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SDPI Superior Drilling Products

Filed: 12 May 21, 3:35pm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the Quarterly Period Ended March 31, 2021

 

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

 

Commission File Number: 001-36453

 

Superior Drilling Products, Inc.

(Exact name of registrant as specified in its charter)

 

Utah 46-4341605
(State or other jurisdiction of
incorporation or organization)
 

(IRS Employer

Identification No )

 

1583 South 1700 East

Vernal, Utah 84078

(Address of principal executive offices)

 

435-789-0594

(Issuer’s telephone number)

(Former name, address, and fiscal year, if changed since last report)

 

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

 

Title of each class: Trading Symbol(s) Name of each exchange on which registered:
Common Stock, $0.001 par value SDPI NYSE American

 

Securities Registered Pursuant to Section 12(g) of the Exchange Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or such shorter period that the Registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] Smaller reporting company [X] 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 Exchange Act).

Yes [  ] No [X]

 

There were 25,762,342 shares of common stock, $0.001 par value, issued and outstanding as of May 12, 2021.

 

 

 

 
 

 

Superior Drilling Products, Inc.

FORM 10-Q

 

QUARTER ENDED MARCH 31, 2021

 

TABLE OF CONTENTS

 

 Page
  
PART I-FINANCIAL INFORMATION 
  
Item 1. Financial Statements3
  
Condensed Consolidated Balance Sheet (Unaudited) at March 31, 2021 and December 31, 20203
  
Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2021 and 20204
  
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2021 and 20205
  
Notes to Condensed Consolidated Financial Statements (Unaudited)6
  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations13
  
Item 4. Controls and Procedures18
  
PART II - OTHER INFORMATION 
  
Item 1. Legal Proceedings19
  
Item 1A. Risk Factors19
  
Item 6. Exhibits22
  
Signatures23

 

2
 

 

PART I - FINANCIAL INFORMATION.

 

Item 1. Financial Statements

 

Superior Drilling Products, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

  

March 31,

2021

  

December 31,

2020

 
ASSETS        
Current assets        
Cash $2,262,251  $1,961,441 
Accounts receivable, net  1,601,837   1,345,622 
Prepaid expenses  109,354   90,269 
Inventories  996,083   1,020,008 
Asset held for sale  -   40,000 
Other current assets  42,751   40,620 
Total current assets  5,012,276   4,497,960 
Property, plant and equipment, net  7,211,648   7,535,098 
Intangible assets, net  527,778   819,444 
Right of use assets  65,624   99,831 
Other noncurrent assets  84,115   87,490 
Total assets $12,901,441  $13,039,823 
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities        
Accounts payable $741,727  $430,014 
Accrued expenses  1,468,257   1,091,519 
Income tax payable  122,826   106,446 
Current portion of operating lease liability  54,063   79,313 
Current portion of financial obligation  59,420   61,691 
Current portion of long-term debt, net of discounts  1,651,283   1,397,337 
Total current liabilities  4,097,576   3,166,320 
Operating lease liability  11,561   20,518 
Long-term financial obligation, less current portion  4,161,463   4,178,261 
Long-term debt, less current portion, net of discounts  1,341,487   1,451,049 
Total liabilities  9,612,087   8,816,148 
Commitments and contingencies (Notes 8, 9 and 12)        
Shareholders’ equity        
Common stock - $0.001 par value; 100,000,000 shares authorized; 25,762,342 shares issued and outstanding  25,762   25,762 
Additional paid-in-capital  40,787,092   40,619,620 
Accumulated deficit  (37,523,500)  (36,421,707)
Total shareholders’ equity  3,289,354   4,223,675 
Total liabilities and shareholders’ equity $12,901,441  $13,039,823 

 

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

 

3
 

 

Superior Drilling Products, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

  For the Three Months 
  Ended March 31, 
  2021  2020 
       
Revenue        
Tool revenue $1,663,763  $3,612,918 
Contract services  760,890   1,744,845 
         
Total Revenue  2,424,653   5,357,763 
         
Operating costs and expenses        
Cost of revenue  1,175,593   2,314,508 
Selling, general and administrative expenses  1,515,590   2,017,899 
Depreciation and amortization expense  690,074   760,764 
         
Total operating costs and expenses  3,381,257   5,093,171 
         
Operating income (loss)  (956,604)  264,592 
         
Other income (expense)        
Interest income  48   4,688 
Interest expense  (138,057)  (177,258)
Impairment on asset held for sale  -   (30,000)
Gain on sale of assets  10,000   142,234 
Total other expense  (128,009)  (60,336)
         
