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 June 30, 2022March 31, 2023
or
☐ |
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)
Utah | 46-4341605 | |
(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) | ( Identification No ) |
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 |
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 shares of its common stock $0.001 par value, issued and outstanding as of August 12, 2022.outstanding.
Superior Drilling Products, Inc.
FORM 10-Q
QUARTER ENDED June 30, 2022
TABLE OF CONTENTS
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, | |||||||||||||||
June 30, 2022 | December 31, 2021 | 2023 | 2022 | |||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash | $ | 2,827,426 | $ | 2,822,100 | $ | 1,955,903 | $ | 2,158,025 | ||||||||
Accounts receivable, net | 2,799,480 | 2,871,932 | ||||||||||||||
Accounts receivable | 3,959,754 | 3,241,221 | ||||||||||||||
Prepaid expenses | 643,155 | 435,595 | 356,696 | 367,823 | ||||||||||||
Inventories | 1,324,724 | 1,174,635 | 2,248,861 | 2,081,260 | ||||||||||||
Asset held for sale | - | 216,000 | ||||||||||||||
Other current assets | 88,588 | 55,159 | 152,219 | 140,238 | ||||||||||||
Total current assets | 7,683,373 | 7,359,421 | 8,673,433 | 8,204,567 | ||||||||||||
Property, plant and equipment, net | 7,426,690 | 6,930,329 | 10,241,092 | 8,576,851 | ||||||||||||
Intangible assets, net | 152,778 | 236,111 | 27,778 | 69,444 | ||||||||||||
Right of use assets, net | 160,301 | 20,518 | ||||||||||||||
Right of use assets | 606,323 | 638,102 | ||||||||||||||
Other noncurrent assets | 110,519 | 65,880 | 112,619 | 111,519 | ||||||||||||
Total assets | $ | 15,533,661 | $ | 14,612,259 | $ | 19,661,245 | $ | 17,600,483 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 1,095,552 | $ | 1,139,091 | $ | 1,664,491 | $ | 1,043,581 | ||||||||
Accrued expenses | 853,194 | 467,462 | 782,054 | 891,793 | ||||||||||||
Income tax payable | 219,912 | 206,490 | 427,165 | 351,618 | ||||||||||||
Current portion of operating lease liability | 160,301 | 13,716 | 51,182 | 44,273 | ||||||||||||
Current portion of financial obligation | 70,025 | 65,678 | 76,406 | 74,636 | ||||||||||||
Current portion of long-term debt, net of discounts | 2,204,508 | 2,195,759 | 1,157,879 | 1,125,864 | ||||||||||||
Other current liabilities | - | 216,000 | ||||||||||||||
Total current liabilities | 4,603,492 | 4,088,196 | 4,159,177 | 3,747,765 | ||||||||||||
Long-term operating lease liability | - | 6,802 | ||||||||||||||
Operating lease liability, less current portion | 493,296 | 523,375 | ||||||||||||||
Long-term financial obligation, less current portion | 4,075,778 | 4,112,658 | 4,017,280 | 4,038,022 | ||||||||||||
Long-term debt, less current portion, net of discounts | 190,533 | 256,675 | 489,303 | 529,499 | ||||||||||||
Deferred income | 675,000 | 675,000 | ||||||||||||||
Total liabilities | 8,869,803 | 8,464,331 | 9,834,056 | 9,513,661 | ||||||||||||
Commitments and contingencies (Note 10) | - | |||||||||||||||
Commitments and contingencies (Note 9) | ||||||||||||||||
Shareholders’ equity | ||||||||||||||||
Common stock - $ | par value; shares authorized; shares issued and outstanding, respectively28,235 | 28,235 | ||||||||||||||
Common stock - $ | par value; shares authorized; shares issued and outstanding29,245 | 29,245 | ||||||||||||||
Additional paid-in-capital | 43,493,802 | 43,071,201 | 44,171,076 | 43,943,928 | ||||||||||||
Accumulated deficit | (36,858,179 | ) | (36,951,508 | ) | (34,373,132 | ) | (35,886,351 | ) | ||||||||
Total shareholders’ equity | 6,663,858 | 6,147,928 | 9,827,189 | 8,086,822 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 15,533,661 | $ | 14,612,259 | $ | 19,661,245 | $ | 17,600,483 |
The accompanying notes are an integral part of these unauditedcondensed consolidated 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 | 2022 | 2021 | |||||||||||||
