Notes
to Condensed Consolidated Financial Statements (Unaudited)
September
30, 2020
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 and nine months ended September 30, 2020 and 2019, 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 and nine months ended September 30, 2020 are
not necessarily indicative of the results of operations expected for the year ended December 31, 2020. 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, 2019 and 2018 and the notes thereto, which were included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2019, 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.
COVID-19
The
COVID-19 pandemic-related reduction in energy demand and the dramatic decline in commodity prices that began in the first quarter
of 2020 continued to cause disruptions and volatility in the second and third quarters of 2020. Sharp declines in crude oil and
natural gas production along with reduced demand for refined products due to the economic shutdown in the wake of the pandemic
affected our business in the second quarter, and we expect will continue to do so in the near term. Further, significant uncertainty
remains regarding the duration and extent of the impact of the pandemic on the energy industry. See Note 2 – Liquidity.
Leases
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires assets and liabilities that arise from all
leases to be recognized on the balance sheet for lessees and expanded financial statement disclosures for both lessees and lessors.
We adopted the new standard effective January 1, 2020 and elected the modified retrospective transition method and as such, the
comparative financial information will not be restated and will continue to be reported under the lease standard in effect during
those periods. The adoption of this standard resulted in approximately $270,000 of additional assets and liabilities on our consolidated
balance sheet representing the recognition of operating lease right-of-use assets and operating lease liabilities. Right-of-use
assets represent the Company’s right to use an underlying asset for the lease term and lease liability represents the Company’s
obligation to make lease payments arising from the lease, both of which are recognized based on the present value of the future
minimum lease payments over the lease term at the commencement date. Leases with a lease term of 12 months or less at inception
are not recorded on the condensed consolidated balance sheet and are expensed on a straight-line basis over the lease term in
the condensed consolidated statement of operations. The interest rate implicit in lease contracts is typically not readily determinable.
As a result, the Company utilizes an estimate of its incremental borrowing rate to discount lease payments, which reflects the
fixed rate at which the Company believes it could borrow on a collateralized basis the amount of the lease payments in the same
currency, for a similar term, in a similar economic environment. See Note 8 – Leases.
Significant
Customers
For
the nine months ended September 30, 2020, two customers represented 81% of our total revenue during the period. For the nine months
ended September 30, 2019, two customers represented 94% of our total revenue during the period.
Significant
Vendors
We
had one vendor that represented 13.9% of our purchases for the nine months ended September 30, 2020. The vendor had approximately
$72,000 in accounts payable at September 30, 2020 and purchases in the nine months of 2020 from this vendor totaled approximately
$554,000. We had one vendor that represented 12% of our purchases for the nine months ended September 30, 2019. This vendor
had approximately $218,000 in accounts payable at September 30, 2019 and purchases during the nine months of 2019 from this vendor
totaled approximately $772,000.
Reclassifications
Certain prior year amounts have been reclassified
to the balance sheet to conform to the current year presentation. The reclassifications were within accounts payable and accrued
expenses and did not impact net income.
Recently
Issued Accounting Standards
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes
the impairment model for most financial assets and certain other instruments, including trade and other receivables, and requires
the use of a new forward-looking expected loss model that will result in the earlier recognition of allowances for losses. Early
adoption is permitted and entities must adopt the amendment using a modified retrospective approach to the first reporting period
in which the guidance is effective. For smaller reporting companies, as provided by Accounting Standards Update 2019-10, Financial
Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), ASU 2016-13 is effective
for annual periods, including interim periods within those annual periods, beginning after December 15, 2022. The adoption of
ASU 2016-13 is currently not expected to have a material effect on our consolidated financial statements.
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (“Topic 740”) - Simplifying the Accounting for Income
Taxes. ASU 2019-12 is intended to simplify accounting for income taxes. It removes certain exceptions to the general principles
in Topic 740 and amends existing guidance to improve consistent application. ASU 2019-12 is effective for annual periods, including
interim periods within those annual periods, beginning after December 15, 2020. The adoption of ASU 2019-12 is currently not expected
to have a material effect on our consolidated financial statements.
