NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Basis of Presentation
Superior
Drilling Products, Inc. (the “Company”, “we”, “our” or “us”) is a drilling and
completion tool technology company. We design and manufacture new drill bit and horizontal drill string enhancement tools and
refurbish PDC (polycrystalline diamond compact) drill bits for the oil, natural gas and mining services industry. Our customers
are primarily engaged in domestic and international exploration and production of oil and natural gas.
We
were incorporated on December 10, 2013 under the name SD Company, Inc. in order to facilitate (a) the reorganization of the entities
that are now our consolidated subsidiaries and (b) the subsequent acquisition of Hard Rock Solutions, LLC. We changed our name
from SD Company Inc. to Superior Drilling Products, Inc. on May 22, 2014 in conjunction with closing of that reorganization and
the completion of our initial public offering. Our headquarters and principal manufacturing operations are located in Vernal,
Utah.
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.
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 refurbishment, manufacturing, repair, and
sale of drill string tools. Our manufactured products are produced in a standard manufacturing operation, even when produced to
our customer’s specifications. We also earn royalty fees under certain arrangements for the tools we sell. In May 2016,
the Company entered into an agreement with DTI to be our exclusive distributor of the Drill-N-Ream tool in the United States and
Canada. This agreement began the change of direction of our business from renting tools to selling tools.
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. The Company may act as an agent by billing
and collecting its customers’ tool rental revenue. When we are an agent for our customer, revenue is presented in the statement
of operations on a net basis. At December 31, 2016, there was approximately $221,000 of accounts receivable and approximately
$207,000 of accounts payable related to transactions we performed as an agent for our customer.
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 2013 (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 $9,000 and $0 as of December 31, 2016, and 2015,
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 market. 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, including
assets held under capital leases, 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
|
|
Furniture and fixtures
|
|
|
7 years
|
|
Transportation equipment
|
|
|
5 - 30 years
|
|
Computer equipment and software
|
|
|
3-5 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.
In
2016, the Company recognized an impairment loss of $840,380 related to property that was sold in the first quarter of 2017. This
loss was recorded in 2016 and the asset was classified as held for sale. The impairment loss was based on a third-party independent
appraisal that utilized the sales comparison approach that determined the fair value of the property. There was no gain 0on the
sale of the asset in 2017 as the impairment had been recorded to reflect the fair value of the property. (See Note 10 –
Related Party Transactions).
In 2016 and 2015, the Company recognized an
impairment loss in cost of sales of $211,056 and $66,651, respectively, related to the Open Hole Strider technology that
had been capitalized as part of fixed assets. It was determined in 2016 that the tool design had limited market potential and
the Company decided to re-design the tool to be offered to a broader market.
Goodwill
Goodwill
is the excess cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination.
The Company allocated $7,802,903 to goodwill in in conjunction with the Hard Rock acquisition in 2014.
An
assessment for impairment is performed annually or whenever an event indicating impairment may have occurred. The Company completes
its annual impairment test for goodwill and other indefinite-lived intangibles using an assessment date of December 31. Goodwill
is reviewed for impairment by comparing the carrying value of the reporting unit’s net assets (including allocated goodwill)
to the fair value of the reporting unit. The fair value of the reporting units is determined using a discounted cash flow approach.
Determining the fair value of a reporting unit requires judgment and the use of significant estimates and assumptions. Such estimates
and assumptions include revenue growth rates, operating margins, weighted average costs of capital, drill rig counts, market share
and future market conditions, among others. If the reporting unit’s carrying value is greater than its fair value, a second
step is performed whereby the implied fair value of goodwill is estimated by allocating the fair value of the reporting unit in
a hypothetical purchase price allocation analysis. The Company recognizes a goodwill impairment charge for the amount by which
the carrying value of goodwill exceeds its fair value. The impairment test is a fair value test which includes assumptions such
as growth and discount rates. Any impairment losses are reflected in operating income.
The
Company determined goodwill of $7,802,903 was fully impaired while performing the 2015 annual impairment test. Global oil and
natural gas commodity prices, particularly crude oil, decreased significantly. The decrease in commodity prices had a negative
impact on industry drilling and capital expenditure activity, which affected the demand for products and services of our Company.