For the Three Months | For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenue | ||||||||||||||||
Tool revenue | $ | 2,891,580 | $ | 2,273,464 | $ | 5,660,827 | $ | 3,937,227 | ||||||||
Contract services | 1,649,262 | 1,125,645 | 3,010,180 | 1,886,534 | ||||||||||||
Total Revenue | 4,540,842 | 3,399,109 | 8,671,007 | 5,823,761 | ||||||||||||
Operating costs and expenses | ||||||||||||||||
Cost of revenue | 2,116,096 | 1,224,179 | 3,883,995 | 2,399,772 | ||||||||||||
Selling, general and administrative expenses | 1,894,403 | 1,473,081 | 3,541,051 | 2,988,670 | ||||||||||||
Depreciation and amortization expense | 402,648 | 585,504 | 813,379 | 1,275,577 | ||||||||||||
Total operating costs and expenses | 4,413,147 | 3,282,764 | 8,238,425 | 6,664,019 | ||||||||||||
Operating income (loss) | 127,695 | 116,345 | 432,582 | (840,258 | ) | |||||||||||
Other income (expense) | ||||||||||||||||
Interest income | 2,980 | 50 | 3,176 | 98 | ||||||||||||
Interest expense | (132,738 | ) | (145,521 | ) | (256,600 | ) | (283,577 | ) | ||||||||
Impairment on asset held for sale | - | - | - | - | ||||||||||||
Loan forgiveness | - | - | - | - | ||||||||||||
Loss on disposition of assets, net | (22,146 | ) | (11,187 | ) | (22,146 | ) | (1,187 | ) | ||||||||
Total other expense | (151,904 | ) | (156,658 | ) | (275,570 | ) | (284,666 | ) | ||||||||
Income (loss) before income taxes | (24,209 | ) | (40,313 | ) | 157,012 | (1,124,924 | ) | |||||||||
Income tax expense | (32,299 | ) | (26,468 | ) | (63,683 | ) | (43,649 | ) | ||||||||
Net income (loss) | $ | (56,508 | ) | $ | (66,781 | ) | $ | 93,329 | $ | (1,168,573 | ) | |||||
Basic earnings (loss) per common share | $ | (0.00 | ) | $ | (0.00 | ) | $ | 0.00 | $ | (0.05 | ) | |||||
Basic weighted average common shares outstanding | 28,235,001 | 25,762,342 | 28,235,001 | 25,762,342 | ||||||||||||
Diluted earnings (loss) per common share | $ | (0.00 | ) | $ | (0.00 | ) | $ | 0.00 | $ | (0.05 | ) | |||||
Diluted weighted average common shares outstanding | 28,235,001 | 25,762,342 | 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 | $ | 43,281,334 | $ | (36,801,671 | ) | $ | 6,507,898 | |||||||||||
Stock-based compensation expense | - | - | 212,468 | - | 212,468 | |||||||||||||||
Net loss | - | - | - | (56,508 | ) | (56,508 | ) | |||||||||||||
Balance – June 30, 2022 | 28,235,001 | $ | 28,235 | $ | 43,493,802 | $ | (36,858,179 | ) | $ | 6,663,858 | ||||||||||
Balance – December 31, 2020 | 25,762,342 | $ | 25,762 | $ | 40,619,620 | $ | (36,421,707 | ) | $ | 4,223,675 | ||||||||||
Stock-based compensation expense | - | - | 167,472 | - | 167,472 | |||||||||||||||
Net loss | - | - | - | (1,101,793 | ) | (1,101,793 | ) | |||||||||||||
Balance – March 31, 2021 | $ | 25,762 | $ | 40,787,092 | $ | (37,523,500 | ) | $ | 3,289,354 | |||||||||||
Balance | $ | 25,762 | $ | 40,787,092 | $ | (37,523,500 | ) | $ | 3,289,354 | |||||||||||
Stock-based compensation expense | - | - | 167,033 | - | 167,033 | |||||||||||||||
Net loss | - | - | - | (66,781 | ) | (66,781 | ) | |||||||||||||
Net income (loss) | - | - | - | (66,781 | ) | (66,781 | ) | |||||||||||||
Balance – June 30, 2021 | 25,762,342 | $ | 25,762 | $ | 40,954,125 | $ | (37,590,281 | ) | $ | 3,389,606 | ||||||||||
Balance | 25,762,342 | $ | 25,762 | $ | 40,954,125 | $ | (37,590,281 | ) | $ | 3,389,606 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
2022 | 2021 | |||||||
For the Six Months | ||||||||
Ended June 30, | ||||||||
2022 | 2021 | |||||||
Cash Flows From Operating Activities | ||||||||
Net income (loss) | $ | 93,329 | $ | (1,168,573 | ) | |||
Adjustments to reconcile Net income (loss) to net cash from operating activities: | ||||||||
Depreciation and amortization expense | 813,379 | 1,275,575 | ||||||
