NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company innovates, designs, engineers, manufactures, sells, rents and
repairs drilling and completion tools.
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.
In
April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can utilize the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for implementing new or revised accounting standards. In
other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise
apply to nonissuers. We have elected to delay such adoption of new or revised accounting standards, and as a result, we may not
implement new or revised accounting standards on the relevant dates on which adoption of such standards is required for other
issuer companies.
Subject
to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions,
including without limitation, providing an auditor’s attestation report on our system of internal controls over financial
reporting pursuant to Section 404 and implementing any requirement that may be adopted regarding mandatory audit firm rotation
or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor
discussion and analysis). We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which
the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of June of that year, (ii) the end
of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date
on which we issue more than $1.0 billion in non-convertible debt in a three-year period or (iv) January 1, 2020.
Segment
Reporting
We
operate as a single operating segment, which reflects how we manage our business. We operate in the United States and the Middle
East. Our operations in the Middle East represented less than 10% of our consolidated operations for all periods presented in
these consolidated financial statements.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant
items subject to estimates and assumptions include the carrying amount and useful lives of property and equipment and intangible
assets, impairment assessments, share-based compensation expense, and valuation allowances for accounts receivable, inventories,
and deferred tax assets.
Revenue
Recognition
We
are a drilling and completion tool technology company and we generate revenue from the manufacturing, repair, rental and sale
of drilling and completion 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 the 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.
Tool
Rental
: Rental revenue is recognized upon completion of the customer’s job for which the tool was rented. While the
duration of the rents vary by job and number of runs, these rents 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
: Since 1996, we have refurbished PDC drill bits for Baker Hughes. We are currently operating
under a four-year vendor agreement with Baker Hughes that was renewed in 2018 (the “Vendor Agreement”). We recognize
revenue for our PDC drill bit services upon shipment of the drill bit. Shipping and handling costs related to refurbishing services
are paid directly by Baker Hughes at the time of shipment. By contract, we can only refurbish and manufacture oil or gas drill
bits for Baker Hughes, but we are not contractually prohibited from manufacturing drill bits for the mining industry.
Cash
and cash equivalents
Cash
and cash equivalents consist of cash on deposit. We maintain cash deposits with financial institutions that may exceed federally
insured limits at times. We have chosen credible institutions and believe our risk of loss is negligible.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash equivalents, receivables, payables, and bank debt. The Company
believes that the carrying values of these instruments on the accompanying consolidated balance sheets approximate their fair
values.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are generally due within 60 days of the invoice date. No interest is charged on past-due balances. We grant credit
to our customers based upon an evaluation of each customer’s financial condition. We periodically monitor the payment history
and ongoing creditworthiness of our customers. An allowance for doubtful accounts is established at a level estimated by management
to be adequate based upon various factors including historical experience, aging status of customer accounts, payment history
and financial condition of our customers. The allowance for doubtful accounts was $9,288 and $18,450 as of December 31,
2018, and 2017, respectively.
Inventories
Inventories
consist of raw materials, work-in-process and finished goods and are stated at the lower of cost, determined using the weighted-average
cost method, or net realizable value. Finished goods inventories include raw materials, direct labor and production overhead.
The Company regularly reviews inventories on hand and current market conditions to determine if the cost of finished goods inventories
exceed current market prices and impairs the cost basis of the inventory accordingly.
Property,
Plant and Equipment
Property,
plant and equipment is stated at cost. The cost of ordinary maintenance and repair is charged to operating expense, while replacement
of critical components and major improvements are capitalized. Depreciation or amortization of property and equipment, is calculated
using the straight-line method over the asset’s estimated useful life as follows:
Buildings and leasehold Improvements
|
|
|
2-39 years
|
|
Machinery, equipment and rental tools
|
|
|
18 months -10 years
|
|
Office equipment, fixtures and software
|
|
|
3-7 years
|
|
Transportation equipment
|
|
|
5 - 30 years
|
|
Property,
plant and equipment is reviewed for impairment on an annual basis or whenever events or changes in circumstances indicate the
carrying value of an asset or asset group may not be recoverable. Indicative events or circumstances include, but are not limited
to, matters such as a significant decline in market value or a significant change in business climate. An impairment loss is recognized
when the carrying value of an asset exceeds the estimated undiscounted future cash flows from the use of the asset and its eventual
disposition. The amount of impairment loss recognized is the excess of the asset’s carrying value over its fair value. Assets
to be disposed of are reported at the lower of the carrying value or the fair value less cost to sell. Upon sale or other disposition
of an asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying value of the
asset and the net proceeds received.
