Item
1. Financial Statements
Superior
Drilling Products, Inc.
Condensed
Consolidated Balance Sheets
(Unaudited)
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,275,063
|
|
|
$
|
2,375,179
|
|
Accounts receivable,
net
|
|
|
2,628,892
|
|
|
|
2,667,042
|
|
Prepaid expenses
|
|
|
224,833
|
|
|
|
111,530
|
|
Interest receivable
|
|
|
275,614
|
|
|
|
-
|
|
Inventories
|
|
|
1,034,899
|
|
|
|
1,196,813
|
|
Other
current assets
|
|
|
161,996
|
|
|
|
-
|
|
Total current
assets
|
|
|
8,601,297
|
|
|
|
6,350,564
|
|
Property, plant
and equipment, net
|
|
|
8,006,462
|
|
|
|
8,809,348
|
|
Intangible assets,
net
|
|
|
4,297,778
|
|
|
|
6,132,778
|
|
Related party
note receivable
|
|
|
7,367,212
|
|
|
|
7,367,212
|
|
Other
noncurrent assets
|
|
|
48,727
|
|
|
|
15,954
|
|
Total
assets
|
|
$
|
28,321,476
|
|
|
$
|
28,675,856
|
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
658,561
|
|
|
$
|
1,021,469
|
|
Accrued expenses
|
|
|
725,151
|
|
|
|
543,758
|
|
Current
portion of long-term debt, net of discounts
|
|
|
8,443,430
|
|
|
|
6,101,678
|
|
Total current
liabilities
|
|
|
9,827,142
|
|
|
|
7,666,905
|
|
Long-term
debt, less current portion, net of discounts
|
|
|
2,521,021
|
|
|
|
6,706,375
|
|
Total liabilities
|
|
|
12,348,163
|
|
|
|
14,373,280
|
|
Commitments and
contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
Common stock - $0.001
par value; 100,000,000 shares authorized; 24,550,979 and 24,535,155 shares, respectively
|
|
|
24,551
|
|
|
|
24,535
|
|
Additional paid-in-capital
|
|
|
39,280,059
|
|
|
|
38,907,864
|
|
Accumulated
deficit
|
|
|
(23,331,297
|
)
|
|
|
(24,629,823
|
)
|
Total
shareholders’ equity
|
|
|
15,973,313
|
|
|
|
14,302,576
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
28,321,476
|
|
|
$
|
28,675,856
|
|
The
accompanying notes are an integral part of these consolidated condensed financial statements.
Superior
Drilling Products, Inc.
Condensed
Consolidated Statements of Income
(Unaudited)
|
|
For
the Three Months
|
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,765,361
|
|
|
$
|
4,446,540
|
|
|
$
|
14,764,577
|
|
|
$
|
11,865,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
1,665,774
|
|
|
|
1,716,740
|
|
|
|
5,407,389
|
|
|
|
4,388,860
|
|
Selling,
general and administrative expenses
|
|
|
1,866,833
|
|
|
|
1,102,373
|
|
|
|
4,991,481
|
|
|
|
3,837,218
|
|
Depreciation
and amortization expense
|
|
|
942,473
|
|
|
|
907,837
|
|
|
|
2,820,183
|
|
|
|
2,745,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating costs and expenses
|
|
|
4,475,080
|
|
|
|
3,726,950
|
|
|
|
13,219,053
|
|
|
|
10,971,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
290,281
|
|
|
|
719,590
|
|
|
|
1,545,524
|
|
|
|
894,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
113,555
|
|
|
|
90,959
|
|
|
|
305,694
|
|
|
|
255,327
|
|
Interest expense
|
|
|
(178,642
|
)
|
|
|
(224,510
|
)
|
|
|
(552,692
|
)
|
|
|
(698,638
|
)
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
43,669
|
|
Loss
on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,167
|
|
Total other
expense
|
|
|
(65,087
|
)
|
|
|
(133,551
|
)
|
|
|
(246,998
|
)
|
|
|
(387,475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
225,194
|
|
|
$
|
586,039
|
|
|
|
1,298,526
|
|
|
$
|
506,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income earnings per common share
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
|
0.05
|
|
|
$
|
0.02
|
|
Basic
weighted average common shares outstanding
|
|
|
24,542,551
|
|
|
|
24,261,272
|
|
|
|
24,537,647
|
|
|
|
24,218,477
|
|
Diluted
income per common share
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
|
0.05
|
|
|
$
|
0.02
|
|
Diluted
weighted average common shares outstanding
|
|
|
25,162,445
|
|
|
|
24,261,272
|
|
|
|
25,156,629
|
|
|
|
24,218,477
|
|
The
accompanying notes are an integral part of these consolidated condensed financial statements.