Income (loss) before income taxes  (1,084,613)  204,256 
Income tax expense  (17,180)  (6,210)
         
Net income (loss) $(1,101,793) $198,046 
         
Basic income (loss) earnings per common share $(0.04) $0.01 
Basic weighted average common shares outstanding  25,762,342   25,418,126 
Diluted income (loss) per common share $(0.04) $0.01 
Diluted weighted average common shares outstanding  25,762,342   25,418,126 

 

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

 

4
 

 

Superior Drilling Products, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

  For the Three Months 
  Ended March 31, 
  2021  2020 
Cash Flows From Operating Activities        
Net income (loss) $(1,101,793) $198,046 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:        
Depreciation and amortization expense  690,074   760,764 
Share based compensation expense  167,472   106,996 
Gain on sale of assets  (10,000)  (142,234)
Impairment on asset held for sale  -   30,000 
Amortization of deferred loan costs  4,631   4,631 
Changes in operating assets and liabilities:        
Accounts receivable  (256,215)  625,419 
Inventories  (41,795)  (303,122)
Prepaid expenses and other noncurrent assets  (17,841)  296,392 
Accounts payable and accrued expenses  688,451   660,731 
Income tax payable  16,380   6,210 
Other long term liabilities  -   (61,421)
Net Cash Provided By Operating Activities  139,363   2,182,412 
Cash Flows From Investing Activities        
Purchases of property, plant and equipment  (9,236)  (37,850)
Proceeds from sale of fixed assets  50,000   117,833 
Net Cash Provided By Investing Activities  40,764   79,983 
Cash Flows From Financing Activities        
Principal payments on debt  (135,403)  (975,440)
Proceeds received from debt borrowings  -   72,520 
Payments on revolving loan  (280,245)  (39,461)
Proceeds received on revolving loan  536,331   812,224 
Debt issuance costs  -   - 
Net Cash Provided By (Used In) Financing Activities  120,683   (130,157)
Net increase in Cash  300,810   2,132,238 
Cash at Beginning of Period  1,961,441   1,217,014 
Cash at End of Period $2,262,251  $3,349,252 
Supplemental information:        
Cash paid for Interest $130,363  $182,368 
Inventory converted to property, plant and equipment $65,720   47,907 
Reduction of debt with sale of asset $-   211,667 

 

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

 

5
 

 

Superior Drilling Products, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2021

 

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 headquarters and manufacturing operations are located in Vernal, Utah. 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 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 interim consolidated condensed financial statements for the three months ended March 31, 2021 and 2020, and the related footnote disclosures included herein, are unaudited. However, in the opinion of management, these unaudited 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, 2021 are not necessarily indicative of the results of operations expected for the year ending December 31, 2021. These interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the years ended December 31, 2020 and 2019 and the notes thereto, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”).

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant items subject to estimates and assumptions include the carrying amount and useful lives of property and equipment and intangible assets, impairment assessments, share-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.

 

Concentrations of Credit Risk

 

The Company has two significant customers that represented 85% and 84% of our revenue for the three months ended March 31, 2021 and 2020, respectively. These customers had approximately $846,000 and $2,120,000 in accounts receivable at March 31, 2021 and 2020, respectively.

 

The Company had two vendors that represented 22% of our purchases for the quarter ended March 31, 2021. These vendors had approximately $221,000 in accounts payable at March 31, 2021 and purchases in the first quarter of 2021 from these vendors totaled approximately $239,000. The Company had two vendors that represented 26% of our purchases for the three months ended March 31, 2020. The vendors had approximately $454,000 in accounts payable at March 31, 2020 and purchases in the first quarter of 2020 from these vendors totaled approximately $524,000.

 

Impact of COVID-19

 

The COVID-19 pandemic has impacted and may further impact the Company’s operations, and the operations of the Company’s suppliers and vendors, as a result of quarantines, facility closures, and travel and logistics restrictions. The extent to which the COVID-19 pandemic will continue to impact the Company’s business, financial condition and results of operations will depend on future developments, which are highly uncertain and depend on, among other things, the duration, spread, severity, and impact of the COVID-19 pandemic and the success and speed of vaccination efforts both in the United States and globally, the effects of the COVID-19 pandemic on the Company’s customers, suppliers, and vendors and the remedial actions and stimulus measures adopted by local and federal governments, and to what extent normal economic and operating conditions can resume. Therefore, the Company cannot reasonably estimate future impacts of the COVID-19 pandemic at this time.

 

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.

