UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM
(Mark One)
For
the Quarterly Period Ended
Commission
File Number:
(Exact name of registrant as specified in its charter)
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There were shares of common stock, $0.001 par value, issued and outstanding as of May 13, 2022.
Superior Drilling Products, Inc.
FORM 10-Q
QUARTER ENDED March 31, 2022
TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION.
Item 1. Financial Statements
Superior Drilling Products, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
| March 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses | ||||||||
| Inventories | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Right of use assets | ||||||||
| Other noncurrent assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Income tax payable | ||||||||
| Current portion of operating lease liability | ||||||||
| Current portion of financial obligation | ||||||||
| Current portion of long-term debt, net of discounts | ||||||||
| Total current liabilities | ||||||||
| Operating lease liability | ||||||||
| Long-term financial obligation, less current portion | ||||||||
| Long-term debt, less current portion, net of discounts | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 11) | ||||||||
| Shareholders’ equity | ||||||||
| Common stock - $ par value; shares authorized; shares issued and outstanding, respectively | ||||||||
| Additional paid-in-capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
| 3 |
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | ||||||||
| Tool revenue | $ | $ | ||||||
| Contract services | ||||||||
| Total Revenue | ||||||||
| Operating costs and expenses | ||||||||
| Cost of revenue | ||||||||
| Selling, general and administrative expenses | ||||||||
| Depreciation and amortization expense | ||||||||
| Total operating costs and expenses | ||||||||
| Operating income (loss) | ( | ) | ||||||
| Other income (expense) | ||||||||
| Interest income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Gain (loss) on disposition of assets, net | - | |||||||
| Total other expense | ( | ) | ( | ) | ||||
| Income (loss) before income taxes | ( | ) | ||||||
| Income tax expense | ( | ) | ( | ) | ||||
| Net income/(loss) | $ | $ | ( | ) | ||||
| Basic loss earnings per common share | $ | $ | ( | ) | ||||
| Basic weighted average common shares outstanding | ||||||||
| Diluted loss per common share | $ | $ | ( | ) | ||||
| Diluted weighted average common shares outstanding | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Total Shareholders’ | |||||||||||||||||
| Shares | Par Value | Capital | Deficit | Equity | ||||||||||||||||
| Balance – December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||
| Net income | - | - | - | |||||||||||||||||
| Balance – March 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance – December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Stock-based compensation expense | - | - | - | |||||||||||||||||
| Net income | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance – March 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| 2022 | (Restated) 2021 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Stock-based compensation expense | ||||||||
| (Gain) loss on disposition of assets, net | - | ( | ) | |||||
| Amortization of deferred loan costs | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ||||||||
| Prepaid expenses and other noncurrent assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Income tax payable | ||||||||
| Net Cash From Operating Activities | ||||||||
| Cash Flows From Investing Activities | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of fixed assets | - | |||||||
| Net Cash From Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Principal payments on debt | ( | ) | ( | ) | ||||
| Payments on revolving loan | ( | ) | ( | ) | ||||
| Proceeds received on revolving loan | ||||||||
| Net Cash From Financing Activities | ( | ) | ||||||
| Net Change in Cash | ||||||||
| Cash at Beginning of Period | ||||||||
| Cash at End of Period | $ | $ | ||||||
| Supplemental information: | ||||||||
| Cash paid for Interest | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
Superior Drilling Products, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2022
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Superior Drilling Products, Inc. (the “Company”, “SDPI”, “we”, “our” or “us”) is an innovative drilling and completion tool technology company providing cost saving solutions that drive production efficiencies for the oil and natural gas drilling industry. Our drilling solutions include the patented Drill-N-Ream® well bore conditioning tool (“Drill-N-Ream tool”) and the patented Strider™ Drill String Oscillation System technology (“Strider technology” or “Strider”). In addition, the Company is a manufacturer and refurbisher of PDC (polycrystalline diamond compact) drill bits for a leading oil field services company. We operate a state-of-the-art drill tool fabrication facility, where we manufacture solutions for the drilling industry, as well as customers’ custom products. Our headquarters and manufacturing operations are located in Vernal, Utah.
Our subsidiaries include (a) Superior Drilling Solutions, LLC (previously known as Superior Drilling Products, LLC), a Utah limited liability company (“SDS”), together with its wholly owned subsidiary Superior Design and Fabrication, LLC, a Utah limited liability company (“SDF”), (b) Extreme Technologies, LLC, a Utah limited liability company (“ET”), (c) Meier Properties Series, LLC, a Utah limited liability company (“MPS”), (d) Meier Leasing, LLC, a Utah limited liability company (“ML”), and (e) Hard Rock Solutions, LLC (“HR” or “Hard Rock”).
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Superior Drilling Products Inc. and all of its wholly-owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
Unaudited Interim Financial Presentation
These unaudited interim condensed consolidated financial statements for the three months ended March 31, 2022 and 2021, and the related footnote disclosures included herein, are unaudited. However, in the opinion of management, these unaudited condensed consolidated interim financial statements have been prepared on the same basis as the audited financial statements and reflect all adjustments necessary to fairly state the results for such periods. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results of operations expected for the year ended December 31, 2022. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2021 and the notes thereto, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”).
Segment Reporting
We operate as a single operating segment, which reflects how we manage our business. We operate in North America and the Middle East. See note 9.
Use of 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, share-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.
| 7 |
Concentrations of Credit Risk
The
Company has two significant customers that represented
The Company had two vendors that represented % of its purchases for the three months ended March 31, 2022. These vendors had approximately $ in accounts payable as of March 31, 2022 and purchases in the three months of ended March 31, 2022 from these vendors totaled approximately $. The Company had two vendors that represented % of its purchases for the three months ended March 31, 2021. These vendors had approximately $ in accounts payable as of March 31, 2021 and purchases in the three months ended March 31, 2021 from these vendors totaled approximately $.
Restatement of the Consolidated Financial Statements
The
purpose of this restatement is to correct an error in the Company’s previously issued financial statements for the year ended March
31, 2021 in connection with the classification of $
There was no effect of the restatement to the Company’s condensed consolidated balance sheet, condensed consolidated statement of operations and condensed consolidated statement of shareholders’ equity for the quarter ended March 31, 2021.
In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality (“SAB 99”) and Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), the Company has determined that the impact of adjustments relating to the correction of this accounting error are not material to previously issued annual audited and unaudited interim financial statements.
