NYSE MKT: SDPI
2014 ANNUAL REPORT
Superior Drilling Products, Inc. is an innovative, cutting-edge drilling tool technology company that
manufactures, repairs, sells and rents drilling tools. We manufacture and market drill string tools,
including the patented Drill-N-Ream™ well bore conditioning tool, for the oil, natural gas and
mining services industries. In addition, we are a manufacturer and refurbisher of PDC
(polycrystalline diamond compact) drill bits for a leading oilfield services company. We operate
a state-of-the-art drill tool machining facility, manufacturing custom products and solutions for our
drilling industry customers.
Our strategy is to leverage our technological expertise in drill tool technology and innovative,
precision machining to broaden our drill tool technology offerings for rent or sale, while establishing
an effective sales and logistics infrastructure through which we can provide proprietary tools to
exploration and production companies and drill rig operators.
Selected Financial Data
(in thousands, except per share data)
Revenue
Cost of revenue
Selling, general and administrative
Depreciation and amortization
Operating income
Operating margin
Other expense and tax
Net (loss) income
Weighted AVG loss per share – diluted
Weighted AVG shares outstanding – diluted
Cash and cash equivalents
Trade accounts receivable, net
Total assets
Total debt
Total liabilities
Year Ended December 31,
2014
2013
$ 20,037
$ 11,923
7,016
8,103
3,240
1,678
8.4%
2,299
4,855
2,168
1,207
3,692
31.0%
24
$ (621)
$ (0.04)
13,831
$ 3,668
N/A*
-
$ 5,792
$ 11
4,403
57,543
23,871
27,477
2,979
20,761
19,781
20,504
Total stockholders' equity
$ 30,066
$ 257
* Information not comparable for the year ended December 31, 2013 as a result of the reorganization
of the Company on May 22, 2014.
Dear Fellow Shareholders,
As I look back on our
Company’s progress during
2014, it was clearly a
transformative year for Superior
Drilling Products (SDP).
Our Initial Public Offering (IPO)
of Common Stock on the
NYSE MKT under the ticker symbol
SDPI and the concurrent acquisition
of Hard Rock Solutions in May 2014
led the wave of change.
Over 22 years, we had built a solid,
growing business on our original
concept of refurbishing PDC
(polycrystalline diamond compact) drill bits – services which we exclusively provide
to Baker Hughes. More recently, we had started a third-party manufacturing
operation as well. With the $28.7 million in net proceeds from the IPO, we used
$12.5 million to acquire Hard Rock Solutions (Hard Rock) and secure full rights for
the Drill-N-Ream™ well bore conditioning system. Thus began the process of
transforming SDP. During the latter half of 2014, we invested in our distribution,
sales and product creation operations for us to advance as an innovative drilling tool
technology development, manufacturing, sales and rental tool company.
Drill-N-Ream: Creating Value for Our Customers
The patented Drill-N-Ream is an innovative technology that enables faster and more
efficient drilling of horizontal wells for our customers, thereby saving them time and
money. As the manufacturer and partner of Hard Rock, we realized that the tool’s
early success was a very strong indicator of its future potential if properly marketed.
After the acquisition, we rapidly established four new distribution centers, or stocking
points, and upgraded the original Williston basin site. These serve as a base of
operations for our sales team and provide the logistical structure from which to
support nine basins and grow revenue. We also developed and upgraded our sales
force, which now consists of nine field sales staff, two city sales personnel and two
engineering/sales support personnel.
Expanding Product Offerings: New Solutions and Opportunities
Our strategy for growth is to leverage our technological expertise in drill tool
technology and our innovative, precision-machining know-how to broaden our drill
tool offerings for our customers. We believe we can continually introduce innovative
products that help our customers reduce costs, improve efficiencies and accelerate
their ability to develop and complete their well fields.
We have been creating a broader variety of sizes and fittings of our Drill-N-Ream,
which is now being used in a wider variety of applications than we had imagined just
a year ago. In addition to being used for drilling out the lateral section of a horizontal
well, our tool is now operational in the vertical or directional section of the wellbore.
We are field testing the patent-pending Strider™, a downhole vibrating tool that
reduces drill string friction to provide more weight on bit, provides more power with
less energy and, compared with competitive products, creates less jarring and shock,
Drill-N-Ream
Runs
2014 by Quarter
198
107
29
Q2 Q3 Q4
Customers
Using DNR
2014 Monthy Avg.
17
13
6
Q2 Q3 Q4
Rigs
Using DNR
2014 Monthy Avg.
43
35
23
Q2 Q3 Q4
Basins
Using DNR
2014
9
8
3
Q2 Q3 Q4
reducing the potential for damage to the bottom hole assembly. We expect to have the Strider
available in the market within the latter half of 2015.
In January 2015, to further expand our product portfolio, we acquired the exclusive manufacturing,
marketing and sales rights of the OrBIT™ completion drill bit product line. The OrBIT milling bit opens
up the completion and workover markets for us to complement the development drilling market we
serve. We believe that this diversification will serve the Company well, and we are exploring additional
ways to unlock value for our customers by introducing new technologies to serve the completions
segment of oilfield services.
Rapid Adjustment to Changing Industry Dynamics
We believe our achievements in 2014 were impressive, even as the industry experienced a sudden
and extreme drop in oil prices, resulting in a precipitous decline in the U.S. rig count as we headed
into 2015. It’s expected that the rig count could be down as much as 40% to 60% year over year.
While we believe our technologies are uniquely suited to enable our customers to perform better in a
tighter margin environment, we are recognizing customer hesitation as they await the market bottom.
History has shown that trying times often result in the increased adoption of new technologies. We
expect that we are in a unique position to grow in a contracted market as exploration and production
companies and drill rig operators look to find efficiencies and cost savings in an increasingly
competitive environment.
We are excited about the future and the opportunities our technologies offer. We appreciate your
investment and interest in SDP.
Sincerely,
G. Troy Meier
Chairman and Chief Executive Officer
May 4, 2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2014
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ____________ to ____________
Commission File Number 001-36453
___________
SUPERIOR DRILLING PRODUCTS, INC.
(Name of registrant as specified in its charter)
Utah
(State or other jurisdiction of
incorporation or organization)
1583 South 1700 East
Vernal, Utah
(Address of Principal Executive Offices)
46-4341605
(I.R.S. Employer
Identification No.)
84078
(Zip Code)
Issuer's Telephone Number: 435-789-0594
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
Title of each class:
Common Stock, $0.001 par value
Name of each exchange on which registered:
NYSE MKT
Securities Registered Pursuant to Section 12(g) of the Exchange Act: None
1
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange. [ ] Yes [X] No
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
[ ] Yes [X] No
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the
registrant as of June 30, 2014 was approximately $57,384,739. The registrant had issued and
outstanding 17,291,646 shares of its common stock on March 30, 2015.
Documents incorporated by reference: Portions of the registrant’s definitive proxy statement for its
2015 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after December 31, 2014, are incorporated by reference to the extent set forth in Part III
of this Form 10-K.
2
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
SUPERIOR DRILLING PRODUCTS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2014
BUSINESS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
SELECTED FINANCIAL DATA
6
32
32
32
33
34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
34
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 43
44
FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
51
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
71
71
72
DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EXHIBIT INDEX
73
73
73
73
73
74
81
74
3
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Superior Drilling Products,
Inc. (the “Company” or “SDPI”). 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 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
environmentally related penalties, capital expenditures, remedial actions and proceedings;
• effects of pending 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 light 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
4
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 this report and the following:
fluctuations in our operating results;
•
the volatility of oil and natural gas prices;
•
the cyclical nature of the oil and gas industry;
• consolidation within our customers’ industries;
• competitive products and pricing pressures;
• our reliance on significant customers;
• our limited operating history;
•
• our dependence on key personnel;
• costs of raw materials;
• our dependence on third party suppliers;
• unforeseen risks in our manufacturing processes;
•
• 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
the need for skilled workers;
and political unrest in other countries;
terrorist threats or acts, war and civil disturbances;
• access to capital markets;
•
• our ability to protect our intellectual property;
•
•
• breaches of security in our information systems;
•
related party transactions with our founders; and
•
risks associated with our common stock.
impact of environmental matters, including future environmental regulations;
implementing and complying with safety policies;
Many of such factors are beyond the Company’s ability to control or predict. Any of the factors,
or a combination of these factors, could materially affect the Company’s future results of operations and
the ultimate accuracy of the forward-looking statements. Management cautions against putting undue
reliance on forward-looking statements or projecting any future results based on such statements or
present or prior earnings levels. Every forward-looking statement speaks only as of the date of the
particular statement, and the Company undertakes no obligation to publicly update or revise any
forward-looking statement.
5
ITEM 1. BUSINESS
Nature of Operations
PART I
Superior Drilling Products, Inc. (the “Company”, “we”, “our” or “us”) is a drilling and
completion tool technology company. We are an innovative, cutting-edge refurbisher of PDC
(polycrystalline diamond compact) drill bits, and a designer and manufacturer of new drill bit and
horizontal drill string enhancement tools for the oil, natural gas and mining services industry. All of the
drilling tools that we rent are manufactured by us. Our customers are 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
(“HR”). 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 our initial public offering which occurred on
May 23, 2014 (“Offering” or “IPO”). Our corporate headquarters and manufacturing operations are
located in Vernal, Utah. Our common stock trades on the NYSE MKT exchange under the ticker
symbol “SDPI”.
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 Drilling Products of California, LLC, a California limited liability company
(“SDPC”), (b) Superior Design and Fabrication, LLC, a Utah limited liability company (“SDF”), (c)
Extreme Technologies, LLC, a Utah limited liability company (“ET”), (d) Meier Property Series, LLC, a
Utah limited liability company (“MPS”), (e) Meier Leasing, LLC, a Utah limited liability company
(“ML”), (f) HR.
Overview
We currently have three basic operations:
• Our PDC drill bit refurbishing and manufacturing service,
• Our emerging technologies business that manufactures the Drill N Ream tool, our new
completion bits, custom drill tool products to customer specifications, and our innovative
pending drill string enhancement tools, and
• Our new product development business that conducts our research and development, and
designs our new completion bits, horizontal drill string enhancement tools, other down-hole
drilling technologies, and drilling tool manufacturing technologies .
From our headquarters in Vernal, Utah, 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” well bore enhancement tool, and conduct our new product research and
development from this facility. We believe that we continue to set the trend in oil and gas drill bit and
drill string tool technology and design.
6
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 our largest client, Baker Hughes. For
the past 18 years, we have exclusively provided our PDC drill bit refurbishing services for the Rocky
Mountain, California and Alaska regions of Baker Hughes’s substantial oil field operations. In addition,
we have expanded our offerings and our customer base by demonstrating our engineering, design and
manufacturing expertise of down-hole drilling tools. We continuously work with our customers to
develop new products and enhancements to existing products, improve efficiency and safety, and solve
complex drilling tool problems. We employ a senior work force with special training and extensive
experience related to drill bit refurbishing and tooling manufacture. They produce our products and
services using a suite of highly technical, purpose-built equipment, much of which we design and
manufacture for our proprietary use. Most of our manufacturing equipment and products use advanced,
patent-pending technologies that enable us to increase efficiency, enhance drill bit integrity, and
improve safety.
Drilling Industry Background
Overview
Drilling is part of 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 revenues and profits for both drillers and equipment manufacturers. Likewise, as discussed
below under “– Trends in the Industry,” significant decreases in the prices of those commodities
typically lead E&P companies, as we have seen in recent months, to reduce their capital expenditures,
which decreases the demand for drilling equipment.
Most oil and gas operators do not own their own rigs and instead rely on specialized rig contractors
to provide the rig and the crew. Drilling contractors typically provide the rig and the operating crews to
E&P companies on a day-rate basis. In the U.S., drilling contracts are normally by well or a short-term
period (e.g., 90 days). Internationally, the contracts are normally one to three years. International
contracts are longer because the E&P company usually owns a larger field and the mobilization costs are
prohibitive for anything less than a one-year term.
Drill Bits
Historical. The first drill bits used in the oil drilling industry were “fish tail” bits that were relatively
durable, but very slow. In 1909, Howard Hughes Sr., patented the first two-cone rotary bit. In 1931, two
Hughes engineers invented the “Tricone”, a roller cone drill bit with three cones. The Hughes patent for
7
the Tricone bit lasted until 1951, after which other companies made similar bits. By the early 1980s, the
PDC fixed cutter drill bit had gained market traction. PDC fixed cutter bits have no rolling cones or
other moving parts. Instead they have ridges studded with synthetic black diamond “cutters” or PDCs,
and drilling occurs due to shearing the rock as the bit is rotated by the drill string. The vast majority of
drilling today is with PDC bits.
Hybrid Drill Bit — Cutting Mechanics. Today’s modern hybrid drill bit, combines the Tricone roller
configuration with PDC fixed cutter framework. These hybrid bits provide “rolling torque”
management: the dual action cutting structures balance down-hole dynamics for greatly enhanced
stability, bit life, and drilling efficiency. Baker Hughes is a leader in hybrid bit technology and is
utilizing our capabilities to grow this business.
Trends in the Industry
We believe that the following trends will affect the oilfield drilling industry, and consequently the
demand for our products in the coming years.
Declining Rig Count; Industry Volatility. During the latter half of 2014, oil prices dramatically
declined in the United States and as a result, the number of operating drill rigs began to be reduced.
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. For example, the NYMEX-WTI oil price has
recently been as low as $43.08, while the NYMEX-Henry Hub has recently been as low as $1.91 per
MMBtu. Per Baker Hughes weekly rotary rig count report as of December 26, 2104 the US rig count
was 1,840, which has now decreased as of March 20, 2015 to 1,069. Our business is highly dependent
upon the vibrancy of the oil and gas drilling operations in the U.S. While during the last several months
of the year, we were able to continue to gain market share with our Drill N Ream tool, we began to see
pressure from customers on pricing. For 2015, we expect this pressure to be sustained until the pricing
of oil stabilizes around the world, providing greater certainty for our customers and their capital
investment plans. The impact of pricing on our drill bit refurbishment business is especially pronounced
as our exclusive customer for that business is a leading supplier of drill bits to the oil & gas exploration
and production industry globally. We believe the value of our Drill N Ream and the new tools we are
introducing in 2015, as well as our low market penetration, provide us opportunity to grow sales despite
these current market conditions. Our goal is for these tools sales growth to help offset the decline we
anticipate in our PDC drill bit refurbishment business and our third party manufacturing services
business.
Advent of horizontal drilling requires new technologies. The oil and gas industry is increasingly
using directional (e.g., horizontal) drilling in their exploration and production activities because of
measurably 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. We believe that with our extensive
knowledge and experience in the oilfield industry we can identify these challenges and design and
develop tools that will help our customers with their drilling challenges. Further development of drill
string components, such as our Drill N Ream tool, will become increasingly important to our business as
we continue to grow through both organic expansion and strategic acquisitions.
8
We believe that our Drill N Ream tool is well suited for horizontal drilling activity. In addition, we
are developing additional technologies to take advantage of the oil and gas industry’s significant shift to
horizontal drilling and its resulting need for new horizontal drill string tools and technology.
Customer Diversification. With our acquisition of Hard Rock in May 2014, which provided us the
Drill N Ream technology, the rental customers already employing the Drill N Ream tool became our
direct customers. By increasing our capabilities and directly renting products to our customers, we have
diversified our customer base and sources of revenue. Our manufacturing technologies operations also
provide us diversification opportunities as we can design and manufacture to customer specifications
new technologies they have under development.
Halliburton to Acquire Baker Hughes. During 2014, Halliburton announced its planned acquisition
of Baker Hughes. Currently Baker Hughes is our sole customer for our bit refurbishment business and
we do not know how this acquisition may impact our business. Despite this, we intend to continue
developing our long-time relationship with Baker Hughes.
Our Drill Bit Business
Our drill bit refurbishing for Baker Hughes was so successful that refurbishing used drill bits now has
become an industry standard. As the refurbishing industry grew, our arrangement with Baker Hughes
evolved into an exclusive agreement to perform all drill bit refurbishment work for Baker’s Rocky
Mountain region and points west, including the significant oil-producing states of California and Alaska.
Today, we believe that we continue to lead the industry in drill bit repair technology – continually
improving repair techniques to improve drill bit performance and efficiency.
The Meiers, our founders, strategically located their drill bit refurbishment operations in Vernal, Utah
in order to take advantage of the close proximity to our target market, an experienced oil field labor
pool, access to higher education facilities, and a quality of life and cost of living that would attract and
retain skilled workers and their families. Starting during the economic downturn in 2007, we reassessed
our manufacturing processes and business lines, and decided to reposition our self and redefine its
mission to one of bringing high tech machining into the oil and gas and mining industries. Drawing on
Mr. Meier’s manufacturing and design expertise, we completely redesigned our manufacturing process,
and custom designed equipment and facilities, and developed custom software to control all aspects of
the drill bit refurbishing process. Attention was paid as well to addressing safety, health and
environmental issues during the manufacturing process.
By fall 2007, we had built and moved into a new SMART facility located in the new Ropers Business
Park in Vernal, Utah that allowed for future expansion with our occupying two additional buildings, one
to house our precision machining and a third to house over flow of both refurbishing and machining in
subsequent years. We now operate from a modern facility with custom features and solutions. We
employ a senior work force with special training and extensive experience related to drill bit
refurbishing and tooling manufacture to produce our products and services using a suite of highly
technical, computer controlled, purpose-built equipment, much of which we design and manufacture for
our proprietary use. Most of our manufacturing equipment and products now use advanced, patent-
pending technologies that enable us to increase efficiency, enhance drill bit integrity, and improve
safety.
9
Our Horizontal Drilling Tools
Recently, challenging new horizontal oil and gas well designs and construction have substantially
increased the technical demands on drill bit and drill string components. This change in development
activity requires investment in new drilling equipment to address the unique demands of this new
drilling environment.
Drill N Ream Well Bore Conditioning Tool. As a first response to the horizontal drilling challenge,
HR designed and manufactured the Drill N Ream well bore conditioning tool. The Drill N Ream is a
dual-section reaming tool which is located behind the bottom hole assembly (BHA) to smooth and
slightly enlarge the well bore in the curved and horizontal sections of horizontal wells, in both oil and
water based mud. The Drill N Ream is available in multiple sizes and can be custom manufactured to fit
any hole size. The Drill N Ream tool allows the drill string to move through a conditioned well bore
left by the drill bit with less friction and material stress, extending the horizontal distance that can be
drilled during a run and making tripping (removal of the drill string) and the running of casing in the
completed well much easier. Each time a drilling operator has to trip the drill string and replace a bit or
other drill string component, it costs the operator substantial time and money, so we believe anything
that allows each run to extend further is of great value to our customers. As a result, the Drill N Ream
tool has been used in over 1,000 well drilling operations, which we believe indicates significant initial
industry acceptance in a fairly short period of time. We are also developing a suite of other horizontal
drill string tools, each of which addresses a different technical challenge presented by today’s
horizontal drilling designs.
The Drill N Ream tool removes the well bore tortuosity brought about from the drill bit geo-steering,
and from directional drilling overcorrections and formation interactions. As a result, the Drill N Ream
extends the horizontal distance of the well bore by (a) smoothing out ledges and doglegs left by the bit,
which allows the drill string to move through a conditioned well bore with less friction and stress, (b)
reducing tool joint damages and trip time (i.e. the time required to pull up and resend the drill string),
and (c) enhancing the power available to drive the drill bit assembly.