 

6
 

 

NOTE 2. LIQUIDITY

 

We believe that our cash generated from operations and our borrowing capacity under our current credit facility will be sufficient to fund our operations for the next 12 months. To enhance liquidity, our operational and financial strategies include managing our operating costs, accelerating collections of international receivables, and reducing working capital requirements and restructuring our debt. If we are unable to do this, we may not be able to, among other things, (i) maintain our revised general and administrative spending levels; (ii) fund certain obligations as they become due; and (iii) respond to competitive pressures or unanticipated capital requirements. COVID-19 has also led to a significant disruption in the equity and debt capital markets, which could hinder our ability to raise new capital or obtain financing on acceptable terms. We cannot provide any assurance that financing will be available to us in the future on acceptable terms, if at all.

 

In 2020, the Company filed a Form S-3 Shelf Registration that will allow the Company to offer and sell, from time to time, up to $20,000,000 of securities. We believe maintaining an active Shelf Registration provides additional financial flexibility to access the capital markets. However, there is no assurance that such financings could be consummated on acceptable terms or at all.

 

Also in 2020, the Company received notification from the NYSE American to the Company indicating that, as a result of the Company’s stockholders’ equity of $4.7 million as of September 30, 2020, and reported losses for each of the last five fiscal years, the Company was not in compliance with the stockholders’ equity standards for continued listing on the NYSE American. On January 28, 2021, the Company received notice that the NYSE American had accepted the Company’s plan that was submitted on December 18, 2020, to regain compliance with the continued listing standards of the NYSE American. The Company has been granted a plan period through May 18, 2022 to regain compliance.

 

NYSE American Regulations staff will review the Company periodically for compliance with the initiatives outlined in the plan. If the Company is not in compliance with the continued listing standards by May 18, 2022 or if the Company does not make progress consistent with the plan during the plan period, NYSE Regulation staff may initiate delisting proceedings as appropriate.

 

NOTE 3. 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.

 

Performance Obligations

 

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer under Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts with customers contain a single performance obligation to provide agreed-upon products or services. For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. In accordance with Topic 606, we do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.

 

7
 

 

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 86% of our revenue is from North America and approximately 14% is from the Middle East for the three months ended March 31, 2021. For the three months ended March 31, 2020, approximately 85% of our revenue was from North America and approximately 15% was from the Middle East.

 

Revenue disaggregated by revenue source are as follows:

 

  Three months ended March 31, 
  2021  2020 
       
Tool Revenue:        
Tool and product sales $495,000  $990,734 
Tool rental  336,453   777,253 
Other related revenue  832,310   1,844,931 
Total Tool Revenue  1,663,763   3,612,918 
         
Contract Services  760,890   1,744,845 
         
Total Revenue $2,424,653  $5,357,763 

 

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 Topic 606.

 

8
 

 

NOTE 4. INVENTORIES

 

Inventories are comprised of the following:

 

  March 31, 2021  December 31, 2020 
Raw material $734,215  $733,734 
Work in progress  99,261   50,631 
Finished goods  162,607   235,643 
  $996,083  $1,020,008 

 

NOTE 5. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are comprised of the following:

 

  March 31, 2021  December 31, 2020 
Land $880,416  $880,416 
Buildings  4,764,441   4,764,441 
Building improvements  755,039   755,039 
Machinery and equipment  11,373,601   11,298,642 
Office equipment, fixtures and software  628,358   628,358 
Transportation assets  265,760   265,760 
   18,667,615   18,592,656 
Accumulated depreciation  (11,455,967)  (11,057,558)
  $7,211,648  $7,535,098 

 

In 2019, the Company decided to sell the Company airplane and related hangar and reported the assets as assets held for sale on our balance sheet at their carrying value, which is lower than the expected fair value less costs to sell. The Company sold the airplane for a gain of approximately $142,000 in February 2020 and the Company sold the hangar for a gain of $10,000 in March 2021.

 

Depreciation expense related to property, plant and equipment for the three months ended March 31, 2021 and 2020 was $398,408 and $469,098, respectively. The increase in machinery and equipment was mostly the result of the Company’s increased rental tool fleet for the Middle East operations.

 

NOTE 6. INTANGIBLE ASSETS

 

Intangible assets are comprised of the following:

 

  March 31, 2021  December 31, 2020 
Developed technology $7,000,000  $7,000,000 
Customer contracts  6,400,000   6,400,000 
Trademarks  1,500,000   1,500,000 
   14,900,000   14,900,000 
Accumulated amortization  (14,372,222)  (14,080,556)
  $527,778  $819,444 

 

Amortization expense related to intangible assets was $291,666 for the three months ended March 31, 2021 and 2020.