Impairment
of Long-Lived Assets
We
review the recoverability of long-lived assets, such as property and equipment, when events or changes in circumstances occur
that indicate the carrying value of the asset or asset group may not be recoverable. The assessment of possible impairment is
based on our ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted)
of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized
for the difference between estimated fair value and the carrying value. We concluded there were no indicators evident or other
circumstances present that these assets were not recoverable and accordingly, no impairment charges of long-lived assets were
recognized for 2018 and 2017.
Intangible
Assets
The
Company’s intangible assets with finite lives consist of developed technology, customer contracts and relationships, and
trade names and trademarks.
The
cost of intangible assets with finite lives is amortized using the straight-line method over the estimated period of economic
benefit, ranging from 3 to 17 years. Asset lives are adjusted whenever there is a change in the estimated period of economic benefit.
No residual value has been assigned to these intangible assets.
Intangible
assets with finite lives are tested for impairment whenever events or changes in circumstances indicate the carrying value may
not be recoverable. These conditions may include a change in the extent or manner in which the asset is being used or a change
in future operations. The Company assesses the recoverability of the carrying amount by preparing estimates of future revenue,
margins, and cash flows. If the sum of expected future cash flows (undiscounted and without interest charges) is less than the
carrying amount, an impairment loss is recognized. The impairment loss recognized is the amount by which the carrying amount exceeds
the fair value. Fair value of these assets may be determined by a variety of methodologies, including discounted cash flow models.
Research
and Development
We
expense research and development costs as they are incurred. For the years ended December 31, 2018 and 2017, these
expenses were approximately $1,265,000 and $746,000, respectively, and are included in the selling, general, and
administrative expenses in the statement of operations.
Earnings
(Loss) Per Share
Basic
earnings (loss) per common share is calculated by dividing net income (loss) available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income
(loss) attributable to common shareholders by the weighted average number of common shares outstanding, including potentially
dilutive common share equivalents, if the effect is dilutive. Potentially dilutive common shares equivalents include stock options
and warrants. Approximately 30,502 options to purchase our common stock were excluded from this calculation because they
were antidilutive for the year ended December 31, 2018.
Income
Taxes
The
Company recognizes an asset or liability for the deferred tax consequences of all temporary differences between the tax basis
of assets or liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts
in future years when the reported amounts of the asset or liabilities are recovered or settled and for operating loss carry forwards.
These deferred tax assets and liabilities are measured using the enacted tax rates that will be in effect when the differences
are expected to reverse and the carry forwards are expected to be realized. Deferred tax assets are reviewed periodically for
recoverability and a valuation allowance is provided as necessary.
Debt
Issuance Costs
Costs
related to debt issuance are capitalized and amortized as interest expense over the term of the related debt using the straight-line
method, which approximates the effective interest method. Upon the repayment of debt, the Company accelerates the recognition
of an appropriate amount of the costs as interest expense. Debt issuance costs related to the Hard Rock Note are presented as
a direct reduction from the carrying amount of the note payable. As of December 31, 2018 and 2017, the amortized
debt issuance costs were $77,641 and $79,424, respectively.
Share
Based Compensation
Share
based compensation expense for share based payments, related to stock option and restricted stock awards, is recognized based
on their grant-date fair values. The Company recognizes compensation expense on a straight-line basis over the requisite service
period of the award.
Concentrations
and Credit Risk
The
Company has two significant customers that represented 95% and 97% of our revenue for the years ended December 31, 2018
and 2017, respectively. These customers had approximately $1,863,000 and $2,523,000 in accounts receivable at
December 31, 2018 and 2017, respectively.