As part of the first step of goodwill impairment testing, we updated our income approach assessment of the future cash flows for
our Company, applying expected long-term growth rates, discount rates, and terminal values that we consider reasonable for our
Company. Critical assumptions include a recovery and market expansion of the
Drill-N-Ream
tool during 2016 and beyond. The Company’s market capitalization was also used to
corroborate reporting unit valuation. As goodwill was fully impaired in 2015, no test was performed in 2016.
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.
Comprehensive
Income (Loss)
Comprehensive
income (loss) encompasses all changes in stockholders’ equity, except those arising from investments from and distributions
to stockholders. The Company’s comprehensive income (loss) includes net income (loss) and foreign currency translation adjustments.
Research
and Development
We
expense research and development costs as they are incurred. For the years ended December 31, 2016 and 2015, these expenses were
approximately $1,200,000 and $1,500,000, 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 250,000 warrants to purchase our common stock were excluded from this calculation because they were
antidilutive for the year ended December 31, 2016.
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, 2016 and 2015, the debt issuance costs were
$153,503 and $261,493, 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, net of estimated forfeitures, on a straight-line
basis over the requisite service period of the award. Estimated forfeitures are based on historical experience.
Concentrations
and Credit Risk
The
Company has two significant customers that represent 63% of our revenue for the year ended December 31, 2016, respectively. These
customers had $649,960 in accounts receivable at December 31, 2016. We had one customer that represented 37%, of our revenue for
the year ended December 31, 2015, and had $887,081 in accounts receivable at December 31, 2015.
Assets
and Liabilities Held for Sale
The
Company classifies disposal groups as held for sale in the period in which all of the following criteria are met: (1) management,
having the authority to approve the action, commits to a plan to sell the disposal group; (2) the disposal group is available
for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups;
(3) an active program to locate a buyer or buyers and other actions required to complete the plan to sell the disposal group have
been initiated; (4) the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for
recognition as a completed sale, within one year, except if events of circumstances beyond the Company’s control extend
the period of time required to sell the disposal group beyond one year; (5) the disposal group is being actively marketed for
sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate
that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. See Note 10 –
Related Party Transactions.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year presentation. The reclassifications did not impact net
income.
Recently
Issued Accounting Standards
In
May 2014, the
Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09,
Revenue
from Contracts with Customers
(“ASU 2014-09”), which requires an entity to recognize the amount of revenue to
which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing
revenue recognition guidance in U.S. GAAP when it becomes effective.
In August 201
5, the FASB
issued ASU No. 2015-14,
Revenue from Contracts with Customers
(“ASU 2015-14”)
,
which deferred the effective
date of ASU 2014-09 for all entities by one year and is effective for the Company’s fiscal year beginning January 1, 2018.
ASU 2015-14 permits the use of either the retrospective or cumulative effect transition method. We have not yet selected a transition
method nor has the effect of the standard on ongoing financial reporting been determined.
In
July 2015, the FASB issued ASU No. 2015-11, “
Simplifying the Measurement of Inventory
.” This standard requires
management to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The pronouncement
is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period
and should be applied retrospectively, with early application permitted. The Company is currently evaluating the impact the pronouncement
will have on the consolidated financial statements and related disclosures.
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 will adopt this guidance on January 1, 2019. The Company is currently evaluating
the impact the pronouncement will have on the consolidated financial statements and related disclosure.
In
March 2016, the FASB issued ASU No. 2016-09, “
Improvements to Employee Share-Based Payment Accounting
.” This
standard simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. The pronouncement
is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual periods,
with early adoption permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated
financial statements and related disclosures.
Effective
January 1, 2016, the Company adopted the accounting guidance the FASB issued ASU 2015-03, “
Simplifying the Presentation
of Debt Issuance Costs.
” This guidance related to the imputation of interest and which simplifies the presentation of
debt issuance costs and requires that debt issuance cost related to a recognized debt liability be presented in the balance sheet
as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The adoption of this accounting
standard did not have a material effect on the consolidated financial statements and related disclosures.
NOTE
2. PUBLIC OFFERING
On
September 30, 2016, we priced a follow-on public offering of common stock at $1.00 per share. The transaction closed on October
5, 2016. Net of underwriting and stock offering expenses of approximately $709,000, the net proceeds to the Company were approximately
$5.0 million. The Company used the proceeds to repay a $1 million promissory note received in conjunction with the public offering
(“Bridge Financing”), to repay its $868,000 indebtedness with Federal National Commercial Credit (“FNCC”)
and pay the remaining $500,000 plus accrued interest on the Hard Rock Note (see Note 6 – Long-term Debt). We have used the
remaining funds from the offering and cash flows from operations to service on going debt obligations, which include real property
leases and equipment loans, as well as for general corporate purposes, including growth working capital.