Superior
Drilling Products, Inc.
Condensed
Consolidated Statements Of Cash Flows
(Unaudited)
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash Flows From Operating
Activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,298,526
|
|
|
$
|
506,863
|
|
Adjustments to reconcile net loss to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization expense
|
|
|
2,820,183
|
|
|
|
2,745,232
|
|
Amortization of
debt discount
|
|
|
43,459
|
|
|
|
59,766
|
|
Share based compensation
expense
|
|
|
372,211
|
|
|
|
498,384
|
|
Impairment of inventories
|
|
|
41,396
|
|
|
|
-
|
|
Gain on sale of
assets
|
|
|
-
|
|
|
|
(12,167
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
38,150
|
|
|
|
(1,493,995
|
)
|
Interest receivable
|
|
|
(
275,614
|
)
|
|
|
(
251,600
|
)
|
Inventories
|
|
|
121,484
|
|
|
|
(9,220
|
)
|
Prepaid expenses
and other assets
|
|
|
(308,072
|
)
|
|
|
(64,245
|
)
|
Accounts payable
and accrued expenses
|
|
|
(181,515
|
)
|
|
|
(610,936
|
)
|
Other
long-term liabilities
|
|
|
-
|
|
|
|
(17,490
|
)
|
Net
Cash Provided by Operating Activities
|
|
|
3,970,208
|
|
|
|
1,350,592
|
|
Cash Flows From Investing
Activities
|
|
|
|
|
|
|
|
|
Purchases of property,
plant and equipment
|
|
|
(183,263
|
)
|
|
|
(220,101
|
)
|
Proceeds
from sale of fixed assets
|
|
|
-
|
|
|
|
2,483,921
|
|
Net
Cash Provided by (Used in) Investing Activities
|
|
|
(183,263
|
)
|
|
|
2,263,820
|
|
Cash Flows From Financing
Activities
|
|
|
|
|
|
|
|
|
Principal payments
on debt
|
|
|
(1,887,061
|
)
|
|
|
(2,858,882
|
)
|
Principal payments
on related party debt
|
|
|
-
|
|
|
|
(74,293
|
)
|
Principal
payments on capital lease obligations
|
|
|
-
|
|
|
|
(217,302
|
)
|
Net
Cash Used in Financing Activities
|
|
|
(1,887,061
|
)
|
|
|
(3,150,477
|
)
|
Net increase in Cash
|
|
|
1,899,884
|
|
|
|
463,935
|
|
Cash at Beginning
of Period
|
|
|
2,375,179
|
|
|
|
2,241,902
|
|
Cash at End
of Period
|
|
$
|
4,275,063
|
|
|
$
|
2,705,837
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Cash paid for Interest
|
|
$
|
488,112
|
|
|
$
|
617,565
|
|
Non-cash payment
of other long-term liability by offsetting related-party note receivable
|
|
$
|
-
|
|
|
$
|
550,000
|
|
Acquisition of equipment
by issuance of note payable
|
|
$
|
-
|
|
|
$
|
16,557
|
|
Purchases of
property, plant and equipment included in accrued expenses
|
|
$
|
-
|
|
|
$
|
626,000
|
|
The
accompanying notes are an integral part of these consolidated condensed financial statements.
Superior
Drilling Products, Inc.
Notes
to Condensed Consolidated Financial Statements (Unaudited)
September
30, 2018
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, 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 30, (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.
Revenue
Recognition
We
are a drilling and completion tool technology company and we generate revenue from the manufacturing, repair, 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.