NOTE
2. LIQUIDITY
The significant decline in oil demand due
to COVID-19, the instability of oil prices caused by geopolitical issues and production levels, and the limited availability of
storage capacity, have together resulted in our customers announcing significant reductions to their capital expenditure budgets
for 2020. Demand for our products and services has been severely impacted as a result, and management expects
this to continue for the duration of 2020 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.
In an effort to offset the reduction in revenue
resulting from the weakened macroeconomic environment, we have implemented certain cost reduction measures during
2020. These measures included, but were not limited to, the following:
|
●
|
20%
reduction of the base salary beginning in April 2020 and a 40% salary deferral beginning in October 2020 for the Company’s
Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer;
|
|
|
|
|
●
|
20%
reduction in the base salaries beginning in April 2020 and a 20% deferral of base salaries beginning in October
2020 of certain non-executive officers of the Company;
|
|
|
|
|
●
|
20%
reduction in fees to be paid beginning in April 2020 and a 40% deferral of fees beginning in October 2020 to the independent
directors on the Board for their service as directors;
|
|
|
|
|
●
|
5%
to 10% reduction in salaries beginning in April 2020 and a 10% deferral of salaries beginning in October 2020 of other
members of the management team and salaried workforce;
|
|
|
|
|
●
|
43%
reduction of the Company’s
workforce; and
|
|
|
|
|
●
|
Closure of our West Texas repair facility in July 2020.
|
We
have also entered into amended agreements with certain of our customers, reduced our planned capital expenditures
for 2020 and decided to defer further investment in new technology development, including our Strider technology, for the foreseeable
future. Management is working diligently with vendors to achieve amended price concessions and terms of our payables. We believe
the U.S. onshore activity for the remainder of 2020 will remain at depressed levels and continue to be constrained.
We
are working to minimize the decline in revenue by adding additional revenue streams and maintaining cost containment
measures in order to be cash flow positive. We believe that
our borrowing capacity, cash generated from operations and the proceeds of the Paycheck Protection Program (“PPP”)
loan (see Note 9 – Long-Term Debt) 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.
Additionally,
in July 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.
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.
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
83% of our revenue was from the United States and approximately 17% was from the Middle East for the nine
months ended September 30, 2020. For the nine months ended September 30, 2019, approximately 95% of our revenue was from the United
States and approximately 5% was from the Middle East.
Tool
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: Tool 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: We recognize revenue for our PDC drill bit services upon transfer of control, which we
have determined to be upon shipment. Shipping and handling costs related to refurbishing services are paid directly by the customer
at the time of shipment.
Revenue
disaggregated by revenue source are as follows:
|
|
Nine
months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Tool Revenue:
|
|
|
|
|
|
|
|
|
Tool and product sales
|
|
$
|
971,520
|
|
|
$
|
3,358,119
|
|
Tool rental
|
|
|
1,716,210
|
|
|
|
755,720
|
|
Other related revenue
|
|
|
3,459,550
|
|
|
|
5,098,581
|
|
Total Tool Revenue
|
|
|
6,147,280
|
|
|
|
9,212,420
|
|
|
|
|
|
|
|
|
|
|
Contract Services
|
|
|
2,782,313
|
|
|
|
5,443,583
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
8,929,593
|
|
|
$
|
14,656,003
|
|
Contract
Costs
We
do not incur any material costs of obtaining contracts.
Contract
Balances
Under
our sales contracts, we invoice customers after our performance obligations have been satisfied, at which point payment is unconditional.
Accordingly, our contracts do not give rise to contract assets or liabilities under ASC 606.