NOTE
3. INVENTORIES
Inventories
is comprised of the following:
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
Raw material
|
|
$
|
952,419
|
|
|
$
|
968,254
|
|
Work in progress
|
|
|
90,017
|
|
|
|
117,661
|
|
Finished goods
|
|
|
125,256
|
|
|
|
324,879
|
|
|
|
$
|
1,167,692
|
|
|
$
|
1,410,794
|
|
During
2016, the Company entered into a distribution agreement with Drilling Tools International (“DTI”), under which DTI
has 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 tool. This agreement began the change of direction of our business
from renting tools to selling tools. Due to this change in our business model, we moved tools with a net book value of $225,710
from property, plant and equipment into inventory during 2016.
The
Company recorded an impairment loss in the cost of sales of $210,745 and $124,872 during the years ended December 31, 2016 and
2015, respectively, relating to the discontinuation of OrBit, a completion drill line product line. As of December 31, 2016, the
OrBit product line was fully impaired with a net book value of $0.
The
Company recorded an impairment loss in the cost of sales of $147,801 during the year ended December 31, 2016 relating to several
Strider technologies. Several parts of these tools needed to be replaced so an impairment charge was recognized.
NOTE
4. PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment are comprised of the following:
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
Land
|
|
$
|
880,416
|
|
|
$
|
2,268,039
|
|
Buildings
|
|
|
4,847,778
|
|
|
|
4,847,778
|
|
Buildings – Superior Auto Body
|
|
|
-
|
|
|
|
2,213,729
|
|
Leasehold improvements
|
|
|
717,232
|
|
|
|
717,232
|
|
Machinery and equipment
|
|
|
5,060,281
|
|
|
|
7,200,530
|
|
Machinery under capital lease
|
|
|
2,322,340
|
|
|
|
2,322,340
|
|
Furniture and fixtures
|
|
|
507,554
|
|
|
|
507,554
|
|
Transportation assets
|
|
|
882,163
|
|
|
|
1,317,397
|
|
|
|
|
15,217,764
|
|
|
|
21,394,599
|
|
Accumulated depreciation
|
|
|
(6,149,405
|
)
|
|
|
(6,739,097
|
)
|
|
|
$
|
9,068,359
|
|
|
$
|
14,655,502
|
|
During
the year ended December 31, 2016, we sold transportation assets that were no longer necessary to our business operations and rental
tools for proceeds of $415,817 and gain of $76,211.
In
2016, the Company recognized an impairment loss of $840,380 related to real estate property that was sold in the first quarter
of 2017. This loss was recorded in 2016 and the asset was classified as held for sale. The impairment loss was based on a third-party
independent appraisal that utilized the sales comparison approach that determined the fair value of the property. Upon the sale
of the property in 2017, there was no gain or loss on the sale of the asset as it had been adjusted to reflect the fair value
of the property. (See Note 10 – Related Party Transactions).
In
2016 and 2015, the Company recognized an impairment loss in the cost of sales of $211,056 and $66,651, respectively, related to
the Open Hole Strider tool that had been capitalized as part of fixed assets and inventory. It was determined in 2016 that the
tool design had limited market potential and the company decided to re-design the tool to be offered to a broader market.
Depreciation
expense related to property, plant and equipment for the year ended December 31, 2016 and 2015 was $ 1,844,582 and $2,371,881,
respectively.
NOTE
5. INTANGIBLE ASSETS
Intangible
assets are comprised of the following:
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
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
|
|
|
(6,320,556
|
)
|
|
|
(3,873,889
|
)
|
|
|
$
|
8,579,444
|
|
|
$
|
11,026,111
|
|
Amortization
expense related to intangible assets for the years ended December 31, 2016 and 2015 was $2,446,667 each year.
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, 2016, the Company will recognize the following amortization expense for the
respective periods ending December 31 noted below:
2017
|
|
|
2,446,667
|
|
2018
|
|
|
2,446,667
|
|
2019
|
|
|
1,700,000
|
|
2020
|
|
|
1,166,667
|
|
2021
|
|
|
583,334
|
|
Thereafter
|
|
|
236,109
|
|
Total
|
|
$
|
8,579,444
|
|
During
the years ended December 31, 2016 and 2015, no impairments were recognized related to other intangible assets
.