Specifically,
• We expect that our field sales and tool distribution organization that we developed in the second
half of 2014 will permit us to expand the Drill N Ream rental revenue, substantially beyond what
HRS was able to generate with its much smaller geographic footprint subject to limits on our
business resulting from the volatility in oil and gas market in 2015.
• The Drill N Ream tool is specifically designed to reduce the drill string stress and downtime, and
therefore the cost, of drilling a horizontal well, such as those typically drilled using hydraulic
fracturing technology.
• We believe that the Drill N Ream’s adoption and continued use by operators supports it
effectiveness and industry acceptance. In addition, we understand that a number of customers
have rented the Drill N Ream tool after first trying its competitors. We expect the above factors
to support increasing interest in, and revenues from, the Drill N Ream over the next several years
as more well operators are (a) contacted by our larger sales force, and (b) reports of its
effectiveness are transmitted through word-of-mouth by an increasing user base to other well
operators.
10
Other Horizontal Drill String Tools. We are developing a suite of other horizontal drill string tools,
using our unique facility and technology platform, and exploiting our additional capacity and
manufacturing expertise. Our new product delivery goal is to bring to market at least one new tool per
year. We expect our next drill string stimulation tool, which we called Strider, to be fully
commercialized during 2015. Strider is designed to help dissipate the inertial drag of a horizontal drill
string by generating rhythmic pulses that break the frictional connection between the drill strings and
well bore greatly enhancing drilling rates.
Clean Out Bits. There is a need in the industry for an inexpensive bit that can be used for the purpose
of drilling out plugs or debris left in the production casing after the completion process. With our
purchase of OrBit and our manufacturing technology, we have a product that is ideal for this purpose
and very competitive in price.
New Product Development and Intellectual Property
Our sales and earnings are influenced by our ability to provide the high-level service that our
customers demand successfully, which in turn relies on our ability to develop new processes,
technology, and products. Much of our product development occurs in response to specific customer
requests, in which case we are typically able to pass costs along to the customer. However, we have also
historically dedicated additional resources toward the development of new technology and equipment to
enhance the effectiveness, safety, and efficiency of the products and services we provide. Although
certain of our competitors may spend greater amounts on research and development, we believe that our
product development efforts are greatly enhanced by the investments of management time and energy
we make to improve our customer service and to work with our customers on their specific product
needs and challenges. During 2014, research and development costs were approximately $0.6 million,
but for 2015, we expect that it will increase due the testing and expected completion of the Strider tool.
Of greatest importance to our development efforts is our ability to preserve excellent customer
relations and stay close enough to our customers’ operations so that we can observe opportunities to
make changes to our service offerings (and the products that support them) that would yield the
maximum benefit to our customers. Although we highly value our proprietary products and technology,
we also depend on our technological capabilities, customer service oriented culture, and application of
our know-how to distinguish ourselves from our competitors. We also consider the services we provide
to our customers, and the technical knowledge and skill of our personnel, to be more important than our
registered intellectual property in our ability to compete. While we stress the importance of our research
and development programs, the technical challenges and market uncertainties associated with the
development and successful introduction of new and updated products are such that we cannot assure
you that we will realize any particular amount of future revenue from the services and related products
resulting from our research and development programs.
Suppliers and Raw Materials
We acquire supplies, component parts, products and raw materials from suppliers, including steel
suppliers, foundries, forge shops and original equipment manufacturers. The prices we pay for our raw
materials may be affected by, among other things, energy, industrial diamond, steel and other
commodity prices, tariffs and duties on imported materials and foreign currency exchange rates. Certain
11
of our component parts, products or specific raw materials are only available from a limited number of
suppliers.
Our ability to obtain suitable quality raw materials and components, such as PDC’s, steel and flux,
solder, heating elements, is critical to our ability to remanufacture Baker Hughes drill bits, and to
manufacture the Drill N Ream tool and other pending drill line products. In order to purchase raw
materials and components in timely and cost effective manner, we have developed both domestic and
international sourcing connections and arrangements. We maintain quality assurance and testing
programs to analyze and test these raw materials and components in order to assure their compliance
with our rigorous specifications and standards. We generally try to purchase our raw materials from
multiple suppliers so we are not dependent on any one supplier, but this is not always possible.
One of the challenges with our new drilling tool manufacturing division has been getting steel at an
acceptable price, accurate specifications, and on time delivery. We have experienced increased costs in
recent years due to rising steel prices. Since Baker Hughes pays the cost of materials and supplies used
in our drill bit refurbishing process, cost increases are not as critical a short-term financial component
for that line of business. We have no assurance that we will be able to continue to purchase these raw
materials on a timely basis or at historical prices.
Proprietary Rights
We rely primarily on a combination of patent, trade secret, copyright and trademark laws,
confidentiality procedures, and other intellectual property protection methods to protect our proprietary
technology. Mr. Meier currently has (a) U.S. patent applications pending, and related international
patent applications pending as co-inventor, and (b) individually with respect to our pending line of other
horizontal drilling tools. There is no assurance that our patent applications will result in issued patents,
that the existing patents or that any future patents issued to us will provide any competitive advantages
for their products or technology, or that, if challenged, the patents issued to us will be held valid and
enforceable. Despite our precautions, unauthorized parties may attempt to copy aspects of our products
or obtain and use information that we regard as proprietary. Existing intellectual property laws afford
only limited protection and policing violations of such laws is difficult. The laws of certain countries in
which our products are or may be used by our customers do not protect our products and intellectual
property rights to the same extent as do the laws of the United States. There is no assurance that these
protections will be adequate or that our competitors will not independently develop similar technology,
gain access to our trade secrets or other proprietary information, or design around our patents.
We may be required to enter into costly litigation to enforce its intellectual property rights or to
defend infringement claims by others. Such infringement claims could require us to license the
intellectual property rights of third parties. There is no assurance that such licenses would be available
on reasonable terms, or at all.
Marketing and Sales
We do not engage in any marketing or sales efforts for our PDC drill bits in the oil and gas industry
because we are under an exclusive contract with Baker Hughes for those services.
12
For the Drill N Ream tool, HR has conducted all of the sales and marketing efforts to date under our
manufacturing and licensing arrangement. To date, the Drill N Ream tool has been deployed largely in
North Dakota’s Bakken oil field, Utah, Oklahoma, Wyoming, Montana, New Mexico, Colorado and
Texas. Our goal is to expand the Drill N Ream tool’s coverage by targeting a substantially expanded
sales and marketing effort in the Ohio, Pennsylvania, and California, among others.
In January 2015, we entered into an Exclusive Manufacturing, Marketing, Sales and Consulting
Agreement with Tenax Energy Solutions, LLC granting us the perpetual and exclusive right and license
to manufacture, market, sell and rent products utilizing technology used in a certain subsurface drilling
tool (the “Original IP”). Among other things, the Marketing Agreement provides that we will make
monthly payments commencing on February 1, 2015 through January 1, 2017 to Tenax, subject to
certain conditions, or alternatively, we may prepay any of the monthly payments for each quarterly
period, subject to certain conditions. Tenax and their affiliates also agree not to show to any third party
any new or additional intellectual property created or developed by Tenax without first showing such
New IP to us and giving us an option to make a proposal to Tenax with respect to the New IP. Tenax
has the right, in their sole discretion, to reject such proposal and offer the New IP to any third party, but
only on higher purchase price terms and conditions. Commencing on January 1, 2016, we have the
option to purchase from Tenax the patent applications and/or patents relating to the Original IP for an
additional payment.
Growth Strategies
We intend to pursue the following growth strategies as we seek to expand our market share and
solidify our position as a competitive drilling and completion tool manufacturer in the drilling and
completion industry:
• Leverage our acquisition of Hard Rock. We have combined Hard Rock’s existing marketing
team, which has more than 25 years of oil field customer contacts, with Troy Meier’s extensive
connections in the drilling industry, in order to achieve greater market penetration and revenues
for the Drill N Ream tool. We have used the Hard Rock marketing and sales team to propel our
upcoming drill string component products successfully into the drilling marketplace and have
taken that expertise to grow a larger sales and marketing force.
• Leverage Technical Expertise to Develop New Products. We intend to use our deep technical
and high tech capacities in advanced materials science, and the manufacture and assembly of
precision drilling products, to identify new products, services and markets, particularly
horizontal drill string enhancement components.
• Continue to enhance our Baker Hughes relationship. Despite its proposed acquisition by
Halliburton, we intend to continue developing our long-time relationship with Baker Hughes.
• Strengthen and support our employees. Our experienced employees and management team are
our most valuable resources. Attracting, training, and retaining key personnel, has been, and will
remain critical to our success. To achieve our goals, we intend to remain focused on providing
our employees with training, personal and professional growth opportunities, as well as adding
13
performance-based
competitive benefits.
incentives,
including opportunities for stock ownership, and other
• Seek strategic acquisitions to enhance or expand our product lines. In analyzing new
acquisitions, we intend to pursue opportunities that complement our existing product line and/or
that are geographically situated and served by our current and future sales force. We believe that
strategic acquisitions will enable us to exploit economies of scale in the areas of finance, human
resources, marketing, administration, information technology, and legal, while also providing
cross-marketing opportunities among our drill tool product offerings. We are also working with
the local university and high school to develop and teach local programs in machining and
engineering expertise and technical resources.
Competitive Strengths
We believe that we differentiate ourselves from our competitors on the basis of the quality and
reliability of our products and services, our proprietary technology, and our ability to rapidly respond
with products that meet the most demanding needs of our customers.
•
Industry-recognized expertise and innovation. We believe that we have developed a strong
reputation for producing quality products and services based upon our industry-recognized
depth of experience, ability to attract and retain quality employees, and innovative processes
and applications. We believe that a number of the drill bit refurbishing processes and
technologies that we developed have now become industry standards.
• Experienced management team with proven track record. Our executive officers and senior
operational managers have extensive experience both with us and in the oil field service
industry generally. Our chief executive officer and co-founder, Troy Meier, has a 33-year
relationship with Baker Hughes, providing innovative ideas to support Baker Hughes in
maintaining their leadership role in the drill bit industry. Meier family entities continue to
own the majority of our outstanding stock which we believe aligns their interests with the
interests of our public investors.
• Cutting-edge manufacturing capacity and proprietary technology. We have created and
designed a cutting-edge machining facility with custom features. We recruited and hired a
high level, cross-industry machining team to produce our products and services using a suite
of highly technical, computer controlled, purpose-built equipment, much of which we design
and manufacture for our proprietary use. Most of our manufacturing equipment and products
now use advanced, patent-pending technologies that enable us to increase efficiency, enhance
the integrity and precision drill bit and drill string tool integrity, and improve safety.
Competition
Drill Bit Refurbishing. The primary competitors for our drill bit refurbishing services are the in-
house units at Hughes Christensen, the division of Baker Hughes responsible for drill bits. However, our
competitive advantage is demonstrated by our client’s continuing requests for us to take over or manage
14
work. Other drill bit manufacturers also have in-house refurbishing units, but they are not our
competitors since we have an exclusive contract with Baker Hughes.
Drill String Tools. The primary competitors for our Drill N Ream tool are several single-section
reaming tool manufacturers, including Baker Oil Tools (a division of Baker Hughes), NOV, and
Schlumberger. We believe that the Drill N Ream tool is the only dual-section or dual cutting structure
drill string reamer on the market today. We believe that distinction will allow us to continue building on
the Drill N Ream tool’s first-mover advantage. We believe that our other pending drill string tools are at
the forefront of drill string tool technological development for horizontal drilling. Consequently,
potential competitors who may be developing similar technology are currently unknown. There are
existing tools that would compete with the drill string stimulation tool, such as the Agitator tool
marketed by NOV. However, we believe our technology in the drill string stimulation tool offers
significant advantages over the Agitator and we believe will be rapidly accepted in the drilling market.
Customers
Drill Bit Refurbishing. Our sole customer for our drill bit refurbishing services is Hughes
Christensen, the division of Baker Hughes responsible for drill bits, under our exclusive long-term
contract with them. We work directly with their field engineers, manufacturing and marketing
representatives to develop new products and enhancements, improve efficiency and safety, and solve
complex drilling tool problems.
Drill String Tools. E&P operators, our customers, are demanding key technologies, such as
advanced directional drilling and more complex completion systems. As the industry adapts to these
increased demands, we believe that there will be significant opportunities to bring new products and
equipment to market, such as our Drill N Ream tool, that have been designed and engineered with these
new challenges in mind.
Seasonality
A substantial portion of our business is not significantly impacted by changing seasons. A small
portion of the revenue we generate from selected operations may benefit from higher first quarter
activity levels, as operators take advantage of the winter freeze to gain access to remote drilling and
production areas. In the past, some of our revenue in Alaska has declined during the second quarter due
to warming weather conditions that resulted in thawing, softer ground, difficulty accessing drill sites and
road bans that curtailed drilling activity.
Environmental, Health and Safety Regulation
While our operations are subject to numerous stringent and complex laws and regulations governing
the discharge of materials into the environment, health and safety aspects of our operations, or otherwise
relating to human health and environmental protection, we have put a strong focus on these issues.
We designed and built our Vernal facility as a fully-contained business park, except for the city sewer
connection. Underlying our entire facility, including parking lots and runoff storage areas, is a complete
capture and containment field that collects all building drainage and ground run off in isolated tanks.
15
Captured drainage and runoff, as well as all hazardous waste generated in our manufacturing processes
is regularly removed from our facility by a certified hazardous waste disposal company. However, the
trend in environmental regulation has been to impose increasingly stringent restrictions and limitations
on activities that may impact the environment, and thus, any changes in environmental laws and
regulations or in enforcement policies that result in more stringent and costly waste handling, storage,
transport, disposal, or remediation requirements could have a material adverse effect on our operations
and financial position. Moreover, accidental releases or spills of regulated substances may occur in the
course of our operations, and we cannot assure you that we will not incur significant costs and liabilities
as a result of such releases or spills, including any third-party claims for damage to property, natural
resources or persons. Failure to comply with these laws or regulations or to obtain or comply with
permits may result in the assessment of administrative, civil and criminal penalties, imposition of
remedial or corrective action requirements, and the imposition of orders or injunctions to prohibit or
restrict certain activities or force future compliance.
The following is a summary of the more significant existing environmental, health and safety laws
and regulations to which our business operations are subject and for which compliance could have a
material adverse impact on our capital expenditures, results of operations or financial position.
Hazardous Substances and Waste. The Resource Conservation and Recovery Act (“RCRA”) and
comparable state statutes, regulate the generation, transportation, treatment, storage, disposal and
cleanup of hazardous and non-hazardous wastes. Under the auspices of the EPA, the individual states
administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more
stringent requirements. We are required to manage the transportation, storage and disposal of hazardous
and non-hazardous wastes in compliance with RCRA.
The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), also
known as the Superfund law, imposes joint and several liability, without regard to fault or legality of
conduct, on classes of persons who are considered to be responsible for the release of a hazardous
substance into the environment. These persons include the owner or operator of the site where the
release occurred, and anyone who disposed or arranged for the disposal of a hazardous substance
released at the site. We currently own, lease, or operate numerous properties that have been used for
manufacturing and other operations for many years. We also contract with waste removal services and
landfills. These properties and the substances disposed or released on them may be subject to CERCLA,
RCRA and analogous state laws. Under such laws, we could be required to remove previously disposed
substances and wastes, remediate contaminated property, or perform remedial operations to prevent
future contamination. In addition, it is not uncommon for neighboring landowners and other third parties
to file claims for personal injury and property damage allegedly caused by hazardous substances
released into the environment.
Environmental reviews done in connection with a new housing project contiguous to our Vernal
facility, identified some petroleum incursions. However, it has been determined that the source of the
incursions is not from our property.
Water Discharges. The Federal Water Pollution Control Act (the “Clean Water Act”) and analogous
state laws impose restrictions and strict controls with respect to the discharge of pollutants, including
spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants
16
into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or
an analogous state agency. A responsible party includes the owner or operator of a facility from which a
discharge occurs. The Clean Water Act and analogous state laws provide for administrative, civil and
criminal penalties for unauthorized discharges and, together with the Oil Pollution Act of 1990, impose
rigorous requirements for spill prevention and response planning, as well as substantial potential liability
for the costs of removal, remediation, and damages in connection with any unauthorized discharges.
Employee Health and Safety. We are subject to a number of federal and state laws and regulations,
including OSHA and comparable state statutes, establishing requirements to protect the health and safety
of workers. In addition, the OSHA hazard communication standard, the EPA community right-to-know
regulations under Title III of the federal Superfund Amendment and Reauthorization Act and
comparable state statutes require that information be maintained concerning hazardous materials used or
produced in our operations and that this information be provided to employees, state and local
government authorities and the public. Substantial fines and penalties can be imposed and orders or
injunctions limiting or prohibiting certain operations may be issued in connection with any failure to
comply with laws and regulations relating to worker health and safety.
There is no assurance that any present or future noncompliance with Environmental Laws will not
have a material adverse effect on the Company’s results of operations or financial condition. See “Risk
Factors.”
Insurance and Risk Management
We maintain insurance coverage of types and amounts that we believe to be customary and
reasonable for companies of our size and with similar operations. In accordance with industry practice,
however, we do not maintain insurance coverage against all of the operating risks to which our business
is exposed. Therefore, there is a risk our insurance program may not be sufficient to cover any particular
loss or all losses.
Currently, our insurance program includes, among other things, general liability, umbrella liability,
sudden and accidental pollution, personal property, vehicle, workers’ compensation, and employer’s
liability coverage. Our insurance includes various limits and deductibles or retentions, which must be
met prior to or in conjunction with recovery.
Employees
As of December 31, 2014, we had 95 full-time employees. We generally have been able to locate
and engage highly qualified employees as needed and do not expect our growth efforts to be constrained
by a lack of qualified personnel. None of our employees is covered by an ongoing collective bargaining
agreement, and we have experienced no work stoppages. We consider our employee relations to be
good.
ITEM 1A. Risk Factors
In this Item 1A. the terms “we,” “our,” “us,” and the “Company used herein refer to Superior
Drilling Products, Inc. and its subsidiaries unless otherwise indicated or as the context so requires.
17
Risks Related to Our Business and Industry
A material or extended decline in expenditures by the oil and gas industry could significantly
reduce our revenue and income and result in an impairment of our goodwill and other assets.
Our business depends upon the condition of the oil and gas industry and, in particular, the
willingness of oil and gas companies to make capital expenditures on exploration, drilling and
production operations. The level of capital expenditures is generally dependent on the prevailing view of
future oil and gas prices, which are influenced by numerous factors affecting the supply and demand for
oil and gas, including:
• worldwide economic activity;
• the level of exploration and production activity;
• interest rates and the cost of capital;
• environmental regulation;
• federal, state and foreign policies regarding exploration and development of oil and gas;
• the ability of OPEC to set and maintain production levels and pricing;
• governmental regulations regarding future oil and gas exploration and production;
• the cost of exploring and producing oil and gas;
• the cost of developing alternative energy sources;
• the availability, expiration date and price of leases;
• the discovery rate of new oil and gas reserves;
• the success of drilling for oil and gas in unconventional resource plays such as shale formations;
• technological advances; and
• weather conditions.