Unaudited
Interim Financial Presentation
These
interim consolidated condensed financial statements for the three and nine months ended September 30, 2018 and 2017, 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, 2018 are
not necessarily indicative of the results of operations expected for the year ended December 31, 2018. 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, 2017 and 2016 and the notes thereto, which were included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2017, 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.
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. In August
2015, FASB delayed the effective date one year, which is now effective for the Company’s fiscal year beginning January 1,
2019. 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, 2019.
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. LIQUIDITY
At
September 30, 2018, we had a working capital deficit of approximately $1,200,000. The Company’s manufacturing facility is
financed by a commercial bank loan mortgage with principal of $4,200,000 due February 15, 2019 (see Note 7 – Long-Term Debt).
The classification of this debt from long-term to short-term resulted in a working capital deficit at September 30, 2018. Our
principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. We
continue to expect to be cash flow positive in 2018. If we are unable to manage our working capital requirements and successfully
refinance our commercial bank loan that is collateralized by our property, 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.
NOTE
3. INVENTORIES
Inventories
are comprised of the following:
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
Raw material
|
|
$
|
778,570
|
|
|
$
|
1,040,795
|
|
Work in progress
|
|
|
208,194
|
|
|
|
77,702
|
|
Finished
goods
|
|
|
48,135
|
|
|
|
78,316
|
|
|
|
$
|
1,034,899
|
|
|
$
|
1,196,813
|
|
The
Company recorded an impairment loss in the cost of sales of $41,396 in the first quarter of 2018 relating to steel inventory unrelated
to the Company’s primary operations. During the second quarter of 2018, the Company sold this unrelated inventory to a third-party
wholesaler for approximately $248,000. No gain or loss was recorded upon the sale.
NOTE
4. PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment are comprised of the following:
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
Land
|
|
$
|
880,416
|
|
|
$
|
880,416
|
|
Buildings
|
|
|
4,847,778
|
|
|
|
4,847,778
|
|
Building improvements
|
|
|
719,619
|
|
|
|
717,232
|
|
Machinery and equipment
|
|
|
8,341,098
|
|
|
|
8,216,237
|
|
Furniture and fixtures
|
|
|
510,181
|
|
|
|
507,557
|
|
Transportation
assets
|
|
|
811,378
|
|
|
|
811,378
|
|
|
|
|
16,110,470
|
|
|
|
15,980,598
|
|
Accumulated
depreciation
|
|
|
(8,104,008
|
)
|
|
|
(7,171,250
|
)
|
|
|
$
|
8,006,462
|
|
|
$
|
8,809,348
|
|
Depreciation
expense related to property, plant and equipment for the three and nine months ended September 30, 2018 was $330,806 and $985,183,
respectively, and for the three and nine months ended September 30, 2017 was $296,170 and $910,232, respectively.
NOTE
5. INTANGIBLE ASSETS
Intangible
assets are comprised of the following:
|
|
September
30,
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
|
|
|
(10,602,222
|
)
|
|
|
(8,767,222
|
)
|
|
|
$
|
4,297,778
|
|
|
$
|
6,132,778
|
|
Amortization
expense related to intangible assets for the three and nine months ended September 30, 2018 and September 30, 2017, was $611,667
and $1,835,000, 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, 2018, the Company reviewed the net balance of the intangible assets and determined no impairment was needed.
NOTE
6. RELATED PARTY NOTE RECEIVABLE
In
January 2014, we entered into a Note Purchase and Sale Agreement under which we agreed to purchase a loan made to Tronco Energy
Corporation (“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, which included 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 5.25%.
We earned interest of $97,489 and $275,614 for the three
and nine months ending September 30, 2018, respectively, and interest of $87,867 and $251,000 for the three and nine months ended
September 30, 2017, respectively.
On
August 8, 2017, the Board of Directors agreed to extend the terms of the Tronco loan to interest only payments due December 31, 2018, 2019, 2020, and 2021, with a balloon payment of all unpaid interest and principal due upon full maturity on December
31, 2022.
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 first position liens on all of Tronco assets, as well as 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 all 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 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 September 30, 2018. On April 27, 2018, the Company released
the 530,725 restricted stock units we previously held as additional collateral for the Tronco note. The Company believes the market
value of the 8,267,860 shares is sufficient collateral for the note.