NOTE
6. 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.
As
the result of our purchase of the Tronco loan, 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 became tradable in the public market 180 days after
the closing of our initial public offering 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. As discussed in Note 10 – Related Party Transactions, as of February 2017,
the
Company holds 8,267,860 shares as collateral for the Tronco note
.
In
2015, the Board of Directors agreed to extend the terms of the Tronco loan to interest only payments due on December 31, 2015
and 2016, with a balloon payment of all unpaid interest and principal due in full maturity on December 31, 2017. The interest
rate on the note is 3.75%. We earned interest of $311,979 and $291,238 in the years ending December 31, 2016 and 2015, respectively.
Based on an informal agreement between Tronco and the Meiers, we forfeited the receipt of the cash interest earned as a reduction
to the related party note payable (See Note 7 – Long-Term Debt).
On March 28, 2017, the Company and Tronco
finalized an agreement with a third party and pursuant to this agreement, the third party acquired all of Tronco Ohio assets for
$550,000. As Tronco’s senior secured lender, we released our lien and security interest on these assets in accordance with
the agreement.
Also
on March 28, 2017 and related to the sale of the Tronco assets, the Company agreed to a non-cash receipt of the $550,000 from
Tronco by reducing our bonus accrual liabilities. The bonus accrual was earned by the Meiers in 2014, and was recorded in other
long term liability. As a result of this agreement, we have reduced both the other long-term liability and the Tronco note receivable
in 2017.
NOTE
7. LONG-TERM DEBT
Long-term
debt is comprised of the following:
|
|
December
31,
2016
|
|
|
December
31,
2015
|
|
Real
estate loans
|
|
$
|
7,264,036
|
|
|
$
|
7,585,063
|
|
Hard
Rock Note, net of discount
|
|
|
7,846,497
|
|
|
|
9,738,521
|
|
Related
party loans
|
|
|
-
|
|
|
|
826,583
|
|
Machinery
loans
|
|
|
684,921
|
|
|
|
853,970
|
|
Transportation
loans
|
|
|
398,929
|
|
|
|
658,430
|
|
|
|
|
16,194,383
|
|
|
|
19,662,567
|
|
Current
portion of long-term debt
|
|
|
(2,905,682
|
)
|
|
|
(3,078,264
|
)
|
|
|
$
|
13,288,701
|
|
|
$
|
16,584,303
|
|
Real
Estate Loans
Our
manufacturing facility was financed by a commercial bank loan requiring monthly payments of approximately $39,000, including principal
and interest at 5.25%. A lump sum principal payment of approximately $4.2 million is due at the maturity date of this loan on
August 15, 2018.
In
2012, we became co-borrowers on a $1.7 million loan and a $1.2 million loan for Superior Auto Body. The interest on this debt
accrued at 5.50% and 2.42%, respectively, and the notes required monthly payments of $10,565 and $7,517, respectively, and a lump
sum payment at maturity for the remaining principal balance. Both notes were paid off in February 2017 in conjunction with the
sale of the Superior Auto Body land and building (see Note 10 – Related Party Transactions).
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 by Hard Rock in the
closing of the Hard Rock acquisition. 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 approximately $108,000 and $567,000 during 2016 and 2015, 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 Solutions, LLC. As amended and restated, the Hard Rock Note accrues interest at 5.75% per annum and matures and is fully
payable on January 15, 2020. Under the current terms of the Hard Rock Note, we are required to make the following payments: accrued
interest only on each of January 15, March 15, May 15 and July 15, 2017; $500,000 in principal plus accrued interest on each of
January 15, March 15, May 15 and July 15, 2018, and $1,000,000 in principal plus accrued interest on each of January 15, March
15, May 15 and July 15, 2019. The remaining balance of principal of $2,000,000 and accrued interest on the Hard Rock Note are
due on January 15, 2020.
During
the year ending December 31, 2016, we paid interest of $769,582 and a principal payment of $2,000,000, of which $1,000,000 was
paid with 700,000 restricted shares of common stock on August 10, 2016 (having an agreed per share value of $1.43). The Company
paid interest of $406,250 and a principal payment of $2,500,000 during the year ending December 31, 2015. Subsequent to year end,
we made the accrued interest payments related to the note on January 15, 2017 and March 15, 2017 of $129,808 and $74,356, respectively.
