2016 ANNUAL REPORT
NYSE MKT: SDPI
Superior Drilling Products, Inc. is an innovative, cutting-edge drilling tool technology company
providing cost saving solutions that drive production efficiencies for the oil and natural gas drilling
industry. We design, manufacture, repair, and sell drilling tools. Our drilling solutions include the
patented Drill-N-Ream® well bore conditioning tool and the patented Strider™ oscillation system
technology. In addition, we are a manufacturer and refurbisher of PDC (polycrystalline diamond
compact) drill bits for a leading oil field services company. We operate a state-of-the-art drill tool
fabrication facility, where we manufacture our solutions for the drilling industry, as well as
customers’ custom products.
Our strategy for growth is to leverage our expertise in drill tool technology and innovative,
precision machining in order to broaden our product offerings and solutions for the oil and gas
industry.
Selected Financial Data
(in thousands, except per share data)
Revenue
Cost of revenue
Selling, general and administrative
Depreciation and amortization
Operating (loss) income
Operating margin
Net loss
Year Ended December 31,
2015
$ 12,706
2016
$ 7,153
2014
$ 20,037
4,492
5,776
4,291
6,618
7,014
4,819
(8,246)
(13,547)
7,016
8,103
3,240
1,678
(115.3)%
(106.6)%
8.4%
$ (9,129)
$ (14,456)
$ (621)
Weighted average loss per share - diluted
$ (0.48)
$ (0.83)
$ (0.04)
Weighted average shares outstanding - diluted
19,156
17,347
13,831
Cash and cash equivalents
Accounts receivable
Total assets
Total debt
Total liabilities
$ 2,242
$ 1,297
$ 5,792
1,039
32,989
16,684
19,020
1,861
38,755
20,250
22,580
4,403
57,543
23,871
27,477
Total stockholders' equity
$ 13,968
$ 16,175
$ 30,066
Dear Fellow Shareholders,
Given the severely weak conditions of the oil & gas industry throughout 2015 and 2016, the last
two years were certainly a challenge for our Company. The industry endured the lowest level of
operating rigs in recorded history, hitting the bottom of the cycle in May 2016. These
challenging times created the opportunity for us to develop and deploy a new business model,
with a major shift in our go-to-market strategy, for our flagship well bore conditioning tool, the
Drill-N-Ream®. This new model highlights efficiencies and allows our team to focus on what we
know best – innovating technologies, precision manufacturing expertise and process
improvement. We ended 2016 with a solid vision for growth and results that demonstrate the
validity of our new go-to-market strategy.
Sales in the second half of 2016 almost doubled the first half at $4.6 million, with total annual
sales of $7.2 million. While this was down from 2015 sales of $12.7 million, the trend set in
the second half of last year has us on a path to exceed that level in 2017.
Reinventing ourselves as a company in the first half of last year allowed us to improve our
cost structure through reduced staffing, salary reductions, stock in lieu of cash payments and
productivity improvements. These actions helped us to prudently manage our cash while
continuing to make investments in new technology.
We identified and took strategic steps to stabilize and strengthen our balance sheet. We
restructured our debt and completed a follow-on offering with net proceeds of approximately
$5 million in October 2016. In early 2017, we sold non-core real estate property, using that
cash to further reduce debt. At March 31, 2017, our debt balance was $14 million, a 30%
decrease from the prior year.
Our vision is to be a leader in the development and
commercialization of innovative, cutting-edge drill string
enhancement technologies that deserve to be on every rig.
Our industry experience, understanding of customers’ needs, and ability to put together teams
capable of developing market-leading solutions is at the core of our strategy for growth.
Our Drill-N-Ream® (DnR) well bore conditioning tool is proving it deserves to be on every oil and
natural gas operating rig. In fact, the tool’s imbedded technology has enabled a wider scope of
use. DnR is being used to improve penetration rates, decrease days-on-wells, and reduce
shock and vibrations on the bottom-hole-assembly, which extends drilling tool life expectancy.
Getting steerable systems around the curve is yet another benefit operators are receiving when
employing the DnR system. The ultimate benefit of taking days off a well while delivering a
quality wellbore is a must for operators as they standardize cost saving practices. No longer
just for laterals, DnR is proving value in every section and size of the well bore. The market’s
need for this technology and its recognition of the tool’s value and capability has been proven
by the steady increase in its adoption rate, coupled with its use in multiple stages within a given
well bore.
Expanding our Tool Set
2017 is the introduction year for our Strider technology. In January, we commercialized the
Coiled Tubing StriderTM (CTS) technology, which has had successful runs in a number of
different environments, and market reception has been encouraging. The CTS has a unique
drive system that produces lower operating pressure than typical oscillation tools, allowing
operators to maintain higher efficiencies when using coil tubing on longer drill outs and clean
outs. We are in discussions with highly qualified channel partners to distribute and market
this technology.
In the pipeline behind the CTS is the Open Hole StriderTM (OHS) technology that will be
commercialized in the second half 2017. Our research and development team is making
excellent progress with the construction of the tool, using advanced material science to create
a cost-effective technology, and the results are looking very promising.
Strong 2017 Outlook
In the first half of 2017, rig counts surged enhancing our opportunity and outlook. More
importantly, operators are proactively looking for innovative ways to reduce their production
costs. Our technologies, processes and procedures help them accomplish this goal. As our
core business of designing, developing and manufacturing new technology is gaining traction,
our fleet maintenance business has also been robust
Our manufacturing expertise enabled us to manage a strong increase in volume as we began
2017, and we demonstrated significant leverage gained on higher volumes. First quarter
revenue was up 133% over the prior year and up 44% over the trailing fourth quarter of 2016,
with significantly improved margins.
This is an exciting time for Superior Drilling Products Inc. Our seasoned management team,
experienced research and development capabilities, game-changing technology in the early
stages of recognition and adoption, proven go-to-market partnerships in place with more being
developed, and additional products in the pipeline all contribute to our bright future. We hope
you share in our excitement.
Sincerely,
Troy Meier
Chairman and Chief Executive Officer
June 28, 2017
SEC FORM 10-K/A
and FORM 10-K
This page intentionally left blank.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
(Amendment No. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2016
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 01-33522
SUPERIOR DRILLING PRODUCTS, INC.
(Exact 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)
Registrant’s telephone number, including area code: (435) 789-0594
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of Class)
NYSE MKT
(Name of Exchange on Which Registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 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. Yes [X]
No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate
Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405)
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.
[ ]
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”,
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ]
Emerging growth company [X]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
[ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business
day of the most recently completed first fiscal quarter, March 31, 2017, was approximately $12.6 million.
As of April 28, 2017, there were 24,197,148 shares of the registrant’s common stock outstanding, par value
$.001 per share.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends our Annual Report on Form 10-K for
the fiscal year ended December 31, 2016, originally filed with the Securities and Exchange Commission on March
31, 2017 (the “Original Filing”). We are filing this Amendment to include the information required by Part III, Items
10, 11, 12, 13 and 14, which were not included in the Original Filing in reliance on Instruction G(3) to Form 10-K.
We have also deleted the reference to an amendment to the Original Filing on the cover page under “Documents
Incorporated By Reference.” In accordance with Rule 12b-15 under the Securities and Exchange Act of 1934, as
amended, Item 15 of Part IV of the Original Filing is hereby amended and restated in its entirety.
Except as described above, no other changes have been made to the Original Filing. The Original Filing
continues to speak as of the date of the Original Filing, and we have not updated the disclosures contained therein to
reflect any events which occurred at a date subsequent to the filing of the Original Filing.
1
TABLE OF CONTENTS
PART III
Item 10 Directors, Executive Officers and Corporate Governance
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13 Certain Relationships and Related Transactions, and Director Independence
Item 14 Principal Accounting Fees and Services
Item 15 Exhibits and Financial Statement Schedules
SIGNATURES
Form 10-K filed March 31, 2017
3
3
6
12
15
16
17
25
30
2
Item 10. Directors, Executive Officers and Corporate Governance.
Directors, Executive Officers and Significant Employees
PART III
The following table sets forth information concerning our directors, executive officers and significant employees as
of December 31, 2016:
Name
G. Troy Meier
Annette Meier
James R.Lines
Robert Iversen
Michael V. Ronca
Christopher D. Cashion
Age
Position
55 Board Chair, Class III Director and Chief Executive
Officer
54 Class II Director, President and Chief Operating Officer
55 Class II Director
62 Class III Director
63 Class I Director
61 Chief Financial Officer
G. Troy Meier. Mr. Meier has served as our Board Chair, one of our Class III Directors and Chief Executive
Officer since 2014. Mr. Meier has over 34 years of experience in the oil and gas industry. Mr. Meier and co-founder
Annette Meier founded our predecessor company in 1999. Since that time through the present, Mr. Meier has
spearheaded the development of our new manufacturing business and our research and development activities. As
our chief innovator, Mr. Meier has been responsible for not only inventing, but also designing, engineering and
manufacturing industry specific machinery and processes and has several patent applications pending. Previously, in
1993, Mr. Meier started our predecessor company, Rocky Mountain Diamond, after thirteen years with Christensen
Diamond and its successors. At Christensen Diamond, Mr. Meier established overseas factories in Ireland,
Venezuela and China. In addition, Mr. Meier designed tools to improve efficiency both in the plants and in the field.
Previously, Mr. Meier had been Christensen Diamond’s first drill bit fabricator specialist and by age 28, was made
the Northern Region design engineer responsible for designing drill bits, core systems, centric bits, nozzle systems
and related products. As the co-founder, Mr. Meier for the last six years has focused 100% of his attention on our
development and growth.
Mr. Meier was selected to serve on our Board of Directors and as the Board Chair because of his extensive
industry experience, his role as our co-founder and chief innovator, and his and Ms. Meier’s majority shareholding.
Mr. Meier is married to Annette Meier.
Annette Meier. Ms. Meier has served as our Class II Director, President and Chief Operating Officer since 2014.
Ms. Meier has over 21 years of experience in the oil and gas industry. Since our inception in 1999 to the present,
Ms. Meier has managed all of our day-to-day operations and business. In 2008, Ms. Meier envisioned and co-created
“CHUCK,” our custom shop management and inventory program software. Ms. Meier was also instrumental to the
development of the “nucleus grinding system” that is currently utilized in our new manufacturing processes. In
2005, Ms. Meier served as the creator and chief architect of the Ropers Business Park, the state-of-the-art campus
that houses our remanufacturing and new manufacturing facilities in Vernal, Utah. Ms. Meier’s understanding of our
business processes resulted in her designing and facilitating the SMART FACILITY layout, process and control
systems within the manufacturing plant. Previously, in 1993, Ms. Meier co-founded and managed our predecessor
company, Rocky Mountain Diamond. As the co-founder, Ms. Meier for the last six years has focused 100% of her
attention on our development and growth. Ms. Meier has been the recipient of numerous state, local and industry
awards over the years that recognized her for innovation and leadership.
Ms. Meier was selected to serve on our Board of Directors because of her extensive industry experience, her role
as our co-founder and substantial knowledge of our day-to-day operations, and her and Mr. Meier’s majority
shareholding. Ms. Meier is married to G. Troy Meier.
James Lines. Mr. Lines has served as a Class II director since December 2016, also serves on the Audit
Committee, Compensation Committee and the Nominating and Governance Committee of our Board of Directors.
Mr. Lines has served as President and Chief Executive Officer of Graham Corporation since January 2008. Graham
3
designs, manufactures and sells critical equipment for the energy, defense and chemical/petrochemical industries.
Previously, Mr. Lines served as Graham’s President and Chief Operating Officer since June 2006. Mr. Lines has
served Graham in various capacities since 1984, including Vice President and General Manager, Vice President of
Engineering and Vice President of Sales and Marketing. Prior to joining its management team, he served Graham as
an application engineer and sales engineer as well as a product supervisor. Mr. Lines holds a B.S. in Aerospace
Engineering from the State University of New York at Buffalo.
Mr. Lines was selected by the Board of Directors as a nominee due to his extensive experience in growing a midsize
business, as well as his background in manufacturing and engineering in the energy industry.
Robert E. Iversen. Mr. Iversen has served as a Class III Director since 2014 and has been the Chairman of the
Compensation Committee since joining the Board. He has also been a member of the Audit Committee and the
Nominating and Governance Committee since 2014. Mr. Iversen has broad executive and operational management
experience in the sales, service, and manufacturing sectors of the global upstream oil and gas industry. Currently,
Mr. Iversen is a partner and president of CTI Energy Services, LLC of Springtown, Texas, a drilling services
company he started in 2011. Mr. Iversen has strong experience in the development and commercialization of new
technology products and in company marketing and advertising programs. Previously, Mr. Iversen collaborated with
G. Troy Meier as a partner and senior vice president in Tronco Energy Services from 2008 to 2011. From 2002 to
2008, he served as President and other C-level positions with Ulterra Drilling Technologies (Fort Worth, Texas),
INRG (Houston, Texas) and NQL Energy Services (Nisku, Alberta). In 1994, Mr. Iverson and partners purchased
the U.S. division of DBS Stratabit, a small, underperforming diamond bit company, where, as President until 2002,
he built it into a top tier provider of high technology products. Mr. Iversen previously held numerous executive
positions in marketing, technology and engineering at various divisions of the Baker Hughes companies, and their
predecessors, from 1980 through 1994. Mr. Iversen holds a Bachelor of Science Petroleum Engineering, Montana
Tech, as well as numerous technical and executive post-graduate certifications.
Mr. Iversen was selected to serve on our Board of Directors because of his strong experience with start-up
companies and the development and commercialization of new technology products. Mr. Iversen further brings his
broad executive and operational management expertise in the oil and gas industry.
Michael Ronca. Mr. Ronca has served as a Class I director since 2014, and also serves on the Audit
Committee, Compensation Committee and the Nominating and Governance Committee of our Board of Directors.
Mr. Ronca has over 30 years of experience as an executive building and monetizing businesses. Since 2009, Mr.
Ronca has served as President and Chief Executive Officer of EagleRidge Energy, LLC, an oil and gas exploration
and development company active in north and central Texas. Previously, he served as Chairman of BAS Oil & Gas,
a private company active in developing reserves in the Barnett Shale trend in North Texas. Mr. Ronca has a long
history of participating in the energy industry starting with his time at Tenneco Inc., where he served as the Assistant
to the Chairman and CEO and later established a new oil and gas division which operated throughout the offshore
and onshore Gulf Coast region. He later executed a leveraged buyout with the backing of private equity and soon
after took the company public on the NYSE under the name of Domain Energy where he also served as President
and CEO. In 1998, Domain Energy merged into Range Resources where Mr. Ronca served as Chief Operating
Officer for several years. Mr. Ronca has a BS degree from Villanova University and an MBA in Finance from
Drexel University.
Mr. Ronca was selected to serve on our Board of Directors because of his strong experience within the oil and
gas industry.
Christopher D. Cashion. Mr. Cashion has over 30 years of experience in the fields of accounting, finance and
private equity. Mr. Cashion joined us in March 2014 to serve as our Chief Financial Officer on a full-time basis.
Previously, Mr. Cashion worked as an independent financial and business consultant since 1998. From January 2013
through February 2014, Mr. Cashion was the Chief Financial Officer for Surefire Industries USA LLC, a Houston-
based hydraulic fracturing equipment manufacturing company. Previously, from January 2005 to August 2012, Mr.
Cashion provided chief financial officer services to five start-up portfolio companies owned by the Shell
Technology Venture Fund, a private equity fund. Prior to his tenure with the start-up portfolio companies, Mr.
Cashion worked for the First Reserve Corporation, a private equity firm, from 1991 to 1993. Mr. Cashion worked
with Baker Hughes, Inc. from 1981 to 1991 and with Ernst & Young from 1977 to 1981. Mr. Cashion holds a B.S.
4
in Accounting from the University of Tennessee and an M.B.A. in Finance and International Business from the
University of Houston. Mr. Cashion has been a Certified Public Accountant since 1979.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our
directors and executive officers, and persons who own more than 10% of our equity securities, to file initial reports
of ownership and reports of changes in ownership of our common stock with the SEC and to furnish us a copy of
each filed report.
To our knowledge, based solely on review of the copies of such reports furnished to us and written
representations that no other reports were required, during the fiscal year ended December 31, 2016, our officers,
directors and greater than 10% beneficial owners timely filed all required Section 16(a) reports.
Material Changes in Director Nominations Process
There have not been any material changes to the procedures by which shareholders may recommend nominees
to our Board.
Audit Committee
Our Audit Committee is comprised solely of “independent” directors, as defined under and required by Rule
10A-3 of the Exchange Act and the NYSE MKT rules. Our Audit Committee is directly responsible for, among
other things, the appointment, compensation, retention and oversight of our independent registered public
accounting firm. The oversight of our independent public accounting firm includes reviewing the plans and results
of the audit engagement with the firm, approving any additional professional services provided by the firm and
reviewing the independence of the firm. Commencing with our first report on internal controls over financial
reporting, the Committee will be responsible for discussing the effectiveness of the internal controls over financial
reporting with our independent registered public accounting firm and relevant financial management. The members
of this Committee are Messrs. Iversen, Ronca, and Lines with Mr. Lines serving as committee chair. Our Board of
Directors has determined that Mr. Lines qualifies as an “audit committee financial expert,” as defined by the rules
under the Exchange Act. The Audit Committee held six meetings in 2016.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, as well as each
member of our Board. The Code of Business Conduct and Ethics is available under “Corporate Governance” at the
“Investors” section of our website at www.sdpi.com. We intend to post amendments to or waivers from the Code of
Business Conduct and Ethics (to the extent applicable to our principal executive officer, principal financial officer or
principal accounting officer) at this location on our website.
Corporate Governance
The charters for our Audit Committee, Compensation Committee and Nominating and Corporate Governance
Committee and our Code of Business Conduct and Ethics are available under “Corporate Governance” at the
“Investors” section of our website at www.sdpi.com. Copies of these documents are also available in print form at
no charge by sending a request to Christopher Cashion, our Chief Financial Officer, Superior Drilling Products, Inc.,
1583 South 1700 East, Vernal, Utah 84078, telephone (435) 789-0594.
5
Item 11. Executive Compensation.
Summary Compensation Table
The following table provides information concerning compensation paid or accrued during the fiscal years
ended December 31, 2016 and 2015, to our principal executive officer, our chief operating officer and our principal
financial officer, to whom we sometimes refer together as our “named executive officers.”
Stock
Awards
(3)
Option
Awards
Non-Equity
Incentive Plan
Compensation
All Other
Compensation
Name and
Principal
Position
G. Troy Meier
Chief Executive
Officer
Annette Meier
President and
Chief Operating
Officer
Christopher
Cashion
Chief Financial
Officer
Year Salary
2016 $ 297,135 (1) $ — $ 200,447 (4) $ 35,364 (6) $
Bonus
$
2015 $ 443,942 (2) $ — $ 175,750 (5) $ —
2016 $ 266,173 (1) $ — $ 149,457 (4) $ 31,266 (6) $
2015 $ 397,211 (2) $ — $ 138,750 (5) $ —
$
2016 $ 188,769 (1) $ — $ 73,849 (4) $ 21,231 (6) $
2015 $ 280,384 (2) $ — $ 64,750 (5) $ —
$
— $
— $
— $
— $
— $
— $
Total
9,971 (7) $ 511,187
18,762 (7) $ 638,454
3,989 (8) $ 450,885
8,343 (8) $ 544,304
9,678 (9) $ 293,527
7,652 (9) $ 352,786
(1) For 2016, Mr. Meier, Ms. Meier, and Mr. Cashion’s annual base salaries were $475,000, $425,000 and
$300,000, respectively, and were reduced for the entire year by 30% due to the downturn in the Oil and Gas
Industry. Additionally, Mr. Meier, Ms. Meier, and Mr. Cashion received option awards in lieu of cash as part
of their salary for 2016.
(2) For 2015, Mr. Meier, Ms. Meier and Mr. Cashion’s annual base salaries were $475,000, $425,000 and
$300,000, respectively, however on October 1, their salaries were reduced by 30%, due to the downturn in the
oil and gas industry.
(3) Reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. See Note 12
to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2016 for additional detail regarding assumptions underlying the value of these equity awards.
(4) The grant date fair value for restricted stock awards in 2016 was based on the closing price of our common
stock on the grant date (November 10, 2016), which was $0.97 per share. The restricted stock awards will vest
in accordance with the following vesting schedule: 33 1/3% of the shares of restricted common stock will vest
on November 10, 2017, 33 1/3% of the shares of restricted common stock will vest on November 10, 2018
and 33 1/3% of the shares of restricted common stock will vest on November 10, 2019.
(5) The grant date fair value for restricted stock awards in 2015 was based on the closing price of our common
stock on the grant date (August 10, 2015), which was $1.85 per share. The restricted stock awards will vest in
accordance with the following vesting schedule: 33 1/3% of the shares of restricted common stock vested on
the date of grant, 33 1/3% of the shares of restricted common stock vested on August 10, 2016 and 33 1/3% of
the shares of restricted common stock will vest on August 10, 2017.
(6) During March 2016, each of the named executive officers agreed to receive awards of stock options in lieu of
base salary. The grant date fair value for stock option awards was based on the closing price of our common
stock on the grant date of a) March 4, 2016, which was $1.73 per share; b) March 18, 2016, which was $1.67
per share; and c) March 31, 2016, which was $1.37 per share. All options vested 100% on the grant date and
have a ten year term expiring on March 4, 2026 March 18, 2026 and March 31, 2026, respectively. The fair
value of the vested stock options were calculated using the Black-Scholes model with a volatility and discount
rate over the expected term of each employee.
