As filed with the Securities and Exchange Commission on April 4, 2014

Registration No. 333-     

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

SD COMPANY, INC.

(Exact Name of Registrant as specified in its charter)

 

Utah		1389		46-4341605
(State or other jurisdiction of incorporation)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)

1583 South 1700 East, Vernal, UT 84078
(435) 789-0594

(Address, including zip code, and telephone number, including
area code, of Registrant’s principal executive offices)

 

Troy Meier, CEO
SD COMPANY, INC.
1583 South 1700 East
Vernal, UT 84078
(435) 789-0594

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

Eugenie D. Rivers		Michael T. Raymond
Shahzad Qadri		Bradley J. Wyatt
Wong Fleming, P.C.		Dickinson Wright, PLLC
2340 130 th Avenue NE, Ste. D150		2600 W. Big Beaver Rd., Ste. 300
Bellevue, WA 98005		Troy, MI 48084-3312
(425) 869-4040		248-433-7200

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

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. (Check one):

Large accelerated filer o		Accelerated filer o
Non-accelerated filer (Do not check if a smaller reporting company)		Smaller reporting company x

 

CALCULATION OF REGISTRATION FEE

Title of each class of securities to be registered		Proposed maximum aggregate offering price (1)(2)				Amount of Registration Fee
Common Stock, $.001 par value		$	34,500,000			$	4,444

(1)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.

(2)

Includes            Shares that the Underwriter has the option to purchase to cover over-allotments, if any.

(3)

Calculated under section 6(b) of the Securities Act of 1933 as .000128800 of the aggregate offering price.

 

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant files a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), shall determine.

 

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SUBJECT TO COMPLETION, DATED            , 2014

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

     Shares

 

Common Stock

 

This is the initial public offering of securities of SD COMPANY, INC. We are offering to sell           shares of our common stock in this offering (the “ Shares ”). Prior to this offering, there has been no public market for our securities. The initial public offering price is expected to be between $     and $     per Share. We have applied to list the Shares on the NYSE MKT under the symbol “SDPI”.

We are an “emerging growth company” and a “smaller reporting company” under the federal securities laws and will be subject to reduced public company reporting requirements. See “Risk Factors” beginning on page 11 for a discussion of the factors you should consider before you make your decision to invest in our securities.

		Per Share				Total (3)
Public offering price		$				$
Underwriting discount and commission (1)		$				$
Proceeds, before expenses, to us (2)		$				$

(1)

See “Underwriting” beginning on page 84 for disclosure regarding compensation payable to the Underwriter by us.

(2)

Before deducting estimated expenses of $     payable by us.

(3)

In addition, we have granted the underwriter a 45-day option to purchase up to a maximum of            in additional Shares from us at the public offering price, less the underwriting discounts and commissions, to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The Shares are offered by the Underwriter, subject to prior sale when, as and if delivered to and accepted by the Underwriter and subject to right to reject orders in whole or in part. Delivery of the Shares will be made on or about             , 2014.

 

Sole Book-Running Manager

Roth Capital Partners, LLC

 

The date of this prospectus is             2014.

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		Page
ABOUT THIS PROSPECTUS			ii
PROPRIETARY INFORMATION			ii
INDUSTRY DATA			ii
PROSPECTUS SUMMARY			1
OFFERING SUMMARY			8
RISK FACTORS			11
USE OF PROCEEDS			25
DETERMINATION OF THE OFFERING PRICE			26
DIVIDEND POLICY			26
CAPITALIZATION			27
DILUTION OF THE PRICE YOU PAY FOR YOUR SHARES			28
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			30
OIL AND GAS DRILLING INDUSTRY			46
BUSINESS			51
MANAGEMENT			62
EXECUTIVE COMPENSATION			68
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS			73
SHARES ELIGIBLE FOR FUTURE SALE			76
DESCRIPTION OF CAPITAL STOCK			78
BENEFICIAL OWNERSHIP OF COMMON STOCK			83
UNDERWRITING			84
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF COMMON STOCK			87
LEGAL MATTERS			90
EXPERTS			90
WHERE YOU CAN FIND MORE INFORMATION			90

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary sets forth the material terms of the offering, but does not contain all of the information that you should consider before investing in our securities. You should read the entire prospectus carefully before making an investment decision, especially the risks of investing in our securities described under “Risk Factors.” Unless otherwise indicated or the context otherwise requires, all references in this prospectus to “Superior” “we,” “us,” and “our” refer to SD COMPANY, INC., a Utah corporation, and the combined subsidiaries, including the businesses of Superior Drilling Products, LLC, Superior Design and Fabrication, LLC, Extreme Technologies, LLC, Meier Properties Series, LLC, and Meier Leasing, LLC, and Superior Drilling Products of California, LLC as our historical accounting predecessors. Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriter’s over-allotment option.

Overview

We are an innovative, cutting-edge remanufacturer of PDC (polycrystalline diamond compact) drill bits, and a designer and manufacturer of new drill bit and horizontal drill string enhancement tools for the oil, natural gas and mining services industry. We currently operate four basic lines of business:

From our headquarters in Vernal, Utah, we operate a technologically advanced PDC drill bit remanufacturing facility, as well as a state-of-the-art, high-tech drill tool machining facility. We manufacture our drill string enhancement tools, including the patent pending “Drill N Ream” well bore enhancement tool, and conduct our new product research and development from this facility. We believe that we continue to set the trend in oil and gas drill bit and drill string tool technology and design.

Our co-founder, Troy Meier, developed the first commercially-viable process to remanufacture PDC drill bits after a successful 13-year career with a predecessor of our largest client, Baker Hughes, the world’s fifth largest oilfield services company. For the past 18 years, we have serviced the Rocky Mountain, California and Alaska regions exclusively for Baker Hughes’s substantial oil field operations. We continuously work with our customers to develop new products and enhancements, improve efficiency and safety, and solve complex drilling tool problems. We employ a senior work force with special training and extensive experience related to drill bit remanufacturing and tooling manufacture. They produce our products and services using a suite of highly technical, purpose-built equipment, much of which we design and manufacture for our proprietary use. Most of our manufacturing equipment and products use advanced, patent-pending technologies that enable us to increase efficiency, enhance drill bit integrity, and improve safety.

Recently, challenging new horizontal oil and gas well designs and construction have substantially increased the technical demands on drill bit and drill string components. To respond to this horizontal drilling challenge, we collaborated with Hard Rock Solutions, Inc. (“HRSI”). HRSI designed the Drill N Ream well bore conditioning tool in 2011 (“ Drill N Ream ”). The Drill N Ream tool is a dual-section reaming tool which is located behind the bottom hole assembly (“BHA”) of the drill string to smooth and slightly enlarge the well bore in the curved and horizontal sections of horizontal wells, in both oil and water based mud. The Drill N Ream tool is available in multiple sizes and can be custom manufactured to fit any hole size. The Drill N Ream tool allows the drill string to move through a conditioned well bore left by the drill bit with less friction

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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 retract a drill string and replace a bit or other drill string component, it costs the operator substantial time and money, so we believe anything that allows each run to extend further is of great value to our customers. As a result, the Drill N Ream tool is now in use in over 850 well drilling operations, which we believe indicates significant initial industry acceptance in a fairly short period of time. We are also developing a suite of other horizontal drill string tools, each of which addresses a different technical challenge presented by today’s horizontal drilling designs.

Under our existing agreement with HRSI, we produce the Drill N Ream tools and HRSI markets them to well operators on a rental basis. This arrangement allows the well operator to switch out Drill N Ream tools when theirs becomes dull, and HRSI then returns the dull tools to us for refurbishing. We now have the opportunity to purchase HRSI’s interest in the Drill N Ream tool rental business, including the Drill N Ream inventory, rental arrangements, customer lists, contract employees, facilities and its owner’s 50% interest in the patents pending relating to the Drill N Ream. Before closing our acquisition, HRSI will move those assets into its wholly-owned subsidiary, Hard Rock Solutions, LLC (“ Hard Rock ”). ( See “— Hard Rock Acquisition and Financing”, below). We intend to use a portion of the offering proceeds to complete our purchase of Hard Rock, at which time we will operate Hard Rock as our wholly-owned subsidiary.

We believe that we differentiate ourselves from our competitors on the basis of the quality and reliability of our products and services, our proprietary technology, and our ability to rapidly respond with products that meet the most demanding and changing needs of our customers.

The primary competitors for our drill bit remanufacturing services are the in-house units at Hughes Christensen, the division of Baker Hughes responsible for drill bits. We believe our competitive advantage is demonstrated by both our significantly superior production times according to reports we have received from Baker Hughes regarding their in-house production times, as well as our client’s continuing requests for us to take over or manage the work currently being done by those in-house units. Other drill bit manufacturers also have in-house remanufacturing units, but they are not our competitors since we have an exclusive contract with Baker Hughes. The primary competitors for our Drill N Ream tool are several single-section reaming tool manufacturers, including Baker Hughes itself. However, the Drill N Ream tool is the only dual-sectioned drill string reamer with advanced features of cutter and blade placement and diamond dome bearing surface technology on the market today. We believe that distinction will allow us to continue to build on the Drill N Ream’s first-mover advantage, and establish a strong marketing and distribution network, once we complete our acquisition of Hard Rock upon closing of this offering.

Competitive Strengths

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Growth Strategies

We intend to pursue the following growth strategies as we seek to expand our market share and solidify our position as a leading drill component manufacturer in the drilling industry:

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Trends in the Industry

We believe that the following trends will positively affect the oilfield drilling industry, and consequently the demand for our products in the coming years.

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Corporate Reorganization

We were formed as a Utah corporation in December 2013 in order to conduct this offering. Immediately before closing of this offering, we will conduct a corporate reorganization (“ Reorganization ”) after which we will conduct our business through the following five direct wholly-owned subsidiaries and one secondary wholly-owned subsidiary:

Subsidiary:		State of Organization				Year of Organization
Superior Drilling Products, LLC ( “SDP” )*			Utah				1999*
SDP Subsidiary: Superior Drilling Products of California, LLC ( “SDCA” )			California				2011
Superior Design and Fabrication, LLC ( “SDF” )			Utah				2011
Extreme Technologies LLC ( “ET” )			Utah				2011
Meier Properties Series, LLC ( “MPS” )			Utah				2008
Meier Leasing, LLC ( “ML” )			Utah				2008

Each of the above subsidiaries (SDF, ET, SDP, MPS, ML and SDCA) will be treated as our historical accounting predecessors for financial statement reporting purposes.

