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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from ____________ to ____________
Commission
File Number
(Name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s
Telephone Number: (
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
| Title of each class: | Trading Symbol(s) | Name of each exchange on which registered: | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934, during the preceding 12 months (or such shorter period that the Registrant was required to file such report(s)), and (2)
has been subject to such filing requirements for the past 90 days. ☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒
As of August 14, 2023, the registrant had shares of its common stock issued and outstanding.
TABLE OF CONTENTS
| PART I | ||
| Item 1. | Financial Statements (Unaudited) | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 17 |
| Item 4. | Controls and Procedures | 17 |
| PART II | ||
| Item 1. | Legal Proceedings | 18 |
| Item 1A. | Risk Factors | 18 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 18 |
| Item 3. | Defaults Upon Senior Securities | 18 |
| Item 4. | Mine Safety Disclosures | 18 |
| Item 5. | Other Information | 18 |
| Item 6. | Exhibits | 19 |
| SIGNATURES | 20 | |
| ii |
Forward-Looking Statements
Forward-looking statements involve risks and uncertainties that are beyond the control of Superior Drilling Products, Inc. (the “Company” or “SDPI”). Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurances can be given that these expectations will prove to be correct. Forward-looking statements are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Forward-looking statements include statements that are not historical facts and can be identified by the words “anticipate,” “estimate,” “expect,” “may,” “project,” “believe” or similar expressions, or by the Company’s discussion of strategies or trends. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control, including:
| ● | the volatility of oil and natural gas prices; | |
| ● | the cyclical nature of the oil and gas industry; | |
| ● | availability of financing and access to capital markets; | |
| ● | our reliance on significant customers; | |
| ● | consolidation within our customers’ industries; | |
| ● | competitive products and pricing pressures; | |
| ● | our ability to develop and commercialize new and/or innovative drilling and completion tool technologies; | |
| ● | fluctuations in our operating results; | |
| ● | our dependence on key personnel; | |
| ● | costs and availability of raw materials; | |
| ● | our dependence on third party suppliers; | |
| ● | unforeseen risks in our manufacturing processes; | |
| ● | the need for skilled workers; | |
| ● | our ability to successfully manage our growth strategy; | |
| ● | unanticipated risks associated with, and our ability to integrate, acquisitions; | |
| ● | current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries, specifically the Middle East region and Eastern Europe; | |
| ● | the potential impact of the coronavirus, variants of the coronavirus or other major health crises on our business and results of operations, including the impact to our supply chain; | |
| ● | terrorist threats or acts, war and civil disturbances; | |
| ● | our ability to protect our intellectual property; | |
| ● | impact of environmental matters, including future environmental regulations; | |
| ● | implementing and complying with safety policies; | |
| ● | breaches of security in our information systems and other cybersecurity risks; | |
| ● | related party transactions with our founders; and | |
| ● | risks associated with our common stock. |
| iii |
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Superior Drilling Products, Inc.
Condensed Consolidated Balance Sheets (Unaudited)
| June 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Inventories | ||||||||
| Asset held for sale | ||||||||
| 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 financing obligation | ||||||||
| Current portion of long-term debt, net of discounts | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Operating lease liability, less current portion | ||||||||
| Long-term financing obligation, less current portion | ||||||||
| Long-term debt, less current portion, net of discounts | ||||||||
| Deferred income | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 9) | ||||||||
| Shareholders’ equity | ||||||||
| Common stock - $ par value; shares authorized; and shares issued and outstanding as of June 30, 2023 and December 31, 2022, 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 consolidated financial statements.