NOTE
7. LONG-TERM DEBT
Long-term
debt is comprised of the following:
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
Real
estate loans
|
|
$
|
4,313,510
|
|
|
$
|
4,518,424
|
|
Hard Rock Note, net
of discount
|
|
|
5,965,818
|
|
|
|
7,422,912
|
|
Machinery loans
|
|
|
374,955
|
|
|
|
513,317
|
|
Transportation
loans
|
|
|
310,168
|
|
|
|
353,400
|
|
|
|
|
10,964,451
|
|
|
|
12,808,053
|
|
Current
portion of long-term debt
|
|
|
(8,443,430
|
)
|
|
|
(6,101,678
|
)
|
Long-term
debt, less current portion
|
|
$
|
2,521,021
|
|
|
$
|
6,706,375
|
|
Real
Estate Loans
Our
manufacturing facility is financed by a commercial bank loan requiring monthly payments of approximately $43,000, including principal
and interest. On August 1, 2018, we entered into an agreement with our lender to extend the due date of the commercial real estate
loan from August 15, 2018 to February 15, 2019. The interest rate for the loan extension is 7.1%.
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. At issuance, the fair value of the Hard Rock Note was determined to be $11,144,000, which is less than the face
value due to a below-market interest rate. The resulting discount of $1,356,000 will be amortized to interest expense using the
effective interest method, totaling $12,178 and $43,459 for the three and nine months ended September 30, 2018, respectively,
and $19,657 and $59,766 for the three and nine months ended September 30, 2017, respectively.
On August 10, 2016, certain of our subsidiaries
entered into an amended and restated note with the seller in our acquisition of Hard Rock. As amended and restated, the Hard Rock
Note accrues interest at 5.75% per annum and matures on January 15, 2020. We have made all the required principal and accrued
interest payments related to the note for 2018. For 2019, we are required to pay $1,000,000 in principal plus accrued interest
on each of January 15, March 15, May 15 and July 15, 2019. The remaining $2,000,000 balance of principal plus accrued interest
on the Hard Rock Note is due on January 15, 2020.
NOTE
8. COMMITMENTS AND CONTINGENCIES
We
are subject to litigation that arises from time to time in the ordinary course of our business activities. We are not currently
involved in any litigation which management believes could have a material effect on our financial position or results of operations.
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 September 30, 2018, and our results of operations
for the three and nine months ended September 30, 2018 and 2017. 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, 2017 and 2016, which were included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2017, 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.
Jumpstart
Our Business Startups Act of 2012
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 30, (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.
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
operating results and cash flow;
|
|
|
|
|
●
|
scheduled,
budgeted and other future capital expenditures;
|
|
|
|
|
●
|
working
capital requirements;
|
|
|
|
|
●
|
the
availability of expected sources of liquidity;
|
|
|
|
|
●
|
the
transition of our business to primarily selling tools;
|
|
|
|
|
●
|
the
introduction into the market of the Company’s future products;
|
|
|
|
|
●
|
the
market for the Company’s existing and future products;
|
|
|
|
|
●
|
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
|
|
|
|
|
●
|
future
operations, financial results, business plans and cash needs
|
|
|
|
|
●
|
environmentally
related penalties, capital expenditures, remedial actions and proceedings;
|
|
|
|
|
●
|
effects
of potential legal proceedings;
|
|
|
|
|
●
|
changes
in customers’ future product and service requirements that may not be cost effective or within the Company’s capabilities;
and
|
|
|
|
|
●
|
future
operations, financial results, business plans and cash needs
|
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, 2017, and in our subsequent Exchange Act
filings and the following:
|
●
|
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;
|
|
|
|
|
●
|
consolidation
within our customers’ industries;
|
|
|
|
|
●
|
competitive
products and pricing pressures;
|
|
|
|
|
●
|
our
reliance on significant customers;
|
|
|
|
|
●
|
our
limited operating history;
|
|
|
|
|
●
|
our
ability to develop and commercialize new and/or innovative drilling and completion tool technologies;
|
|
|
|
|
●
|
fluctuations
in our operating results;
|
|
|
|
|
●
|
our
dependence on key personnel;
|
|
|
|
|
●
|
costs
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;
|
|
|
|
|
●
|
terrorist
threats or acts, war and civil disturbances;
|
|
|
|
|
●
|
our
ability to protect our intellectual property;
|
|
|
|
|
●
|
impact
of environmental matters, including future environmental regulations;
|
|
|
|
|
●
|
implementing
and complying with safety policies;
|
|
|
|
|
●
|
breaches
of security in our information systems and other cybersecurity risks;
|
|
|
|
|
●
|
related
party transactions with our founders; and
|
|
|
|
|
●
|
risks
associated with our common stock.
|
Many
of 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 based on current financial performance. 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.