6
(7) Represents certain company paid health care costs for G. Troy and Annette Meier and personal use of a
company vehicle.
(8) Represents personal use of a company vehicle.
(9) Represents certain company paid health care costs.
Narrative Disclosure to Summary Compensation Table
See the footnotes to the Summary Compensation Table and “Employment Agreements and Potential Benefits Upon
Termination or Change-in-Control” for narrative disclosure with respect to the table, as well as the below
discussion.
Employment Agreements and Potential Benefits Upon Termination or Change-in-Control
In connection with our initial public offering, we planned to enter into employment agreements with each of
our named executive officers, and the forms of those agreements were filed with the SEC as exhibits to our
registration statement on Form S-1. However, management and the Board have continued to discuss and negotiate
the final terms of those agreements and as of the date hereof, the agreements have not been executed. As a result,
none of the named executive officers currently has a contractual right to any of the benefits described below. The
employment agreements to be entered into with our named executive officers will provide for, among other things,
the payment of base salary, reimbursement of certain costs and expenses, and for each named executive officer’s
participation in our bonus plan and employee benefit plans.
With the exception of G. Troy Meier’s and Annette Meier’s employment agreements, each agreement will
provide for a term of employment commencing on the date of the agreement and continuing (a) until we or the
executive provide 30-days written notice of termination to the other party, (b) upon termination by us for cause, or
(c) upon the executive’s death or disability. Except with respect to certain items of compensation, as described
below, the terms of each agreement will be similar in all material respects.
In addition to the base salaries shown above,
● Mr. Meier’s employment agreement provides for an annual review by our Board of Directors, and a
performance bonus of 70% to 110% of his base salary based on criteria to be established by the Compensation
Committee and participate in our incentive plans.
● Ms. Meier’s employment agreement provides for an annual review by our Board of Directors, and a
performance bonus of 70% to 110% of her base salary based on criteria to be established by the Compensation
Committee and participate in our incentive plans.
● Mr. Cashion’s employment agreement entitles him to receive up to a performance bonus based on criteria
established by the Compensation Committee, and to participate in our incentive plans.
Each of the Meiers’ employment agreements will provide for customary and usual fringe benefits generally
available to our executive officers, and reimbursement for reasonable out-of-pocket business expenses, including the
use of a company vehicle.
Change of Control Provisions. Each named executive officer’s employment agreement will also provide that in
the event of a Change in Control (as defined below), during the term of executive’s employment, (a) we are
obligated to pay such executive a single lump sum payment, within 30 days of the termination of such executive
officer’s employment, equal to one year salary, and (b) the executive’s equity awards, if any, shall immediately vest.
“Change in Control” means approval by our stockholders of:
7
(1) (a) a reorganization, merger, consolidation or other form of corporate transaction or series of transactions,
in each case, with respect to which persons who were our stockholders immediately prior to such transaction do not,
immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election
of directors of the reorganized, merged or consolidated company’s then outstanding voting securities, in
substantially the same proportions as their ownership immediately prior to such transaction, (b) our liquidation or
dissolution, or (c) the sale of all or substantially all of our assets (unless such reorganization, merger, consolidation
or other corporate transaction, liquidation, dissolution or sale is subsequently abandoned); or
(2) the acquisition in a transaction or series or transactions by any person, entity or “group”, within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, of more than 50% of either the then outstanding
shares of common stock or the combined voting power of our then outstanding voting securities entitled to vote
generally in the election of directors (a “Controlling Interest”), excluding any acquisitions by (a) us or our
subsidiaries, (b) any person, entity or “group” that as of the date of the amendments to the employment agreements
owns beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act of a Controlling Interest, or (c)
any of our employee benefit plans.
G. Troy Meier’s and Annette Meier’s employment agreements will provide that (a) the non-competition
covenant does not apply following the termination of employment if their employment is terminated without cause
or for good reason, (b) the non-solicitation of employees covenant applies with respect to any current employee or
any former employee who was employed by us within the prior six months, and (c) the non-solicitation of customers
covenant applies to all actual or targeted prospective clients of ours to the extent solicited on behalf of any person or
entity in connection with any business competitive with our business.
As consideration and compensation to our executive officers for, and subject to each executive officer’s
adherence to, the above covenants and limitations, we have agreed to continue to pay the executive officer’s base
salary in the same manner as if they continued to be employed by us during the one-year non-competition period
following the executive officer’s termination.
Payments on Termination. Except as noted above, upon termination of employment under these agreements,
(a) we are only required to pay each executive officer that portion of their respective annual base salary that have
accrued and remain unpaid through the effective date of the executive officer’s termination, and (b) we have no
further obligation whatsoever to the executive officer other than reimbursement of previously incurred expenses
which are appropriately reimbursable under our expense reimbursement policy. However, if employment
termination is due to the executive’s death, we will continue to pay the executive’s annual base salary for the period
through the end of the calendar month in which death occurs to the executive’s estate.
8
Outstanding Equity Awards for Year Ended December 31, 2016
The following table shows the number of shares covered by exercisable and unexercisable options awards and
stock awards held by our named executive officers on December 31, 2016. Each of the 2014 awards in the table was
made under the 2014 Employee Stock Incentive Plan and each of the 2015 and 2016 awards in the table was made
under the 2015 Long Term Incentive Plan.
Option Awards
Stock Awards
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(b) (5)
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(c)
Option
Exercise
Price
($)
(e)
Option
Expiration
Date
(f)
Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(#)
(g)
Market
Value of
Shares
or
Units of
Stock
That
Have
Not
Vested
($)
(h) (1)
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units or
Other
Rights
That
Have
Not
Vested
($)
(j)
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have
Not
Vested
(#)
(i)
Name
(a)
G.
Troy
Meier
Annette
Meier
Christopher
Cashion
19,980
20,681
25,081
17,698
18,319
22,217
11,995
12,416
15,057
—
—
—
—
—
—
—
—
—
—
—
—
1.73 03/04/2026
1.67 03/18/2026
1.37 03/31/2026
31,730 $ 58,701 (2)
206,646 $ 200,447 (3)
—
—
—
—
—
—
—
1.73 03/04/2026
1.67 03/18/2026
1.37 03/31/2026
25,050 $ 46,343 (2)
154,079 $ 149,457 (3)
—
—
—
—
—
—
—
1.73 03/04/2026
1.67 03/18/2026
1.37 03/31/2026
11,690 $ 21,627 (2)
25,000 $ 98,750 (4)
76,135 $ 73,851 (3)
—
—
—
—
—
—
(1) Reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. See Note 12
to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2016 for additional detail regarding assumptions underlying the value of these equity awards.
9
(2) The grant date fair value for restricted stock awards is based on the closing price of our common stock on the
grant date August 10, 2015, which was $1.85 per share. The restricted stock awards will vest in accordance
with the following vesting schedule: 33 1/3% of the shares of restricted common stock vested on August 10,
2015, 33 1/3% of the shares of restricted common stock vested on August 10, 2016 and 33 1/3% of the shares
of restricted common stock will vest on August 10, 2017.
(3) The grant date fair value for restricted stock awards is based on the closing price of our common stock on the
grant date (November 10, 2016), which was $0.97 per share. The restricted stock awards will vest in
accordance with the following vesting schedule: 33 1/3% of the shares of restricted common stock will vest
on November 10, 2017, 33 1/3% of the shares of restricted common stock will vest on November 10, 2018
and 33 1/3% of the shares of restricted common stock will vest on November 10, 2019.
(4) The grant date fair value for restricted stock awards is based on the closing price of our common stock on the
grant date (December 22, 2014), which was $3.95 per share. The restricted stock awards will vest in
accordance with the following vesting schedule: 33 1/3% of the shares of restricted common stock vested on
December 22, 2015, 33 1/3% of the shares of restricted common stock vested on December 22, 2016 and 33
1/3% of the shares of restricted common stock will vest on December 22, 2017.
(5) During March 2016, each of the named executive officers agreed to receive awards of stock options in lieu of
base salary. The grant date fair value for stock option awards was based on the closing price of our common
stock on the grant date of a) March 4, 2016, which was $1.73 per share; b) March 18, 2016, which was $1.67
per share; and c) March 31, 2016, which was $1.37 per share. All options vested 100% on the grant date and
have a ten year term expiring on March 4, 2026 March 18, 2026 and March 31, 2026, respectively. The fair
value of the vested stock options were calculated using the Black-Scholes model with a volatility and discount
rate over the expected term of each employee.
Director Compensation
Our employee directors are not separately compensated for their service as a director. In 2016, each of our
non-employee directors received 54,380 shares of restricted common stock for his service as a director. In addition
to receiving shares of stock, our non-employee directors received the following cash fees: Mr. Cryan, $75,031; Mr.
Iversen, $47,775; and Mr. Ronca, $45,938. The members of our Board of Directors are entitled to reimbursement of
their expenses incurred in connection with the attendance at Board and committee meetings in accordance with
Company policy.
The following table summarizes the annual compensation for our non-employee directors during 2016.
Fees
Earned
or Paid
in
Cash
(b)
Option
Stock
Awards
Awards
(d) (2)
(c) (1)
$ 75,031 $ 52,749 $ 10,719
— — —
$ 47,775 $ 52,749 $ 6,825
$ 45,938 $ 52,749 $ 6,563
Non-Equity
Incentive Plan
Compensation
(e)
Nonqualified
Deferred
Compensation
All Other
Compensation
(g)
Earnings (f)
—
—
—
—
—
—
—
—
Total (h)
— $ 138,499
—
—
— $ 107,349
— $ 105,249
Name
(a)
Terence Cryan (3)
James R.Lines (3)
Robert Iversen
Michael V. Ronca
(1) Reflects the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 of awards
granted by the Board of Directors. See Note 12 to our consolidated financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2016 for additional detail regarding
assumptions underlying the value of these equity awards. The grant date fair value for restricted stock awards
is based on the closing price of our common stock on the grant date (November 10, 2016), which was $0.97
per share, respectively. As of December 31, 2016, each non-employee director held an aggregate of 96,965
outstanding shares of restricted stock. Each director’s restricted stock awards will vest in accordance with the
following vesting schedule: a) for the shares granted on August 12, 2014: 33 1/3% of the shares of restricted
10
common stock will vest on the first anniversary of the date of grant, 33 1/3% of the shares of restricted
common stock will vest on the second anniversary of the date of grant and 33 1/3% of the shares of restricted
common stock will vest on the third anniversary of the date of grant, and b) for the shares granted on August
10, 2015: 33 1/3% of the shares of restricted common stock will vest on the first anniversary of the date of
grant, 33 1/3% of the shares of restricted common stock will vest on the second anniversary of the date of
grant and 33 1/3% of the shares of restricted common stock will vest on the third anniversary of the date of
grant , and c) for the shares granted on November 10, 2016: 33 1/3% of the shares of restricted common stock
will vest on the first anniversary of the date of grant, 33 1/3% of the shares of restricted common stock will
vest on the second anniversary of the date of grant and 33 1/3% of the shares of restricted common stock will
vest on the third anniversary of the date of grant in each case, so long as the director continues to serve on the
Board through such date.
(2) The grant date fair value for stock option awards in 2016 was based on the closing price of our common stock
on the grant date of March 31, 2016, which was $1.37 per share. All options vested 100% on the grant date
and have a ten year term expiring on March 31, 2026. The fair value of the vested stock options were
calculated using the Black-Scholes model with a volatility and discount rate over the expected term of each
employee.
(3) Mr. Cryan completed his Board tenure on December 15, 2016 and Mr. Lines was elected to the Board on
December 15, 2016.
11
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
The following table sets forth information with respect to the beneficial ownership of our common stock as of
April 18, 2017, by:
●
each person who is known by us to beneficially own 5% or more of the outstanding class of our capital
stock;
●
each member of the Board;
●
each of our executive officers; and
●
all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC. To our knowledge, each of the
holders of capital stock listed below has sole voting and investment power as to the capital stock owned unless
otherwise noted.
Name and Address of Beneficial Owner
FMR LLC (3)
245
Boston, Massachusetts 02210
Summer
Lone Star Value Management LLC (2)
53 Forest Avenue, 1st Floor
Old Greenwich, Connecticut 06870
Street
Reid Walker (4)
3953
Dallas, Texas 75219
Maple
Avenue,
Suite
150
G. Troy Meier (5)
Annette Meier (6)
Christopher D. Cashion (7), (12)
James R.Lines (9)
Robert Iversen (8), (10)
Michael V. Ronca (8), (11)
Executive Officers and Directors as a group (6 persons)
*
Less than 1%
Numbers of Shares of
Common Stock
Beneficially Owned
% of Common Stock
Outstanding (1)
2,409,569
2,679,479
1,657,143
10,217,248
10,137,173
225,603
13,000
111,385
108,912
10,217,248
10.0 %
11.0 %
6.9 %
42.2 %
41.9 %
*
*
*
*
42.2 %
(1) Based on 24,197,148 shares outstanding as of April 18, 2017. Unless otherwise noted, the address for the
holder is 1583 South 1700 East, Vernal, Utah 84078.
(2) Based on Form 4 filed with the SEC on February 3, 2017 by Lone Star Value Investors, LP, Lone Star Value
Investors GP, LLC (the general partner of Lone Star Value Investments), Lone Star Value Management, LLC
(the investment manager for Long Star Value Investments) and Jeffrey E. Eberwein. Mr. Eberwein serves as
the manager of Lone Star Value GP and sole member of Lone Star Value Management. Includes 2,412,739
deemed to be beneficially owned by Lone Star Value Investors and Lone Star Value GP, and 2,679,479
deemed to be owned by Lone Star Value Management and Mr. Eberwein.
(3) Based on a Schedule 13G/A filed with the SEC on February 14, 2017 by FMR LLC, Fidelity Small Cap
Growth Fund, Select Energy Services Portfolio, Edward C. Johnson III and Abigail P. Johnson. Mr. Johnson
is a Director and the Chairman of FMR LLC and Ms. Johnson is a Director, the Vice Chairman, the Chief
Executive Officer and the President of FMR LLC. Members of the family of Mr. Johnson, including Ms.
12
Johnson, are the predominant owners, directly or through trusts, of Series B voting common shares of FMR
LLC, representing 49% of the voting power of FMR LLC. The Johnson family group and all other Series B
shareholders have entered into a shareholders’ voting agreement under which all Series B voting common
shares will be voted in accordance with the majority vote of Series B voting common shares. Accordingly,
through their ownership of voting common shares and the execution of the shareholders’ voting agreement,
members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a
controlling group with respect to FMR LLC.
Neither FMR LLC nor Mr. Johnson nor Ms. Johnson has the sole power to vote or direct the voting of the
shares owned directly by the various investment companies registered under the Investment Company Act
(“Fidelity Funds”) advised by Fidelity Management & Research Company, a wholly owned subsidiary of
FMR LLC, which power resides with the Fidelity Funds’ Boards of Trustees. Fidelity Management &
Research Company carries out the voting of the shares under written guidelines established by the Fidelity
Funds’ Boards of Trustees.
(4) Based on a Schedule 13D/A filed with the SEC on October 12, 2016 by Reid Walker, D4D LLC, a Texas
limited liability company, and Hard 4 Holdings, LLC, a Texas limited liability company of which Mr. Walker
is the manager and 100% beneficial owner. Of the total 1,657,143 shares, 1,114,286 shares of common stock
and a warrant exercisable for 357,143 shares of common stock held by Hard 4 Holdings, LLC, which Mr.
Walker shares dispositive or voting power over, and Mr. Walker personally owns 185,714 additional shares of
the Company.
(5)
(6)
(7)
Includes (i) 5,641,510 shares of common stock indirectly owned through his ownership in Meier Family
Holding Company, LLC, and (ii) 3,173,350 shares of common stock indirectly owned through his ownership
in Meier Management Company, LLC. Also includes 95,000 shares of restricted common stock that vests in
accordance with the following vesting schedule: 33 1/3% of the shares of restricted common stock vested on
August 10, 2015, 33 1/3% of the shares of restricted common stock will vest on August 10, 2016 and 33 1/3%
of the shares of restricted common stock will vest on August 10, 2017. Also includes 206,646 of restricted
common stock that vests in accordance with the following vesting schedule: 33 1/3% of the shares of
restricted common stock will vest on November 10, 2017, 33 1/3% of the shares of restricted common stock
will vest on November 10, 2018, and 33 1/3% of the shares of restricted common stock will vest on
November 10, 2019.
Includes (i) 5,641,510 shares of common stock indirectly owned through her ownership in Meier Family
Holding Company, LLC, and (ii) 3,173,350 shares of common stock indirectly owned through her ownership
in Meier Management Company, LLC. Also includes 75,000 shares of restricted common stock that vests in
accordance with the following vesting schedule: 33 1/3% of the shares of restricted common stock vested on
August 10, 2015, 33 1/3% of the shares of restricted common stock will vest on August 10, 2016 and 33 1/3%
of the shares of restricted common stock will vest on August 10, 2017. Also includes 154,079 of restricted
common stock that vests in accordance with the following vesting schedule: 33 1/3% of the shares of
restricted common stock will vest on November 10, 2017, 33 1/3% of the shares of restricted common stock
will vest on November 10, 2018, and 33 1/3% of the shares of restricted common stock will vest on
November 10, 2019.
Includes (a) 75,000 shares of restricted common stock that vests in accordance with the following vesting
schedule: 33 1/3% of the shares of restricted common stock vested on December 22, 2015, 33 1/3% of the
shares of restricted common stock will vest on December 22, 2016 and 33 1/3% of the shares of restricted
common stock will vest on December 22, 2017 and (b) 35,000 shares of restricted common stock that vests in
accordance with the following vesting schedule: 33 1/3% of the shares of restricted common stock vested on
August 10, 2015, 33 1/3% of the shares of restricted common stock will vest on August 10, 2016 and 33 1/3%
of the shares of restricted common stock will vest on August 10, 2017. Also includes 76,135 of restricted
common stock that vests in accordance with the following vesting schedule: 33 1/3% of the shares of
restricted common stock will vest on November 10, 2017, 33 1/3% of the shares of restricted common stock
will vest on November 10, 2018, and 33 1/3% of the shares of restricted common stock will vest on
November 10, 2019.
13
(8) Includes (a) 18,750 shares of restricted common stock that vests in accordance with the following vesting
schedule: 33 1/3% of the shares of restricted common stock vested on August 12, 2015, 33 1/3% of the shares of
restricted common stock will vest on August 12, 2016 and 33 1/3% of the shares of restricted common stock will
vest on August 12, 2017 and (b) 23,734 shares of restricted common stock that vests in accordance with the
following vesting schedule: 33 1/3% of the shares of restricted common stock will vest on August 10, 2016, 33
1/3% of the shares of restricted common stock will vest on August 10, 2017 and 33 1/3% of the shares of
restricted common stock will vest on August 10, 2018. Also includes 54,380 of restricted common stock that
vests in accordance with the following vesting schedule: 33 1/3% of the shares of restricted common stock will
vest on November 10, 2017, 33 1/3% of the shares of restricted common stock will vest on November 10, 2018,
and 33 1/3% of the shares of restricted common stock will vest on November 10, 2019.
(9) The address of Mr. Lines is 1110 Ransom Road, Lancaster, New York 14086.
(10) The address of Mr. Iversen is 4928 FM 1374 Road, Huntsville, Texas 77340.
(11) The address of Mr. Ronca is 17318 Chagall Lane, Spring, Texas 77379.
(12) The address of Mr. Cashion is 20615 Sundance Springs Lane, Spring, Texas 77379
Securities Authorized For Issuance Under Equity Compensation Plans
The following table sets forth information regarding our existing equity compensation plans as of December 31,
2016.
Equity Compensation Plan Information
Number of
securities
remaining
available for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected in
column (a))
(c)
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)
780,484 (1) $
1.31
101,046 (2)
-
780,484
-
—
101,046
Plan Category
Equity compensation plans approved by
security holders (1)
Equity compensation plans not approved by security
holders
Total as of December 31, 2016
(1) Consists of 37,500 shares under the 2014 Employee Stock Incentive Plan and 742,984 shares under the 2015
Long Term Incentive Plan.
(2) Consists of 101,046 shares remaining available for future issuance under the 2015 Long Term Incentive Plan.
The 2014 Employee Stock Incentive Plan was frozen by the Board of Directors such that no future grants of
awards will be made and the 2014 Employee Stock Incentive Plan remains effective only with respect to
awards outstanding as of June 15, 2015 until they expire according to their terms.
14
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Certain Relationships and Related Party Transactions
Related Party Transactions
On January 1, 2016, the Company completed the divestiture of our interest in Superior Auto Body and
Paint, LLC, by selling the remaining ownership interests in the business operations to a third party. The Company
received $101,400 in proceeds. The Company leased certain of its facilities to Superior Auto Body (“SAB”). We
recorded rental income from the related party in the amounts of $199,902 for the years ended December 31, 2016
and 2015. As discussed below, in 2017, we sold the facilities that had been leased to SAB and accordingly, we will
no longer receive this rental income.
