File Number:Number 001-36453

 

Superior Drilling Products, Inc.SUPERIOR DRILLING PRODUCTS, INC.

(Exact nameName of registrant as specified in its charter)

 

Utah46-4341605

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1583 South 1700 East

Vernal, Utah

84078
(Address of Principal Executive Offices) (IRS Employer
Identification No )
Zip Code)

 

Registrant’s Telephone Number: (1583 South 1700 East

Vernal, Utah84078

(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 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

Large accelerated filer ☐Accelerated filer ☐
Non-accelerated filer (Do not check if a smaller reporting company) ☐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 Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

There wereAs of May 5, 2023, the registrant had 28,235,00129,245,080 shares of its common stock $0.001 par value, issued and outstanding as of May 13, 2022.outstanding.

 

 

 

 

 

Superior Drilling Products, Inc.

FORM 10-Q

QUARTER ENDED March 31, 2022

TABLE OF CONTENTS

 

 PagePART I
 
PART I-FINANCIAL INFORMATIONItem 1.Financial Statements (Unaudited)1
Item 2.
Item 1. Financial Statements3
Condensed Consolidated Balance Sheets (Unaudited) at March 31,2022 and December 31, 20213
Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2022 and 20214
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the three months ended March 31, 2022 and 20215
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2022 and 20216
Notes to Condensed Consolidated Financial Statements (Unaudited)7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations11
Item 3.Quantitative and Qualitative Disclosures About Market Risk15
Item 4.Controls and Procedures15
 PART II 
Item 1.Legal Proceedings16
Item 1A.Risk Factors16
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds16
Item 3.Defaults Upon Senior Securities16
Item 4. Controls and Procedures21Mine Safety Disclosures16
Item 5.Other Information16
Item 6.Exhibits17
 
PART II - OTHER INFORMATIONSIGNATURES
Item 1. Legal Proceedings22
Item 1A. Risk Factors22
Item 6. Exhibits22
Signatures2318

 

2i

Forward-Looking Statements

Forward-looking statements involve risks and uncertainties that are beyond the control of Superior Drilling Products, Inc. (the “Company” or “SDPI”). 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. Forward-looking statements 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. Forward-looking statements include statements that are not historical facts and can be identified by the words “anticipate,” “estimate,” “expect,” “may,” “project,” “believe” or similar expressions, or by the Company’s discussion of strategies or trends. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control, including:

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;
the volatility of oil and natural gas prices;
the cyclical nature of the oil and gas industry;
availability of financing 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;
fluctuations in our operating results;
our dependence on key personnel;
costs and availability 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, specifically the Middle East region and Eastern Europe;
the potential impact of the coronavirus, variants of the coronavirus or other major health crises on our business and results of operations, including the impact to our supply chain;
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.

ii

 

 

PART I - FINANCIAL INFORMATION.INFORMATION

 

Item 1. Financial Statements (Unaudited).

Superior Drilling Products, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

 March 31, December 31, 
 March 31, 2022  December 31, 2021  2023  2022 
ASSETS                
Current assets                
Cash $2,854,093  $2,822,100  $1,955,903  $2,158,025 
Accounts receivable, net  3,155,906   2,871,932 
Accounts receivable  3,959,754   3,241,221 
Prepaid expenses  248,502   435,595   356,696   367,823 
Inventories  1,024,345   1,174,635   2,248,861   2,081,260 
Asset held for sale  -   216,000 
Other current assets  55,744   55,159   152,219   140,238 
Total current assets  7,338,590   7,359,421   8,673,433   8,204,567 
Property, plant and equipment, net  7,480,390   6,930,329   10,241,092   8,576,851 
Intangible assets, net  194,444   236,111   27,778   69,444 
Right of use assets  18,873   20,518   606,323   638,102 
Other noncurrent assets  65,880   65,880   112,619   111,519 
Total assets $15,098,177  $14,612,259  $19,661,245  $17,600,483 
        
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities                
Accounts payable $1,245,122  $1,139,091  $1,664,491  $1,043,581 
Accrued expenses  609,991   467,462   782,054   891,793 
Income tax payable  212,878   206,490   427,165   351,618 
Current portion of operating lease liability  11,561   13,716   51,182   44,273 
Current portion of financial obligation  67,853   65,678   76,406   74,636 
Current portion of long-term debt, net of discounts  2,116,480   2,195,759   1,157,879   1,125,864 
Other current liabilities  -   216,000 
Total current liabilities  4,263,885   4,088,196   4,159,177   3,747,765 
Operating lease liability  7,312   6,802 
Operating lease liability, less current portion  493,296   523,375 
Long-term financial obligation, less current portion  4,093,686   4,112,658   4,017,280   4,038,022 
Long-term debt, less current portion, net of discounts  225,396   256,675   489,303   529,499 
Deferred income  675,000   675,000 
Total liabilities  8,590,279   8,464,331   9,834,056   9,513,661 
Commitments and contingencies (Note 11)  -     
Commitments and contingencies (Note 9)        
Shareholders’ equity                
Common stock - $0.001 par value; 100,000,000 shares authorized; 28,235,001 shares issued and outstanding, respectively  28,235   28,235 
Common stock - $0.001 par value; 100,000,000 shares authorized; 29,245,080 shares issued and outstanding  29,245   29,245 
Additional paid-in-capital  43,281,334   43,071,201   44,171,076   43,943,928 
Accumulated deficit  (36,801,671)  (36,951,508)  (34,373,132)  (35,886,351)
Total shareholders’ equity  6,507,898   6,147,928   9,827,189   8,086,822 
Total liabilities and shareholders’ equity $15,098,177  $14,612,259  $19,661,245  $17,600,483 

 

The accompanying notes are an integral part of these condensed unauditedconsolidated financial statements.

1

Superior Drilling Products, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

  2023  2022 
  Three Months Ended March 31, 
  2023  2022 
Revenue $6,281,214  $4,130,164 
Operating cost and expenses        
Cost of revenue  2,238,597   1,767,903 
Selling, general, and administrative expenses  2,338,841   1,646,643 
Depreciation and amortization expense  326,014   410,733 
Total operating cost and expenses  4,903,452   3,825,279 
Operating income  1,377,762   304,885 
Other income (expense)        
Interest income  16,898   197 
Interest expense  (154,091)  (123,861)
Recovery of related party note receivable  350,262   - 
Total other income (expense)  213,069   (123,664)
Income before income taxes  1,590,831   181,221 
Income tax expense  (77,612)  (31,384)
Net income $1,513,219  $149,837 
         
Earnings per common share - basic $0.05  $0.01 
Weighted average common shares outstanding - basic  29,245,080   28,235,001 
         
Earnings per common share - diluted $0.05  $0.01 
Weighted average common shares outstanding - diluted  29,305,216   28,305,101 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Superior Drilling Products, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