Overview
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, and repairs drilling
and completion tools. 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.
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 leverage our expertise in drill tool technology and precision machining in order to broaden our product
offerings and solutions for the oil and gas industry. We believe through our patented technologies, as well as technologies under
development, that we can offer the industry the solutions it demands to improve drilling efficiencies and reduce production costs.
Our
co-founder, Troy Meier, developed the first commercially-viable process for refurbishing PDC drill bits after a successful 13-year
career with a predecessor of Baker Hughes Inc. He was also co-inventor of the Drill-N-Ream tool. We made a major strategic shift
in 2016 to focus on our core competencies of innovation in manufacturing technologies, creation of solution for the upstream oil
and gas industry, drilling tool fleet maintenance and repair and the development engineering and manufacture of new tools and
technologies.
For
the past 22 years, we have manufactured and refurbished PDC drill bits exclusively for Baker Hughes’s oilfield operations
in the Rocky Mountain, California and Alaska regions, as well as other areas as needed to support their internal operations. Effective
April 1, 2018, we entered into a new Vendor Agreement (the “Agreement”) with Baker Hughes Oilfield Operations LLC
(“Baker Hughes”), replacing our former Vendor Agreement, which expired on March 31, 2018. Under the agreement, we
will now serve an expanded market throughout the U.S., receive a base minimum volume in drill bit refurbishment and continue to
provide our drill bit refurbishment services exclusively for Baker Hughes. The agreement has a four-year term and allows for modifications
in the event of market deterioration. Either party has the right to cancel the agreement with 6-months’ notice.
We
have been expanding our offerings and broadening our customer base and the end-users of our technologies by demonstrating our
engineering, design and manufacturing expertise of down-hole drilling tools. In addition to the patented Drill-N-Ream tool, our
products include the Strider technology, the V-Stream Advanced Conditioning System and the Dedicated Reamer Stinger. We have a
pipeline of concepts of more horizontal drill string tools, each of which addresses a different technical challenge presented
by today’s horizontal drilling designs. We are developing our relationships with our customers and the industry to understand
the markets needs in order to develop new products and design enhancements to existing products in order to improve efficiency
and safety and solve complex drilling tool problems.
We
manufacture our solutions, as well as custom products, in our state-of-the-art drill tool fabrication facility where we operate
a technologically-advanced PDC drill bit refurbishing facility, as well as a state-of-the-art, high-tech drilling and completion
tool engineering design and manufacturing operation. We manufacture our drill string enhancement tools, including the patented
Drill- N-Ream tool and the patented Strider technology, and conduct our new product research and development from this facility.
We
employ a senior work force with specialized training and extensive experience related to drill bit refurbishing and drill and
completion tool manufacturing. They produce our products and services using a suite of highly technical, purpose-built equipment,
much of which we designed and manufactured for our proprietary use. Our manufacturing equipment and products use advanced technologies
that enable us to increase efficiency, enhance product integrity, improve safety, and solve complex drilling tool problems.
In
May 2016, the Company entered into an agreement with Drilling Tools International (“DTI”), under which DTI had a requirement
to purchase our Drill-N-Ream tool for their rental tool business and achieve market share requirements in order to maintain exclusive
marketing rights for the Drill-N-Ream. DTI, has exclusive rights to market the Drill-N-Ream in the U.S. and Canada, both onshore
and offshore. It must achieve defined market share goals with our tool that started in June 2017 and increase through the end
of 2020. We receive revenue from DTI for tool sales, tool repairs and a royalty fee based on the tools usage. We are currently
negotiating a new agreement and metrics with DTI to grow the market share of the Drill-N-Ream.