| 1 |
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Operating cost and expenses | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| Selling, general, and administrative expenses | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| Total operating cost and expenses | ||||||||||||||||
| Operating income | ||||||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Recovery of related party note receivable | ||||||||||||||||
| Loss on disposition of assets | ( | ) | ( | ) | ||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Income (loss) before income taxes | ( | ) | ||||||||||||||
| Income tax expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ||||||||||
| Earnings (loss) per common share - basic | $ | $ | ( | ) | $ | $ | ||||||||||
| Weighted average common shares outstanding - basic | ||||||||||||||||
| Earnings (loss) per common share - diluted | $ | $ | ( | ) | $ | $ | ||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Share-based compensation expense | ||||||||
| Amortization of right-of-use assets | ||||||||
| Amortization of deferred loan costs | ||||||||
| Loss on disposition of assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable, accrued expenses, and other liabilities | ||||||||
| Income tax payable | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash Flows From Investing Activities | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Proceeds from recovery of related party note receivable | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Principal payments on debt | ( | ) | ( | ) | ||||
| Proceeds received from debt | ||||||||
| Payments on revolving loan | ( | ) | ( | ) | ||||
| Proceeds received from revolving loan | ||||||||
| Proceeds from exercise of stock options | ||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Right of use assets obtained in exchange for lease obligations | $ | $ | ||||||
| Disposal of asset held for sale | $ | $ | ||||||
| Property, plant and equipment in accounts payable | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
Superior Drilling Products, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Total Shareholders’ | |||||||||||||||||
| Shares | Par Value | Capital | Deficit | Equity | ||||||||||||||||
| For the Quarter Ended June 30, 2022 | ||||||||||||||||||||
| Balance - March 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Share-based compensation expense | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance - June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| For the Quarter Ended June 30, 2023 | ||||||||||||||||||||
| Balance - March 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Share-based compensation expense | - | |||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Balance - June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Shareholders’ | |||||||||||||||||
| Shares | Par Value | Capital | Deficit | Equity | ||||||||||||||||
| For the Six Months Ended June 30, 2022 | ||||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Share-based compensation expense | - | |||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Balance - June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| For the Six Months Ended June 30, 2023 | ||||||||||||||||||||
| Balance - December 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Share-based compensation expense | - | |||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Balance - June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
Superior Drilling Products, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 in Vernal, Utah, where we manufacture solutions for the drilling industry, as well as customers’ custom products. We also operate a repair facility in Dubai. Our headquarters are also located in Vernal, Utah.
Our subsidiaries include (a) Superior Drilling Solutions, LLC (previously known as Superior Drilling Products, LLC), a Utah limited liability company (“SDS”), together with its wholly owned subsidiary Superior Design and Fabrication, LLC, a Utah limited liability company (“SDF”), (b) Extreme Technologies, LLC, a Utah limited liability company (“ET”), (c) Meier Properties Series, LLC, a Utah limited liability company (“MPS”), (d) Meier Leasing, LLC, a Utah limited liability company (“ML”), and (e) Hard Rock Solutions, LLC (“HR” or “Hard Rock”).
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of Superior Drilling Products Inc. and all of its wholly owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.
These condensed consolidated financial statements for the three and six months ended June 30, 2023 and 2022, and the related footnote disclosures included herein, are unaudited. The preparation of financial statements in conformity with GAAP requires the use of management’s estimates. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results of operations expected for the year ended December 31, 2023. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the years ended December 31, 2022 and 2021 and the notes thereto, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission (the “SEC”).
Significant Accounting Policies
The Company’s accounting policies are set forth in Note 1 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC. There were no significant updates or revisions to our accounting policies during the three or six months ended June 30, 2023.
Concentrations of Credit Risk
The
Company has two significant customers that represented
The Company had two vendors that represented % and % of its purchases for each of the six months ended June 30, 2023 and 2002, respectively. These vendors had approximately $ and $ in accounts payable as of June 30, 2023 and December 31, 2022, respectively.
| 5 |
Superior Drilling Products, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
2. REVENUE
Disaggregation of Revenue
The following table presents revenue disaggregated by type:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Tool revenue: | ||||||||||||||||
| Tool and product sales | $ | $ | $ | $ | ||||||||||||
| Tool rental | ||||||||||||||||
| Other related revenue | ||||||||||||||||
| Total tool revenue | ||||||||||||||||
| Contract services | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
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.
Contract Costs
We did not incur any material costs of obtaining contracts.