Hard Rock Acquisition and Financing

Immediately after completing this offering, we will close our acquisition of Hard Rock from HRSI. SDP is the acquiring party under the Membership Interest Purchase Agreement (MIPA) with HRSI, Hard Rock’s parent entity. SDP will assign the MIPA to us immediately before completion of this offering as part of the Reorganization. See “Business — Hard Rock Acquisition”. Upon our acquisition of Hard Rock, that limited liability company will also become one of our wholly-owned subsidiaries.

HRSI’s primary business is selling or renting the Drill N Ream tool directly to oil field customers. HRSI, Hard Rock’s corporate parent, was organized and began operations in 2001. HRSI’s president was the inventor of the Drill N Ream product with patent pending. HRSI is the sole authorized distributor and sales agent for

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the Drill N Ream tool, which we manufacture, under a profit sharing arrangement. In 2013, HRSI formed Hard Rock as a wholly-owned subsidiary, and prior to closing this offering, will have transferred, in accordance with the terms of the MIPA, its tool rental business to Hard Rock, in order to facilitate our purchase transaction. Specifically, the tool rental business consists of Drill N Ream inventory rental agreements, customer lists, contract employees, facilities, and its owner’s 50% interest in the patents pending relating to the Drill N Ream.

SDP and HRSI have signed a MIPA under which we will purchase all of HRSI’s tool rental business, which HRSI will transfer to Hard Rock before closing of the transaction, for $25 million, with $12.5 million payable at closing, and the $12.5 million payable under a seller-held note payable in annual installments over three years. See “Business — Hard Rock Acquisition”. In addition, each of HRSI’s president and Mr. Meier have transferred their respective 50% interest in the Drill N Ream patents pending to HRSI, under the terms of a Intellectual Property Protection Agreement (IPPA), and HRSI will transfer all of the patents pending to Hard Rock before our purchase of Hard Rock. The signed MIPA and IPPA will be deposited into third-party escrow at least three days before closing of this offering and the purchase transaction. SDP will assign its interest in the MIPA and IPPA to us in connection with the Reorganization immediately before closing this offering.

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Act ”). An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

We may take advantage of these provisions for up to five years or until such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenue, have more than $700 million in market value of our capital stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced reporting burdens. We have taken advantage of these reduced reporting burdens in this prospectus and, accordingly, the information that we provide stockholders may be different than you may receive from other public companies in which you hold equity interests. Under Section 107(b) of the JOBS Act, “emerging growth companies” can take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are required to be adopted by an issuer. This decision to opt out of the extended transition period under the JOBS Act is irrevocable. In addition, as a smaller reporting company, we have taken advantage of certain reduced reporting obligations available to smaller reporting companies.

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OFFERING SUMMARY

The stated number of Shares of common stock to be outstanding following this offering is based on      Shares outstanding and      Shares issuable under convertible securities, as of     , 2014, and excludes      Shares reserved for future issuance under our equity incentive plans.

Unless otherwise indicated, this prospectus reflects and assumes the rounding of all fractional share amounts to the nearest whole number.

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We have prepared the unaudited pro forma financial information on a basis consistent with our audited historical combined financial statements, and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. The below historical and pro forma results are not necessarily indicative of the results that may be expected in any future period or full fiscal year.

You should read these tables in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (“ MD&A ”) which includes a discussion of factors materially affecting the comparability of the financial information presented in this prospectus order “Organizational Structure,” “Selected Historical Combined and Unaudited Pro Forma Financial Data” and our historical and pro forma financial statements and related notes included elsewhere in this prospectus. Our summary unaudited pro forma financial data is presented for informational purposes only. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. Our summary unaudited pro forma financial data does not purport to represent what our results of operations or financial position would have been if we operated as a public company during the periods presented, and may not be indicative of our future performance.

Combined Statements of Operations Data (dollars in thousands, except per Share data):

		Year Ended December 31, 2013
		SD Company, Inc. (1)				HRSI				Pro Forma with HRSI (2)
Gross revenues		$	11,923			$	8,478			$	17,633
Gross profit			5,861				5,708				8,573
Income from continuing operations			3,692				3,206				3,003
Change in guaranteed debt obligation			342				—				342
Other income (expense) (net)			(366	)			96				(2,851	)
Income tax (expense) benefit			—				44				(184	)
Net income		$	3,668			$	3,346			$	310
Unaudited pro forma earnings per Share: basic and diluted		$	0.20			$	N/A			$	0.02
EBITDA		$	5,662			$	3,830			$	8,041

EBITDA is a non-GAAP performance measure. Our board of directors and management team focus on EBITDA as a key performance and compensation measure. EBITDA assists us in comparing our performance over various reporting periods because it removes from our operating results the impact of items that our management believes do not reflect our core operating performance. The compensation committee of our board of directors will determine the annual variable compensation for certain members of our management team based, in part, on EBITDA. In addition, we expect that EBITDA will be an important metric for investors to assess our ability to comply with those covenants

EBITDA is not a substitute for net income (loss), income from continuing operations, cash flows from operating activities or any other measure prescribed by GAAP. There are limitations to using non-GAAP measures such as EBITDA. Although we believe that EBITDA can make an evaluation of our operating performance more consistent because it removes items that do not reflect our core operations, other companies in our industry may define EBITDA differently than we do. As a result, it may be difficult to use EBITDA to compare the performance of those companies to our performance. EBITDA should not be considered as a

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measure of the income generated by our business or discretionary cash available to us to invest in the growth of our business. Our management compensates for these limitations by reference to our GAAP results and using EBITDA as a supplemental measure.

We remove the following items from net income attributable to SD Company, Inc., Hard Rock Solutions, Inc. and unaudited pro forma statements to get to EBITDA:

The following table reconciles net income attributable to SD Company, Inc., Hard Rock Solutions, Inc. and unaudited pro forma financial statements to EBITDA for the year ending December 31, 2013 (dollars in thousands):

		SD Company				HRSI				Pro Forma
Net Income		$	3,668			$	3,346			$	310
Interest expense			786				15				3,382
Depreciation and amortization expense			1,207				513				4,165
Income tax expense			8				(44	)			184
EBITDA		$	5,662			$	3,830			$	8,041

Balance Sheet Data (dollars in thousands):

		Company Historical Combined (1)				HRSI Historical				Pro Forma with HRSI (2)
		As of December 31, 2013								As of December 31, 2013
		Actual				Historical				Pro Forma
Cash and cash equivalents		$	11				2,755			$	13,917
Accounts receivable			2,979				1,032				2,821
Total assets			20,761				5,131				59,747
Long-term debt and obligations			19,781				—				24,593
Total liabilities			20,504				1,234				28,222
Total stockholders’ equity		$	257				3,896			$	31,526

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oil and gas may continue to fluctuate in the near- and long-term. Worldwide military, political, and economic events have in the past contributed to oil and gas price volatility and are likely to do so in the future. Any prolonged reduction in oil and natural gas prices may depress the immediate levels of exploration, development, and production activity.

A significant downturn in the oil and gas industry will adversely affect the demand for oilfield services. If demand for drilling services or drilling rig utilization rates decreases significantly, demand for our products and services may decrease, which could have a material adverse effect on our business, financial condition and results of operations.

The oil and gas industry is undergoing continuing consolidation that may impact our results of operations.

The oil and gas industry is rapidly consolidating. This consolidation may result in reduced capital spending by existing and potential customers, which may lead to decreased demand for our products and services as they use their size and purchasing power to seek economies of scale and pricing concessions. Additionally, customers could acquire one of our competitors and begin producing products similar to ours, which may also lead to decreased demand for our products and services. We are unable to predict what effect consolidation in the industry may have on price or customer capital spending, or on our selling strategies, competitive position, ability to attract and retain customers, or ability to negotiate favorable customer agreements. If we cannot maintain sales levels for customers that have consolidated, or replace such revenues with increased business activities from other customers, this consolidation activity could have a significant negative impact on our business, financial condition and results of operations.

We operate in an intensively competitive industry, and if we fail to compete effectively, our business will suffer.

As our industry rapidly consolidates, it is becoming intensely competitive. Our competitors are numerous, ranging from small private firms to multi-billion dollar public companies. Our competitors, some of whom have a more diverse product line and access to greater amounts of capital than we do, have the ability to compete against the cost savings generated by our technology by reducing prices and by introducing competing technologies. Our competitors may also have the ability to offer bundles of products and services to customers that we do not offer. In addition, our customers may elect to develop and adopt competing technologies. These competitive forces could force us to make price concessions or otherwise reduce prices for our services. If we are unable to maintain our competitiveness, our market share, revenue, and profits could decline, adversely affecting our business, financial condition or results of operations.

Our operating results may be adversely impacted by worldwide economic uncertainties and specific conditions in the markets we address.

The oil and gas industry has a history of periodic downturns, due to the factors discussed previously in these “Risk Factors”. In addition, the general worldwide economy has experienced downturns, at various times over the past several years, due to the lack of available credit, slower economic activity, concerns about inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, and adverse business conditions. These conditions make it extremely difficult for our clients and vendors to forecast accurately future business activities, which could cause businesses to slow spending on services and products. Those conditions make it very difficult for us to predict the short-term and long-term impacts on our business. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery worldwide or in the oil and gas industry. Any economic slowdown could have an adverse effect on our business, financial condition and results of operations. As a consequence, operating results for a particular future period are difficult to predict and, therefore, prior results are not necessarily indicative of results to be expected in future periods.

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Risks Relating to Our Business

We derive a significant portion of our revenues from a small number of customers. The loss of any of our major customers may cause significant declines in our revenues.