In February 2017, the Company sold real estate to SAB for the net proceeds of $2.5 million. The cash
received from the sale was used to pay down the $2.5 million loan balance on the property. As part of the sale, the
Company released 547,000 shares of the Meiers common stock from the collateral for the Tronco Note.
Policies and Procedures for Related Party Transactions
Any request for us to enter into a transaction with an executive officer, director, principal stockholder or any of
such persons’ immediate family members or affiliates, in which the amount involved exceeds $120,000, must first
be presented to our audit committee for review, consideration and approval. All of our directors and executive
officers are required to report to the audit committee chair any such related person transaction. In approving or
rejecting the proposed agreement, our audit committee shall consider the facts and circumstances available and
deemed relevant to the audit committee, including, but not limited to, costs and benefits to us, the terms of the
transaction, the availability of other sources for comparable services or products, and, if applicable, the impact on a
director’s independence. Our audit committee shall approve only those agreements that, in light of known
circumstances, are in, or are not inconsistent with, our best interests and the best interests of our stockholders, as our
audit committee determines in the good faith exercise of its discretion. If we should discover related person
transactions that have not been approved, the audit committee will be notified and will determine the appropriate
action, including ratification, rescission or amendment of the transaction.
Director Independence
The Board has determined that the following members are independent within the meaning of the listing rules
of the NYSE MKT: James Lines, Robert Iversen and Michael Ronca.
15
Item 14. Principal Accounting Fees and Services.
Independent Registered Public Accountant Fees
The following table sets forth the fees incurred by us in fiscal years 2016 and 2015 for services performed by
Hein & Associates, LLP and BDO:
Audit Fees
Audit-Related Fees
Tax Fees (2)
All Other Fees
Total
December 31,
2016
December 31,
2015
$
$
272,339 $
—
—
80,798
353,137 $
165,379
—
—
—
165,379
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Registered Public
Accountants
The charter of the Audit Committee and its pre-approval policy require that the Audit Committee review and
pre-approve the Company’s independent registered public accounting firm's fees for audit, audit-related, tax and
other services. The Chairman of the Audit Committee has the authority to grant pre-approvals, provided such
approvals are within the pre-approval policy and are presented to the Audit Committee at a subsequent meeting. For
the year ended December 31, 2016, the Audit Committee approved 100% of the services described above under the
captions “Audit Fees.”
16
Item 15. Exhibits and Financial Statement Schedules.
1. Financial Statements. Reference is made to the Index to Consolidated Financial Statements at Item 7 of this
Annual Report on Form 10-K.
2. Financial Statement Schedules. All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes to the financial statements.
3. Exhibits.
Exhibit No. Description
2.1
3.1
3.2
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).
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).
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
Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014).
10.1
10.2
10.3
10.4
10.5
10.6
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).
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).†
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).†
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 (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).
17
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
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).
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 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).
18
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
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).
Loan Agreement(s), dated December 30, 2013, between Superior Drilling Products, LLC, Meier
Leasing, LLC and Meier Management Company, LLC, as co-borrowers, 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).
19
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
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).
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 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).
10.35
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).
20
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
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).
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 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).
Exclusive Manufacturing, Marketing, Sales and Consulting Agreement among Hard Rock Solutions,
LLC, Extreme Technologies, LLC, Tenax Energy Solutions, LLC and Kevin Jones dated January 9,
2015 (incorporated by reference to Exhibit 10.45 to the Company’ s annual report on form 10-K for
the year ended December 31, 2014 filed on March 31, 2015.
Business Loan Agreement between Meier Properties, Series LLC and American Bank of the North
dated April 9, 2015 (incorporated by reference to Exhibit 10.1 to the Company’ s Current Report on
Form 8-K filed on April 15, 2015).
21
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
Commercial Guaranty between Superior Drilling Products, Inc. and American Bank of the North dated April
9, 2015 (incorporated by reference to Exhibit 10.2 to the Company’ s Current Report on Form 8-K filed on
April 15, 2015).
Commercial Guaranty between G. Troy Meier and American Bank of the North dated April 9, 2015
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 15,
2015).
Commercial Guaranty between Annette Meier and American Bank of the North dated April 9, 2015
(incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on April 15,
2015).
Amended and Restated Promissory Note from Hard Rock Solutions, LLC and Superior Drilling
Solutions, LLC in favor of WMAFC, Inc. dated April 28, 2015 (incorporated by reference to Exhibit
10.1 to the Company’ s Current Report on Form 8-K filed on April 15, 2015).
Form of Nonstatutory Stock Option Agreement (3 Year Vesting) under the 2015 Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed
on April 28, 2015).
Form of Nonstatutory Stock Option Agreement (2 Year Vesting) under the 2015 Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed
on April 28, 2015).
Form of Award of Restricted Stock (3 Year Vesting) under the 2015 Incentive Plan (incorporated by
reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on April 28,
2015).
Form of Award of Restricted Stock (2 Year Vesting) under the 2015 Incentive Plan (incorporated by
reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on April 28,
2015).
2015 Long Term Incentive Plan effective June 15, 2015 (incorporated herein by reference to
Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed with the
Commission on April 30, 2015).
Second Amended and Restated Promissory Note from Hard Rock Solutions, LLC and Superior
Drilling Solutions, LLC in favor of WMAFC, Inc. dated September 28, 2015 (incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 1, 2015).
10.57++
Business Agreement between Hard Rock Solutions, LLC and Baker Hughes Oilfield Operations,
Inc. dated January 25, 2016 (incorporated by reference to Exhibit 10.1 to the Company’ s Form 8-K
filed on January 29, 2016).
10.58
10.59
10.60
Loan and Security Agreement among Superior Drilling Products, Inc., Superior Drilling Solutions,
LLC, Hard Rock, LLC and Extreme Technologies, LLC as co-Borrowers and Federal National
Commercial Credit as Lender date March 8, 2016 (incorporated by reference to Exhibit 10.1 to the
Company’ s Current Report on Form 8-K filed on March 10, 2016).
Promissory Note dated March 8, 2016 issued in favor of Federal National Commercial Credit as
Lender (incorporated by reference to Exhibit 10.2 to the Company’ s Current Report on Form 8-K
filed on March 10, 2016).
Term Promissory Note dated March 8, 2016 issued in favor of Federal National Commercial Credit
as Lender (incorporated by reference to Exhibit 10.3 to the Company’ s Current Report on Form 8-
K filed on March 10, 2016).
22
10.61
Subordination Agreement among Superior Drilling Products, Inc., Meier Management Company,
LLC and Federal National Commercial Credit dated March 8, 2016 (incorporated by reference to
Exhibit 10.4 to the Company’ s Current Report on Form 8-K filed on March 10, 2016).
10.62
Form of Fully Vested Non-Statutory Stock Option Agreement (incorporated by reference to Exhibit
10.5 to the Company’s Current Report on Form 8-K filed on March 10, 2016).
10.63
10.64
10.65
10.66
10.67
10.68
10.69
10.70
10.71
21.1
23.1
Amended Loan and Security Agreement among Superior Drilling Products, Inc., Superior Drilling
Solutions, LLC, Hard Rock, LLC and Extreme Technologies, LLC as co-Borrowers and Federal
National Commercial Credit as Lender dated March 28, 2016 (incorporated by reference to Exhibit
10.1 to the Company’ s Current Report on Form 8-K filed on March 30, 2016).
Distribution Agreement between Hard Rock Solutions, LLC and Drilling Tools International, Inc.
dated May 12, 2016 (incorporated by reference to Exhibit 10.1 to the Company’ s Current Report on
Form 8-K filed on May 13, 2016).
Second Amendment to Loan and Security Agreement among Superior Drilling Products, Inc.,
Superior Drilling Solutions, LLC, Hard Rock, LLC and Extreme Technologies, LLC as co-
Borrowers and Federal National Commercial Credit as Lender dated May 12, 2016 (incorporated by
reference to Exhibit 10.3 to the Company’ s Current Report on Form 8-K filed on May 16, 2016).
Promissory Note from Superior Drilling Products Inc. in favor of the Donald A. Foss Revocable
Living Trust dated August 5, 2016 (incorporated by reference to Exhibit 10.1 to the Company’ s
Current Report on Form 8-K filed on August 11, 2016).
Warrant issued by Superior Drilling Products, Inc. in favor of the Donald A. Foss Revocable Living
Trust dated August 5, 2016 (incorporated by reference to Exhibit 10.2 to the Company’ s Current
Report on Form 8-K filed on August 11, 2016).
Promissory Note from Hard Rock Solutions, LLC and Superior Drilling Solutions, LLC in favor of
WMAFC, Inc. dated August 10, 2016 (incorporated by reference to Exhibit 10.3 to the Company’ s
Current Report on Form 8-K filed on August 11, 2016).
Modification and Forbearance Agreement dated August 16, 2016 by and among Superior Drilling
Products, Inc., Superior Drilling Solutions, LLC, Hard Rock Solutions, LLC, Extreme
Technologies, LLC and Federal National Payables, Inc. (incorporated by reference to Exhibit 10.1
to the Company’ s Current Report on Form 8-K filed on August 17, 2016).
Guaranty dated August 16, 2016 among G. Troy Meier, Annette Meier, and Federal National
Payables, Inc. (incorporated by reference to Exhibit 10.2 to the Company’ s Current Report on Form
8-K filed on August 17, 2016).
Amended and Restated Distribution Agreement between Hard Rock Solutions, LLC and Drilling
Tools International, Inc. dated August 30, 2016 (incorporated by reference to Exhibit 10.1 to the
Registrant’ s Current Report on Form 8-K filed on August 31, 2016).
Subsidiaries of the Registrant (previously filed)
Consent of Hein & Associates LLP (previously filed)
31.1*
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for G. Troy Meier.
31.2*
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Christopher D.
Cashion.
23
32**
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for G. Troy Meier and
Christopher D. Cashion.
* Filed herewith.
** Furnished herewith.
†
Indicates a management contract or compensatory plan, contract or arrangement.
++ Portions of this exhibit have been omitted pursuant to a request for confidential treatment submitted
to the Securities and Exchange Commission and this exhibit has been filed separately with the
Securities and Exchange Commission in connection with such request.
24
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.
Date: April 28, 2017
SUPERIOR DRILLING PRODUCTS, INC.
By: /s/ G. Troy Meier
G. Troy Meier, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Position
Date
/s/ G. Troy Meier
G. Troy Meier
Chief Executive Officer
(Principal Executive Officer)
/s/ Christopher Cashion
Christopher Cashion
Chief Financial Officer
(Principal Financial and Principal
Accounting Officer)
April 28, 2017
April 28, 2017
/s/ Annette Meier
Annette Meier
/s/ James Lines
James Lines
/s/ Robert Iversen
Robert Iversen
/s/ Michael V. Ronca
Michael V. Ronca
President, Chief Operating Officer and Director
April 28, 2017
Director
Director
Director
April 28, 2017
April 28, 2017
April 28, 2017
25
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a),
PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, G. Troy Meier, certify that:
1.
I have reviewed this Annual Report on Form 10-K/A (Amendment No. 1) of Superior Drilling Products, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: April 28, 2017
/s/ G. Troy Meier
G. Troy Meier
Chief Executive Officer
26
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a)/15d-14(a),
PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Christopher Cashion, certify that:
1.
I have reviewed this Annual Report on Form 10-K/A (Amendment No. 1) of Superior Drilling Products, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
Annual Report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: April 28, 2017
/s/ Christopher Cashion
Christopher Cashion
Chief Financial Officer
27
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Superior Drilling Products, Inc. (the “Company”) on Form 10-K/A
(Amendment No. 1) for the fiscal year ended December 31, 2016 (the “Report”), as filed with the Securities and
Exchange Commission on the date hereof, I, G. Troy Meier, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: April 28, 2017
/s/ G. Troy Meier
G. Troy Meier
Chief Executive Officer
28
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Superior Drilling Products, Inc. (the “Company”) on Form 10-K/A
(Amendment No. 1) for the fiscal year ended December 31, 2016 (the “Report”), as filed with the Securities and
Exchange Commission on the date hereof, I, Christopher Cashion, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: April 28, 2017
/s/ Christopher Cashion
Christopher Cashion
Chief Financial Officer
29
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, 2016
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
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
30
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 [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X]
No
The registrant had issued and outstanding 24,197,148 shares of its common stock on March 28, 2017.
Documents incorporated by reference: Portions of the registrant’s definitive proxy statement for its 2017 annual
meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days after
December 31, 2016, are incorporated by reference to the extent set forth in Part III of this Form 10-K.
31
SUPERIOR DRILLING PRODUCTS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016
PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDERS MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
EXHIBIT INDEX
SIGNATURES
35
58
58
58
59
60
60
68
69
75
92
92
92
93
93
93
93
93
94
95
102
32
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. The forward-looking statements contained in or incorporated by reference into
this Form 10-K are largely based on our expectations, which reflect estimates and assumptions made by our
management. These estimates and assumptions reflect our best judgment based on currently known market
conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are
inherently uncertain and involve a number of risks and uncertainties that are beyond our control, including:
●
●
●
●
●
the volatility of oil and natural gas prices;
the cyclical nature of the oil and gas industry;
availability of financing, flexibility in restructuring existing debt and access to capital markets;
consolidation within our customers’ industries;
competitive products and pricing pressures;
● our reliance on significant customers;
● our limited operating history;
●
fluctuations in our operating results;
● our dependence on key personnel;
●
costs of raw materials;
● our dependence on third party suppliers;
● unforeseen risks in our manufacturing processes;
●
the need for skilled workers;
● our ability to successfully manage our growth strategy;
● unanticipated risks associated with, and our ability to integrate, acquisitions;
●
●
current and potential governmental regulatory actions in the United States and regulatory actions and
political unrest in other countries;
terrorist threats or acts, war and civil disturbances;
● our ability to protect our intellectual property;
●
●
impact of environmental matters, including future environmental regulations;
implementing and complying with safety policies;
● breaches of security in our information systems;
●
●
related party transactions with our founders; and
risks associated with our common stock.
33
Many of these factors are beyond our ability to control or predict. These factors are not intended to
represent a complete list of the general or specific factors that may affect us.
In addition, management’s assumptions about future events may prove to be inaccurate. All readers are
cautioned that the forward-looking statements contained in this Annual Report on Form 10-K are not guarantees of
future performance, and we cannot assure any reader that such statements will be realized or that the forward-
looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied
in the forward-looking statements due to factors described in “Item 1A. Risk Factors” included elsewhere in this
prospectus and in the documents that we include as exhibits to this Annual Report, and our subsequent SEC filings.
All forward-looking statements speak only as of the date they are made. We do not intend to update or revise any
forward-looking statements as a result of new information, future events or otherwise, except as required by law.
These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our
behalf.
34
ITEM 1. BUSINESS
Nature of Operations
PART I
Superior Drilling Products, Inc. (the “Company”, “SDPI”, “we”, “our” or “us”) is an innovative drilling
and completion tool technology company providing cost saving solutions that drive production efficiencies for the
oil and natural gas drilling industry. The Company innovates, designs, engineers, manufactures, sells, and repairs
drilling and completion tools. Our drilling solutions include the patented Drill-N-Ream® well bore conditioning tool
(“Drill-N-Ream tool”) and the patented Strider™ Drill String Oscillation System technology (“Strider technology”).
In addition, the Company is a manufacturer and refurbisher of PDC (polycrystalline diamond compact) drill bits for
a leading oil field services company. We operate a state-of-the-art drill tool fabrication facility, where we
manufacture solutions for the drilling industry, as well as customers’ custom products. The Company’s strategy for
growth is to leverage its expertise in drill tool technology and innovative, precision machining in order to broaden its
product offerings and solutions for the oil and gas industry.
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
Design and Fabrication, LLC, a Utah limited liability company (“SDF”), (b) Extreme Technologies, LLC, a Utah
limited liability company (“ET”), (c) Meier Properties Series, LLC, a Utah limited liability company (“MPS”), (d)
Meier Leasing, LLC, a Utah limited liability company (“ML”), and (e) HR.
Overview
We are a drilling and completion tool technology company. We design and manufacture new drill bit and
horizontal drill string enhancement tools and refurbish PDC (polycrystalline diamond compact) drill bits for the oil,
natural gas and mining services industry. Our customers are primarily engaged in domestic and international
exploration and production of oil and natural gas.
We currently have three basic operations:
● Our PDC drill bit and other tool refurbishing and manufacturing service,
● Our emerging technologies business that manufactures the Drill-N-Ream tool, our innovative drill
string enhancement tool, the Strider technology and other tools, and
● Our new product development business that conducts our research and development, and designs our
horizontal drill string enhancement tools, other down-hole drilling technologies, and drilling tool
manufacturing technologies.
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 tool and the
patented Strider technology, and conduct our new product research and development from this facility.
35
Our co-founder, Troy Meier, developed the first commercially-viable process for refurbishing PDC drill
bits after a successful 13-year career with a predecessor of Baker Hughes Inc. For the past 21 years, we have
exclusively provided our PDC drill bit refurbishing services for the Rocky Mountain, California and Alaska regions
of Baker Hughes’s oilfield 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 specialized training and extensive experience related to drill bit
refurbishing and drill and completion tool manufacturing. They produce our products and services using a suite of
highly technical, purpose-built equipment, much of which we design and manufacture for our proprietary use. Our
manufacturing equipment and products use advanced technologies that enable us to increase efficiency, enhance
product integrity, improve efficiency and safety, and solve complex drilling tool problems.
In 2016, the Company entered into an agreement with Drilling Tools International (“DTI”), under which
DTI has a requirement to purchase our Drill-N-Ream tool for their rental tool business and achieve market share
requirements in order to maintain exclusive marketing rights for the Drill-N-Ream. This agreement began the
change of direction of our business model from a rental tool company to a manufacturer that designs, builds and
sells tools. DTI, has exclusive rights to market the Drill-N-Ream in the U.S., and in Canada, both onshore and
offshore. It must achieve defined market share goals with our tool starting in June 2017 that increase through to the
end of 2020. We receive revenue from DTI for tool sales, tool repairs and a royalty fee based on the tools usage.
In 2016, the Company also entered into an agreement with Baker Hughes to supply its Open Hole Strider
drill string oscillation tool which reduces drill string friction on horizontal wells, resulting in improved rates of
penetration and cost savings. The agreement has no set expiration date or minimum shipment requirement. It will
remain in force until either the Company or Baker Hughes cancel it. Subject to certain limitations, the agreement is
terminable by Baker Hughes on 30 days prior written notice.
Oil and Gas Drilling Industry
Overview
Drilling and completion of oil and gas wells are 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 revenue and profits for both drillers and
equipment manufacturers. Likewise, significant decreases in the prices of those commodities may lead E&P
companies to reduce their capital expenditures, which decreases the demand for drilling equipment.
Trends in the Industry
Recent Rig Count Improvement; Industry Volatility. Our business is highly dependent upon the vibrancy of
the oil and gas drilling operations in the U.S. 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. Beginning in the latter half of
2014 and through early 2016, oil prices dramatically declined in the United States and as a result, the number of
operating drill rigs has been measurably reduced. The NYMEX-WTI oil price was as low as $26.19 in February
2016, while the NYMEX-Henry Hub natural gas price was as low as $1.49 per MMBtu in March 2016. The Baker
Hughes weekly rotary rig count decreased over 70% from the high of 1,931 on September 13, 2014 to a historic low
of 404 as of May 27, 2016.
36
While Baker Hughes is a leading supplier of drill bits to the oil and natural gas exploration and production
industry globally, our business with them decreased measurably during this time as a result of the decline in drilling
activity. This severely impacted both pricing and volume for drill bit refurbishment. We are contracted with Baker
Hughes to serve the Rocky Mountain region that includes the Bakken shale formation in North Dakota. This region
is higher cost production and as such, the drill rig count reduction has been more dramatic than the overall U.S rig
count decline. During the second half of calendar year 2016 and the first couple months of 2017, the U.S. rig count
has increased from the historic low of 404 in May 2016 to 809 as of March 24, 2017. With this increase in market
activity, we have seen an increase in demand for our product and services.
Advent of horizontal drilling requires new technologies. We believe the value of our Drill-N- Ream tool
and Strider technology combined with our low market penetration provide us sales opportunities in soft as well as
robust markets.
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 our Drill-N-Ream tool and Strider technology have proven to provide significant
operational efficiencies and costs savings 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/directional drilling and its
resulting need for new drill string tools and technology.
We expect that with our extensive knowledge and experience in the oilfield industry, we can identify
additional challenges with directional drilling, and then design and develop tools that will help our customers with
their drilling challenges. Further development of additional drill string components, such as our Drill-N-Ream and
Strider technology, will become increasingly important to our business as we continue to grow through both organic
expansion and strategic acquisitions.
GE Oil & Gas to merge with Baker Hughes. During 2016, GE Oil and Gas announced its planned merger
with 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. In January 2016, the Company entered into an agreement with Baker Hughes to
supply the Strider technology with our Open Hole Strider tool and related services to Baker Hughes. Tool shipments
associated with the agreement are expected to begin in late 2017. The agreement has no set expiration date or
minimum shipment requirement. It will remain in force until it is canceled by either us or Baker Hughes, as
stipulated in the agreement.
Our Drill Bit Refurbishment Business
As the refurbishing industry grew, our arrangement with Baker Hughes is an agreement to perform our drill
bit refurbishment work exclusively for Baker Hughes’ Rocky Mountain, California and Alaskan regions. 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.