Related
Party Loans
In
2014, the Company issued notes payable to related parties in the amount of $2 million. The notes bear interest at 7.5% and mature
on January 2, 2017. In January 2017, the Company made a $50,000 payment. Based on an informal agreement, the Company will continue
to reduce the balance on the note in 2017 against the interest due to the Company on the Tronco note receivable (see Note 6 –
Note Receivable) instead of repaying the note.
Bridge
Financing
On
August 8, 2016, we entered into a private transaction with a private investor pursuant to which we issued a promissory note in
the aggregate principal amounts of $1,000,000 and a warrant to purchase up to an aggregate of 250,000 shares of our common stock,
subject to certain adjustments to the number of shares and the exercise price described in the warrants. These warrants were valued
at $112,024, based on using the Black Scholes model and were recorded as a liability and treated as derivatives. The variable
inputs used in the Black Scholes calculation were; expected volatility of 95%, discount rate of 0.72% and the term of the warrants
of 5 years. Once the indebtedness was paid off on October 5, 2016, and the final number of shares were known, the liability was
removed and the warrants were included in equity.
Machinery
Loans
During
February 2013, we obtained a commercial loan collateralized by specific machinery with a face value of $592,000, requiring monthly
payments of approximately $8,600, including principal and interest at 6% beginning March 1, 2013 and continuing through maturity
on February 1, 2020. This loan contains a minimum debt service ratio and fixed charge covenants. The Company was in compliance
with these covenants as of December 31, 2016.
In
2013, we obtained a $627,000 loan for machinery The Small Business Administration has guaranteed 75% of the loan balance and the
terms are as follows: 7-year maturity, 6.00% interest rate, 84 monthly payments of $9,160. The machinery is held as collateral.
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, 2016, the loans bear interest ranging from 0%-8.39% with maturity dates ranging
from July 2017 through October 2021, and are collateralized by the vehicles. Our cumulative monthly payment under these loans
as of December 31, 2016 was approximately $3,050, 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 all long-term debt are as follows(1) :
Year
|
|
|
|
2017
|
|
$
|
2,577,488
|
|
2018
|
|
|
6,709,503
|
|
2019
|
|
|
4,323,767
|
|
2020
|
|
|
2,234,131
|
|
2021
|
|
|
134,503
|
|
Thereafter
|
|
|
861,572
|
|
Total
long-term debt
|
|
$
|
16,840,964
|
|
(1)
|
Excludes
discounts for debt issuance costts.
|
NOTE
8. LEASES
Capital
Leases
In
2012, we entered into a lease for machinery which required an initial payment of $928,776, followed by 3 monthly payments of $15,000,
and 58 monthly payments of approximately $32,000. The terms of the lease included an imputed interest rate of 12.52%. The lease
term expires August 1, 2017, at which time we may either purchase the machinery for the greater of its then-agreed fair value
or 15% of its original cost, renew the lease for an additional 12 months or return the machine. We have not yet made a decision
as to what we will elect at the end of the lease term. Payments under the lease are personally guaranteed by the Meiers. The lease
has been capitalized and, accordingly, the machinery and related obligation under the lease have been included in the accompanying
balance sheet as of December 31, 2016. Accumulated amortization on machinery under the capitalized lease totaled $1,442,098 and
$1,209,864 for the year ending December 31, 2016 and 2015, respectively. Amortization expense for this machine is included in
depreciation and amortization expense on the combined statement of operations.
The
remaining future minimum lease payment total of $217,302 is required before the term expires in August 2017, which includes $9,242
imputed interest expense.
Operating
Leases
We
also lease certain property and equipment under non-cancellable agreements which have been accounted for as operating leases.
Future minimum lease payments required under operating leases in effect at December 31, 2016 are as follows:
Year
|
|
|
|
2017
|
|
$
|
166,451
|
|
2018
|
|
|
140,977
|
|
2019
|
|
|
130,086
|
|
2020
|
|
|
76,512
|
|
Thereafter
|
|
|
-
|
|
Operating
leases
|
|
$
|
514,026
|
|
NOTE
9. 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,
except as follows:
In
October 2013, Del-Rio Resources, Inc. (“Del-Rio”) filed suit, on its own behalf and derivatively on behalf of Philco
Exploration, LLC (“Philco”), against the following co-defendants (a) Tronco Ohio, LLC and Tronco, (b) the lender on
the Tronco loan, ACF Property Management, Inc. (p.k.a. Fortuna Asset Management, LLC,) (“ACF”), (c) Troy and Annette
Meier personally, and several of their family trusts, (d) Meier Family Holding Company, LLC and Meier Management Company, LLC,
and (e)
Superior Drilling Solutions,
LLC
and
Meier
Properties Series, LLC
. That
suit is currently pending in the Eighth Judicial District Court, Uintah County, Utah under Cause #130800125.