3. INVENTORIES
Inventories were comprised of the following:
| June 30, 2023 | December 31, 2022 | |||||||
| Raw material | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total inventories | $ | $ | ||||||
| 6 |
Superior Drilling Products, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
4. PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment was comprised of the following:
| June 30, 2023 | December 31, 2022 | |||||||
| Land | $ | $ | ||||||
| Buildings | ||||||||
| Leasehold improvements | ||||||||
| Machinery, equipment, and rental tools | ||||||||
| Office equipment, fixtures and software | ||||||||
| Transportation assets | ||||||||
| Property, plant and equipment, gross | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Total property, plant and equipment, net | $ | $ | ||||||
Depreciation
expense related to property, plant and equipment for the three months ended June 30, 2023 and 2022 was $
5. INTANGIBLE ASSETS
Intangible assets were comprised of the following:
| June 30, 2023 | December 31, 2022 | |||||||
| Developed technology | $ | $ | ||||||
| Customer contracts | ||||||||
| Trademarks | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Total intangible assets, net | $ | $ | ||||||
Amortization
expense related to intangible assets for the three months ended June 30, 2023 and 2022 was $
6. RELATED PARTY RECEIVABLE
In
January 2014, we entered into a Note Purchase and Sale Agreement under which we agreed to purchase a loan made to Tronco Energy Corporation
(“Tronco”) 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 $
| 7 |
Superior Drilling Products, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
On
March 31, 2023, the Company entered into a fourth amended and restated loan agreement and note with Tronco to extend the maturity date
of the principal to
7. LONG-TERM DEBT
Long-term debt is comprised of the following:
| June 30, 2023 | December 31, 2022 | |||||||
| Credit Agreement | $ | $ | ||||||
| Machinery loans | ||||||||
| Transportation loan | ||||||||
| Insurance loan | ||||||||
| Total long-term debt | ||||||||
| Less: current portion of long-term debt, net of discounts | ( | ) | ( | ) | ||||
| Total long-term debt, less current portion, net of discounts | $ | $ | ||||||
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 $
Amounts
outstanding under the Line of Credit at any time may not exceed the sum of: (a) up to 85% of accounts receivable or such lesser percentage
as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect (less a dilution reserve
as determined by AFS in its sole good faith discretion), plus (b) the lesser of (i) up to 50% of inventory or such lesser percentage
as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect, or (ii) the inventory
sublimit, minus (c) the borrowing base reserve as may be determined from time to time by AFS. As of June 30, 2023, the Company had approximately
$
The
interest rate for the Term Loan and the Line of Credit is prime plus
| 8 |
Superior Drilling Products, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
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 Line of Credit is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause. At June 30, 2023, we were in compliance with the covenants in the Credit Agreement.
Machinery Loans
The
Company financed the purchase of machinery and equipment through various loans. The outstanding loans have interest rates ranging from
Transportation Loan
The
Company financed the purchase of a vehicle with a loan agreement. The term of the loan is 60 months and matures in
Insurance Loan
The
Company financed insurance premiums with a loan agreement. The term of the loan is 10 months and matures in March 2024. The interest
rate of the loan is
8. FINANCING OBLIGATION LIABILITY
On
December 7, 2020, the Company entered into an agreement to sell 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 outstanding balance of the financing obligation liability is summarized below:
| June 30, 2023 | December 31, 2022 | |||||||
| Financing obligation for sale-leaseback transaction | $ | $ | ||||||
| Current principal portion of finance obligation | ( | ) | ( | ) | ||||
| Non-current portion of financing obligation | $ | $ | ||||||
| 9 |
Superior Drilling Products, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
9. COMMITMENTS AND CONTINGENCIES
We are subject to litigation that arises from time to time in the ordinary course of our business activities. In February 2019, the Company filed a patent infringement lawsuit in the United States District Court for the Western District of Louisiana, Lafayette Division, asserting that Stabil Drill Specialties, LLC’s (“Stabil Drill”) Smoothbore Eccentric Reamer infringes the patents of Extreme Technologies, LLC (one of our subsidiaries) on our patented Drill-N-Ream well bore conditioning tool. The lawsuit was subsequently moved from Louisiana to the United States District Court for the Southern District of Texas, Houston Division. Additionally, on May 20, 2019, Extreme Technologies, LLC sued Short Bit & Tool Co. and Lot William Short, Jr. (“Defendants”) in the Northern District of Texas-Dallas Division for their work manufacturing the Smoothbore Eccentric Reamer for Stabil Drill. The Dallas lawsuit is stayed pending resolution of the first-filed, Houston suit. On October 1, 2020, Superior Energy Services, Stabil Drill’s parent company, filed for bankruptcy, which resulted in a brief, automatic stay of the litigation. Superior Energy Services announced on February 2, 2021, that it successfully completed its financial restructuring and emerged from Chapter 11 bankruptcy, but this bankruptcy did not affect Extreme 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. On May 23, 2022, the Court issued its Order on Claim Construction of the patents, adopting Extreme Technologies’ proffered interpretation on the disputed claim terms. On February 13, 2023, the lawsuit was reassigned to United States District Judge Drew B. Tipton and United States Magistrate Judge Peter Bray. On March 27, 2023, Judge Bray entered an amended Scheduling Order. In accordance with such amended Scheduling Order, fact discovery ended on April 14, 2023, and expert discovery is scheduled to end on or before August 31, 2023. On July 5, 2023, Judge Bray issued a Memorandum and Recommendation finding that Stabil Drill is prohibited from asserting its patent invalidity affirmative defenses. On August 2, 2023, Stabil Drill filed objections to the Court’s Order and the Court could possibly modify the Order based upon Stabil Drill’s filed objections. The parties are preparing this case for trial and expect a jury trial setting in early spring of 2024.