37
Our Horizontal Drilling Tools and Technologies
Drill-N-Ream Tool. The Drill-N-Ream tool is a dual-section reaming tool which is located behind the
bottom hole assembly (BHA) to smooth and slightly enlarge the well drift in the curved and horizontal sections of
horizontal wells, in both oil and water based mud. The Drill-N-Ream tool is available in multiple sizes and can be
custom manufactured to fit any hole size. The Drill-N-Ream tool conditions the well bore as it is being drilled and
allows the drill string to move through the 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. 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 conditions 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 tool 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 remove and reinsert the drill string), and (c) enhancing the power available to drive the
drill bit assembly.
Specifically,
● Traditional methods for conditioning the well bore entails removing the drill string and running a
dedicated reamer through the well bore, typically in two separate runs. The Drill-N-Ream tool
eliminates the need for dedicated reamer runs, and therefore reduces the cost of drilling a horizontal
well.
● We believe that the Drill-N-Ream’s adoption and continued use by operators supports it effectiveness
and industry acceptance. In fact, leading operators have begun to standardize their bottom hole
assembly with a Drill-N-Ream tool. 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 revenue from, the Drill-N-Ream tool over the next several years as more
well operators’ reports of its effectiveness are transmitted through word-of-mouth by an increasing
user base to other well operators.
Strider Technology. The Strider technology utilizes its unique patented design to reduce drill string friction
on horizontal wells, resulting in improved rates of penetration and cost savings. Its revolutionary engineering
provides a cost-effective alternative to conventional downhole vibration tools. The Strider technology 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.
The Strider technology is composed of two main parts, a hydraulic channeling chamber (HCC) and a
rhythmic pulsation chamber (RPC). The RPC contains a precisely engineered, high speed pulse-valve that
systematically restricts flow area. During flow restriction, or “closure”, the ideal amount of fluid is allowed to
continue down hole. This perfectly controlled hydraulic flow produces an optimal pulse frequency, which is
preferred for bottom hole assembly equipment. The low frequency also allows for placement of the Strider
technology to the bit closer than typical oscillation tools.
We believe that our Strider technology is at the forefront of drill string tool technological development for
horizontal drilling. We believe our technology in the drill string stimulation tool offers significant advantages over
our competitors and we believe our Strider technology will be rapidly accepted in the drilling market and completion
markets.
38
We have two tools that we have developed with our Strider technology: the Coiled Tubing Strider (CTS)
and the Open Hole Strider.
The CTS is used in the completions industry to assist the coiled tube used to complete previously drilled
well bores to get to bottom depth. It is used by oil field services companies that specialize in completions, as well as
by the operators.
The Open Hole Strider is used as a component of the bottom hole assembly for drilling to create improved
drilling efficiencies by reducing friction and adding additional thrust behind the drill bit.
V-Stream advanced conditioning system (“V-Stream”). The V-Stream tool is an integral spiral blade
stabilizer and is engineered to combine stabilization with reaming. A cavity or plenum in the middle of the blades
facilities enhanced fluid flow for cuttings transport and reduces torque when compared to typical stabilizers with
similar overall blade length. Non-active cutters at gauge enable the V-Stream to remove formation and condition the
hole while controlling deviation. With these unique features, the V-Stream will stabilize the BHA and condition the
hole simultaneously to optimize the drilling operations.
Dedicated Reamer Stinger (“DR Stinger”). DR Stinger is designed to optimize dedicated reamer
operations. DR Stinger utilized our fully patented Drill-N-Ream tool with its dual stage eccentric reamers which
conditions well bores by increasing well bore drift. The two reamer stages spaced approximately five feet apart act
in unison to force each other into the formation while efficiently reducing ledges, doglegs, and well bore tortuosity.
With DR Stinger, a tapered stinger is placed just below the Drill-N-Ream tool at the end of the drill string. The DR
Stinger eliminates any bit costs during the reamer operation as it is run without a bit, offering a much better
indication of hole conditions. Floats are included in the DR Stinger, as well as an anti-plug port system with both
features eliminating any plugging of the drill string. With no bit on the DR Stringer, the drill string will find and
keep well bore center preventing unplanned side tracks.
New Product Development and Intellectual Property
Our sales and earnings are influenced by our ability to successfully provide the high-level service that our
customers demand, which in turn relies on our ability to develop new processes, technology, and products. 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. During 2015, research and
development costs were approximately $1.5 million. In 2016, our research and development costs decreased slightly
to $1.2 million, which represented 16.7% of our 2016 revenue as we continued to maintain our commitment to new
product development during the downturn in our industry.
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, our customer relationships, 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 investors 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 of our component parts, products or specific raw
materials are only available from a limited number of suppliers.
39
Our ability to obtain suitable quality raw materials and components, such as PDC’s, steel and flux, solder
and heating elements, is critical to our ability to remanufacture Baker Hughes drill bits, and to manufacture the
Drill-N-Ream tool and Strider technology tools and other future 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.
Because Baker Hughes pays the cost of direct materials and supplies used in our drill bit refurbishing
process, cost increases are not as critical as short-term financial components for that line of business. However, the
price and availability of commodities and components, in particular steel, can have an impact on our operations. 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 U.S. patent applications pending, and related international patent applications pending as co-inventor,
and individually with respect to the Strider technology and other pending 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 our 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 bit refurbishing in the oil and gas
industry because we are under an exclusive contract with Baker Hughes for those services.
In 2016, the Company entered into an agreement with DTI, under which DTI has a requirement to purchase
our Drill-N-Ream tool for their rental tool business and achieve market share requirements in order to maintain
exclusive marketing rights for the Drill-N-Ream tool. This agreement began the change of direction of our business
model from a rental tool company to a manufacturer that designs, builds and sells tools. DTI, has exclusive rights to
market the Drill-N-Ream tool in the U.S., both onshore and offshore, and in Canada. It must achieve defined market
share goals with our tool starting in June 2017 that increase through to the end of 2020. We receive revenue from
DTI for tool sales, tool repairs and a royalty fee based on the tools usage.
Our Open Hole Strider agreement with Baker Hughes enables us to supply our drill string oscillation tool
which reduces drill string friction on horizontal wells, resulting in improved rates of penetration and cost savings.
The agreement has no set expiration date or minimum shipment requirement. It will remain in force until either SDP
or Baker Hughes cancel it. Subject to certain limitations, the agreement is terminable by Baker Hughes on 30 days
prior written notice. The Open Hole Strider tool has been deployed in North Dakota’s Bakken oil field, Oklahoma
and Wyoming, with the goal to expand to other surrounding states in the near future. The tool is expected to be
commercialized later in 2017 or early 2018.
40
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 tool manufacturer in the drilling industry:
Leverage highly advanced tool technologies. We currently have two differentiated advanced drilling tool
technologies that address challenges encountered in the oil and gas drilling marketplace.
● The Strider technology is a patented drill string oscillation system that minimizes drill string friction
thereby improving weight on bit for directional drilling. Its technological advancements, including a two-part
design, enable the Strider to be placed closer to the drill bit than other oscillation tools. We have two tools that
incorporate the Strider technology: the CTS and the Open Hole Strider.
● The Drill-N-Ream tool has a unique design that provides a cleaner well bore with fewer ledges and a
wider drift, while eliminating the need for a dedicated reaming run. As a result, our end users experience fewer drill
string tool failures and reduce the number of drilling days per well.
Expand our channels to market. We have strategically shifted from creating a rental tool business to
leveraging existing distribution channels in the exploration and production industry. We recently entered into an
agreement with DTI, establishing DTI as the exclusive distributor of our patented Drill-N-Ream tool in the United
States and Canada onshore and offshore markets. As a result of this agreement, we believe our technology will
penetrate the market more efficiently as DTI already has developed long-term relationships with end users. We
expect to add additional distributors as we expand our tool offering. We also expect to leverage our distributor and
customer relationships to identify needs for new tool development and to use these channels to market to sell a
broadened product offering as it is developed.
Continue to enhance our Baker Hughes relationship. For the past 21 years, we have exclusively provided
our PDC drill bit refurbishing services for the Rocky Mountain, California and Alaska regions of Baker Hughes’s
substantial oilfield operations. While Baker Hughes continues to use us for its drill bit refurbishment in the Rocky
Mountain region, we have also leveraged our longtime relationship to increase our market penetration. In 2016, we
added our Open Hole Strider tool rental agreement to our drill bit refurbishing business with Baker Hughes. Their
sales force will now offer the Open Hole Strider drill string oscillation tool in order to provide a complete offering to
their customers. We will continue to develop our long-time relationship with Baker Hughes and look for other ways
to partner with them.
Strengthen and support our employees. Our experienced employees and management team are some of our
most valuable resources. Attracting, training, and retaining key personnel, has been and will continue to be 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 performance-based incentives, including opportunities for
stock ownership, and other competitive benefits. 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.
Seek strategic acquisitions to enhance or expand our product lines. While capital constraints are currently
requiring us to focus on organic growth, we are continually looking to find new technologies to add to our arsenal of
tools for the exploration and production industry. In analyzing new acquisitions, we intend to pursue opportunities
that complement our existing product line and/or that are geographically situated within territories 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.
41
Competitive Strengths
We believe that we differentiate ourselves from our competitors because of the technological advantages of
our proprietary tools, the quality and reliability of our products, our responsive service, and our manufacturing
flexibility to rapidly respond with products that meet the most demanding needs of our customers.
Cutting-edge manufacturing capability and proprietary technologies. 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 design and manufacture our products 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 technologies that enable us to increase efficiency, enhance the integrity
of precision drill bit and drill string tools that we manufacture and improve safety.
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 several the drill bit
refurbishing processes and technologies that we developed have raised 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 oilfield 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.
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. Other drill bit manufacturers also
have in-house refurbishing units, but they are not our competitors because of our exclusive contract with Baker
Hughes.
Drilling Enhancement 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 patented 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 Strider technology is at the forefront of drill string tool technological development for
horizontal drilling. There are existing tools that would compete with the Open Hole 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 our Strider technology will be rapidly accepted in the
drilling market. We do not believe there is a competitive tool to the CTS for the completions industry.
42
Customers
Distributor/Agent Relationships and Customer Diversification. With the expansion of our tool offerings,
we have increased our customer base through our channels to market. We recently established an agreement with
Baker Hughes to be a market channel partner for new customers of our Strider technology, specifically the Open
Hole Strider. We engaged with DTI in May 2016 to be the exclusive distributor of the Drill-N-Ream in the United
States and Canada onshore and offshore markets. We are also working on additional prospective channel partners,
specifically for the CTS. By increasing our capabilities and renting or selling 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 under
development.
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, which we
expect that we will renew prior to its expiration in October 2017. 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.
Drilling Enhancement Tools. E&P operators, other oil field services companies and distributors are
demanding key technologies, such as advanced directional drilling and more complex completion systems in order
to reduce costs resource requirements and tie to production. We believe that there will be significant opportunities to
bring new products and equipment to market, such as our Drill-N-Ream tool and Strider technology, 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
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, and 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. 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.
43
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.
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 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.
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, directors and officers 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.
44
Employees
As of December 31, 2016, we had 43 full-time employees compared with 66 full-time employees at the
same time in December 2015. We generally have been able to locate and engage highly qualified employees as
needed. None of our employees are 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
Risks Related to Our Business and Industry
An extended decline in expenditures by the oil and gas industry has reduced, and is expected to continue to
significantly impact our revenue and income and resulted in an impairment of our 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;
● weather conditions.
We expect continued volatility in both crude oil and natural gas prices, as well as in the level of 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.
Due to reduced commodity prices and the unprecedented rapid decline in the rig count during 2015 and 2016
to historic lows, we had measurably lower operating cash flows. As a result of this situation coupled with
pending payments required on our indebtedness, we may be unable to maintain adequate liquidity and make
payments on our debt.
45
At December 31, 2016, we had working capital of approximately $2.1 million. During 2015 and into 2016,
our principal sources of liquidity were cash flow from operations and our $3 million credit facility with Federal
National Commercial Credit (“FNCC”). In addition, on August 5, 2016, we completed the $1 million Bridge
Financing (as defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations
- Liquidity and Capital Resources”) to provide us with liquidity until we could close the public offering described
below. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and
debt service payments. Given the current environment of the oil and gas industry, our revenue dramatically declined
in 2015 and 2016.
On September 30, 2016, we priced a public offering of common stock at $1.00 per share. The transaction
closed on October 5, 2016 and was recorded as a receivable and common stock subscribed. Net of underwriting and
stock offering expenses of approximately $709,000, proceeds to the Company were approximately $5.0 million. The
Company used the proceeds to pay off the $1 million Bridge Financing and its $868,000 indebtedness with FNCC,
as well as for general corporate purposes, including working capital.
As amended and restated effective August 10, 2016, the Hard Rock Note accrues interest at 5.75% per
annum and matures and is fully payable on January 15, 2020. Under the current terms of Hard Rock Note, and after
the payment described below, we are required to make the following payments: accrued interest on each of January
15, March 15, May 15 and July 15, 2017, $500,000 (plus accrued interest) on each of January 15, March 15, May 15
and July 15, 2018, and $1,000,000 (plus accrued interest) on each of January 15, March 15, May 15 and July 15,
2019, with the remaining balance of principal and accrued interest on the Hard Rock Note due on January 15, 2020.
In connection with the amendment and restatement, we made an interest payment of approximately
$304,000 on the Hard Rock Note. In addition we issued 700,000 restricted shares of common stock (having an
agreed per share value of $1.43, or $1,000,000 in the aggregate) as payment for $1,000,000 of the $1,500,000 due on
the Hard Rock Note on or before October 15, 2016. Interest continued to accrue on the Hard Rock Note based on the
$1,000,000 value of the shares until the resale of such shares was registered with the SEC, which was completed on
November 21, 2016.
Our operational and financial strategies include lowering our operating costs and capital spending to match
revenue trends, managing our working capital and managing our debt to enhance liquidity. For example, to conserve
cash, we implemented a salary for stock options program during the first quarter of 2016 for senior management and
our board of directors. With the recent capital raise, the success we are having with our distributor agreement with
DTI and the opportunity with our new CTS tool, we believe we should have sufficient capital to support our
opportunities in 2017. We may need additional capital to support additional growth. We cannot provide any
assurance that financing will be available to us in the future on acceptable terms.
We will continue to work to grow revenue and review additional cost cutting measures with the goal to be
cash flow positive in 2017. If we are unable to do this, we may not be able to, among other things, (i) maintain our
current general and administrative spending levels; (ii) fund certain obligations as they become due; and (iii)
respond to competitive pressures or unanticipated capital requirements.
Failure to generate sufficient revenue to make payments on the Hard Rock Note could result in our loss of the
patents securing such note.
On August 10, 2016, certain of our subsidiaries entered into an amended and restated note with the seller in
our acquisition of Hard Rock Solutions, LLC (as so amended and restated, the “Hard Rock Note”). As amended and
restated, the Hard Rock Note accrues interest at 5.75% per annum and matures and is fully payable on January 15,
2020. Under the current terms of the Hard Rock Note, we are required to make the following payments: accrued
interest only on each of January15, March 15, May 15 and July 15, 2017; $500,000 in principal plus accrued interest
on each of January 15, March 15, May 15 and July 15, 2018, and $1,000,000 in principal plus accrued interest on
each of January 15, March 15, May 15 and July 15, 2019. The remaining balance of principal of $2,000,000 and
accrued interest on the Hard Rock Note are due on January 15, 2020.
46
The Hard Rock Note is secured by all of the patents, patents pending, other patent rights, and the Drill-N-
Ream trademark purchased in the Hard Rock acquisition (the “Drill-N-Ream Collateral”). If we do not have the
funds necessary to make the future payments under the Hard Rock Note and fail to make any payments as required
thereunder, and we are unsuccessful in amending or restructuring the payment terms, the holder of the Hard Rock
Note could conduct a foreclosure sale on the Drill-N-Ream Collateral in order to apply the proceeds thereof toward
repayment of the Hard Rock Note and all foreclosure costs, and our subsidiary Superior Drilling Solutions, LLC
would be liable for any shortfall or receive any excess from the sales proceeds. The failure to retain and use the
Drill-N-Ream Collateral in our business 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.
Our level of indebtedness could adversely affect our future ability to raise additional capital to fund growth,
limit our ability to react to changes in our business or our industry and place us at a competitive
disadvantage.
As noted above, we are required to make payments on the Hard Rock Note of accrued interest only in 2017,
$2.0 million (plus accrued interest) in 2018 and $4.0 million (plus accrued interest) for 2019, with the balance due
on maturity in January 2020. Interest will continue to accrue on the Hard Rock Note based on the $1,000,000 value
of the shares of common stock until such shares are registered. In addition, we are required to make monthly
payments of approximately $135,000 on our other indebtedness. During the year ending December 31, 2016, we
paid interest of $769,582 and a principal payment of $2,000,000 on the Hard Rock Note, of which $1,000,000 was
paid in stock. In addition, we issued 700,000 restricted shares of common stock on August 10, 2016 (having an
agreed per share value of $1.43, or $1,000,000 in the aggregate) as payment for the remaining $1,000,000 required
principal payment. The Company paid interest of $406,250 and a principal payment of $2,500,000 during the year
ending December 31, 2015.
Our level of debt and debt service requirements could have important consequences. For example, it could
(i) result in a foreclosure upon our key assets, (ii) increase our vulnerability to general adverse economic and
industry conditions, (iii) limit our ability to fund future capital expenditures and working capital, to engage in future
acquisitions or development activities, or to otherwise realize the value of our assets and opportunities fully because
of the need to dedicate a substantial portion of our cash flow from operations to payments on our debt, (iv) increase
our cost of borrowing, (v) restrict us from making strategic acquisitions or causing us to make non-strategic
divestitures, (vi) limit our flexibility in planning for, or reacting to, changes in our business or industry in which we
operate, placing us at a competitive disadvantage compared with our competitors who are less leveraged and (vii)
impair our ability to obtain additional financing in the future.
There may be significant annual and quarterly 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 revenue, 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 revenue 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 revenue 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 revenue. As a
result, if future revenue is below expectations, net income or loss may be disproportionately affected by a reduction
in revenue, as any corresponding reduction in expenses may not be proportionate to the reduction in revenue.
47
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 had two large customers that comprised 62% of our total revenue in 2016. 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.
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.
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.
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. 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 market share and selling strategies, our competitive position, our ability to retain
customers or our ability to negotiate favorable agreements with our customers.
48
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 competing market share, product and service offerings and financial
resources, further intensifying competition.
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 the other members of our
management team. 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 drill bit
refurbishment and manufacturing business and for our drill string tool manufacturing business. In addition, we must
have a reliable source of steel available for our 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 drill bit refurbishment
business. However, sourcing cost-effective supplies of quality steel in the relatively low volumes that our tool
manufacturing requires can be challenging. 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 drill bit refurbishment or our drill tool
manufacturing 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.
Events beyond our control may impact 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 our Vernal, Utah manufacturing facilities. A natural disaster, extended utility
failure or other significant event at our facility could significantly affect our ability to manufacture sufficient
quantities of key products or otherwise deliver products to meet customer demand or contractual 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
49
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.
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.
We may be unable to employ enough skilled and qualified workers to sustain or expand our current
operations.
Our operations 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 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, 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:
50
●
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 future acquisitions, we could be impeded from realizing all of the
anticipated 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 anticipated 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;
● 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 anticipated
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.
51
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 revenue. 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.
The use and protection of our proprietary technology will affect our success. 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 in international waters and therefore may 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.
We attempt to limit access to and distribution of our technology by customarily entering into confidentiality
and/or license agreements with our employees, customers and potential customers and suppliers. 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.
52
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 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.
53
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.
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 revenue. 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.
We have identified material weaknesses in our disclosure controls and procedures and internal control over
financial reporting. A failure to establish and maintain our internal control over financial reporting could harm our
business and financial results.
In connection with the preparation of this Annual Report, our management concluded that our internal
controls over financial reporting and disclosure controls and procedures were not effective due to certain material
weaknesses.
54
During the course of the assessments, management identified that we have a lack of staffing within our
accounting department, in terms of the small number of employees performing our financial and accounting
functions, which does not provide the necessary segregation of duties surrounding the cash disbursements process,
and a lack of accounting expertise to appropriately apply GAAP for complex and non-routine transactions, which
results in a material weakness. 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. Our management currently believes the additional accounting resources will remediate the
weakness with respect to insufficient personnel.
These processes provide reasonable assurance regarding the reliability of financial reporting for external
purposes in accordance with accounting principles generally accepted in the United States. Because of their inherent
limitations, these processes are not intended to provide absolute assurance that we would prevent or detect a
misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control
over financial reporting could limit our ability to report our financial results accurately and timely, or to detect and
prevent fraud. Failure to remediate these material weaknesses or additional material weaknesses in internal control
over financial reporting could cause a loss of investor confidence and decline in the market price of our stock.
Our information systems may experience an interruption or breach in security.
We rely on our proprietary production management technology which has changed how users connect to
our knowledge and 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.
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 market value of less than $75 million as of June 15, 2016. 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.
55
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 exceeds $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 $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 a substantial portion 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 governance and 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.
56
The market price of our common stock has been and may continue to 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;
● 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;
●
the authorization given to our board of directors to issue and set the terms of preferred stock; and
●
establishment of a classified board of directors.