  2023  2022 
  Three Months Ended March 31, 
  2023  2022 
Cash Flows from Operating Activities        
Net income $1,513,219  $149,837 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization expense  326,014   410,733 
Share-based compensation expense  227,148   210,133 
Amortization of right-of-use assets  51,257   - 
Amortization of deferred loan cost  3,087   4,631 
Changes in operating assets and liabilities:        
Accounts receivable  (718,533)  (283,974)
Inventories  (167,601)  150,290 
Prepaid expenses and other current assets  (1,954)  186,508 
Accounts payable, accrued expenses, and other liabilities  (262,804)  248,560 
Income tax payable  75,547   6,388 
Net cash provided by operating activities  1,045,380   1,083,106 
Cash Flows From Investing Activities        
Purchases of property, plant and equipment  (1,567,524)  (919,127)
Proceeds from recovery of related party note receivable  350,262   

-

 
Net cash used in investing activities  (1,217,262)  (919,127)
Cash Flows from Financing Activities        
Principal payments on debt  (213,905)  (131,978)
Payments on revolving loan  (472,089)  (21,541)
Proceeds received from revolving loan  655,754   21,533 
Net cash used in financing activities  (30,240)  (131,986)
Net (decrease) increase in cash  (202,122)  31,993 
Cash at beginning of period  2,158,025   2,822,100 
Cash at end of period $1,955,903  $2,854,093 
         
Supplemental information:        
Cash paid for interest $151,107  $122,157 
Property, plant and equipment in accounts payable $381,064  $- 
Disposal of asset held for sale $216,000  $- 
Right of use assets obtained in exchange for lease obligations $19,478  $- 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

Superior Drilling Products, Inc.

Condensed Consolidated Statements of Operations

Changes in Shareholders’ Equity (Unaudited)

 

  2022  2021 
  For the Three Months 
  Ended March 31, 
  2022  2021 
       
Revenue        
Tool revenue $2,769,247  $1,663,763 
Contract services  1,360,917   760,890 
         
Total Revenue  4,130,164   2,424,653 
         
Operating costs and expenses        
Cost of revenue  1,767,903   1,175,593 
Selling, general and administrative expenses  1,646,643   1,515,590 
Depreciation and amortization expense  410,733   690,074 
         
Total operating costs and expenses  3,825,279   3,381,257 
         
Operating income (loss)  304,885   (956,604)
         
Other income (expense)        
Interest income  197   48 
Interest expense  (123,861)  (138,057)
Gain (loss) on disposition of assets, net  -   10,000 
Total other expense  (123,664)  (128,009)
         
Income (loss) before income taxes  181,221   (1,084,613)
Income tax expense  (31,384)  (17,180)
         
Net income/(loss) $149,837  $(1,101,793)
         
Basic loss earnings per common share $.01  $(0.04)
Basic weighted average common shares outstanding  28,235,001   25,762,342 
Diluted loss per common share $0.01  $(0.04)
Diluted weighted average common shares outstanding  28,305,101   25,762,342 
  Shares  Par Value  Capital  Deficit  Equity 
  Common Stock  

Additional

Paid-in

  Accumulated  

Total

Shareholders’

 
  Shares  Par Value  Capital  Deficit  Equity 
Balance - December 31, 2022  29,245,080  $29,245  $43,943,928  $(35,886,351) $8,086,822 
Share-based compensation expense  -   -   227,148   -   227,148 
Net income  -   -   -   1,513,219   1,513,219 
Balance - March 31, 2023  29,245,080  $29,245  $44,171,076  $(34,373,132) $9,827,189 

  Common Stock  

Additional

Paid-in

  Accumulated  

Total

Shareholders’

 
  Shares  Par Value  Capital  Deficit  Equity 
Balance - December 31, 2021  28,235,001   28,235   43,071,201   (36,951,508)  6,147,928 
Balance  28,235,001   28,235   43,071,201   (36,951,508)  6,147,928 
Share-based compensation expense  -   -   210,133   -   210,133 
Net income  -   -   -   149,837   149,837 
Balance - March 31, 2022  28,235,001  $28,235  $43,281,334  $(36,801,671) $6,507,898 
Balance  28,235,001  $28,235  $43,281,334  $(36,801,671) $6,507,898 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4

Superior Drilling Products, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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’
 
  Shares  Par Value  Capital  Deficit  Equity 
Balance – December 31, 2021  28,235,001  $28,235  $43,071,201  $(36,951,508) $6,147,928 
                     
Stock-based compensation expense  -   -   210,133   -   210,133 
Net income  -   -   -   149,837   149,837 
                     
Balance – March 31, 2022  28,235,001  $28,235  $43,281,334  $(36,801,671) $6,507,898 
                     
Balance – December 31, 2020  25,762,342  $25,762  $40,619,620  $(36,421,707) $4,223,675 
Beginning balance  25,762,342  $25,762  $40,619,620  $(36,421,707) $4,223,675 
                     
Stock-based compensation expense  -   -   167,472   -   167,472 
Net income  -   -   -   (1,101,793)  (1,101,793)
                     
Balance – March 31, 2021  25,762,342  $25,762  $40,787,092  $(37,523,500) $3,289,354 
Ending balance  25,762,342  $25,762  $40,787,092  $(37,523,500) $3,289,354 

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)

  2022  (Restated) 2021 
  For the Three Months 
  Ended March 31, 
  2022  (Restated) 2021 
Cash Flows From Operating Activities        
Net loss $149,837  $(1,101,793)
Adjustments to reconcile net loss to net cash from operating activities:        
Depreciation and amortization expense  410,733   690,074 
Stock-based compensation expense  210,133   167,473 
(Gain) loss on disposition of assets, net  -   (10,000)
Amortization of deferred loan costs  4,631   4,631 
Changes in operating assets and liabilities:        
Accounts receivable  (283,974)  (256,215)
Inventories  150,290   23,925 
Prepaid expenses and other noncurrent assets  186,508   (17,841)
Accounts payable and accrued expenses  248,560   688,449 
Income tax payable  6,388   16,380 
Net Cash From Operating Activities  1,083,106   205,083 
Cash Flows From Investing Activities        
Purchases of property, plant and equipment  (919,127)  (74,956)
Proceeds from sale of fixed assets  -   50,000 
Net Cash From Investing Activities  (919,127)  (24,956)
Cash Flows From Financing Activities        
Principal payments on debt  (131,978)  (135,403)
Payments on revolving loan  (21,541)  (280,245)
Proceeds received on revolving loan  21,533   536,331 
Net Cash From Financing Activities  (131,986)  120,683 
Net Change in Cash  31,993   300,810 
Cash at Beginning of Period  2,822,100   1,961,441 
Cash at End of Period $2,854,093  $2,262,251 
Supplemental information:        
Cash paid for Interest $122,157  $130,363 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

Superior Drilling Products, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2022

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 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 for a leading oil field services 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. 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 condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The condensed 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 condensed consolidated financial statements for the three months ended March 31, 20222023 and 2021,2022, and the related footnote disclosures included herein, are unaudited. However, in the opinionThe preparation of management, these unaudited condensed consolidated interim financial statements have been prepared onin conformity with GAAP requires the same basis as the audited financial statements and reflect all adjustments necessary to fairly state the results for such periods.use of management’s estimates. The results of operations for the three months ended March 31, 20222023 are not necessarily indicative of the results of operations expected for the year ended December 31, 2022.2023. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the yearyears ended December 31, 2022 and 2021 and the notes thereto, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021,2022, 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.

