| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 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 ® Our
subsidiaries include (a) Superior Drilling Solutions, LLC (previously known as Superior Drilling Products, LLC), a Utah limited liability
company (“SDS”), together with its wholly owned subsidiary Superior Design and Fabrication, LLC, a Utah limited liability
company (“SDF”), (b) Extreme Technologies, LLC, a Utah limited liability company (“ET”), (c) Meier Properties
Series, LLC, a Utah limited liability company (“MPS”), (d) Meier Leasing, LLC, a Utah limited liability company (“ML”),
and (e) Hard Rock Solutions, LLC (“HR” or “Hard Rock”). Basis
of Presentation The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”). The consolidated financial statements include the accounts of Superior Drilling Products
Inc. and all of its wholly owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation. The Company
does not have investments in any unconsolidated subsidiaries. Use
of Estimates The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant items subject
to estimates and assumptions include the carrying amount and useful lives of property and equipment and intangible assets, impairment
assessments, share-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets. Revenue
Recognition We
account for revenue in accordance with Accounting Standard Codification (“ASC”) Topic 606, Revenue from Contracts with Customers
(“ASC 606”), except for tool rental revenue. Under ASC 606 revenue is measured based on a consideration specified in a customer’s
contract, excluding any sale incentives and taxes collected on behalf of third parties. Revenue is recognized when a customer obtains
control of promised goods or services in an amount that reflects the consideration that we expect to receive for those goods or services.
To recognize revenue, we (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii)
determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize
revenue when, or as, we satisfy the performance obligation(s). Shipping and handling costs incurred are accounted for as fulfillment
costs and are included in cost of revenues in the statements of operations. Tool
sales, rentals and other related revenue Tool
and Product Sales Tool
Rental SUPERIOR DRILLING PRODUCTS,
INC. NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS Other
Related Revenue: Contract
Services Drill
Bit Manufacturing and Refurbishment 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 revenue. All
of our contracts are less than one year in duration. We do not disclose the value of unsatisfied performance obligations for (i) contracts
with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have
the right to invoice for services performed. Cash
and Restricted Cash We
maintain cash deposits with financial institutions that may exceed federally insured limits at times. We have chosen credible institutions
and believe our risk of loss is negligible. Cash
and restricted cash were comprised of the following: SCHEDULE OF CASH AND RESTRICTED CASH
2023 2022
December
31,
2023 2022
Cash $ 2,504,487 $ 2,158,025
Restricted
cash 166,139 -
Cash
and restricted cash $ 2,670,626 $ 2,158,025 Fair
Value of Financial Instruments The
Company’s financial instruments consist of cash, receivables, payables, and bank debt. The Company believes that the carrying values
of these instruments on the accompanying consolidated balance sheets approximate their fair values due to the relatively short period
to maturity for these instruments. Accounts
Receivable and Allowance for Credit Losses Domestically,
accounts receivable are generally due within 60 days of the invoice date. Internationally, our due date terms are generally 90 days from
the invoice date. No interest is charged on past-due balances. We grant credit to our customers based upon an evaluation of each customer’s
financial condition. We periodically monitor the payment history and ongoing creditworthiness of our customers. An allowance for credit losses is established at a level estimated by management to be adequate based upon various factors including historical experience,
aging status of customer accounts, payment history and financial condition of our customers. The allowance for credit losses was
$ 0 SUPERIOR
DRILLING PRODUCTS, INC. NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS The
Company analyzes each customer’s length of time a receivable is outstanding, geographical location, and any potential economic
conditions that could cause concern for credit instability. On a weekly basis, this data is reviewed, and a determination made if there
are potential concerns for losses. This historical data, geographical location, review of current economic conditions, and the current
receivables helps establish a forecast for credit risk. Inventories Inventories
consist of raw materials, work-in-process and finished goods and are stated at the lower of cost, determined using the weighted-average
cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead. The Company
regularly reviews inventories on hand and current market conditions to determine if the cost of finished goods inventories exceed current
market prices and impairs the cost basis of the inventory accordingly. Assets
Held for Sale The
Company classifies disposal groups as held for sale in the period in which all of the following criteria are met: (1) management, having
the authority to approve the action, commits to a plan to sell the disposal group; (2) the disposal group is available for immediate
sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups; (3) an active program
to locate a buyer or buyers and other actions required to complete the plan to sell the disposal group have been initiated; (4) the sale
of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale, within
one year, except if events or circumstances beyond the Company’s control extend the period of time required to sell the disposal
group beyond one year; (5) the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current
fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made
or that the plan will be withdrawn. A
disposal group that is classified as held for sale is initially measured at the lower of its carrying amount or fair value less any costs
to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Subsequent
changes in the fair value of a disposal group less any costs to sell are reported as an adjustment to the carrying amount of the disposal
group, as long as the new carrying amount does not exceed the carrying amount of the asset at the time it was initially classified as
held for sale. Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets
and liabilities of the disposal group for all periods presented in the line items assets held for sale and liabilities held for sale,
respectively, in the consolidated balance sheets. Property,
Plant and Equipment Property,
plant and equipment is stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement
of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment is calculated using
the straight-line method over the asset’s estimated useful life as follows: SCHEDULE OF ASSETS ESTIMATED USEFUL LIFE
Buildings
and leasehold improvements 2 39
Machinery,
equipment and rental tools 18 10
Office
equipment, fixtures and software 3 7
Transportation
equipment 5 30 SUPERIOR
DRILLING PRODUCTS, INC. NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Property,
plant and equipment is reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying
value of an asset or asset group may not be recoverable. Indicative events or circumstances include, but are not limited to, matters
such as a significant decline in market value or a significant change in business climate. An impairment loss is recognized when the
carrying value of an asset exceeds the estimated undiscounted future cash flows from the use of the asset and its eventual disposition.