 

NOTE 7. 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 (“Tronco”), a party related to us through common control, 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 continues to hold the 8,267,860 shares of the Company’s common stock as collateral. The Company will record a recovery of the loan if and when consideration or payments of the loan are made in the future. 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. Interest only is due December 31, 2021, with a balloon payment of all unpaid interest and principal due upon maturity on December 31, 2022.

 

9
 

 

NOTE 8. LONG-TERM DEBT

 

Long-term debt is comprised of the following:

 

  March 31, 2021  December 31, 2020 
Hard Rock Note $1,500,000  $1,500,000 
Credit Agreement  1,002,749   825,366 
Machinery loans  440,716   466,448 
Transportation loans  49,305   56,572 
   2,992,770   2,848,386 
Less:        
Current portion  (1,651,283)  (1,397,337)
Long-term debt, net $1,341,487  $1,451,049 

 

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 $1,500,000 as of March 31, 2021, accrues interest at 8.00% per annum and is due in full by October 5, 2022. Under the amended terms of the Hard Rock Note, we are required to make the following payments: accrued interest on January 5, April 5, July 5 and October 5 in 2021 and 2022; plus $750,000 in principal on July 5, 2021 with the remaining balance of principal and accrued interest on the Hard Rock Note due on October 5, 2022. In January and April 2021, the Company made interest payments of $30,247 and $29,589, respectively.

 

Credit Agreement

 

In February 2019, the Company entered into a Loan and Security Agreement (the “Credit Agreement”) with Austin Financial Services, Inc. (“AFS”). The Credit Agreement provides a $4,500,000 credit facility, which includes a $1,000,000 term loan (the “Term Loan”) and a $3,500,000 revolver (the “Revolving Loan”). As of March 31, 2021, we had $583,330 outstanding on the Term Loan and $454,925 outstanding on the Revolving Loan. Amounts outstanding under the Revolving Loan 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. Amounts outstanding on the Revolving Loan as of March 31, 2021, may not exceed $456,428, which is based on a calculation applying 85% of accounts receivable and 50% of inventory. A collateral management fee is payable monthly on the used portion of the Revolving Loan and Term Loan. Even if our borrowings are less than $1,000,000, we still pay interest as if we had borrowed $1,000,000. At March 31, 2021, we had approximately $10,000 of accrued interest.

 

10
 

 

The Credit Agreement contains various restrictive covenants that, among other things, limit or restrict the ability of the Company 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 Revolving Loan is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause. At March 31, 2021, we were in compliance with the covenants in the Credit Agreement.

 

The interest rate for the Term Loan and the Revolving Loan is prime plus 2%. At March 31, 2021, the interest rate for the Term Loan was 8.85%, which includes a 3.6% management fee rate. The effective interest rate for the Revolving Loan for the quarter ending March 31, 2021 was 9.56%. 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, intellectual property, or aircraft. 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.

 

NOTE 9. 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 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 will be $2,160,242, which will correspond to the carrying value of the property. The Company paid $25,950 of principal in 2020 that was prorated for the month of December.

 

The financing obligation is summarized below:

 

  March 31, 2021  December 31, 2020 
Finance obligations for sale-leaseback transactions $4,220,883  $4,239,952 
Current principal portion of finance obligation  (59,420)  (61,691)
Non-current portion of finance obligation $4,161,463  $4,178,261 

 

11
 

 

NOTE 10. TOTAL EQUITY

 

A summary of changes in total equity for the three months ended March 31, 2021 and 2020 is presented below:

 

  Common Stock  Additional
Paid-in
  Accumulated  Total
Shareholders’
 
  Shares  Par Value  Capital  Deficit  Equity 
Balance - December 31, 2020  25,762,342  $25,762  $40,619,620  $(36,421,707) $  4,223,675 
Stock-based compensation expense  -   -   167,472   -   167,472 
Net loss  -   -   -   (1,101,793)  (1,101,793)
Balance - March 31, 2021  25,762,342  $25,762  $40,787,092  $(37,523,500) $3,289,354 

 

  Common Stock  Additional
Paid-in
  Accumulated  Total
Shareholders
 
  Shares  Par Value  Capital  Deficit  Equity 
Balance - December 31, 2019  25,418,126  $25,418  $40,069,391  $(32,991,833) $7,102,976 
Stock-based compensation expense  -   -   106,996   -   106,996 
Net income  -   -   -   198,046   198,046 
Balance - March 31, 2020  25,418,126  $25,418  $40,176,387  $(32,793,787) $7,408,018 

 

NOTE 11. GEOGRAPHICAL OPERATIONS INFORMATION

 

The following summarizes revenue by geographic location:

 