The Company
had one vendor that represented 11% of our purchases for the year ended December 31, 2018. This vendor had approximately $158,000
in accounts payable at December 31, 2018. We had one significant vendor that represented 17% of our purchases for the year ended
December 31, 2017, and had approximately $151,000 in accounts payable at December 31, 2017.
Recently
Issued Accounting Standards
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standards update for “Revenue
from Contracts with Customers,” which supersedes the revenue recognition requirements in “Topic 605, Revenue Recognition.”
This accounting standard update provides new guidance concerning recognition and measurement of revenue and requires additional
disclosures about the nature, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted
this pronouncement on January 1, 2019 using the full retrospective method. Our evaluation efforts to determine the impact of this
standard on our consolidated financial statements included identifying revenue streams with similar contract structures, performing
a detailed review of key contracts by revenue stream, and comparing and analyzing historical policies and practices to the new
standard. Based on our assessment performed, we have determined that our revenue recognition methodology does not materially change
and the adoption of this pronouncement will not have a material impact on the consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, “
Leases
,” which introduces the recognition of lease assets
and lease liabilities by lessees for all leases which are not short-term in nature. The new standard requires a modified retrospective
transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period
presented in the financial statements. The Company is currently evaluating the impact the pronouncement will have on the consolidated
financial statements and related disclosure and will adopt this standard on January 1, 2020.
NOTE
2. INVENTORIES
Inventories
were comprised of the following:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Raw
material
|
|
$
|
738,330
|
|
|
$
|
1,040,795
|
|
Work
in progress
|
|
|
217,158
|
|
|
|
77,702
|
|
Finished
goods
|
|
|
48,135
|
|
|
|
78,316
|
|
|
|
$
|
1,003,623
|
|
|
$
|
1,196,813
|
|
The
Company recorded an impairment loss in the cost of sales of $116,396 during the year ended December 31, 2018 relating
to slow moving inventory and steel inventory sold to a third-party wholesaler for no gain or loss.
There
were no impairment losses recorded by the Company during the year ended December 31, 2017.
NOTE
3. PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment are comprised of the following:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Land
|
|
$
|
880,416
|
|
|
$
|
880,416
|
|
Buildings
|
|
|
4,847,778
|
|
|
|
4,847,778
|
|
Leasehold
improvements
|
|
|
755,039
|
|
|
|
717,232
|
|
Machinery
and equipment
|
|
|
8,816,880
|
|
|
|
8,216,237
|
|
Office equipment, fixtures
and software
|
|
|
518,806
|
|
|
|
507,557
|
|
Transportation
assets
|
|
|
811,378
|
|
|
|
811,378
|
|
|
|
|
16,630,297
|
|
|
|
15,980,598
|
|
Accumulated
depreciation
|
|
|
(8,404,288
|
)
|
|
|
(7,171,250
|
)
|
|
|
$
|
8,226,009
|
|
|
$
|
8,809,348
|
|
Depreciation
expense related to property, plant and equipment for the year ended December 31, 2018 and 2017 was $1,313,564
and $1,229,932 respectively.
NOTE
4. INTANGIBLE ASSETS
Intangible
assets are comprised of the following:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
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
|
|
|
(11,213,889
|
)
|
|
|
(8,767,222
|
)
|
|
|
$
|
3,686,111
|
|
|
$
|
6,132,778
|
|
Amortization
expense related to intangible assets for the years ended December 31, 2018 and 2017 was $2,446,667 and $2,446,666,
respectively.
These
intangible assets will be amortized over their expected useful lives using the straight-line method, which is a weighted-average
amortization period of 6.3 years. As of December 31, 2018, the Company will recognize the following amortization expense
for the respective periods ending December 31 noted below:
2019
|
|
|
1,700,000
|
|
2020
|
|
|
1,166,667
|
|
2021
|
|
|
583,334
|
|
2022
|
|
|
166,667
|
|
2023
|
|
|
69,443
|
|
Total
|
|
$
|
3,686,111
|
|
During
the years ended December 31, 2018 and 2017, there were no impairments recognized related to other intangible assets.