57
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
ITEM 2.
PROPERTIES
The Company owns four buildings as part of its Vernal, Utah 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, (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) 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 March 31,
2017, there have been no updates or decisions made concerning this matter.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
58
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON 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.
Fiscal quarter ended:
March 31,
June 30,
September 30,
December 31,
2016
2015
High
Low
High
Low
$
$
$
$
2.60 $
2.25 $
2.72 $
1.41 $
0.84 $
1.25 $
0.86 $
0.77 $
4.27 $
3.82 $
2.80 $
1.55 $
2.76
2.75
1.20
0.90
Approximate Number of Equity Security Holders
As of March 8, 2017 there were 25 stockholders of record and 1,499 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
Equity Compensation Plan Information
Number of
restricted shares
and securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Number of
securities remaining
available for future
issuance under
equity
compensation plans
(excluding
securities reflected
in column (a))
(c)
Weighted average
exercise price of
outstanding
options, warrants
and rights
(b)
780,484 (1)
1.31
101,046 (2)
-
780,484
-
-
101,046
Plan Category
Equity compensation plans approved by
security holders (1)
Equity compensation plans not approved
by security holders
Total as of December 31, 2016
(1) Consists of 37,500 shares under the 2014 Employee Stock Incentive Plan and 742,984 shares under the 2015
Employee Stock Incentive Plan.
(2) Consists of 101,046 shares remaining available for future issuance under the 2015 Employee Stock Incentive
Plan. The 2014 Employee Stock Incentive Plan was frozen by the Board of Directors such that no future grants
of awards will be made and the 2014 Employee Stock Incentive Plan remains effective only with respect to
awards outstanding as of June 15, 2015 until they expire according to their terms.
59
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Superior Drilling Products, Inc. is an innovative drilling and completion tool technology company
providing cost saving solutions that drive production efficiencies for the oil and natural gas drilling industry. The
Company innovates, designs, engineers, manufactures, sells, and repairs drilling and completion tools. Our drilling
solutions include the patented Drill-N-Ream® well bore conditioning tool (“Drill-N-Ream tool”) and the patented
Strider™ Drill String Oscillation System technology (“Strider technology”). In addition, the Company is a
manufacturer and refurbisher of PDC (polycrystalline diamond compact) drill bits for a leading oil field services
company. We operate a state-of-the-art drill tool fabrication facility, where we manufacture solutions for the drilling
industry, as well as customers’ custom products. The Company’s strategy for growth is to leverage its expertise in
drill tool technology and innovative, precision machining in order to broaden its product offerings and solutions for
the oil and gas industry.
Industry Trends and Highlights of 2016
Our business is highly dependent upon the vibrancy of the oil & gas drilling operations in the U.S. The
reduction in activity has created a more challenging environment in which to market the Company’s drilling
products. Beginning in the latter half of 2014 and through early 2016, oil prices dramatically declined in the United
States and as a result, the number of operating drill rigs in the U.S. was measurably reduced from the high of 1,931
on September 13, 2014 to a historic low of 404 as of May 27, 2016. The rig count began to recover in the latter half
of 2016 and ended the year at 658 rigs. Generally, the industry is not expected to return to the record high rig count,
but rather to operate more efficiently with fewer rigs.
During the dramatic downturn in oil prices and the drill rig count, there was significant pressure on pricing.
While conditions have improved, the need to produce oil and gas at a lower cost continues to drive pricing decisions
of our customers. This requires us to continually find ways to improve efficiencies and take out costs in production.
Although the Company has seen demand for its oil and gas related products and services in the United
States and Canada impacted by these industry conditions, we continue to aggressively market our drilling products.
The impact of volume and pricing on our drill bit refurbishment business was especially pronounced as our
exclusive customer for that business is a leading supplier of drill bits to the oil and gas exploration and production
industry globally.
Our leading product is the Drill-N-Ream tool. Other products include the V-Stream Advance Stabilization
System and Dedicated Reamer Stringer. We commercialized the Coiled Tubing Strider in January 2017 and we
expect to commercialize the Open Hole Strider, which also employs the Strider drill string oscillation system
technology, later in 2017 or early 2018.
In 2016, the Company changed its go-to-market strategy and business model from a rental tool company to
a manufacturer that designs, builds and sells tools. A major step to effect the change was when we entered into an
agreement with Drilling Tools International (“DTI”) in May 2016. Under the agreement, DTI has a requirement to
purchase our Drill-N-Ream tool for their rental tool business and achieve market share requirements in order to
maintain exclusive marketing rights for the Drill-N-Ream tool in the United States and Canada onshore and offshore
markets. It must achieve defined market share goals with our tool starting in June 2017 that increase through to the
end of 2020 to maintain exclusive rights. We receive revenue from DTI for tool sales, tool repairs and a royalty fee
based on the tools usage.
60
Through our agreement with DTI, the Drill-N-Ream has been used by a growing number of operators and
has been used in a greater number of basins than its experience prior to our agreement. There are certain customers
with whom DTI is in the process of obtaining Master Service Agreements. During this process, we may act as an
agent and bill and collect the rental tool usage on DTI’s behalf. When we act as an agent, we record the revenue net
(the amount billed less our share of royalty revenue) on our financials. We remit the net amount to DTI. During
2016, we were an agent to six DTI customers. As of December 31, 2016, we were an agent to two DTI customers.
In January of 2016, we entered into an agreement with Baker Hughes for our Open Hole Strider. The
agreement provides for us to supply to Baker Hughes our drill string oscillation tool to package with their other
products. The Open Hole Strider reduces drill string friction on horizontal wells, resulting in improved rates of
penetration and cost savings. The agreement has no set expiration date or minimum shipment requirement. It will
remain in force until either the Company or Baker Hughes cancel it. Subject to certain limitations, the agreement is
terminable by Baker Hughes on 30 days prior written notice. The Open Hole Strider tool has been deployed in North
Dakota’s Bakken oil field, Oklahoma and Wyoming, with the goal to expand to other surrounding states in the near
future. The tool is expected to be commercialized later in 2017 or early 2018.
We spent much of 2016 also developing the Coiled Tubing Strider, which was subsequently
commercialized in January 2017. This tool also uses the Strider technology, but in the completions industry, a
market in which we had not generated any revenue from before. We are currently considering distribution channel
partners for this product and in the meantime are directly renting the tool to operators, completion services
companies and other customers.
RESULTS OF OPERATIONS
The following table represents our condensed consolidated statement of operations for the periods indicated:
(in thousands)
Revenue
Operating costs and expenses
Loss from continuing operations
Other expense
Income tax benefit
Net loss
For the Years Ended December 31,
2016
7,153
15,399
(8,246 )
(885 )
(2 )
(9,129 )
$
$
100 % $
215 %
(107 )%
(12 )%
0 %
(114 )% $
2015
12,706
26,253
(13,547 )
(1,381 )
(472 )
(14,456 )
100 %
207 %
(107 )%
(11 )%
(4 )%
(114 )%
Material changes of certain items in our statements of operations included in our financial statements for
the comparative periods are discussed below.
During 2016, the Company changed its revenue model from primarily renting tools to primarily selling
tools. As previously noted, the Company entered into a distribution agreement with DTI, under which they purchase
our Drill-N-Ream tool for their rental tool business. As part of this agreement, DTI also hired much of our field
sales team and the related vehicles associated with our previous rental tool business. Thus, rental and sales revenue
changed significantly during 2016 and cost of sales decreased measurably due to the change in our business model.
61
Revenue
Our revenue decreased approximately $5,553,000 during the twelve months ended December 31, 2016
compared with the same period in 2015. The decrease was due to decline in a tool related revenue and our
refurbishing business. Tool revenue for 2016 was approximately $5,483,000. This was comprised of approximately
$4,928,000 of rental tool and tool sales revenue and approximately $556,000 of other related revenue. Tool revenue
for 2015 was $7,756,000 comprised of approximately $7,357,000 of rental tool and tool sales revenue and
approximately $399,000 of other related revenue. Other related revenue includes royalty fees as well as maintenance
and repair revenue. Tool rental revenue was down due to a decline in U.S. drilling activity from 2015 to 2016, but
also as a result of the shift in business model in May of 2016 from a rental tool business to a tool sales business. As
a result, partially offsetting the decline in tool rental revenue was an increase in tool sales revenue. Contract services
revenue was heavily impacted by the decline in drilling activity in 2016, particularly in our bit refurbishment
territory of the Rocky Mountains, California and Alaska. Contract services revenue decreased 66% to approximately
$1,669,000 for the same period in 2016 from approximately $4,950,000 during the twelve months ending December
31, 2015.
Operating Costs and Expenses
Total operating costs and expenses decreased approximately $10,854,000 during the twelve months ended
December 31, 2016 compared with the same period in 2015.
●
●
●
●
Cost of revenue decreased approximately $2,127,000 for the twelve months ended December 31,
2016 in comparison with the same period in 2015. This decrease was due to lower volume and
significant cost cutting measures in 2016, primarily a reduction in employee headcount.
SG&A decreased approximately $1,238,000 for the twelve months ended December 31, 2016
compared with the same period in 2015. The decrease was due primarily to a reduction in
employee headcount and other cost saving measures due to the downturn of the oil industry. The
Company reduced its overall headcount from 66 full time employees at the end of 2015 to 43 at
the end of 2016. The change in the business model also reduced the sales infrastructure costs by an
annualized amount of approximately $1,200,000.
Depreciation and amortization expense decreased approximately $527,000 primarily as a result of
the Drill-N-Ream tool being reclassified from property, plant and equipment to inventory in
accordance with the company’s shift from a rental tool business to a tool sales business.
The Company had an impairment charge related to property, plant and equipment of
approximately $1,054,000 and $67,000 for the years ending December 31, 2016 and 2015,
respectively. The Company had an impairment charge related to goodwill of approximately
$7,803,000 during the year ended December 31, 2015. In 2016, the Company recognized an
impairment loss of $840,380 related to real estate property that was sold in the first quarter of
2017. This loss was recorded in 2016 and the asset was classified as held for sale and was
subsequently sold in February 2017. The impairment loss was based on a third-party independent
appraisal that utilized the sales comparison approach that determined the fair value of the property.
There was no gain on the sale of the asset in 2017 as the impairment had been recorded to reflect
the fair value of the property.
62
Other Income (Expenses)
Other income and expense primarily consists of rent income, interest income, interest expense and loss on
disposition of assets.
●
●
●
Other Income. We receive rent from two real property leases: one lease of a building on our
Vernal campus and the second for the lease of the Superior Auto Body (“SAB”) facilities by a
related party. For the twelve months ended December 31, 2016, lease payments decreased by
approximately $27,000 as compared with the same period in 2015, due to a decrease in rental
income from our Vernal property. As discussed below in “Contractual Obligations,” in 2017, we
sold the facilities that had been leased to SAB and accordingly, we will no longer receive this
rental income.
Interest Income. For the twelve months ended December 31, 2016 and 2015 interest income was
approximately $314,000 and $294,000, respectively. The increase was mainly due to interest
received from the Tronco note receivable.
Interest Expense. Interest expense for the twelve months ended December 31, 2016 and 2015 was
approximately $1,613,000 and $1,823,000, respectively. The decline in interest expense was due
primarily to principal payments associated with the Hard Rock Note.
Liquidity and Capital Resources
At December 31, 2016, we had working capital of approximately $2.1 million. Our principal sources of
liquidity during 2016 were borrowings and the recent equity sale. Our principal uses of cash are operating expenses,
working capital requirements, capital expenditures and debt service payments. Our operational and financial
strategies include lowering our operating costs and capital spending to match revenue trends, managing our working
capital and managing our debt to enhance liquidity. We will continue to work to grow revenue and review additional
cost cutting measures with the plan to be cash flow positive in 2017. If we are unable to do this, we may not be able
to, among other things, (i) maintain our current general and administrative spending levels; (ii) fund certain
obligations as they become due; and (iii) respond to competitive pressures or unanticipated capital requirements. We
cannot provide any assurance that financing will be available to us in the future on acceptable terms.
Public Offering: On September 30, 2016, we priced a follow-on public offering of common stock at $1.00
per share. The transaction closed on October 5, 2016. Net of underwriting expenses of $452,500, stock offering
expenses of $256,419, net proceeds were approximately $5.0 million. The Company used the proceeds to repay its
$1 million Bridge Financing, FNCC indebtedness of $868,000 and pay the remaining $500,000 plus accrued interest
on the Hard Rock Note. We have used the remaining $2.6 million from the offering to service on going debt
obligations, which include real property leases and equipment loans, as well as for general corporate purposes,
including growth working capital. The Bridge Financing Agreement and the FNCC lending agreement were both
terminated upon the repayment on October 5, 2016.
Hard Rock Note: On August 10, 2016, certain of our subsidiaries entered into an amended and restated note
with the seller in our acquisition of Hard Rock Solutions, LLC (as so amended and restated, the “Hard Rock Note”).
As amended and restated, the Hard Rock Note accrues interest at 5.75% per annum and matures and is fully payable
on January 15, 2020. Under the current terms of the Hard Rock Note, we are required to make the following
payments: accrued interest only on each of January 15, March 15, May 15 and July 15, 2017; $500,000 in principal
plus accrued interest on each of January 15, March 15, May 15 and July 15, 2018, and $1,000,000 in principal plus
accrued interest on each of January 15, March 15, May 15 and July 15, 2019. The remaining balance of principal of
$2,000,000 and accrued interest on the Hard Rock Note are due on January 15, 2020.
63
We made an interest payment of approximately $304,000 on the Hard Rock Note on August 5, 2016. In
addition, we issued 700,000 restricted shares of common stock on August 10, 2016 (having an agreed per share
value of $1.43, or $1,000,000 in the aggregate) as payment for $1,000,000 of the $1,500,000 of principal due on
October 15, 2016. On October 15, 2016, we paid $606,000 in principal and accrued interest for the remaining
amounts due in 2016. On October 21, 2016, the Company filed a registration statement with the SEC to register the
resale of the 700,000 shares of restricted stock. Additional interest continued to accrue on the Hard Rock Note based
on the $1,000,000 value of the shares until the registration statement was declared effective on November 21, 2016.
Contractual Obligations
The following table presents our contractual obligations as of December 31, 2016. 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):
2017 2018 2019 2020 2021 Thereafter Total
Debt (1)
Capital Lease (1)
Operating Leases
$ 3,095 $ 7,381 $ 4,682 $ 2,347 $ 181 $
-
-
-
130
-
141
226
166
-
77
1,061 $ 18,747
226
514
-
-
Total
$ 3,487 $ 7,522 $ 4,812 $ 2,424 $ 181 $
1,061 $ 19,487
(1) Amounts represent the expected cash payments of principal and interest amounts associated with our long-term
debt and capital lease obligations.
The aggregate outstanding balance of our notes payable and capital lease obligations net of discounts as of
December 31, 2016, was approximately $16.6 million with interest rates ranging from 0% to 8.4%. Subsequent to
the end of 2016, the Company repaid the $2.5 million loan balance related to the Superior Auto Body property as
described under “Operating Costs and Expenses. “
Cash Flow
Operating Cash Flows
For the year ended December 31, 2016, net cash used in our operating activities was approximately
$1,932,000. The Company had approximately $9,129,000 of net loss, approximately $822,000 decrease in accounts
receivable, approximately $783,000 of stock based compensation expense, approximately $1,054,000 impairment of
property, plant and equipment, a decrease in accounts payable and accrued expenses of approximately $218,000, and
depreciation and amortization expense of approximately $4,291,000.
Investing Cash Flows
For the year ended December 31, 2016, net cash provided by our investing activities was approximately
$165,000.
Financing Cash Flows
For the year ended December 31, 2016, net cash provided by our financing activities was approximately
$2,712,000. Cash used for financing activities was for payments on long-term debt and long-term capital lease
obligations of $3,616,000 and the Company received $5.0 million in net proceeds from our recently completed
public offering of common stock in the fourth quarter of 2016, which priced on September 30, 2016 and closed and
funded on October 4, 2016.
64
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,
revenue, 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, stock-
based compensation, determining the allowance for doubtful accounts, valuation of inventory, and recoverability of
long-lived assets, useful lives used in calculating depreciation and amortization, and valuation of intangible assets.
Revenue Recognition
We are a drilling and completion tool technology company and we generate revenue from the
refurbishment, manufacturing, repair, and sale of drilling and completion tools. Our manufactured products are
produced in a standard manufacturing operation, even when produced to our customer’s specifications. We also earn
royalty fees under certain arrangements for the tools we sell. In May 2016, the Company entered into an agreement
with DTI to be our exclusive distributor of the Drill-N-Ream tool in the United States and Canada, land and
offshore. This agreement began the change of direction of our business from renting tools to selling tools.
Tool sales, rentals and other related revenue
Tool and Product Sales: Revenue for tool and product sales is recognized upon shipment of tools or
products to the customer. Shipping and handling costs related to tool and product sales are recorded gross as a
component of both the sales price and cost of the product sold.
Tool Rental: Rental revenue is recognized upon completion of the customer’s job for which the tool was
rented. While the duration of the rents vary by job and number of runs, these rents are generally less than one month.
The rental agreements are typically based on the price per run or footage drilled and do not have any minimum
rental payments or term.
Other Related Revenue: We receive revenue from the repair of tools upon delivery of the repaired tool to
the customer. We earn royalty commission revenue when our customer invoices their customer for the use of our
tools. The Company may act as an agent by billing and collecting its customers’ tool rental revenue. When we are an
agent for our customer, revenue is presented in the statement of operations on a net basis.
Drill Bit Manufacturing and Refurbishment: Since 1996, we have refurbished PDC drill bits for Baker
Hughes. We are currently operating under a four-year vendor agreement with Baker Hughes that was renewed in
2013, and we expect the agreement will renew in October 2017. We recognize revenue for our PDC drill bit services
upon shipment of the drill bit. Shipping and handling costs related to refurbishing services are paid directly by Baker
Hughes at the time of shipment. By contract, we can only refurbish and manufacture oil or gas drill bits for Baker
Hughes, but we are not contractually prohibited from manufacturing drill bits for the mining industry.
65
Stock-Based Compensation
On June 15, 2015, our stockholders approved the Superior Drilling Company, Inc. 2015 Long Term
Incentive Plan (the “2015 Incentive Plan”). The purpose of the 2015 Incentive Plan is to advance the interests of the
Company and its stockholders by providing an incentive to attract, retain and reward persons performing services for
the Company and its affiliates and by motivating such persons to contribute to the growth and profitability of the
Company and our affiliates. Subject to adjustment as provided in the 2015 Incentive Plan, the maximum aggregate
number of shares of the Company’s common stock that may be issued with respect to awards under the 2015
Incentive Plan is 1,592,878.
On March 4, 2016, the Board of Directors granted options to acquire 78,944 shares of stock from the
Company’s 2015 Incentive Plan to officers and employees based on the closing price of the Company’s common
stock on the date of the grant, which was $1.73. These options vested 100% on the grant date and have a ten year
term expiring on March 4, 2026. The fair value of the vested stock options were calculated using the Black-Scholes
model with a volatility and discount rate over the expected term of each employee.
On March 18, 2016, the Board of Directors granted options to acquire 81,714 shares of stock from the 2015
Incentive Plan to officers and employees based on the closing price of the Company’s common stock on the date of
the grant, which was $1.67. These options vested 100% on the grant date and have a ten year term expiring on
March 18, 2026. The fair value of the vested stock options were calculated using the Black-Scholes model with a
volatility and discount rate over the expected term of each employee.
On March 31, 2016, the Board of Directors granted options to acquire 148,475 shares of stock from the
2015 Incentive Plan to directors, officers and employees based on the closing price of the Company’s common stock
on the date of the grant, which was $1.37. These options vested 100% on the grant date and have a ten-year term
expiring on March 31, 2026. The fair value of the vested stock options were calculated using the Black-Scholes
model with a volatility and discount rate over the expected term of each employee.
On December 5, 2016, the Board of Directors granted 5,000 stock options from the Company’s 2015
Incentive Plan to officers and employees based on the closing price of the Company’s common stock on the date of
the grant, which was $1.20. These restricted stock units and options vested 33% on the first anniversary of the grant
date, 33% on the second anniversary of the grant date and 34% on third anniversary of the grant date.
On December 22, 2016, the Board of Directors granted 54,200 stock options from the Company’s 2015
Incentive Plan to officers and employees based on the closing price of the Company’s common stock on the date of
the grant, which was $1.11. These restricted stock units and options vested 33% on the first anniversary of the grant
date, 33% on the second anniversary of the grant date and 34% on third anniversary of the grant date.
Options issued during March 2016 were part of a cash management plan by decreasing the base salary of
employees and directors in exchange for options.
Concentration of Credit Risk
Historically, substantially all of our revenue was derived from our refurbishing of PDC drill bits and our
manufacturing of the Drill-N-Ream tool. However, after the Hard Rock acquisition, our historical Hard Rock
revenue and accounts receivable percentages became spread out among our drill bit refurbishment customers and
Hard Rock’s rental tool customers. Subsequently we entered into an exclusive United States and Canada distribution
agreement with DTI to sell the Drill-N-Ream tool. As a result of this agreement, the majority of our revenue is now
concentrated between our two largest customers.