  Three months ended March 31, 2021  Three months ended March 31, 2020 
Revenue:        
North America $2,092,200  $4,580,510 
Middle East  332,453   777,253 
  $2,424,653  $5,357,763 

 

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

 

  March 31, 2021  December 31, 2020 
Property, plant and equipment, net:        
North America $5,975,625  $6,008,431 
Middle East  1,236,023   1,526,667 
  $7,211,648  $7,535,098 

 

NOTE 12. 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 Stabil Drill Specialties, LLC (“Stabil Drill”) infringed on our patent that covers the Company’s well bore conditioning tool, the Drill-N-Ream. 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. Extreme sued for patent infringement based on the same patents discussed in the Stabil Drill litigation. On December 23, 2019, the Court stayed Extreme’s patent infringement claim against Defendants pending resolution of the Southern District of Texas Stabil Drill case. The court ordered the Company to serve discovery requests upon Stabil Drill and gave Stabil Drill deadlines to respond and produce documents and permit product inspection. Stabil Drill filed a motion for summary judgement and the Company responded and cross-moved for patent infringement. The parties are awaiting the judge’s decision. On October 1, 2020, Superior Energy Services, Stabil Drill’s parent company, filed for bankruptcy, which may result in a delay in the resolution of this litigation. Superior Energy Services announced on February 2, 2021 that it successfully completed its financial restructuring and emerged from Chapter 11 bankruptcy. We are not currently involved in any other litigation which management believes could have a material effect on our financial position or results of operations.

 

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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, 2021, and our results of operations for the three months ended March 31, 2021 and 2020. 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, 2020 and 2019, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, 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. These forward-looking statements include the following types of information and statements as they relate to the Company:

 

 future operations, financial results, business plans, cash flow and cash requirements;
   
 scheduled, budgeted and other future capital expenditures;
   
 working capital requirements;
   
 the availability of expected sources of liquidity;
   
 the introduction into the market of the Company’s future products;
   
 the market for the Company’s existing and future products;
   
 the opportunity to diversify the markets served by the Company or products provided within the existing oil and gas industry as a result of receiving the ISO-9001 certification;
   
 the Company’s ability to develop new applications for its technologies;
   
 the exploration, development and production activities of the Company’s customers;
   
 compliance with present and future environmental regulations and costs associated with environmentally related penalties, capital expenditures, remedial actions and proceedings;
   
 effects of potential legal proceedings; and
   
 changes in customers’ future product and service requirements that may not be cost effective or within the Company’s capabilities.

 

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These statements are based on assumptions and analyses in consideration of the Company’s experience and perception of historical trends, current conditions, expected future developments and other factors the Company believes were appropriate in the circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements.

 

While it is not possible to identify all factors, the Company continues to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed under “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and the following:

 

 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, flexibility in restructuring existing debt 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;
   
 our ability to diversify products/services provided to customers and markets in which we operate;
   
 fluctuations in our operating results;
   
 our dependence on key personnel;
   
 costs 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;
   
 the potential impact of major health crises on our business and results of operations;
   
 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.

 

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Many of such factors are beyond the Company’s ability to control or predict. Any of the factors, or a combination of these factors, could materially affect the Company’s future results of operations and the ultimate accuracy of the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. Every forward-looking statement speaks only as of the date of the particular statement, and the Company undertakes no obligation to publicly update or revise any forward-looking statement.

 

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 PDC drill bit and other tool refurbishing and manufacturing service,
   
 Our 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 our global market penetration of our current drill tool technology and 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, 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

 

The COVID-19 pandemic adversely impacted our business and operations in 2020 and into 2021. The significant decline in oil demand due to COVID-19 coupled with a global over supply of oil drove down oil prices. This resulted in our customers significantly reducing capital expenditures in 2020. The COVID-19 pandemic has impacted and may further impact our operations, and the operations of our suppliers and vendors, as a result of quarantines, facility closures, and travel and logistics restrictions. The extent to which the COVID-19 pandemic will continue to impact our business, financial condition and results of operations will depend on future developments, which are highly uncertain and depend on, among other things, the duration, spread, severity, and impact of the COVID-19 pandemic and the success and speed of vaccination efforts both in the United States and globally, the effects of the COVID-19 pandemic on our customers, suppliers, and vendors and the remedial actions and stimulus measures adopted by local and federal governments, and to what extent normal economic and operating conditions can resume. Therefore, we cannot reasonably estimate future impacts of the COVID-19 pandemic at this time.

 

As we look at 2021, we are cautiously optimistic that the global economy and oil demand will recover from the impact of the global pandemic. As vaccine rollouts ramp up around the world, we expect rising oil and gas demand combined with continued discipline from the Organization of Petroleum Exporting Countries (OPEC) plus and publicly-traded operators to re-balance inventories. This should be supportive of higher oil prices and solid operating cash flows across the industry.