NOTE
5. 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. That agreement provided that, upon our full repayment of the Tronco loan from the proceeds
of the Offering, the lender would assign to us all of its rights under the Tronco loan, including all of the collateral documents.
On May 30, 2014, we closed our purchase of the Tronco loan for a total payoff of $8.3 million, including principal, interest,
and early termination fees. As a result of that purchase, we became Tronco’ s senior secured lender, and as a result are
entitled to receive all proceeds from sales of the Tronco-owned collateral, as discussed below.
The
interest rate on the note is 5.5%. We earned interest of $377,746 and $338,204 in the years ending December 31,
2018 and 2017, respectively.
On
December 18, 2018, the Board of Directors approved a bonus to Troy and Annette Meier with an approximate value of $587,500. The
Board and the Meiers decided a portion of the dollar value of such awards would be used to pay the annual interest on the Tronco
Note of $211,741 and $190,045 remitted for taxes on the Meiers behalf. The remainder of $185,714 was given to the Meiers in the
form of restricted stock units. See Note 10 – Share-Based Compensation.
On
March 28, 2017, Tronco finalized an agreement with a third party and pursuant to this agreement, the third party acquired all
of the Ohio assets of Tronco for $550,000. As Tronco’s senior secured lender, we agreed to release our lien and security
interest on these assets in accordance with the agreement. The Company agreed to a non-cash receipt of the $550,000 from Tronco
by reducing our bonus accrual liabilities, which was earned by the Meiers in 2014, but not paid, and was recorded in other long-term
liability. As a result of this agreement, we reduced both the other long-term liability and the Tronco related party note receivable
during the first quarter of 2017.
On
August 8, 2017, the Board of Directors agreed to extend the terms of the Tronco loan to interest only payments due December 31,
2017, 2018, 2019, 2020, and 2021, with a balloon payment of all unpaid interest and principal due upon full maturity on December
31, 2022.
On
December 4, 2017, as part of the annual awards made to employees of the Company, the Board of Directors approved grants of restricted
stock units to Troy and Annette Meier with an approximate value of $587,500. The Board and the Meiers decided in lieu of making
such awards, the dollar value of such awards would be used to pay the annual interest on the Tronco note of $34,992, and the principal
on the Tronco note of $379,507 in 2017. The remainder of approximately $173,000 were remitted for taxes on the Meiers behalf.
See Note 10 – Share-Based Compensation.
We
have the direct legal right to enforce the collateral and guaranty agreements entered into in connection with the Tronco loan
and to collect Tronco’s collateral sales proceeds, in order to recover the loan purchase amount. The Tronco loan continues
to be secured by the guarantees of Troy and Annette Meier (the “Meier Guaranties”), which are directly payable to
and legally enforceable by us. In addition, the Meiers have provided us with stock pledges in which they pledge a portion
of their shares of our common stock held by their family entities (the “Meier Stock Pledge”), as collateral for the
Meiers guaranties until full repayment of Tronco loan. The pledged shares, which are subject to insider timing requirements and
volume limitations under Rule 144 of the Securities Act and required periodic black-out periods, are being held in third-party
escrow by the Company’s attorneys until full repayment of the Tronco loan, the balance of which is $7,367,212.
The Company holds 8,267,860 shares as collateral for the Tronco note as of December 31, 2018. The Company believes the
market value of the 8,267,860 shares is sufficient collateral for the note.
NOTE
6. LONG-TERM DEBT
Long-term
debt is comprised of the following:
|
|
December
31,
2018
|
|
|
December
31,
2017
|
|
Real
estate loans
|
|
$
|
4,255,152
|
|
|
$
|
4,518,424
|
|
Hard
Rock Note, net of discount
|
|
|
6,000,000
|
|
|
|
7,422,912
|
|
Machinery
loans
|
|
|
327,879
|
|
|
|
513,317
|
|
Transportation
loans
|
|
|
292,722
|
|
|
|
353,400
|
|
|
|
|
10,875,753
|
|
|
|
12,808,053
|
|
Current
portion of long-term debt
|
|
|
(4,578,759
|
)
|
|
|
(6,101,678
|
)
|
|
|
$
|
6,296,994
|
|
|
$
|
6,706,375
|
|
Real
Estate Loans
On February 1, 2019,
we signed a loan agreement for $3,129,861 related to our commercial bank loan for our Vernal, Utah Campus. We paid
$1,000,000 towards the previous loan that was scheduled to mature on February 15, 2019, upon refinancing. The loan
requires monthly payments of approximately $43,000, including principal and interest at 7.25%, and is secured by
the land and buildings at our Vernal, Utah Campus. A balloon payment of $2,500,000 is due upon maturity on February
15, 2021.