The effects of the restatement on the Company’s consolidated statement of cash flows for the quarter ended March 31, 2021 are as follows:
| March 31, 2021 | |||||||||
| As Reported | As Restated | ||||||||
| - | Net cash from operating activities | ||||||||
| - | Net cash from investing activities | ( |
) | ||||||
There was no impact to net cash provided from financing activities within our consolidated statement of cash flows nor was there an impact on the net change in cash resulting from restatement.
Uncertain Tax Matters
The Company believes it has appropriately accrued for the expected outcome of uncertain tax matters and believes such liabilities represent a reasonable provision for taxes ultimately expected to be paid; however, these liabilities may need to be adjusted as new information becomes known and as tax examinations continue to progress, or as settlements or litigations occur.
| 8 |
Recent Accounting Pronouncements
There are no recently issued accounting pronouncements that we have not yet adopted that we believe will have a material effect on our financial statements.
Income Tax Expense
The
Company recorded income tax expense during the quarter of $
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.
| 9 |
Disaggregation of Revenue
Approximately
Revenue disaggregated by revenue source are as follows:
Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Tool Revenue: | ||||||||
| Tool and product sales | $ | $ | ||||||
| Tool rental | ||||||||
| Other related revenue | ||||||||
| Total Tool Revenue | ||||||||
| Contract Services | ||||||||
| Total Revenue | $ | $ | ||||||
Contract Costs
We do not incur any material costs of obtaining contracts.
Contract Balances
Under our sales contracts, we invoice customers after our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under ASC 606.
| 10 |
NOTE 3. INVENTORIES
Inventories are comprised of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Raw material | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| $ | $ | |||||||
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Land | $ | $ | ||||||
| Buildings | ||||||||
| Building improvements | ||||||||
| Machinery and equipment | ||||||||
| Office equipment, fixtures and software | ||||||||
| Transportation assets | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
The
Company sold its airplane hangar for a gain of $
Depreciation
expense related to property, plant and equipment for the three months ended March 31, 2022 and 2021 was $
NOTE 5. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Developed technology | $ | $ | ||||||
| Customer contracts | ||||||||
| Trademarks | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Amortization
expense related to intangible assets for the three months ended March 31, 2022 and 2021 was $
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 $
| 11 |
NOTE 7. LONG-TERM DEBT
Long-term debt is comprised of the following:
| March 31, 2022 | December 31, 2021 | |||||||
| Hard Rock Note | $ | $ | ||||||
| Credit Agreement | ||||||||
| Machinery loans | ||||||||
| Transportation loans | ||||||||
| Less: | ||||||||
| Current portion | ( | ) | ( | ) | ||||
| Long-term debt, net | $ | $ | ||||||
Hard Rock Note
In
2014, the Company purchased all of the interests of Hard Rock Solutions, LLC (“Hard Rock”). Consideration consisted of $
The
Hard Rock Note has a remaining balance of $
| 12 |
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 $
As
of March 31, 2022, we had approximately $
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 LOC is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause. As of March 31, 2022, we were in compliance with the covenants in the Credit Agreement.
The
interest rate for the Term Loan and the LOC is prime plus
NOTE 8. FINANCING OBLIGATION
On
December 7, 2020, the Company entered into a sale agreement (the “Sale Agreement”). Pursuant to the terms of the Sale Agreement,
the Company sold land and property related to the Company’s headquarters and manufacturing facility in Vernal, Utah (the “Property”)
for a purchase price of $
The
Company received cash of $
The financing obligation is summarized below:
| March 31, 2022 | December 31, 2021 | |||||||
| Finance obligations for sale-leaseback transactions | $ | $ | ||||||
| Current principal portion of finance obligation | ( | ) | ( | ) | ||||
| Non-current portion of finance obligation | $ | $ | ||||||
| 13 |
NOTE 9. GEOGRAPHICAL OPERATIONS INFORMATION
The following summarizes revenue by geographic location:
Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue: | ||||||||
| North America | $ | $ | ||||||
| Middle East | $ | $ | ||||||
| $ | $ | |||||||
The following summarizes net property, plant and equipment by geographic location:
| March 31, 2022 | December 31, 2021 | |||||||
| Property, plant and equipment, net: | ||||||||
| North America | $ | $ | ||||||
| Middle East | ||||||||
| $ | $ | |||||||
NOTE 10. COMMITMENTS AND CONTINGENCIES
We are subject to litigation that arises from time to time in the ordinary course of our business activities. In February 2019, the Company filed a patent infringement lawsuit in the United States District Court for the Western District of Louisiana, Lafayette Division, asserting that Stabil Drill Specialties, 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 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. The parties are preparing this case for trial and expect a jury trial setting in late 2022 or early 2023.
NOTE 11. SHAREHOLDERS’ EQUITY
The Company is authorized to issue shares of common stock, par value $. As of March 31, 2022 and December 31, 2021, the number of common shares issued and outstanding was .
The Company did not grant stock options or stock awards during the three months ended March 31, 2022 and 2021, respectively.
NOTE 12. SUBSEQUENT EVENTS
On
March 22, 2022, the Company entered into an agreement with Mazak to purchase a new CNC machine for $
| 14 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Introduction
The following discussion and analysis was prepared to supplement information contained in the accompanying financial statements and is intended to provide certain details regarding our financial condition as of March 31, 2022, and our results of operations for the three months ended March 31, 2022 and 2021. It should be read in conjunction with the unaudited financial statements and notes thereto contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”) as well as our audited financial statements for the years ended December 31, 2021 and 2020, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission (the “SEC”).
Unless the context requires otherwise, references to the “Company” or to “we,” “us,” or “our” and other similar terms are to Superior Drilling Products, Inc. and all of its subsidiaries.
Forward- Looking Statements
This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements contained in all parts of this document that are not historical facts are forward-looking statements that involve risks and uncertainties that are beyond the control of the Company. You can identify the Company’s forward-looking statements by the words “anticipate,” “estimate,” “expect,” “may,” “project,” “believe” and similar expressions, or by the Company’s discussion of strategies or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurances can be given that these expectations will prove to be correct. The forward-looking statements contained in or incorporated by reference into this Form 10-K are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control, including:
| ● | the continued impact of COVID-19 on domestic and global economic conditions and the future impact of such conditions on the oil and gas industry and the demand for our services; | |
| ● | the volatility of oil and natural gas prices; | |
| ● | the cyclical nature of the oil and gas industry; | |
| ● | availability of financing and access to capital markets; | |
| ● | our reliance on significant customers; | |
| ● | consolidation within our customers’ industries; | |
| ● | competitive products and pricing pressures; |
| 15 |
| ● | our ability to develop and commercialize new and/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. |
Many of these factors are beyond our ability to control or predict. These factors are not intended to represent a complete list of the general or specific factors that may affect us. The events in Ukraine, Russia, and the surrounding areas may result in political instability and may add a potential risk.
| 16 |
In addition, management’s assumptions about future events may prove to be inaccurate. All readers are cautioned that the forward-looking statements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or that the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors described in “Item 1A. Risk Factors” in our annual report on form 10-K for the year ended December 31, 2021 and in our subsequent SEC filings. All forward-looking statements speak only as of the date they are made. We do not intend to update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Executive Summary
We innovate, design, engineer, manufacture, sell, and repair drilling and completion tools in the United States, Canada, and the Middle East.