66
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are generally due within 60 days of the invoice date. No interest is charged on past-
due balances. We grant credit to our customers based upon an evaluation of each customer’s financial condition. We
periodically monitor the payment history and ongoing creditworthiness of our customers. An allowance for doubtful
accounts is established at a level estimated by management to be adequate based upon various factors including
historical experience, aging status of customer accounts, payment history and financial condition of our customers.
The allowance for doubtful accounts was $9,000 and $0 at December 31, 2016 and 2015, respectively.
Intangible Assets
Annually, and more often as necessary, we will perform an evaluation of our intangible assets for
indications of impairment. If indications exist, we will perform an evaluation of the fair value of the intangible
assets and, if necessary, record an impairment charge. As of December 31, 2016, the Company performed an
evaluation of the intangible assets. Based on this assessment, we have determined no impairment was needed.
Segment Reporting
We are a drilling and completion tool technology company and we generate revenue from the innovation,
design, engineering, manufacturing, selling, renting and repairing of our drilling and completion tools. We evaluate
our business performance as a single entity and we report as a single segment.
Valuation of Inventories
Inventories consist of raw materials, work-in-process and finished goods and are stated at the lower of cost,
determined using the weighted-average cost method, or market. Finished goods inventories include raw materials,
direct labor and production overhead. The Company regularly reviews inventories on hand and current market
conditions to determine if the cost of finished goods inventories exceed current market prices and impairs the cost
basis of the inventory accordingly.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. The cost of ordinary maintenance and repair is charged to
operating expense, while replacement of critical components and major improvements are capitalized. Depreciation
or amortization of property, plant 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
67
Property, plant and equipment is reviewed for impairment on an annual basis or whenever events or changes
in circumstances indicate the carrying value of an asset or asset group may not be recoverable. Indicative events or
circumstances include, but are not limited to, matters such as a significant decline in market value or a significant
change in business climate. An impairment loss is recognized when the carrying value of an asset exceeds the
estimated undiscounted future cash flows from the use of the asset and its eventual disposition. The amount of
impairment loss recognized is the excess of the asset’s carrying value over its fair value. Assets to be disposed of are
reported at the lower of the carrying value or the fair value less cost to sell. Upon sale or other disposition of an
asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying value
of the asset and the net proceeds received.
In 2016, the Company recognized an impairment loss of $840,380 related to property that was sold in the
first quarter of 2017. This loss was recorded in 2016 and the asset is classified as held for sale. The impairment loss
was based on a third-party independent appraisal that utilized the sales comparison approach that determined the fair
value of the property. There was no gain on sale on the sale of the asset in 2017 as the impairment had been
recorded to reflect the fair value of the property.
In 2016 and 2015, the Company recognized an impairment loss of $211,056 and $66,651, respectively,
related to the Open Hole Strider tool that had been capitalized as part of fixed assets and inventory. It was
determined in 2016 that the tool design had limited market potential and the company decided to re-design the tool
to be offered to a broader market.
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.
Concentration of Credit Risk — We are dependent on just a few main customers. The Company had two significant
customers that represented 63% of our revenue for the year ended December 31, 2016, respectively. These
customers had $649,960 in accounts receivable at December 31, 2016. We had one customer that represented 37%,
of our revenue for the year ended December 31, 2015, and had $887,081 in accounts receivable at December 31,
2015.
We are continuing to develop new products and tools which we believe will broaden our customer base,
which will have a positive effect on diversifying our concentration of credit risk.
68
ITEM 8.
FINANCIAL STATEMENTS
SUPERIOR DRILLING PRODUCTS, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2016 and 2015
Consolidated Statements of Operations – for the Years Ended December 31, 2016 and 2015
Consolidated Statements of Shareholders’ Equity – for the Years Ended December 31, 2016 and 2015
Consolidated Statements of Cash Flows – for the Years Ended December 31, 2016 and 2015
Notes to Consolidated Financial Statements
Page
70
71
72
73
74
75
69
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, 2016 and 2015, and the related consolidated statements of
operations, shareholders’ equity, and cash flows for each of 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, 2016 and 2015, and the
results of their operations and their cash flows for each of the years then ended, in conformity with U.S. generally
accepted accounting principles.
/s/ Hein & Associates LLP
Dallas, Texas
March 31, 2017
70
SUPERIOR DRILLING PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2016 and 2015
ASSETS
2016
2015
Current assets
Cash
Accounts receivable, net
Prepaid expenses
Inventories
Asset held for sale
Other current assets
Total current assets
Property, plant and equipment, net
Intangible assets, net
Note receivable
Other noncurrent assets
Total assets
$
2,241,902 $
1,038,664
76,175
1,167,692
2,490,000
13,598
7,028,031
9,068,359
8,579,444
8,296,717
15,954
1,297,002
1,861,002
179,450
1,410,794
-
-
4,748,248
14,655,502
11,026,111
8,296,717
19,365
$ 32,988,505 $ 38,745,943
LIABILITIES AND SHAREHOLDERS’ 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 long-term debt, net of discounts
Total current liabilities
Other long term liability
Capital lease obligation, less current portion
Related party debt, less current portion
Long-term debt, less current portion, net of discounts
Total liabilities
Commitments and contingencies –Note 9
Shareholders’ equity
Common stock - $0.001 par value; 100,000,000 shares authorized; 24,120,695
and 17,459,605 shares outstanding, respectively
Additional paid-in-capital
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
1,066,514 $
449,004
-
217,302
272,215
2,905,682
4,910,717
820,657
-
-
13,288,701
19,020,075
638,593
809,765
2,000
332,185
555,393
2,522,871
4,860,807
880,032
246,090
271,190
16,313,113
22,571,232
24,120
38,295,428
(24,351,118 )
13,968,430
17,460
31,379,520
(15,222,269 )
16,174,711
$ 32,988,505 $ 38,745,943
The accompanying notes are an integral part of these consolidated financial statements.
71
SUPERIOR DRILLING PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2016 and 2015
Revenue
Operating cost and expenses
Cost of revenue
Selling, general, and administrative expenses
Depreciation and amortization expense
Impairment of property, plant and equipment – held for sale
Impairment of goodwill
Total operating costs and expenses
Operating loss
Other income (expense)
Interest income
Interest expense
Other income
Gain (loss) on sale of assets
Total other expense
Loss before income taxes
Income tax benefit
Net loss
Basic loss per common share
Basic weighted average common shares outstanding
Diluted loss per common share
Diluted weighted average Common shares outstanding
2016
2015
$
7,153,063 $ 12,706,372
4,491,670
5,775,760
4,291,249
840,380
-
6,618,330
7,013,653
4,818,548
-
7,802,903
15,399,059
26,253,434
(8,245,996 )
(13,547,062 )
313,547
(1,613,214 )
237,203
177,611
(884,853 )
293,932
(1,822,636 )
240,286
(92,378 )
(1,380,796 )
(9,130,849 )
(2,000 )
(14,927,858 )
(472,279 )
$
(9,128,849 ) $ (14,455,579 )
$
$
(0.48 ) $
19,155,981
(0.48 ) $
19,155,981
(0.83 )
17,347,306
(0.83 )
17,347,306
The accompanying notes are an integral part of these consolidated financial statements.
72
SUPERIOR DRILLING PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Common Stock
Additional
Paid-in
Par Value Capital
Shares
Accumulated Stockholders
Deficit
Equity
Total
Balance - December 31, 2014
17,291,646 $
17,292 $ 30,815,609 $
(766,690 ) 30,066,211
Share based compensation expense
167,959
168
563,911
-
564,079
Net loss
-
-
- (14,455,579 ) (14,455,579 )
Balance - December 31, 2015
17,459,605
17,460 31,379,520 (15,222,269 ) 16,174,711
Share based compensation expense
Warrants issued for bridge financing
Stock issued for Hard Rock note
Issuance of common stock, net of
fees and expenses
Net loss
211,090
-
700,000
210
-
700
783,252
112,024
999,300
-
-
-
783,462
112,024
1,000,000
5,750,000
-
5,750 5,021,332
-
-
-
(9,128,849 )
5,027,082
(9,128,849 )
Balance - December 31, 2016
24,120,695 $
24,120 $ 38,295,428 $ (24,351,118 ) $ 13,968,430
The accompanying notes are an integral part of these consolidated financial statements.
73
SUPERIOR DRILLING PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
Cash Flows From Operating Activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
2016
2015
$
(9,128,849 ) $ (14,455,579 )
Depreciation and amortization expense
Amortization of debt discount
Deferred tax benefit
Share based compensation expense
Unrealized loss on warrant derivative
Impairment of goodwill
Impairment of property, plant and equipment
Impairment of inventories
(Gain) loss on sale of assets
Non-cash items
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Other noncurrent assets
Accounts payable and accrued expenses
Other long term liabilities
Net Cash (Used in) Provided by Operating Activities
Cash Flows From Investing Activities
Purchases of property, plant and equipment
Proceeds from sale of fixed assets
Net Cash Provided by (Used in) Investing Activities
Cash Flows From Financing Activities
Principal payments on debt
Principal payments on capital lease obligations
Principal payments on related party debt
Proceeds received from borrowings on debt
Proceeds from line of credit
Proceeds from sale of subsidiary
Proceeds from payments on note receivable
Proceeds received from issuance of common stock, net
Debt issuance costs
Net Cash Provided (Used) in Financing Activities
4,291,249
107,975
(2,000 )
783,462
112,024
-
1,054,482
569,602
(177,611 )
-
822,338
(115,444 )
89,677
(60,866 )
(218,375 )
(59,375 )
(1,931,711 )
4,818,548
567,187
(473,279 )
564,079
-
7,802,903
66,651
-
92,378
(291,238 )
2,541,999
(191,715 )
29,484
84,285
(531,077 )
-
624,626
(352,751 )
517,385
164,634
(1,284,782 )
62,000
(1,222,782 )
(3,254,971 )
(360,971 )
(268,835 )
1,500,000
226,885
50,700
22,533
5,027,082
(230,446 )
2,711,977
(3,159,100 )
(492,452 )
(292,977 )
47,299
-
-
-
-
(3,897,230 )
Net Increase (decrease) in Cash
Cash at Beginning of Period
Cash at End of Period
Supplemental information:
Cash paid for Interest
Warrants issued for bridge financing debt
Note receivable interest forfeited as payment on related party note payable
Long term debt paid with stock
$
$
$
$
$
944,900
1,297,002
2,241,902 $
(4,495,386 )
5,792,388
1,297,002
1,563,280 $
112,024
311,979 $
1,000,000 $
1,159,969
-
291,238
-
The accompanying notes are an integral part of these consolidated financial statements.
74
SUPERIOR DRILLING PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Superior Drilling Products, Inc. (the “Company”, “we”, “our” or “us”) is a drilling and completion tool technology
company. We design and manufacture new drill bit and horizontal drill string enhancement tools and refurbish PDC
(polycrystalline diamond compact) drill bits for the oil, natural gas and mining services industry. Our customers are
primarily engaged in domestic and international exploration and production of oil and natural gas.
We were incorporated on December 10, 2013 under the name SD Company, Inc. in order to facilitate (a) the
reorganization of the entities that are now our consolidated subsidiaries and (b) the subsequent acquisition of Hard
Rock Solutions, LLC. We changed our name from SD Company Inc. to Superior Drilling Products, Inc. on May 22,
2014 in conjunction with closing of that reorganization and the completion of our initial public offering. Our
headquarters and principal manufacturing operations are located in Vernal, Utah.
The Company’s consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the
accounts of Superior Drilling Products Inc. and all of its wholly-owned subsidiaries. All significant intercompany
accounts have been eliminated in consolidation. The Company does not have investments in any unconsolidated
subsidiaries.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results
could differ from those estimates. Significant items subject to estimates and assumptions include the carrying
amount and useful lives of property and equipment and intangible assets, impairment assessments, share-based
compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.
Revenue Recognition
We are a drilling and completion tool technology company and we generate revenue from the refurbishment,
manufacturing, repair, and sale of drill string tools. Our manufactured products are produced in a standard
manufacturing operation, even when produced to our customer’s specifications. We also earn royalty fees under
certain arrangements for the tools we sell. In May 2016, the Company entered into an agreement with DTI to be our
exclusive distributor of the Drill-N-Ream tool in the United States and Canada. This agreement began the change of
direction of our business from renting tools to selling tools.
Tool sales, rentals and other related revenue
Tool and Product Sales: Revenue for tool and product sales is recognized upon shipment of tools or products to the
customer. Shipping and handling costs related to tool and product sales are recorded gross as a component of both
the sales price and cost of the product sold.
Tool Rental: Rental revenue is recognized upon completion of the customer’s job for which the tool was rented.
While the duration of the rents vary by job and number of runs, these rents are generally less than one month. The
rental agreements are typically based on the price per run or footage drilled and do not have any minimum rental
payments or term.
75
Other Related Revenue: We receive revenue from the repair of tools upon delivery of the repaired tool to the
customer. We earn royalty commission revenue when our customer invoices their customer for the use of our tools.
The Company may act as an agent by billing and collecting its customers’ tool rental revenue. When we are an agent
for our customer, revenue is presented in the statement of operations on a net basis. At December 31, 2016, there
was approximately $221,000 of accounts receivable and approximately $207,000 of accounts payable related to
transactions we performed as an agent for our customer.
Contract Services
Drill Bit Manufacturing and Refurbishment: Since 1996, we have refurbished PDC drill bits for Baker Hughes. We
are currently operating under a four-year vendor agreement with Baker Hughes that was renewed in 2013 (the
“Vendor Agreement”). We recognize revenue for our PDC drill bit services upon shipment of the drill bit. Shipping
and handling costs related to refurbishing services are paid directly by Baker Hughes at the time of shipment. By
contract, we can only refurbish and manufacture oil or gas drill bits for Baker Hughes, but we are not contractually
prohibited from manufacturing drill bits for the mining industry.
Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit. We maintain cash deposits with financial institutions that may
exceed federally insured limits at times. We have chosen credible institutions and believe our risk of loss is
negligible.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, receivables, payables, and bank debt.
The Company believes that the carrying values of these instruments on the accompanying consolidated balance
sheets approximate their fair values.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are generally due within 60 days of the invoice date. No interest is charged on past-due
balances. We grant credit to our customers based upon an evaluation of each customer’s financial condition. We
periodically monitor the payment history and ongoing creditworthiness of our customers. An allowance for doubtful
accounts is established at a level estimated by management to be adequate based upon various factors including
historical experience, aging status of customer accounts, payment history and financial condition of our customers.
The allowance for doubtful accounts was $9,000 and $0 as of December 31, 2016, and 2015, respectively.
Inventories
Inventories consist of raw materials, work-in-process and finished goods and are stated at the lower of cost,
determined using the weighted-average cost method, or market. Finished goods inventories include raw materials,
direct labor and production overhead. The Company regularly reviews inventories on hand and current market
conditions to determine if the cost of finished goods inventories exceed current market prices and impairs the cost
basis of the inventory accordingly.
76
Property, Plant and Equipment
Property, plant and equipment is stated at cost. The cost of ordinary maintenance and repair is charged to operating
expense, while replacement of critical components and major improvements are capitalized. Depreciation or
amortization of property and equipment, including assets held under capital leases, is calculated using the straight-
line method over the asset’s estimated useful life as follows:
Buildings and leasehold Improvements
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, plant and equipment is reviewed for impairment on an annual basis or whenever events or changes in
circumstances indicate the carrying value of an asset or asset group may not be recoverable. Indicative events or
circumstances include, but are not limited to, matters such as a significant decline in market value or a significant
change in business climate. An impairment loss is recognized when the carrying value of an asset exceeds the
estimated undiscounted future cash flows from the use of the asset and its eventual disposition. The amount of
impairment loss recognized is the excess of the asset’s carrying value over its fair value. Assets to be disposed of are
reported at the lower of the carrying value or the fair value less cost to sell. Upon sale or other disposition of an
asset, the Company recognizes a gain or loss on disposal measured as the difference between the net carrying value
of the asset and the net proceeds received.
In 2016, the Company recognized an impairment loss of $840,380 related to property that was sold in the first
quarter of 2017. This loss was recorded in 2016 and the asset was classified as held for sale. The impairment loss
was based on a third-party independent appraisal that utilized the sales comparison approach that determined the fair
value of the property. There was no gain 0on the sale of the asset in 2017 as the impairment had been recorded to
reflect the fair value of the property. (See Note 10 – Related Party Transactions).
In 2016 and 2015, the Company recognized an impairment loss in cost of sales of $211,056 and $66,651,
respectively, related to the Open Hole Strider technology that had been capitalized as part of fixed assets. It was
determined in 2016 that the tool design had limited market potential and the Company decided to re-design the tool
to be offered to a broader market.
Goodwill
Goodwill is the excess cost of an acquired entity over the amounts assigned to assets acquired and liabilities
assumed in a business combination. The Company allocated $7,802,903 to goodwill in in conjunction with the Hard
Rock acquisition in 2014.
An assessment for impairment is performed annually or whenever an event indicating impairment may have
occurred. The Company completes its annual impairment test for goodwill and other indefinite-lived intangibles
using an assessment date of December 31. Goodwill is reviewed for impairment by comparing the carrying value of
the reporting unit’s net assets (including allocated goodwill) to the fair value of the reporting unit. The fair value of
the reporting units is determined using a discounted cash flow approach. Determining the fair value of a reporting
unit requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include
revenue growth rates, operating margins, weighted average costs of capital, drill rig counts, market share and future
market conditions, among others. If the reporting unit’s carrying value is greater than its fair value, a second step is
performed whereby the implied fair value of goodwill is estimated by allocating the fair value of the reporting unit
in a hypothetical purchase price allocation analysis. The Company recognizes a goodwill impairment charge for the
amount by which the carrying value of goodwill exceeds its fair value. The impairment test is a fair value test which
includes assumptions such as growth and discount rates. Any impairment losses are reflected in operating income.
77
The Company determined goodwill of $7,802,903 was fully impaired while performing the 2015 annual impairment
test. Global oil and natural gas commodity prices, particularly crude oil, decreased significantly. The decrease in
commodity prices had a negative impact on industry drilling and capital expenditure activity, which affected the
demand for products and services of our Company. As part of the first step of goodwill impairment testing, we
updated our income approach assessment of the future cash flows for our Company, applying expected long-term
growth rates, discount rates, and terminal values that we consider reasonable for our Company. Critical assumptions
include a recovery and market expansion of the Drill-N-Ream tool during 2016 and beyond. The Company’s market
capitalization was also used to corroborate reporting unit valuation. As goodwill was fully impaired in 2015, no test
was performed in 2016.
Intangible Assets
The Company’s intangible assets with finite lives consist of developed technology, customer contracts and
relationships, and trade names and trademarks.
The cost of intangible assets with finite lives is amortized using the straight-line method over the estimated period of
economic benefit, ranging from 3 to 17 years. Asset lives are adjusted whenever there is a change in the estimated
period of economic benefit. No residual value has been assigned to these intangible assets.
Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate
the carrying value may not be recoverable. These conditions may include a change in the extent or manner in which
the asset is being used or a change in future operations. The Company assesses the recoverability of the carrying
amount by preparing estimates of future revenue, margins, and cash flows. If the sum of expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount, an impairment loss is recognized. The
impairment loss recognized is the amount by which the carrying amount exceeds the fair value. Fair value of these
assets may be determined by a variety of methodologies, including discounted cash flow models.
Comprehensive Income (Loss)
Comprehensive income (loss) encompasses all changes in stockholders’ equity, except those arising from
investments from and distributions to stockholders. The Company’s comprehensive income (loss) includes net
income (loss) and foreign currency translation adjustments.
Research and Development
We expense research and development costs as they are incurred. For the years ended December 31, 2016 and 2015,
these expenses were approximately $1,200,000 and $1,500,000, respectively, and are included in the selling,
general, and administrative expenses in the statement of operations.
Earnings (Loss) Per Share
Basic earnings (loss) per common share is calculated by dividing net income (loss) available to common
shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss)
per share is calculated by dividing net income (loss) attributable to common shareholders by the weighted average
number of common shares outstanding, including potentially dilutive common share equivalents, if the effect is
dilutive. Potentially dilutive common shares equivalents include stock options and warrants. Approximately 250,000
warrants to purchase our common stock were excluded from this calculation because they were antidilutive for the
year ended December 31, 2016.
78
Income Taxes
The Company recognizes an asset or liability for the deferred tax consequences of all temporary differences between
the tax basis of assets or liabilities and their reported amounts in the financial statements that will result in taxable or
deductible amounts in future years when the reported amounts of the asset or liabilities are recovered or settled and
for operating loss carry forwards. These deferred tax assets and liabilities are measured using the enacted tax rates
that will be in effect when the differences are expected to reverse and the carry forwards are expected to be realized.
Deferred tax assets are reviewed periodically for recoverability and a valuation allowance is provided as necessary.
Debt Issuance Costs
Costs related to debt issuance are capitalized and amortized as interest expense over the term of the related debt
using the straight-line method, which approximates the effective interest method. Upon the repayment of debt, the
Company accelerates the recognition of an appropriate amount of the costs as interest expense. Debt issuance costs
related to the Hard Rock Note are presented as a direct reduction from the carrying amount of the note payable. As
of December 31, 2016 and 2015, the debt issuance costs were $153,503 and $261,493, respectively.
Share Based Compensation
Share based compensation expense for share based payments, related to stock option and restricted stock awards, is
recognized based on their grant-date fair values. The Company recognizes compensation expense, net of estimated
forfeitures, on a straight-line basis over the requisite service period of the award. Estimated forfeitures are based on
historical experience.