 

Use of EstimatesSignificant Accounting Policies

 

The preparationCompany’s accounting policies are set forth in Note 1 – Summary of financial statements in conformity with GAAP requires managementSignificant Accounting Policies of the Notes to make estimates and assumptions that affect the reported amountsConsolidated Financial Statements in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant items subjectCompany’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC. There were no significant updates or revisions to estimates and assumptions includeour accounting policies during the carrying amount and useful lives of property and equipment and intangible assets, share-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.three months ended March 31, 2023.

7

 

Concentrations of Credit Risk

 

The Company has two significant customers that represented 9087% and 8590% of its revenue for the three months ended March 31, 20222023 and 2021,2022, respectively. These customers had approximately $2,137,0001,880,000 and $846,0001,751,000 in accounts receivable as of March 31, 20222023 and 2021,December 31, 2022, respectively.

 

The Company had two vendors that represented 13% of its purchases for each of the three months ended March 31, 2022.2023 and 2002, respectively. These vendors had approximately $122,000354,000 and $136,000 in accounts payable as of March 31, 20222023 and purchases in the three months of ended MarchDecember 31, 2022, from these vendors totaled approximately $274,000. The Company had two vendors that represented 22% of its purchases for the three months ended March 31, 2021. These vendors had approximately $221,000 in accounts payable as of March 31, 2021 and purchases in the three months ended March 31, 2021 from these vendors totaled approximately $239,000.

Restatement of the Consolidated Financial Statements

The purpose of this restatement is to correct an error in the Company’s previously issued financial statements for the year ended March 31, 2021 in connection with the classification of $65,720 of inventory converted to property, plant and equipment reported within the Supplemental Information section of the Statement of Cash Flows. The $65,720 in inventory converted to property, plant and equipment has now been re-classified to purchases of property, plant and equipment in the Cash Flows from Investing Activities section of the Statement of Cash Flows.

There was no effect of the restatement to the Company’s condensed consolidated balance sheet, condensed consolidated statement of operations and condensed consolidated statement of shareholders’ equity for the quarter ended March 31, 2021.

In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality (“SAB 99”) and Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), the Company has determined that the impact of adjustments relating to the correction of this accounting error are not material to previously issued annual audited and unaudited interim financial statements.

The effects of the restatement on the Company’s consolidated statement of cash flows for the quarter ended March 31, 2021 are as follows:

SCHEDULE OF RESTATEMENT OF CONSOLIDATED STATEMENT OF CASH FLOWS

   March 31, 2021 
   As Reported  As Restated 
-Net cash from operating activities  139,363   205,083 
-Net cash from investing activities  40,764   (24,956)

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.

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.respectively.

 

85

Superior Drilling Products, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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 quarter of $31,384 with income before income taxes of $181,221. In the U.S. the Company has not generated a tax liability due to incurring taxable losses.

NOTE 2. 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.

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.

9

 

Disaggregation of Revenue

 

Approximately 91% of ourThe following table presents revenue is from North America and approximately 9% is from the Middle East for the three months ended March 31, 2022. For the three months ended March 31, 2021, approximately 86% of our revenue was from North America and approximately 14% was from the Middle East.

Revenue disaggregated by revenue source are as follows:type:

SCHEDULE OF REVENUE DISAGGREGATED BY REVENUE

  2022  2021 
  

Three months ended

March 31,

 
  2022  2021 
       
Tool Revenue:        
Tool and product sales $664,300  $495,000 
Tool rental  385,150   336,453 
Other related revenue  1,719,797   832,310 
Total Tool Revenue  2,769,247   1,663,763 
         
Contract Services  1,360,917   760,890 
         
Total Revenue $4,130,164  $2,424,653 

 

  2023  2022 
  Three Months Ended March 31, 
  2023  2022 
Tool revenue:        
Tool and product sales $1,537,380  $664,300 
Tool rental  806,153   385,150 
Other related revenue  1,910,676   1,719,797 
Total tool revenue  4,254,209   2,769,247 
Contract services  2,027,005   1,360,917 
Total revenue $6,281,214  $4,130,164 

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 ASC 606.

10

NOTE Contract Costs

We did not incur any material costs of obtaining contracts.

3. INVENTORIES

 

Inventories arewere comprised of the following:

SCHEDULE OF INVENTORIES

  March 31, 2022  December 31, 2021 
Raw material $835,614  $769,547 
Work in progress  112,643   65,945 
Finished goods  76,088   339,143 
Inventories, net $1,024,345  $1,174,635 

 

  March 31,  December 31, 
  2023  2022 
Raw material $1,156,935  $1,334,669 
Work in progress  478,906   168,214 
Finished goods  613,020   578,377 
Total inventories $2,248,861  $2,081,260 

NOTE

4. PROPERTY, PLANT AND& EQUIPMENT

 

Property, plant and equipment arewas comprised of the following:

SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT

  March 31, 2022  December 31, 2021 
Land $880,416  $880,416 
Buildings  4,764,441   4,764,441 
Building improvements  755,039   755,039 
Machinery and equipment  13,126,624   12,207,497 
Office equipment, fixtures and software  628,356   628,358 
Transportation assets  265,760   265,760 
Property, plant and equipment, gross  20,420,636   19,501,511 
Accumulated depreciation  (12,940,246)  (12,571,182)
Property, plant and equipment, net $7,480,390  $6,930,329 

The Company sold its airplane hangar for a gain of $10,000 in February 2021.

  March 31,  December 31, 
  2023  2022 
Land $880,416  $880,416 
Buildings  4,764,441   4,764,441 
Leasehold improvements  755,039   755,039 
Machinery, equipment, and rental tools  16,494,647   14,546,060 
Office equipment, fixtures and software  628,358   628,358 
Transportation assets  265,760   265,760 
Property, plant and equipment, gross  23,788,661   21,840,074 
Accumulated depreciation  (13,547,569)  (13,263,223)
Total property, plant and equipment, net $10,241,092  $8,576,851 

 

Depreciation expense related to property, plant and equipment for the three months ended March 31, 20222023 and 20212022 was $369,066284,347 and $398,408369,066, respectively.

 

6

Superior Drilling Products, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE

5. INTANGIBLE ASSETS

 

Intangible assets arewere comprised of the following:

SCHEDULE OF INTANGIBLE ASSETS 

 March 31, December 31, 
 March 31, 2022  December 31, 2021  2023  2022 
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 
Accumulated amortization  (14,705,556)  (14,663,889)
Intangible assets, net $194,444  $236,111 
Total intangible assets, gross  1,500,000   1,500,000 
Less: accumulated amortization  (14,872,222)  (14,830,556)
Total intangible assets, net $27,778  $69,444 

 

Amortization expense related to intangible assets for the three months ended March 31, 20222023 and 20212022 was $41,667 and $291,66641,667, respectively.