We contract exclusively with Baker Hughes, a multinational organization, for our entire drill bit remanufacturing business, and most of our original equipment drill bit manufacturing business, which currently represents large majority of our revenues. Even after closing of the Hard Rock acquisition with the proceeds of this offering, only a small number of customers will represent a significant amount of our consolidated revenues, and we may be unable to maintain and expand those current customer relationships. If we lose any of our major customers to a competitor or for any other reason, including, for example, if our reputation declines, if a customer materially reduces its orders from us, if our relationship with one or more of our major customers deteriorates, or if a major customer becomes insolvent or otherwise unable to pay for our products, our business and results of operations may be materially adversely affected.

The annual installments on the promissory note we intend to give to Hard Rock’s seller at closing of that acquisition will be a major expense. Failure to generate sufficient revenue to make those installments in a timely manner or at all may cause us to go into default and potentially to lose the patents securing that note.

We have contracted to purchase all of Hard Rock’s limited liability company interests and the all of the patents pending and other technology covering the Drill N Ream tool (“ Hard Rock IP ”) for $25 million. The purchase agreement provides for us to pay $12.5 million of the purchase price to the seller at closing of the acquisition promptly after completion of this offering. The seller has agreed to carry back a promissory note for the remaining $12.5 million of the purchase price, secured by the Hard Rock IP. See — “Prospectus Summary — Hard Rock Acquisition”. If we do not generate subsequent annual income sufficient to make the annual payments under the seller’s note and fail to make any annual payment on time or at all, then we may go into default and potentially forfeit the Hard Rock IP back to the seller. The failure to retain the Hard Rock IP after closing the acquisition would cause a significant loss of our investment and might have a material adverse effect on our revenues and ability to grow our drill string tool business.

Our level of other indebtedness, including the loans on our facilities and equipment, and the financial covenants contained in the loan documents, could reduce our financial flexibility.

Our level of indebtedness could affect our operations in several ways, including the following:

A high level of indebtedness would increase the risk that we may default on our debt obligations. Our ability to meet our debt obligations and to reduce our level of indebtedness will depend on our future performance.

We may experience fluctuations in our quarterly operating results.

Our quarterly operating results may fluctuate significantly in the future. Significant annual and quarterly fluctuations in our results of operations may be caused by, among other factors:

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There can be no assurance that the level of revenues and profits, if any, achieved by us in any particular fiscal period will not be significantly lower than in other, including comparable, fiscal periods. We believe quarter-to-quarter comparisons of our revenues and operating results are not necessarily meaningful and should not be relied on as indicators of future performance. Our operating expenses are relatively fixed in the short term and are based on management’s expectations of future revenues.

If our revenues do not increase along with these expenses, our business could be negatively affected and net profits, if any, in a given quarter may be smaller than expected. This could result in a material adverse impact on our results of operations or financial condition.

We may be exposed to unforeseen risks in our product manufacturing and processes, which could adversely affect our results of operations.

We operate our business from a single manufacturing facility. A natural disaster or extended utility failure at our facility could significantly impact our production ability. 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 be conducted under fixed price contracts. Fluctuations in our manufacturing process, or inaccurate estimates and assumptions used in pricing our contracts, even if due to factors out of our control, may result in cost overruns which we may be required to absorb. Any shut down of our manufacturing facility, reductions in our manufacturing process or efficiency, or cost overruns could adversely affect our business, financial condition and results of operations.

Our business relies heavily on the continued services and presence of our founders, executive officers and key personnel, the loss of whom could significantly disrupt our business, if we are unable to attract and retain qualified replacement personnel.

Our success is dependent to a significant degree upon the business expertise and continued contributions of our founders and senior management team. In particular, we are dependent upon the efforts and services of our founders, Mr. Troy Meier, our Chairman and Chief Executive Officer, and Ms. Annette Meier, our President, because of their knowledge, experience, skills, and relationships with major clients and other members of our management team. The loss of their services for any reason could have a material adverse effect on our operations. In addition, the loss of the services of our Chief Financial Officer, or one or more of our other executive officers or key employees could harm our business. Because we are a small and rapidly growing company, we believe the loss of key personnel would be more disruptive to us than it would be to a large, multinational manufacturer. Many of our key employees could, with little or no prior notice, voluntarily terminate their employment with us at any time.

We do not maintain key person life insurance on the life of any of our executives or key employees that benefit us. The loss of the services of any of our senior officers or key employees, or an inability to attract and retain similarly qualified persons, may adversely affect our business and prospects. In addition, as we grow, it may become necessary to identify, hire and integrate additional or new management members. Even if we are able to attract and hire new management members, integration into our business will inevitably cause disruption to our business and occur over an extended period of time. During that time, the lack of sufficient or effective senior management personnel could cause our results of operations to suffer.

We may be unable to employ a sufficient number of skilled and qualified workers to sustain or expand our current operations.

Both of our remanufacturing and new manufacturing lines of business require personnel with specialized skills and experience. Our ability to be productive and profitable will depend upon our ability to attract, employ and retain skilled workers. In addition, our ability to expand our operations depends in part on our ability to

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increase the size of our skilled labor force. The demand for skilled workers is high, the supply is limited, and the cost to attract and retain qualified personnel has increased over the past few years. 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 presents numerous managerial, administrative, operational, and other challenges. Our ability to manage the growth of our operations will require us to continue to improve our management information systems and our other internal systems and controls. 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.

We intend and expect to continue to make acquisitions that could disrupt our operations and adversely impact our business and operating results.

In addition to acquiring Hard Rock with the proceeds of this offering, our growth strategy includes acquiring other companies that complement our service offerings or broaden our technical capabilities and geographic presence. Acquisitions involve certain known and unknown risks that could cause our actual growth or operating results to differ from our expectations or the expectations of securities analysts. Difficulties with an acquisition strategy include:

Further, acquisitions may also cause us to:

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In addition, our acquisition strategy may divert management’s attention away from our existing businesses, risking the dissatisfaction or loss of key clients or key employees, and expose us to unanticipated problems or legal liabilities, including responsibility as a successor-in-interest for undisclosed or contingent liabilities of acquired businesses or assets.

Our inability to integrate acquisitions successfully could impede us from realizing all of the benefits of the acquisitions, which could weaken our results of operations.

If we are unable to successfully integrate Hard Rock or other future acquisitions, we could be impeded from realizing all of the benefits of those acquisitions and could weaken our business operations. The integration process may disrupt our business and, if implemented ineffectively, may preclude realization of the full benefits expected by us and could harm our results of operations. In addition, the overall integration of the combining companies may result in unanticipated problems, expenses, liabilities, and competitive responses, and may cause our stock price to decline. The difficulties of integrating an acquisition include, among others:

Finally, even if the operations of an acquisition are integrated successfully, we may not realize the full benefits of the acquisition, including the synergies, cost savings, or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all.

If we are unable to raise additional capital, if required in the future, our business could be negatively affected, and/or we could be prevented from achieving our growth objectives.

Our capital needs after this offering will depend on many factors, including our clients demands for our services, the amount of revenue generated from operations, and any future bank borrowings or equipment capital leases, none of which can be predicted with certainty. As a result of these factors, we are unable to predict accurately the amount or timing of its future capital needs, if any. If the net proceeds from this offering, and the cash flow from our operations, are not sufficient to meet our currently budgeted working capital requirements for at least the next 12 months, we may be required to raise capital through public or private financing or other arrangements. That financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Additional equity financing may dilute the interests of our shareholders, and debt financing, if available, may involve restrictive covenants and could reduce our profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures. The inability to obtain additional capital if and when needed could materially and adversely affect our business and results of operations.

To compete in our new drill string tool manufacturing industry, we must continue to develop new technologies, methodologies, and products, on a timely and cost-effective basis.

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

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If we are not able to do so, our ability to service our customers’ demand may be adversely affected. However, we may not succeed in developing new products or enhancing our existing products on a timely basis, and such new products or enhancements may not achieve market acceptance. Furthermore, from time to time others may announce new products, enhancements or technologies that have the potential to replace or render our existing products obsolete. We may encounter resource constraints, technical barriers, or other difficulties that would delay introduction of new services and related products in the future. Our competitors may introduce new products or obtain patents before we do and achieve a competitive advantage. Additionally, the time and expense invested in product development may not result in commercial applications. Any failure by us to anticipate correspond adequately to changes in technology and customer preferences, the introduction of new products or enhancements by others, or any significant delays in the development or introduction of new products by us could have a material adverse effect on our business and results of operations.

Additionally, we must continue to further develop and expand our bit remanufacturing services to meet our exclusive customer’s needs for bit remanufacturing. 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.

An interruption in the availability or change in the cost of raw materials or other supplies could negatively affect our business.

We rely on the availability of volume and quality of synthetic diamond cutters for both our remanufactured drill bit business and for our new drill string tool manufacturing business. In addition, we must have a reliable source of steel available for our new manufacturing business which is both of sufficient quality, and available at a cost-effective price. We do not have fixed price contracts or arrangements for all of the raw materials and other supplies that we purchase. Baker Hughes provides the diamond cutters for our remanufacturing business. However, sourcing cost-effective supplies of quality steel in the relatively low volumes that our new tool manufacturing requires can be challenging. However, shortages of, and price increases for, steel and other raw materials and supplies that we use in our business may occur. Future shortages or price fluctuations in synthetic diamond cutters or steel could have a material adverse effect on our ability to conduct either our remanufacturing business or our new drill tools in a timely and cost-effective manner.

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 in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) as “conflict minerals”. 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 Securities Exchange Commission. Added requirements of compliance with Dodd-Frank may in turn adversely affect our results of operations.

Our success at establishing and maintaining a competitive edge for our products requires us to secure and maintain our current and pending patents, as well as protect and enforce our trade secrets and other intellectual property rights.

We regard significant elements of our technology as proprietary and rely on a combination of patent, trade secret, copyright and trademark laws, confidentiality procedures and other intellectual property protection to protect our proprietary technology.