The amount of impairment loss recognized is the excess of the asset’s carrying value over its fair value. Assets to be disposed
of are reported at the lower of the carrying value or the fair value less cost to sell. Upon sale or other disposition of an asset, the
Company recognizes a gain or loss on disposal measured as the difference between the net carrying value of the asset and the net proceeds
received. Intangible
Assets The
Company’s intangible assets with finite lives consist of developed technology, customer contracts and relationships, and trade
names and trademarks. The
cost of intangible assets with finite lives is amortized using the straight-line method over the estimated period of economic benefit,
ranging from 5 9 Intangible
assets with finite lives are tested for impairment whenever events or changes in circumstances indicate the carrying value may not be
recoverable. These conditions may include a change in the extent or manner in which the asset is being used or a change in future operations.
The Company assesses the recoverability of the carrying amount by preparing estimates of future revenue, margins, and cash flows. If
the sum of expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, an impairment loss
is recognized. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value. Fair value of these
assets may be determined by a variety of methodologies, including discounted cash flow models. Leases We
account for leases in accordance with ASC Topic 842 - Leases (“ASC 842”), which requires assets and liabilities that arise
from all leases to be recognized on the balance sheet for lessees and expanded financial statement disclosures for both lessees and lessors.
Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liability represents
the Company’s obligation to make lease payments arising from the lease, both of which are recognized based on the present value
of the future minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception
are not recorded on the condensed consolidated balance sheet and are expensed on a straight-line basis over the lease term in the condensed
consolidated statement of operations. The
Company determines whether a contract is a lease, or contains a lease, at inception of the contract and whether that lease meets the
classification criteria of a finance or operating lease. The Company discounts lease payments based on an estimate of its incremental
borrowing rate as the Company’s leases do not provide a readily determinable implicit rate. Operating lease assets and liabilities
are included on our consolidated balance sheets. Operating lease expense (excluding variable lease costs) is recognized on a straight-line
basis over the lease term. Research
and Development We
expense research and development costs as they are incurred. For the years ended December 31, 2023 and 2022, these expenses were approximately
$ 765,000 436,000 SUPERIOR
DRILLING PRODUCTS, INC. NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Earnings
(Loss) Per Share Basic
earnings (loss) per common share is calculated by dividing net income (loss) available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) attributable
to common shareholders by the weighted average number of common shares outstanding, including potentially dilutive common share equivalents,
if the effect is dilutive. Potentially dilutive common shares equivalents include stock options. Income
Taxes The
Company recognizes an asset or liability for the deferred tax consequences of all temporary differences between the tax basis of assets
or liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years
when the reported amounts of the asset or liabilities are recovered or settled and for operating loss carry forwards. These deferred
tax assets and liabilities are measured using the enacted tax rates that will be in effect when the differences are expected to reverse
and the carry forwards are expected to be realized. In
assessing the realizability of deferred tax assets, management considers whether it is more-likely-than-not that the deferred tax assets
will be realized. In making such a determination, the Company considers all available positive and negative evidence, including future
reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, carryback potential if
permitted under the tax law, and results of recent operations. The
Company accounts for uncertainty in income taxes using a recognition and measurement threshold for tax positions taken or expected to
be taken in a tax return, which are subject to examination by federal and state taxing authorities. The tax benefit from an uncertain
tax position is recognized when it is more likely than not that the position will be sustained upon examination by taxing authorities
based on the technical merits of the position. The amount of the tax benefit recognized is the largest amount of the benefit that has
a greater than 50% likelihood of being realized upon ultimate settlement. The effective tax rate and the tax basis of assets and liabilities
reflect management’s estimates of the ultimate outcome of various tax uncertainties. The Company recognizes penalties and interest
related to uncertain tax positions within the income tax expense financial statement caption in the accompanying consolidated statements
of operations. Debt
Issuance Costs Costs
related to debt issuance are capitalized and amortized as interest expense over the term of the related debt using the straight-line
method, which approximates the effective interest method. Upon the repayment of debt, the Company accelerates the recognition of an appropriate
amount of the costs as interest expense. Debt issuance costs are presented as a direct reduction from the carrying amount of the note
payable. For the years ended December 31, 2023 and 2022, the amortized debt issuance costs were $ 10,618 3,087 Share-Based
Compensation Share-based
compensation expense related to stock option and restricted stock awards is recognized based on the grant-date fair values. The Company
recognizes compensation expense on a straight-line basis over the requisite service period of the award. Concentrations
of Credit Risk The
Company has two significant customers that represent 85 88 1,677,000 1,751,000 The
Company had two significant vendors that represent 12 440,000 12 74,000 SUPERIOR
DRILLING PRODUCTS, INC. NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS Government
Grant The
Company applied for and received a grant award of up to $ 750,000 During
2022, the Company met the conditions of the grant and received the initial grant funding totaling $ 675,000 675,000 Foreign
currency transactions Foreign
currency transactions are initially measured and recorded in U.S. dollars using the exchange rate on the date of the transaction. Foreign
currency denominated monetary assets and liabilities are measured at the end of each reporting period using the exchange rate at that
date. Gains and losses from foreign currency transactions, which are included in selling, general, and administrative expenses, have
not been significant in any of the periods presented. Nonmonetary assets and liabilities are not subsequently remeasured. 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. |