We currently have three basic operations:
| ● | Our emerging technology business that manufactures the Drill-N-Ream tool, our innovative drill string enhancement tool, and Strider technology and other tools, | |
| ● | Our PDC drill bit and other tool refurbishing and manufacturing service, and emerging technologies business that manufactures the Drill-N-Ream tool, our innovative drill string enhancement tool, the Strider technology and other tools, and | |
| ● | Our new product development business that conducts our research and development, and designs our horizontal drill string enhancement tools, other down-hole drilling technologies, and drilling tool manufacturing technologies. |
Our strategy for growth is to expand the global market penetration of our current drilling tool solutions and to leverage our expertise in drilling tool technologies and precision machining in order to broaden our product offerings and solutions for the oil and gas industry, as well as other industries that require precision machining and quality. We believe through our patented technologies, as well as technologies under development, that we can offer the oil and gas industry the solutions it demands to improve drilling efficiencies and reduce production costs.
Recent Developments and Trends
Currently we are experiencing raw material delays and difficulties in hiring and retaining direct laborers. The COVID-19 pandemic has caused and continues to cause disruption to the U.S. and global economies, including the impact of government and company actions to reduce the spread of the virus and consumer behavior in response to the same; and, although the United States and other countries have continued to roll out vaccinations, it is uncertain how quickly and effectively such vaccinations will be distributed or help to control the spread of COVID-19 and its variants. We continue to actively monitor the impacts and potential impacts of the COVID-19 pandemic in all aspects of our business. Although we are unable to predict the total impact of the COVID-19 pandemic on our business, results of operations, liquidity or capital resources at this time, we expect we may be negatively affected if the pandemic and related public health measures result in substantial manufacturing or supply chain problems, disruptions in local and global future economies, volatility in the global financial markets, overall reductions in demand, delays in payment, restrictions on the shipment of our products, or other ramifications. These current conditions are a result of COVID-19.
| 17 |
The Russia – Ukraine conflict is a global concern. The Company does not have any direct exposure to Russia or Ukraine through its operations, employee base, investments or sanctions. The Company does not receive goods or services sourced from those countries, does not anticipate any disruption in its supply chain and has no business relationships, connections to or assets in Russia, Belarus or Ukraine. No impairments to assets have been made due to the conflict. The global oil industry has been impacted by this situation, but the Company’s operations and business in the Middle East has not been disrupted to date. The increase in oil producing activities in the United States has benefitted the Company’s operations. We are unable at this time to know the full ramifications of the Russia – Ukraine conflict and its effects on our business.
The total U.S. rig count as reported by Baker Hughes as of April 29, 2022 was 698 rigs, an increase of 112 rigs from the rig count as of December 31, 2021. We expect North American onshore activity to continue to improve throughout 2022 compared with 2021.
The Middle East market is a softer market due to the COVID-19 impact. Although this segment of our business is rebounding, the improvements are at a slower rate compared with the Company’s domestic market.
CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended March 31,2022 Compared with the Three Months Ended March 31, 2021
The following table represents summary consolidated operating results for the periods indicated:
| Three-Months Ended March 31, | ||||||||||||||||
| (in thousands) | 2022 | 2021 | ||||||||||||||
| Tool revenue | 2,769 | 67 | % | 1,664 | 69 | % | ||||||||||
| Contract services | 1,361 | 33 | % | 761 | 31 | % | ||||||||||
| Revenue | 4,130 | 100 | % | 2,425 | 100 | % | ||||||||||
| Operating costs and expenses | 3,825 | 93 | % | 3,381 | 139 | % | ||||||||||
| Operating income (loss) | 305 | 7 | % | (956 | ) | (39 | )% | |||||||||
| Other expense | (124 | ) | (4 | )% | (128 | ) | (5 | )% | ||||||||
| Income tax expense | (31 | ) | (1 | )% | (17 | ) | (1 | )% | ||||||||
| Net income (loss) | 150 | 4 | % | (1,101 | ) | (45 | )% | |||||||||
Material changes of certain items in our statements of operations included in our financial statements for the comparative periods are discussed below. Comparisons are to the prior-year period unless stated otherwise.
| 18 |
Three Months Ended March 31, 2022 Compared with the Three Months Ended March 31, 2021
Revenue. Our revenue increased approximately $1,705,000 or 70%. Tool revenue increased $1,105,000 or 66% from the prior-year period while contract services increased $600,000 or 79%. Revenue increased as the Company had improved capacity to meet growing demand for bit and other toll manufacturing services as well as continued growth in the number of end users and percentage of rigs using our Drill-N-Ream tool. Higher Contract Services revenue also grew with improved capacity to deliver on increased volume for drill bit and other toll refurbishment services. Demand growth reflects customers increasing the use of outsource manufacturing and refurbishment services and increased drilling activity driven by improved market conditions for the oil & gas industry.
Operating Costs and Expenses. Total operating costs and expenses increased approximately $444,000 for the three-month period ended March 31, 2022.
| ● | Cost of revenue increased approximately $592,000 due to higher volume. As a percentage of revenue, cost of revenue was 43% and 48% of revenue for the three months ended March 31, 2022 and 2021, respectively. The decline in the cost of revenue as a percent of revenue was the result of strong operating leverage from higher volume. | |
| ● | Selling, general and administrative expenses increased approximately $131,000 due in part to an approximate increase in equity compensation expense of $34,000, payroll and tax expenses of $196,000, legal expenses of $9,000, insurance expenses of $9,000 and board compensation of $14,000. Conversely, consulting expenses decreased by approximately $39,000 and tax, audit and related SEC expenses decreased by $92,000. | |
| ● | Depreciation and amortization expense decreased approximately $279,000, or 40%, to $411,000. The decrease was primarily a result of fully amortizing a portion of the Company’s intangible assets and fully depreciating manufacturing center equipment. |
Other Expense. Other expense primarily consists of interest expense and interest income.
| ● | Interest expense for the three months ended March 31, 2022 and 2021 was approximately $124,000 and $138,000, respectively. |
Income Tax Expense. Income tax expense increased by approximately $14,000 from the prior year due to increased foreign income taxes due to increased revenues from foreign sources.
| 19 |
Liquidity and Capital Resources
As of March 31, 2022, we had working capital of approximately $3,094,000. 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. We will continue to work to grow revenue and manage costs and expect to be cash flow positive in 2022. If we are unable to do this, we may not be able to, among other things, (i) maintain our current general and administrative spending levels; (ii) fund certain obligations as they become due; and (iii) respond to competitive pressures or unanticipated capital requirements. We cannot provide any assurance that financing will be available to us in the future on acceptable terms.