Tronco
and Del-Rio are the sole owners and managers of Philco. Philco served as the exploration operator. Part of the collateral for
the Tronco loan is Philco’ s mineral leases. Del-Rio’ s suit alleges that the defendants made amendments to the Tronco
loan without complying with the voting provisions of Philco’ s operating agreement, and that all of the Meier-related entities
somehow benefitted from the Tronco loan proceeds, in an unspecified manner. Del-Rio’ s suit seeks to invalidate ACF’
s deeds of trust on the Philco mineral leases, and to acquire title to those Philco mineral leases. ACF no longer has deeds of
trust of any of the Philco mineral leases. Del Rio is also requesting monetary and punitive damages, disgorgement, prejudgment
interest, post judgment interest, costs, and attorney fees, against all defendants, in an amount to be determined at trial.
We
believe that Del-Rio’s claims are without merit, and all defendants are actively defending in this matter. In particular,
SDS’ and MPS’ only involvement was to grant guaranties and/or security interests in their respective separate personal
and real property to ACF to additionally collateralize the Tronco loan before its purchase by us. In addition, since the Meiers
and their personal trusts guaranty repayment of the Tronco loan, we believe that the basis of Del-Rio’ s damages claims
are nullified. Consequently, we do not believe that Del Rio’s purported claims against SDS and MPS will have any material
adverse effect on our cash flow, business, or operations. As of March 31, 2017, there have been no updates or decisions
made concerning this matter.
NOTE
10. RELATED PARTY TRANSACTIONS
Superior
Auto Body
On
January 1, 2016, the Company completed the divestiture of our interest in Superior Auto Body and Paint, LLC, by selling the remaining
ownership interests in the business operations to a third party. The Company received $101,400 in proceeds.
The
Company leased certain of its facilities to Superior Auto Body (“SAB”). We recorded rental income from the related
party in the amounts of $199,902 for the years ended December 31, 2016 and 2015. As discussed below, in 2017, we sold the facilities
that had been leased to SAB and accordingly, we will no longer receive this rental income.
In
February 2017, the Company sold real estate to SAB for the net proceeds of $2.5 million. The cash received from the sale was used
to pay down the $2.5 million loan balance on the property. As part of the sale, the Company released 547,000 shares of the Meiers
common stock from the collateral for the Tronco Note. Prior to the sale, the Company held 8,814,860 common stock shares as collateral
for the Tronco Note. After the sale in 2017, the Company holds 8,267,860 shares as collateral for the Tronco Note (see Note 6
– Note Receivable).
NOTE
11. INCOME TAXES
Components
of income tax benefit are as follows:
Current
income taxes:
|
|
For
the Year Ended
December 31, 2016
|
|
|
For
the Year Ended
December 31, 2015
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
(2,000
|
)
|
|
|
1,000
|
|
Current
provision for income taxes
|
|
|
(2,000
|
)
|
|
|
1,000
|
|
Deferred
provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
(413,148
|
)
|
State
|
|
|
-
|
|
|
|
(60,131
|
)
|
Deferred
provision (benefit) for income taxes
|
|
|
-
|
|
|
|
(473,279
|
)
|
Provision
for income taxes
|
|
$
|
(2,000
|
)
|
|
$
|
(472,279
|
)
|
The
non-current deferred tax assets and liabilities consist of the following:
Deferred
tax assets:
|
|
|
|
|
|
|
263A
adjustment
|
|
|
21,595
|
|
|
|
26,178
|
|
Accrued
expenses
|
|
|
305,024
|
|
|
|
326,589
|
|
Prepaid
expense
|
|
|
(24,908
|
)
|
|
|
(66,596
|
)
|
Stock
compensation
|
|
|
55,624
|
|
|
|
55,817
|
|
Stock
option
|
|
|
60,970
|
|
|
|
-
|
|
Amortization
of intangibles
|
|
|
3,791,944
|
|
|
|
3,444,048
|
|
Net
operating loss
|
|
|
4,263,351
|
|
|
|
2,088,208
|
|
Others
|
|
|
11,887
|
|
|
|
35,489
|
|
Total
non-current deferred tax assets
|
|
|
8,485,487
|
|
|
|
5,909,733
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