NOTE
4. INVENTORIES
Inventories
are comprised of the following:
|
|
September 30, 2020
|
|
|
December
31, 2019
|
|
Raw material
|
|
$
|
809,958
|
|
|
$
|
800,662
|
|
Work in progress
|
|
|
36,229
|
|
|
|
75,235
|
|
Finished goods
|
|
|
97,683
|
|
|
|
48,135
|
|
|
|
$
|
943,870
|
|
|
$
|
924,032
|
|
NOTE
5. PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment are comprised of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Land
|
|
$
|
880,416
|
|
|
$
|
880,416
|
|
Buildings
|
|
|
4,764,441
|
|
|
|
4,758,832
|
|
Building improvements
|
|
|
755,039
|
|
|
|
755,039
|
|
Machinery and equipment
|
|
|
11,232,415
|
|
|
|
10,343,486
|
|
Office equipment, fixtures and software
|
|
|
628,358
|
|
|
|
615,357
|
|
Transportation assets
|
|
|
350,871
|
|
|
|
350,871
|
|
|
|
|
18,611,540
|
|
|
|
17,704,001
|
|
Accumulated depreciation
|
|
|
(10,752,340
|
)
|
|
|
(9,658,309
|
)
|
|
|
$
|
7,859,200
|
|
|
$
|
8,045,692
|
|
In
2019, the Company decided to sell the Company airplane and related hangar. Accordingly, these assets were reported as assets
held for sale on our balance sheet as of December 31, 2019 at their carrying value, which was lower than the expected fair
value less costs to sell. In February 2020, the Company sold the airplane for a gain of approximately $142,000. The Company recorded
a $30,000 impairment related to the hangar in March 2020 and expects a sale of the hangar to be completed in the
next 12 months.
Depreciation
expense related to property, plant and equipment for the three and nine months ended September 30, 2020 was $401,592 and $1,259,398,
respectively and for the three and nine months ended September 30, 2019 was $446,888 and $1,271,737, respectively.
NOTE
6. INTANGIBLE ASSETS
Intangible
assets are comprised of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
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
|
|
|
(13,788,889
|
)
|
|
|
(12,913,889
|
)
|
|
|
$
|
1,111,111
|
|
|
$
|
1,986,111
|
|
Amortization
expense related to intangible assets for the three and nine months ended September 30, 2020 was $291,667 and $875,000, respectively
and for the three and nine months ended September 30, 2019 was $291,667 and $1,408,333, respectively.
Annually,
and more often as necessary, we will perform an evaluation of our intangible assets for indications of impairment. If indications
exist, we will perform an evaluation of the fair value of the intangible assets and, if necessary, record an impairment charge.
As of September 30, 2020, the Company reviewed the net balance of the intangible assets and determined no impairment was needed.
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. 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 upon receiving repayment of
the note or interest in other income. On July 7, 2020, the Company entered into an amended and restated loan agreement and note
with Tronco changing the payment terms on the note. As amended, the interest rate on the note is fixed at 2% per annum. Interest
only is due December 31, 2021 and 2022, with a balloon payment of all unpaid interest and principal due upon maturity on December
31, 2022.
NOTE
8. LEASES
The
Company determines whether a contract is a lease, or contains a lease, at inception of the contract and whether that lease meets
the classification criteria of a finance or operating lease. The Company discounts lease payments based on an estimate of its
incremental borrowing rate as the Company’s leases do not provide a readily determinable implicit rate.
The
Company leases certain facilities in Texas, Utah and Dubai under long-term operating leases with lease terms of one year to two
years. Effective January 1, 2020, the Company adopted the provision of ASC 842 Leases.
The
table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheet as of
September 30, 2020:
|
|
Classification on Balance Sheet
|
|
September
30, 2020
|
|
Assets
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease right of use assets
|
|
$
|
146,450
|
|
Total lease assets
|
|
|
|
$
|
146,450
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
Operating lease liability
|
|
Current operating lease liability
|
|
$
|
108,104
|
|
Noncurrrent liabilities
|
|
|
|
|
|
|
Operating lease liability
|
|
Long-term operating lease liability
|
|
|
38,346
|
|
Total lease liability
|
|
|
|
$
|
146,450
|
|
The
lease expense and the cash paid under operating leases for the three and nine months ended September 30, 2020 was $26,827
and $141,817, respectively. At September 30, 2020, the weighted average remaining lease terms were 1.84 years and
the weighted average discount rate was 7.25%.