Stock-based compensation expense | 422,601 | 334,505 | ||||||
Loss on disposition of assets, net | 22,146 | 1,187 | ||||||
Amortization of deferred loan costs | 9,262 | 9,262 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 72,452 | (584,780 | ) | |||||
Inventories | (149,223 | ) | (161,566 | ) | ||||
Prepaid expenses and other assets | (285,628 | ) | (280,814 | ) | ||||
Accounts payable and accrued expenses | 342,193 | 877,585 | ||||||
Income tax payable | 13,422 | 32,149 | ||||||
Net Cash From Operating Activities | 1,353,933 | 334,530 | ||||||
Cash Flows From Investing Activities | ||||||||
Purchases of property, plant and equipment | (1,249,419 | ) | 54,780 | |||||
Proceeds from sale of fixed assets | - | 50,000 | ||||||
Net Cash From Investing Activities | (1,249,419 | ) | 104,780 | |||||
Cash Flows From Financing Activities | ||||||||
Principal payments on debt | (281,487 | ) | (266,719 | ) | ||||
Proceeds received from debt borrowings | 182,318 | - | ||||||
Payments on revolving loan | (553,650 | ) | (513,897 | ) | ||||
Proceeds received on revolving loan | 553,631 | 1,068,978 | ||||||
Net Cash From Financing Activities | (99,188 | ) | 288,362 | |||||
Net Change in Cash | 5,326 | 727,672 | ||||||
Cash at Beginning of Period | 2,822,100 | 1,961,441 | ||||||
Cash at End of Period | $ | 2,827,426 | $ | 2,689,113 | ||||
Supplemental information: | ||||||||
Cash paid for Interest | $ | 247,952 | $ | 270,492 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Superior Drilling Products, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 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 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 interimcondensed consolidated condensed financial statements for the three and six months ended June 30,March 31, 2023 and 2022, and 2021, 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 and six months ended June 30, 2022March 31, 2023 are not necessarily indicative of the results of operations expected for the year ended December 31, 2022.2023. These unaudited interimcondensed consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the years ended December 31, 20212022 and 20202021 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 for more on our geographical operational information.
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, impairment assessments, share-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.three months ended March 31, 2023.
Concentrations of Credit Risk
The Company has two significant customers that represented 8987% and 8790% of its revenue for the sixthree months ended June 30,March 31, 2023 and 2022, and 2021, respectively. These customers had approximately $1,808,0001,880,000 and $1,229,0001,751,000 in accounts receivable at June 30,as of March 31, 2023 and December 31, 2022, and 2021, respectively.
The Company had two vendors that represented sixthree months ended June 30, 2022.March 31, 2023 and 2002, respectively. These vendors had approximately $ and $ in accounts payable at June 30,as of March 31, 2023 and December 31, 2022, and purchases in the six months of 2022 from these vendors totaled approximately $. The Company had two vendors that represented % of its purchases for the six months ended June 30, 2021. This vendor had approximately $ in accounts payable at June 30, 2021 and purchases in the six months ended June 30, 2021 from this vendor totaled approximately $.respectively. % of its purchases for each of the
Restatement of the Unaudited Condensed Consolidated Financial Statements
The purpose of this restatement is to correct an error in the Company’s previously issued financial statements for the six months ended June 30, 2021 in connection with the classification of $65,720 of inventory converted to property, plant and equipment reported within the 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.