The Hard Rock Note had a remaining balance of $750,000 as of March 31, 2022, accrues interest at 8.00% per annum and is fully payable with accrued interest on October 5, 2022.
Our Credit Agreement facilitated by Austin Financial Services (“AFS”) is comprised of $800,000 Term Loan and $3,500,000 Line of Credit (“LOC”). As of March 31, 2022, we had approximately $250,000 outstanding on the Term Loan and approximately $1,000,000 outstanding on the LOC. Amounts outstanding under the LOC at any time may not exceed the sum of: (a) up to 85% of accounts receivable or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect (less a dilution reserve as determined by AFS in its sole good faith discretion), plus (b) the lesser of (i) up to 50% of inventory or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect, or (ii) the inventory sublimit, minus (c) the borrowing base reserve as may be determined from time to time by AFS. A collateral management fee is payable monthly on the used portion of the LOC and Term Loan. If our borrowings are less than $1,000,000, we still pay interest as if we had borrowed $1,000,000. As of March 31, 2022 we had approximately $10,000 of accrued interest combined between the two loans.
The interest rate for the Term Loan and the LOC is prime plus 2%. As of March 31, 2022 the interest rate for both loans was 9.10%, which includes a 3.6% management fee rate. The obligations of the Company under the agreement are secured by a security interest in substantially all of the tangible and intangible assets of the Company, other than any assets owned by the Company that constitute real property (and fixtures affixed to such real property), certain excluded equipment, intellectual property, or aircraft. The Credit Agreement matures on February 20, 2023, and the Company plans to refinance this credit facility.
| 20 |
Cash Flows
Three-Months Ended March 31, 2022 Compared with the Three- Months Ended March 31, 2021
Net cash provided by operating activities was approximately $1,083,000 and $205,000 for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, the Company had approximately $152,000 of net income, approximately $308,000 increase in the changes of the current assets and liabilities accounts, depreciation, and amortization expense of approximately $411,000. For the three months ended March 31, 2021 the Company had approximately $1,102,000 of net loss approximately $455,000 increase in the change in current assets and liabilities accounts, and depreciation and amortization expense of approximately $690,000.
Net cash used in investing activities for the three months ended March 31, 2022 was approximately $919,000, which includes a down payment for new equipment and an investment in our Middle East tools, compared with $25,000 for the three months ended March 31, 2021 for the purchase of equipment net of proceeds from the sale of the company’s airplane hangar of $50,000 in 2021.
Net cash used in financing activities was approximately $132,000 for the three months ended March 31, 2022. Net cash provided by financing activities was approximately $121,000 for the three months ended March 31, 2021. Net borrowings on the line of credit was approximately $256,000 during the three months ended March 31, 2021 compared with zero in the same period of 2022.
Critical Accounting Policies
The discussion of our financial condition and results of operations is based upon our consolidated condensed financial statements, which have been prepared in accordance with U.S. GAAP. During the preparation of our financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those discussed below. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. While we believe that the estimates and assumptions used in the preparation of our consolidated condensed financial statements are appropriate, actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated condensed financial statements. Our estimates and assumptions are evaluated periodically and adjusted when necessary. The more significant estimates affecting amounts reported in our consolidated condensed financial statements include, but are not limited to: stock based compensation, determining the allowance for doubtful accounts, valuation of inventories, recoverability of long-lived assets, useful lives used in calculating depreciation and amortization, and valuation of intangible assets.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2022.
Changes in Internal Controls over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the first quarter of 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Internal Controls and Procedures
This quarterly report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the Company’ s registered public accounting firm due to a transaction period established by the rules of the Securities and Exchange Commission for newly public companies. Under these rules, we will not be required to include an attestation report for so for as long as we are a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.
| 21 |
PART II
Item 1. Legal Proceedings
We are subject to litigation that arises from time to time in the ordinary course of our business activities. In February 2019, the Company filed a patent infringement lawsuit in the United States District Court for the Western District of Louisiana, Lafayette Division, asserting that Stabil Drill Specialties, 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’s 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. The parties are preparing this case for trial and expect a jury trial setting in late 2022 or early 2023.
Item 1A. Risk Factors
As of the date of this filing, the Company remains subject to the risk factors previously disclosed in Part I, Item 1A “Risk Factors” in our 2021 Annual Report on Form 10-K.
We are a smaller reporting company and are not required to present this information.
Item 6. Exhibits
The exhibits listed below are filed as part of this report:
| Exhibit No. | Description | |
| 31.1* | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for G. Troy Meier. | |
| 31.2* | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Christopher D. Cashion. | |
| 32.1** | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for G. Troy Meier.** | |
| 32.2** | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Christopher D. Cashion.** | |
| 101.INS * | Inline XBRL Instance | |
| 101.XSD * | Inline XBRL Schema | |
| 101.CAL * | Inline XBRL Calculation | |
| 101.DEF * | Inline XBRL Definition | |
| 101.LAB * | Inline XBRL Label | |
| 101.PRE * | Inline XBRL Presentation | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
** Furnished herewith.
* Filed herewith.