 

NOTE 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 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, which reduced the related party note receivable balance to $0. The Company holds 8,267,860 shares of the Company’s common stock as collateral. The Company will record a recovery of the loan upon receiving repayment of the note or interest in other income.

On July 7, 2020,March 31, 2023, the Company entered into ana fourth amended and restated loan agreement and note with Tronco changingto extend the payment terms onmaturity date of the note.principal to March 31, 2033. As amended, the interest rate on the note is fixed at 22.8%% per annum. annum and provides for principal and accrued interest payments in the amount of $The750,000 annually on March 31, 2024 through 2032, with the balance of all remaining outstanding principal and accrued interest due on March 31, 2033. In the event the average closing price for the Company’s common stock for 10 consecutive trading days is equal to or greater than $3.00 per share, Tronco shall pay fifty percent of the then outstanding principal balance together with all accrued, unpaid interest within ten days of the date on which the 10-day trading average first equals or exceeds $3.00. In the event the average closing price for 10 consecutive trading days is $4.00 per share or greater, Tronco shall pay the entire outstanding principal balance together with all accrued, unpaid interest within ten (10) days of the date on which the 10-day average first equals or exceeds $4.00. In addition, in the event of a sale of all or substantially all of the assets or a controlling equity interest in the Company, Tronco and the Meiers must utilize the proceeds received from such sale to pay the entire outstanding principal balance on the note maturesreceivable together with all accrued, unpaid interest. On March 24, 2023, there was a balloonprincipal and interest payment of all unpaid interest$350,262 which was reflected as a recovery of related party note receivable in other income and principal dueexpense on December 31, 2022.the Condensed Consolidated Statement of Operations. The Tronco note balance, including accrued interest, was approximately $6,567,000 and $6,884,000as of March 31, 2022 was approximately $6,783,0002023 and December 31, 2021 was approximately $6,749,000. The Company continues to hold 8,267,860 shares of the Company’s stock as collateral.2022, respectively.

 

11

NOTE 7. LONG-TERM DEBT

 

Long-term debt is comprised of the following:

SCHEDULE OF LONG-TERM DEBT INSTRUMENTSOBLIGATIONS 

  March 31, 2022  December 31, 2021 
Hard Rock Note $750,000  $750,000 
Credit Agreement  1,233,483   1,312,194 
Machinery loans  329,160   357,963 
Transportation loans  29,233   32,277 
Long term debt, Total  2,341,876   2,452,434 
Less:        
Current portion  (2,116,480)  (2,195,759)
Long-term debt, net $225,396  $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 March 31, 2022, accrues interest at 8.00% per annum and is fully payable on October 5, 2022. The Company paid an interest payment on the note on January 20, 2022 of $17,589 and is obligated to pay interest payments on April 5, 2022 and July 5, 2022 prior to the full payment due on October 5, 2022. In April, the Company made the accrued interest payment of $12,328.77.

  March 31,  December 31, 
  2023  2022 
Credit Agreement $1,000,466  $813,713 
Machinery loans  629,866   664,674 
Transportation loan  16,850   20,027 
Insurance loan  -   156,949 
Total long-term debt  1,647,182   1,655,363 
Less: current portion of long-term debt, net of discounts  (1,157,879)  (1,125,864)
Total long-term debt, less current portion, net of discounts $489,303  $529,499 

 

127

Superior Drilling Products, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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 $4,300,000 credit facility, which includes a $800,000 term loan (the “Term Loan”) and a $3,500,000 line of credit (the “LOC”“Line of Credit”). The Credit Agreement maturesoriginally was to mature on February 20, 2023, subject to early termination pursuant to the terms of the agreement or extension as may be agreed by the parties.parties, but it has been renewed to February 20, 2024. Cancellation is allowed with a 60-day notice. The balance of the Credit Agreement totaled approximately $1,001,000 and $814,000 as of March 31, 2023 and December 31, 2022, respectively.

 

As of March 31, 2022, we had approximately $250,000 outstanding on the Term Loan and approximately $1,000,000 outstanding on the LOC. Amounts outstanding under the LOCLine of Credit 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 AFSAFS. As of March 31, 2023, the Company had approximately $101,000 of availability under the Line of Credit.

The interest rate for the Term Loan and the Line of Credit is prime plus 2%. At March 31, 2023, the interest rate for the Line of Credit was 13.60%, which includes a 3.6% management fee rate. Even if our borrowings under the Line of Credit are less than $1,000,000, we still pay interest as if we had borrowed $1,000,000. 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. A collateral management fee is payable monthly on the used portion of the Line of Credit and Term Loan.

 

The Credit Agreement contains various restrictive covenants that, among other things, limit or restrict the ability of the borrowers 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 LOCLine of Credit is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause. As ofAt March 31, 2022,2023, we were in compliance with the covenants in the Credit Agreement.

The interest rate for the Term Loan and the LOC is prime plus 2%. As of March 31, 2022, the interest rate for the Term Loan was 9.10%, which includes a 3.6% management fee rate. Even if our borrowings under the LOC are less than $1,000,000, we still pay interest as if we had borrowed $1,000,000. As of March 31, 2022, we had approximately $10,000 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. A collateral management fee is payable monthly on the used portion of the LOC and Term Loan.Machinery Loans

 

The Company financed the purchase of machinery and equipment through various loans. The outstanding loans have interest rates ranging from 5.50% to 5.94%, and repayment terms of 48-60 months. The balance of the machinery loans totaled approximately $630,000 and $665,000 as of March 31, 2023 and December 31, 2022, respectively.

NOTE

Transportation Loan

The Company financed the purchase of a vehicle with a loan agreement. The term of the loan is 60 months and matures in June 2024. The interest rate of the loan is 6.99%. The loan is collateralized by the vehicle.

Insurance Loan

In June 2022, the Company financed insurance premiums with a loan agreement. In September 2022, an additional insurance amount was added to the loan. The balance of the insurance loan totaled $156,949 as of December 31, 2022. The insurance loan was fully repaid in March 2023.

8

Superior Drilling Products, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

8. FINANCING OBLIGATION LIABILITY

 

On December 7, 2020, the Company entered into a salean agreement (the “Sale Agreement”). Pursuant to the terms of the Sale Agreement, the Company soldsell 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 (the “Sale Agreement”). Concurrent with the sale of the Property, the Company entered into a fifteen-year lease agreement (the “Lease Agreement”), whereby the Company will to lease back the Property at an annual rate of $311,395 with payments made monthly, subject to annual rent increases of 1.5%. Under the Lease Agreement, the Company has an option to extend the term of the lease and to repurchase the Property. Due to this repurchase option, the Company was unable to account for the transfer as a sale under ASC Topic 842, Leases, and as such, the transaction is a failed sale-leaseback that is accounted for as a financing transaction.

 

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%. At the conclusion of the fifteen-year lease period, the financing obligation residual is estimated to be $2,188,710, which corresponds to the carrying value of the property. The balance of the financing obligation as of March 31, 2022 and December 31, 2021 wasCompany paid $4,161,53918,971 and $4,178,33616,796, of principal during the three months ended March 31, 2023 and 2022, respectively.