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 condensed consolidated statement of cash flows for the six months ended June 30, 2021 are as follows:
SCHEDULE OF RESTATEMENT OF CONSOLIDATED STATEMENT OF CASH FLOWS
June 30, 2021 | |||||||||
As Reported | As Restated | ||||||||
- | Net cash from operating activities | $ | 400,250 | $ | 334,530 | ||||
- | Net cash from investing activities | $ | 39,060 | $ | 104,780 |
There was no impact to net cash provided from financing activities within our consolidated statement of cash flows nor was there an impact on the net change in cash resulting from restatement. There was no effect from the restatement on the Company’s condensed consolidated balance sheet, condensed consolidated statement of operations and condensed consolidated statement of shareholders’ equity for the six months ended June 30, 2021.
Uncertain Tax Matters
The Company believes it has appropriately accrued for the expected outcome of uncertain tax matters and believes such liabilities represent a reasonable provision for taxes ultimately expected to be paid; however, these liabilities may need to be adjusted as new information becomes known and as tax examinations continue to progress, or as settlements or litigations occur.
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 six months ended June 30, 2022 and 2021 of $63,683 and $43,649, respectively with income before income taxes of $157,012 and a loss before income taxes of $1,124,924, respectively. The reason that the Company has income tax expense greater than income before income taxes is due to the Company having taxable income in a foreign tax jurisdiction. In the U.S. the Company is not subject to U.S. taxes due to having a taxable loss.
Superior Drilling Products, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) |
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.
Disaggregation of Revenue
Approximately 89% of ourThe following table presents revenue is from North America and approximately 11% is from the Middle East for the three months ended June 30, 2022. For the six months ended June 30, 2022, approximately 90% of our revenue was from North America and approximately 10% was from the Middle East.
Revenue disaggregated by revenue source are as follows:type:
SCHEDULE OF REVENUE DISAGGREGATED BY REVENUE
2022 | 2021 | 2022 | 2021 | |||||||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Tool Revenue: | ||||||||||||||||
Tool and product sales | $ | 627,200 | $ | 660,000 | $ | 1,291,500 | $ | 1,155,000 | ||||||||
Tool rental | 519,724 | 460,453 | 904,874 | 796,906 | ||||||||||||
Other related revenue | 1,744,656 | 1,153,011 | 3,464,453 | 1,985,321 | ||||||||||||
Total Tool Revenue | 2,891,580 | 2,273,464 | 5,660,827 | 3,937,227 | ||||||||||||
Contract Services | 1,649,262 | 1,125,645 | 3,010,180 | 1,886,534 | ||||||||||||
Total Revenue | $ | 4,540,842 | $ | 3,399,109 | $ | 8,671,007 | $ | 5,823,761 |
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 TopicASC 606.
Contract Costs
We did not incur any material costs of obtaining contracts.
NOTE
3.INVENTORIES
Inventories arewere comprised of the following:
SCHEDULE OF INVENTORIES
June 30, 2022 | December 31, 2021 | |||||||
Raw material | $ | 1,017,672 | $ | 769,547 | ||||
Work in progress | 136,650 | 65,945 | ||||||
Finished goods | 170,402 | 339,143 | ||||||
Inventories, net | $ | 1,324,724 | $ | 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
June 30, 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 | 12,946,080 | 12,207,497 | ||||||
Office equipment, fixtures and software | 628,358 | 628,358 | ||||||
Transportation assets | 265,760 | 265,760 | ||||||
Property, plant and equipment, gross | 20,240,094 | 19,501,511 | ||||||
Accumulated depreciation | (12,813,404 | ) | (12,571,182 | ) | ||||
Property, plant and equipment, net | $ | 7,426,690 | $ | 6,930,329 |
Middle East tools, no longer in service, were written down on June 30, 2022. The asset value of the tools was $510,836 and the accumulated depreciation totaled $487,825. The net gain (loss) was $(23,012).