 

The total U.S. rig count as reported by Baker Hughes as of April 23, 2021 was 438 rigs, a decrease of 290 rigs from the rig count as of March 27, 2020 but an increase of 87 rigs from the rig count as of December 31, 2020. We expect North American onshore activity to continue to improve in 2021 compared with the second half of 2020.

 

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CONSOLIDATED RESULTS OF OPERATIONS

 

Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020

 

The following table represents summary consolidated operating results for the periods indicated:

 

  Three-Months Ended March 31, 
(in thousands) 2021  2020 
Tool revenue  1,664   69%  3,613   67%
Contract services  761   31%  1,745   33%
Revenue $2,425   100% $5,358   100%
Operating costs and expenses  3,381   139%  5,093   95%
Income (loss) from operations  (956)  (39)%  265   5%
Other expense  (128)  (5)%  (60)  (1)%
Income tax expense  (17)  (1)%  (6)  0%
Net income (loss) $(1,101)  (45)% $198   4%

 

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.

 

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Revenue. Our revenue decreased approximately $2,933,000 or 55%. The reduction was driven primarily by the global recession created by the COVID-19 pandemic and its resultant impact on the oil and gas industry. The Company’s U.S. revenue declined 54% due to reduced PDC drill bit and blade repair and reduced DNR tool sales reflecting depressed drilling activity in the U.S. compared with pre-pandemic levels. The contraction in the oil and gas industry impacted contract services revenue which declined approximately $984,000 or 56% to $761,000. Tool revenue was $1,664,0000, down 54%, or $1,949,000, from the prior-year period. International revenue declined $445,000 or 57% from the prior period to $332,000.

 

Operating Costs and Expenses. Total operating costs and expenses decreased approximately $1,712,000 for the March 31, 2021 three-month period.

 

 Cost of revenue decreased approximately $1,139,000 due to lower volume and reduced costs resulting from the Company’s reduction in force implemented throughout 2020. As a percentage of revenue, cost of revenue was 49% and 43% of revenue for the three months ended March 31, 2021 and 2020, respectively.
   
 Selling, general and administrative expenses decreased approximately $502,000 to $1,516,000 and was 63% of revenue compared with 38% in the prior-year period. The decline in expenses was due to cost reduction measures implemented by us in 2020 in response to the significant reduction in our revenue related to market conditions, driven by COVID-19. Cost reductions included lower headcount and the deferral of new product development.
   
 Depreciation and amortization expense decreased approximately $71,000, or 9%, to $690,000.

 

Other Expense. Other expense primarily consists of interest expense, interest income, and gain/loss on disposition of assets. 

 

 Interest expense for the three months ended March 31, 2021 and 2020 was approximately $138,000 and $177,000, respectively. The decrease was the result of lower debt balances.
   
 

The Company sold its airplane hangar in March 2021 for a gain of $10,000. The Company sold its airplane in February 2020 for a gain of approximately $142,000.

 

Income Tax Expense. The increase in income tax expense from the prior year is due to increase in income in foreign jurisdictions.

 

Liquidity and Capital Resources

 

At March 31, 2021, we had working capital of approximately $915,000. 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 match revenue trends, accelerating collections of international receivables, and managing our working capital and debt to enhance liquidity. We will continue to work to grow revenue and manage costs to minimize negative net cash flow in 2021. 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.

 

In addition, the significant decline in demand for oil due to the impacts of COVID-19 on the global economy, the instability of oil prices caused by geopolitical issues and over supply have resulted in the announcements by our customers and end users of our tools and technology of significant reductions to their capital expenditure budgets. Our expectation is that demand for our products and services will continue to be impacted in 2021 and potentially beyond; however, we are currently unable to estimate the full impact to our business, how long this significant drop in demand will last or the depth of the decline. We have minimal planned capital expenditures for 2021 of $1,700,000 and we will further defer investment in new technology development, including our Strider technology.

 

The Hard Rock Note had a remaining balance of $1,500,000 as of March 31, 2021. It accrues interest at 8.00% per annum and is due in full by October 5, 2022. Under the amended terms of the Hard Rock Note, we are required to make the following payments: accrued interest on January 5, April 5, July 5 and October 5 in 2021 and 2022; plus $750,000 in principal on July 5, 2021 with the remaining balance of principal and accrued interest on the Hard Rock Note due on October 5, 2022. In January and April 2021, the Company made interest payments of $30,247 and $29,589, respectively.