Also
in 2016, the Company entered into a non-exclusive agreement with Baker Hughes to supply them with the Strider technology and related
services. Tool shipments under the agreement are dependent upon the timing of the commercialization of the Strider technology.
The agreement has no set expiration date or minimum shipment requirement. It will remain in force until it is canceled by either
us or Baker Hughes, as stipulated in the agreement.
In
December 2017, the Company entered into an agreement with Weatherford U.S., L.P. (“Weatherford”) to launch a joint
market development program to introduce our Drill-N-Ream tool in the Middle East. Under the development agreement, Weatherford
and SDPI will demonstrate the Drill-N-Ream’s capabilities with large Middle East operators in Saudi Arabia, Kuwait and Oman.
The program was extended through December 31, 2018. SDPI and Weatherford each employ a local resident Product Champion
to execute the pilot test program of 18 Drill-N-Ream tools. Upon the technology being proven in the region, the parties plan to
enter into a long-term commercial agreement.
Oil
and Gas Drilling Industry
Overview
Drilling
and completion of oil and gas wells are upstream operations in the oil and gas industry served by the oilfield services group
within the energy industry. The drilling industry is often segmented into the North American market and the International market.
These markets share common exposure to the same macro environment, but also exhibit unique factors that drive the dynamics of
each market.
Oilfield
services companies drill the wells for hydrocarbon exploration and production (“E&P”) companies. Demand for onshore
drilling is a function of the willingness of E&P companies to make operating and capital expenditures to explore for, develop
and produce hydrocarbons. When oil or natural gas prices increase, E&P companies generally increase their capital expenditures,
resulting in greater revenue and profits for both drillers and equipment manufacturers. Likewise, significant decreases in the
prices of those commodities may lead E&P companies to reduce their capital expenditures, which decreases the demand for drilling
equipment.
Trends
in the Industry
Recent
Rig Count Improvement; Industry Volatility.
Our business is highly dependent upon the vibrancy of the oil and gas drilling
operations in the U.S. As we expand into international markets, we will become more subject to changes in the industry in the
countries in which we operate, such as Saudi Arabia, Kuwait and Oman. Worldwide military, political and economic events have
contributed to oil and natural gas price volatility and are likely to continue to do so in the future.
The
oil and natural gas industry has recovered from its low in January 2016 when prices were just about $26 per barrel to
today’s prices of nearly $70 per barrel. Correspondingly, the U.S. rig count increased from its low 404 rigs in May
of 2016 to 1,067 as of October 19, 2018. The rate of growth in rig count stabilized in July 2017 and has increased at a slower
rate from then to approximately 1,068 rigs as of October 26, 2018. Production of oil and gas in the U.S. has increased
to record levels and has grown at a faster rate than the increased rig count because of better rig technology and higher rates
of productivity per rig. With the increase in market activity, we have seen an increase in demand for our product and services,
although we have not seen an increase in pricing.
Advancing
Production Technologies.
The oil and gas industry is increasingly using directional (e.g., horizontal) drilling in their exploration
and production activities because of significantly improved recovery rates that can be achieved with these methods. With the rise
of this type of drilling, traditional drill string tools used for vertical drilling do not necessarily provide the best performance
or are not well suited for directional drilling. In addition, current and expected oil and natural gas prices combined with more
technically challenging horizontal drilling has driven the demand for new technologies. We believe the value of our Drill-N-Ream
tool has proven to provide significant operational efficiencies and costs savings for horizontal drilling activity and, combined
with our low market penetration, provide us sales opportunities in soft as well as robust markets. Early results of our Strider
technology have also delivered a similar outcome.