We are not currently involved in any other litigation.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ||||||||||
| Denominator: | ||||||||||||||||
| Weighted average shares of common stock outstanding - basic | ||||||||||||||||
| Effect of dilutive options | ||||||||||||||||
| Weighted average shares of common stock outstanding - diluted | ||||||||||||||||
| Earnings (loss) per common share – basic | $ | $ | ( | ) | $ | $ | ||||||||||
| Earnings (loss) per common share - diluted | $ | $ | ( | ) | $ | $ | ||||||||||
11. LEASES
The
Company leases certain facilities Utah and Dubai under long-term operating leases with lease terms of
| 10 |
Superior Drilling Products, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Other information related to operating leases:
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows | $ | $ | ||||||
| Weighted average remaining lease-term (in years) | ||||||||
| Weighted average discount rate | % | % | ||||||
12. SEGMENT REPORTING
We report our segment results based on our geographic areas of operations, North America and International. These segments have similarities from a product perspective, but management believes that due to operational differences, such as sales models and regulatory environments, information about the segments would be useful to readers of the financial statements.
| ● | North America includes our PDC drill bit and specialty tool sales and contract services business in the United States and Mexico, which have been aggregated | |
| ● | International includes our specialty tool rental business in the Middle East |
Revenue and certain operating expenses are directly attributable to each segment.
Unallocated corporate costs primarily include corporate shared costs, such as payroll and compensation, professional fees, and rent, as well as costs associated with certain shared research and development activities.
Our operating segments are not evaluated using asset information. Prior periods have been restated to conform with the current year presentation. This change was made due to international revenue becoming more significant in the current year.
The following table summarizes information about our segments:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue: | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| International | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| Operating income: | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| International | ( | ) | ( | ) | ||||||||||||
| Corporate costs, unallocated | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating income | $ | $ | $ | $ | ||||||||||||
North
America revenue includes revenue from customers in Mexico totaling approximately $
Information about products and services
See Note 2 – Revenue
| 11 |
Superior Drilling Products, Inc.
Notes to the Condensed Consolidated Financial Statements (unaudited)
13. SUBSEQUENT EVENT
Loan Agreement
On July 28, 2023, the Company entered into a Loan Agreement (the “Loan Agreement”) among Vast Bank, National Association, as lender (the “Lender”), and various subsidiaries of the Company as guarantors (the “Guarantors”).
The Loan Agreement provides for loans through the following facilities (collectively, the “Loans”):
| ● | Revolving
Line which provides the lesser of $ | |
| ● | Term
Loan for $ |
The Company will make payments of principal and interest monthly on the Term Loan, and interest only on the Revolving Line, commencing on August 28, 2023.
The
Company paid the Lender a non-refundable upfront fee of
A portion of the proceeds of the Loans were used to repay the Credit Agreement.