 

Our Credit Agreement is comprised of $1,000,000 Term Loan and $3,500,000 Revolving Loan. As of March 31, 2021, we had $583,330 outstanding on the Term Loan and $454,925 outstanding on the Revolving Loan. Amounts outstanding under the Revolving Loan 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. Amounts outstanding on the Revolving Loan as of March 31, 2021, may not exceed $456,428, which is based on a calculation applying 85% of accounts receivable and 50% of inventory. A collateral management fee is payable monthly on the used portion of the Revolving Loan and Term Loan. If our borrowings are less than $1,000,000, we still pay interest as if we had borrowed $1,000,000. At March 31, 2021, we had approximately $10,000 of accrued interest.

 

The interest rate for the Term Loan and the Revolving Loan is prime plus 2%. At March 31, 2021, the interest rate for the Term Loan was 8.85%, which includes a 3.6% management fee rate. The effective interest rate for the Revolving Loan for the quarter ending March 31, 2021 was 9.56%. 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.

 

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Cash Flows

 

Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020

 

Net cash provided by operating activities was approximately $139,000 and $2,182,000 for the three months ended March 31, 2021 and 2020, respectively. For the three months ended March 31, 2021, the Company had approximately $1,102,000 of net loss, approximately $688,000 increase in accounts payable and accrued expenses, depreciation and amortization expense of approximately $690,000, which were offset by approximately $256,000 decrease in accounts receivable. For the three months ended March 31, 2020, the Company had approximately $198,000 of net income, approximately $625,000 increase in accounts receivable, approximately $660,000 increase in accounts payable and depreciation and amortization expense of approximately $761,000.

 

Net cash provided by investing activities was approximately $41,000 for the three months ended March 31, 2021 as a result of the proceeds from the sale of the Company’s airplane hangar. Net cash provided by investing activities was approximately $80,000 for the three months ended March 31, 2020 and related to the sale of the Company’s airplane, which was offset by property, plant and equipment purchases for tools to support the expansion in the Middle East.

 

Net cash provided by financing activities was approximately $121,000 for the three months ended March 31, 2021. Net cash used in financing activities was approximately $130,000 for the three months ended March 31, 2020.

 

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: revenue recognition, 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, 2021.

 

Changes in Internal Controls over Financial Reporting

 

None

 

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.

 

18
 

 

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 Stabil Drill Specialties, LLC (“Stabil Drill”) infringed on our patent that covers the Company’s well bore conditioning tool, the Drill-N-Ream. 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. Extreme sued for patent infringement based on the same patents discussed in the Stabil Drill litigation. On December 23, 2019, the Court stayed Extreme’s patent infringement claim against Defendants pending resolution of the Southern District of Texas Stabil Drill case. The court ordered the Company to serve discovery requests upon Stabil Drill and gave Stabil Drill deadlines to respond and produce documents and permit product inspection. Stabil Drill filed a motion for summary judgement and the Company responded and cross-moved for patent infringement. The parties are awaiting the judge’s decision. On October 1, 2020, Superior Energy Services, Stabil Drill’s parent company, filed for bankruptcy, which may result in a delay in the resolution of this litigation. Superior Energy Services announced on February 2, 2021 that it successfully completed its financial restructuring and emerged from Chapter 11 bankruptcy. We are not currently involved in any other litigation which management believes could have a material effect on our financial position or results of operations.

 

Item 1A. Risk Factors

 

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 2020 Annual Report on Form 10-K. The risk factors below updates or expands upon those risk factors.

 

19
 

 

We may be unable to maintain adequate liquidity and make payments on our debt.

 

At March 31, 2021, we had working capital of approximately $915,000. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. Our operational and financial strategies include lowering our operating costs and capital spending to match revenue trends, managing our working capital and debt to enhance liquidity.

 

While we believe that our cash generated from operations and our borrowing capacity under our current credit facility will be sufficient to fund our operations for 2021, our operational and financial strategies include managing our operating costs, working capital and debt to enhance liquidity. We will continue to work to grow revenue and review additional cost containment measures in order to be cash flow positive in 2021. 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.

 

On May 6, 2020, certain subsidiaries of the Company amended and restated the outstanding note (the “Hard Rock Note”) with the seller in our acquisition of Hard Rock Solutions, LLC. As amended, the Hard Rock Note accrues interest at 8.00% per annum and matures and is now fully payable on October 5, 2022. Under the amended terms of the Hard Rock Note, we are required to make the following payments: accrued interest on each January 5, April 5, July 5, and October 5 in 2021 and 2022; and $750,000 (plus accrued interest) on July 5, 2021 with the remaining principal balance of $750,000 plus accrued interest on the Hard Rock Note due on October 5, 2022. If we are unable to make the payments required, we could lose our rights to market the Drill-N-Ream.