The
following is the aggregate future lease payments for operating leases as of September 30, 2020:
2020 (remaining)
|
|
$
|
26,827
|
|
2021
|
|
|
90,042
|
|
2022
|
|
|
23,304
|
|
2023
|
|
|
16,104
|
|
Total undiscounted lease payments
|
|
|
156,277
|
|
Less: effects of discounting
|
|
|
(9,827
|
)
|
Present value of lease payments
|
|
$
|
146,450
|
|
NOTE
9. LONG-TERM DEBT
Long-term
debt is comprised of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Real estate loans
|
|
$
|
2,681,373
|
|
|
$
|
2,938,191
|
|
Hard Rock Note
|
|
|
1,500,000
|
|
|
|
3,000,000
|
|
Credit Agreement
|
|
|
1,065,146
|
|
|
|
1,134,626
|
|
Machinery loans
|
|
|
495,635
|
|
|
|
580,185
|
|
PPP Loan
|
|
|
891,600
|
|
|
|
-
|
|
Transportation loans
|
|
|
63,769
|
|
|
|
298,404
|
|
|
|
|
6,697,523
|
|
|
|
7,951,406
|
|
Less:
|
|
|
|
|
|
|
|
|
Current portion
|
|
|
4,760,252
|
|
|
|
(4,102,542
|
)
|
Long-term debt, net
|
|
$
|
1,937,271
|
|
|
$
|
3,848,864
|
|
Real
Estate Loans
On
February 1, 2019, we signed a loan agreement for $3,129,861 refinancing our commercial bank loan which is secured by the land
and buildings at 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 approximately $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 all of the patents, patents pending, other patent rights, and trademarks transferred to Hard Rock.
The Company paid $803,630 of principal
and accrued interest on January 5, 2020, and $790,223 of principal and accrued interest on April 5, 2020. In April 2020, the Company
amended and restated the Hard Rock Note. Under the amended terms of the Hard Rock Note, we are required to make principal payments
of $750,000 plus accrued interest on July 5, 2021 and October 5, 2022. Interest accrues at a rate of 8% per annum. The Company
paid $29,759 of accrued interest on July 5, 2020 and $30,247 of accrued interest on October 5, 2020. Accrued interest only payments
will also be due on the fifth day of January, April and October 2021 and January, April and July 2022. The remaining principal
balance of the Hard Rock Note is $1,500,000.
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 September 30, 2020,
$359,916 was 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 September
30, 2020, may not exceed $511,791, 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 September 30, 2020, we had approximately
$9,456 of accrued interest.
The
Credit Agreement contains various restrictive covenants that, among other things, limit or restrict the ability of the borrowers
to incur additional indebtedness; incur additional liens; make dividends and other restricted payments; make investments; engage
in mergers, acquisitions and dispositions; make optional prepayments of other indebtedness; engage in transactions with affiliates;
and enter into restrictive agreements. The Credit Agreement does not include any financial covenants. If an event of default occurs,
the lenders are entitled to accelerate the advances made thereunder and exercise rights against the collateral. Borrowing under
the Revolving Loan is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration
clause. At September 30, 2020, 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 September 30, 2020, the interest rate was 8.85%, which
includes a 3.6% management fee rate. The obligations of the Company under the agreement are secured by a security interest in
substantially all of the tangible and intangible assets of the borrowers, 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.
Paycheck
Protection Program
On
April 21, 2020, the Company received loan proceeds of $891,600 under a promissory note from its existing commercial bank (the
“PPP Loan”). The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts
up to 2.5 times the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable
after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and
utilities, and maintains its payroll levels.