Hard
Rock Note
In
2014, the Company purchased all of the interests of 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 the patents, patents pending, other patent rights, and trademarks transferred to Hard Rock by Hard Rock in the closing of the
acquisition. At issuance, the fair value of the Hard Rock Note was determined to be $11,144,000, which was less than the face
value due to a below-market interest rate. The resulting discount of $1,356,000 is amortized to interest expense using the effective
interest method, totaling approximately $78,000 and $76,000 during 2018 and 2017, respectively.
On
November 21, 2018, certain of our subsidiaries entered into an amended and restated note with the seller in our acquisition
of Hard Rock Solutions, LLC. As amended and restated, the Hard Rock Note accrues interest at 7.25% per annum and matures
on October 5, 2020. We made all the required principal and accrued interest payments related to the note for 2018. Under
the current terms of Hard Rock Note, we are required to pay principal payments of $750,000 (plus accrued interest) on each January
5, April 5, July 5 and October 5 in 2019 and 2020. On January 10, 2019, the Company made a principal payment of $750,000 and an
interest payment of $183,411.
Transportation
Loans
Vehicles
Our
loans for Company vehicles and other transportation are with various financing parties we have engaged with in connection with
the acquisition of the vehicles. As of December 31, 2018, the loans bear interest ranging from 0%-8.29% with maturity dates
ranging from October 2019 through October 2021, and are collateralized by the vehicles. Our cumulative monthly payment
under these loans as of December 31, 2018 was approximately $2,200, including principal and interest.
Airplane
Loan
Our
loan for the Company airplane bears interest at 7.35%, requires monthly payments of principal and interest of approximately $3,500,
matures in May of 2026 and is collateralized by the airplane.
Future
annual maturities of total debt are as follows (1) :
Year
|
|
|
|
2019
|
|
$
|
4
,578,760
|
|
2020
|
|
|
3,519,077
|
|
2021
|
|
|
2,
599,458
|
|
2022
|
|
|
51,962
|
|
2023
|
|
|
33,520
|
|
Total
debt
|
|
$
|
10,782,777
|
|
(1)
|
Excludes
discounts for debt issuance costs.
|
NOTE
7. 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. Stabil Drill has not yet responded to the
lawsuit. As of the date of this annual report, the lawsuit is in initial stages . We cannot predict the outcome of this
matter, but our legal costs could have a material effect on our financial position or results of operations in future
periods. We
are not currently involved in any other litigation which management believes could have a material effect on our
financial position or results of operations.
NOTE
8. RELATED PARTY TRANSACTIONS
Notes
Payable
In
2014, the Company issued notes payable to related parties in the amount of $2 million. The notes bear interest at 7.5% and were
scheduled to mature on January 2, 2017. The Company did not pay these notes upon maturity as the Company and the related parties
informally agreed to offset these notes payable with the related-party note receivable. During the year ended December 31,
2017, the Company made principal payments and interest payments of $80,000 related to the notes payable. Additionally, the
Company applied $207,942 in principal and interest due to the Company on the related party note receivable (see Note 5
– Related Party Note Receivable) during the year ended December 31, 2017 and reduced the balance to $0 as of December 31,
2017.
Related
Party Note Receivable
The
Company holds 8,267,860 shares as collateral for the Tronco
Note (see Note 5 – Related Party Note Receivable).