In
connection with the Loan Agreement, the Company entered into Business Manager Agreements for the purchase by the Lender of certain domestic
and international accounts receivable of the Company. The face amount of the accounts under each agreement that may be purchased cannot
exceed $
Amendment to Lease
In
connection with entering into the Loan Agreement, Meier Properties, Series LLC, a subsidiary of the Company, entered into an amendment
(the “Amendment”) to the lease for the Company’s facilities in Vernal, Utah. Under the amendment, the tenant paid a
security deposit of approximately $
Restricted Stock Units
On August 10, 2023, the Board of Directors granted restricted stock units to Troy Meier, Chairman and Chief Executive Officer, granted restricted stock units to Annette Meier, President and Chief Operating Officer, granted restricted stock units to Chris Cashion, Chief Financial Officer, and restricted stock units to each of the three independent members of the Board of Directors. In addition, the Board of Directors authorized stock options to be granted to employees of the Company other than Mr. and Mrs. Meier and Mr. Cashion. These stock options will vest over .
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Superior Drilling Products, Inc. is an innovative drilling and completion tool technology company providing cost saving solutions that drive production efficiencies for the oil and natural gas drilling industry. Our headquarters and manufacturing operations are located in Vernal, Utah and we operate a repair facility in Dubai. We design, manufacture, repair and sell or rent our drilling solutions which include the patented Drill-N-Ream® well bore conditioning tool (“Drill-N-Ream tool” or “DNR”) and the patented Strider™ Drill String Oscillation System technology (“Strider technology” or “Strider”). In addition, the Company is a refurbisher of PDC (polycrystalline diamond compact) drill bits primarily for a leading oil field services company. In our state-of-the-art drill tool fabrication facility, we also design and manufacture custom products for our customers.
Our strategy for growth is to leverage our expertise in drill tool technology and precision machining in order to broaden our product offerings and solutions for the oil and gas industry. We believe through our patented technologies, as well as technologies under development, that we can offer the oil and gas industry the solutions it demands to improve drilling efficiencies and reduce production costs.
As a result of its ISO 9000 certification, the Company is qualified to bid on projects in industries outside oil and gas. We believe that with this certification, and our history of supplying high quality parts to research and development departments operating in the aerospace industry, we can work to diversify our revenue sources outside of the oil & gas industry.
Industry Trends and Market Factors
The Russia – Ukraine conflict is a global concern. The Company does not have any direct exposure to Russia or Ukraine through its operations, employee base, investments or sanctions. The Company does not receive goods or services sourced from those countries, does not anticipate any disruption in its supply chain and has no business relationships, connections to or assets in Russia, Belarus or Ukraine. No impairments to assets have been made due to the conflict. The global oil industry has been impacted by this situation, but the Company’s operations and business in the Middle East has not been disrupted to date. The increase in oil producing activities in the United States has benefitted the Company’s operations. We are unable at this time to know the full ramifications of the Russia – Ukraine conflict and its effects on our business.
Inflationary and/or recessionary factors relating to the oil and gas industry may directly affect the Company’s operations. The increased demand for oil and gas production has benefited the Company’s operations. The Company is not immune to the effects of inflation on its labor requirements, supply chain and costs of revenues. The Company continues to monitor these economic trends as part of its strategic forward planning.
The total U.S. rig count as reported by Baker Hughes as of June 30, 2023 was 674 rigs, a decrease of 76 rigs from the rig count as of June 30, 2022.
The Middle East market began to improve during 2022 after a slow rebound from the COVID-19 impact, and continues to improve through mid-2023. Total rig count in that region as of June 30, 2023 was 329 compared with 303 at the same time last year.
How We Generate our Revenue
We are a drilling and completion tool technology company. We generate revenue from the refurbishment, manufacturing, repair, rental and sale of drill string tools. Our manufactured products are produced in a standard manufacturing operation, even when produced to our customer’s specifications. We also earn royalty fees under certain arrangements for certain tools we sell.
Tool sales, rentals and other related revenue
Tool and Product Sales: Revenue for tool and product sales is recognized upon shipment of tools or products to the customer. Shipping and handling costs related to tool and product sales are recorded gross as a component of both the sales price and cost of the product sold.
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Tool Rental: Rental revenue is recognized upon completion of the customer’s job for which the tool was rented. While the duration of the rental will vary by job and number of runs, these rentals are generally less than one month. The rental agreements are typically based on the price per run or footage drilled and do not have any minimum rental payments or term.
Other Related Revenue: We receive revenue from the repair of tools upon delivery of the repaired tool to the customer. We earn royalty commission revenue when our customer invoices their customer for the use of our tools.