The
application for these funds required the Company to, in good faith, certify that the current economic uncertainty made the loan
request necessary to support the ongoing operations of the Company. Some of the uncertainties related to the Company’s operations
that are directly related to COVID-19 include, but are not limited to, the severity of the virus, the duration of the outbreak,
governmental, business or other actions (which could include limitations on operations or mandates to provide products or services),
impacts on the supply chain, and the effect on customer demand or changes to operations. In addition, the health of the Company’s
workforce, and its ability to meet staffing needs to continue to build, repair and distribute drilling tools, and other critical
functions, are uncertain and is vital to its operations.
The
PPP Loan certification further requires the Company to take into account our current business activity and our ability to access
other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business.
The Company had approximately $341,000 of available credit under the Credit Agreement as of April 21, 2020. Further, the Company
has a limited market capitalization and the Company’s shares have limited trading volume and as a result, the Company believes
it met and continues to meet the certification requirements.
The
term of the Company’s PPP Loan is two years. The annual interest rate on the PPP Loan is 1% and no payments of principal
or interest are due during the six-month period beginning on the date of the PPP Loan.
NOTE
10. TOTAL EQUITY
A
summary of changes in total equity for the nine months ended September 30, 2020 and 2019 is presented below:
|
|
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
|
|
|
199,360
|
|
|
|
199
|
|
|
|
369,644
|
|
|
|
-
|
|
|
|
369,843
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,774,732
|
)
|
|
|
(2,774,732
|
)
|
Balance - September 30, 2020
|
|
|
25,617,486
|
|
|
$
|
25,617
|
|
|
$
|
40,439,035
|
|
|
$
|
(35,766,565
|
)
|
|
$
|
4,698,087
|
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Shareholders
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance - December 31, 2018
|
|
|
25,018,098
|
|
|
$
|
25,018
|
|
|
$
|
39,440,611
|
|
|
$
|
(32,055,410
|
)
|
|
$
|
7,410,219
|
|
Stock-based compensation expense
|
|
|
79,652
|
|
|
|
80
|
|
|
|
473,637
|
|
|
|
-
|
|
|
|
473,717
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,061,058
|
)
|
|
|
(1,061,058
|
)
|
Balance - September 30, 2019
|
|
|
25,097,750
|
|
|
$
|
25,098
|
|
|
$
|
39,914,248
|
|
|
$
|
(33,116,468
|
)
|
|
$
|
6,822,878
|
|
On August 7, 2020, the Board of Directors
recommended and the Company’s shareholders approved an additional 2,543,448 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 5,536,353.
Also on August 7, 2020, the Board
of Directors granted 259,765 restricted stock units to Troy Meier, Chairman and Chief Executive Officer, 199,219 restricted
stock units to Annette Meier, President and Chief Operating Officer, 140,625 restricted stock units to Chris Cashion, Chief
Financial Officer, and 87,891 restricted stock units to each of the three independent members of the Board of Directors. In
addition, the Board of Directors authorized 675,000 restricted stock units to be granted to employees of the company other than
Mr. and Mrs. Meier and Mr. Cashion. These restricted stock units will vest over three years from the date of grant.
NOTE
11. GEOGRAPHICAL OPERATIONS INFORMATION
The
following summarizes revenue by geographic location:
|
|
Three months ending September 30,
|
|
|
Nine months ending September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,118,404
|
|
|
$
|
4,787,693
|
|
|
$
|
7,387,847
|
|
|
$
|
13,957,666
|
|
Middle East
|
|
$
|
429,038
|
|
|
$
|
288,522
|
|
|
$
|
1,541,746
|
|
|
$
|
698,337
|
|
|
|
$
|
1,547,442
|
|
|
$
|
5,076,215
|
|
|
$
|
8,929,593
|
|
|
$
|
14,956,003
|
|
The
following summarizes net property, plant and equipment by geographic location:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
6,600,808
|
|
|
$
|
7,160,646
|
|
Middle East
|
|
|
1,258,392
|
|
|
|
885,046
|
|
|
|
$
|
7,859,200
|
|
|
$
|
8,045,692
|
|
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. 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. 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.