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 June 30,March 31, 2023 and 2022 and 2021 was $360,981284,347 and $377,171369,066, respectively, and for the six months ended June 30, 2022 and 2021 was $730,046 and $775,577, 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, | |||||||||||||||
June 30, 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 | (14,747,222 | ) | (14,663,889 | ) | ||||||||||||
Intangible assets, net | $ | 152,778 | $ | 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 June 30,March 31, 2023 and 2022 and 2021 was $41,667 and $208,333, respectively, and for the six months ended June 30, 2022 and 2021 was $83,333 and $500,00041,667, 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 $ , which reduced the related party note receivable balance to $ . The Company holds 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 . As amended, the interest rate on the note is fixed at % per annum. annum and provides for principal and accrued interest payments in the amount of $ annually on March 31, 2024 through 2032, with the balance of all remaining outstanding principal and accrued interest due on March 31, 2033. 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$ 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, as of June 30, 2022 was approximately $ and $ as of March 31, 2023 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.
NOTE 7. LONG-TERM DEBT (check with Drew on this heading)2022, respectively.
Total7. LONG-TERM DEBT
Long-term debt is comprised of the following:
SCHEDULE OF LONG-TERM DEBT INSTRUMENTSOBLIGATIONS
June 30, 2022 | December 31, 2021 | |||||||
Hard Rock Note | $ | 750,000 | $ | 750,000 | ||||
Credit Agreement | 1,154,769 | 1,312,194 | ||||||
Machinery loans | 299,927 | 357,963 | ||||||
Transportation loans | 26,217 | 32,277 | ||||||
Insurance financing | 164,128 | - | ||||||
Long term debt, Total | 2,395,041 | 2,452,434 | ||||||
Less: | ||||||||
Current portion | (2,204,508 | ) | (2,195,759 | ) | ||||
Long-term debt, net | $ | 190,533 | $ | 256,675 |
Hard Rock Note
In 2014, the Company purchased all of the interests of Hard Rock Solutions, LLC (“Hard Rock”). Consideration consisted of $12.5 million paid in cash at closing and a $12.5 million seller’s note (the “Hard Rock Note”). The Hard Rock Note and subsequent amendments are secured by all of the patents, patents pending, other patent rights, and trademarks transferred to Hard Rock.
The Hard Rock Note has a remaining balance of $750,000 as of June 30, 2022, accrues interest at 8.00% per annum and is fully payable and will be paid on or before October 5, 2022.The Company paid an interest payment on the note on July 5, 2022 of $14,959.
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 |
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 $4,500,0004,300,000 credit facility, which includes a $1,000,000800,000 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 June 30, 2022, we had approximately $167,000 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 AFS. 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 of June 30, 2022,At March 31, 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 June 30, 2022, the interest rate for the Term Loan was 10.35%, 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 June 30, 2022, we had approximately $9,900 of accrued interest. The obligations of the Company under the Credit Agreement are secured by a security interest in substantially all of the tangible and intangible assets of the Company, other than any assets owned by the Company that constitute real property (and fixtures affixed to such real property), certain excluded equipment or intellectual property. 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/orand to repurchase the Property. Due to thethis 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 did not record the transaction as a failed sale-leaseback.
As a result of the agreement, theThe 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 June 30, 2022 and December 31, 2021 wasCompany paid $4,145,80318,971 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
June 30, 2022 | December 31, 2021 | |||||||
Finance obligations for sale-leaseback transactions | $ | 4,145,803 | $ | 4,178,336 | ||||
Current principal portion of finance obligation | (70,025 | ) | (65,678 | ) | ||||
Non-current portion of finance obligation | $ | 4,075,778 | $ | 4,112,658 |
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 | 2022 | 2021 | |||||||||||||
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenue: | ||||||||||||||||
North America | $ | 4,021,118 | $ | 2,941,056 | $ | 7,766,133 | $ | 5,033,255 | ||||||||
Middle East | $ | 519,724 | $ | 458,053 | $ | 904,874 | $ | 790,506 | ||||||||
Revenues | $ | 4,540,842 | $ | 3,399,109 | $ | 8,671,007 | $ | 5,823,761 |
The following summarizes net property, plant and equipment by geographic location:
SCHEDULE OF NET PROPERTY, PLANT AND EQUIPMENT BY GEOGRAPHIC LOCATION
June 30, 2022 | December 31, 2021 | |||||||
Property, plant and equipment, net: | ||||||||
North America | $ | 5,369,729 | $ | 5,762,066 | ||||
Middle East | 2,056,961 | 1,168,263 | ||||||
Property, plant and equipment, net | $ | 7,426,690 | $ | 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’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 mid-2023.during 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
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 shares of common stock, par value $ . AsThe operating lease expense was approximately $62,748 and $1,800 for the three months ended March 31, 2023 and 2022, respectively.