Concentrations and Credit Risk
The Company has two significant customers that represent 63% of our revenue for the year ended December 31,
2016, respectively. These customers had $649,960 in accounts receivable at December 31, 2016. We had one
customer that represented 37%, of our revenue for the year ended December 31, 2015, and had $887,081 in accounts
receivable at December 31, 2015.
Assets and Liabilities Held for Sale
The Company classifies disposal groups as held for sale in the period in which all of the following criteria are met:
(1) management, having the authority to approve the action, commits to a plan to sell the disposal group; (2) the
disposal group is available for immediate sale in its present condition subject only to terms that are usual and
customary for sales of such disposal groups; (3) an active program to locate a buyer or buyers and other actions
required to complete the plan to sell the disposal group have been initiated; (4) the sale of the disposal group is
probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale, within one
year, except if events of circumstances beyond the Company’s control extend the period of time required to sell the
disposal group beyond one year; (5) the disposal group is being actively marketed for sale at a price that is
reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is
unlikely that significant changes to the plan will be made or that the plan will be withdrawn. See Note 10 – Related
Party Transactions.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. The reclassifications
did not impact net income.
79
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the
amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In
August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (“ASU 2015-14”),
which deferred the effective date of ASU 2014-09 for all entities by one year and is effective for the Company’s
fiscal year beginning January 1, 2018. ASU 2015-14 permits the use of either the retrospective or cumulative effect
transition method. We have not yet selected a transition method nor has the effect of the standard on ongoing
financial reporting been determined.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This standard
requires management to measure inventory at the lower of cost or net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. The pronouncement is effective for annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period and should be applied retrospectively, with early application
permitted. The Company is currently evaluating the impact the pronouncement will have on the consolidated
financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which introduces the recognition of lease assets
and lease liabilities by lessees for all leases which are not short-term in nature. The new standard requires a modified
retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest
comparative period presented in the financial statements. The Company will adopt this guidance on January 1, 2019.
The Company is currently evaluating the impact the pronouncement will have on the consolidated financial
statements and related disclosure.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting
.” This standard simplifies several aspects of the accounting for share-based payment transactions, including the
income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. The pronouncement is effective for annual reporting periods beginning after December 15, 2016,
including interim periods within those annual periods, with early adoption permitted. The Company is currently
evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosures.
Effective January 1, 2016, the Company adopted the accounting guidance the FASB issued ASU 2015-03,
“Simplifying the Presentation of Debt Issuance Costs.” This guidance related to the imputation of interest and which
simplifies the presentation of debt issuance costs and requires that debt issuance cost related to a recognized debt
liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The adoption of this accounting standard did not have a material effect on the
consolidated financial statements and related disclosures.
NOTE 2. PUBLIC OFFERING
On September 30, 2016, we priced a follow-on public offering of common stock at $1.00 per share. The transaction
closed on October 5, 2016. Net of underwriting and stock offering expenses of approximately $709,000, the net
proceeds to the Company were approximately $5.0 million. The Company used the proceeds to repay a $1 million
promissory note received in conjunction with the public offering (“Bridge Financing”), to repay its $868,000
indebtedness with Federal National Commercial Credit (“FNCC”) and pay the remaining $500,000 plus accrued
interest on the Hard Rock Note (see Note 6 – Long-term Debt). We have used the remaining funds from the offering
and cash flows from operations to service on going debt obligations, which include real property leases and
equipment loans, as well as for general corporate purposes, including growth working capital.
80
NOTE 3. INVENTORIES
Inventories is comprised of the following:
Raw material
Work in progress
Finished goods
December 31,
2016
December 31,
2015
$
$
952,419 $
90,017
125,256
1,167,692 $
968,254
117,661
324,879
1,410,794
During 2016, the Company entered into a distribution agreement with Drilling Tools International (“DTI”), under
which DTI has a requirement to purchase our Drill-N-Ream tool for their rental tool business and achieve market
share requirements in order to maintain exclusive marketing rights for the Drill-N-Ream tool. This agreement began
the change of direction of our business from renting tools to selling tools. Due to this change in our business model,
we moved tools with a net book value of $225,710 from property, plant and equipment into inventory during 2016.
The Company recorded an impairment loss in the cost of sales of $210,745 and $124,872 during the years ended
December 31, 2016 and 2015, respectively, relating to the discontinuation of OrBit, a completion drill line product
line. As of December 31, 2016, the OrBit product line was fully impaired with a net book value of $0.
The Company recorded an impairment loss in the cost of sales of $147,801 during the year ended December 31,
2016 relating to several Strider technologies. Several parts of these tools needed to be replaced so an impairment
charge was recognized.
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following:
Land
Buildings
Buildings – Superior Auto Body
Leasehold improvements
Machinery and equipment
Machinery under capital lease
Furniture and fixtures
Transportation assets
Accumulated depreciation
$
$
December 31,
2016
December 31,
2015
2,268,039
4,847,778
2,213,729
717,232
7,200,530
2,322,340
507,554
1,317,397
21,394,599
(6,739,097 )
14,655,502
880,416 $
4,847,778
-
717,232
5,060,281
2,322,340
507,554
882,163
15,217,764
(6,149,405 )
9,068,359 $
During the year ended December 31, 2016, we sold transportation assets that were no longer necessary to our
business operations and rental tools for proceeds of $415,817 and gain of $76,211.
In 2016, the Company recognized an impairment loss of $840,380 related to real estate property that was sold in the
first quarter of 2017. This loss was recorded in 2016 and the asset was classified as held for sale. The impairment
loss was based on a third-party independent appraisal that utilized the sales comparison approach that determined
the fair value of the property. Upon the sale of the property in 2017, there was no gain or loss on the sale of the asset
as it had been adjusted to reflect the fair value of the property. (See Note 10 – Related Party Transactions).
81
In 2016 and 2015, the Company recognized an impairment loss in the cost of sales of $211,056 and $66,651,
respectively, related to the Open Hole Strider tool that had been capitalized as part of fixed assets and inventory. It
was determined in 2016 that the tool design had limited market potential and the company decided to re-design the
tool to be offered to a broader market.
Depreciation expense related to property, plant and equipment for the year ended December 31, 2016 and 2015 was
$ 1,844,582 and $2,371,881, respectively.
NOTE 5. INTANGIBLE ASSETS
Intangible assets are comprised of the following:
Developed technology
Customer contracts
Trademarks
Accumulated amortization
December
31,
2016
December
31,
2015
6,400,000
1,500,000
$ 7,000,000 $ 7,000,000
6,400,000
1,500,000
14,900,000 14,900,000
(3,873,889 )
$ 8,579,444 $ 11,026,111
(6,320,556 )
Amortization expense related to intangible assets for the years ended December 31, 2016 and 2015 was $2,446,667
each year.
These intangible assets will be amortized over their expected useful lives using the straight-line method, which is a
weighted-average amortization period of 6.3 years. As of December 31, 2016, the Company will recognize the
following amortization expense for the respective periods ending December 31 noted below:
2017
2018
2019
2020
2021
Thereafter
Total
2,446,667
2,446,667
1,700,000
1,166,667
583,334
236,109
$ 8,579,444
During the years ended December 31, 2016 and 2015, no impairments were recognized related to other intangible
assets.
82
NOTE 6. NOTE RECEIVABLE
In January 2014, we entered into a Note Purchase and Sale Agreement under which we agreed to purchase a loan
made to Tronco Energy Corporation (“Tronco”), a party related to us through common control, in order to take over
the legal position as Tronco’ s senior secured lender. That agreement provided that, upon our full repayment of the
Tronco loan from the proceeds of the Offering, the lender would assign to us all of its rights under the Tronco loan,
including all of the collateral documents. On May 30, 2014, we closed our purchase of the Tronco loan for a total
payoff of $8.3 million, including principal, interest, and early termination fees. As a result of that purchase, we
became Tronco’ s senior secured lender, and as a result are entitled to receive all proceeds from sales of the Tronco-
owned collateral, as discussed below.
As the result of our purchase of the Tronco loan, we have the direct legal right to enforce the collateral and guaranty
agreements entered into in connection with the Tronco loan and to collect Tronco’ s collateral sales proceeds, in
order to recover the loan purchase amount. The Tronco loan continues to be secured by the first position liens on all
of Tronco assets, as well as by the guarantees of Troy and Annette Meier (the “Meier Guaranties”), which are
directly payable to and legally enforceable by us. In addition, the Meiers have provided us with stock pledges in
which they pledge all of their shares of our common stock held by their family entities (the ‘ ‘ Meier Stock Pledge’ ‘
), as collateral for the Meiers guaranties until full repayment of Tronco loan. The pledged shares, which became
tradable in the public market 180 days after the closing of our initial public offering subject to insider timing
requirements and volume limitations under Rule 144 of the Securities Act and required periodic black-out periods,
are being held in third-party escrow until full repayment of the Tronco loan. As discussed in Note 10 – Related Party
Transactions, as of February 2017, the Company holds 8,267,860 shares as collateral for the Tronco note.
In 2015, the Board of Directors agreed to extend the terms of the Tronco loan to interest only payments due on
December 31, 2015 and 2016, with a balloon payment of all unpaid interest and principal due in full maturity on
December 31, 2017. The interest rate on the note is 3.75%. We earned interest of $311,979 and $291,238 in the
years ending December 31, 2016 and 2015, respectively. Based on an informal agreement between Tronco and the
Meiers, we forfeited the receipt of the cash interest earned as a reduction to the related party note payable (See Note
7 – Long-Term Debt).
On March 28, 2017, the Company and Tronco finalized an agreement with a third party and pursuant to this
agreement, the third party acquired all of Tronco Ohio assets for $550,000. As Tronco’s senior secured lender, we
released our lien and security interest on these assets in accordance with the agreement.
Also on March 28, 2017 and related to the sale of the Tronco assets, the Company agreed to a non-cash receipt of
the $550,000 from Tronco by reducing our bonus accrual liabilities. The bonus accrual was earned by the Meiers in
2014, and was recorded in other long term liability. As a result of this agreement, we have reduced both the other
long-term liability and the Tronco note receivable in 2017.
83
NOTE 7. LONG-TERM DEBT
Long-term debt is comprised of the following:
Real estate loans
Hard Rock Note, net of discount
Related party loans
Machinery loans
Transportation loans
Current portion of long-term debt
Real Estate Loans
December
31,
2016
December
31,
2015
7,846,497
-
684,921
398,929
$ 7,264,036 $ 7,585,063
9,738,521
826,583
853,970
658,430
16,194,383 19,662,567
(3,078,264 )
$ 13,288,701 $ 16,584,303
(2,905,682 )
Our manufacturing facility was financed by a commercial bank loan requiring monthly payments of approximately
$39,000, including principal and interest at 5.25%. A lump sum principal payment of approximately $4.2 million is
due at the maturity date of this loan on August 15, 2018.
In 2012, we became co-borrowers on a $1.7 million loan and a $1.2 million loan for Superior Auto Body. The
interest on this debt accrued at 5.50% and 2.42%, respectively, and the notes required monthly payments of $10,565
and $7,517, respectively, and a lump sum payment at maturity for the remaining principal balance. Both notes were
paid off in February 2017 in conjunction with the sale of the Superior Auto Body land and building (see Note 10 –
Related Party Transactions).
Hard Rock Note
In 2014, the Company purchased all of the interests of Hard Rock. Consideration consisted of $12.5 million paid in
cash at closing and a $12.5 million seller’ s note (the “Hard Rock Note”). The Hard Rock Note and subsequent
amendments are secured by all of the patents, patents pending, other patent rights, and trademarks transferred to
Hard Rock by Hard Rock in the closing of the Hard Rock acquisition. At issuance, the fair value of the Hard Rock
Note was determined to be $11,144,000, which is less than the face value due to a below-market interest rate. The
resulting discount of $1,356,000 will be amortized to interest expense using the effective interest method, totaling
approximately $108,000 and $567,000 during 2016 and 2015, respectively.
On August 10, 2016, certain of our subsidiaries entered into an amended and restated note with the seller in our
acquisition of Hard Rock Solutions, LLC. As amended and restated, the Hard Rock Note accrues interest at 5.75%
per annum and matures and is fully payable on January 15, 2020. Under the current terms of the Hard Rock Note,
we are required to make the following payments: accrued interest only on each of January 15, March 15, May 15
and July 15, 2017; $500,000 in principal plus accrued interest on each of January 15, March 15, May 15 and July 15,
2018, and $1,000,000 in principal plus accrued interest on each of January 15, March 15, May 15 and July 15, 2019.
The remaining balance of principal of $2,000,000 and accrued interest on the Hard Rock Note are due on January
15, 2020.
During the year ending December 31, 2016, we paid interest of $769,582 and a principal payment of $2,000,000, of
which $1,000,000 was paid with 700,000 restricted shares of common stock on August 10, 2016 (having an agreed
per share value of $1.43). The Company paid interest of $406,250 and a principal payment of $2,500,000 during the
year ending December 31, 2015. Subsequent to year end, we made the accrued interest payments related to the note
on January 15, 2017 and March 15, 2017 of $129,808 and $74,356, respectively.
84
Related Party Loans
In 2014, the Company issued notes payable to related parties in the amount of $2 million. The notes bear interest at
7.5% and mature on January 2, 2017. In January 2017, the Company made a $50,000 payment. Based on an
informal agreement, the Company will continue to reduce the balance on the note in 2017 against the interest due to
the Company on the Tronco note receivable (see Note 6 – Note Receivable) instead of repaying the note.
Bridge Financing
On August 8, 2016, we entered into a private transaction with a private investor pursuant to which we issued a
promissory note in the aggregate principal amounts of $1,000,000 and a warrant to purchase up to an aggregate of
250,000 shares of our common stock, subject to certain adjustments to the number of shares and the exercise price
described in the warrants. These warrants were valued at $112,024, based on using the Black Scholes model and
were recorded as a liability and treated as derivatives. The variable inputs used in the Black Scholes calculation
were; expected volatility of 95%, discount rate of 0.72% and the term of the warrants of 5 years. Once the
indebtedness was paid off on October 5, 2016, and the final number of shares were known, the liability was removed
and the warrants were included in equity.
Machinery Loans
During February 2013, we obtained a commercial loan collateralized by specific machinery with a face value of
$592,000, requiring monthly payments of approximately $8,600, including principal and interest at 6% beginning
March 1, 2013 and continuing through maturity on February 1, 2020. This loan contains a minimum debt service
ratio and fixed charge covenants. The Company was in compliance with these covenants as of December 31, 2016.
In 2013, we obtained a $627,000 loan for machinery The Small Business Administration has guaranteed 75% of the
loan balance and the terms are as follows: 7-year maturity, 6.00% interest rate, 84 monthly payments of $9,160. The
machinery is held as collateral.
Transportation Loans
Vehicles
Our loans for Company vehicles and other transportation are with various financing parties we have engaged with in
connection with the acquisition of the vehicles. As of December 31, 2016, the loans bear interest ranging from 0%-
8.39% with maturity dates ranging from July 2017 through October 2021, and are collateralized by the vehicles. Our
cumulative monthly payment under these loans as of December 31, 2016 was approximately $3,050, including
principal and interest.
Airplane Loan
Our loan for the Company airplane bears interest at 7.35%, requires monthly payments of principal and interest of
approximately $3,500, matures in May of 2026 and is collateralized by the airplane.
Future annual maturities of all long-term debt are as follows(1) :
Year
2017
2018
2019
2020
2021
Thereafter
Total long-term debt
(1) Excludes discounts for debt issuance costts.
85
$
$
2,577,488
6,709,503
4,323,767
2,234,131
134,503
861,572
16,840,964
NOTE 8. LEASES
Capital Leases
In 2012, we entered into a lease for machinery which required an initial payment of $928,776, followed by 3
monthly payments of $15,000, and 58 monthly payments of approximately $32,000. The terms of the lease included
an imputed interest rate of 12.52%. The lease term expires August 1, 2017, at which time we may either purchase
the machinery for the greater of its then-agreed fair value or 15% of its original cost, renew the lease for an
additional 12 months or return the machine. We have not yet made a decision as to what we will elect at the end of
the lease term. Payments under the lease are personally guaranteed by the Meiers. The lease has been capitalized
and, accordingly, the machinery and related obligation under the lease have been included in the accompanying
balance sheet as of December 31, 2016. Accumulated amortization on machinery under the capitalized lease totaled
$1,442,098 and $1,209,864 for the year ending December 31, 2016 and 2015, respectively. Amortization expense
for this machine is included in depreciation and amortization expense on the combined statement of operations.
The remaining future minimum lease payment total of $217,302 is required before the term expires in August 2017,
which includes $9,242 imputed interest expense.
Operating Leases
We also lease certain property and equipment under non-cancellable agreements which have been accounted for as
operating leases. Future minimum lease payments required under operating leases in effect at December 31, 2016
are as follows:
Year
2017
2018
2019
2020
Thereafter
Operating leases
$
$
166,451
140,977
130,086
76,512
-
514,026
86
NOTE 9. COMMITMENTS AND CONTINGENCIES
We are subject to litigation that arises from time to time in the ordinary course of our business activities. We are not
currently involved in any litigation which management believes could have a material effect on our financial
position or results of operations, except as follows:
In October 2013, Del-Rio Resources, Inc. (“Del-Rio”) filed suit, on its own behalf and derivatively on behalf of
Philco Exploration, LLC (“Philco”), against the following co-defendants (a) Tronco Ohio, LLC and Tronco, (b) the
lender on the Tronco loan, ACF Property Management, Inc. (p.k.a. Fortuna Asset Management, LLC,) (“ACF”), (c)
Troy and Annette Meier personally, and several of their family trusts, (d) Meier Family Holding Company, LLC and
Meier Management Company, LLC, and (e) Superior Drilling Solutions, LLC and Meier Properties Series, LLC.
That suit is currently pending in the Eighth Judicial District Court, Uintah County, Utah under Cause #130800125.
Tronco and Del-Rio are the sole owners and managers of Philco. Philco served as the exploration operator. Part of
the collateral for the Tronco loan is Philco’ s mineral leases. Del-Rio’ s suit alleges that the defendants made
amendments to the Tronco loan without complying with the voting provisions of Philco’ s operating agreement, and
that all of the Meier-related entities somehow benefitted from the Tronco loan proceeds, in an unspecified manner.
Del-Rio’ s suit seeks to invalidate ACF’ s deeds of trust on the Philco mineral leases, and to acquire title to those
Philco mineral leases. ACF no longer has deeds of trust of any of the Philco mineral leases. Del Rio is also
requesting monetary and punitive damages, disgorgement, prejudgment interest, post judgment interest, costs, and
attorney fees, against all defendants, in an amount to be determined at trial.
We believe that Del-Rio’s claims are without merit, and all defendants are actively defending in this matter. In
particular, SDS’ and MPS’ only involvement was to grant guaranties and/or security interests in their respective
separate personal and real property to ACF to additionally collateralize the Tronco loan before its purchase by us. In
addition, since the Meiers and their personal trusts guaranty repayment of the Tronco loan, we believe that the basis
of Del-Rio’ s damages claims are nullified. Consequently, we do not believe that Del Rio’s purported claims against
SDS and MPS will have any material adverse effect on our cash flow, business, or operations. As of March 31,
2017, there have been no updates or decisions made concerning this matter.
NOTE 10. RELATED PARTY TRANSACTIONS
Superior Auto Body
On January 1, 2016, the Company completed the divestiture of our interest in Superior Auto Body and Paint, LLC,
by selling the remaining ownership interests in the business operations to a third party. The Company received
$101,400 in proceeds. The Company leased certain of its facilities to Superior Auto Body (“SAB”). We recorded
rental income from the related party in the amounts of $199,902 for the years ended December 31, 2016 and 2015.
As discussed below, in 2017, we sold the facilities that had been leased to SAB and accordingly, we will no longer
receive this rental income.
In February 2017, the Company sold real estate to SAB for the net proceeds of $2.5 million. The cash received from
the sale was used to pay down the $2.5 million loan balance on the property. As part of the sale, the Company
released 547,000 shares of the Meiers common stock from the collateral for the Tronco Note. Prior to the sale, the
Company held 8,814,860 common stock shares as collateral for the Tronco Note. After the sale in 2017, the
Company holds 8,267,860 shares as collateral for the Tronco Note (see Note 6 – Note Receivable).