RESULTS
OF OPERATIONS
The
following table represents our condensed consolidated statement of operations for the periods indicated:
|
|
Three-Months
Ended September 30,
|
|
|
Nine-Months
Ended September 30,
|
|
(in
thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Tool revenue
|
|
$
|
3,361
|
|
|
|
71
|
%
|
|
$
|
3,182
|
|
|
|
72
|
%
|
|
$
|
10,962
|
|
|
|
74
|
%
|
|
$
|
7,938
|
|
|
|
67
|
%
|
Contract services
|
|
|
1,404
|
|
|
|
29
|
%
|
|
|
1,265
|
|
|
|
28
|
%
|
|
|
3,803
|
|
|
|
26
|
%
|
|
|
3,928
|
|
|
|
33
|
%
|
Revenue
|
|
$
|
4,765
|
|
|
|
100
|
%
|
|
$
|
4,447
|
|
|
|
100
|
%
|
|
$
|
14,765
|
|
|
|
100
|
%
|
|
$
|
11,866
|
|
|
|
100
|
%
|
Operating costs and expenses
|
|
|
4,475
|
|
|
|
94
|
%
|
|
|
3,727
|
|
|
|
84
|
%
|
|
|
13,219
|
|
|
|
90
|
%
|
|
|
10,971
|
|
|
|
92
|
%
|
Income from continuing operations
|
|
|
290
|
|
|
|
6
|
%
|
|
|
720
|
|
|
|
16
|
%
|
|
|
1,546
|
|
|
|
10
|
%
|
|
|
894
|
|
|
|
8
|
%
|
Other expense
|
|
|
65
|
|
|
|
1
|
%
|
|
|
134
|
|
|
|
3
|
%
|
|
|
247
|
|
|
|
2
|
%
|
|
|
387
|
|
|
|
4
|
%
|
Net income
|
|
$
|
225
|
|
|
|
5
|
%
|
|
$
|
586
|
|
|
|
13
|
%
|
|
$
|
1,299
|
|
|
|
8
|
%
|
|
$
|
507
|
|
|
|
4
|
%
|
Material
changes of certain items in our statements of operations included in our financial statements for the comparative periods are
discussed below.
For
the three months ended September 30, 2018, as compared with the three months ended September 30, 2017
Revenue
.
Our revenue increased approximately $318,000, during the three months ended September 30, 2018. Tool revenue increased $179,000
to $3,361,000 from approximately $3,182,000 in the prior-year period. Tool revenue in the third quarter of 2018 was comprised
of approximately $1,655,000 of tool rental and sales revenue and approximately $1,706,000 of other related revenue. Tool revenue
in the prior-year period was comprised of approximately $2,012,000 of tool rental and sales revenue and approximately $1,170,000
of other related revenue.
Tool
revenue for the third quarter 2018 grew as a result of an increase in other related revenue, which includes royalty fees and
repair of tools, which was driven by the increase in U.S. drilling activity from 2017 to 2018 and our distributor’s
increase in market share. This increase was partially offset by a decline in tool sales/rental revenue.
Contract
services revenue was approximately $1,404,000 for the three months ended September 30, 2018 compared with approximately $1,265,000
for the three months ended September 30, 2017. The increase in contract services revenue was due to an increase in drill bit refurbishment
activity.
Operating
Costs and Expenses
. Total operating costs and expenses increased approximately $748,000 during the three months ended September
30, 2018 compared with the same period in 2017.
|
●
|
Cost
of revenue decreased approximately $51,000 in the third quarter of 2018 compared with
the prior-year period due to a decrease in tool sales/rental volume. As a percentage
of revenue, cost of sales was 35% compared with 39% in the prior-year period. The
improvement in the margin was the result of higher contract services volume and
the associated operating leverage as well as higher other related tool revenue, which includes royalty fees that have no
associated cost of revenue.
|
|
|
|
|
●
|
Selling,
general and administrative expenses increased approximately $764,000 for the three months ended September 30, 2018. The increase
was primarily due to an increase in research and development costs, costs associated with our international market development,
and higher salaries.
|
Other
Income (Expenses)
. Other income and expense primarily consists of interest income, interest expense and gain or loss on disposition
of assets.
|
●
|
Interest
Income.
For the three months ended September 30, 2018 and 2017, interest income was approximately $114,000 and $91,000,
respectively, and related primarily to interest received from the Tronco related party note receivable.
|
|
|
|
|
●
|
Interest
Expense.
Interest expense for the three months ended September 30, 2018 and 2017 was approximately $179,000 and $225,000,
respectively. Lower interest expense was due primarily to the reduction in the balance outstanding on the Hard Rock Note.
|
For
the nine months ended September 30, 2018 as compared with the nine months ended September 30, 2017
Revenue
.