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. SEGMENT REPORTING
We report our segment results based on our geographic areas of June 30, 2022operations, North America and December 31, 2021,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 numbersegments would be useful to readers of common shares issuedthe 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 outstandingcertain 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 current year presentation. This change was .made due to international revenue becoming more significant in the current year.
The Company did 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 |
noNorth America revenue includes revenue from operations in Mexico totaling approximately $15,000 and $18,000t grant stock options or stock awards during for the sixthree months ended June 30,March 31, 2023 and 2022, respectively. The remainder of the North America revenue was derived from operations in the United States of America.
Information about products and 2021, respectively.services
NOTE 12. SUBSEQUENT EVENTS
On March 22, 2022, the Company entered into an agreement with Mazak to purchase a new CNC machine for $956,000. A down payment of $286,800 was used to secure the asset. The machine was received on April 14, 2022 and final acceptance was completed on July 1, 2022. The Company financed the remaining balance of $669,200 with payments of $12,783 starting on August 1, 2022.
On August 9, 2022, the Board of Directors approved restricted stock units to Troy Meier, Chairman and Chief Executive Officer, Annette Meier, President and Chief Operating Officer, Chris Cashion, Chief Financial Officer, and to each of the three independent members of the Board of Directors. The grant date for these units is effective the filing date of the Form S-8 registration statement. The registration effective date of the filing is August 12, 2022. The restricted stock units awarded to Troy Meier is 332,500, the restricted stock units awarded to Annette Meier is 255,000, the restricted stock units awarded to Chris Cashion is 120,000 and the restricted stock units awarded to each of the three independent members of the Board of Directors is 75,000. In addition, the Board of Directors authorized stock options and restricted stock units to be granted to employees of the Company other than Mr. and Mrs. Meier and Mr. Cashion. These stock options and restricted stock units will vest over .
See Note 2 – Revenue.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationOperations
Overview
Introduction
The following discussionSuperior Drilling Products, Inc. is an innovative drilling 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 June 30, 2022, and our results of operationscompletion tool technology company providing cost saving solutions that drive production efficiencies for the threeoil and six months ended June 30, 2022natural gas drilling industry. Our headquarters and 2021. It should be readmanufacturing operations are located in conjunction withVernal, Utah. Our drilling solutions include the unaudited financial statementspatented Drill-N-Ream® well bore conditioning tool (“Drill-N-Ream tool”) and notes thereto contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”the 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 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”).customers’ custom products.
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:
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.
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 tools in the United States, Canada, and the Middle East.
We currently have three basic operations:
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, and various critical supply chains, as a result of government and company actions to reduce the spread of the virus and consumer behavior in response to the same; and, although the United States and other countries have continued to roll out vaccinations, it is uncertain how quickly and effectively such vaccinations will be distributed or help to control the spread of COVID-19 and its variants. We continue to actively monitor the impacts and potential impacts of the COVID-19 pandemic in all aspects of our business. Although we are unable to predict the total impact of the COVID-19 pandemic on our business, results of operations, liquidity or capital resources at this time, we expect we may be negatively affected if the pandemic and related public health measures result in substantial manufacturing or supply chain problems, disruptions in local and global future economies, volatility in the global financial markets, overall reductions in demand, delays in payment, restrictions on the shipment of our products, or other ramifications. These current conditions are a result of COVID-19.
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 July 1, 2022March 31, 2023 was 750755 rigs, compared with 586an increase of 105 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 actions taken by governmentsCOVID-19 impact. Total rig count in that region to address COVID-19. Although this segmentas 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.