 

The financing obligation liability is summarized below:

SCHEDULE OF FINANCING OBLIGATION LIABILITY 

  March 31, 2022  December 31, 2021 
Finance obligations for sale-leaseback transactions $4,161,539  $4,178,336 
Current principal portion of finance obligation  (67,853)  (65,678)
Non-current portion of finance obligation $4,093,686  $4,112,658 

13

NOTE 9. GEOGRAPHICAL OPERATIONS INFORMATION

  March 31,  December 31, 
  2023  2022 
Financing obligation for sale-leaseback transaction $4,093,686  $4,112,658 
Current principal portion of finance obligation  (76,406)  (74,636)
Non-current portion of financing obligation $4,017,280  $4,038,022 

 

The following summarizes revenue by geographic location:

SCHEDULE OF REVENUE AND PROPERTY, PLANT AND EQUIPMENT BY GEOGRAPHIC LOCATION

  2022  2021 
  

Three months ended

March 31,

 
  2022  2021 
       
Revenue:        
North America $3,745,014  $2,092,200 
Middle East $385,150  $332,453 
Revenues $4,130,164  $2,424,653 

The following summarizes net property, plant and equipment by geographic location:

SCHEDULE OF NET PROPERTY, PLANT AND EQUIPMENT BY GEOGRAPHIC LOCATION

  March 31, 2022  December 31, 2021 
Property, plant and equipment, net:        
North America $5,456,973  $5,762,066 
Middle East  2,023,417   1,168,263 
Property, plant and equipment, net $7,480,390  $6,930,329 

NOTE 10.9. 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, LLC’s (“Stabil Drill”) Smoothbore Eccentric Reamer infringes the patents of Extreme Technologies, LLC (one of our subsidiaries) on our patented Drill-N-Ream well bore conditioning 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 for their work manufacturing the Smoothbore Eccentric Reamer for Stabil Drill. The Dallas lawsuit is stayed pending resolution of the 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, but this bankruptcy did not affect Extreme TechnologiesTechnologies’ claims against Stabil Drill. On March 9, 2021, the Court lifted the automatic bankruptcy stay, and on May 12, 2021, the Court denied Stabil drill’sDrill’s motion for summary judgment of non-infringement. On May 23, 2022, the Court issued its Order on Claim Construction of the patents, adopting Extreme Technologies’ proffered interpretation on the disputed claim terms. On February 13, 2023, the lawsuit was reassigned to United States District Judge Drew B. Tipton and United States Magistrate Judge Peter Bray. On March 27, 2023, Magistrate Bray entered an amended Scheduling Order. In accordance with such amended Scheduling Order, fact discovery ended on April 14, 2023, and expert discovery is scheduled to end on or before June 8, 2023. The parties are preparing this case for trial and expect a jury trial setting in late 2022during the fall or early winter of 2023.

 

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

10. EARNINGS PER SHARE

Basic and diluted earnings per share of common stock have been computed as follows:

SCHEDULE OF BASIC AND DILUTED EARNINGS PER SHARE

  2023  2022 
  Three Months Ended March 31, 
  2023  2022 
Numerator:      
Net income $1,513,219  $149,837 
Denominator:        
Weighted average shares of common stock outstanding - basic  29,245,080   28,235,001 
Effect of dilutive options  60,136   70,100 
Weighted average shares of common stock outstanding - diluted  29,305,216   28,305,101 
         
Earnings per common share - basic $0.05  $0.01 
Earnings per common share - diluted $0.05  $0.01 

9

Superior Drilling Products, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

11. SHAREHOLDERS’ EQUITYLEASES

 

The Company is authorizedleases certain facilities Utah and Dubai under long-term operating leases with lease terms of one year to issue 100,000,000 shares of common stock, par value $0.001two years. As of March 31, 2022The operating lease expense was approximately $62,748 and December 31, 2021, the number of common shares issued and outstanding was $28,235,0011,800.

The Company did not grant stock options or stock awards during for the three months ended March 31, 20222023 and 2021,2022, respectively.

 

NOTE Other information related to operating leases:

SCHEDULE OF OTHER INFORMATION RELATED TO OPERATING LEASE

  Three Months Ended March 31, 
  2023  2022 
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash flows $54,138  $38,559 
Weighted average remaining lease-term (in years)  2.7   .75 
Weighted average discount rate  7.25%  7.25%

12. SUBSEQUENT EVENTSSEGMENT REPORTING

 

On March 22, 2022,We report our segment results based on our geographic areas of operations, North America and International. These segments have similarities from a product perspective, but management believes that due to operational differences, such as sales models and regulatory environments, information about the Company entered into an agreement with Mazaksegments would be useful 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 4/14/2022 and, upon acceptancereaders of the machine,financial statements.

North America includes our PDC drill bit and specialty tool sales and contract services business in the United States and Mexico, which have been aggregated
International includes our specialty tool rental business in the Middle East

Revenues and certain operating expenses are directly attributable to our segments.

Unallocated corporate costs primarily include corporate shared costs, such as payroll and compensation, professional fees, and rent, as well as costs associated with certain shared research and development activities.

Our operating segments are not evaluated using asset information. Prior periods have been restated to conform with the Company will financecurrent year presentation. This change was made due to international revenue becoming more significant in the remaining balancecurrent year.

The following table summarizes information about our segments:

SCHEDULE OF SEGMENTS INFORMATION WITH GEOGRAPHIC AREAS

  2023  2022 
  Three Months Ended March 31, 
  2023  2022 
Revenues:      
North America $5,475,061  $3,745,014 
International  806,153   385,150 
Total revenue $6,281,214  $4,130,164 
         
Operating income:        
North America $3,605,959  $2,096,321 
International  109,810   (144,871)
Corporate costs, unallocated  (2,338,007)  (1,646,565)
Total operating income $1,377,762  $304,885 

North America revenue includes revenue from operations in Mexico totaling approximately $15,000 and $18,000 for the three months ended March 31, 2023 and 2022, respectively. The remainder of $the North America revenue was derived from operations in the United States of America.

669,200.

Information about products and services

See Note 2 – Revenue.

 

1410

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationOperations

Overview

 

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 March 31, 2022, and our results of operations for the three months ended March 31, 2022 and 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, 2021 and 2020, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 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. The forward-looking statements contained 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 risks and uncertainties that are beyond our control, including:

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;
the volatility of oil and natural gas prices;
the cyclical nature of the oil and gas industry;
availability of financing and access to capital markets;
our reliance on significant customers;
consolidation within our customers’ industries;
competitive products and pricing pressures;

15

our ability to develop and commercialize new and/oris an innovative drilling and completion tool technologies;
fluctuations in our operating results;
our dependence on key personnel;
costs and availability 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, specifically the Middle East region and Eastern Europe;
the potential impact of the coronavirus, variants of the coronavirus or other major health crises on our business and results of operations, including the impact to our supply chain;
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 these factors are beyond our ability to control or predict. These factors are not intended to represent a complete list of the general or specific factors that may affect us. The events in Ukraine, Russia, and the surrounding areas may result in political instability and may add a potential risk.