Our revenue increased approximately $2,899,000, or 24% as a result of the $3,024,000, or 38%, increase in tool revenue, which
more than offset the decline in Contract Services. Tool revenue grew to $10,962,000 primarily due to the $2,127,000 increase in
Other related revenue and the $897,000 increase in tool rental and sales. Tool rental and sales were approximately $6,153,000
and Other related revenue was approximately $4,809,000. Tool revenue for the nine months ended September 30, 2017 was approximately
$7,938,000 which was comprised of approximately $5,257,000 of tool rental and sales revenue and approximately $2,681,000 of other
related revenue.
Tool
revenue for the nine months ended September 30, 2018 grew as a result of an increase in Drill-N-Ream purchases from our
distributor, the increase in other related revenue, which was driven by the increase in U.S. drilling activity from
2017 to 2018 and our distributor’s increase in market share.
Contract
services revenue was approximately $3,803,000 compared with approximately $3,928,000 for the nine months ended September 30, 2017.
The decrease in contract services revenue was the result of a reduction in manufacturing custom orders.
Operating
Costs and Expenses
. Total operating costs and expenses increased approximately $2,248,000 during the nine months ended September
30, 2018 compared with the same period in 2017.
|
●
|
Cost
of revenue increased approximately $1,019,000 as a result of higher volume. As a percentage of revenue, cost of sales was
37% for each of the nine months ended September 30, 2018 and 2017.
|
|
|
|
|
●
|
Selling,
general and administrative expenses increased approximately $1,154,000. The increase was primarily due to an increase in research
and development expense, costs associated with our international market development, and higher salaries.
|
Other
Income (Expenses)
. Other income and expense primarily consists of rent income, interest income, interest expense and loss
on disposition of assets.
|
●
|
Other
Income.
In the first quarter 2017, we received $44,000 rental income for the lease on the SAB facilities up until it was
sold in February 2017. As result of the sale, we did not have other income for the nine months ended September 30, 2018.
|
|
|
|
|
●
|
Interest
Income.
For the nine months ended September 30, 2018 and 2017 interest income was approximately $306,000 and $255,000,
respectively, and related primarily to interest received from the Tronco related party note receivable.
|
|
|
|
|
●
|
Interest
Expense.
Interest expense for the nine months ended September 30, 2018 and 2017 was approximately $553,000 and $699,000,
respectively. Lower interest expense was due primarily to the reduction in the balance outstanding on the Hard Rock Note.
|
Liquidity
At
September 30, 2018, we had a working capital deficit of approximately $1,200,000. The Company’s manufacturing facility is
financed by a commercial bank loan mortgage with principal of $4,200,000 due February 15, 2019 (see Note 7 – Long-Term Debt).
The classification of this debt from long-term to short-term resulted in a working capital deficit at September 30, 2018.
Our
principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. We
continue to expect to be cash flow positive in 2018. If we are unable to manage our working capital requirements and successfully
refinance our commercial bank loan that is collateralized by our property, 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 August 10, 2016, certain of our subsidiaries
entered into an amended and restated note with the seller in our acquisition of Hard Rock. As amended and restated, the Hard Rock
Note accrues interest at 5.75% per annum and matures on January 15, 2020. We have made all the required principal and accrued
interest payments related to the note for 2018. For 2019, we are required to pay $1,000,000 in principal plus accrued interest
on each of January 15, March 15, May 15 and July 15, 2019. The remaining $2,000,000 balance of principal plus accrued interest
on the Hard Rock Note is due on January 15, 2020.
Cash
Flow
Operating
Cash Flows
For
the nine months ended September 30, 2018, net cash provided by our operating activities was approximately $3,970,000. The Company
had approximately $1,299,000 of net income and approximately $244,000 increase in prepaid expenses and other assets, which was
offset by a decrease in accounts payable and accrued expenses of approximately $429,000.
Investing
Cash Flows
For
the nine months ended September 30, 2018, net cash used in our investing activities was approximately $183,000 and related to
property, plant and equipment purchases.
Financing
Cash Flows
For
the nine months ended September 30, 2018, net cash used in our financing activities was approximately $1,887,000 and related to
principal payments on debt.
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, revenues, 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.