We currently hold a number of U.S. patents, some applications pending, and related international patent applications pending. There is no assurance that our competitors will not design competing products using the

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same or similar technology after these patents have expired. It may also be possible for a third party to design around our patents, or use different technology.

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. However, patent rights do not necessarily grant the patent owner the right to practice the invention claimed in a patent, but merely the right to exclude others from practicing the patented invention. In addition, patent rights have strict territorial limits, and we do not have patents in every jurisdiction in which we conduct business or in which our products are used. Thus, there is no assurance that our patent applications will result in issued patents, that our existing patents or any future patents will give we any competitive advantages for its products or technology, or that, if challenged, our patents will be held valid and enforceable.

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 develop technology independently. We cannot provide assurance that this independently developed technology will not be equivalent or superior to our proprietary technology. Further, our intellectual property rights may not have the value that management believes them to have and such value may change over time as we and others develop new product designs and improvements.

Unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regards as proprietary, and existing intellectual property laws give only limited protection with respect to such actions. Policing violations of such laws is difficult. The laws of certain countries in which our products are or may be distributed do not protect our products and intellectual property rights to the same extent as do the laws of the United States.

We may be required to enter into other costly litigation to enforce its intellectual property rights or to defend infringement claims by others. We may not prevail in any such legal proceedings related to such claims, and our products and services may be found to infringe, impair, misappropriate, dilute or otherwise violate the intellectual property rights of others. Any legal proceeding concerning intellectual property could be protracted and costly and is inherently unpredictable and could have a material adverse effect on our business, regardless of its outcome. Losing an infringement claim 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.

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 meet these requirements or do not properly implement and comply with our safety program, there could be a material adverse effect on our business, operating results, or financial condition.

Our operations are subject to environmental and operational safety laws and regulations that may expose us to significant costs and liabilities.

Federal, state and local environmental and health and safety laws apply to our facilities. These laws and regulations govern matters such as:

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Environmental Laws .  Proper waste disposal and environmental regulation are major considerations for us because certain metals, minerals, and chemicals used in our manufacturing processes are classified as hazardous substances. Our operations are therefore subject to numerous stringent and complex federal, state and local laws, regulations and ordinances concerning solid waste disposal, hazardous materials storage, use and disposal, air emissions, waste water disposal, employee health and other environmental protection matters (together, “ Environmental Laws ”). These laws and regulations may, among other things, 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 operational 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. Because the Company is a generator of hazardous materials, it is subject to financial exposure even if it fully complies with these laws.

Even an inadvertent failure to comply with the Environmental Laws could result in substantial costs to us, including clean-up costs, fines and civil or criminal sanctions, or third-party claims for property damage or personal injury. In addition, certain Environmental Laws impose 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.

As a generator of hazardous materials, we are subject to financial exposure even if it fully complies with current Environmental laws. Environmental laws could become more stringent over time. The trend in environmental regulation has been to impose increasingly stringent restrictions and limitations on activities that may impact the environment. This could result in higher costs to comply with new laws, and increased risks and penalties for noncompliance. The implementation of new laws and regulations could result in materially increased costs, stricter standards and enforcement, larger fines and liability and increased capital expenditures and operating costs, for both us and our customers.

It is possible that environmental issues may arise in the future that we are not now aware of and cannot predict at this time. There is no assurance that any present or future noncompliance with Environmental Laws will not have a material adverse effect on our results of operations or financial condition. See “Business Environmental Matters.”

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.

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 that may result in increased costs to the Company.

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.

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Additionally, 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.

Our operations are subject to stringent regulations as it relates to “water discharges” that may result in increased costs for our operations.

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. If the water recapture systems at our Vernal facility were to fail, we might incur liability for unauthorized discharges.

Our Company is subject to several state and federal laws and regulations as it relates to employee health and safety, failure of the Company to be in compliance may result in significant fines and penalties.

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.

Our product liability insurance may not be sufficient to cover the damages awarded in a successful product liability claim. Uninsured or underinsured claims or litigation or an increase in our insurance premiums could adversely impact our results.

We are subject to the risk of product liability claims and lawsuits for harm caused by our products. Most of our products are used in hazardous drilling and production applications in which an accident or a failure of a product can cause personal injury, loss of life, damage to property, equipment or the environment or suspension of operations. Any defects could give rise to liability for damages, including consequential damages, and could impair the market’s acceptance of our products.

There is no assurance that our insurance will be sufficient to cover any claims that may arise. An unexpected judgment could be rendered against us in cases in which we could be uninsured or underinsured and beyond the amounts we currently have reserved or anticipate incurring. The liability for payment of damages in a successful product liability claim in excess of our insurance coverage could have a material adverse effect on our business, financial condition and results of operations. In addition, we may not be able to maintain adequate insurance coverage at rates we believe are reasonable. Significant increases in the cost of insurance and more restrictive coverage could also have an adverse impact on our results of operations.

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Unavailability or cancellation of third-party insurance coverage would increase our overall risk exposure as well as disrupt the management of our business operations.

If any of our third-party insurers fail, suddenly cancel our coverage, or otherwise are unable to provide us with adequate insurance coverage, then our overall risk exposure and our operational expenses would increase and the management of our business operations would be disrupted. In addition, there can be no assurance that any of our existing insurance coverage will be renewable upon the expiration of the coverage period or that future coverage will be affordable at the required limits.

Our information systems may experience an interruption or breach in security.

We rely on “CHUCK”, our proprietary production management technology, and on other information systems to conduct our business. Any failure, interruption or breach in security of our information systems could result in failures or disruptions in our customer relationship management, general ledger systems and other systems. Threats to our information technology systems associated with cyber-security risks and cyber incidents or attacks continue to grow. It is also possible that breaches to our systems could go unnoticed for some period of time. Risks associated with these threats include, among other things, loss of intellectual property, impairment of our ability to conduct our operations, disruption of our customers’ operations, loss or damage to our customer data delivery systems, and increased costs to prevent, respond to or mitigate cyber-security events. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial position or results of operations.

Risks Relating to Our Common Stock

As a smaller reporting company, we are subject to scaled disclosure requirements that may make it more challenging for investors to analyze our results of operations and financial prospects.

Currently, we are a “smaller reporting company,” meaning that our outstanding common stock held by non-affiliates had a value of less than $75 million at the time of filing of our registration statement. As a “smaller reporting company,” we are able to provide simplified executive compensation disclosures in our filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in our SEC filings, including, being required to provide only two years of audited financial statements in annual reports. Consequently, it may be more challenging for investors to analyze our results of operations and financial prospects.

We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years following the completion of this offering. 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 this offering, (b) the first fiscal year after our annual gross revenue exceed $1.0 billion, (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (d) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $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

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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.

Future forecast of earnings are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause our actual results to differ materially from such forecasts.

Earnings forecasts are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause our actual results to differ materially from that which is forecasted. Because of our purchase of Hard Rock, we may face greater difficulties in accurately projecting future consolidated earnings. Any earnings forecasts will be prepared by management and will not be verified by an opinion or report from any independent registered public accountants. We cannot assure you that we will be able to forecast earnings accurately, if at all, or that we will be able to achieve such forecasts.

The Meiers own a controlling interest of our stock and thus will have substantial control over our management and affairs, and over certain actions requiring a shareholder vote.

Immediately following this offering, Troy and Annette Meier will own, beneficially through their affiliated entities, approximately 61% of the combined voting power of our stock (or 58% if the underwriter exercise their option to purchase additional Shares in full). In addition, both Mr. Meier and Ms. Meier will serve on our Board of Directors. Consequently, the Meiers will, for the foreseeable future, have significant influence over our management and affairs and will be able to control virtually all matters requiring stockholder approval, including the election of directors and significant corporate transactions such as mergers or other sales of our company or assets, and their interests could differ from ours and those of our other stockholders. In addition, the concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

An active market for our common stock may not develop, which would adversely affect the liquidity and price of the Shares.

Liquid and active trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. However, before this offering, our common stock was not traded on any market. An active trading market for our securities may never develop or, if developed, it may not be sustained. As a result, you may be unable to sell your Shares unless an active market for our common stock can be established or sustained.

Our initial application to list our common stock on the NYSE MKT market may not be approved and even if it is approved, there is no guarantee that we will be able to maintain our listing on NYSE MKT market.

Our common stock is not currently traded on any public market, but we have applied to have our common stock listed on the NYSE MKT market. There is no guarantee that NYSE MKT will approve our initial listing application or that we will be able to remedy any problems identified by NYSE MKT that would prevent our listing. Additionally, even if we are listed on the NYSE MKT, we will be required to comply with certain quantitative and qualitative continued listing requirements, including a minimum bid price and corporate governance requirements. If we fail to meet these continued listing requirements, we may receive notification from NYSE MKT of such failure, which must be publicly filed, and we could eventually be delisted from the NYSE MKT.

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The initial public offering price of our common stock may be higher than the market price of our common stock after this offering, which may be volatile.

The initial public offering price has been negotiated between us and representatives of the underwriter, based on numerous factors which we discuss in the “Underwriting” section of this prospectus, and may not be indicative of the market price of our common stock after this offering. The subsequent market price of our common stock may vary significantly due to a number of factors, some of which are beyond our control. The following factors could affect our common stock price:

In addition, the trading markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. If the market price of our common stock drops, you could lose a substantial part or all of your investment in our common stock. Consequently, you may not be able to sell your shares of our common stock at prices equal to or greater than the price paid by you in the offering.

Purchasers of common stock will experience immediate and substantial dilution in the net tangible book value per share of common stock from the initial public offering price.

Assuming an initial public offering price of $     per share (the mid-point of the price range set forth on the cover page of this prospectus), our pro forma net tangible book value as of December 31, 2013, after giving effect to this offering, would be $     per share. As a result, you will experience an immediate and substantial price dilution equal to $     in the net tangible book value per share of common stock from the initial public offering price. See “Dilution” for a complete description of the calculation of net tangible book value.

Future sales of our common stock in the public market could lower our stock price, and any additional capital raised by us through the sale of equity may reduce your ownership percentage in us.