Contract Services
Drill Bit Manufacturing and Refurbishment: We recognize revenue for our PDC drill bit services upon transfer of control, which we have determined to be upon shipment of the product. Shipping and handling costs related to refurbishing services are paid directly by the customer at the time of shipment. We also provide contract manufacturing services to customers.
Costs of Conducting Our Business
Cost of revenue is comprised of direct and indirect costs to manufacture, repair and supply our products, including labor, materials, utilities, equipment repair, lease expense related to our facilities, supplies and freight.
Selling, general and administrative expense is comprised of costs such as new business development, technical product support, research and development costs, compensation expense for general corporate operations including accounting, human resources, risk management, etc., information technology expenses, safety and environmental expenses, legal and professional fees and other related administrative functions.
Other income (expense), net is comprised primarily of interest expense and recovery of a fully reserved related party note receivable.
Results of Operations
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||
| Tool Revenue | $ | 3,552,340 | 66 | % | $ | 2,891,580 | 64 | % | $ | 7,806,550 | 67 | % | $ | 5,660,827 | 65 | % | ||||||||||||||||
| Contract Services | 1,815,010 | 34 | % | 1,649,262 | 36 | % | 3,842,014 | 33 | % | 3,010,180 | 35 | % | ||||||||||||||||||||
| Total Revenue | 5,367,350 | 100 | % | 4,540,842 | 100 | % | 11,648,564 | 100 | % | 8,671,007 | 100 | % | ||||||||||||||||||||
| Operating cost and expenses | ||||||||||||||||||||||||||||||||
| Cost of revenue | 2,013,167 | 38 | % | 2,116,096 | 47 | % | 4,251,758 | 37 | % | 3,883,995 | 45 | % | ||||||||||||||||||||
| Selling, general, and administrative expenses | 2,458,804 | 46 | % | 1,894,403 | 42 | % | 4,797,653 | 41 | % | 3,541,051 | 41 | % | ||||||||||||||||||||
| Depreciation and amortization expense | 349,447 | 7 | % | 402,648 | 9 | % | 675,460 | 6 | % | 813,379 | 9 | % | ||||||||||||||||||||
| Total operating cost and expenses | 4,821,418 | 90 | % | 4,413,147 | 97 | % | 9,724,871 | 83 | % | 8,238,425 | 95 | % | ||||||||||||||||||||
| Operating income | 545,932 | 10 | % | 127,695 | 3 | % | 1,923,693 | 17 | % | 432,582 | 5 | % | ||||||||||||||||||||
| Other income (expense) | (116,111 | ) | -2 | % | (151,904 | ) | -3 | % | 96,959 | 1 | % | (275,570 | ) | -3 | % | |||||||||||||||||
| Income (loss) before income taxes | 429,821 | 8 | % | (24,209 | ) | -1 | % | 2,020,652 | 17 | % | 157,012 | 2 | % | |||||||||||||||||||
| Income tax expense | (106,654 | ) | -2 | % | (32,299 | ) | -1 | % | (184,266 | ) | -1 | % | (63,683 | ) | -1 | % | ||||||||||||||||
| Net income (loss) | $ | 323,167 | 6 | % | $ | (56,508 | ) | -1 | % | $ | 1,836,386 | 16 | % | $ | 93,329 | 1 | % | |||||||||||||||
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Comparison of the Three Months Ended June 30, 2023 and 2022
Revenue
Our revenue increased approximately $827,000, or 18%. The increase was driven by an approximately $661,000, or 23%, increase in tool revenue reflecting approximately $523,000 from the expansion of our business in the Middle East. Contract services revenue increased by $166,000, or 10%, over the prior year, primarily due to higher PDC bit refurbishment demand and a tool price increase implemented in the second half of calendar year 2022.
Operating Costs and Expenses
Cost of Revenue
Cost of revenue decreased approximately $103,000, or 5%. Cost savings were realized due to a better product mix and efficiencies in manufacturing.
Selling, general and administrative expenses
Selling, general and administrative expenses increased approximately $564,000, or 30%. The increase was the result of increased international payroll costs with the hiring of four additional technical sales and business development personnel and increased intellectual property related legal fees.