| 22 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SUPERIOR DRILLING PRODUCTS, INC. | ||
| May 13, 2022 | By: | /s/ G. TROY MEIER |
| G. Troy Meier, Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| May 13, 2022 | By: | /s/ CHRISTOPHER CASHION |
| Christopher Cashion, Chief Financial Officer | ||
| (Principal Financial Officer and Principal Accounting Officer) | ||
| 23 |
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT
I, G. Troy Meier, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Superior Drilling Products, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or other persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 13, 2022 | |
| /s/ G. Troy Meier | |
| G. Troy Meier | |
| President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT
I, Christopher Cashion, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Superior Drilling Products, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or other persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 13, 2022 | |
| /s/ Christopher Cashion | |
| Christopher Cashion | |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Superior Drilling Products, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, G. Troy Meier, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: May 13, 2022 | |
| /s/ G. Troy Meier | |
| G. Troy Meier | |
| President and Chief Executive Officer |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Superior Drilling Products, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Christopher Cashion, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: May 13, 2022 | |
| /s/ Christopher Cashion | |
| Christopher Cashion | |
| Chief Financial Officer |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Common stock, par value | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 100,000,000 | 100,000,000 |
| Common stock, shares issued | 28,235,001 | 28,235,001 |
| Common stock, shares outstanding | 28,235,001 | 28,235,001 |
Condensed Consolidated Statements of Shareholders' Equity (Unaudited) - USD ($) |
Common Stock [Member] |
Additional Paid-in Capital [Member] |
Retained Earnings [Member] |
Total |
|---|---|---|---|---|
| Beginning balance at Dec. 31, 2020 | $ 25,762 | $ 40,619,620 | $ (36,421,707) | $ 4,223,675 |
| Beginning balance, shares at Dec. 31, 2020 | 25,762,342 | |||
| Stock-based compensation expense | 167,472 | 167,472 | ||
| Net income | (1,101,793) | (1,101,793) | ||
| Ending balance at Mar. 31, 2021 | $ 25,762 | 40,787,092 | (37,523,500) | 3,289,354 |
| Ending balance, shares at Mar. 31, 2021 | 25,762,342 | |||
| Beginning balance at Dec. 31, 2021 | $ 28,235 | 43,071,201 | (36,951,508) | 6,147,928 |
| Beginning balance, shares at Dec. 31, 2021 | 28,235,001 | |||
| Stock-based compensation expense | 210,133 | 210,133 | ||
| Net income | 149,837 | 149,837 | ||
| Ending balance at Mar. 31, 2022 | $ 28,235 | $ 43,281,334 | $ (36,801,671) | $ 6,507,898 |
| Ending balance, shares at Mar. 31, 2022 | 28,235,001 |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||
| 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® 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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Superior Drilling Products Inc. and all of its wholly-owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
Unaudited Interim Financial Presentation
These unaudited interim condensed consolidated financial statements for the three months ended March 31, 2022 and 2021, and the related footnote disclosures included herein, are unaudited. However, in the opinion of management, these unaudited condensed consolidated interim financial statements have been prepared on the same basis as the audited financial statements and reflect all adjustments necessary to fairly state the results for such periods. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results of operations expected for the year ended December 31, 2022. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2021 and the notes thereto, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”).
Segment Reporting
We operate as a single operating segment, which reflects how we manage our business. We operate in North America and the Middle East. See note 9.
Use of 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, share-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.
Concentrations of Credit Risk
The Company has two significant customers that represented 90% and 85% of its revenue for the three months ended March 31, 2022 and 2021, respectively. These customers had approximately $2,137,000 and $846,000 in accounts receivable as of March 31, 2022 and 2021, respectively.
The Company had two vendors that represented % of its purchases for the three months ended March 31, 2022. These vendors had approximately $ in accounts payable as of March 31, 2022 and purchases in the three months of ended March 31, 2022 from these vendors totaled approximately $. The Company had two vendors that represented % of its purchases for the three months ended March 31, 2021. These vendors had approximately $ in accounts payable as of March 31, 2021 and purchases in the three months ended March 31, 2021 from these vendors totaled approximately $.
Restatement of the Consolidated Financial Statements
The purpose of this restatement is to correct an error in the Company’s previously issued financial statements for the year ended March 31, 2021 in connection with the classification of $65,720 of inventory converted to property, plant and equipment reported within the Supplemental Information section of the Statement of Cash Flows. The $65,720 in inventory converted to property, plant and equipment has now been re-classified to purchases of property, plant and equipment in the Cash Flows from Investing Activities section of the Statement of Cash Flows.
There was no effect of the restatement to the Company’s condensed consolidated balance sheet, condensed consolidated statement of operations and condensed consolidated statement of shareholders’ equity for the quarter ended March 31, 2021.
In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality (“SAB 99”) and Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), the Company has determined that the impact of adjustments relating to the correction of this accounting error are not material to previously issued annual audited and unaudited interim financial statements.
The effects of the restatement on the Company’s consolidated statement of cash flows for the quarter ended March 31, 2021 are as follows:
There was no impact to net cash provided from financing activities within our consolidated statement of cash flows nor was there an impact on the net change in cash resulting from restatement.
Uncertain Tax Matters
The Company believes it has appropriately accrued for the expected outcome of uncertain tax matters and believes such liabilities represent a reasonable provision for taxes ultimately expected to be paid; however, these liabilities may need to be adjusted as new information becomes known and as tax examinations continue to progress, or as settlements or litigations occur.
Recent Accounting Pronouncements
There are no recently issued accounting pronouncements that we have not yet adopted that we believe will have a material effect on our financial statements.
Income Tax Expense
The Company recorded income tax expense during the quarter of $31,384 with income before income taxes of $181,221. In the U.S. the Company has not generated a tax liability due to incurring taxable losses.
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REVENUE |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Revenue from Contract with Customer [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| REVENUE | NOTE 2. REVENUE
Our revenue is derived from short-term contracts. Revenue is recognized when we satisfy a performance obligation by transferring control of the promised goods or services to our customers at a point in time, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. We also assess our customer’s ability and intention to pay, which is based on a variety of factors including our customer’s historical payment experience and financial condition. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 days.
Revenue generally does not include right of return or other significant post-delivery obligations. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. We elected to treat shipping and handling costs as a fulfillment cost instead of as a separate performance obligation. We recognize the cost for shipping and handling when incurred as an expense in cost of sales.
All of our contracts are less than one year in duration. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Disaggregation of Revenue
Approximately 91% of our revenue is from North America and approximately 9% is from the Middle East for the three months ended March 31, 2022. For the three months ended March 31, 2021, approximately 86% of our revenue was from North America and approximately 14% was from the Middle East.
Revenue disaggregated by revenue source are as follows:
Contract Costs
We do not incur any material costs of obtaining contracts.
Contract Balances
Under our sales contracts, we invoice customers after our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under ASC 606.
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INVENTORIES |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| INVENTORIES | NOTE 3. INVENTORIES
Inventories are comprised of the following:
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PROPERTY, PLANT AND EQUIPMENT |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY, PLANT AND EQUIPMENT | NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following:
The Company sold its airplane hangar for a gain of $10,000 in February 2021.