Our Articles of Incorporation allow us to issue significant numbers of additional shares, including shares that may be issued under our employee and director incentive plans. After this offering, we may file a registration statement with the SEC on Form S-8 providing for the registration of shares of our common stock issued or reserved for issuance under employee and director stock incentive plans. After the expiration of lock-up agreements with the Underwriter, and subject to the satisfaction of vesting conditions, shares registered under the Form S-8 registration statement would be immediately available for resale in the public market.

In addition, after completion of this offering and assuming full subscription of the offering and over-allotment, we will have approximately      shares of our common stock which we may sell in subsequent public or private offerings. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with a future acquisition), or the perception that such sales could occur, could dilute your percentage of ownership in our common stock, and may adversely affect prevailing market prices of our common stock. See “Shares Eligible for Future sale”.

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Our declaration of dividends is within the discretion of our Board of Directors and there can be no assurance that we will pay dividends.

Our dividend policy is within the discretion of our Board of Directors and will depend upon various factors, including our results of operations, financial condition, capital requirements and investment opportunities. We can provide no assurance that we will pay dividends on our common stock. No dividends on our common stock will accrue in arrears. 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. See “Description of Capital Stock — Dividends.”

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.

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 certificate of incorporation and bylaws contain provisions that may make acquiring control of our company difficult, including:

We have a significant number of shares of currently restricted and locked-up stock outstanding which, if registered or otherwise eligible for resale in the future could have a depressive effect on the price of our publicly traded shares.

Upon completion of this offering, we will have up to approximately      shares outstanding (subject to certain other assumptions). Of these shares, approximately      shares will be restricted from resale, of which      shares may be transferable under Rule 144 of the Securities Act upon expiration of the underwriter’s180-day lock-up period after closing of this offering. We also have reserved another      shares for issuance under outstanding warrants and stock options. Significant sales of our shares in the future under another registration statement, pursuant to Rule 144, or otherwise, or the prospect of such sales, may depress the price of our common stock. See “Shares Eligible for Future Sale.”

By opting out Utah’s Control Shares Acquisition Act, we may be a more susceptible target for a hostile takeover than if we had not opted out of the protections of that act.

In our Articles of Incorporation we have elected to not be subject to Utah’s Control Shares Acquisitions Act (Utah Code Ann. 61-6-1 et seq.) (“Control Shares Act”). The Control Shares Act provides stringent rules governing takeovers of Utah public corporations. While Utah public corporations that have not opted out of the Control Share Act will be more difficult to acquire, they may achieve lower valuations than those corporations that opt out of the act’s provisions. Our decision to not be subject to the Control Shares Act may make it easier for a potential hostile takeover to occur than if we had not opted out of the coverage of that act.

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USE OF PROCEEDS
OFFERING TOTAL		$
Hard Rock acquisition down payment		$	12,500,000
Offering costs (estimated)		$	3,000,000
Tronco loan repayment and deferred interest payment (estimated)		$	8,261,600
Commercial line of credit repayment (estimated)		$	695,800
Repayment of Meier personal loan (estimated)		$	2,000,000
Working capital and corporate purposes for 12-months including:
Sales and marketing activities and costs (estimated)		$	1,300,000
Capital expenditures including lease buy-outs and new machinery (estimated)		$	1,500,000
Additional costs related to being a public company (estimated)		$	2,500,000
Other working capital and corporate purposes to be determined

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DETERMINATION OF THE OFFERING PRICE

The price of the Shares we are offering was determined by our board through ‘arm’s length’ negotiations with the underwriter in order for us to raise up to a total of $     in this offering. Among the factors considered were:

The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of shares of common stock. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the shares of common stock can be resold at or above the offering price.

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, total debt, and capitalization as of December 31, 2013:

•

on an actual basis; and

•

on a pro forma basis to reflect our receipt of the net proceeds from our sale of 6,700,000 shares of our common stock in this offering at an assumed initial public offering price of $6.00 per share the midpoint of the price range set forth on the front cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses; and

•

on an as adjusted basis to reflect our receipt of the net proceeds from our sale of       shares of our common stock in this offering at an assumed initial public offering price of $     per share the midpoint of the price range set forth on the front cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses.

		As of December 31, 2013
		Actual				Pro Forma				As Adjusted
		(In thousands, except share and per share amounts)
Cash and cash equivalents		$	11			$	13,917			$
Total debt		$	19,781			$	24,593			$
Stockholders’ equity:
Undesignated preferred stock: $0.001 par value; 20,000,000 shares authorized, no shares issued and outstanding, actual and as adjusted		$	—			$	—			$	—
Common stock: $0.001 par value; 100,000,000 shares authorized,        shares issued and outstanding, actual; 100,000,000 shares authorized,        shares issued and outstanding, as adjusted		$	—			$	19			$
Additional paid-in capital		$	257			$	31,507			$
Retained earnings		$	—			$	—			$
Total stockholders’ equity		$	257			$	31,526			$
Total capitalization		$	20,038			$	56,119			$

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DILUTION OF THE PRICE YOU PAY FOR YOUR SHARES

Dilution represents the difference between the offering price and our net tangible book value per share immediately after completion of this offering. Dilution arises mainly as a result of (a) our determination of the offering price of the shares being offered, (b) the potential for issuance of additional Shares upon conversion of the Bridge Loan and exercise of the Bridge Lender’s warrants, and (c) the lower book value of the Shares held by our existing stockholders.

Our “net tangible book value per share” is determined by subtracting our total liabilities from our total tangible assets, and then dividing the result by the number of our outstanding Shares. As of September 30, 2013, our net tangible book value was $    , or $     per share, based upon       shares outstanding.

If we close this offering at per share price of $     (the midpoint of the price range stated on the cover page of this prospectus) for      shares, we will receive $    , less the estimated underwriting discounts and commissions and estimated offering expenses. See “    ”. The following table illustrates the per share dilution if we had received those net offering proceeds on December 31, 2013:

Actual as of December 31, 2013:
Net tangible book value		$
Number of outstanding shares
Net tangible book value per share – existing shareholders		$
Adjusted as if offering had closed on December 31, 2013:
Adjusted net tangible book value (offering proceeds assumed at $     price/share)		$
Number of shares outstanding post-offering
Adjusted net tangible book value per share as if offering proceeds received		$
Accretion/Dilution Analysis
Potential gain per share for existing shareholders		$
Potential dilution to new investors (assumed $     offering price/share)			($   )

*

Based on our financial statement as of the periods December 31, 2013, as appear elsewhere in this prospectus.

If the underwriter’s over-allotment option is exercised in full, the number of Shares held by our existing shareholders after this offering would be     , or     %, and the number of shares held by new investors would increase to     , or     %, based upon      shares outstanding after this offering. In that case, our as-adjusted net tangible book value would have been $    , or $     per share, and the dilution per share to new investors would have be $     if the offering had closed as of December 31, 2013.

A $     increase or decrease in the assumed initial public offering price of $     per share, which is the midpoint of the price range set forth on the cover page of the prospectus, would increase or decrease, as applicable, our as adjusted net tangible book value per share by $    , and increase or decrease, as applicable, the dilution per share to new investors by $    , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, any increase or decrease in the number of shares that we sell in the offering will increase or decrease our net proceeds in proportion to such increase or decrease, as applicable, multiplied by the offering price per share, less underwriting discount and commission and offering expenses.

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The following table sets forth, as of December 31, 2013, on the as-adjusted basis described above, the differences between our existing shareholders and new investors with respect to the total number of shares purchased from us, the total consideration paid, and the average price per share paid before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, at an assumed initial public offering price of $ .00 per share, which is the midpoint of the range set forth on the cover page of this prospectus:

		Shares Purchased								Total Consideration								Average Price Per Share
		Number				Percent				Amount				Percent
Existing stockholders							%			$					%			$
New investors
Total							100	%		$					100	%		$

A $     increase or decrease in the assumed initial public offering price of $     per share of our common stock would increase or decrease, as applicable, total consideration paid by new investors, total consideration paid by all shareholders, and average price per share paid by all shareholders by $    , $    , and $    , respectively, assuming the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same. Similarly, any increase or decrease in the number of shares that we sell in the offering will increase or decrease our net proceeds in proportion to such increase or decrease, as applicable, multiplied by the offering price per share, less underwriting discount and commission.

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The Vendor Agreements also include a non-competition provision that precludes us from performing remanufacturing or other services relating to PDC drill bits used in the oil, gas, water and geothermal drilling industries, except to the extent that we were already conducting a line of business before the customer entered into that line of business. The Vendor Agreement also assigns to the customer all rights in any intellectual property which we develop and which relates to the remanufacturing services of PDC bits provided to the customer.

Opportunities to Expand our Business with Baker Hughes.   In recent oral communications, Baker Hughes has requested that we help fill their additional demand for drill bits by increasing our manufacturing services by 25% – 30%. In addition, they have communicated interest in our possibly managing some of their in-house remanufacturing facilities. This expansion of our relationship with Baker Hughes would diversify our products, as well as our customer base outside of the Rocky Mountain, California and Alaska regions.

Components of Income and Expense

Operating Revenues.   Currently, we have three primary sources of revenue: (a) remanufacturing drill bits for Baker Hughes, (b) Drill N Ream unit manufacturing and reamer royalty revenues from HRSI, and (c) new manufacturing. Baker Hughes accounted for 73% and 66%, and HRSI accounted for 23% and 31% of our revenue for the years ended December 31, 2013 and 2012, respectively.

See also “— Critical Accounting Policies and Estimates — Revenue Recognition.”

Direct Costs.   We expense direct costs of production when incurred. No inventory is recorded as any amount would be immaterial. Excluded from production costs of both lines of business are facilities costs, depreciation and amortization. Those excluded costs instead are included in operating expenses.

Remanufactured Drill Bits .  Direct costs for our remanufactured drill bit business consist primarily of labor and materials used in the remanufacturing process. The single largest expense related to remanufacturing a drill bit is the new PDC cutters, however, those are purchased and provided to us by Baker Hughes, so we do not incur any cost for them.