Oil and gas prices and the level of drilling and production activity have been characterized by
significant volatility in recent years. 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. For example, for
the five years ended December 31, 2014, the NYMEX-WTI oil price ranged from a high of $113.93 per
barrel to a low of $53.27 per barrel, while the NYMEX-Henry Hub natural gas price ranged from a high
of $6.15 per MMBtu to a low of $1.91 per MMBtu. . Per Baker Hughes weekly rotary rig count report
as of December 26, 2104 the US rig count was 1,840, which has now decrease as of March 20, 2015 to
1,069. We expect continued volatility in both crude oil and natural gas prices, as well as in the level of
18
drilling and production related activities. Even during periods of high prices for oil and natural gas,
companies exploring for oil and gas may cancel or curtail programs, seek to renegotiate contract terms,
including the price of our products and services, or reduce their levels of capital expenditures for
exploration and production for a variety of reasons. These risks are greater during periods of low or
declining commodity prices. Continued significant or prolonged declines in hydrocarbon prices have
had, and may continue to have, a material adverse effect on our results of operations.
Our customers’ industries are undergoing continuing consolidation that may impact our results
of operations.
The oil and gas industry is rapidly consolidating and, as a result, some of our largest customers
have consolidated and are using their size and purchasing power to seek economies of scale and pricing
concessions. This consolidation may result in reduced capital spending by some of our customers or the
acquisition of one or more of our primary customers, which may lead to decreased demand for our
products and services. For example during 2014, Halliburton announced its acquisition of Baker
Hughes. Currently Baker Hughes is our sole customer for our bit refurbishment business and we do not
know how this acquisition may impact our business. We cannot assure you that we will be able to
maintain our level of sales to a customer that has consolidated or replace that revenue with increased
business activity with other customers. As a result, the acquisition of one or more of our primary
customers, such as Baker Hughes, may have a significant negative impact on our results of operations,
financial position or cash flows. We are unable to predict what effect consolidations in the industry may
have on price, capital spending by our customers, our selling strategies, our competitive position, our
ability to retain customers or our ability to negotiate favorable agreements with our customers.
We may be unable to successfully compete with other manufacturers of drilling equipment.
Several of our competitors are diversified multinational companies with substantially larger
operating staffs and greater capital resources than ours and which have been engaged in the
manufacturing business for a much longer time than us. If these competitors substantially increase the
resources they devote to developing and marketing competitive products and services, we may not be
able to compete effectively. Similarly, consolidation among our competitors could enhance their
product and service offerings and financial resources, further intensifying competition.
Our customer base is concentrated and the loss of, or nonperformance by, one or more of our
significant customers could cause our revenue to decline substantially.
We contract exclusively with Baker Hughes, a multinational organization, for our entire drill bit
remanufacturing business, and most of our original equipment drill bit manufacturing business. It is
likely that we will continue to derive a portion of our revenue from a relatively small number of
customers in the future. If a major customer decided not to continue to use our services or significantly
reduces its drilling plans, our revenue would decline and our operating results and financial condition
could be harmed. In addition, we are subject to credit risk due to the concentration of our customer base.
Any increase in the nonpayment of and nonperformance by our counterparties, either as a result of
changes in financial and economic conditions or otherwise, could have a material effect on our business,
results of operations and financial condition and could adversely affect our liquidity.
19
Our operating history may not be sufficient for investors to evaluate our business and prospects.
We are a recently formed company with a short operating history. This may make it more
difficult for investors to evaluate our business and prospects and to forecast our future operating results.
As a result, historical financial data may not give you an accurate indication of what our actual results
would have been if subsequent acquisitions had been completed at the beginning of the periods
presented or of what our future results of operations are likely to be. Our future results will depend on
our ability to efficiently manage our operations and execute our business strategy.
There may be fluctuations in our operating results.
Significant annual and quarterly fluctuations in our results of operations may be caused by,
among other factors, our volume of revenues, the timing of new product or service announcements,
releases by us and our competitors in the marketplace of new products or services, seasonality and
general economic conditions. There can be no assurance that the level of revenues achieved by us in
any particular fiscal period will not be significantly lower than in other comparable fiscal periods. We
believe quarter-to-quarter comparisons of our revenues and operating results are not necessarily
meaningful and should not be relied on as indicators of future performance. Our operating expenses are
relatively fixed in the short term and are based on management’s expectations of future revenues. As a
result, if future revenues are below expectations, net income or loss may be disproportionately affected
by a reduction in revenues, as any corresponding reduction in expenses may not be proportionate to the
reduction in revenues.
We must continue to develop new technologies, methodologies and products, on a timely and cost-
effective basis to satisfy the needs of our customers.
The drilling industry is driven primarily by cost minimization, and our strategy is aimed at
reducing drilling costs through the application of new drill bit assembly and drill string tool
technologies. Our continued success will depend on our ability to meet our customers’ changing needs,
on a timely and cost-effective basis, by successfully enhancing our current products and processes;
developing, producing and marketing new products and processes’; and responding to evolving industry
standards and other technological changes.
We cannot assure you that our products will be able to satisfy the specifications of our
customers or that we will be able to perform the testing necessary to prove that the product
specifications are satisfied in the future, or that the costs of modifications to our products to satisfy their
requirements will not adversely affect our results of operations. Failure to meet our customer’s demand
for services may adversely affect our business. We may encounter resource constraints, competition, or
other difficulties that may delay our ability to expand our bit remanufacturing services to the level
desired or required by our customer. If our products are unable to satisfy such requirements, or we are
unable to perform any required testing, our customers may cancel their contracts and/or seek new
suppliers, and our business, results of operations, cash flows or financial position may be adversely
affected.
20
We are dependent on key personnel who may be difficult to replace.
Our success is dependent to a significant degree upon the business expertise and continued
contributions of our founders and senior management team. In particular, we are dependent upon the
efforts and services of our founders, Mr. Troy Meier, our Chairman and Chief Executive Officer, and
Ms. Annette Meier, our President, because of their knowledge, experience, skills, and relationships with
major clients and other members of our management team, as well as the other members of our
executive team. Although we have employment arrangements certain members of senior management,
as a practical matter, those agreements will not assure the retention of our employees and we may not
be able to enforce all of the provisions in any such employment agreement, including the non-
competition provisions. Our future success also depends on our ability to identify, attract, hire, train,
retain and motivate other highly skilled technical, managerial, marketing and customer service
personnel. Competition for such personnel in is intense, and we cannot assure you that we will be able
to successfully attract, integrate or retain sufficiently qualified personnel. Our inability to retain these
types of individuals could have a material adverse effect on our business, results of operations and
financial condition.
Increases in the cost of raw materials used in our manufacturing processes could negatively
impact our profitability.
We rely on the availability of volume and quality of synthetic diamond cutters for both our
remanufactured drill bit business and for our new drill string tool manufacturing business. In addition,
we must have a reliable source of steel available for our new manufacturing business which is both of
sufficient quality, and available at a cost-effective price. We do not have fixed price contracts or
arrangements for all of the raw materials and other supplies that we purchase. Baker Hughes provides
the diamond cutters for our remanufacturing business. However, sourcing cost-effective supplies of
quality steel in the relatively low volumes that our new tool manufacturing requires can be challenging.
However, shortages of, and price increases for, steel and other raw materials and supplies that we use in
our business may occur. Future shortages or price fluctuations in synthetic diamond cutters or steel
could have a material adverse effect on our ability to conduct either our remanufacturing business or our
new drill tools in a timely and cost effective manner.
We depend on third-party suppliers for timely deliveries of raw materials, and our results of
operations could be adversely affected if we are unable to obtain adequate supplies in a timely
manner.
Our manufacturing operations depend upon obtaining adequate supplies of raw materials from third
parties. The ability of these third parties to deliver raw materials may be affected by events beyond our
control. Any interruption in the supply of raw materials needed to manufacture our products could
adversely affect our business, results of operations and reputation with our customers.
We may be exposed to unforeseen risks in our product manufacturing and processes, which could
adversely affect our financial conditions and results of operations.
We operate our business from a single manufacturing facility. A natural disaster, extended
utility failure or other significant event at our facility could significantly to manufacture sufficient
quantities of key products or otherwise deliver products to meet customer demand or contractual
21
requirements which may result in a loss of revenue and other adverse business consequences. In
addition, the equipment and management systems necessary for our operations are subject to wear and
tear, break down and obsolescence, which could cause them to perform poorly or fail, resulting in
fluctuations in manufacturing efficiencies and production costs. Significant manufacturing fluctuations
may affect our ability to deliver products to our customers on a timely basis and we may suffer financial
penalties and a diminution of our commercial reputation and future product orders. Additionally, some
of our business may in the future be conducted under fixed price contracts. Fluctuations in our
manufacturing process, or inaccurate estimates and assumptions used in pricing our contracts, even if
due to factors out of our control, may result in cost overruns which we may be required to absorb. Any
shut down of our manufacturing facility, reductions in our manufacturing process or efficiency, or cost
overruns could adversely affect our business, financial condition and results of operations.
Failure to generate sufficient revenue to make payments on the Hard Rock Note could result in
our loss of the patents securing the Hard Rock Note.
The purchase price for the Hard Rock acquisition included a seller-carried promissory note for
$12.5 million (the “Hard Rock Note”). The Hard Rock Note is secured by all of the patents, patents
pending, other patent rights, and trademarks currently owned by Hard Rock. If we do not generate
revenues sufficient to make the annual payments under the Hard Rock Note and fail to make any annual
payment on time or at all, then we may be deemed to be in default and could potentially forfeit the
patents which secure the Hard Rock Note. The failure to retain this intellectual property could cause a
significant loss of our investment and might have a material adverse effect on our financial condition
and results of operation, as well as our ability to grow our drill string tool business.
We may be unable to employ a sufficient number of skilled and qualified workers to sustain or
expand our current operations.
Both of our remanufacturing and new manufacturing lines of business require personnel with
specialized skills and experience. The supply of skilled and experienced personnel may not be sufficient
to meet current or expected demand. Any significant increase in the wages paid by competing
employers could result in a reduction of our skilled labor force, increases in the wage rates that we must
pay, or both. If any of these events were to occur, our capacity could be diminished, our ability to
respond quickly to customer demands or strong market conditions may be inhibited and our growth
potential impaired, any of which could have a material adverse effect on our business, financial
condition and results of operations.
If we are not able to manage our growth strategy successfully, our business, and results of
operations may be adversely affected.
Our growth strategy includes acquisitions and the development and implementation of new
product designs and improvements, which presents numerous managerial, administrative, operational
and other challenges. Our ability to manage the growth of our operations will depend on our ability to
develop systems and services and related technologies to meet evolving industry requirements and, if
so, at prices acceptable to our customers to compete in the industry in which we operate. Our ability to
compete effectively will also depend on our ability to continue to obtain patents on our proprietary
technology and products. Although we do not consider any single patent to be material to our business
22
as a whole, the inability to protect our future innovations through patents could have a material adverse
effect. In addition, our growth will increase our need to attract, develop, motivate, and retain both our
management and professional employees. The inability of our management to manage our growth
effectively or the inability of our employees to achieve anticipated performance could have a material
adverse effect on our business.
Acquisitions and investments may not result in anticipated benefits and may present risks not
originally contemplated, which could have a material adverse effect on our financial condition,
results of operations and cash flows.
Our growth strategy includes acquiring other companies that complement our service offerings or
broaden our technical capabilities and geographic presence. From time to time, we evaluate purchases
and sales of assets, businesses or other investments. These transactions may not result in the anticipated
realization of savings, creation of efficiencies, offering of new products or services, generation of cash
or income or reduction of risk. In addition, acquisitions may be financed by borrowings, requiring us to
incur debt, or by the issuance of our common stock. These transactions involve numerous risks, and we
cannot ensure that:
• any acquisition would be successfully integrated into our operations and internal controls;
• the due diligence conducted prior to an acquisition would uncover situations that could result in
financial or legal exposure;
• the use of cash for acquisitions would not adversely affect our cash available for capital
expenditures and other uses;
• any disposition, investment, acquisition or integration would not divert management resources
from the operation of our business; or
• any disposition, investment, acquisition or integration would not have a material adverse effect
on our financial condition, results of operations or cash flows.
Our inability to integrate acquisitions successfully could impede us from realizing all of the
benefits of the acquisitions which could have a material adverse effect on our financial condition
and results of operations.
If we are unable to successfully integrate Hard Rock or other future acquisitions, we could be
impeded from realizing all of the benefits of those acquisitions and could weaken our business
operations. The integration process may disrupt our business and, if implemented ineffectively, may
preclude realization of the full benefits expected by us and could harm our results of operations. In
addition, the overall integration of the combining companies may result in unanticipated problems,
expenses, liabilities and competitive responses, and may cause our stock price to decline. The
difficulties of integrating an acquisition include, among others:
•
unanticipated issues in integration of information, communications, and other systems;
23
•
•
•
•
•
•
unanticipated incompatibility of logistics, marketing, and administration methods;
maintaining employee morale and retaining key employees;
integrating the business cultures of both companies;
preserving important strategic client relationships;
coordinating geographically separate organizations; and
consolidating corporate and administrative infrastructures and eliminating duplicative operations.
Even if the operations of an acquisition are integrated successfully, we may not realize the full
benefits of the acquisition, including the synergies, cost savings or growth opportunities that we expect.
These benefits may not be achieved within the anticipated time frame, or at all. Failing to realize the
benefits could have a material adverse effect on our financial condition and results of operations.
Conditions in the global financial system may have impacts on our business and financial position
that we currently cannot predict.
Uncertainty in the credit markets may negatively impact the ability of our customers to finance
purchases of our products and services and could result in a decrease in, or cancellation of, orders or
adversely affect the collectability of our receivables. If the availability of credit to our customers is
reduced, they may reduce their drilling and production expenditures, thereby decreasing demand for our
products and services, which could have a negative impact on our financial position. Additionally,
unsettled conditions could have an impact on our suppliers, causing them to be unable to meet their
obligations to us. Although we do not currently anticipate a need to access the credit markets in the
short term, a prolonged constriction on future lending by banks or investors could result in higher
interest rates on future debt obligations or could restrict our ability to obtain sufficient financing to meet
our long-term operational and capital needs.
If we are unable to raise additional capital, if required in the future, our business could be
negatively affected, and we could be prevented from achieving our growth objectives.
Our principal sources of liquidity have been cash flow from operations and proceeds from the
Offering. Our principal uses of cash are operating expenses, working capital requirements, capital
expenditures, and repayment of debt. However, due to decrease in rig count, we cannot be certain of
maintaining future revenues to provide operating cash and meet all cash requirements. Our capital
needs will depend on many factors, including our clients demands for our services, the amount of
revenue generated from operations and any future bank borrowings or equipment capital leases, none of
which can be predicted with certainty. As a result of these factors, we are unable to predict accurately
the amount or timing of our future capital needs, if any. We can make no assurances that our business
operations will provide us with sufficient cash flows to continue our operations. We may need to raise
additional capital through equity and debt financing for product development, acquisitions and for our
corporate general and administrative expenses. We cannot provide any assurance that any financing will
be available to us in the future on acceptable terms or at all. Any such financing could be dilutive to our
existing stockholders. If we cannot raise required funds on acceptable terms, we may not be able to,
among other things, (i) maintain our general and administrative expenses at current levels including
retention of key personnel and consultants; (ii) successfully develop our business; (iii) fund certain
24
obligations as they become due; and (iv) respond to competitive pressures or unanticipated capital
requirements.
A terrorist attack or armed conflict could harm our business.
Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or
other countries may adversely affect the United States and global economies and could prevent us from
meeting our financial and other obligations. If any of these events occur, the resulting political
instability and societal disruption could reduce overall demand for oil and natural gas, potentially
putting downward pressure on demand for our services and causing a reduction in our revenues. Oil and
natural gas related facilities could be direct targets of terrorist attacks, and our operations could be
adversely impacted if infrastructure integral to our customers' operations is destroyed or damaged. Costs
for insurance and other security may increase as a result of these threats, and some insurance coverage
may become more difficult to obtain, if available at all.
Materials and minerals used in our manufacturing process may become subject to laws and
regulations that may expose us to significant costs and liabilities.
The diamonds comprising the diamond cutting discs used in our operations are synthetic and
manufactured in the United States, South Africa and China. Neither those diamond cutters nor any other
minerals used in our operations are currently identified as “conflict minerals” in the Dodd-Frank Wall
Street Reform and Consumer Protection Act. However, we cannot predict or control if the United States
Secretary of State will or will not identify one of the minerals used in our manufacturing process as a
conflict mineral. Should the materials used in our manufacturing process be designated as a conflict
mineral, we will be required to file Form SD with the SEC and conduct the required diligence to
determine the source of the conflict mineral in connection with such disclosure. Any increased costs
and expenses associated with this could have a material adverse impact on our financial condition and
results of operations.
Our success will be affected by the use and protection of our proprietary technology. There are
limitations to our intellectual property rights in our proprietary technology, and thus our right to
exclude others from the use of such proprietary technology.
Our success will be affected by our development and implementation of new product designs
and improvements and by our ability to protect and maintain critical intellectual property assets related
to these developments. Although in many cases our products are not protected by any registered
intellectual property rights, in other cases we rely on a combination of patents and trade secret laws to
establish and protect this proprietary technology.
We currently hold multiple U.S. patents and have multiple pending patent applications for
products and processes in the U.S. and certain non-U.S. countries. Patent rights give the owner of a
patent the right to exclude third parties from making, using, selling, and offering for sale the inventions
claimed in the patents in the applicable country. Patent rights do not necessarily grant the owner of a
patent the right to practice the invention claimed in a patent, but merely the right to exclude others from
practicing the invention claimed in the patent. It may also be possible for a third party to design around
our patents. Furthermore, patent rights have strict territorial limits. Some of our work will be conducted
25
in international waters and may, therefore, not fall within the scope of any country's patent jurisdiction.
We may not be able to enforce our patents against infringement occurring in international waters and
other “non-covered” territories. Also, we do not have patents in every jurisdiction in which we conduct
business and our patent portfolio will not protect all aspects of our business and may relate to obsolete
or unusual methods, which would not prevent third parties from entering the same market.
In addition, by customarily entering into confidentiality and/or license agreements with our
employees, customers and potential customers and suppliers, we attempt to limit access to and
distribution of our technology. Our rights in our confidential information, trade secrets, and confidential
know-how will not prevent third parties from independently developing similar information. Publicly
available information (e.g. information in expired issued patents, published patent applications, and
scientific literature) can also be used by third parties to independently develop technology. We cannot
provide assurance that this independently developed technology will not be equivalent or superior to
our proprietary technology.
Our competitors may infringe upon, misappropriate, violate or challenge the validity or
enforceability of our intellectual property and we may not able to adequately protect or enforce our
intellectual property rights in the future.
Our businesses and our customers’ businesses are subject to environmental laws and regulations
that may increase our costs, limit the demand for our products and services or restrict our
operations.