on fixed assets
|
|
|
(1,008,413
|
)
|
|
|
(1,624,453
|
)
|
Total
non-current deferred tax liabilities
|
|
|
(1,008,413
|
)
|
|
|
(1,624,453
|
)
|
|
|
|
|
|
|
|
|
|
Net
non-current deferred tax assets/liabilities
|
|
|
7,477,074
|
|
|
|
4,285,280
|
|
Less:
Valuation Allowance
|
|
|
(7,477,074
|
)
|
|
|
(4,285,280
|
)
|
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, 2016 and 2015 is as follows:
|
|
For
the Year Ended
December 31, 2016
|
|
|
For
the Year Ended
December 31, 2015
|
|
|
|
|
|
|
|
|
Tax
at federal statutory rate
|
|
$
|
(3,104,489
|
)
|
|
$
|
(5,075,472
|
)
|
State
income taxes
|
|
|
(1,320
|
)
|
|
|
660
|
|
Permanent
differences
|
|
|
196,479
|
|
|
|
273,190
|
|
Change
in valuation allowance
|
|
|
3,191,794
|
|
|
|
4,285,280
|
|
Other
- State rate effect
|
|
|
(272,768
|
)
|
|
|
(464,450
|
)
|
Change
in status
|
|
|
14,216
|
|
|
|
508,385
|
|
Other
|
|
|
(25,912
|
)
|
|
|
127
|
|
Provision
for income taxes
|
|
$
|
(2,000
|
)
|
|
$
|
(472,279
|
)
|
NOTE
12. SHARE BASED COMPENSATION
On
November 11, 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.
On
June 15, 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. 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 1,552,905. As of December 31, 2016, there were 780,484 shares outstanding with respect
to awards granted under the Company’s 2015 Incentive Plan.
On
August 10, 2015, the Board of Directors granted 71,202 restricted stock units from the Company’ s 2015 Incentive Plan to
the Directors based on the closing price of the Company’ s common stock on the date of the grant. These restricted stock
units will vest over a three-year period.
On
August 10, 2015, the Board of Directors granted 366,000 restricted stock units from the Company’ s 2015 Incentive Plan to
officers and employees based on the closing price of the Company’ s common stock on the date of the grant. These restricted
stock units vested 33% on the grant date, 33% on the first anniversary of the grant date and 34% on second anniversary of the
grant date.
On
December 23, 2015, the Board of Directors granted 7,000 restricted stock units from the Company’ s 2015 Incentive Plan to
an employee based on the closing price of the Company’ s common stock on the date of the grant. These restricted stock units
vested 33% on the grant date, 33% on the first anniversary of the grant date and 34% on second anniversary of the grant date.
On
November 10, 2016, the Board of Directors granted 600,000 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.
Compensation
expense recognized for grants vesting under the 2014 Incentive Plan was approximately $233,000 and $210,000 for the years ending
December 31, 2016 and 2015, respectively. Compensation expense recognized for grants of restricted stock vesting under the 2015
Incentive Plan was approximately $406,000 and $334,000 for the years ending December 31, 2016 and 2015, 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 2.9 years equaled approximately $773,000 at December 31, 2016.
These shares vest
over a three-year time period.
The
following table summarizes RSU activity for the years ended December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
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
|
|
|
407,493
|
|
|
$
|
2.48
|
|
|
|
131,250
|
|
|
$
|
4.81
|
|
Granted
|
|
|
600,000
|
|
|
|
0.97
|
|
|
|
444,202
|
|
|
|
1.84
|
|
Forfeited
|
|
|
(17,342
|
)
|
|
|
1.62
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(287,543
|
)
|
|
|
2.22
|
|
|
|
(167,959
|
)
|
|
|
2.61
|
|
Unvested
RSU’ s at end of period
|
|
|
702,608
|
|
|
$
|
1.31
|
|
|
|
407,493
|
|
|
$
|
2.48
|
|
Stock
Options -
On August 10, 2015, the Board of Directors granted 87,500 stock options from the Company’ s 2015 Incentive
Plan to officers and employees based on the closing price of the Company’ s common stock on the date of the grant. These
restricted stock units and options vested 33% on the grant date, 33% on the first anniversary of the grant date and 34% on second
anniversary of the grant date.