 

Our Credit Agreement is comprised of $1,000,000 Term Loan and $3,500,000 Revolving Loan. As of March 31, 2021, we had $583,330 outstanding on the Term Loan and $454,925 outstanding on the Revolving Loan. If we are unable to make required payments under the Credit Agreement, we would be in default thereunder, which would permit the holders of the indebtedness to accelerate the maturity thereof, unless we are able to obtain, on a timely basis, a necessary waiver or amendment. Any waiver or amendment may require us to revise the terms of the Credit Agreement which could increase the cost of our borrowings, require the payment of additional fees, and adversely impact the results of our operations. Upon the occurrence of any event of default that is not waived, the lenders could elect to exercise any of their available remedies, which include the right to not lend any additional amounts or, in the event we have outstanding indebtedness under the Credit Agreement, to declare any outstanding indebtedness, together which any accrued interest and other fees, to be immediately due and payable. If we are unable to repay the outstanding indebtedness, if any, under the Credit Agreement when due, the lenders would be permitted to proceed against their collateral, and this could have a material adverse effect on our business and financial condition.

 

Failure to generate sufficient revenue to make payments on the Hard Rock Note could result in our loss of the patents securing such note.

 

The Hard Rock Note is secured by all of the patents, patents pending, other patent rights, and the Drill-N-Ream trademark purchased in the Hard Rock acquisition (the “Drill-N-Ream Collateral”). If we do not have the funds necessary to make the future payments under the Hard Rock Note and fail to make any payments as required thereunder, and we are unsuccessful in amending or restructuring the payment terms, the holder of the Hard Rock Note could conduct a foreclosure sale on the Drill-N-Ream Collateral in order to apply the proceeds thereof toward repayment of the Hard Rock Note and all foreclosure costs, and our subsidiary Superior Drilling Solutions, LLC would be liable for any shortfall or receive any excess from the sales proceeds. The failure to retain and use the Drill-N-Ream Collateral in our business could cause a significant loss of our investment and might have a material adverse effect on our financial condition and results of operation, as well as our ability to grow our drill string tool business.

 

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Our level of indebtedness could adversely affect our future ability to raise additional capital to fund growth, limit our ability to react to changes in our business or our industry and place us at a competitive disadvantage.

 

We are required to make a payment on the Hard Rock Note of $750,000 (plus accrued interest) in 2021. In addition, we are required to make monthly payments of approximately $46,000 on our other indebtedness.

 

Our level of debt and debt service requirements could have important consequences. For example, it could (i) result in a foreclosure upon our key assets, (ii) increase our vulnerability to general adverse economic and industry conditions, (iii) limit our ability to fund future capital expenditures and working capital, to engage in future acquisitions or development activities, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a substantial portion of our cash flow from operations to payments on our debt, (iv) increase our cost of borrowing, (v) restrict us from making strategic acquisitions or causing us to make non-strategic divestitures, (vi) limit our flexibility in planning for, or reacting to, changes in our business or industry in which we operate, placing us at a competitive disadvantage compared with our competitors who are less leveraged and (vii) impair our ability to obtain additional financing in the future.

 

Our customer base is concentrated and the loss of, or nonperformance by, one or more of our significant customers, or our failure to expand our channels to market and further commercialize could cause our revenue to decline substantially.

 

We have two large customers that currently comprise 84% of our total revenue. It is likely that we will continue to derive a portion of our revenue from a relatively small number of customers in the future. If a major customer decided not to continue to use our services or significantly reduces its drilling plans, or if we are unable to expand our channels to market or further commercialize, our revenue would decline and our operating results and financial condition could be harmed. In addition, we are subject to credit risk due to the concentration of our customer base. Any increase in the nonpayment of and nonperformance by our counterparties, either as a result of changes in financial and economic conditions or otherwise, could have a material effect on our business, results of operations and financial condition and could adversely affect our liquidity.

 

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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 * XBRL Instance
   
101.XSD * XBRL Schema
   
101.CAL * XBRL Calculation
   
101.DEF * XBRL Definition
   
101.LAB * XBRL Label
   
101.PRE * XBRL Presentation

 

** Furnished herewith.

* Filed herewith.

 

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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 12, 2021By:/s/ G. TROY MEIER
  G. Troy Meier, Chief Executive Officer
  (Principal Executive Officer)
   
May 12, 2021By:/s/ CHRISTOPHER CASHION
  Christopher Cashion, Chief Financial Officer
  (Principal Financial Officer and Principal Accounting Officer)

 

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