Our operations and the operations of our customers are also subject to federal, state, local and
foreign laws and regulations relating to the protection of human health and the environment. These
environmental laws and regulations affect the products and services we design, market and sell, as well
as the facilities where we manufacture our products. For example, our operations are subject to
numerous and complex laws and regulations that, among other things, may regulate the management
and disposal of hazardous and non-hazardous wastes; require acquisition of environmental permits
related to our operations; restrict the types, quantities and concentrations of various materials that can
be released into the environment; limit or prohibit operation activities in certain ecologically sensitive
and other protected areas; regulate specific health and safety criteria addressing worker protection;
require compliance with operational and equipment standards; impose testing, reporting and record-
keeping requirements; and require remedial measures to mitigate pollution from former and ongoing
operations. We are required to invest financial and managerial resources to comply with such
environmental, health and safety laws and regulations and anticipate that we will continue to be
required to do so in the future. In addition, environmental laws and regulations could limit our
customers’ exploration and production activities. These laws and regulations change frequently, which
makes it impossible for us to predict their cost or impact on our future operations. For example,
legislation to regulate emissions of greenhouse gases has been introduced in the U.S. Congress, and
there has been a wide-ranging policy debate, both nationally and internationally, regarding the impact
of these gases and possible means for their regulation. In addition, efforts have been made and continue
to be made in the international community toward the adoption of international treaties or protocols that
would address global climate change issues, such as the annual United Nations Climate Change
Conferences. Also, the EPA has undertaken new efforts to collect information regarding greenhouse gas
emissions and their effects. Following a finding by the EPA that certain greenhouse gases represent a
26
danger to human health, the EPA has expanded its regulations relating to those emissions and has
adopted rules imposing permitting and reporting obligations. The results of the permitting and reporting
requirements could lead to further regulation of these greenhouse gases by the EPA. To date, there has
been no significant legislative progress in cap and trade proposals or greenhouse gas emission
reductions. The adoption of legislation or regulatory programs to reduce greenhouse gas emissions
could also increase the cost of consuming, and thereby reduce demand for, the hydrocarbons that our
customers produce. Consequently, such legislation or regulatory programs could have an adverse effect
on our financial condition and results of operations. It is too early to determine whether, or in what
form, further regulatory action regarding greenhouse gas emissions will be adopted or what specific
impact a new regulatory action might have on us or our customers. Generally, the anticipated regulatory
actions do not appear to affect us in any material respect that is different, or to any materially greater or
lesser extent, than other companies that are our competitors. However, our business and prospects could
be adversely affected to the extent laws are enacted or modified or other governmental action is taken
that prohibits or restricts our customers’ exploration and production activities or imposes environmental
protection requirements that result in increased costs to us or our customers.
Environmental laws may provide for “strict liability” for damages to natural resources or threats
to public health and safety, rendering a party liable for environmental damage without regard to
negligence or fault on the part of such party. Sanctions for noncompliance may include revocation of
permits, corrective action orders, administrative or civil penalties, and criminal prosecution. Some
environmental laws and regulations provide for joint and several strict liability for remediation of spills
and releases of hazardous substances. In addition, we may be subject to claims alleging personal injury
or property damage as a result of alleged exposure to hazardous substances, as well as damage to
natural resources. These laws and regulations also may expose us to liability for the conduct of or
conditions caused by others, or for our acts that were in compliance with all applicable laws and
regulations at the time such acts were performed. Any of these laws and regulations could result in
claims, fines or expenditures that could be material to results of operations, financial position and cash
flows.
Our failure to implement and comply with our safety program could adversely affect our
operating results or financial condition.
Our safety program is a fundamental element of our overall approach to risk management, and
the implementation of the safety program is a significant issue in our dealings with our clients. Unsafe
job sites and office environments have the potential to increase employee turnover, increase the cost of
a project to our clients, expose us to types and levels of risk that are fundamentally unacceptable, and
raise our operating costs. The implementation of our safety processes and procedures are monitored by
various agencies and rating bureaus, and may be evaluated by certain clients in cases in which safety
requirements have been established in our contracts. If we fail to comply with safety regulations or
maintain an acceptable level of safety at our facilities we may incur fines, penalties or other liabilities,
or may be held criminally liable. We may incur additional costs to upgrade equipment or conduct
additional training, or otherwise incur costs in connection with compliance with safety regulations.
Failure to maintain safe operations or achieve certain safety performance metrics could disqualify us
from doing business with certain customers, particularly major oil companies.
27
Our products are used in operations that are subject to potential hazards inherent in the oil and
gas industry and, as a result, we are exposed to potential liabilities that may affect our financial
condition and reputation.
Our products are used in potentially hazardous drilling, completion and production applications
in the oil and gas industry where an accident or a failure of a product can potentially have catastrophic
consequences. Risks inherent to these applications, such as equipment malfunctions and failures,
equipment misuse and defects, explosions, blowouts and uncontrollable flows of oil, natural gas or well
fluids and natural disasters, on land or in deep water or shallow-water environments, can cause personal
injury, loss of life, suspension of operations, damage to formations, damage to facilities, business
interruption and damage to or destruction of property, surface water and drinking water resources,
equipment and the environment. In addition, we provide certain services that could cause, contribute to
or be implicated in these events. If our products or services fail to meet specifications or are involved in
accidents or failures, we could face warranty, contract or other litigation claims, which could expose us
to substantial liability for personal injury, wrongful death, property damage, loss of oil and gas
production, and pollution and other environmental damages. Our insurance policies may not be
adequate to cover all liabilities. Further, insurance may not be generally available in the future or, if
available, insurance premiums may make such insurance commercially unjustifiable. Moreover, even if
we are successful in defending a claim, it could be time-consuming and costly to defend.
In addition, the frequency and severity of such incidents could affect operating costs,
insurability and relationships with customers, employees and regulators. In particular, our customers
may elect not to purchase our products or services if they view our safety record as unacceptable, which
could cause us to lose customers and substantial revenues. In addition, these risks may be greater for us
because we may acquire companies that have not allocated significant resources and management focus
to quality, or safety requiring rehabilitative efforts during the integration process. We may incur
liabilities for losses associated with these newly acquired companies before we are able to rehabilitate
such companies' quality, safety and environmental programs.
Our information systems may experience an interruption or breach in security.
We rely on our proprietary production management technology, changing how users connect to
knowledge (“CHUCK”) and on other information technology (“IT”) systems to conduct our business.
Despite our security and back-up measures, our IT systems are vulnerable to computer viruses, natural
disasters and other disruptions or failures. The failure of our IT systems to perform as anticipated for any
reason or any significant breach of security could disrupt our business and result in numerous adverse
consequences, including reduced effectiveness and efficiency of our operations and those of our
customers, inappropriate disclosure of confidential information, increased overhead costs, loss of
intellectual property and damage to our reputation, which could have a material adverse effect on our
business and results of operations. In addition, we may be required to incur significant costs to prevent
or respond to damage caused by these disruptions or security breaches in the future.
28
Our related party transactions with the Meiers and their affiliated entities may cause conflicts of
interests that may adversely affect us.
We have entered into, and may, in the future, enter into various transactions and agreements with
the Meiers and their affiliated entities. We believe that the transactions and agreements that we have
entered into with the Meiers are on terms that are at least as favorable as could reasonably have been
obtained at such time from third parties. However, these relationships could create, or appear to create,
potential conflicts of interest when our board of directors is faced with decisions that could have
different implications for us and the Meiers or their affiliates. The appearance of conflicts, even if such
conflicts do not materialize, might adversely affect the public’s perception of us, as well as our
relationship with other companies and our ability to enter into new relationships in the future, which
may have a material adverse effect on our ability to do business.
Risks Relating to Our Common Stock
As a smaller reporting company, we are subject to scaled disclosure requirements that may make
it more challenging for investors to analyze our results of operations and financial prospects.
Currently, we are a “smaller reporting company,” meaning that our outstanding common stock
held by non-affiliates had a value of less than $75 million at the time of filing of our registration
statement. As a “smaller reporting company,” we are able to provide simplified executive compensation
disclosures in our filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act
requiring that independent registered public accounting firms provide an attestation report on the
effectiveness of internal control over financial reporting; and have certain other decreased disclosure
obligations in our SEC filings, including, being required to provide only two years of audited financial
statements in annual reports. Consequently, it may be more challenging for investors to analyze our
results of operations and financial prospects.
We are an emerging growth company, and any decision on our part to comply only with certain
reduced reporting and disclosure requirements applicable to emerging growth companies could
make our common stock less attractive to investors.
We are an emerging growth company, and, for as long as we continue to be an emerging growth
company, we may choose to take advantage of exemptions from various reporting requirements
applicable to other public companies but not to “emerging growth companies,” including, but not
limited to, not being required to have our independent registered public accounting firm audit our
internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements,
and exemptions from the requirements of holding a nonbinding advisory vote on executive
compensation and shareholder approval of any golden parachute payments not previously approved.
We could be an emerging growth company for up to five years following the completion of our initial
public offering in May 2014. We will cease to be an emerging growth company upon the earliest of: (a)
the end of the fiscal year following the fifth anniversary of our initial public offering, (b) the first fiscal
year after our annual gross revenue exceed $1.0 billion, (c) the date on which we have, during the
previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (d) the
end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded
29
$700 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will
find our common stock less attractive if we choose to rely on these exemptions. If some investors find
our common stock less attractive as a result of any choices to reduce future disclosure, there may be a
less active trading market for our common stock and the price of our common stock may be more
volatile.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised
accounting standards until such time as those standards apply to private companies. However, we have
elected to adopt new or revised accounting standards at such times as applicable to other non-emerging
grown public companies.
Furthermore, a material weakness in internal controls may remain undetected for a longer period
because of our extended exemption from the auditor attestation requirements under Section 404(b) of
Sarbanes-Oxley.
As long as we are controlled by the Meiers, the ability of our stockholders to influence the outcome
of matters will be limited.
The Meiers continue to own 51% of our outstanding common stock and serve on our Board of Directors.
As long as they have voting control of our company, SDPI will have the ability to take many
stockholder actions, including the election or removal of directors, irrespective of the vote of, and
without prior notice to, any other stockholder. As a result, the Meiers will have the ability to influence or
control all matters affecting us, including:
•
the composition of our board of directors and, through our board of directors, decision-making
with respect to our business direction and policies, including the appointment and removal of our
officers;
• any determinations with respect to acquisitions of businesses, mergers or other business
combinations and change of control transactions;
• our acquisition or disposition of assets; and
• our capital structure.
The market price of our common stock may be volatile.
The trading price of our common stock and the price at which we may sell common stock in the
future are subject to large fluctuations in response to any of the following:
• limited trading volume in our common stock;
• quarterly variations in operating results;
• general financial market conditions;
• the prices of natural gas and oil;
• announcements by us and our competitors;
30
• our liquidity;
• changes in government regulations;
• our ability to raise additional funds;
• our involvement in litigation; and
• other events.
We do not anticipate paying dividends on our common stock in the near future.
We have not paid any dividends in the past and do not intend to pay cash dividends on our common
stock in the foreseeable future. We currently intend to retain any earnings for the future operation and
development of our business. In addition, under Utah law no distribution may be made if, after giving it
effect: (a) we would be unable to pay our debts as they come due, or (b) our total assets would be less
than our total liabilities. We can provide no assurance that those restrictions will not prevent us from
paying a dividend in future periods.
We may issue preferred stock whose terms could adversely affect the voting power or value of our
common stock.
Our articles of incorporation authorizes us to issue, without the approval of our shareholders,
one or more classes or series of preferred stock having such designations, preferences, limitations and
relative rights, including preferences over our common stock respecting dividends and distributions, as
our board of directors may determine. The terms of one or more classes or series of preferred stock
could adversely impact the voting power or value of our common stock. For example, we might grant
holders of preferred stock the right to elect some number of our directors in all events or on the
happening of specified events or the right to veto specified transactions. Similarly, the repurchase or
redemption rights or liquidation preferences we might assign to holders of preferred stock could affect
the residual value of the common stock.
Certain provisions in our organizational documents could delay or prevent a change in control.
The existence of some provisions in our organizational documents could delay or prevent a
change in control of our company, even if that change would be beneficial to our shareholders. Our
articles of incorporation and bylaws contain provisions that may make acquiring control of our
company difficult, including:
•
•
•
provisions regulating the ability of our shareholders to nominate directors for election or
to bring matters for action at annual meetings of our shareholders;
limitations on the ability of our shareholders to call a special meeting and act by written
consent; and
the authorization given to our board of directors to issue and set the terms of preferred
stock.
31
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
ITEM 2.
PROPERTIES
The Company owns four buildings as part of its Vernal offices, which are used for
manufacturing and executive offices. The Company’s management believes its current manufacturing
and office facility is sufficient for its current operations.
ITEM 3.
LEGAL PROCEEDINGS
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 Energy Corporation (“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 (SDS) and Meier Property
Series, LLC (MPS). 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 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 December 31, 2014, there have
been no updates or decisions made concerning this matter.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
32
PART II
ITEM 5.
FOR REGISTRANT’S COMMON
MARKET
EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
PRICE RANGE OF COMMON STOCK
The Company’s common stock trades on the NYSE MKT market under the symbol
“SDPI”. The following table sets forth the high and low sale prices of our common stock as quoted on
the NYSE MKT.
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
HIGH
LOW
$
N/A * $
6.82
7.32
6.04
N/A *
4.49
5.70
3.55
*The Company was not public until May 29, 2014
Approximate Number of Equity Security Holders
As of March 20, 2015 there were 20 stockholders of record and 922 beneficial owners of the
Company’s common stock.
Dividends
The Company does not presently pay dividends on its common stock. The Company intends for
the foreseeable future to continue the policy of not paying dividends and retaining earnings, if any, to
finance the development and growth of its business.
Securities Authorized for Issuance under Equity Compensation Plans
Plan Category
Equity compensation plans approved by security
Equity Compensation Plan Information
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
holders (1) ........................................................................
131,250 (2)
4.81
___1,592,878 (2)
Equity compensation plans not approved by security
holders ..............................................................................
Total as of December 31, 2014 ...........................................
_________________
(1) Consists of the 2014 Employee Stock Incentive Plan.
(2) Of the total 1,724,128 shares under the Plan, 131,250 shares of commons stock were outstanding at December 31, 2014
-
__131,250__
-
—
1,592,878___
33
See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters” for information regarding our equity compensation plans as of December 31,
2014.
Recent Sales of Unregistered Securities
On May 22, 2014, the Company issued 5,641,510 shares of its restricted common stock to Meier
Family Holding Company, LLC and 3,173,350 shares of its restricted common stock to Meier
Management Company, LLC
On May 29, 2014 the Company converted debt of $2,000,000 in exchange for 714,286 shares of
the Company’s restricted common stock and 714,286 warrants at a conversion price of $4.00.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Outlook
During the latter half of 2014, oil prices dramatically declined in the United States and as a
result, the number of operating drill rigs began to be reduced. Our business is highly dependent upon
the vibrancy of the oil & gas drilling operations in the U.S. While during the last several months of the
year, we were able to continue to gain market share with our Drill N Ream tool, we began to see
pressure from customers on pricing. For 2015, we expect this pressure to be sustained until the pricing
of oil stabilizes around the world, providing greater certainty for our customers and their capital
investment plans. The impact of pricing on our drill bit refurbishment business is especially pronounced
as our exclusive customer for that business is a leading supplier of drill bits to the oil & gas exploration
and production industry globally. We believe the value of our Drill N Ream and the new tools we are
introducing in 2015, as well as our low market penetration, provide us opportunity to grow sales despite
market conditions. Our goal is for these tools sales growth to help offset the decline we anticipate in our
PDC drill bit refurbishment business.
We are currently in the process of financing a new manufacturing tool machine in the amount of
$1.1 million, which we purchased during December 2014. Also, we are completing the renewal of a $5
million loan extending the term from August 2015 to 2018. The notes to be renewed are outstanding
with American Bank of the North and relate to the note on our corporate offices and manufacturing
facilities. During the first quarter of 2015 we have implemented a reduction in staffing and other cost
saving measures. We will continue to monitor the developing oil and gas market and evaluate the need
for further cost cutting measures.
Management believes that through current and planned operations the Company should be able
to meet all of its debt payment and operating requirements during 2015. In the event we are not able to
meet these obligations, we may need to raise additional capital through equity and debt financings to
34
support our operations and for our corporate general and administrative expenses. Although as a public
company we have access to the public markets for capital raises, we cannot provide any assurances that
financing will be available to us in the future on acceptable terms or at all. If we cannot raise required
funds on acceptable terms, we may not be able to, among other things, (i) maintain our general and
administrative expenses level; (ii) fund certain obligations as they become due; (iii) further refinance
debt to better meet our cash flow requirements; and (iv) respond to competitive pressures or
unanticipated capital requirements.
RESULTS OF OPERATIONS
The following table represents our condensed consolidated statement of operations for the periods
indicated:
(in thousands)
Revenue
For the Years Ended December 31,
2014
2013
$20,037 100 % $ 11,923 100 %
Operating costs and expenses
18,359 92 %
8,231 69 %
Income from continuing operations
1,678
8 %
3,692 31 %
Other income (expense)
(1,825) (9) %
(24) (0) %
Income tax expense (benefit)
474
2 %
-
- %
Net income (loss)
$
(621) (3) % $ 3,668 31 %
Material changes of certain items in our statements of operations included in our financial
statements for the comparative periods are discussed below.
Revenue. Our revenue increased approximately $8.1 million, during the twelve months ended
December 31, 2014 compared with the same period in 2013. Manufacturing and refurbishment revenue
increased by approximately $3.2 million due to an overall increase in U.S. land drilling activity in 2014
versus 2013 and specific customer demand. The Company received Drill N Ream royalties, rental and
repair of $6.6 million during 2014, including $0.4 million of tool repairs and sales. During 2013, Drill-
N-Ream royalty was $1.7 million. The $4.9 million increase in revenue associated with the Drill N
Ream was due to the Hard Rock Acquisition and replaced royalty revenue with rental tool revenue. For
the twelve months ended December 31, 2014, Drill N Ream rental tool revenue was approximately $5.7
million.
Operating Costs and Expenses. Total operating costs and expenses increased approximately
$10.1 million during the twelve months ended December 31, 2014 compared with the same period in
2013.
Cost of revenue increased approximately $2.2 million for the twelve months ended December
31, 2014 in comparison with the same period in 2013. This increase reflects the development of the
35
rental tool field sales and distribution infrastructure and the increase in costs associated with the revenue
growth of the refurbishment and manufacturing businesses.
Selling, general and administrative expenses (“SG&A”) increased approximately $5.9 million for
the twelve months ended December 31, 2014 compared with the same period in 2013. The increase was
due primarily to additional personnel related costs required to support our organic growth combined
with the growth of our rental tool business. Payroll and related costs increased by approximately $2.2
million, which was primarily due to new hires of engineering, sales, marketing and administrative
employees as well as an overall increase in salaries. Also, professional fees increased by approximately
$1.3 million due to an increase in legal, audit, accounting and consulting fees associated with the
process of becoming and maintaining a public company.
Depreciation and amortization expense increased approximately $2 million primarily attributable
to the additional Hard Rock assets.
Other Income (Expenses). Other income and expense primarily consists of rent income, interest
income and interest expense. We receive rent from three real property leases: one building on our
Vernal campus, the second for lease of the Superior Auto Body (“SAB”) facilities by a related party, and
the third for property in Bakersfield, CA. For the twelve months ended December 31, 2014, rent income
decreased by approximately $0.09 million as compared with twelve months ended December 31, 2013.
This is primarily due to the sale of our Bakersfield facility in 2014. Interest income for the twelve
months ended December 31, 2014 and December 31, 2013 was approximately $0.2 and $0, respectively,
which increase was mainly due to interest received from the Tronco loan (see Notes 8 and 9 to our to the
consolidated financial statements in Item 8). The interest expense for the twelve months ended
December 31, 2014 and December 30, 2013 was approximately $2.3 and $0.8, respectively, reflecting
higher debt levels in 2014 from the Hard Rock Acquisition.
Components of Income and Expense
Operating Revenue. We generate revenue from the refurbishment, manufacturing, repair and
rentals of drill string tools. As noted earlier, prior to the acquisition of Hard Rock and the Drill N Ream
tool on May 29, 2014, we received revenue from HRSI’s for the manufacturing of the tool and royalties
based on HRSI’s rental income.