Depreciation and amortization expenses
Depreciation and amortization expenses decreased approximately $53,000, or 13%. The decrease was primarily due to a portion of the intellectual property intangible balance that reached its full amortization and a decrease in depreciation expense due to assets becoming fully depreciated.
Comparison of the Six Months Ended June 30, 2023 and 2022
Revenue
Our revenue increased approximately $2,978,000, or 34%. The increase was driven by an approximately $2,146,000, or 38%, increase in tool revenue reflecting strong DNR tool sales of approximately $855,000 and approximately $944,000 from the expansion of our business in the Middle East. Contract services revenue increased by $832,000, or 28%, primarily due to higher PDC bit refurbishment demand and a tool price increase implemented in the second half of calendar year 2022.
Operating Costs and Expenses
Cost of Revenue
Cost of revenue increased approximately $368,000, or 9%. The increase was driven by higher sales volume. As a percent of revenue, costs declined 8 points to 37% of revenue due to improved overhead absorption on higher volume, a better product mix and efficiencies in manufacturing more than offsetting higher payroll costs, additional facility expenses and higher tool repair costs associated expansion of our international business.
Selling, general and administrative expenses
Selling, general and administrative expenses increased approximately $1,257,000, or 35%. Higher costs reflect the expansion of our Middle East operations included staffing with four additional technical sales and business development personnel as well as increased intellectual property related legal fees. Legal fees could increase further as we pursue the patent infringement lawsuit discussed in Note 9 – Commitments and Contingencies of the notes to condensed consolidated financial statements within this Quarterly Report on Form 10-Q.
Depreciation and amortization expenses
Depreciation and amortization expenses decreased approximately $138,000, or 17%. The decrease was primarily due to a portion of the intellectual property intangible balance that reached its full amortization and a decrease in depreciation expense due to assets becoming fully depreciated.
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Other Income (Expenses)
Recovery of related party note receivable
Recovery of related party note receivable increased approximately $350,000, or 100%, reflecting a principal and interest payment applied to the fully reserved related party note receivable. No payment was received in the prior-year period. See Note 6 – Related Party Receivable of the notes to condensed consolidated financial statements within this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
At June 30, 2023, we had working capital of approximately $4,091,000. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. Our operational and financial strategies include managing our operating costs and capital spending to reflect revenue trends, accelerating collections of international receivables, and controlling our working capital and debt to enhance liquidity.
Credit Agreement
We have a Loan and Security Agreement with Austin Financial Services, Inc. (“AFS”) (the “Credit Agreement”). The Credit Agreement provides a $4,300,000 credit facility, which includes a $800,000 term loan (the “Term Loan”) and a $3,500,000 line of credit (the “Line of Credit”). The Credit Agreement originally was to mature on February 20, 2023, subject to early termination pursuant to the terms of the agreement or extension as may be agreed by the parties, but it has been renewed to February 20, 2024. Cancellation is allowed with a 60-day notice. The balance of the Credit Agreement totaled approximately $1,146,000 as of June 30, 2023.
For more details of the terms of the Credit Agreement, see Note 7 – Long-Term Debt of the notes to condensed consolidated financial statements within this Quarterly Report on Form 10-Q.
Financing Obligation Liability
We have a financing obligation liability related to a failed sale-leaseback transaction. The balance of the financing obligation was approximately $4,076,000 as of June 30, 2023.
For more details on the terms of this transaction, see Note 8 – Financing Obligation Liability of the notes to condensed consolidated financial statements within this Quarterly Report on Form 10-Q.
Machinery Loans
The Company financed the purchase of machinery and equipment in July 2022. The term of the loan is 60 months and matures in July 2027. The loan has an interest rate of 5.50%. The balance of the machinery loans totaled approximately $595,000 as of June 30, 2023.
Cash Flow
| Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash provided by operating activities | $ | 920,505 | $ | 1,353,933 | ||||
| Net cash used in investing activities | (2,082,299 | ) | (1,249,419 | ) | ||||
| Net cash provided by (used in) financing activities | 183,560 | (99,188 | ) | |||||
| Net (decrease) increase in cash | $ | (978,234 | ) | $ | 5,326 | |||
Operating Cash Flows
For the six months ended June 30, 2023, net cash provided by operating activities was approximately $921,000. The Company had approximately $1,836,000 of net income, $1,239,000 of non-cash expenses, offset by $2,154,000 decrease in working capital accounts.