How We Generate our Revenue
On May 18, 2022We are a drilling and completion tool technology company. We generate revenue from the New York Stock Exchange American LLC (“NYSE”) notified the Company that it was backrefurbishment, manufacturing, repair, rental and sale of drill string tools. Our manufactured products are produced in compliance with all the continued listing standards and has resolved the continued listing items previously referenced in the NYSE letters dated November 18, 2020 and May 20, 2021.
2022 Outlook and Guidancea standard manufacturing operation, even when produced to our customer’s specifications. We also earn royalty fees under certain arrangements for certain tools we sell.
The Company’s expectations for 2022 are as follows:
Revenue: $22 million to $25 million
SG&A: $7.0 million to $7.3 million
Adjusted EBITDA: $6 million to $8 million
The full year 2022 expectations reflects the impact from the sale of the $3.8 million stage one MENA DNR fleet to Bin Zayed Petroleum in the third quarter of 2022. The Company expects third quarter 2022Tool sales, rentals and other related revenue will be $8 million to $9 million and Adjusted EBITDA to range between $3.5 million to$4.0 million.
CONSOLIDATED RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2022 Compared with the Three and Six Months Ended June 30, 2021
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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
(in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||
Tool revenue | 2,892 | 64 | % | 2,273 | 67 | % | 5,661 | 65 | % | 3,937 | 68 | % | ||||||||||||||||||||
Contract services | 1,649 | 36 | % | 1,126 | 33 | % | 3,010 | 35 | % | 1,887 | 32 | % | ||||||||||||||||||||
Revenue | $ | 4,541 | 100 | % | $ | 3,399 | 100 | % | 8,671 | 100 | % | 5,824 | 100 | % | ||||||||||||||||||
Operating costs and expenses | 4,413 | 97 | % | 3,283 | 97 | % | 8,238 | 95 | % | 6,664 | 114 | % | ||||||||||||||||||||
Operating income (loss) | 128 | 3 | % | 116 | 3 | % | 433 | 5 | % | (840 | ) | (14 | )% | |||||||||||||||||||
Other expense | (152 | ) | (3 | )% | (157 | ) | (4 | )% | (276 | ) | (3 | )% | (285 | ) | (5 | )% | ||||||||||||||||
Income tax expense | (32 | ) | (1 | )% | (26 | ) | (1 | )% | (64 | ) | (1 | )% | (44 | ) | (1 | )% | ||||||||||||||||
Net income (loss) | $ | (56 | ) | (1 | )% | $ | (67 | ) | (2 | )% | 93 | 1 | % | (1,169 | ) | (20 | )% |
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.
Three Months Ended June 30, 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 Three Months Ended June 30, 2021product. 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
Revenue. OurCost of revenue increased approximately $1,142,000 or 34%. Tool revenue increased $618,000 or 27% from the prior-year period while contract services increased $524,000 or 47%. The increase in revenue was dueis comprised of direct and indirect costs to increased demand from continued growth in the number of end usersmanufacture, repair and percentage of rigs usingsupply our Drill-N-Ream tool combined with an improvement in market conditionsproducts, including labor, materials, utilities, equipment repair, lease expense related to our facilities, supplies and increased drilling activity.freight.
Operating CostsSelling, general and Expenses. Total operatingadministrative 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, increased approximately $1,130,000 for the June 30, 2022 three-month period.safety and environmental expenses, legal and professional fees and other related administrative functions.
Other income (expense), net is comprised primarily |
Other Expense. Other expense primarily consists of interest expense and interest income.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 | % |
Income Tax Expense. The increase in income tax expense from the prior year was due to higher foreign income tax as a result of the growth in international revenue.