Manufacturing. Our manufactured products are produced in a standard manufacturing
operation, even when produced to our customer’s specifications.
• Drill Bits. Since 1996, we have refurbished PDC drill bits for Baker Hughes. We are currently
operating under a four-year vendor agreement with Baker Hughes (the “Vendor Agreement”),
which expires 2017. In addition, we have a right of first refusal to provide remanufacturing
services to all of Baker Hughes operations in the western United States, except Texas and
Oklahoma, and agree not to perform drill bit remanufacturing services for any other party in the
oil, gas, water and geothermal drilling industries. Baker Hughes agrees to provide us with all the
PDC diamond cutters needed to remanufacture their drill bits, and they retain a security interest
in all of those PDC cutters. The Vendor Agreement also grants Baker Hughes the right, for up to
60 days after termination of the Vendor Agreement, to purchase our Vernal manufacturing
36
facility and the remanufacturing machinery located in our remanufacturing facility, for a to-be-
determined fair market value, and subject to certain other requirements and conditions. The
Vendor Agreement also include a non-competition provision that precludes us from performing
remanufacturing or other services relating to PDC drill bits used in the oil, gas, water and
geothermal drilling industries, except to the extent that we were already conducting a line of
business before the customer entered into that line of business. We recognize revenue for our
PDC drill bit services at the time that the services are rendered, typically upon shipment of the
drill bit. We also design and manufacture new PDC drill bits for Baker Hughes on an ongoing
purchase order basis. Baker Hughes pays an approximate prevailing market rate for these new
bits. 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.
• Drill N Ream Units. Prior to the acquisition of HR, HRSI would place orders for Drill N Ream
units with us upon receiving a customer request, and we would sell the ordered Drill N Ream
units to HRSI at prevailing market prices. In addition, HRSI would pay us royalties equal to
25% of their tool rental revenue, less certain HRSI operating expenses. These royalty revenues
are included in the first five months of revenue for 2014. Upon our acquisition of Hard Rock,
this arrangement ceased. We now incur the entire cost of manufacturing the Drill N Ream units,
however, we also own those Drill N Ream units, and collect 100% of the total rental income paid
by customers under existing and future Drill N Ream rental service agreements.
• Other Machined Tools. We also design and manufacture other new tools and component parts
for other oil and gas industry participants from time to time. We recognize revenue for the
manufacture of other machined tools and parts upon their shipment to the customer. Shipping
and handling costs related to product sales are recorded gross as a component of both the sales
price and cost of the product sold.
Rental Tools. We provide rental tool services for our customers. We currently have the Drill N
Ream tool available for rent to our customers. Rental includes delivery to customers’ drill rig operations
and replacement of tools when in need of repair. See also “— Critical Accounting Policies and
Estimates — Revenue Recognition.”
Cost of revenue. We expense direct costs of production when incurred. Direct costs for
manufacturing and refurbishment consist primarily of labor, materials and cutting tools. Also, included
in the production costs are manufacturing and refurbishment overhead costs. In addition we include the
field sales and distribution infrastructure cost associated with our rental tool business.
Selling, general and administrative expenses. Included within this category are our new
product development expenses specifically related to our research and engineering activities. We
expense all expenses under this category when incurred. Generally these expenses include the payroll
costs of administrative support staff, upper management, engineering personnel and corporate sales and
marketing personnel, including payroll taxes and employee benefits. Also included are expenses
pertaining to professional services, legal and accounting fees and administrative operating costs
including those expenses necessary to maintain our status as a NYSE MKT company.
37
Factors Affecting Comparability
We believe that the following selected factors can be expected to have a significant effect on the
comparability of our recent or future results of operations:
Reorganization.
In connection with the closing of the Offering in May 2014, we completed the Reorganization in
which we acquired all of the limited liability company membership interests of SDS, SDF, ET, MPS, ,
and ML and, as a result, became the holding company under which those subsidiaries conduct
operations. Each of the subsidiaries is considered to be a historical accounting predecessor for financial
statement reporting purposes.
Hard Rock Acquisition.
In May 2014, we purchased 100% of the limited liability company membership interests of HR
(the “Hard Rock Acquisition”), HRSI’s subsidiary, pursuant to a membership interest purchase
agreement with HRSI. HRSI began operations in 2001 and has been marketing and renting the Drill N
Ream tool since 2011. The HR purchase price was $25 million, consisting of $12.5 million in cash at
closing, and a seller-carried promissory note for $12.5 million (the “HR Note”). The HR Note accrues
interest at the JP Morgan Chase Bank, N.A. annual prime rate. Under the terms of the HR Note, we will
pay annual principal installments of $5 million plus interest on each anniversary date of May 30, 2015
and 2016. One final payment of $2.5 million plus interest will be paid on May 30, 2017. The HR Note
is secured by all of the patents, patents pending, other patent rights, and trademarks to be owned by HR
after our acquisition of HR. After the acquisition, HR continues to conduct its operations as our wholly-
owned subsidiary.
Public Company Expenses.
Upon consummation of the Offering, we became a public company. Our common stock is listed
on the NYSE MKT. As a result, we must comply with laws, regulations, and requirements that we did
not need to comply with as a private company, including certain provisions of the Sarbanes-Oxley Act
and related SEC regulations, and we also must comply with the requirements of NYSE MKT.
Compliance with the requirements of being a public company will increase our operating expenses in
order to pay our employees, legal counsel, and accountants to assist us in, among other things, external
reporting, instituting, and monitoring a more comprehensive compliance and board governance function,
establishing and maintaining internal control over financial reporting in accordance with Section 404 of
the Sarbanes-Oxley Act, and preparing and distributing periodic public reports in compliance with our
obligations under the federal securities laws. In addition, being a public company makes it more
expensive for us to obtain director and officer liability insurance. We estimate that incremental annual
public company costs will be between $0.5 million and $1 million.
Liquidity and Capital Resources
At December 31, 2014, we had negative working capital of approximately $2.5 million, which is
mainly due to $10.9 million current portion of our debt. This amount includes the $5 million of
38
principal on the HR Note and two notes that are due within the next 12 months of approximately $5
million, which are currently in the process of completing a renewal extending the term from August
2015 to 2018. The notes to be renewed are outstanding with American Bank of the North and relate to
the note on our corporate offices and manufacturing facilities. Once these two notes are refinanced, it is
expected to change our negative working capital from $2.5 million to a positive working capital of
approximately $2.5 million. As of December 31, 2014, we had current assets of approximately $11.9
consisting of cash, account receivable, inventory, deferred tax asset and other current assets, and current
liabilities of approximately $14.4 consisting of accounts payable, accrued expenses, income tax payable,
amounts payable to our founders, current deferred tax liability, current portion of capital lease
obligation, and current long term debt obligation. As of December 31, 2014, we had cash of
approximately $5.8 million.
During 2014 our principal sources of liquidity were cash flow from operations and proceeds from
the Offering. Our principal uses of cash are operating expenses, working capital requirements, and
capital expenditures, repayment of debt and research and development for the Strider tool. We believe
that our sources of liquidity, including cash flow from operations, existing cash, and cash equivalents
and renegotiation of certain debt obligations will be sufficient to meet our projected cash requirements
for at least the next 12 months.
Superior Auto Body
During 2014, the Company decided to divest itself of Superior Auto Body and has begun the
process, which should be completed in 2015.
Contractual Obligations
The following table presents our contractual obligations as of December 31, 2014. Our
obligations to make payments in the future may vary due to certain assumptions including the duration
of our obligations and anticipated actions by third parties according to the following table (in
thousands):
2015
2016
2017
2018
2019
Thereafter
Total
Debt (1)
Capital Lease (1)
Operating Leases
$ 10,942
$ 5,954
$ 5,143
$ 329
$ 314
$ 1,145
$ 23,828
386
547
386
220
257
159
-
-
140
139
-
76
1,031
1,282
Total
$11,875
$6,560
$5,559
$469
$453
$1,221
$ 26,141
(1) Amounts represent the expected cash payments of principal amounts associated with our long-term debt and capital lease
obligations.
The aggregate outstanding balance of our notes payable as of December 31, 2014 was
approximately $23.8 million with interest rates ranging from 0% to 8.4%.
39
Cash Flow
Operating Cash Flows
For the year ended December 31, 2014, net cash provided by our operating activities was
approximately $4.3 million. The Company had approximately $0.6 million of net loss, approximately
$1.4 million increase in accounts receivable, an increase in accounts payable and accrued expenses of
approximately $2.1 million and depreciation and amortization expense of approximately $3.2 million.
Investing Cash Flows
For the year ended December 31, 2014, net cash used in our investing activities was
approximately $22.9 million, of which approximately $12.5 million was used for the HR Acquisition,
and approximately $8.3 million for the purchase of the Tronco note receivable and approximately $3.7
million was used for property, plant and equipment purchases.
Financing Cash Flows
For the year ended December 31, 2014, net cash provided by our financing activities was
approximately $24.3 million, primarily attributable to gross proceeds from the Offering, which was
$31.1 million. Costs of the Offering were approximately $3.6 million and cash used for financing
activities was for payments on long-term debt and long-term capital lease obligations of approximately
$3.7 million.
Off Balance Sheet Arrangements
None
Critical Accounting Policies
The discussion of our financial condition and results of operations is based upon our
consolidated financial statements, which have been prepared in accordance with GAAP. During the
preparation of these 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 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 financial statements.
Our estimates and assumptions are evaluated periodically and adjusted when necessary. The more
significant estimates affecting amounts reported in our consolidated financial statements include, but are
not limited to: revenue recognition, determining the allowance for doubtful accounts, valuation of
inventory, and recoverability of long-lived assets, useful lives used in calculating depreciation and
amortization, note receivable - Tronco Loan Guaranty, and accounting for the HR Acquisition.
40
Revenue Recognition.
Refurbishing — Refurbishing services are performed in our facilities for Baker Hughes under the
Vendor Agreement. Under the Vendor Agreement, revenue is determined based on a standard hourly
rate to complete the work. Revenue for refurbishing services is recognized as the services are rendered
and upon shipment to the customer. Shipping and handling costs related to refurbishing services are paid
directly by Baker Hughes at the time of shipment.
Manufacturing — Revenue from manufactured products are sold at prevailing market rates. We
recognize revenue for these products upon customer pickup, which is when title passes, when
collectability is reasonably assured and when there are no further significant obligations for future
performance. Typically this is at the time of customer acceptance. Shipping and handling costs related to
product sales are recorded as a component of both the sales price and cost of the product sold.
Rental income — HR operates as a rental tool company to oil and natural gas companies.
While the duration of the rents vary by job and number of runs, these rents are generally less than one
month. The rental agreements do not have any minimum rental payments or term. Revenue is
recognized upon completion of the job. The tools are rented to entities operating in North Dakota,
Wyoming, Texas, Montana, Oklahoma, Utah, New Mexico and Colorado.
Accounts Receivable; 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. As of December 31, 2014 and 2013, management determined that no allowance for doubtful
accounts was deemed necessary due to our expectation that the Company will collect all amounts owed.
Valuation of Inventory — 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
41
Property, Plant and Equipment — Property and equipment are 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
Machinery, equipment and rental
tools
Furniture and fixtures
Transportation equipment
Computer equipment and software
2-39 years
18 months -
10 years
7 years
5 - 30 years
3-5 years
Property and equipment are 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.
During the fourth quarter of 2014, the Company determined that the estimated life of its Drill-N-
Tool is eighteen months compared with the original nine months, based on recent historical
experience.
Goodwill and Related Intangible Assets — Goodwill is the excess cost of an acquired entity over
the amounts assigned to assets acquired and liabilities assumed in a business combination. We did not
recognize any goodwill as the result of the Reorganization. To determine the amount of goodwill
resulting from the HR Acquisition, we hired an outside third party to perform an assessment to
determine the fair value of Hard Rock’s tangible and intangible assets and liabilities and goodwill was
allocated to be $7,095,000.
The Company reviewed the value of goodwill as of December 31, 2014 and determined no
impairment was needed. The same procedure will be followed for any future acquisitions. Annually,
and more often as necessary, we will perform an evaluation of our intangible assets and goodwill for
indications of impairment. If indications exist, we will perform an assessment of the fair value of the
intangible assets and the goodwill and if necessary, record an impairment charge. Future impairment
tests could result in impairment of our Goodwill and related Intangible Assets.
42
Note Receivable - Tronco — See the discussion of the Tronco note receivable in Note 9 to our
consolidated financial statements included in Item 8.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
We do not maintain any derivative instruments such as interest rate swap arrangements, hedging
contracts, futures contracts or the like. Our only indebtedness as of December 31, 2014 that is subject to
fluctuating interest rates is the Hard Rock Note. A 1% change in the interest rate would yield an
additional $95,000 of interest expense. See Note 7 to our consolidated financial statements included in
Item 8.
Concentration of Credit Risk — In the past, we were dependent on just a few main customers,
however, we believe that our purchase of Hard Rock and our development of new products has
broadened our customer base, which will have a positive effect on diversifying our concentration of
credit risk in the future.
43
ITEM 8.
FINANCIAL STATEMENTS
SUPERIOR DRILLING PRODUCTS, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Page
45
Consolidated Balance Sheets – December 31, 2014 and 2013
46
Consolidated Statements of Operations – for the Years Ended December
31, 2014 and 2013
Consolidated Statements of Shareholders’ Equity – for the Years Ended
December 31, 2014 and 2013
Consolidated Statements of Cash Flows – for the Years Ended December
31, 2014 and 2013
47
48
49
Notes to Consolidated Financial Statements
51-70
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders
Superior Drilling Products, Inc.
We have audited the accompanying consolidated balance sheets of Superior Drilling Products, Inc. and
subsidiaries (collectively, the “Company”) as of December 31, 2014 and 2013, and the related consolidated
statements of operations, shareholders’ equity, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Superior Drilling Products, Inc. and subsidiaries as of December 31, 2014 and 2013, and the
results of their operations and their cash flows for the years then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ Hein & Associates LLP
Dallas, Texas
March 30, 2015
45
SUPERIOR DRILLING PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
FOR THE YEARS ENDED DECEMBER 31,
ASSETS
2014
2013
Current assets
Cash
Accounts receivable
Prepaid expenses
Inventory
Deferred tax asset
Other current assets
Total current assets
Property, plant and equipment, net
Real estate investments
Intangible assets, net
Goodwill
Note receivable
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable
Accrued expenses
Income tax payable
Current portion of capital lease obligation
Current portion of related party debt
Current portion of guaranteed debt obligation
Current portion of long-term debt
Total current liabilities
Deferred tax liability
Capital lease obligation, less current portion
Related party debt, less current portion
Long-term debt, less current portion
Total liabilities
Commitments and contingencies – see Note 10
Stockholders' equity
Common stock - $0.001 par value; 100,000,000 shares
authorized; 17,291,646 and 1,000 shares outstanding,
respectively
Additional paid-in-capital
Stock subscription receivable
Retained deficit
Total stockholders' equity
$ 5,792,388
4,403,001
163,934
1,219,079
271,298
45,000
11,894,700
15,963,629
-
13,472,778
7,802,903
8,296,717
112,606
$ 11,256
2,978,666
182,530
96,028
-
61,038
3,329,518
15,048,871
2,187,926
-
-
-
194,935
$ 57,543,333
$ 20,761,250
$ 893,376
1,967,091
1,000
292,979
492,452
-
10,720,243
14,367,141
744,577
578,273
1,117,820
10,669,311
27,477,122
$ 445,947
277,579
-
258,235
-
4,395,637
3,316,578
8,693,976
-
871,252
-
10,939,216
20,504,444
17,292
1
30,815,609
-
(766,690)
30,066,211
256,806
(1)
-
256,806
Total liabilities and stockholders' equity
$ 57,543,333
$ 20,761,250
The accompanying notes are an integral part of these consolidated financial statements.
46
SUPERIOR DRILLING PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
2014
2013
Revenue
$ 20,036,895
$ 11,922,969
Operating cost and expenses
Cost of revenue
Selling, general, and administrative expenses
Depreciation and amortization expense
7,015,722
4,855,043
8,103,166
2,168,350
3,240,445
1,207,288
Total operating costs and expenses
18,359,333
8,230,681
Operating income
1,677,562
3,692,288
Other income (expense)
Interest income
Interest expense
Other income
Gain (loss) on sale of PP&E
Change in guaranteed debt
Total other income (expense)
173,315
-
(2,279,597)
(786,140)
380,723
474,312
(53,287)
(54,205)
(45,834)
341,895
(1,824,680)
(24,138)
Income (loss) before income taxes
Income tax expense (benefit)
(147,118)
3,668,150
474,279
-
Net income (loss)
$ (621,397)
$ 3,668,150
Basic earnings per common share
$ (0.04)
N/A *
Basic Weighted Average Common Shares Outstanding
13,831,259
-
Diluted earnings Per Common Share
$ (0.04)
N/A *
Diluted Weighted Average Common Shares Outstanding
13,831,259
-
*
Information is not comparable for the years ending December 31, 2013 as a result of the Reorganization of the
Company on May 22, 2014.
The accompanying notes are an integral part of these consolidated financial statements.
47
SUPERIOR DRILLING PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Common Stock
Shares
Par
Value
Additional
Paid-in
Capital
Stock
Total
Retained
Subscription
Stockholders
Deficit
Receivable
Equity
Balance - January 1, 2013
Contributions
Distributions
Earnings prior to reorganization
Stock issued to founders as part
of organization of Corporation
0
-
-
-
$ -
$ (1,382,065)
$ -
$ -
$ (1,382,065)
-
-
-
2,278,629
(4,307,908)
3,668,150
-
-
-
-
-
-
2,278,629
(4,307,908)
3,668,150
1,000
1
-
-
(1)
-
Balance - December 31, 2013
1,000
$ 1
$ 256,806
$ -
$ (1)
$ 256,806
Stock issued to founders as
part of reorganization
Sale of common stock
Offering costs paid out of
proceeds
Tronco guarantee release
Stock and warrants issued for
debt conversion
Non-cash contributions
Payable to founders
Distributions paid to founders
prior to reorganization
Real estate and related debt
not included in reorganization
Earnings prior to
reorganization
Stock issued for services
Net income after
reorganization
8,813,860
8,814
(8,815)
-
1
-
7,762,500
7,763
31,042,237
-
-
31,050,000
-
-
(3,578,865)
-
-
(3,578,865)
-
-
4,449,626
-
-
4,449,626
714,286
714
2,248,927
-
-
2,249,641
-
-
-
-
639,401
(2,000,000)
-
-
-
-
639,401
(2,000,000)
-
-
(1,976,283)
-
-
(1,976,283)
-
-
(447,208)
-
-
(447,208)
-
-
145,294
-
-
145,294
-
-
44,490
-
-
44,490
-
-
-
(766,690)
-
(766,690)
Balance - December 31, 2014
17,291,646
$ 17,292
$ 30,815,609
$ (766,690)
$ -
$ 30,066,211
The accompanying notes are an integral part of these consolidated financial statements.