16

In addition, management’s assumptions about future events may prove to be inaccurate. All readers are cautioned that the forward-looking statements 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 due to factors described in “Item 1A. Risk Factors” in our annual report on form 10-K for the year ended December 31, 2021 and in our subsequent SEC filings. All forward-looking statements speak only as of the date they are made. We do not intend to update or revise any forward-looking 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 toolstool 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 United States, Canada,patented Drill-N-Ream® well bore conditioning tool (“Drill-N-Ream tool”) and the Middle East.patented Strider™ Drill String Oscillation System technology (“Strider technology” or “Strider”). In addition, the Company is a manufacturer of Drill-N-Ream tools and refurbisher of PDC (polycrystalline diamond compact) drill bits for a leading oil field services 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.

We currently have three basic operations:

Our emerging technology business that manufactures the Drill-N-Ream tool, our innovative drill string enhancement tool, and Strider technology and other tools,
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 drillingdrill tool technologiestechnology 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.industry. 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 DevelopmentsIn December 2020, the Company successfully obtained ISO 9000 certification and Trendsis now qualified to bid on projects in industries outside oil and gas. We believe that with this certification, and our history of supplying high quality parts to research and development departments operating in the aerospace industry, we can effectively execute our industry diversification strategy.

Industry Trends and Market Factors

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 impact 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. These current conditions are a result of COVID-19.

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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.

 

Inflationary and/or recessionary factors relating to the oil and gas industry may directly affect the Company’s operations. The increased demand for oil and gas production has benefited the Company’s operations. The Company is not immune to the effects of inflation on its labor requirements, supply chain and costs of revenues. The Company continues to monitor these economic trends as part of its strategic forward planning.

The total U.S. rig count as reported by Baker Hughes as of April 29, 2022March 31, 2023 was 698755 rigs, an increase of 112105 rigs from the rig count as of DecemberMarch 31, 2021. We expect North American onshore activity to continue to improve throughout 2022 compared with 2021.2022.

 

The Middle East market isbegan to improve during 2022 after a softer market due toslow rebound from the COVID-19 impact. Although this segmentTotal rig count in that region as of our business is rebounding, the improvements are at a slower rateMarch 31, 2023 was 323 compared with 303 at the Company’s domestic market.

same time last year.

CONSOLIDATED RESULTS OF OPERATIONS

How We Generate our Revenue

 

We are a drilling and completion tool technology company. We generate revenue from the refurbishment, manufacturing, repair, rental and sale of drill string tools. Our manufactured products are produced in a standard manufacturing operation, even when produced to our customer’s specifications. We also earn royalty fees under certain arrangements for certain tools we sell.

Three Months Ended March 31,2022 Compared with the Three Months Ended March 31, 2021

Tool sales, rentals and other related revenue

 

The following table represents summary consolidated operating resultsTool and Product Sales: Revenue for tool and product sales is recognized upon shipment of tools or products to the periods indicated: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.

 

  Three-Months Ended March 31, 
(in thousands) 2022  2021    
Tool revenue  2,769   67%  1,664   69%
Contract services  1,361   33%  761   31%
Revenue  4,130   100%  2,425   100%
Operating costs and expenses  3,825   93%  3,381   139%
Operating income (loss)  305   7%  (956)  (39)%
Other expense  (124)  (4)%  (128)  (5)%
Income tax expense  (31)  (1)%  (17)  (1)%
Net income (loss)  150   4%  (1,101)  (45)%

Tool Rental: Rental revenue is recognized upon completion of the customer’s job for which the tool was rented. While the duration of the rental will vary by job and number of runs, these rentals 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.

 

Material changesOther Related Revenue: We receive revenue from the repair of certain items intools upon delivery of the repaired tool to the customer. We earn royalty commission revenue when our statements of operations included in our financial statementscustomer invoices their customer for the comparative periods are discussed below. Comparisons are to the prior-year period unless stated otherwise.use of our tools.

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Three Months Ended March 31, 2022 Compared withContract 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 of the product. Shipping and handling costs related to refurbishing services are paid directly by the customer at the time of shipment. We also provide contracting manufacturing services to customers.

Costs of Conducting Our Business

Cost of revenue is comprised of direct and indirect costs to manufacture, repair and supply our products, including labor, materials, utilities, equipment repair, lease expense related to our facilities, supplies and freight.

Selling, general and administrative expense is comprised of costs such as new business development, technical product support, research and development costs, compensation expense for general corporate operations including accounting, human resources, risk management, etc., information technology expenses, safety and environmental expenses, legal and professional fees and other related administrative functions.

Other income (expense), net is comprised primarily of interest expense and recovery of a fully reserved related party note receivable.

Results of Operations

  Three Months Ended March 31, 
  2023  2022 
Revenue            
Tool revenue $4,254,209   68% $2,769,247   67%
Contract services  2,027,005   32%  1,360,917   33%
Total revenue  6,281,214   100%  4,130,164   100%
Operating cost and expenses                
Cost of revenue  2,238,597   36%  1,767,903   43%
Selling, general, and administrative expenses  2,338,841   37%  1,646,643   40%
Depreciation and amortization expense  326,014   5%  410,733   10%
Total operating cost and expenses  4,903,452   78%  3,825,279   93%
Operating income  1,377,762   22%  304,885   7%
Other income (expense)  213,069   3%  (123,664)  -3%
Income before income taxes  1,590,831   25%  181,221   4%
Income tax expense  (77,612)  -1%  (31,384)  -1%
Net income $1,513,219   24% $149,837   4%

Comparison of the Three Months Ended March 31, 20212023 and 2022

Revenue

 

Revenue. Our revenue increased approximately $1,705,000$2,151,000, or 70%. Tool52%, for the three months ended March 31, 2023 compared with the same period in the prior year. The increase was driven by approximately $1,485,000, or 54%, increase in tool revenue compared to the prior year reflecting the strong market share of our patented Drill-N-ReamTM well bore conditioning tool (“Drill-N-Ream tool” or “DNR”) in the U.S. and expansion of our business in the Middle East which contributed approximately $420,000 of the increase in tool revenue. Contract services revenue increased $1,105,000by $666,000, or 66% from49%, over the prior-year period while contractprior year, primarily due to expansion of services for our major customer and increased $600,000 or 79%. Revenue increased as the Company had improved capacity to meet growing demand for bit and other toll manufacturing services as well as continued growthactivity in the numberoil and gas industry.

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Operating Costs and Expenses

Cost of end users and percentage of rigs using our Drill-N-Ream tool. Higher Contract Services revenue also grew with improved capacity to deliver on increased volume for drill bit and other toll refurbishment services. Demand growth reflects customers increasing the use of outsource manufacturing and refurbishment services and increased drilling activity driven by improved market conditions for the oil & gas industry.Revenue

 

Operating CostsCost of revenue increased approximately $471,000, or 27%, for the three months ended March 31, 2023 compared with the same period in the prior year. The increase was driven by higher sales volume, consistent with the 52% increase in revenue compared with the prior year. Cost savings were realized due to a better product mix and Expenses. Total operatingefficiencies in manufacturing. International cost of revenue increased 59% in 2023 due to higher payroll costs, additional facility expenses and higher tool repair costs associated with the increase in revenue.