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New Machined Tools .  Direct costs for our machined tool products consist primarily of steel and cutting tools. Direct costs also include production expenses, labor and other expenses incurred in connection with the new tool manufacturing projects.

Operating Expenses.   We expense operating costs when incurred. Operating expenses include the costs of the support staffs, management and administrative personnel costs, payroll taxes, and employee benefits for all of our employees and the portion of salaries and wages not allocated to direct costs of remanufactured drill bit and machined tool revenues for those employees who are directly engaged in the production process, as discussed above. Operating expenses also include facility costs, depreciation and amortization, professional services, legal and accounting fees and administrative operating costs.

Factors Affecting Comparability

We believe that the following selected factors can be expected to have a significant effect on the comparability of our recent or future results of operations:

Holdings Reorganization.   In connection with the closing of this offering, we will complete a reorganization transaction in which we will acquire all of the limited liability company membership interests of SDP, SDF, ET, MPS and ML and, as a result, became the holding company under which those subsidiaries will conduct operations. Each of the Subsidiaries is considered to be a historical accounting predecessor for financial statement reporting purposes.

Hard Rock Acquisition.   In January 2014, we entered into a membership interest purchase agreement with HRSI (“ MIPA ”), under which we will purchase 100% of the limited liability company membership interest of its subsidiary, Hard Rock. Closing of the Hard Rock acquisition is scheduled to occur promptly after completion of this offering. HRSI began operations in 2001 and has been marketing and renting the Drill N Ream tool. The Hard Rock purchase price is $25 million, consisting of $12.5 million in cash at closing, and a seller-carried promissory note for $12.5 million (the “ Hard Rock Note ”). The Hard Rock Note will mature three years from the closing date, and accrue interest at the JP Morgan Chase Bank, N.A. annual prime rate. Under the terms of the Hard Rock Note, we will pay two annual principal installments of $5 million plus interest and one final payment of $2.5 million plus interest, on each subsequent anniversary date of the Hard Rock Note date. The Hard Rock Note will be secured by all of the patents, patents pending, other patent rights, and trademarks to be owned by Hard Rock after our acquisition of Hard Rock under the MIPA. After that acquisition, Hard Rock will conduct operations as our wholly-owned subsidiary.

Public Company Expenses.   Upon consummation of our initial public offering, we will become a public company. We also intend to apply to list our securities on the NYSE MKT. As a result, we will need to comply with laws, regulations, and requirements that we did not need to comply with as a private company, including certain provisions of the Sarbanes-Oxley Act and related Securities and Exchange Commission regulations, and will need to comply with the requirements of NYSE MKT if our securities approved for listing. Compliance with the requirements of being a public company will require us to increase our operating expenses in order to pay our employees, legal counsel, and accountants to assist us in, among other things, external reporting, instituting, and monitoring a more comprehensive compliance and board governance function, establishing and maintaining internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, and preparing and distributing periodic public reports in compliance with our obligations under the federal securities laws. In addition, being a public company will make it more expensive for us to obtain director and officer liability insurance. We estimate that incremental annual public company costs will be between $0.5 million and $1 million.

Stock-Based Compensation.

Employee Stock Incentive Plan .  On March 31, 2014, our Board of Directors approved our 2014 Stock Incentive Plan (“ Employee Plan ”) in connection with the completion of this offering. A total of two million Shares are authorized and reserved for issuance under the Employee Plan. The Company also anticipates that it will adopt a Director Equity Compensation Plan (“ Director Plan ”) after the closing of this offering, however, the terms of or number of shares to be reserved under that plan are currently unknown. Equity and equity-based compensation plans are intended to make available incentives that will assist us to attract, retain, and motivate employees, officers, consultants, and directors by allowing them to acquire an ownership interest

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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. No equity awards have been granted to date under any plan.

Additional Compensation Expenses.   Upon completion of this offering, we intend to hire (a) additional financial and accounting personnel in connection with our change in status to a publicly traded company, and (b) additional sales and marketing professionals in connection with our acquisition of Hard Rock, in order to market the Drill N Ream tool and our other pending drill string tools. Accordingly, we expect compensation expenses, as reflected in operating expenses, will be higher in future periods.

Internal Controls and Procedures

Before completion of this offering, we have been a private company with limited accounting personnel to adequately execute our accounting processes, and other supervisory resources with which to address our internal control over financial reporting. We are in the process of implementing sufficient accounting and financial reporting systems, processes, controls and personnel in order to adequately support our development strategy and to comply with public reporting requirements.

We are not currently required to comply with the SEC’s rules related to Section 404 of the Sarbanes-Oxley Act and are, therefore, not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. We will not be required to make our first assessment of our internal control over financial reporting until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a public company, we will need to upgrade our systems, implement additional internal controls, reporting systems and procedures and hire additional accounting, finance and legal staff.

Further, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting until the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company, unless it is determined that we are a non-accelerated filer, in which case our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control. When, and if, it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to remedy or avoid material weaknesses or significant deficiencies in the future.

Recent Accounting Pronouncements

JOBS Act.   On April 5, 2012, the Jumpstart Our Business Startups Act (“ JOBS Act ”) was signed into law. Under the JOBS Act, we are an emerging growth company within the meaning of the rules under the Securities Act, and we may utilize certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies. For example, we will not have to provide an auditor’s attestation report on our internal controls in future annual reports on Form 10-K as otherwise required by Section 404(b) of the Sarbanes-Oxley Act. Also, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards applicable to public companies. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by issuers. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Other.   No other pronouncements materially affecting our financial statements were issued during 2012 or 2013 thereafter that have impacted, or are expected to impact, our financial statements and results of operations.

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Critical Accounting Policies and Estimates

The discussion of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with U.S. GAAP. During the preparation of these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those discussed below. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. While we believe that the estimates and assumptions used in the preparation of our combined 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 combined financial statements. Our estimates and assumptions are evaluated periodically and adjusted when necessary. The more significant estimates affecting amounts reported in our combined and consolidated financial statements include, but are not limited to: determining the allowance for doubtful accounts, recoverability of long-lived assets, useful lives used in calculating depreciation and amortization, and accruals for guarantees.

We believe that the following critical accounting policies involve our more significant judgments and estimates used in the preparation of our financial statements. For further information on all of our significant policies, see Note 1 to our combined and consolidated financial statements included elsewhere in this prospectus.

Revenue Recognition.

Remanufacturing  — Remanufacturing services are performed in our facilities for a customer under four-year Vendor Agreements dated October 28, 2013 and July 13, 2009. Under both contracts, revenue is determined based on a standard hourly rate to complete the work and is subject to adjustment every July and January. Rate adjustments are calculated by the customer based on their internal cost estimates for a similar type of services performed in-house at their facilities plus 10%. Revenue for remanufacturing services is recognized as the services are rendered and when collectability is reasonably assured, typically upon shipment to the customer. Shipping and handling costs related to remanufacturing services are paid directly by the customer at the time of shipment. During the 2013 and 2012 fiscal years, our rates were not increased pursuant to the vendor contracts.

Manufacturing  — Revenue from Drill N Ream rentals is earned and payable to us upon cash receipt of rental income by HRSI. All other manufactured products are sold at prevailing market rates. We recognize revenue for these products upon delivery, when title passes, when collectability is reasonably assured and when there are no further significant obligations for future performance. Typically this is at the time of customer acceptance. Shipping and handling costs related to product sales are recorded as a component of both the sales price and cost of the product sold.

Rental Income  — Revenue from rental of the third building on our Vernal campus to Baker Hughes, and our lease revenue from the Superior Auto Body property is recognized according to the terms of the related leases, typically at the beginning of the monthly rental period.

Concentration of Credit Risk.   Historically substantially all of our revenues were derived from our remanufacturing of PDC drill bits under our exclusive contract with Baker Hughes, plus, more recently, our manufacturing of the Drill N Ream units for HRSI. Together, Baker Hughes and HRSI accounted for 96% and 97% of our revenue for the years ended December 31, 2013 and 2012, respectively. However, after our acquisition of Hard Rock upon completion this offering, our historical HRSI revenues and accounts receivable percentages will be spread out among Hard Rock’s customers. For the year ended December 31, 2013, five of HRSI’s Drill N Ream rental customers represented approximately 91% of HRSI’s Drill N Ream rental revenues for that period. We believe that the loss of Baker Hughes as a customer would have a significant adverse impact on our business and results of operations. However, we believe that our purchase of Hard Rock and continuing growth of our new manufacturing business will have a positive effect on diversifying our concentration of credit risk in the future.

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Accounts Receivable; Allowance for Doubtful Accounts .  Accounts receivable are generally due within 60 days of the invoice date. No interest is charged on past-due balances. We grant credit to our customers based upon an evaluation of each customer’s financial condition. We periodically monitor the payment history and ongoing creditworthiness of our customers. An allowance for doubtful accounts is established at a level estimated by management to be adequate based upon various factors including historical experience, aging status of customer accounts, payment history and financial condition of our customers. As of December 31, 2013 and 2012, management determined that no allowance for doubtful accounts was deemed necessary due to our expectation that the Company will collect all amounts owed.

Goodwill and Related Intangible Assets.   Goodwill is the excess cost of an acquired entity over the amounts assigned to assets acquired and liabilities assumed in a business combination. We will not be recognizing any goodwill as the result of the Reorganization. To determine the amount of goodwill resulting from our upcoming purchase of Hard Rock and other future acquisitions, we will perform an assessment, to determine the fair value of the acquired company’s tangible and intangible assets and liabilities. Goodwill will be allocated to the appropriate subsidiary at that time. Annually, and more often as necessary, we will perform an evaluation of our intangible assets and goodwill for indications of impairment. If indications exist, we will perform an assessment of the fair value of the intangible assets and the goodwill and if necessary, record an impairment charge.