48
SUPERIOR DRILLING PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Cash Flows From Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net
cash provided in operating activities:
Depreciation and amortization expense
Amortization of debt discount
Deferred tax benefit
Common stock issued for services
Change in guaranteed debt
Loss on disposition of assets
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and other current assets
Other assets
Accounts payable and accrued expenses
Other liabilities
Net Cash Provided by Operating Activities
Cash Flows From Investing Activities
Purchases of property, plant and equipment
Proceeds from sale of fixed assets
Note receivable to Tronco
Purchase of Hard Rock assets
Net Cash Used in Investing Activities
Cash Flows From Financing Activities
Principal payments on debt
Principal payments on capital lease obligations
Proceeds received from borrowings on debt
Proceeds received from issuance of common stock
Principal payments on long-term debt–related party
Initial Public Offering costs
Capital contributions
Capital distributions
Net Cash Provided (Used) in Financing Activities
Net Increase (decrease) in Cash
Cash at Beginning of Period
Cash at End of Period
Supplemental information:
Cash paid for Interest
Non-cash PP&E additions
49
2014
2013
$ (621,397)
$ 3,668,150
3,240,445
767,975
473,279
44,490
45,837
53,287
(1,424,335)
(483,651)
43,634
90,481
2,137,939
-
4,367,984
1,102,905
-
-
-
(341,895)
54,205
(1,824,172)
-
(80,849)
(78,168)
296,962
-
2,797,138
(3,730,882)
1,648,075
(8,296,717)
(12,500,000)
(22,879,524)
(196,547)
28,141
-
-
(168,406)
(3,527,830)
(258,234)
2,000,000
31,050,000
-
(3,578,865)
(1,392,399)
24,292,672
(607,484)
(228,101)
231,125
-
(53,925)
-
2,278,629
(4,307,908)
(2,687,664)
5,781,132
11,256
$ 5,792,388
(58,932)
70,188
$ 11,256
$ 1,837,407
$ -
$ 771,040
$ 775,541
Non-cash refinancing of lease to debt
Stock issued to founders upon reorganization (see
Note 2)
Conversion of bridge loan for stock and warrants
(see Note 2)
Non-cash contributions of inventory by Meiers
(see Note 11)
Non-cash $2 million payable by Meiers upon
reorganization (see Note 2)
Real estate and related debt not included in
reorganization (see Note 2)
Relief of Tronco guarantee upon IPO (see Note 9)
$ -
$ 455,195
$ 8,814
$ -
$ 2,249,641
$ -
$ 639,401
$ -
$ 2,000,000
$ -
$ 447,208
$ -
$ 4,449,626
$ -
The accompanying notes are an integral part of these consolidated financial statements.
50
SUPERIOR DRILLING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Superior Drilling Products, Inc. (the “Company”, “we”, “our” or “us”) is a drilling and
completion tool technology company. We manufacture, repair, sell and rent drilling tools. All of the
drilling tools that we rent are manufactured by us. Our customers are engaged in the 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 (see Note 2) and (b) the subsequent acquisition of Hard Rock
Solutions, LLC (see Note 3). We changed our name from SD Company Inc. to Superior Drilling
Products, Inc. on May 22, 2014 in conjunction with closing of that reorganization. Our headquarters and
principal manufacturing operations are located in Vernal, Utah.
Basis of Presentation
The accompanying consolidated financial statements of the Company include the accounts of the
Company, and of its wholly-owned subsidiaries (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 Drilling Products of California, LLC, a California limited liability company
(“SDPC”), (b) Superior Design and Fabrication, LLC, a Utah limited liability company (“SDF”), (c)
Extreme Technologies, LLC, a Utah limited liability company (“ET”), (d) Meier Property Series, LLC, a
Utah limited liability company (“MPS”), (e) Meier Leasing, LLC, a Utah limited liability company
(“ML”), and (f) Hard Rock Solutions, LLC, a Utah limited liability company (“HR”). These
consolidated condensed financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”), and all significant
intercompany accounts have been eliminated in combination.
As a company with less than $1.0 billion in revenue during its last fiscal year, we qualify as an
emerging growth company as defined in the recently enacted Jumpstart Our Business Startups Act of
2012, or the JOBS Act. An emerging growth company may take advantage of exemptions from various
reporting requirements applicable to other public companies that are not an “emerging growth
company.”
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America 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. The more significant estimates affecting amounts reported in our
consolidated financial statements include, but are not limited to: determining the allowance for doubtful
51
accounts, recoverability of long-lived assets, useful lives used in calculating depreciation and
amortization, valuation of inventory, Note receivable - Tronco and accounting for the HR Acquisition as
defined in Note 3.
Revenue Recognition.
Refurbishing — Refurbishing services are performed in our facilities for Baker Hughes under a
Vendor Agreement. Under the Vendor Agreement, revenue is determined based on a standard hourly
rate to complete the work. Revenue for refurbishing services is recognized as the services are rendered
and upon shipment to the customer. Shipping and handling costs related to refurbishing services are paid
directly by Baker Hughes at the time of shipment.
Manufacturing — Revenue from manufactured products are sold at prevailing market rates. We
recognize revenue for these products upon customer pick, which is when title passes, when collectability
is reasonably assured and when there are no further significant obligations for future performance.
Typically this is at the time of customer acceptance. Shipping and handling costs related to product sales
are recorded as a component of both the sales price and cost of the product sold.
Rental income — Hard Rock operates as a rental tool company to oil and natural gas
companies. While the duration of the rents vary by job and number of runs, these rents are generally
less than one month. The rental agreements do not have any minimum rental payments or term.
Revenue is recognized upon completion of the job. The tools are rented to entities operating in
North Dakota, Wyoming, Texas, Montana, Oklahoma, Utah, New Mexico and Colorado.
Customer Concentration Risk — In the past, we were dependent on just a few main customers,
primarily Baker Hughes, however, we believe that our purchase of HR and our development of new
products has broadened our customer base, which will have a positive effect on diversifying our
concentration of credit risk in the future. During 2014 Baker Hughes was a significant customer
representing 60% of our revenue and included in accounts receivable at December 31, 2014 was $2.8
million.
Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit and high quality with maturities of three
months or less. 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.
Accounts Receivable; 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. As of December 31, 2014 and 2013,
52
management determined that no allowance for doubtful accounts was deemed necessary due to our
expectation that the Company will collect all amounts owed.
Inventory
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 and equipment are 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
Machinery, equipment and rental
tools
Furniture and fixtures
Transportation equipment
Computer equipment and software
2-39 years
18 months -
10 years
7 years
5 - 30 years
3-5 years
Property and equipment are 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.
Goodwill and Related Intangible Assets
Goodwill is the excess cost of an acquired entity over the amounts assigned to assets acquired
and liabilities assumed in a business combination. We did not recognize any goodwill as the result of the
Reorganization. To determine the amount of goodwill resulting from the Hard Rock Acquisition, we
53
hired an outside third party to perform an assessment to determine the fair value of Hard Rock’s tangible
and intangible assets and liabilities and goodwill was allocated to be $7,095,000.
For goodwill, 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 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.
As part of our internal annual business outlook for our Company we performed during the fourth
quarter, we considered changes in the global economic environment which affected our stock price and
market capitalization. During the last half of 2014, global oil and natural gas commodity prices,
particularly crude oil, decreased significantly. This decrease in commodity prices has had, and is
expected to continue to have a negative impact on industry drilling and capital expenditure activity,
which affects 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 is also used to corroborate reporting unit valuation. The
Company believes that the estimates and assumptions used in impairment assessments are reasonable.
The Company reviewed the value of goodwill as of December 31, 2014 and determined no impairment
was needed.
Intangible assets with definite lives comprised of developed technology, customer contracts and
relationships, and trade names and trademarks are amortized on a straight-line basis over the life of the
intangible asset, generally three to seventeen years. These assets are tested for impairment whenever
events or changes in circumstances indicate that their carrying amount may not be recoverable.
Research and Development
We expense research and development costs as they are incurred. For the year ended December
31, 2014 and 2013, these expenses were $0.6 million and $0.1 million, respectively.
54
Basic and Diluted Earnings Per Share
Basic earnings per common share is computed by dividing net income by the weighted-average
number of common shares outstanding during the period. Diluted gain per share is calculated to give
effect to potentially issuable common shares, which include stock warrants. As of December 31, 2014,
the Company had warrants exercisable for 714,286 shares of common stock at $4.00 per share. These
warrants have a 4 year term expiring in February 2018. These warrants were anti-dilutive for year ended
December 31, 2014.
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.
Share-Based Compensation
The Company follows ASC 718, Compensation- Stock Compensation (“ASC 718”), which
requires the measurement and recognition of compensation expense for all share-based payment awards,
including restricted stock units, based on estimated grant date fair values. Restricted stock units are
valued using the market price of our common shares on the date of grant. The Company records
compensation expense, net of estimated forfeitures, over the requisite service period in selling, general
and administrative expenses in consolidated statement of operations.
Recently Enacted Accounting Standards
In November 2014, the FASB issued ASU No. 2014-17, "Business Combinations: Pushdown
Accounting." This ASU provides companies with the option to apply pushdown accounting in its
separate financial statements upon occurrence of an event in which an acquirer obtains control of the
acquired entity. The election to apply pushdown accounting can be made either in the period in which
the change of control occurred, or in a subsequent period. This ASU is effective on November 18,
2014. Implementation of this standard is not expected to have a material effect on the consolidated
financial statements.
In June 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-12,
"Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance
Target Could Be Achieved after the Requisite Service Period" (“ASU 2014-12”), which requires that a
performance target that affects vesting and that could be achieved after the requisite service period be
treated as a performance condition. As such, the performance target should not be reflected in estimating
the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning
after December 15, 2015, and with early adoption is permitted.
55
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers,"
which will supersede most of the existing revenue recognition requirements in GAAP and will require
entities to recognize revenue at an amount that reflects the consideration to which they are expected to
be entitled in exchange for transferring goods or services to a customer. The new standard also requires
significantly expanded disclosures regarding the qualitative and quantitative information of an entity's
nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with
customers. The pronouncement is effective for annual reporting periods beginning after December 15,
2016, including interim periods within that reporting period and is to be applied retrospectively, and
early application is not permitted.
In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements and
Property, Plant, and Equipment - Reporting Discontinued Operations and Disclosures of Disposals of
Components of an Entity" (“ASU 2014-08”), which amends the definition of a discontinued operation by
raising the threshold for a disposal to qualify as discontinued operations. ASU 2014-08 will also require
entities to provide additional disclosures about discontinued operations as well as disposal transactions
that do not meet the discontinued operations criteria. The pronouncement is effective prospectively for
all disposals (except disposals classified as held for sale before the adoption date) of components
initially classified as held for sale in periods beginning on or after December 15, 2014.
Liquidity and Capital Resources
At December 31, 2014, we had negative working capital of approximately $2.5 million, which is
mainly due to a large current portion of our debt. We have two notes that are due within the next 12
months of approximately $5 million, which are currently in the process of being refinanced. Once these
two notes are refinanced, it is expected to change our negative working capital from $2.5 million to a
positive working capital of approximately $2.5 million. During 2014 our principal sources of liquidity
were cash flow from operations and proceeds from the Offering. Our principal uses of cash are operating
expenses, working capital requirements, capital expenditures, and repayment of debt. We believe that
our sources of liquidity, including cash flow from operations, existing cash, and cash equivalents and
renegotiation of certain debt obligations will be sufficient to meet our projected cash requirements for at
least the next 12 months.
In the event we are not able to meet these obligations, we may need to raise additional capital
through equity and debt financings to support our operations and for our corporate general and
administrative expenses. Although as a public company we have access to the public markets for capital
raises, we cannot provide any assurances that financing will be available to us in the future on
acceptable terms or at all. If we cannot raise required funds on acceptable terms, we may not be able to,
among other things, (i) maintain or decrease our general and administrative expenses depending on
market demands for our products and services; (ii) fund certain obligations as they become due; and (iii)
respond to competitive pressures or unanticipated capital requirements. At December 31, 2014, we had
negative working capital of approximately $2.5 million.
56
NOTE 2. CORPORATE REORGANIZATION
On December 10, 2013, the date the Company was incorporated, a stock subscription was
received by us for 1,000 shares of our common stock from Meier Family Holdings, LLC and Meier
Management Company (collectively, the “Founders”).
On May 22, 2014, we closed the reorganization of SDS, SDF, ET, MPS, and ML into wholly-
owned subsidiaries of the Company under the terms of an agreement and plan of reorganization, dated
December 15, 2013 (the “Reorganization”). In exchange for their ownership interest in those entities,
the Founders trusts received 8,813,860 shares of our common stock, in addition to the initial 1,000
shares of our common stock. Each of the subsidiaries is considered to be the historical accounting
predecessor for financial statement reporting purposes. See Note 12 for further discussion of the income
tax impact of Reorganization.
On May 29, 2014, the Company completed its initial public offering of common stock pursuant
to a registration statement on Form S-1 (File 333-195085), as amended and declared effective by the
SEC on May 22, 2014 (the “Offering”). Pursuant to the registration statement, the Company registered
the offer and sale of 7,762,500 shares of common stock, which included 1,012,500 shares of common
stock pursuant to an option granted to the underwriters to cover over-allotments. The Company’s sale of
the shares in the Offering closed on May 29, 2014.
The gross proceeds of the Offering, based on the public offering price of $4.00 per share, were
approximately $31.1 million. After subtracting underwriting discounts and commissions of $2.4 million,
the Company received net proceeds of approximately $28.7 million from the Offering. The Company
used $12.5 million of the net proceeds to acquire Hard Rock (See Note 3).
The Naples property loan was used by a now-defunct limited liability company in which Troy
Meier was an investor to purchase approximately 11 unimproved acres in Naples, Utah for a now-
terminated property development venture. When the venture failed, the Company took title to the
property and assumed this loan. This loan was secured by the purchased property. The raw land loan
was used to purchase approximately 47 unimproved acres in Vernal, Utah that is contiguous to the
Meier’s residence for approximately $0.7 million. This loan was secured by the purchased property.
Prior to closing the Offering, the Naples property loan and the raw land loan totaling $1.7 million, were
distributed to the Founders. The land being held as collateral under the Naples property loan and the
raw land loan were also distributed at historical cost totaling approximately $2.2 million.
Upon closing of the Offering, the Company issued notes to the Founders trusts, in the amounts of
approximately $1.3 million and $7 million, respectively, as additional consideration for the
Reorganization. The obligations were initially required to be paid by the Company on or before January
2, 2015. On December 22, 2015, the Board of Directors and the Founders agreed to extend the maturity
date to January 2, 2017, with an interest rate of 7.5% dating back to May 22, 2014. The Company has
made payments on these notes in the aggregate of approximately $0.5, which includes principle payment
of approximately $0.4 in aggregate, as of December 31, 2014.
Upon closing of the Offering, the Company’s $2 million Bridge Loan automatically converted
into 714,286 shares of our common stock, and a four-year warrant to purchase an equivalent number of
57
shares of our common stock at $4.00 per share (see also Note 7). The conversion feature and detachable
warrants qualified as a derivative liability at inception and recorded at a fair value of $1.9 million. Upon
conversion, the detachable warrant was recognized in additional paid in capital at a fair value of $1.1
million. Fair value was determined using a Black-Scholes option model with level 3 fair value inputs as
follows:
Strike price per share
Market price per share
Volatility
Term
Risk-free rate
NOTE 3. HARD ROCK ACQUISITION
$4.00
$4.00
47.3%
4 years
0.69%
Immediately upon closing the Offering, the Company used a portion of the Offering proceeds to
fund the purchase of all the interests of HR from its parent entity, Hard Rock Solutions, Inc. (“HRSI”)
under the terms of a membership interest purchase agreement dated January 28, 2014 (the “Hard Rock
Acquisition”). Closing of the Hard Rock Acquisition occurred on May 29, 2014.
HR operates as a rental tool company to oil and natural gas companies. While the duration
of the rents varies by job, these rents are generally less than one month. The tools are rented
primarily to entities operating in North Dakota, Wyoming, Texas, Montana, Oklahoma, Utah, New
Mexico and Colorado. Before our acquisition of HR, we received revenue from HRSI for
manufacturing and repairing the reamers, and the reamer royalty income upon rental of the tool.
The Hard Rock Acquisition has been treated as a business combination since the Company
acquired substantially all of the operating assets of HR. The majority of the purchase price was assigned
to intangible assets, which consist of developed technology, customer contracts and relationships, trade
names and trademarks and goodwill. The intangible assets will be amortized over the following lives:
Intangible Assets
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer contracts and relationships . . . . . . . . . . . . . . . . . . . . . . .
Trade names and trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Life
7 Years
5 Years
9 Years
Consideration consisted of $12.5 million paid at closing of the Offering and a $12.5 million
seller’s note (the “Hard Rock Note”). 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 based on the JP
Morgan Chase Bank, N.A. annual prime rate, or 3.25% per annum as of December 31, 2014. Fair value
was estimated based on the present value of future cash flows at a market-assumed rate. The fair value
of the assets acquired and the Hard Rock Notes are as follows:
Estimated fair value of assets acquired:
Rental tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets:
$ 832,097
9,000
100,000
58
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer contracts and relationships . . . . . . . . . . . . . . . . . . . . . . .
Trade names and trademarks. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consideration paid and liabilities assumed:
Cash paid at closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,000,000
6,400,000
1,500,000
7,802,903
23,644,000
12,500,000
12,500,000
(1,356,000)
$ 23,644,000
During the year ended December 31, 2014, the Company reviewed the rental tool inventory and
determined that many of the tools purchased would need to be scrapped due to the tools not meeting our
quality control requirements, and thus the Company removed them from their inventory. It has further
been determined that these tools should not have been included in the purchase price, but the value
should have been included as part of goodwill. We have retroactively decreased the rental tool fair
value estimate from $1.5 million, to $0.8 million and increased goodwill from $7.1 million to $7.8
million as of the acquisition date. The Company had also depreciated these tools, thus in the financials
we have reduced depreciation expense in the amount of $0.1 million.
Acquisition Related Costs
Acquisition-related transaction costs consisted of various advisory, legal, accounting, valuation
and professionals or consulting fees totaling approximately $0.6 million, for the year ending December
31, 2014. These cost were expensed as incurred and included in general administrative expense on our
consolidated statement of operations.
Supplemental Pro Forma Results
HR’s results of operations have been included in our financial statements for periods subsequent
to May 29, 2014, the effective date of the Hard Rock Acquisition. HR contributed revenue of
approximately $5.9 million to the Company for the period from the closing of the Hard Rock
Acquisition (May 29, 2014) through December 31, 2014.
The following unaudited supplemental pro forma results present consolidated information for the
year ended December 31, 2014 as if the Hard Rock Acquisition had been completed on January 1, 2013.
The supplemental pro forma results have been calculated after applying our accounting policies and
include, among others, (i) the amortization associated with the fair value of the acquired intangible
assets, (ii) interest expense associated with the term loan issued to fund the Hard Rock Acquisition and
(iii) the impact of certain fair value adjustments such as a the debt discount. The supplemental pro forma
results do not include any potential synergies, non-recurring charges which result directly from the Hard
Rock Acquisition, cost savings or other expected benefits of the Hard Rock Acquisition. The
supplemental pro forma financial information does not necessarily represent what would have occurred
59
if the transaction had taken place at the beginning of the period presented and should not be taken as
representative of our future consolidated results of operations. Accordingly, this supplemental pro
forma information does not include all costs related to the integration nor the benefits we expect to
realize from operating synergies.