Depreciation expense related to property, plant and equipment for the three months ended March 31, 2022 and 2021 was $369,066 and $398,408, respectively.
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INTANGIBLE ASSETS |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INTANGIBLE ASSETS | NOTE 5. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
Amortization expense related to intangible assets for the three months ended March 31, 2022 and 2021 was $41,667 and $291,666, respectively.
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RELATED PARTY NOTE RECEIVABLE |
3 Months Ended |
|---|---|
Mar. 31, 2022 | |
| Receivables [Abstract] | |
| RELATED PARTY NOTE RECEIVABLE | NOTE 6. RELATED PARTY NOTE RECEIVABLE
In January 2014, we entered into a Note Purchase and Sale Agreement under which we agreed to purchase a loan made to Tronco Energy Corporation in order to take over the legal position as Tronco’s senior secured lender. Tronco is an entity owned by Troy and Annette Meier. Effective August 2017, the Company fully reserved the related party note receivable of $6,979,043, which reduced the related party note receivable balance to $0. The Company will record a recovery of the loan upon receiving repayment of the note or interest in other income. On July 7, 2020, the Company entered into an amended and restated loan agreement and note with Tronco changing the payment terms on the note. As amended, the interest rate on the note is fixed at 2% per annum. The note matures with a balloon payment of all unpaid interest and principal due on December 31, 2022. The Tronco note balance, including accrued interest, as of March 31, 2022 was approximately $6,783,000 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.
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LONG-TERM DEBT |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LONG-TERM DEBT | NOTE 7. LONG-TERM DEBT
Long-term debt is comprised of the following:
Hard Rock Note
In 2014, the Company purchased all of the interests of Hard Rock Solutions, LLC (“Hard Rock”). Consideration consisted of $12.5 million paid in cash at closing and a $12.5 million seller’s note (the “Hard Rock Note”). The Hard Rock Note and subsequent amendments are secured by all of the patents, patents pending, other patent rights, and trademarks transferred to Hard Rock.
The Hard Rock Note has a remaining balance of $750,000 as of March 31, 2022, accrues interest at 8.00% per annum and is fully payable on October 5, 2022. The Company paid an interest payment on the note on January 20, 2022 of $17,589 and is obligated to pay interest payments on April 5, 2022 and July 5, 2022 prior to the full payment due on October 5, 2022. In April, the Company made the accrued interest payment of $12,328.77.
Credit Agreement
In February 2019, the Company entered into a Loan and Security Agreement (the “Credit Agreement”) with Austin Financial Services, Inc. (“AFS”). The Credit Agreement provides a $4,300,000 credit facility, which includes a $800,000 term loan (the “Term Loan”) and a $3,500,000 line of credit (the “LOC”). The Credit Agreement matures on February 20, 2023, subject to early termination pursuant to the terms of the agreement or extension as may be agreed by the parties.
As of March 31, 2022, we had approximately $250,000 outstanding on the Term Loan and approximately $1,000,000 outstanding on the LOC. Amounts outstanding under the LOC at any time may not exceed the sum of: (a) up to 85% of accounts receivable or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect (less a dilution reserve as determined by AFS in its sole good faith discretion), plus (b) the lesser of (i) up to 50% of inventory or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect, or (ii) the inventory sublimit, minus (c) the borrowing base reserve as may be determined from time to time by AFS.
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 LOC is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause. As of March 31, 2022, we were in compliance with the covenants in the Credit Agreement.
The interest rate for the Term Loan and the LOC is prime plus 2%. As of March 31, 2022, the interest rate for the Term Loan was 9.10%, which includes a 3.6% management fee rate. Even if our borrowings under the LOC are less than $1,000,000, we still pay interest as if we had borrowed $1,000,000. As of March 31, 2022, we had approximately $10,000 of accrued interest. The obligations of the Company under the Credit Agreement are secured by a security interest in substantially all of the tangible and intangible assets of the Company, other than any assets owned by the Company that constitute real property (and fixtures affixed to such real property), certain excluded equipment or intellectual property. A collateral management fee is payable monthly on the used portion of the LOC and Term Loan.
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FINANCING OBLIGATION |
3 Months Ended | ||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||
| Financing Obligation | |||||||||||||||||||||||||||||||||||||
| FINANCING OBLIGATION | NOTE 8. FINANCING OBLIGATION
On December 7, 2020, the Company entered into a sale agreement (the “Sale Agreement”). Pursuant to the terms of the Sale Agreement, the Company sold land and property related to the Company’s headquarters and manufacturing facility in Vernal, Utah (the “Property”) for a purchase price of $4,448,500. Concurrent with the sale of the Property, the Company entered into a fifteen-year lease agreement (the “Lease Agreement”), whereby the Company will lease back the Property at an annual rate of $311,395 with payments made monthly, subject to annual rent increases of 1.5%. Under the Lease Agreement, the Company has an option to extend the term of the lease and to repurchase the Property. Due to this repurchase option, the Company was unable to account for the transfer as a sale under ASC Topic 842, Leases, and as such, the transaction is a failed sale-leaseback that is accounted for as a financing transaction.
The Company received cash of $1,622,106, retired real estate debt of $2,638,773 and recorded a financing obligation liability of $4,260,879 related to the transaction. There was no gain recorded since sale accounting was precluded. The financing obligation has an implied interest rate of 6.0%. At the conclusion of the fifteen-year lease period, the financing obligation residual is estimated to be $2,188,710, which corresponds to the carrying value of the property. The balance of the financing obligation as of March 31, 2022 and December 31, 2021 was $4,161,539 and $4,178,336, respectively.
The financing obligation is summarized below:
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GEOGRAPHICAL OPERATIONS INFORMATION |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GEOGRAPHICAL OPERATIONS INFORMATION | NOTE 9. GEOGRAPHICAL OPERATIONS INFORMATION
The following summarizes revenue by geographic location:
The following summarizes net property, plant and equipment by geographic location:
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COMMITMENTS AND CONTINGENCIES |
3 Months Ended |
|---|---|
Mar. 31, 2022 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| COMMITMENTS AND CONTINGENCIES | NOTE 10. COMMITMENTS AND CONTINGENCIES
We are subject to litigation that arises from time to time in the ordinary course of our business activities. In February 2019, the Company filed a patent infringement lawsuit in the United States District Court for the Western District of Louisiana, Lafayette Division, asserting that Stabil Drill Specialties, 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 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. The parties are preparing this case for trial and expect a jury trial setting in late 2022 or early 2023.