NOTE
9. INCOME TAXES
Components
of income tax benefit are as follows:
Current income taxes:
|
|
For
the Year
Ended
December
31, 2018
|
|
|
For
the Year
Ended
December
31, 2017
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Current
provision for income taxes
|
|
|
3,640
|
|
|
|
|
|
Deferred provision (benefit) for income
taxes:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Deferred provision
(benefit) for income taxes
|
|
|
-
|
|
|
|
-
|
|
Provision for
income taxes
|
|
$
|
3,640
|
|
|
$
|
-
|
|
The
non-current deferred tax assets and liabilities consist of the following:
Deferred tax assets:
|
|
|
|
|
|
|
263A adjustment
|
|
$
|
12,295
|
|
|
$
|
14,326
|
|
Accrued expenses
|
|
|
-
|
|
|
|
-
|
|
Stock compensation
|
|
|
81,133
|
|
|
|
48,489
|
|
Stock option
|
|
|
58,102
|
|
|
|
44,922
|
|
Amortization of intangibles
|
|
|
2,965,622
|
|
|
|
2,796,867
|
|
Net operating loss
|
|
|
2,458,939
|
|
|
|
2,999,467
|
|
Others
|
|
|
39,752
|
|
|
|
12,660
|
|
Total non-current
deferred tax assets
|
|
|
5,615,843
|
|
|
|
5,916,731
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(13,781
|
)
|
|
|
(23,301
|
)
|
Depreciation
on fixed assets
|
|
|
(697,478
|
)
|
|
|
(853,089
|
)
|
Total non-current
deferred tax liabilities
|
|
|
(711,259
|
)
|
|
|
(876,390
|
)
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax assets/liabilities
|
|
|
4,904,584
|
|
|
|
5,040,341
|
|
Less:
Valuation Allowance
|
|
|
(4,904,584
|
)
|
|
|
(5,040,341
|
)
|
Total deferred
tax liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Reconciliation
of the tax rate to the U.S. federal statutory tax rate which relate to the year ended December 31, 2018 and 2017
is as follows:
|
|
For
the Year Ended
December 31, 2018
|
|
|
For
the Year Ended
December 31, 2017
|
|
|
|
|
|
|
|
|
Tax at federal statutory
rate
|
|
$
|
(11,494
|
)
|
|
$
|
(80,922
|
)
|
State income taxes
|
|
|
2,875
|
|
|
|
-
|
|
Permanent differences
|
|
|
61,495
|
|
|
|
118,253
|
|
Change in valuation allowance
|
|
|
(135,758
|
)
|
|
|
(2,436,734
|
)
|
Other - State rate effect
|
|
|
(2,044
|
)
|
|
|
(9,578
|
)
|
Change in status
|
|
|
104,960
|
|
|
|
2,408,980
|
|
Other
|
|
|
(16,394
|
)
|
|
|
-
|
|
Provision for
income taxes
|
|
$
|
3,640
|
|
|
$
|
-
|
|
On
December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the 2017 Tax Cuts and Jobs
Act (“2017 Tax Reform”). The 2017 Tax Reform significantly revises the future ongoing U.S. corporate income tax by,
among other things, lowering U. S. corporate income tax rates and implementing a territorial tax system.
We
have reasonably estimated the effects of the 2017 Tax Reform and recorded provisional amounts in our financial statements as of
December 31, 2017. This amount is primarily comprised of the re-measurement of federal net deferred tax liabilities resulting
from the permanent reduction in the U.S. statutory corporate tax rate to 21% from 35%. We also recorded a corresponding decrease
in our valuation allowance for the impact of the 2017 Tax Reform of approximately $5.040 million, with minimal to no effect of
our current statement of operations.
During
the year ended December 31, 2018, the Company reviewed additional tax guidance provided, and implemented new internal policies
to eliminate business entertainment expenses, other than business meals. We determined no revisions were necessary to the tax
provision for the year ended December 31, 2017. The tax provision for the year ended December 31, 2018 is consistent with prior
years and at the current U.S. corporate tax rate of 21%.