SixComparison of the Three Months Ended June 30,March 31, 2023 and 2022 Compared with the Six Months Ended June 30, 2021
Revenue
Revenue. Our revenue increased approximately $2,847,000$2,151,000, or 49%52%, 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 $8,671,000. Tool revenue was $5,661,000, up 27%the prior year reflecting the strong market share of our patented Drill-N-ReamTM well bore conditioning tool (“Drill-N-Ream tool” or $618,000, from“DNR”) in the prior-year period.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 approximately $524,000,by $666,000, or 47%49%, to $3,010,000. The increase in revenue wasover the prior year, primarily due to expansion of services for our major customer and increased demand from 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 combined with an improvement in market conditions and increased drilling activity.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 $1,574,000$692,000, or 42%, for the June 30, 2022 six month period.three months ended March 31, 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
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,rates earned on the cash balance held in interest income, and gain/loss on sale of assets.bearing accounts.
Interest Expense
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 $20,000 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 income before taxes incurred ina principal and interest payment applied to a fully reserved related party note receivable. There was no such payment during the sixthree months ended June 30,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.
Liquidity and Capital Resources
As of June 30, 2022,At March 31, 2023, we had working capital of approximately $3,080,000.$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.
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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. For the six-month period ended June 30, 2022, a positive cashflow funded our requirements.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 June 30, 2022, accrues interest at 8.00% per annum and is fully payable with accrued interest on October 5, 2022.March 31, 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 June 30, 2022, we had approximately $167,000 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 June 30, 2022, we had approximately $9,900 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 for both the Term Loan and the LOC is prime plus 2%, which asCompany had approximately $1,513,000 of June 30, 2022, was 10.35%, which includes a 3.6% management fee rate. The obligationsnet income, $608,000 of the Company under the agreement are securednon-cash expenses, offset by a security interest$1,075,000 decrease 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 currently plans to refinance this credit facility.working capital accounts.
For the three months ended March 31, 2022, net cash provided by operating activities was approximately $1,083,000. The Company had approximately $150,000 of net income, approximately $621,000 of non-cash expenses and $312,000 increase in 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.
Cash Flows
Six Months Ended June 30, 2022 Compared with the Six Months Ended June 30, 2021
Net cash provided by operating activities was approximately $1,354,000 and $335,000 for the six months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022, the Company had approximately $93,000 of net income, approximately $342,000 increase in accounts payable and accrued expenses, depreciation and amortization expense of approximately $813,000, stock-based compensation of $423,000 and an increase in accounts receivable of $72,000. Offsets occurred with decreases in prepaid expenses and other assets of approximately $286,000 and a decrease in inventories of $150,000.
For the six months ended June 30, 2021, the Company had approximately $1,169,000 of net loss, an approximately $585,000 decrease in accounts receivable, $162,000 decrease in inventories, and $281,000 decrease in prepaid expenses and other assets. Increases to cash provided by operating activities occurred with depreciation and amortization expense of approximately $1,276,000, stock-based compensation expense of $335,000, increase in accounts payable and accrued expenses of $878,000 and an increase in income tax payable of $32,000.
Net cash used in investing activities was approximately $1,249,000 for the six months ended June 30, 2022 and cash provided in investing activities was approximately $105,000 for the six months ended June 30, 2021 as restated due to a change in accounting methods. The major cause was the increase in the Company’s international tool fleet.
Net cash used in financing activities was approximately $99,000 for the six months ended June 30, 2022. Net cash provided by financing activities was approximately $288,000 for the six months ended June 30, 2021 due to net proceeds from the line of credit.
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 June 30, 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 six months of 2022quarter ended 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.
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 during the fall or early winter of 2023.
We are not currently involved in mid-2023.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, Proceeds
None.
Item 1A “Risk Factors” in our 2021 Annual Report on Form 10-K.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:
* | Filed herewith. |
** | Furnished herewith. |
** Furnished herewith.
* Filed herewith.
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. | ||
By: | /s/ G. TROY MEIER | |
G. Troy Meier, Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: | /s/ CHRISTOPHER CASHION | |
Christopher Cashion, Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) | ||
May 12, 2023 | By: | /s/ ANNETTE MEIER |
Annette Meier, President, Chief Operating Officer and Director | ||
May 12, 2023 | By: | /s/ JAMES LINES |
James Lines, Director | ||
May 12, 2023 | By: | /s/ ROBERT IVERSEN |
Robert Iversen, Director | ||
May 12, 2023 | By: | /s/ MICHAEL RONCA |
Michael Ronca, Director |