For The Years Ended December 31,
2014
2013
(Unaudited)
(Unaudited)
Revenue
Net income
$
$
23,021,502
946,865
$
$
17,633,309
121,537
NOTE 4. INVENTORY
Inventory is comprised of the following:
Raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NOTE 5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings – Superior Auto Body. . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery under capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2014
$ 990,709
155,903
72,466
$ 1,219,078
December 31,
2013
$ 53,350
42,678
-
$ 96,028
December 31,
2014
$ 2,268,039
4,847,778
2,213,729
710,232
6,338,521
2,322,340
466,213
1,343,349
20,510,201
(4,546,572)
$ 15,963,629
December 31,
2013
$ 2,511,802
6,109,351
2,213,729
571,193
3,456,442
2,322,340
239,378
986,445
18,410,680
(3,361,809)
$15,048,871
Depreciation expense related to property, plant and equipment for the year ended December 31,
2014 and 2013 was $1,804,223 and $1,102,905, respectively.
On December 4, 2014 the Company sold its land and building in Bakersfield, California. The sales
price was $1,648,075, after deducting the cost of the land, building and closing cost, the Company
recorded a net gain on sale of asset of $0.3 million. Due to this sale, the land and buildings held by the
Company decreased by $243,763 and $1,155,017, respectively.
60
During the fourth quarter of 2014, the Company determined that the estimated life of its Drill-N-
Tool is eighteen months compared with the original nine months, based on recent historical
experience. Effective October 1, 2014, the Company began depreciating the Drill-N-Ream tool over
an eighteen month useful life. The impact of this change for the year ending December 31, 2014 was a
decrease of $217,577 to depreciation expense and an increase to net income of the same amount and an
EPS increase of $0.02 per share.
NOTE 6. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2014
December 31,
2013
$ 7,000,000 $ -
-
6,400,000
-
1,500,000
-
14,900,000
(1,427,222)
-
$ 13,472,778 $ -
Amortization expense related to intangible assets for the year ended December 31, 2014 and
2013 was $1,427,222 and $0, respectively.
These intangible assets will be amortized over their expected useful lives using the straight-line
method, which is a weighted-average amortization period of 6.3 years. As of December 31, 2014, the
Company will recognize the following amortization expense for the respective periods ending December
31 noted below:
2015
2016
2017
2018
2019
Thereafter
Total
$1,427,222
2,446,667
2,446,667
2,446,667
2,446,667
2,258,888
$13,472,778
NOTE 7. LONG-TERM DEBT
Long-term debt is comprised of the following:
Real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hard Rock Note (net of $828,667 discount) . . . . . . . . . . . . . . .
EB-5 business loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Related party loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2014
December 31,
2013
$ 7,912,354 $ 10,370,508
-
11,671,333
1,797,178
-
-
1,610,273
1,496,710
1,019,100
591,398
786,767
14,255,794
22,999,827
(10,720,243)
(3,316,578)
$10,939,216
$ 12,279,584
61
Real Estate Loans
Manufacturing Facility
Our manufacturing facility was financed by a commercial bank loan dated August 23, 2010,
collateralized by a deed of trust on the commercial real property and the personal guarantee of two of
our ultimate beneficial owners, with a face value of $4.9 million, requiring monthly payments of
approximately $33,900, including principal and interest at 5.25%, beginning October 15, 2011 and
continuing through maturity on August 15, 2015, and a final balloon payment of approximately
$4,285,000 upon maturity.
Superior Auto Body Loans
Beginning on July 30, 2008, we were co-borrowers with Superior Auto Body, a related party,
for development of an auto body shop located in Riverton, Utah. The auto body shop is titled in MPS
and rented to Superior Auto Body under a lease agreement. See further discussion in Note 11 —
Related Party Transactions.
We remain as co-borrowers on a note agreement of $1.7 million date March 19, 2012 with a
maturity date of March 19, 2017. Interest accrues at 5.50%. The note requires monthly payments of
$10,565. The note agreement is guaranteed by MPS and our owners. On May 25, 2012, we became co-
borrowers on Small Business Administration guaranteed debentures totaling $1.2 million. The
debentures accrue interest at 2.42% and require monthly payments of $6,100 until maturity on July 1,
2032. The debentures are guaranteed by SDP, Superior Auto Body and our founders.
Hard Rock Note
The Hard Rock purchase price was $25 million, consisting of $12.5 million paid in cash at
closing out of the proceeds of Offering, and the “Hard Rock Note”. The Hard Rock Note accrues interest
at the JP Morgan Chase Bank, N.A. annual prime rate. Under the terms of the Hard Rock Note, we will
pay two annual principal installments of $5 million plus accrued interest on May 30, 2015 and 2016 and
one final payment of $2.5 million plus interest on May 30, 2017. The Hard Rock Note is secured by all
of the patents, patents pending, other patent rights, and trademarks transferred to Hard Rock by HR 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 will be amortized to interest expense using the effective interest method.
EB-5 Bakersfield Facility and Business Loans
In 2012, we received funding for expansion of our business into California under the EB-5
program of the United States Citizenship and Immigration Services. In order to obtain funding under this
program, our expansion into California had certain job creation and capital investment requirements
62
both in an area targeted by the program for development. We have obtained three loans under the
program which bear interest at 2.25-5.5% and are collateralized by land, buildings and equipment owned
by us and located in Bakersfield, California. Two loans totaling $1.1 million were completed as of
December 31, 2012, and cumulatively require monthly payments of approximately $7,100, including
principal and interest. The first loan in the amount of $0.7 million has a final maturity date of April 1,
2022, and the second in the amount of $0.5 million has a final maturity date of October 1, 2032. The
third loan is for tenant improvements and was completed in July 2013. The third loan was finalized in
the amount of $0.5 million. This loan requires monthly interest only payments of approximately $9,350,
and has a final maturity date of May 1, 2017. During 2014 all these loan were paid in full. On August 1,
2014, the Company paid off two notes in association with its Bakersfield, California location under the
EB-5 program to the United States Employment Development Lending Center. The total amount paid
was $1.3 million.
Related Party Loans
Upon closing of the Offering, the Company issued notes to the Founders, in the amounts of
$1,280,000 and $720,000, respectively, as additional consideration for the Reorganization. The
obligations were initially required to be paid by the Company on or before January 2, 2015. On
December 22, 2014, the Board of Directors and the Founders agreed to extend the maturity date to
January 2, 2017, with an interest rate of 7.5% dating back to May 22, 2014. The Company has made
payments on these notes in the aggregate of $479,295, which includes principal payment of
approximately $390,000 in aggregate, as of December 31, 2014.
Machinery Loans
During February 2013, the Company 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, 2014.
On December 30, 2013, we purchased machinery for a total cost of approximately $680,000.
We paid $70,000 in cash as a down payment and obtained a loan of $627,000 to complete the purchase,
of which $572,000 was borrowed as of December 31, 2013. During 2014 the company borrowed the
remaining $55,000. 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.
During 2014, we paid off a loan that had a maturity date of February 2014 in the amount of
$391,000.
63
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. During the year ended December 31,
2014, the Company obtained loans on six new vehicles in the amount of $286,248. During the year
ended December 31, 2013, the Company obtained loans on four new vehicles in the amount of
$203,635. As of December 31, 2014, the loans bear interest ranging from 0%-8.39% with maturity
dates ranging from April 2017 through October 2019, and are collateralized by the vehicles. Our
cumulative monthly payment under these loans as of December 31, 2014 was approximately $12,550,
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.
On February 24, 2014, we closed a $2 million bridge loan with a private lender (the “Bridge
Loan”). Effective as of closing of the Offering, the Bridge Loan automatically converted into 714,286
shares of our restricted common stock, and a four-year warrant to purchase an equivalent number of
shares of our common stock at $4.00 per share. As the result of that conversion, the Bridge Loan is
deemed paid in full.
Future annual maturities of all long-term debt are as follows:
Year
2015
2016
2017
2018
2019
Thereafter
Total long-term debt
NOTE 8. LEASES
Capital Leases
$
$
10,942,530
6,539,609
4,557,255
329,053
314,698
1,145,348
23,828,493
In July 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
64
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. 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, 2014. Accumulated amortization on machinery under the capitalized lease totaled
$977,630 and $636,771 as of December 31, 2014 and 2013, respectively. Amortization expense for this
machine is included in depreciation and amortization expense on the combined statement of operations.
Future minimum lease payments required under the capitalized leases in effect at December 31,
2014 are as follows:
Year
2015
2016
2017
Total
Current portion of capital lease obligation
Long-term portion of capital lease obligations
Included in these payments is $0.2 million of imputed interest expense.
Operating Leases
$
$
387,863
387,863
258,575
-
1,034,301
(292,979)
741,322
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, 2014 are as follows:
Year
2015
2016
2017
2018
2019
Thereafter
Operating leases
$
$
547,530
220,474
159,251
140,977
139,086
76,512
1,283,830
NOTE 9. NOTE RECEIVABLE - TRONCO
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
65
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 Meiers (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 certificates representing
the 8,814,860 pledged shares are being held in third-party escrow until full repayment of the Tronco
loan. The pledged shares became tradable in the public market 180 days after the closing of the
Offering, subject to insider timing requirements and volume limitations under Rule 144 of the Securities
Act, and required periodic black-out periods. At a $2.90 per share price at closing of the NYSE MKT on
March 17, 2015, the pledged shares would currently have a market value of over $25 million,
significantly more than the amount necessary to repay the Tronco loan, even if no Tronco assets were
sold.
Based on the combined collateral value of the Tronco assets and of the Meier Stock Pledge, we
have determined that there is no risk of loss to us in connection with Tronco loan. Accordingly, we
have eliminated the guarantee liability totaling $4.4 million as a non-cash charge to additional paid in
capital and recorded the entire net realizable value of the Tronco loan totaling $8,296,717 as an asset in
the balance sheet for the period ended December 31, 2014.
Previously, the Tronco loan had been scheduled to mature in January 2014. On December 18,
2013, it was amended to extend the maturity date to June 30, 2014, in exchange for a one-time payment
of $68,881. The maturity date was further extendable, at Tronco’s election, for three additional six
month periods upon payment of additional extension fees. On June 29, 2014, the independent members
of our Board of Directors approved an extension of the June 30, 2014 payment date to July 31, 2014, to
permit consideration of a loan restructuring to be approved by our independent Board members under
terms no less favorable to us than could be negotiated with a third party at ‘‘arm’s length’’. Any
renewal will continue to be secured by the Meier Guaranties and the Meier Stock Pledge.
During July 2014, the Board of Directors agreed to restructure the Tronco loan effective May 29,
2014. As part of this restructuring the interest rate was decreased to the prime rate of JPMorgan Chase
Bank plus 0.25%, which was 3.5% as of December 31, 2014. The payment requirements and schedule
were also changed with the restructuring. Only interest is due on December 31, 2014 and, a balloon
payment of all unpaid interest and principal is due in full at maturity on December 31, 2015. The
Meiers paid the accrued interest of $164,458 by offsetting their Founders notes which was due on
December 31, 2014.
66
During 2014, Halliburton announced its acquisition of Baker Hughes. Currently Baker Hughes
is our sole customer for our bit refurbishment business and we do not know how this acquisition may
impact our business.
NOTE 10. 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 Meiers personally, and
several of their family trusts, (d) Meier Family Holding Company, LLC and Meier Management
Company, LLC, and (e) SDS and MPS. 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 December 31, 2014, there have
been no updates or decisions made concerning this matter.
NOTE 11. RELATED PARTY TRANSACTIONS
Superior Auto Body
The Company leases certain of its facilities to Superior Auto Body (“SAB”), a related party. We
recorded rental income from the related party in the amounts of $144,943 and $171,942, for the year
ended December 31, 2014 and 2013, respectively.
67
Uintah Steel & Alloy, LLC
The Founders previously owned an equity interest in Uintah Steel & Alloy, LLC (“Uintah”).
From time to time Uintah has purchased and distributed steel on behalf of the Company and other
companies. Prior to the Reorganization on May 29, 2014, Uintah ceased operations and the Founders
contributed all steel inventory purchased by it that was designated for the Company to the Company, at
historical costs totaling an aggregate of approximately $0.6 million. Since that time, the Company has
purchased all of its steel requirements directly from unrelated suppliers and no longer does business with
Uintah.
NOTE 12. INCOME TAXES
Prior to the Reorganization (see Note 2), the Company was a limited liability company and not
subject to federal income tax or state income tax (in most states). Accordingly, no provision for federal
or state income taxes was recorded prior to the Reorganization because the Company’s equity holders
were responsible for income tax on the Company’s profits. In connection with the closing of the
Offering, the Company merged into a corporation and became subject to federal and state income taxes.
The Company’s book and tax basis in assets and liabilities differed at the time of the Reorganization due
primarily to different cost depreciation methods utilized for book and tax purposes for the Company’s
fixed assets. For the year ended December 31, 2014, the Company recorded a net deferred tax expense
of approximately $474,000 to recognize a deferred tax liability related to the Company’s book and tax
basis differences.
Components of the provision for income taxes are as follows:
Current income taxes:
Federal
State
Current provision for income taxes
Deferred provision (benefit) for income taxes:
Federal
State
Deferred provision (benefit) for income taxes
Provision for income taxes
For the Year
Ended December
31, 2014
$ -
1,000
1,000
413,341
59,938
473,279
$ 474,279
The current and non-current deferred tax assets and liabilities consist of the following:
Deferred tax asset:
Current:
Accrued expenses
Prepaid expense
Total current deferred tax assets
For the Year
Ended December
31, 2014
$ 332,120
(60,821)
271,299
68
Non-current:
Amortization of intangibles
Net operating loss
Others
Total non-current deferred tax assets
Total deferred tax assets
Deferred tax liabilities:
Non-current:
Depreciation on fixed assets
Total deferred tax liabilities
201,953
94,007
10,750
306,710
578,009
(1,051,288)
(1,051,288)
Net deferred tax liabilities
$ (473,279)
Reconciliation of the tax rate to the U.S. federal statutory tax rate which relate to the year ended December 31,
2014 is as follows:
Tax at federal statutory rate
Income tax prior to IPO not taxable to the
Company
Change in status
State income taxes
Other
Permanent differences
Provision for income taxes
For the Year
Ended December
31, 2014
$ (79,973)
(415,772)
732,423
629
-
236,972
$ 474,279
NOTE 13. 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 Stock Plan enables the Board of Directors to award incentive and non-qualified stock options,
restricted stock, unrestricted stock and restricted stock units to the Company’s officers, employees,
directors, consultants, and key persons, including prospective employees conditioned on their
69
employment. As of December 31, 2014, 131,250 shares have been granted leaving 1,592,878 shares
available for future grants. The awards granted vest equally over three years. Awards are valued using
the closing share price of the Company’s common stock on the date of grant.
Compensation recognized for grants vesting under the Stock Plan was $44,491 for the year ended
December 31, 2014. The Company recognized compensation expense and recorded it as share-based
compensation and included in selling, general and administrative in the consolidated condensed
statement of operations.
Total unrecognized compensation expense related to unvested restricted stock units expected to be
recognized over the remaining weighted vesting period of 2.8 years equaled $586,447 at December 31,
2014.
A summary of the status of our non-vested shares issued under the Plan as of December 31, 2014 is
presented below:
Non-vested at January 1, 2014
Granted
Vested
Cancelled
Forfeited
Non-vested at December 31, 2014
NOTE 14. SUBSEQUENT EVENTS
Number of
Shares
Weighted
Average
Grant-Date
Fair Value
$ -
$ -
131,250
4.81
-
-
-
-
-
-
$ 131,250
$ 4.81
On January 9, 2015, HR and ET entered into an Exclusive Manufacturing, Marketing, Sales and
Consulting Agreement (the “Marketing Agreement”) with Tenax Energy Solutions, LLC (“Tenax”) and
Kevin Jones (“Jones” and together with Tenax, the “Tenax Parties”) granting the Hard Rock Parties the
perpetual and exclusive right and license to manufacture, market, sell and rent products utilizing
technology used in a certain subsurface drilling tool (the “Original IP”).
Among other things, the Marketing Agreement provides that the Company will make monthly
payments commencing on February 1, 2015 through January 1, 2017 to the Tenax Parties, or
alternatively the Company may prepay any of the monthly payments for each quarterly period, in the
aggregate amount of up to $2 million, subject to future sales or rental revenue of products utilizing the
Original IP. The Tenax Parties and their affiliates also agree not to show to any third party any new or
additional intellectual property created or developed by any of the Tenax Parties (“New IP”) without
first showing such New IP to the Company and giving the Company an option to make a proposal to the
Tenax Parties with respect to the New IP. The Tenax Parties have the right, in their sole discretion, to
reject such proposal and offer the New IP to any third party, but only on higher purchase price terms and
conditions. Commencing on January 1, 2016, the Company has the option to purchase from Jones the
patent applications and/or patents relating to the Original IP for an additional payment.
70
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES
The Company’s management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company’s internal
control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.
Under the supervision and with the participation of the Company’s management, including its
Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the
effectiveness of its internal control over financial reporting based on the framework established by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) as set forth in Internal
Control - Integrated Framework. During the course of this assessment, management identified a
material weakness relating primarily to recording complex financial transactions. To remediate these
issues, management has retained the services of additional third party accounting personnel as well as to
modify existing disclosure controls and procedures in a manner designed to ensure future compliance.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”)) as
of the end of the period covered by this Annual Report. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not
effective as of December 31, 2014 due to certain material weaknesses.
A material weakness is a deficiency, or combination of deficiencies, in internal control over
financial reporting such that there is a possibility that a material misstatement in our interim financial
statements will not be prevented or detected on a timely basis. During the course of our assessment,
management identified that the Company has a lack of staffing within its accounting department, in
terms of the small number of employees performing its financial and accounting functions, which does
not provide the necessary segregation of duties surrounding the cash disbursements process.
Management believes the lack of accounting and financial personnel amounts to a material weakness in
its internal control over financial reporting ability to adequately prepare financial statements and
disclosures, and a lack of accounting expertise to appropriately apply GAAP for complex and non-
routine transactions. As a result, at December 31, 2014 and on the date of this Report, its internal
control over financial reporting is not effective.
To remediate these issues, management has retained the services of additional third party accounting
personnel as well as to modify existing disclosure controls and procedures in a manner designed to
71
ensure future compliance. Our management currently believes the additional accounting resources will
remediate the weakness with respect to insufficient personnel.
Changes in Internal Controls over Financial Reporting
During 2014, the Company implemented several new internal controls. On a monthly basis
physical counts for raw material inventory are taken and reconciled, along with repair supplies. We also
created and verified a fixed assets detail listing with a new fixed asset software. The Company has
implemented a cash and accounts payable payment approval process and financial statements are now
reviewed by management on a monthly basis.
Internal Controls and Procedures
This Annual Report does not include a report of management’s assessment regarding internal
control over financial reporting or an attestation report of the Company’s registered public accounting
firm due to a transaction period established by the rules of the Securities and Exchange Commission for
newly public companies, and will not be required to include an attestation report for so for as long as we
are an “emerging growth company” pursuant to the provisions of the JOBS Act.
ITEM 9B. OTHER INFORMATION
None
72
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Pursuant to Regulation 14A under the Exchange Act, the information required by this Item is
incorporated by reference to the Company’s Definitive Proxy Statement for the 2015 Annual Meeting of
Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2014.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to Regulation 14A under the Exchange Act, the information required by this Item is
incorporated by reference to the Company’s Definitive Proxy Statement for the 2015 Annual Meeting of
Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2014.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Pursuant to Regulation 14A under the Exchange Act, the information required by this Item is
incorporated by reference to the Company’s Definitive Proxy Statement for the 2015 Annual Meeting of
Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2014.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Pursuant to Regulation 14A under the Exchange Act, the information required by this Item is
incorporated by reference to the Company’s Definitive Proxy Statement for the 2015 Annual Meeting of
Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2014.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Pursuant to Regulation 14A under the Exchange Act, the information required by this Item is
incorporated by reference to the Company’s Definitive Proxy Statement for the 2015 Annual Meeting of
Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2014.