Income Taxes.   From inception, (a) SDP, MPS and ML elected to be taxed under subchapter S of the Internal Revenue Code (“ IRC ”) for federal income tax purposes and as flow-through entities for state income tax purposes, and (b) SDPCA, SDF, and ET have operated as disregarded single-member LLCs for federal and state income tax purposes. Accordingly, the net income of the Subsidiaries was not subject to corporate level federal or state income taxes. The related tax attributes of the Subsidiaries were passed through to their respective pre-Reorganization owners, and income taxes were payable by those owners. Accordingly, no federal or state income tax provision has been included in the accompanying combined and consolidated financial statements. We do not have any uncertain tax positions as of December 31, 2013 or 2012. Our federal and state tax returns for the years ended December 31, 2012 and 2011 remain open to examination. For the years ended December 31, 2013 or 2012, there were no income tax interest or penalty items recorded in the combined and consolidated statement of operations or as a liability on the combined and consolidated balance sheet.

Upon closing of the transaction, we will become a C-corporation for federal and state income tax reporting purposes. Accordingly, as of that date we become, and after our corporate reorganization continue to be, subject to federal and state income taxes, which may affect future operating results and cash flows. As of December 31, 2013, we estimated a net deferred tax liability of approximately $1.3 million will be established for differences between the book and tax basis of our assets and liabilities. Upon closing, the deferred tax liability will result in a corresponding expense recorded to net income from operations.

Tronco Guarantee.   In 2009, we determined it was probable that we would assume responsibility for the repayment of the principal portion of the Tronco Loan. Therefore we recorded an accrual for the estimated amount of the loss. Management has estimated the amount owed under our guarantee by reducing the principal balance of the loan by the estimated recoverable amount of Tronco’s assets. Tronco’s assets consist of producing properties and approximately 1,533 mineral acres in the Utica shale formation. The fair value of the producing properties was based on the present value of forecasted production while the undeveloped acreage was based on market lease rates. Changes in the estimated loss from the guarantee are included in loss on guarantee obligation in the combined statements of income.

The ultimate amount and timing of a distribution to the Company may vary from this estimate depending on the ultimate proceeds received upon sale of the oil and gas assets. The Company believes that the guaranty obligation is properly presented net of Tronco’s oil and gas assets since the Tronco Loan represents Tronco’s only secured obligations. All other obligations are unsecured.

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The estimated probable loss from the guarantee is as follows:

		As of December 31,
		2013				2012
Principal amount outstanding		$	8,261,638			$	7,917,234
Estimated recoverable amount of Tronco’s assets			(3,866,001	)			(3,179,702	)
		$	4,395,637			$	4,737,532

The above estimate of the recoverable amount of Tronco’s assets is highly dependent on the acreage valuations in the Utica shale of Ohio. Acreage valuations can change based the overall oil and gas industry and, specifically, producers' estimate of reservoir location in the area.

Results of Operations

The following table represents our condensed combined and consolidated statement of operations for the periods indicated:

		Year ended December 31,
(in thousands)		2013								2012
Gross revenues			11,923				100.0	%		$	9,955				100.0	%
Cost of goods sold			6,062				50.8	%			4,590				46.1	%
Gross profit			5,861				49.2	%			5,365				53.9	%
Operating expenses			2,169				18.2	%			1,261				12.7	%
Income from continuing operations			3,692				31.0	%			4,104				41.2	%
Other income			420				3.5	%			582				5.8	%
Income tax (expense) benefit			—				0.0	%			—				0.0	%
Change in guaranteed debt obligation			342				2.9	%			(207	)			(2.1	%)
Interest expense			(786	)			(6.6	%)			(994	)			(10.0	%)
Net income		$	3,668				30.8	%		$	3,485				35.0	%

The following table represents our gross revenues, direct costs, and gross profits for our remanufacturing and manufacturing lines of business by line of business for the periods indicated:

		Remanufacturing business																Manufacturing business
(in thousands)		Year ended December 31, 2013								Year ended December 31, 2012								Year ended December 31, 2013								Year ended December 31, 2012
Gross revenues		$	8,678				72.8	%		$	6,741				67.7	%		$	1,558				13.1	%		$	933				9.4	%
Cost of goods sold			2,852				23.9	%			2,157				21.7	%			2,003				16.8	%			1,530				15.4	%
Gross profit		$	5,826				48.9	%		$	4,584				46.0	%		$	(445	)			(3.7	%)		$	(597	)			(6.0	%)

Year ended December 31, 2013 compared to year ended December 31, 2012

Revenues.   Our revenues increased approximately $2 million, or 19.8%, in FYE, 2013 as compared to FYE 2012, with increases in most of our revenue categories. Of this increase, our remanufacturing revenues increased $1.9 million, or 28.7% year over year, and constituted approximately 72.8% of our total 2013 revenues. Our new manufacturing revenues increase approximately $.6 million or 67%, year over year, and constituted approximately 13.1% of our total 2013 revenues. Our Drill N Ream rent royalties decreased approximately $.6 million, or 26.1%, and constituted approximately 14.1% of our total 2013 revenues. The significant decrease in our Drill N Ream rental royalties is due to price decrease as a result of increased competition in the reaming tool industry. The increase in our remanufacturing revenues in 2013 was primarily due to increased demand for our remanufacturing services by Baker Hughes as oil and gas field exploration activity jumped in our primary geographic markets in 2012. Before we formed SDF and ET in October 2011, our remanufacturing revenues made up 100% of our gross revenues. While currently continuing to grow, our revenues could be affected adversely by changes in economic conditions that affect the oil and gas exploration business. We are unaware of any upcoming delays in our customer’s current projects, and therefore are not anticipating such events to influence our revenues in the foreseeable future.

Costs of goods sold; Gross profits.   Gross profits decreased from 54% to 49%. This decrease was due to the Company expanding operations into a third building and adding personnel and related costs to better serve

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the customers. Our cost of goods sold increased approximately $1.5 million, or 32.1%, during FYE 2013 compared to FYE 2012. Of this increase, our remanufacturing direct costs increases 32.2% year over year, and constituted 47.0% of total cost of goods sold. Our new manufacturing cost of goods sold increased 30.9% year over year, and constituted 33.0% of total cost of goods sold. The increase in our cost of goods sold in 2013 is primarily due to increased demand for our remanufacturing services by Baker Hughes. However, as a percentage of revenues, cost of goods sold increased for FYE 2013. Cost of goods sold increased as a whole because a second shift was added to operations in order to expand capacity. This has allowed the Company to expand operations and given us the ability to provide more services to its customers. Depreciation is included as a direct cost and increased $.3 million or 33.7% year over year and constituted 20.0% of the direct costs

General and Administrative expenses.   Our operating expenses increased approximately $0.9 million, or 71.9%, for FYE 2013 compared to FYE 2012. However, as a percentage of revenues, operating costs increased to 18.2% for FYE 2013, from 12.7% for FYE 2012. Operating expenses include the costs of management and administrative personnel costs, payroll taxes, bonuses and employee benefits for all of our employees and the portion of salaries and wages not allocated to direct costs of contract revenues for those employees who provide our products. Operating expenses also include facility costs, professional products, legal and accounting fees, and administrative operating costs. We expense operating costs when incurred. The increase in our operating expenses in 2013 was primarily due to the growth in office and other operational expenses.

Other income.   Other income primarily consists of lease payments received from two real property leases: one from Baker Hughes for lease of the fourth building in our Vernal campus, and the other for lease of the SAB facilities. See “Business — Properties”. For FYE 2013, other income decreased $0.2 million, or 20.4%, as compared to FYE 2012, primarily due to the reduction of buildings rented to Baker Hughes. In 2013 they rented only one building instead of two.

Other expenses.   Other expenses consist primarily of interest expense and Change in Guaranteed Debt Obligation relating to the Tronco loan guaranty. See “— Off-Balance Sheet and Contingent Arrangements”, below. Interest expense decreased $.2 million, or 20.9%, in FYE 2013 as compared to FYE 2012. This decrease was primarily due to paying off higher interest loans and by taking on new loans with lower stated interest rates. The Tronco guaranteed debt obligation decreased by a net $0.5 million, at FYE 2013 as compared to FYE 2012.

Income taxes.   During the years ended December 31, 2013 and 2012, the related tax attributes of our Subsidiaries were passed through to their respective pre-Reorganization owners, and income taxes were payable by those owners. See “Critical Accounting Policies and Estimates — Income Taxes”, above.

Cash Flows

The following table reflects our current assets and liabilities, as of the dates indicated:

		December 31,
		2013				2012
Current Assets
Cash		$	11,256			$	70,188
Accounts receivable			2,978,666				1,154,494
Prepaid expenses			182,530				184,131
Other current assets			157,066				74,616
Total			3,329,518				1,483,429
Current Liabilities
Accounts payable		$	445,947			$	231,393
Accrued expenses			277,579				195,171
Current portion of capital lease obligation (1)			258,235				349,741
Current portion of guaranteed debt obligation (2)			4,395,637				—
Long-term debt – related party			—				53,925
Current portion of long-term debt (3)			3,316,578				944,169
Total		$	8,693,976			$	1,774,399

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Operating activities

For the year ended December 31, 2013, net cash provided in our operating activities was approximately $2.8 million, primarily attributable to approximately $3.6 million in net income, plus $300,000 increase in accounts payable and $1.1 million increase in depreciation, offset in part by approximately $1.8 million increase in accounts receivables and a $300,000 decrease in the guaranteed debt obligation.

For the year ended December 31, 2012, net cash used in our operating activities was approximately $4.3 million, primarily attributable to approximately $3.5 million in net income, plus approximately $206,000 increase in guaranteed debt obligations, $742,000 of depreciation, offset by a increase of approximately $169,000 in accounts receivables, and $85,000 increase in prepaid expenses and a increase of approximately,, $79,000 in other assets.

Investing activities

For the year ended December 31, 2013, net cash used in our investing activities was approximately $168,000, primarily attributable to approximately $196,000 used to purchase additional property and equipment, offset by approximately $28,000 generated from the sale of existing property and equipment.

For the year ended December 31, 2012, net cash used in investing activities amounted to $854,000 primarily resulting from cash used for the purchase of property and equipment of $1 million, offset by proceeds of $165,000 generated from the sale of property and equipment.