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For the six months ended June 30, 2022, net cash provided by operating activities was approximately $1,354,000. The Company had approximately $93,000 of net income, approximately $1,267,000 of non-cash expenses and $7,000 increase in working capital accounts.
Investing Cash Flows
For the six months ended June 30, 2023, net cash used in investing activities was approximately $2,082,000, primarily related to purchases of property, plant and equipment, offset by approximately $350,000 related to proceeds from recovery of the Tronco note receivable. The investment in property, plant and equipment represents an increase the DNR Middle East rental fleet and the expansion of capacity to refurbish a second customer’s PDC bits in the U.S. and repair the Company’s DNR tools in the Middle East. The Company expects this will allow it to add new customers, increase volumes, and grow in potential new product lines.
For the six months ended June 30, 2022, net cash used in investing activities was approximately $1,249,000, related to purchases of property, plant and equipment, which included additions to the DNR Middle East rental fleet and an additional CNC machine.
Financing Cash Flows
For the six months ended June 30, 2023, net cash provided by financing activities was approximately $184,000, primarily related to net proceeds from the revolving line of credit of approximately $329,000, proceeds from debt borrowings of approximately $132,000, offset by principal payments on debt of approximately $283,000.
For the six months ended June 30, 2022, net cash used in financing activities was approximately $99,000, primarily related to principal payments on debt of approximately $281,000, offset by proceeds from debt borrowings of approximately $182,000.
Off Balance Sheet Arrangements
The Company had no off balance sheet arrangements.
Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates from those disclosed on our Annual Report on Form 10-K for the year ended December 31, 2022. Please refer to information regarding our critical accounting policies and estimates included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the or the year ended December 31, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting company.
Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer to allow timely decisions regarding required disclosure.
As of the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, as of June 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
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Changes in Internal Controls over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the quarter ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of the Effectiveness of Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. A control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to litigation that arises from time to time in the ordinary course of our business activities. In February 2019, the Company filed a patent infringement lawsuit in the United States District Court for the Western District of Louisiana, Lafayette Division, asserting that Stabil Drill Specialties, LLC’s (“Stabil Drill”) Smoothbore Eccentric Reamer infringes the patents of Extreme Technologies, LLC (one of our subsidiaries) on our patented Drill-N-Ream 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. On May 23, 2022, the Court issued its Order on Claim Construction of the patents, adopting Extreme Technologies’ proffered interpretation on the disputed claim terms. On February 13, 2023, the lawsuit was reassigned to United States District Judge Drew B. Tipton and United States Magistrate Judge Peter Bray. On March 27, 2023, Judge Bray entered an amended Scheduling Order. In accordance with such amended Scheduling Order, fact discovery ended on April 14, 2023, and expert discovery is scheduled to end on or before August 31, 2023. On July 5, 2023, Judge Bray issued a Memorandum and Recommendation finding that Stabil Drill is prohibited from asserting its patent invalidity affirmative defenses. On August 2, 2023, Stabil Drill filed objections to the Court’s Order and the Court could possibly modify the Order based upon Stabil Drill’s filed objections. The parties are preparing this case for trial and expect a jury trial setting in early spring of 2024. We are not currently involved in any other litigation.
Item 1A. Risk Factors
Not required for smaller reporting company.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
| 18 |
Item 6. Exhibits
| * | Filed herewith. |
| ** | Furnished herewith. |
| 19 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | ||
| August 14, 2023 | By: | /s/ G. TROY MEIER |
G. Troy Meier, Chief Executive Officer (Principal Executive Officer) | ||
| August 14, 2023 | By: | /s/ CHRISTOPHER CASHION |
| Christopher Cashion, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | ||
| August 14, 2023 | By: | /s/ ANNETTE MEIER |
| Annette Meier, President, Chief Operating Officer and Director | ||
| August 14, 2023 | By: | /s/ JAMES LINES |
| James Lines, Director | ||
| August 14, 2023 | By: | /s/ ROBERT IVERSEN |
| Robert Iversen, Director | ||
| August 14, 2023 | By: | /s/ MICHAEL RONCA |
| Michael Ronca, Director | ||
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