Selling, general and administrative expenses

Selling, general and administrative expenses increased approximately $444,000$692,000, or 42%, for the three-month periodthree months ended March 31, 2022.2023 compared with the same period in the prior year. The increase was the result of increased payroll costs primarily attributable to reinstatement of executive management salaries and increased legal fees.

Depreciation and amortization expenses

 

Cost of revenue increased approximately $592,000 due to higher volume. As a percentage of revenue, cost of revenue was 43% and 48% of revenue for the three months ended March 31, 2022 and 2021, 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 $131,000 due in part to an approximate increase in equity compensation expense of $34,000, payroll and tax expenses of $196,000, legal expenses of $9,000, insurance expenses of $9,000 and board compensation of $14,000. Conversely, consulting expenses decreased by approximately $39,000 and tax, audit and related SEC expenses decreased by $92,000.
Depreciation and amortization expense decreased approximately $279,000, or 40%, to $411,000. The decrease was primarily a result of fully amortizing a portion of the Company’s intangible assets and fully depreciating manufacturing center equipment.

Depreciation and amortization expenses decreased approximately $85,000 or 21%, for the three months ended March 31, 2023 compared with the same period in the prior year. The decrease was primarily due to a portion of the intellectual property intangible balance that reached its full amortization.

Other Income (Expenses)

Interest Income

 

Other Expense. Other expense primarily consists ofInterest income increased to approximately $17,000 for the three months ended March 31, 2023 compared with approximately $200 for the same period in the prior year. The increase was due to an increase in interest expense andrates earned on the cash balance held in interest income.bearing accounts.

Interest Expense

 

Interest expense for the three months ended March 31, 2022 and 2021 was approximately $124,000 and $138,000, respectively.

Interest expense increased approximately $30,000, or 24%, for the three months ended March 31, 2023 compared with the same period in the prior year. The increase was due primarily to an increase in interest rates and an increase in customer quick-pay options.

Recovery of related party note receivable

 

Income Tax Expense. Income tax expenseRecovery of related party note receivable increased by approximately $14,000 from$350,000, or 100%, for the three months ended March 31, 2023 compared with the same period in the prior yearyear. The increase was due to increased foreign income taxes duea principal and interest payment applied to increased revenues from foreign sources.a fully reserved related party note receivable. There was no such payment during the three months ended March 31, 2022. See Note 6 – Related Party Receivable of the notes to condensed consolidated financial statements within this Quarterly Report on Form 10-Q.

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Liquidity and Capital Resources

 

As ofAt March 31, 2022,2023, we had working capital of approximately $3,094,000.$4,514,000. 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 reflect revenue trends, accelerating collections of international receivables, and controlling our working capital and debt to enhance liquidity.

Credit Agreement

We will continuehave a Loan and Security Agreement with Austin Financial Services, Inc. (“AFS”) (the “Credit Agreement”). The Credit Agreement provides a $4,300,000 credit facility, which includes a $800,000 term loan (the “Term Loan”) and a $3,500,000 line of credit (the “Line of Credit”). The Credit Agreement originally was to workmature on February 20, 2023, subject to grow revenue and manage costs and expectearly termination pursuant to the terms of the agreement or extension as may be cash flow positive in 2022. If we are unableagreed by the parties, but it has been renewed to doFebruary 20, 2024. Cancellation is allowed with a 60-day notice.

For more details of the terms of the Credit Agreement, see Note 7 – Long-Term Debt of the notes to condensed consolidated financial statements within this we may not be ableQuarterly Report on Form 10-Q.

13

Financing Obligation Liability

We have a financing obligation liability related to among other things, (i) maintain our current general and administrative spending levels; (ii) fund certain obligationsa failed sale-leaseback transaction. The balance of the financing obligation was approximately $4,094,000 as they become due; and (iii) respondof March 31, 2023.

For more details on the terms of this transaction, see Note 8 – Financing Obligation Liability of the notes to competitive pressures or unanticipated capital requirements. We cannot provide any assurance that financing will be available to us in the futurecondensed consolidated financial statements within this Quarterly Report on acceptable terms.Form 10-Q.

Machinery Loans

 

The Hard Rock Note had a remainingCompany financed the purchase of machinery and equipment in July 2022. The term of the loan is 60 months and matures in July 2027. The loan has an interest rate of 5.50%. The balance of $750,000the machinery loans totaled approximately $630,000 as of March 31, 2022, accrues interest at 8.00% per annum and is fully payable with accrued interest on October 5, 2022.2023.

 

Our Credit Agreement facilitated by Austin Financial Services (“AFS”) is comprised of $800,000 Term Loan and $3,500,000 Line of Credit (“LOC”). As of March 31, 2022, we had approximately $250,000 outstanding on the Term Loan and approximately $1,000,000 outstanding on the LOC. Amounts outstanding under the LOC 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. A collateral management fee is payable monthly on the used portion of the LOC and Term Loan. If our borrowings are less than $1,000,000, we still pay interest as if we had borrowed $1,000,000. As of March 31, 2022 we had approximately $10,000 of accrued interest combined between the two loans.Cash Flow

  Three Months Ended March 31, 
  2023  2022 
Net cash provided by operating activities $1,045,380  $1,083,106 
Net cash used in investing activities  (1,217,262)  (919,127)
Net cash used in financing activities  (30,240)  (131,986)
Net (decrease) increase in cash $(202,122) $31,993 

Operating Cash Flows

 

For the three months ended March 31, 2023, net cash provided by operating activities was approximately $1,045,000. The interest rate forCompany had approximately $1,513,000 of net income, $608,000 of non-cash expenses, offset by $1,075,000 decrease in working capital accounts.

For the Term Loan and the LOC is prime plus 2%. As ofthree months ended March 31, 2022, the interest rate for both loansnet cash provided by operating activities was 9.10%, which includes a 3.6% management fee rate.approximately $1,083,000. The obligationsCompany had approximately $150,000 of the Company under the agreement are secured by a security interestnet income, approximately $621,000 of non-cash expenses and $312,000 increase 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, and the Company plans to refinance this credit facility.working capital accounts.

Investing Cash Flows

 

For the three months ended March 31, 2023, net cash used in investing activities was approximately $1,217,000, primarily related to purchases of property, plant and equipment, offset by approximately $350,000 related to proceeds from recovery of the Tronco note receivable. The investment in property, plant and equipment will increase the DNR rental fleet and expand capacity for all manufacturing capabilities. This will allow the company to add new customers, increase volumes, and grow in potential new product lines.

For the three months ended March 31, 2022, net cash used in investing activities was approximately $919,000, related to purchases of property, plant and equipment.

Financing Cash Flows

For the three months ended March 31, 2023, net cash used in financing activities was approximately $30,000, primarily related to principal payments on debt of approximately $214,000, offset by net proceeds from the revolving loan of approximately $184,000.