73
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(a) The following documents are filed as part of this Report:
(1) Financial Statements – see Index to Financial Statements appearing on page 44
(2) Financial Statement Schedules – None
(3) Exhibits –
Exhibit No.
2.1
Description
Agreement and Plan of Reorganization, dated December 15, 2013, between Meier Management
Company, LLC, Meier Family Holding Company, LLC, and SD Company, Inc. (incorporated by
reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-1 (Registration No.
333- 195085) filed with the SEC on April 7, 2014).
3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s
Registration Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April
7, 2014S-1).
3.2 Articles of Amendment to Articles of Incorporation (name change) (incorporated by reference to
Exhibit 3.5 to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1
(Registration No. 333- 195085) filed with the SEC on May 6, 2014).
3.3 Bylaws with Exhibit A (incorporated by reference to Exhibit 3.3 to the Registrant’s Registration
10.1
Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014).
Form of Director and Officer Indemnification Agreement (incorporated by reference to
Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 (Registration No.
333- 195085) filed with the SEC on April 7, 2014).
10.2
10.3
2014 Employee Stock Incentive Plan with forms of award agreements as Exhibits
(incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement
on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014).†
Form of Executive Employment Agreement between SD Company, Inc. and Troy
Meier, as CEO (incorporated by reference to Exhibit 10.3 to Amendment No. 1 to the
Registrant’s Registration Statement on Form S-1 (Registration No. 333- 195085) filed
with the SEC on April 30, 2014).†
10.4
Form of Executive Employment Agreement between SD Company, Inc. and Annette
Meier, as President (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to
the Registrant’s Registration Statement on Form S-1 (Registration No. 333- 195085)
filed with the SEC on April 30, 2014).†
10.5
Form of Executive Employment Agreement between SD Company, Inc. and
Christopher Cashion, as CFO (incorporated by reference to Exhibit 10.5 to
Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
74
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
(Registration No. 333- 195085) filed with the SEC on April 30, 2014).†
Vendor Agreement between Superior Drilling Products, LLC, and Hughes Christensen,
a division of Baker Hughes Oilfield Operations, Inc., dated October 28, 2013 with
Exhibit A (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration
Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7,
2014).
Commercial Lease, dated August 15, 2013, between Meier Properties, Series LLC, as
landlord, and Baker Hughes Oilfield Operations, Inc., as tenant (incorporated by
reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S-1
(Registration No. 333- 195085) filed with the SEC on April 7, 2014).
Acknowledgement letter, dated September 11, 2013, between Superior Drilling
Products, LLC and Hard Rock Solutions, Inc., regarding the Drill N Ream
commissions (incorporated by reference to Exhibit 10.8 to the Registrant’s
Registration Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC
on April 7, 2014).
Membership Interest Purchase Agreement (MIPA), dated January 28, 2014, between
Hard Rock Solutions, Inc., as seller, and Superior Drilling Products, LLC, as buyer, of
Hard Rock Solutions, LLC, with Exhibits (incorporated by reference to Exhibit 10.9 to
the Registrant’s Registration Statement on Form S-1 (Registration No. 333- 195085)
filed with the SEC on April 7, 2014).
Intellectual Property Protection Agreement (IPPA), dated January 28, 2014, between
3cReamers, LLC, Hard Rock Solutions, LLC, James D. Isenhour, and Troy Meier
(incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement
on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014).
Form of Subordinated Promissory Note from Hard Rock Solutions LLC and Superior
Drilling Products LLC, as borrower, in favor of Hard Rock Solutions, Inc., as lender,
to be executed upon closing of the Hard Rock acquisition (incorporated by reference to
Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 (Registration No.
333- 195085) filed with the SEC on April 7, 2014).
Form of Security and Pledge Agreement between SD Company, Inc., as debtor, in
favor of Hard Rock Solutions, Inc., as secured party, to be executed upon closing of
the Hard Rock acquisition with attached Schedule A (incorporated by reference to
Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 (Registration No.
333- 195085) filed with the SEC on April 7, 2014).
Form of Assignment Agreement between Superior Drilling Products, LLC and SD
Company, Inc. assigning SDP’s rights under the MIPA and IPPA to SDC, to be
executed in connection with the Reorganization (incorporated by reference to Exhibit
10.13 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-
195085) filed with the SEC on April 7, 2014).
10.14
Securities Purchase Agreement, dated February 24, 2014, between SD Company, Inc.
and Superior Drilling Products, LLC, as borrowers, and D4D, LLC, as lender, for $2
million bridge loan with attached exhibits (incorporated by reference to Exhibit 10.14
75
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
to the Registrant’s Registration Statement on Form S-1 (Registration No. 333- 195085)
filed with the SEC on April 7, 2014).
Secured Convertible Promissory Note, dated February 24, 2014, in the original
principal amount of $2 million, from SD Company, Inc. and Superior Drilling
Products, LLC, as borrowers, in favor of D4D, LLC, as lender, with Exhibits
(incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement
on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014).
Security Agreements, dated February 24, 2014, between SD Company Inc. and
Superior Drilling Products, LLC, respectively, as debtors, and D4D LLC, as secured
party (incorporated by reference to Exhibit 10.16 to the Registrant’s Registration
Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7,
2014).
Form of Common Stock Purchase Warrant to be issued by SD Company Inc. in favor
of D4D LLC upon conversion of $2 million bridge loan with attached exhibits
(incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement
on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014).
Form of Registration Rights Agreement to be entered into between SD Company Inc.
and D4D, LLC upon conversion of $2 million bridge loan (incorporated by reference
to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 (Registration
No. 333- 195085) filed with the SEC on April 7, 2014).
Standard Industrial/Commercial Single-Tenant Lease, dated January 17, 2014, between
Superior Drilling Products of California, LLC (SDP(CA)), as lessor, and Roger
Holder, as lessee, with respect to our Bakersfield facilities (incorporated by reference
to Exhibit 10.19 to the Registrant’s Registration Statement on Form S-1 (Registration
No. 333- 195085) filed with the SEC on April 7, 2014).
Loan Agreement, dated July 3, 2012, between Meier Properties, Series LLC and
Superior Drilling Products LLC, as co-borrowers, and Proficio Bank, as lender.
(Proficio Loan 1) (incorporated by reference to Exhibit 10.35 to the Registrant’s
Registration Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC
on April 7, 2014).
Term Note, dated July 3, 2012, from Meier Properties, Series LLC and Superior
Drilling Products LLC, as co-borrowers, and Proficio Bank, as lender, in the original
principal amount of $240,000. (Proficio Loan 1) with attached exhibits (incorporated
by reference to Exhibit 10.36 to the Registrant’s Registration Statement on Form S-1
(Registration No. 333- 195085) filed with the SEC on April 7, 2014).
Deed of Trust, Security Agreement and Assignment of Leases and Rents, dated July 3,
2012, from Meier Properties, Series LLC, as grantor, to Proficio Bank, as trustee, and
Proficio Bank, as beneficiary. (Proficio Loan 1) (incorporated by reference to Exhibit
10.37 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-
195085) filed with the SEC on April 7, 2014).
10.23
Loan Agreement(s), dated December 30, 2013, between Superior Drilling Products,
LLC, Meier Leasing, LLC and Meier Management Company, LLC, as co-borrowers,
76
10.24
10.25
10.26
10.27
10.28
10.29
respectively, and Proficio Bank, as lender. (Proficio Loan 2) (incorporated by reference
to Exhibit 10.38 to the Registrant’s Registration Statement on Form S-1 (Registration
No. 333- 195085) filed with the SEC on April 7, 2014).
U.S. Small Business Administration Note, dated December 30, 2013, from Superior
Drilling Products, LLC, Meier Leasing, LLC and Meier Management Company, LLC,
as co-borrowers, in favor of Proficio Bank, as lender, in the original principal amount
of $627,000. (Proficio Loan 2) (incorporated by reference to Exhibit 10.39 to the
Registrant’s Registration Statement on Form S-1 (Registration No. 333- 195085) filed
with the SEC on April 7, 2014).
Unconditional Guaranty(s) from each of Gilbert Troy Meier, Annette D. Meier, the
Gilbert Troy Meier Trust, the Annette Deuel Meier Trust, and Meier Family Holding
Company, guarantor(s), respectively, to Proficio Bank, as lender, each dated December
30, 2013. (Proficio Loan 2) (incorporated by reference to Exhibit 10.40 to the
Registrant’s Registration Statement on Form S-1 (Registration No. 333- 195085) filed
with the SEC on April 7, 2014).
Term Note, dated February 4, 2013, between Meier Leasing, LLC and Meier
Management Company, LLC, as co-borrowers, and Proficio Bank, as lender, in the
original principal amount of $592,000. (Proficio Loan 3) (incorporated by reference to
Exhibit 10.42 to the Registrant’s Registration Statement on Form S-1 (Registration No.
333- 195085) filed with the SEC on April 7, 2014).
Third Amendment to Loan Agreement (dated December 18, 2013), Second
Amendment to Loan Agreement (dated June 15, 2009), First Amendment to Loan
Agreement (dated December 10, 2007), and original Loan Agreement (dated August
10, 2007), between Tronco Energy Corporation, as borrower, Philco Exploration, LLC,
as subsidiary, and Fortuna Asset Management LLC (and its assignee ACF Property
Management, Inc. for the amendments). (Tronco Loan) (incorporated by reference to
Exhibit 10.43 to the Registrant’s Registration Statement on Form S-1 (Registration No.
333- 195085) filed with the SEC on April 7, 2014).
Second Amended and Restated Promissory Note, dated January 1, 2014, between
Tronco Energy Corporation, as borrower, and ACF Property Management Inc. as
lender (assignee from Fortuna Asset Management LLC). (Tronco Loan) (incorporated
by reference to Exhibit 10.44 to the Registrant’s Registration Statement on Form S-1
(Registration No. 333- 195085) filed with the SEC on April 7, 2014).
Security Agreement Pledge between Tronco Energy Corporation, as debtor, and ACF
Property Management Inc. as secured party; and Owner Consent to Pledge from Meier
Family Holding Company, LLC, with respect to 95% of the limited liability company
interests in Superior Drilling Products, LLC, each dated June 15, 2009. (Tronco Loan)
(incorporated by reference to Exhibit 10.45 to the Registrant’s Registration Statement
on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014).
10.30
Security Agreement Pledge between Tronco Energy Corporation, as debtor, and ACF
Property Management Inc. as secured party; and Owner Consent to Pledge from Meier
Management Company, LLC, with respect to 5% of the limited liability company
77
10.31
10.32
10.33
10.34
10.35
10.36
interests in Superior Drilling Products, LLC, each dated June 15, 2009. (Tronco Loan)
(incorporated by reference to Exhibit 10.46 to the Registrant’s Registration Statement
on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014).
Security Agreement Pledge between Tronco Energy Corporation, as debtor, and ACF
Property Management Inc., as secured party; and Owner Consent to Pledge from Meier
Management Company, with respect to 100% of the limited liability company interests
in Superior Design and Fabrication, LLC, each dated December 18, 2013. (Tronco
Loan) (incorporated by reference to Exhibit 10.47 to the Registrant’s Registration
Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7,
2014).
Guaranty(s) from Gilbert Troy Meier Trust (dated August 10, 2009), and from
Superior Drilling Products, LLC and Superior Design and Fabrication, LLC (dated
December 18th, 2013), in favor of ACF Property Management, Inc., as lender. (Tronco
Loan) (incorporated by reference to Exhibit 10.48 to the Registrant’s Registration
Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7,
2014).
Loan Purchase Agreement between ACF Property Management Inc., as lender and
seller, SD Company Inc., as buyer, and Tronco Energy Corporation, as borrower, dated
January 1, 2014. (Tronco Loan) (incorporated by reference to Exhibit 10.49 to the
Registrant’s Registration Statement on Form S-1 (Registration No. 333- 195085) filed
with the SEC on April 7, 2014).
Loan Agreement, dated April 3, 2012, between Meier Properties Series LLC and
Superior Auto Body & Paint LLC (SABP) as co-borrowers, and Mountain West Small
Business Finance, as lender. (SABP Loan 1); Change in Terms Agreement dated
March 19, 2012, between Superior Auto BODY & Paint LLC, as borrower and
Mountain America Credit Union, as Lender; and Change in Terms Agreement dated
March 19, 2012, between Superior Auto BODY & Paint LLC, as borrower and
Mountain America Credit Union, as Lender (incorporated by reference to Exhibit
10.50 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
(Registration No. 333- 195085) filed with the SEC on April 30, 2014).
Promissory Note dated March 19, 2012, from Superior Auto Body and Paint LLC, as
borrower, in favor of Mountain America Credit Union in the amount of $1,698,005.00
(incorporated by reference to Exhibit 10.51 to the Registrant’s Registration Statement
on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014).
Loan Agreement, dated May 25, 2012, between Meier Properties Series LLC and
SABP, as co-borrowers and Mountain West Small Business Finance, as lender. (SABP
Loan 2) (incorporated by reference to Exhibit 10.52 to the Registrant’s Registration
Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7,
2014).
10.37
U.S. Small Business Administration Note, dated May 25, 2012, between Meier
Properties, Series LLC, as debtor, SABP, as operating company, and Mountain West
Small Business Finance, as lender, in the original principal amount of $1,159,000.00
(SABP Loan 2) (incorporated by reference to Exhibit 10.53 to the Registrant’s
78
10.38
10.39
10.40
10.41
10.42
10.43
10.44
Registration Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC
on April 7, 2014).
Security Agreement(s), dated May 25, 2012, between each of Meier Properties, Series
LLC and SABP, as debtor(s), and Mountain West Small Business Finance, as lender.
(SABP Loan 2) (incorporated by reference to Exhibit 10.54 to the Registrant’s
Registration Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC
on April 7, 2014).
Continuing Guaranty, dated May 20, 2011, by Superior Drilling Products , as
guarantor, to Mountain America Federal Credit Union, as lender. (SABP Loans 1 and
2) (incorporated by reference to Exhibit 10.55 to the Registrant’s Registration
Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7,
2014).
Lease, dated May 25, 2012, between Meier Properties, Series LLC, as lessor, and
SABP, as lessee (incorporated by reference to Exhibit 10.56 to the Registrant’s
Registration Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC
on April 7, 2014).
Confirmation of Guaranties from Troy Meier, Annette Meier, the G. Troy Meier Trust,
and the Annette Deuel Meier Trust, to Superior Drilling Products, Inc. (incorporated
by reference to Exhibit 10.57 to Amendment No. 3 to the Registrant’s Registration
Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on May 12,
2014).
Stock Pledge Agreement between Meier Management Company, LLC and Superior
Drilling Products, Inc. (incorporated by reference to Exhibit 10.58 to Amendment No.
3 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-
195085) filed with the SEC on May 12, 2014).
Stock Pledge Agreement between Meier Family Holding Company, LLC and Superior
Drilling Products, Inc. (incorporated by reference to Exhibit 10.59 to Amendment No.
3 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-
195085) filed with the SEC on May 12, 2014).
Loan Agreement dated February 4, 2013, between Meier Leasing, LLC and Meier
Management Company, LLC, as co-borrowers, and Proficio Bank, as lender. (Proficio
Loan 3) (incorporated by reference to Exhibit 10.41 to the Registrant’s Registration
Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7,
2014).
10.45* Exclusive Manufacturing, Marketing, Sales and Consulting Agreement among Hard Rock Solutions,
LLC, Extreme Technologies, LLC, Tenax Energy Solutions, LLC (“Tenax”) and Kevin Jones dated
January 9, 2015.
21.1* Subsidiaries of the Registrant
31.1* Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for G. Troy Meier.
79
31.2* Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Christopher D.
Cashion.
32** Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for G. Troy Meier and
Christopher D. Cashion.
101*
Interactive data files pursuant to Rule 405 of Regulation S-T
101.INS XBRL Instance
101.XSD XBRL Schema
101.CAL XBRL Calculation
101.DEF XBRL Definition
101.LAB XBRL Label
101.PRE XBRL Presentation
*
**
†
Filed herewith.
Furnished herewith.
Indicates a management contract or compensatory plan, contract or arrangement.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
March 30, 2015
March 30, 2015
March 30, 2015
March 30, 2015
March 30, 2015
March 30, 2015
SUPERIOR DRILLING PRODUCTS, INC.
By: /s/ G. TROY MEIER
G. Troy Meier, Chief Executive Officer
(Principal Executive Officer)
/s/ CHRISTOPHER D. CASHION
By:
Christopher D. Cashion, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
By: /s/ ANNETTE MEIER
Annette Meier, President, Chief Operating
Officer and Director
By: /s/ TERENCE CRYAN
Terence Cryan, Director
By: /s/ BOB IVERSEN
Bob Iversen, Director
By: /s/ MICHAEL RONCA
Michael Ronca, Director
81
This page intentionally left blank.
SHAREHOLDER INFORMATION
Corporate Headquarters
Superior Drilling Products, Inc.
1583 South 1700 East
PO Box 1656
Vernal, UT 84078
435.789.0594
www.sdpi.com
DIRECTORS AND OFFICERS
Corporate Officers
Troy Meier
Chairman & CEO
Annette Meier
President & COO
Chris Cashion
Chief Financial Officer
Jim Osterloh
Chief Technology Officer
Trent Pope
Vice President of Sales
David Gale
Vice President of Operations
Lane Snell
Vice President of Engineering
Brad Laney
Vice President of Marketing
Board of Directors
Troy Meier, Chairman of the Board
Chief Executive Officer
Superior Drilling Products, Inc.
Terence Cryan 1*, 2, 3
Managing Director
Concert Energy Partners
Robert Iversen 1, 2*, 3
President and Partner
CTI Energy Services
Annette Meier
President and Chief Operating Officer
Superior Drilling Products, Inc.
Michael Ronca 1, 2, 3*
President & Chief Executive Officer
EagleRidge Energy
1
2
3
Audit Committee
Compensation Committee
Nominating & Corporate Governance Committee
* Committee Chairman
Stock Exchange Listing
The Company’s stock is traded on the NYSE MKT
exchange under the symbol SDPI.
2015 Annual Meeting
Superior Drilling Products’ Annual Meeting
of Shareholders will be held at 9:00 am MT
on June 15, 2015 at
Superior Drilling Products, Inc.
Corporate Headquarters
1583 South 1700 East
Vernal, UT 84078
Investor Relations
Investors, stockbrokers, security analysts and
others seeking information about Superior Drilling
Products, contact:
Deborah K. Pawlowski
Kei Advisors LLC
716.843.3908
dpawlowski@keiadvisors.com
Garett K. Gough
Kei Advisors LLC
716.846.1352
ggough@keiadvisors.com
Transfer Agent
For services, such as reporting a change of address,
replacement of lost stock certificates, changes in
registered ownership, or for inquiries about your
account, contact:
VStock Transfer, LLC
18 Lafayette Place
Woodmere, New York 11598
Tel: 212.828.8436
Fax: 646.536.3179
www.vstocktransfer.com
Independent Auditors
Hein & Associates
Dallas, Texas
1583 South 1700 East PO Box 1656 Vernal, UT 84078
435.789.0594 www.sdpi.com