87
NOTE 11. INCOME TAXES
Components of income tax benefit 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,
2016
For the Year
Ended
December 31,
2015
$
$
- $
(2,000 )
(2,000 )
-
-
-
(2,000 ) $
-
1,000
1,000
(413,148 )
(60,131 )
(473,279 )
(472,279 )
The non-current deferred tax assets and liabilities consist of the following:
Deferred tax assets:
263A adjustment
Accrued expenses
Prepaid expense
Stock compensation
Stock option
Amortization of intangibles
Net operating loss
Others
Total non-current deferred tax assets
Deferred tax liabilities:
Depreciation on fixed assets
Total non-current deferred tax liabilities
Net non-current deferred tax assets/liabilities
Less: Valuation Allowance
Total deferred tax liabilities
21,595
305,024
(24,908 )
55,624
60,970
3,791,944
4,263,351
11,887
8,485,487
26,178
326,589
(66,596 )
55,817
-
3,444,048
2,088,208
35,489
5,909,733
(1,008,413 )
(1,008,413 )
(1,624,453 )
(1,624,453 )
7,477,074
(7,477,074 )
- $
4,285,280
(4,285,280 )
-
$
Reconciliation of the tax rate to the U.S. federal statutory tax rate which relate to the year ended December 31, 2016
and 2015 is as follows:
Tax at federal statutory rate
State income taxes
Permanent differences
Change in valuation allowance
Other - State rate effect
Change in status
Other
Provision for income taxes
For the Year
Ended
December 31,
2016
For the Year
Ended
December 31,
2015
$
$
(3,104,489 ) $
(1,320 )
196,479
3,191,794
(272,768 )
14,216
(25,912 )
(2,000 ) $
(5,075,472 )
660
273,190
4,285,280
(464,450 )
508,385
127
(472,279 )
88
NOTE 12. SHARE BASED COMPENSATION
On November 11, 2014, the Company’ s Board of Directors approved that the Directors stock compensation would
be included in the Employee Stock Incentive Plan (“Stock Plan”) that reserves 1,724,128 shares of common stock
for issuance. Equity and equity-based compensation plans are intended to make available incentives that will assist
us in attracting, retaining, and motivating employees, officers, consultants, and directors by allowing them to acquire
an ownership interest in our business, and, as a result, encouraging them to contribute to our success. We may
provide these incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted
stock units, performance shares and units, and other cash-based or stock-based awards. As a result, we expect to
incur non-cash, stock-based compensation expenses in future periods. The Board of Directors has frozen the 2014
Incentive Plan, such that no future grants of awards will be made and the 2014 Incentive Plan shall only remain in
effect with respect to awards under that Plan outstanding as of June 15, 2015 until they expire according to their
terms.
On June 15, 2015, our stockholders approved the Superior Drilling Company, Inc. 2015 Long Term Incentive Plan
(the “2015 Incentive Plan”). The purpose of the 2015 Incentive Plan is to advance the interests of the Company and
its stockholders by providing an incentive to attract, retain and reward persons performing services for the Company
and its affiliates and by motivating such persons to contribute to the growth and profitability of the Company and
our affiliates. Subject to adjustment as provided in the 2015 Incentive Plan, the maximum aggregate number of
shares of the Company’ s common stock that may be issued with respect to awards under the 2015 Incentive Plan is
1,552,905. As of December 31, 2016, there were 780,484 shares outstanding with respect to awards granted under
the Company’s 2015 Incentive Plan.
On August 10, 2015, the Board of Directors granted 71,202 restricted stock units from the Company’ s 2015
Incentive Plan to the Directors based on the closing price of the Company’ s common stock on the date of the grant.
These restricted stock units will vest over a three-year period.
On August 10, 2015, the Board of Directors granted 366,000 restricted stock units from the Company’ s 2015
Incentive Plan to officers and employees based on the closing price of the Company’ s common stock on the date of
the grant. These restricted stock units vested 33% on the grant date, 33% on the first anniversary of the grant date
and 34% on second anniversary of the grant date.
On December 23, 2015, the Board of Directors granted 7,000 restricted stock units from the Company’ s 2015
Incentive Plan to an employee based on the closing price of the Company’ s common stock on the date of the grant.
These restricted stock units vested 33% on the grant date, 33% on the first anniversary of the grant date and 34% on
second anniversary of the grant date.
On November 10, 2016, the Board of Directors granted 600,000 restricted stock units from the Company’ s 2015
Incentive Plan to executive management and directors based on the closing price of the Company’ s common stock
on the date of the grant. These restricted units will vest over a three-year period.
Compensation expense recognized for grants vesting under the 2014 Incentive Plan was approximately $233,000
and $210,000 for the years ending December 31, 2016 and 2015, respectively. Compensation expense recognized
for grants of restricted stock vesting under the 2015 Incentive Plan was approximately $406,000 and $334,000 for
the years ending December 31, 2016 and 2015, respectively. The Company recognized compensation expense and
recorded it as share-based compensation in the consolidated statement of operations.
Total unrecognized compensation expense related to unvested restricted stock units expected to be recognized over
the remaining weighted vesting period of 2.9 years equaled approximately $773,000 at December 31, 2016. These
shares vest over a three-year time period.
89
The following table summarizes RSU activity for the years ended December 31, 2016 and 2015:
2016
2015
Unvested RSU’ s at beginning of period
Granted
Forfeited
Vested
Unvested RSU’ s at end of period
Number of
Restricted
Stock
Units
407,493 $
600,000
(17,342 )
(287,543 )
702,608 $
Weighted -
Average
Grant
Date Fair
Value
Number of
Restricted
Stock
Units
Weighted -
Average
Grant
Date Fair
Value
2.48 131,250 $
0.97 444,202
1.62
-
2.22 (167,959 )
1.31 407,493 $
4.81
1.84
-
2.61
2.48
Stock Options - On August 10, 2015, the Board of Directors granted 87,500 stock options from the Company’ s
2015 Incentive Plan to officers and employees based on the closing price of the Company’ s common stock on the
date of the grant. These restricted stock units and options vested 33% on the grant date, 33% on the first anniversary
of the grant date and 34% on second anniversary of the grant date.
On March 4, 2016, the Board of Directors granted options to acquire 78,944 shares of stock from the Company’ s
2015 Incentive Plan to officers and employees based on the closing price of the Company’ s common stock on the
date of the grant, which was $1.73. These options vested 100% on the grant date and have a ten year term expiring
on March 4, 2026. The fair value of the vested stock options were calculated using the Black-Scholes model with a
volatility and discount rate over the expected term of each employee.
On March 18, 2016, the Board of Directors granted options to acquire 81,714 shares of stock from the Company’ s
2015 Incentive Plan to officers and employees based on the closing price of the Company’ s common stock on the
date of the grant, which was $1.67. These options vested 100% on the grant date and have a ten year term expiring
on March 18, 2026. The fair value of the vested stock options were calculated using the Black-Scholes model with a
volatility and discount rate over the expected term of each employee.
On March 31, 2016, the Board of Directors granted options to acquire 148,475 shares of stock from the Company’ s
2015 Incentive Plan to directors, officers and employees based on the closing price of the Company’ s common
stock on the date of the grant, which was $1.37. These options vested 100% on the grant date and have a ten-year
term expiring on March 31, 2026. The fair value of the vested stock options were calculated using the Black-Scholes
model with a volatility and discount rate over the expected term of each employee.
On December 5, 2016, the Board of Directors granted 5,000 stock options from the Company’ s 2015 Incentive Plan
to officers and employees based on the closing price of the Company’ s common stock on the date of the grant,
which was $1.20. These restricted stock units and options vested 33% on the first anniversary of the grant date, 33%
on the second anniversary of the grant date and 34% on third anniversary of the grant date.
On December 22, 2016, the Board of Directors granted 54,200 stock options from the Company’ s 2015 Incentive
Plan to officers and employees based on the closing price of the Company’ s common stock on the date of the grant,
which was $1.11. These restricted stock units and options vested 33% on the first anniversary of the grant date, 33%
on the second anniversary of the grant date and 34% on third anniversary of the grant date.
These three issuances of options issued during March 2016 were part of decreasing the base salary of employees and
directors in exchange for salary for options plan, issued out of the 2015 Incentive Plan.
Compensation expense recognized for option grants vesting under the 2015 Incentive Plan was approximately
$145,000 and $20,000 for the years ending December 31, 2016 and 2015. The Company recognized compensation
expense and recorded it as share-based compensation in the consolidated condensed statement of operations.
90
The following table summarizes stock options outstanding and changes during the years ended December 31, 2016
and 2015:
2016
2015
Number of
Stock
Options
Weighted -
Average
Exercise
Price
Number of
Stock
Options
Weighted -
Average
Exercise
Price
Stock options outstanding at beginning of
period
Granted
Exercised
Expired
Canceled or forfeited
Stock options outstanding at end of period
Stock options exercised at end of period
86,500 $
368,333
-
(10,325 )
(19,508 )
425,000 $
- $
1.85
1.47
-
1.85
1.85
1.52
-
- $
87,500
-
-
(1,000 )
86,500 $
- $
-
1.85
-
-
1.85
1.85
-
The fair value of stock options granted to employees and directors in 2016 and 2016 was estimated at the grant date
using the Black-Scholes option pricing model using the following assumptions:
Expected volatility
Discount rate
Expected life (years)
Dividend yield
51 %
1.16 %
3
N/A
Option pricing models require the input of highly subjective assumptions, including the expected price volatility.
Expected price volatility is based on the historical volatility of our common stock. Changes in the subjective input
assumptions can materially affect the fair value estimate. The expected term of the options granted is derived from
the output of the option pricing model and represents the period of time that the options granted are expected to be
outstanding. The discount rate for the periods within the contractual term of the option is based on the U.S. Treasury
yield curve in effect at the date of grant.
NOTE 13. SUBSEQUENT EVENTS
Tronco Asset Sale
On March 28, 2017, the Company and Tronco finalized an agreement with a third party and pursuant to this
agreement, the third party acquired all of Tronco Ohio assets for $550,000. As the Tronco’ s senior secured lender,
we released our lien and security interest on these assets in accordance with the agreement.
Also on March 28, 2017 and related to the sale of the Tronco assets, the Company agreed to a non-cash receipt of
the $550,000 from Tronco by reducing our bonus accrual liabilities. The bonus accrual was earned by the Meiers in
2014, and was recorded in other long term liability. As a result of this agreement, we have reduced both the other
long term liability and the Tronco note receivable in 2017.
91
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.
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, 2016 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 and appropriate accounting expertise within its accounting department. Management believes the
lack of accounting and financial personnel amounts to a material weakness in its internal control over financial
reporting and their 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, 2016
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 ensure future compliance.
Changes in Internal Controls over Financial Reporting
None
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
92
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 2017 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the year ended December 31, 2016.
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 2017 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the year ended December 31, 2016.
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 2017 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the year ended December 31, 2016.
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 2017 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the year ended December 31, 2016.
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 2017 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of the year ended December 31, 2016.
93
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report:
PART IV
(1) Financial Statements – see Index to Financial Statements appearing on page 44
(2) Financial Statement Schedules – None
(3) Exhibits –
Exhibit No. Description
2.1
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
Statement on Form S-1 (Registration No. 333- 195085) filed with the SEC on April 7, 2014).
10.1
10.2
10.3
10.4
10.5
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).
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).†
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).†
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 (Registration No. 333- 195085) filed with the SEC on April 30,
2014).†
94
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
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).
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 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).
95
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
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).
Loan Agreement(s), dated December 30, 2013, between Superior Drilling Products, LLC, Meier
Leasing, LLC and Meier Management Company, LLC, as co-borrowers, 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).
96
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
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).
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 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).
97
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
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).
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 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).
98
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
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).
Exclusive Manufacturing, Marketing, Sales and Consulting Agreement among Hard Rock Solutions,
LLC, Extreme Technologies, LLC, Tenax Energy Solutions, LLC and Kevin Jones dated January 9,
2015 (incorporated by reference to Exhibit 10.45 to the Company’ s annual report on form 10-K for
the year ended December 31, 2014 filed on March 31, 2015.
Business Loan Agreement between Meier Properties, Series LLC and American Bank of the North
dated April 9, 2015 (incorporated by reference to Exhibit 10.1 to the Company’ s Current Report on
Form 8-K filed on April 15, 2015).
Commercial Guaranty between Superior Drilling Products, Inc. and American Bank of the North
dated April 9, 2015 (incorporated by reference to Exhibit 10.2 to the Company’ s Current Report on
Form 8-K filed on April 15, 2015).
Commercial Guaranty between G. Troy Meier and American Bank of the North dated April 9, 2015
(incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on
April 15, 2015).
Commercial Guaranty between Annette Meier and American Bank of the North dated April 9, 2015
(incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on
April 15, 2015).
Amended and Restated Promissory Note from Hard Rock Solutions, LLC and Superior Drilling
Solutions, LLC in favor of WMAFC, Inc. dated April 28, 2015 (incorporated by reference to Exhibit
10.1 to the Company’ s Current Report on Form 8-K filed on April 15, 2015).
Form of Nonstatutory Stock Option Agreement (3 Year Vesting) under the 2015 Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on
April 28, 2015).
Form of Nonstatutory Stock Option Agreement (2 Year Vesting) under the 2015 Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on
April 28, 2015).
10.53
Form of Award of Restricted Stock (3 Year Vesting) under the 2015 Incentive Plan (incorporated by
reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on April 28, 2015).
10.54
Form of Award of Restricted Stock (2 Year Vesting) under the 2015 Incentive Plan (incorporated by
reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on April 28, 2015).
10.55
2015 Long Term Incentive Plan effective June 15, 2015 (incorporated herein by reference to
Appendix A to the Company’s Definitive Proxy Statement on Schedule 14A filed with the
Commission on April 30, 2015).
99
10.56
Second Amended and Restated Promissory Note from Hard Rock Solutions, LLC and Superior
Drilling Solutions, LLC in favor of WMAFC, Inc. dated September 28, 2015 (incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 1, 2015).
10.57++
Business Agreement between Hard Rock Solutions, LLC and Baker Hughes Oilfield Operations, Inc.
dated January 25, 2016 (incorporated by reference to Exhibit 10.1 to the Company’ s Form 8-K filed
on January 29, 2016).
10.58
10.59
10.60
10.61
Loan and Security Agreement among Superior Drilling Products, Inc., Superior Drilling Solutions,
LLC, Hard Rock, LLC and Extreme Technologies, LLC as co-Borrowers and Federal National
Commercial Credit as Lender date March 8, 2016 (incorporated by reference to Exhibit 10.1 to the
Company’ s Current Report on Form 8-K filed on March 10, 2016).
Promissory Note dated March 8, 2016 issued in favor of Federal National Commercial Credit as
Lender (incorporated by reference to Exhibit 10.2 to the Company’ s Current Report on Form 8-K
filed on March 10, 2016).
Term Promissory Note dated March 8, 2016 issued in favor of Federal National Commercial Credit
as Lender (incorporated by reference to Exhibit 10.3 to the Company’ s Current Report on Form 8-K
filed on March 10, 2016).
Subordination Agreement among Superior Drilling Products, Inc., Meier Management Company,
LLC and Federal National Commercial Credit dated March 8, 2016 (incorporated by reference to
Exhibit 10.4 to the Company’ s Current Report on Form 8-K filed on March 10, 2016).
10.62
Form of Fully Vested Non-Statutory Stock Option Agreement (incorporated by reference to Exhibit
10.5 to the Company’s Current Report on Form 8-K filed on March 10, 2016).
10.63
10.64
10.65
10.66
10.67
Amended Loan and Security Agreement among Superior Drilling Products, Inc., Superior Drilling
Solutions, LLC, Hard Rock, LLC and Extreme Technologies, LLC as co-Borrowers and Federal
National Commercial Credit as Lender dated March 28, 2016 (incorporated by reference to Exhibit
10.1 to the Company’ s Current Report on Form 8-K filed on March 30, 2016).
Distribution Agreement between Hard Rock Solutions, LLC and Drilling Tools International, Inc.
dated May 12, 2016 (incorporated by reference to Exhibit 10.1 to the Company’ s Current Report on
Form 8-K filed on May 13, 2016).
Second Amendment to Loan and Security Agreement among Superior Drilling Products, Inc.,
Superior Drilling Solutions, LLC, Hard Rock, LLC and Extreme Technologies, LLC as co-
Borrowers and Federal National Commercial Credit as Lender dated May 12, 2016 (incorporated by
reference to Exhibit 10.3 to the Company’ s Current Report on Form 8-K filed on May 16, 2016).
Promissory Note from Superior Drilling Products Inc. in favor of the Donald A. Foss Revocable
Living Trust dated August 5, 2016 (incorporated by reference to Exhibit 10.1 to the Company’ s
Current Report on Form 8-K filed on August 11, 2016).
Warrant issued by Superior Drilling Products, Inc. in favor of the Donald A. Foss Revocable Living
Trust dated August 5, 2016 (incorporated by reference to Exhibit 10.2 to the Company’ s Current
Report on Form 8-K filed on August 11, 2016).
100
10.68
10.69
10.70
10.71
Promissory Note from Hard Rock Solutions, LLC and Superior Drilling Solutions, LLC in favor of
WMAFC, Inc. dated August 10, 2016 (incorporated by reference to Exhibit 10.3 to the Company’ s
Current Report on Form 8-K filed on August 11, 2016).
Modification and Forbearance Agreement dated August 16, 2016 by and among Superior Drilling
Products, Inc., Superior Drilling Solutions, LLC, Hard Rock Solutions, LLC, Extreme Technologies,
LLC and Federal National Payables, Inc. (incorporated by reference to Exhibit 10.1 to the Company’
s Current Report on Form 8-K filed on August 17, 2016).
Guaranty dated August 16, 2016 among G. Troy Meier, Annette Meier, and Federal National
Payables, Inc. (incorporated by reference to Exhibit 10.2 to the Company’ s Current Report on Form
8-K filed on August 17, 2016).
Amended and Restated Distribution Agreement between Hard Rock Solutions, LLC and Drilling
Tools International, Inc. dated August 30, 2016 (incorporated by reference to Exhibit 10.1 to the
Registrant’ s Current Report on Form 8-K filed on August 31, 2016).
21.1*
23.1*
31.1*
31.2*
32**
Subsidiaries of the Registrant
Consent of Hein & Associates LLP
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for G. Troy Meier.
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Christopher D. Cashion.
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.SCH
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.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment submitted to the
Securities and Exchange Commission and this exhibit has been filed separately with the Securities and
Exchange Commission in connection with such request.
101
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.
SIGNATURES
March 31, 2017
March 31, 2017
March 31, 2017
March 31, 2017
March 31, 2017
March 31, 2017
SUPERIOR DRILLING PRODUCTS, INC.
By: /s/ G. TROY MEIER
G. Troy Meier, Chief Executive Officer
(Principal Executive Officer)
By: /s/ CHRISTOPHER CASHION
Christopher Cashion, Chief Financial Officer
(Principal Financial Officer and PrincipalAccounting
Officer)
By: /s/ ANNETTE MEIER
Annette Meier, President, Chief Operating Officer and
Director
By: /s/ JAMES LINES
James Lines, Director
By: /s/ ROBERT IVERSEN
Robert Iversen, Director
By: /s/ MICHAEL RONCA
Michael Ronca, Director
102
Subsidiaries of the Company
● Superior Drilling Solutions, LLC
● Hard Rock Solutions, LLC
● Extreme Technologies, LLC
● Meier Property Series, LLC
● Meier Leasing, LLC
● Superior Design and Fabrication, LLC
103
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement (No. 333-204983) on Form S-8 of Superior
Drilling Products, Inc. of our report dated March 31, 2017, relating to the consolidated financial statements of
Superior Drilling Products, Inc., appearing in this Annual Report on Form 10-K of Superior Drilling Products, Inc.
for the year ended December 31, 2016.
/s/ Hein & Associates LLP
Dallas, Texas
March 31, 2017
104
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT
Exhibit 31.1
I, G. Troy Meier, certify that:
1. I have reviewed this Annual Report on Form 10-K of Superior Drilling Products, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or other persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: March 31, 2017
/s/ G. Troy Meier
G. Troy Meier
President and Chief Executive Officer
105
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT
I, Christopher Cashion, certify that:
1. I have reviewed this Annual Report on Form 10-K of Superior Drilling Products, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of
directors (or other persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: March 31, 2017
/s/ Christopher Cashion
Christopher Cashion
Chief Financial Officer
106
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Superior Drilling Products, Inc. (the “Company”) for the
period ended December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), the undersigned, G. Troy Meier, Chief Executive Officer of the Company, hereby certifies, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of
my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: March 31, 2017
/s/ G. Troy Meier
G. Troy Meier
President and Chief Executive Officer
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been
provided to the Company and will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
107
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Superior Drilling Products, Inc. (the “Company”) for the
period ended December 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), the undersigned, Christopher Cashion, Chief Financial Officer of the Company, hereby certifies, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best
of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
Date: March 31, 2017
/s/ Christopher Cashion
Christopher Cashion
Chief Financial Officer
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been
provided to the Company and will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
108
This page intentionally left blank.
This page intentionally left blank
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 and Chief Executive Officer
Annette Meier
President and Chief Operating Officer
Chris Cashion
Chief Financial Officer
David Gale
Vice President of Operations
Lane Snell
Vice President of Engineering
Board of Directors
Troy Meier, Chairman of the Board
Chief Executive Officer
Superior Drilling Products, Inc.
Robert Iversen 1, 2*, 3
President and Partner
CTI Energy Services
Jim Lines 1*, 2, 3
President and Chief Executive Officer
Graham Corporation
Annette Meier
President and Chief Operating Officer
Superior Drilling Products, Inc.
Michael Ronca 1, 2, 3*
President and Chief Executive Officer
EagleRidge Energy
1 Audit Committee
2 Compensation Committee
3 Nominating & Corporate Governance Committee
* Committee Chairman
Stock Exchange Listing
The Company’s stock is traded on the NYSE MKT
exchange under the symbol SDPI.
2017 Annual Meeting
Superior Drilling Products’ Annual Meeting
of Shareholders will be held at 9:00 am MT
on August 15, 2017 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
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
BR868153-0617-10KW