For the three months ended March 31, 2022, net cash used in financing activities was approximately $132,000, primarily related to principal payments on debt of approximately $132,000.

2014

 

 

Cash Flows

Three-Months Ended March 31, 2022 Compared with the Three- Months Ended March 31, 2021

Net cash provided by operating activities was approximately $1,083,000 and $205,000 for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, the Company had approximately $152,000 of net income, approximately $308,000 increase in the changes of the current assets and liabilities accounts, depreciation, and amortization expense of approximately $411,000. For the three months ended March 31, 2021 the Company had approximately $1,102,000 of net loss approximately $455,000 increase in the change in current assets and liabilities accounts, and depreciation and amortization expense of approximately $690,000.

Net cash used in investing activities for the three months ended March 31, 2022 was approximately $919,000, which includes a down payment for new equipment and an investment in our Middle East tools, compared with $25,000 for the three months ended March 31, 2021 for the purchase of equipment net of proceeds from the sale of the company’s airplane hangar of $50,000 in 2021.

Net cash used in financing activities was approximately $132,000 for the three months ended March 31, 2022. Net cash provided by financing activities was approximately $121,000 for the three months ended March 31, 2021. Net borrowings on the line of credit was approximately $256,000 during the three months ended March 31, 2021 compared with zero in the same period of 2022.

Critical Accounting PoliciesOff Balance Sheet Arrangements

 

The discussionCompany had no off balance sheet arrangements.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates from those disclosed on our Annual Report on Form 10-K for the year ended December 31, 2022. Please refer to information regarding our critical accounting policies and estimates included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our financial conditionAnnual Report on Form 10-K for the or the year ended December 31, 2022.

Item 3. Quantitative 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.Qualitative Disclosures About Market Risk

Not required.

Item 4. Controls and Procedures

Management’s 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 disclosureDisclosure controls and procedures (as definedare our controls and other procedures that are designed to ensure that information required to be disclosed by us in Rules 13a- 15(e) and 15d- 15(e)the reports that we file or submit under the Exchange Act) asAct is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure.

As of the end of the period covered by this Quarterly Report. Based on suchReport, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, haveof the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, as of March 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.effective.

Changes in Internal Controls over Financial Reporting

 

There has been no change in our internal control over financial reporting that occurred during the first quarter of 2022ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

InternalInherent Limitations of the Effectiveness of Controls and Procedures

 

This quarterly reportManagement does not include a report of management’s assessment regardingexpect that our disclosure controls and procedures or our internal control over financial reporting will prevent or an attestation reportdetect all error and fraud. A control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of the Company’ s registered public accounting firmcontrols can provide absolute assurance that misstatements due to a transaction period established by the rules of the Securities and Exchange Commission for newly public companies. Under these rules, weerror or fraud 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-2occur or that all control issues and instances of fraud, if any, within the Exchange Act.Company have been detected.

 

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PART II – OTHER INFORMATION

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, LLC’s (“Stabil Drill”) Smoothbore Eccentric Reamer infringes the patents of Extreme Technologies, LLC (one of our subsidiaries) on our patented Drill-N-Ream well bore conditioning 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 for their work manufacturing the Smoothbore Eccentric Reamer for Stabil Drill. The Dallas lawsuit is stayed pending resolution of the 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, but this bankruptcy did not affect Extreme Technologies, LLC’sTechnologies’ claims against Superior’s subsidiary Stabil Drill. On March 9, 2021, the Court lifted the automatic bankruptcy stay, and on May 12, 2021, the Court denied Stabil Drill’s motion for summary judgment of non-infringement. On May 23, 2022, the Court issued its Order on Claim Construction of the patents, adopting Extreme Technologies’ proffered interpretation on the disputed claim terms. On February 13, 2023, the lawsuit was reassigned to United States District Judge Drew B. Tipton and United States Magistrate Judge Peter Bray. On March 27, 2023, Magistrate Bray entered an amended Scheduling Order. In accordance with such amended Scheduling Order, fact discovery ended on April 14, 2023, and expert discovery is scheduled to end on or before June 8, 2023. The parties are preparing this case for trial and expect a jury trial setting in late 2022during the fall or early winter of 2023.

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.

 

Item 1A. Risk Factors

 

AsNot required.

Item 2. Unregistered Sale of the dateEquity Securities and Use of this filing, the Company remains subject to the risk factors previously disclosed in Part I, Item 1A “Risk Factors” in our 2021 Annual Report on Form 10-K.Proceeds

 

We are a smaller reporting company and are not required to present this information.None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

16

Item 6. Exhibits

The exhibits listed below are filed as part of this report:

 

Exhibit No. Description
2.1Agreement and Plan of Reorganization, dated December 15, 2013, between Meier Management Company, LLC, Meier Family Holding Company, LLC, and SD Company, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant’ s Registration Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014).
3.1Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’ s Registration Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014 S-1).
3.2Articles of Amendment to Articles of Incorporation (name change) (incorporated by reference to Exhibit 3.5 to Amendment No. 2 to the Registrant’ s Registration Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on May 6, 2014).
3.3Bylaws with Exhibit A (incorporated by reference to Exhibit 3.3 to the Registrant’ s Registration Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014).
10.1Second Amendment to Third Amended and Restated Loan Agreement between the Company and Tronco Energy Corporation dated January 31, 2023 (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 2, 2023).
10.2Second Amendment to Third Amended and Restated Promissory Note between the Company and Tronco Energy Corporation dated January 31, 2023 (incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 2, 2023).
10.3Fourth Amended and Restated Promissory Note between Superior Drilling Products, Inc. and Tronco Energy Corporation dated March 31, 2023 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 30, 2023).
10.4Fourth Amended and Restated Loan Agreement between Superior Drilling Products, Inc. and Tronco Energy Corporation dated March 31, 2023 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 30, 2023).
   
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*32** Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for G. Troy Meier.**Meier and Christopher D. Cashion.
   
32.2**101* CertificationInteractive data files pursuant to Section 906Rule 405 of the Sarbanes-Oxley Act of 2002 for Christopher D. Cashion.**Regulation S-T
   
101.INS * Inline XBRL Instance
   
101.XSD *101.SCH 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)

 

*Filed herewith.
**Furnished herewith.

** Furnished herewith.

* Filed herewith.

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 SUPERIOR DRILLING PRODUCTS, INC.
   
May 13, 202212, 2023By:/s/ G. TROY MEIER
  

G. Troy Meier, Chief Executive Officer

(Principal Executive Officer)

   
May 13, 202212, 2023By:/s/ CHRISTOPHER CASHION
  Christopher Cashion, Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)
May 12, 2023By:/s/ ANNETTE MEIER
Annette Meier, President, Chief Operating Officer and Director
May 12, 2023By:/s/ JAMES LINES
James Lines, Director
May 12, 2023By:/s/ ROBERT IVERSEN
Robert Iversen, Director
May 12, 2023By:/s/ MICHAEL RONCA
Michael Ronca, Director

 

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