On
March 4, 2016, the Board of Directors granted options to acquire 78,944 shares of stock from the Company’ s 2015 Incentive
Plan to officers and employees based on the closing price of the Company’ s common stock on the date of the grant, which
was $1.73. These options vested 100% on the grant date and have a ten year term expiring on March 4, 2026. The fair value of the
vested stock options were calculated using the Black-Scholes model with a volatility and discount rate over the expected term
of each employee.
On
March 18, 2016, the Board of Directors granted options to acquire 81,714 shares of stock from the Company’ s 2015 Incentive
Plan to officers and employees based on the closing price of the Company’ s common stock on the date of the grant, which
was $1.67. These options vested 100% on the grant date and have a ten year term expiring on March 18, 2026. The fair value of
the vested stock options were calculated using the Black-Scholes model with a volatility and discount rate over the expected term
of each employee.
On
March 31, 2016, the Board of Directors granted options to acquire 148,475 shares of stock from the Company’ s 2015 Incentive
Plan to directors, officers and employees based on the closing price of the Company’ s common stock on the date of the grant,
which was $1.37. These options vested 100% on the grant date and have a ten-year term expiring on March 31, 2026. The fair value
of the vested stock options were calculated using the Black-Scholes model with a volatility and discount rate over the expected
term of each employee.
On
December 5, 2016, the Board of Directors granted 5,000 stock options from the Company’ s 2015 Incentive Plan to officers
and employees based on the closing price of the Company’ s common stock on the date of the grant, which was $1.20. These
restricted stock units and options vested 33% on the first anniversary of the grant date, 33% on the second anniversary of the
grant date and 34% on third anniversary of the grant date.
On
December 22, 2016, the Board of Directors granted 54,200 stock options from the Company’ s 2015 Incentive Plan to officers
and employees based on the closing price of the Company’ s common stock on the date of the grant, which was $1.11. These
restricted stock units and options vested 33% on the first anniversary of the grant date, 33% on the second anniversary of the
grant date and 34% on third anniversary of the grant date.
These
three issuances of options issued during March 2016 were part of decreasing the base salary of employees and directors in exchange
for salary for options plan, issued out of the 2015 Incentive Plan.
Compensation
expense recognized for option grants vesting under the 2015 Incentive Plan was approximately $145,000 and $20,000 for the years
ending December 31, 2016 and 2015. 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, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
Number
of Stock Options
|
|
|
Weighted
- Average Exercise Price
|
|
|
Number
of Stock Options
|
|
|
Weighted
- Average Exercise Price
|
|
Stock
options outstanding at beginning of period
|
|
|
86,500
|
|
|
$
|
1.85
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
368,333
|
|
|
|
1.47
|
|
|
|
87,500
|
|
|
|
1.85
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(10,325
|
)
|
|
|
1.85
|
|
|
|
-
|
|
|
|
-
|
|
Canceled
or forfeited
|
|
|
(19,508
|
)
|
|
|
1.85
|
|
|
|
(1,000
|
)
|
|
|
1.85
|
|
Stock
options outstanding at end of period
|
|
|
425,000
|
|
|
$
|
1.52
|
|
|
|
86,500
|
|
|
$
|
1.85
|
|
Stock
options exercised at end of period
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The
fair value of stock options granted to employees and directors in 2016 and 2016 was estimated at the grant date using the Black-Scholes
option pricing model using the following assumptions:
Expected
volatility
|
|
|
51
|
%
|
Discount
rate
|
|
|
1.16
|
%
|
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
13. SUBSEQUENT EVENTS
Tronco
Asset Sale
On
March 28, 2017, the Company and Tronco finalized an agreement with a third party and pursuant to this agreement, the third party
acquired all of Tronco Ohio assets for $550,000. As the Tronco’ s senior secured lender, we released our lien and security
interest on these assets in accordance with the agreement.
Also
on March 28, 2017 and related to the sale of the Tronco assets, the Company agreed to a non-cash receipt of the $550,000 from
Tronco by reducing our bonus accrual liabilities. The bonus accrual was earned by the Meiers in 2014, and was recorded in other
long term liability. As a result of this agreement, we have reduced both the other long term liability and the Tronco note receivable
in 2017.