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SHAREHOLDERS’ EQUITY |
3 Months Ended |
|---|---|
Mar. 31, 2022 | |
| Equity [Abstract] | |
| SHAREHOLDERS’ EQUITY | NOTE 11. SHAREHOLDERS’ EQUITY
The Company is authorized to issue shares of common stock, par value $. As of March 31, 2022 and December 31, 2021, the number of common shares issued and outstanding was .
The Company did not grant stock options or stock awards during the three months ended March 31, 2022 and 2021, respectively.
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SUBSEQUENT EVENTS |
3 Months Ended |
|---|---|
Mar. 31, 2022 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS | 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 4/14/2022 and, upon acceptance of the machine, the Company will finance the remaining balance of $669,200. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||
| Organization and Nature of Operations | 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”).
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| Basis of Presentation | 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.
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| Unaudited Interim Financial Presentation | Unaudited Interim Financial Presentation
These unaudited interim condensed consolidated financial statements for the three months ended March 31, 2022 and 2021, and the related footnote disclosures included herein, are unaudited. However, in the opinion of management, these unaudited condensed consolidated interim financial statements have been prepared on the same basis as the audited financial statements and reflect all adjustments necessary to fairly state the results for such periods. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results of operations expected for the year ended December 31, 2022. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2021 and the notes thereto, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the “SEC”).
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| Segment Reporting | 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.
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| Use of Estimates | 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, share-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.
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| Concentrations of Credit Risk | Concentrations of Credit Risk
The Company has two significant customers that represented 90% and 85% of its revenue for the three months ended March 31, 2022 and 2021, respectively. These customers had approximately $2,137,000 and $846,000 in accounts receivable as of March 31, 2022 and 2021, respectively.
The Company had two vendors that represented % of its purchases for the three months ended March 31, 2022. These vendors had approximately $ in accounts payable as of March 31, 2022 and purchases in the three months of ended March 31, 2022 from these vendors totaled approximately $. The Company had two vendors that represented % of its purchases for the three months ended March 31, 2021. These vendors had approximately $ in accounts payable as of March 31, 2021 and purchases in the three months ended March 31, 2021 from these vendors totaled approximately $.
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| Restatement of the Consolidated Financial Statements | Restatement of the Consolidated Financial Statements
The purpose of this restatement is to correct an error in the Company’s previously issued financial statements for the year ended March 31, 2021 in connection with the classification of $65,720 of inventory converted to property, plant and equipment reported within the Supplemental Information section of the Statement of Cash Flows. The $65,720 in inventory converted to property, plant and equipment has now been re-classified to purchases of property, plant and equipment in the Cash Flows from Investing Activities section of the Statement of Cash Flows.
There was no effect of the restatement to the Company’s condensed consolidated balance sheet, condensed consolidated statement of operations and condensed consolidated statement of shareholders’ equity for the quarter ended March 31, 2021.
In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality (“SAB 99”) and Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), the Company has determined that the impact of adjustments relating to the correction of this accounting error are not material to previously issued annual audited and unaudited interim financial statements.
The effects of the restatement on the Company’s consolidated statement of cash flows for the quarter ended March 31, 2021 are as follows:
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.
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| Uncertain Tax Matters | 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.
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| Recent Accounting Pronouncements | 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.
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| Income Tax Expense | Income Tax Expense
The Company recorded income tax expense during the quarter of $31,384 with income before income taxes of $181,221. In the U.S. the Company has not generated a tax liability due to incurring taxable losses.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF RESTATEMENT OF CONSOLIDATED STATEMENT OF CASH FLOWS | The effects of the restatement on the Company’s consolidated statement of cash flows for the quarter ended March 31, 2021 are as follows:
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REVENUE (Tables) |
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Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue from Contract with Customer [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF REVENUE DISAGGREGATED BY REVENUE | Revenue disaggregated by revenue source are as follows:
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INVENTORIES (Tables) |
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Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF INVENTORIES | Inventories are comprised of the following:
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PROPERTY, PLANT AND EQUIPMENT (Tables) |
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Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT | Property, plant and equipment are comprised of the following:
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INTANGIBLE ASSETS (Tables) |
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Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF INTANGIBLE ASSETS | Intangible assets are comprised of the following:
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LONG-TERM DEBT (Tables) |
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Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF LONG-TERM DEBT INSTRUMENTS | Long-term debt is comprised of the following:
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FINANCING OBLIGATION (Tables) |
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Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||
| Financing Obligation | |||||||||||||||||||||||||||||||||||||
| SCHEDULE OF FINANCING OBLIGATION | The financing obligation is summarized below:
|
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GEOGRAPHICAL OPERATIONS INFORMATION (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF REVENUE AND PROPERTY, PLANT AND EQUIPMENT BY GEOGRAPHIC LOCATION | The following summarizes revenue by geographic location:
|
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| SCHEDULE OF NET PROPERTY, PLANT AND EQUIPMENT BY GEOGRAPHIC LOCATION | The following summarizes net property, plant and equipment by geographic location:
|