NOTE
10. SHARE-BASED COMPENSATION
In
2014, the Company’s Board of Directors approved that the Directors stock compensation would be included in the Employee
Stock Incentive Plan (“Stock Plan”) that reserves 1,724,128 shares of common stock for issuance. Equity and equity-based
compensation plans are intended to make available incentives that will assist us in attracting, retaining, and motivating employees,
officers, consultants, and directors by allowing them to acquire an ownership interest in our business, and, as a result, encouraging
them to contribute to our success. We may provide these incentives through the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units, performance shares and units, and other cash-based or stock-based awards. As a result,
we expect to incur non-cash, stock-based compensation expenses in future periods. The Board of Directors has frozen the 2014 Incentive
Plan, such that no future grants of awards will be made and the 2014 Incentive Plan shall only remain in effect with respect to
awards under that Plan outstanding as of June 15, 2015 until they expire according to their terms.
In
2015, our stockholders approved the Superior Drilling Company, Inc. 2015 Long Term Incentive Plan (the “2015 Incentive Plan”).
The purpose of the 2015 Incentive Plan is to advance the interests of the Company and its stockholders by providing an incentive
to attract, retain and reward persons performing services for the Company and its affiliates and by motivating such persons to
contribute to the growth and profitability of the Company and our affiliates. In 2017, the Company’s board of directors
approved an additional 1,440,000 shares of the Company’s common stock to be added to the 2015 Incentive Plan. Subject to
adjustment as provided in the 2015 Incentive Plan, the maximum aggregate number of shares of the Company’s common stock
that may be issued with respect to awards under the 2015 Incentive Plan is 2,992,905. As of December 31, 2018, there were
845,679 shares outstanding with respect to awards granted under the Company’s 2015 Incentive Plan.
Restricted
stock units
On
August 3, 2018, the Board of Directors granted 189,038 restricted stock units from the Company’s 2015 incentive plan to
executive management and directors based on the average price of the Company’s common stock on the date of the grant. These
restricted units will vest over a three - year period.
On
December 18, 2018, the Board of Directors granted 147,391 restricted stock units from the Company’s 2015 incentive plan
to Troy and Annette Meier based on the average price of the Company’s common stock on the date of the grant. These restricted
units will vest over a three - year period (see Note 6-Related Party Note Receivable).
On
December 4, 2017, the Board of Directors granted 267,443 restricted stock units from the Company’s 2015 incentive plan to
executive management and directors based on the closing price of the Company’s common stock on the date of the grant. These
restricted units will vest over a three - year period.
On
December 4, 2017, the Board of Directors approved grants of restricted stock units to Troy and Annette Meier with an approximate
value of $587,500. The Board and the Meiers decided in lieu of making such awards, the dollar value of such awards would be used
to pay interest and principal on the Tronco Note (see Note 5-Related Party Note Receivable ).
Compensation
expense recognized for grants vesting under the 2014 Incentive Plan was $0 and approximately $142,000 for the years ending
December 31, 2018 and 2017, respectively. Compensation expense recognized for grants of restricted stock vesting
under the 2015 Incentive Plan was approximately $458,000 and $456,000 for the years ending December 31, 2018 and
2017, respectively. The Company recognized compensation expense and recorded it as share-based compensation in the consolidated
statement of operations.
Total
unrecognized compensation expense related to unvested restricted stock units expected to be recognized over the remaining weighted
vesting period of 1.44 years equaled approximately $622,000 at December 31, 2018. These shares vest over
three years.
The
following table summarizes RSU activity for the years ended December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
|
|
Number
of Restricted Stock Units
|
|
|
Weighted
-
Average Grant
Date Fair Value
|
|
|
Number
of Restricted Stock Units
|
|
|
Weighted
-
Average Grant
Date Fair Value
|
|
Unvested
RSU’s at beginning of period
|
|
|
647,195
|
|
|
$
|
1.12
|
|
|
|
702,608
|
|
|
$
|
1.31
|
|
Granted
|
|
|
336,429
|
|
|
|
1.60
|
|
|
|
282,578
|
|
|
|
1.27
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(286,579
|
)
|
|
|
1.12
|
|
|
|
(337,991
|
)
|
|
|
1.64
|
|
Unvested
RSU’s at end of period
|
|
|
697,048
|
|
|
$
|
1.35
|
|
|
|
647,195
|
|
|
$
|
1.12
|
|
Stock
Options
On
October 8, 2018, the Board of Directors granted 5,000 stock options from the Company’s 2015 Incentive Plan to officers and
employees based on the Company’s common stock on the date of grant, which was $4.05. These options vest 33% on the first
anniversary of the grant date, 33% on the second anniversary of the grant date, and 34% on the third anniversary of the grant
date.
On
December 7, 2018, the Board of Directors granted 75,000 stock options from the Company’s 2015 Incentive Plan to officers
and employees based on the Company’s common stock on the date of grant, which was $1.69. These options vest 33% on the first
anniversary of the grant date, 33% on the second anniversary of the grant date, and 34% on the third anniversary of the grant
date.
On
December 1, 2017, the Board of Directors granted 67,500 stock options from the Company’s 2015 Incentive Plan to officers
and employees based on the Company’s common stock on the date of grant, which was $1.30. These options vest 33% on the first
anniversary of the grant date, 33% on the second anniversary of the grant date, and 34% on the third anniversary of the grant
date.
Compensation
expense recognized for option grants vesting under the 2015 Incentive Plan was approximately $61,000 and $15,000 for the
years ending December 31, 2018 and 2017. The Company recognized compensation expense and recorded it as share-based
compensation in the consolidated condensed statement of operations.
The
following table summarizes stock options outstanding and changes during the years ended December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
|
|
Number
of Stock Options
|
|
|
Weighted
- Average Exercise Price
|
|
|
Number
of Stock Options
|
|
|
Weighted
- Average Exercise Price
|
|
Stock
options outstanding at beginning of period
|
|
|
458,827
|
|
|
$
|
1.50
|
|
|
|
425,000
|
|
|
$
|
1.52
|
|
Granted
|
|
|
93,206
|
|
|
|
1.80
|
|
|
|
67,500
|
|
|
|
1.30
|
|
Exercised
|
|
|
(9,364
|
)
|
|
|
1.52
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(10,135
|
)
|
|
|
1.76
|
|
|
|
(6,701
|
)
|
|
|
1.44
|
|
Canceled
or forfeited
|
|
|
(566
|
)
|
|
|
1.26
|
|
|
|
(26,972
|
)
|
|
|
1.28
|
|
Stock
options outstanding at end of period
|
|
|
531,968
|
|
|
|
1.56
|
|
|
|
458,827
|
|
|
$
|
1.50
|
|
Stock
options exercised at end of period
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The
fair value of stock options granted to employees and directors in 2018 was estimated at the grant date using the Black-Scholes
option pricing model using the following assumptions:
Expected
volatility
|
|
|
56.7
|
%
|
Discount
rate
|
|
|
2.71
|
%
|
Expected
life (years)
|
|
|
3
|
|
Dividend
yield
|
|
|
N/A
|
|
Option
pricing models require the input of highly subjective assumptions, including the expected price volatility. Expected price volatility
is based on the historical volatility of our common stock. Changes in the subjective input assumptions can materially affect the
fair value estimate. The expected term of the options granted is derived from the output of the option pricing model and represents
the period of time that the options granted are expected to be outstanding. The discount rate for the periods within the contractual
term of the option is based on the U.S. Treasury yield curve in effect at the date of grant.
NOTE
11. SUBSEQUENT EVENTS
In
February 2019, the Company entered into a $4.3 million financing agreement comprised of a $0.8 million term loan and a $3.5 million
asset-based revolving credit facility. The interest rate for the term loan and the revolver is prime plus 2%. The obligations
of the borrowers, which includes the Company and its subsidiaries, under the agreement are secured by a security interest in substantially all of the tangible and intangible assets
of the borrowers, other than any assets owned by the borrowers that constitute real property (and fixtures affixed to such real
property), certain excluded equipment, intellectual property, or aircraft. The credit facility 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.
Also 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 infringed on our patent that covers the Company’s well bore conditioning tool, the Drill-N-Ream. Stabil Drill
has not yet responded to the lawsuit. As of the date of this annual report, the lawsuit is in initial stages. We cannot predict
the outcome of this matter, but our legal costs could have a material effect on our financial position or results of operations
in future periods.