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SCHEDULE OF RESTATEMENT OF CONSOLIDATED STATEMENT OF CASH FLOWS (Details) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Net cash from operating activities | $ 1,083,106 | $ 205,083 |
| Net cash from investing activities | $ (919,127) | (24,956) |
| Previously Reported [Member] | ||
| Net cash from operating activities | 139,363 | |
| Net cash from investing activities | $ 40,764 | |
SCHEDULE OF REVENUE DISAGGREGATED BY REVENUE (Details) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Disaggregation of Revenue [Line Items] | ||
| Total Revenue | $ 4,130,164 | $ 2,424,653 |
| Tools and Product Sales [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total Revenue | 664,300 | 495,000 |
| Tool Rental [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total Revenue | 385,150 | 336,453 |
| Other Related Revenue [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total Revenue | 1,719,797 | 832,310 |
| Tool Revenue [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total Revenue | 2,769,247 | 1,663,763 |
| Contract Services [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Total Revenue | $ 1,360,917 | $ 760,890 |
REVENUE (Details Narrative) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Disaggregation of Revenue [Line Items] | ||
| Description of payment terms | 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 | |
| Revenue Benchmark [Member] | Geographic Concentration Risk [Member] | UNITED STATES | ||
| Disaggregation of Revenue [Line Items] | ||
| Concentration risk percentage | 91.00% | 86.00% |
| Revenue Benchmark [Member] | Geographic Concentration Risk [Member] | Middle East [Member] | ||
| Disaggregation of Revenue [Line Items] | ||
| Concentration risk percentage | 9.00% | 14.00% |
SCHEDULE OF INVENTORIES (Details) - USD ($) |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Inventory Disclosure [Abstract] | ||
| Raw material | $ 835,614 | $ 769,547 |
| Work in progress | 112,643 | 65,945 |
| Finished goods | 76,088 | 339,143 |
| Inventories, net | $ 1,024,345 | $ 1,174,635 |
SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT (Details) - USD ($) |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Property, Plant and Equipment [Abstract] | ||
| Land | $ 880,416 | $ 880,416 |
| Buildings | 4,764,441 | 4,764,441 |
| Building improvements | 755,039 | 755,039 |
| Machinery and equipment | 13,126,624 | 12,207,497 |
| Office equipment, fixtures and software | 628,356 | 628,358 |
| Transportation assets | 265,760 | 265,760 |
| Property, plant and equipment, gross | 20,420,636 | 19,501,511 |
| Accumulated depreciation | (12,940,246) | (12,571,182) |
| Property, plant and equipment, net | $ 7,480,390 | $ 6,930,329 |
PROPERTY, PLANT AND EQUIPMENT (Details Narrative) - USD ($) |
1 Months Ended | 3 Months Ended | |
|---|---|---|---|
Feb. 28, 2021 |
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Property, Plant and Equipment [Abstract] | |||
| Gain on sale of asset | $ 10,000 | ||
| Depreciation expense related to property, plant and equipment | $ 369,066 | $ 398,408 | |
SCHEDULE OF INTANGIBLE ASSETS (Details) - USD ($) |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Finite-Lived Intangible Assets [Line Items] | ||
| Intangible assets, gross | $ 14,900,000 | $ 14,900,000 |
| Accumulated amortization | (14,705,556) | (14,663,889) |
| Intangible assets, net | 194,444 | 236,111 |
| Developed Technology Rights [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Intangible assets, gross | 7,000,000 | 7,000,000 |
| Customer Contracts [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Intangible assets, gross | 6,400,000 | 6,400,000 |
| Trademarks and Trade Names [Member] | ||
| Finite-Lived Intangible Assets [Line Items] | ||
| Intangible assets, gross | $ 1,500,000 | $ 1,500,000 |
INTANGIBLE ASSETS (Details Narrative) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Goodwill and Intangible Assets Disclosure [Abstract] | ||
| Amortization of intangible assets | $ 41,667 | $ 291,666 |
RELATED PARTY NOTE RECEIVABLE (Details Narrative) - Tronco Energy Corporation [Member] - USD ($) |
3 Months Ended | |||
|---|---|---|---|---|
Aug. 31, 2017 |
Mar. 31, 2022 |
Dec. 31, 2021 |
Jul. 07, 2020 |
|
| Defined Benefit Plan Disclosure [Line Items] | ||||
| Related party note receivable | $ 6,979,043 | |||
| Debt instrument decrease | $ 0 | |||
| Debt interest rate | 2.00% | |||
| Common stock hold as collateral | 8,267,860 | |||
| Tronco Note [Member] | ||||
| Defined Benefit Plan Disclosure [Line Items] | ||||
| Related party note receivable | $ 6,783,000 | $ 6,749,000 | ||
| Debt maturity description | The note matures with a balloon payment of all unpaid interest and principal due on December 31, 2022 |
SCHEDULE OF LONG-TERM DEBT INSTRUMENTS (Details) - USD ($) |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Debt Instrument [Line Items] | ||
| Long term debt, Total | $ 2,341,876 | $ 2,452,434 |
| Current portion | (2,116,480) | (2,195,759) |
| Long-term debt, net | 225,396 | 256,675 |
| Hard Rock Note [Member] | ||
| Debt Instrument [Line Items] | ||
| Long term debt, Total | 750,000 | 750,000 |
| Credit Agreement [Member] | ||
| Debt Instrument [Line Items] | ||
| Long term debt, Total | 1,233,483 | 1,312,194 |
| Machinery Loans [Member] | ||
| Debt Instrument [Line Items] | ||
| Long term debt, Total | 329,160 | 357,963 |
| Transportation Loans [Member] | ||
| Debt Instrument [Line Items] | ||
| Long term debt, Total | $ 29,233 | $ 32,277 |
SCHEDULE OF FINANCING OBLIGATION (Details) - USD ($) |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Financing Obligation | ||
| Finance obligations for sale-leaseback transactions | $ 4,161,539 | $ 4,178,336 |
| Current principal portion of finance obligation | (67,853) | (65,678) |
| Non-current portion of finance obligation | $ 4,093,686 | $ 4,112,658 |
SCHEDULE OF REVENUE AND PROPERTY, PLANT AND EQUIPMENT BY GEOGRAPHIC LOCATION (Details) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||
| Revenues | $ 4,130,164 | $ 2,424,653 |
| North America [Member] | ||
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||
| Revenues | 3,745,014 | 2,092,200 |
| Middle East [Member] | ||
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||
| Revenues | $ 385,150 | $ 332,453 |
SCHEDULE OF NET PROPERTY, PLANT AND EQUIPMENT BY GEOGRAPHIC LOCATION (Details) - USD ($) |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||
| Property, plant and equipment, net | $ 7,480,390 | $ 6,930,329 |
| North America [Member] | ||
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||
| Property, plant and equipment, net | 5,456,973 | 5,762,066 |
| Middle East [Member] | ||
| Revenues from External Customers and Long-Lived Assets [Line Items] | ||
| Property, plant and equipment, net | $ 2,023,417 | $ 1,168,263 |
SHAREHOLDERS’ EQUITY (Details Narrative) - $ / shares |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Equity [Abstract] | ||
| Common stock, shares authorized | 100,000,000 | 100,000,000 |
| Common stock, par value | $ 0.001 | $ 0.001 |
| Common stock, shares issued | 28,235,001 | 28,235,001 |
| Common stock, shares outstanding | 28,235,001 | 28,235,001 |
SUBSEQUENT EVENTS (Details Narrative) - USD ($) |
Apr. 14, 2022 |
Mar. 22, 2022 |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|---|---|
| Subsequent Event [Line Items] | ||||
| Purchase of machinery value | $ 7,480,390 | $ 6,930,329 | ||
| Mazak [Member] | CNC Machine [Member] | ||||
| Subsequent Event [Line Items] | ||||
| Purchase of machinery value | $ 956,000 | |||
| Payment to pruchase machine | $ 286,800 | |||
| Mazak [Member] | CNC Machine [Member] | Subsequent Event [Member] | ||||
| Subsequent Event [Line Items] | ||||
| Payment to pruchase machine | $ 669,200 |
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