Financing activities

For the year ended December 31, 2013, net cash used in financing activities was approximately $2.7 million, primarily attributable to approximately $661,000 in payments on long-term debt, $228,000 in payments on long-term lease obligations, and $4.3 million in S-corporation owners’ distributions, offset by $2.3 million in shareholder capital contributions.

For the year ended December 31, 2012, net cash used in financing activities was approximately $3.5 million, primarily attributable to approximately $617,000 in payments on long-term debt, $147,000 in payments on long-term lease obligations, and $3.0 million in S-corporation owners’ distributions, offset by approximately $207,000 in shareholder capital contributions.

HRSI — Results of Operations

The following table represents HRSI’s statement of operations for the periods indicated:

		Year ended December 31,
		2013								2012
		(in thousands)
Gross revenues		$	8,478				100.0	%		$	11,977				100.0	%
Cost of goods sold			2,771				32.7	%			3,113				26.0	%
Gross profit			5,707				67.3	%			8,864				74.0	%
Operating expenses			2,501				29.5	%			3,021				25.2	%
Operating income			3,206				37.8	%			5,843				48.8	%
Other Income (expense) – net			96				1.1	%			5				0.0	%
Income tax benefit			(44	)			(0.5	%)			(31	)			(0.3	%)
Net income		$	3,346				39.5	%		$	5,879				49.1	%

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Year ended December 31, 2013 compared to year ended December 31, 2012

Revenues .   For the year ended December 31, 2013 (FYE 2013), HRSI’s revenues decreased approximately $3.5 million, or 29%, as compared to the year ended December 31, 2012 (FYE 2012). HRSI is a five-person, family-owned business managed and primarily conducted by its two owners, one of whom is primarily responsible for generating rental contract business, and the other of whom is primarily responsible for both business and financial management. The decrease in Drill N Ream rental revenue for the year ended December 31, 2013 was primarily caused by the diversion of a substantial amount of the owners’ attention to the business sale process, and to HRSI’s first financial statement audit in preparation for this offering. For this reason, and for the reasons discussed in “Business – Our Horizontal Drilling Tools”, we do not believe that the decrease in Drill N Ream revenue in second half 2013 is indicative of future Drill N Ream rental revenues after our acquisition of Hard Rock, and therefore does not constitute a negative trend.

Approximately five of HRSI’s customers are responsible for approximately 93% of HRSI’s revenues. As a result, HRSI’s revenues could be affected adversely by the loss of any of those customers, or by changes in those major customers’ equipment demand as the result of economic conditions that affect the oil and gas exploration business. However, we are unaware of any upcoming delays in HRSI’s customers’ current projects, and therefore are not anticipating such events to influence Hard Rock’s revenues in the foreseeable future.

Costs of goods sold; Gross profits .  HRSI’s costs of goods sold consist almost entirely of the cost of the Drill N Ream tools that it purchases from us, and of the Drill N Ream rental royalties that it pays to us. As a result, the rental royalties will be eliminated after our acquisition of Hard Rock from the proceeds of this offering. The costs of goods sold decreased approximately $0.3 million, or 11%, during FYE 2013 compared to FYE 2012. The decrease in HRSI’s cost of goods sold in 2013 is primarily due to decreased demand for rental of the Drill N Ream tool by HRSI’s customers. However, as a percentage of revenues, costs of goods sold increase to 33% in FYE 2013 from 26% in FYE 2012. The increase in cost of goods sold was due to the increase in tooling costs for repairing more of the rental tools, instead of acquiring new ones as was the case in 2012. Depreciation also increased because the tools have a full year depreciation instead of the partial year in 2012. As a result, HRSI’s gross profits decrease approximately $3.2 million, or 17%, during FYE 2013 as compared to FYE 2012.

Operating expenses .  HRSI’s operating expenses decrease approximately $0.5 million, or 17%, for FYE 2013 as compared to FYE 2012. Operating expenses include facility costs, professional products, legal and accounting fees, and administrative operating costs, which include funding a pension plan for the benefit of HRSI’s owners. The decrease in operating expenses was primarily due to the funding of the pension plan. The pension plan is not part of the assets being transferred to Hard Rock.

Income taxes .  Effective January 1, 2012, HRSI made an election to be taxed as an S-corporation. During FYE 2013 and 2012, HRSI’s related tax attributes were passed through to it owners, and income taxes were payable by those owners. The tax benefit was generated based on reversals of built-in gains after the S-corp election.

Income taxes .  During FYE 2013 and 2012, HRSI’s related tax attributes were passed through to it owners, and income taxes were payable by those owners. The tax benefit was generated based on reversals of built-in gains after the S-corp election.

The following table reflects HRSI’s current assets and liabilities, as of the dates indicated:

		December 31,
		2013				2012
		(In thousands)
Current Assets
Cash		$	2,755			$	6,580
Accounts receivable			1,032				1,704
Prepaid expenses			13				22
Total		$	3,800			$	8,306

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		December 31,
		2013				2012
		(In thousands)
Current Liabilities
Accounts payable		$	77			$	1,113
Accrued commissions (payable to SDP)			200				615
Accrued expenses			25				11
Income taxes payable			572				559
Current portion of long-term debt			—				9
Total		$	874			$	2,307

Cash Flows

Operating activities

For the year ended December 31, 2013, net cash provided by HRSI’s operating activities was approximately $2.9 million, primarily attributable to approximately $3.3 million in net income, plus approximately $500,000 in depreciation and amortization, and an increase of approximately $673,000 in accounts receivable offset by and a decrease of approximately $1.4 million in accounts payable.

For the year ended December 31, 2012, net cash provided by HRSI’s operating activities was approximately $7.7 million, primarily attributable to approximately $5.9 million in net income, plus approximately $764,000 decrease in accounts receivable, approximately $56,000 decrease in prepaids and other current assets, approximately $635,000 increase in payables and accrued liabilities and approximately $358,000 in depreciation and amortization.

Investing activities

For the year ended December 31, 2013, net cash used in HRSI’s investing activities was approximately $400,000, primarily attributable to approximately $800,000 used to purchase additional property and equipment, offset by approximately $400,000 generated from the sale of existing property and equipment.

For the year ended December 31, 2012, net cash used in investing activities amounted to approximately $920,000 primarily resulting from cash used for the purchase of property and equipment of approximately $1.1 million, offset by proceeds of approximately $167,000 generated from the sale of property and equipment.

Financing activities

For the year ended December 30, 2013, net cash used in financing activities was approximately $6.4 million, attributable to approximately $6.4 million in S-corporation owners’ distributions.

For the year ended December 31, 2012, net cash used in financing activities was approximately $1.0 million, attributable to S-corporation owners’ distributions.

Pro Forma Results of Operations — Hard Rock Acquisition

The following table represents our pro forma condensed combined statement of operations for the periods indicated, as if we had completed our acquisition of Hard Rock on January 1, 2013. All Drill N Ream income and expenses have been adjusted to reflect the net effect of HRSI’s rental revenues and direct costs, and SDP’s rental royalties and costs.

		Actual (2) Year ended								Pro Forma (1) Year ended
(in thousands)		December 31, 2013								December 31, 2013
Gross revenues		$	11,923				100	%		$	17,633				100	%
Costs of goods sold			6,062				50.8	%			9,060				51.4	%
Gross profit			5,861				49.2	%			8,573				48.6	%
Operating expenses			2,169				18.2	%			5,570				31.6	%
Income from continuing operations			3,692				31.0	%			3,003				17.0%

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		Actual (2) Year ended								Pro Forma (1) Year ended
(in thousands)		December 31, 2013								December 31, 2013
Other Income			420				3.5	%			531				3.0	%
Change in guaranteed debt obligation			342				2.9	%			342				1.9	%
Interest Expense			(786	)			(6.6	%)			(3,382	)			(19.2	%)
Income tax (expense)			—				0.0	%			(184	)			(1.0	%)
Net income		$	3,668				30.8	%		$	310				1.8	%

This unaudited pro forma condensed combined statement of operations data is presented for illustration purposes only, and does not necessarily indicate the operating results that would have been achieved if the Hard Rock acquisition had occurred at the beginning of the period presented, nor is it indicative of future operating results. The unaudited pro forma condensed combined statement of operations data should be read in conjunction with our historical combined financial statements and accompanying notes included in this prospectus. Also, this unaudited pro forma condensed combined statement of operations data does not reflect HRSI’s actual results of operations, and should be read in conjunction with HRSI’s historical financial statements and accompanying notes presented elsewhere in this prospectus.

Pro forma year ended December 31, 2013 compared to actual year ended December 31, 2013

Gross revenues .  Our FYE 2013 revenues, on a pro forma basis with Hard Rock, would have increased approximately $5.7 million (48%) over our actual results for the same period without the Hard Rock acquisition. This pro forma increase in revenues is primarily due to the amount that the Drill N Ream rental revenue received by HRSI exceeded the rental royalty that HRSI actually paid to us.

Cost of sales; Gross Profit .  In comparison to the significant increase in pro forma revenues for FYE 2013, our pro forma direct costs for FYE 2013 would have increased approximately $3 million, or (49%) as the result of Hard Rock acquisition. However, our percentage of direct costs to revenues would have been consistent at 51% on a pro forma basis, from our actual 51% percentage of direct costs to revenues.

Operating expenses .  On a pro forma basis, our operating costs would have been approximately $3.4 million, or (157%) higher than our actual operating costs, for FYE 2013. However, as a percentage of revenues, our pro forma operating costs would only have increased 14% from our operating costs as a percentage of revenues in FYE 2013. The increase in pro forma operating expenses is primarily due to the cost of marketing salaries and expenses relating to the Drill N Ream rentals.

Income taxes .  On a pro forma basis, our consolidated effective federal and state income tax rate would have increased to 39% as compared to zero for our actual year ended December 31, 2013. This pro forma increase in effective tax rate is due to our Reorganization into a C-corporation holding company structure immediately before closing of this offering and acquisition of Hard Rock. Our actual FYE 2013 effective tax rate of zero is due the pass-through tax status of SDP, SDF, ET, MPS, and ML in FYE 2013. See “Critical Accounting Policies and Estimates — Income Taxes”, above.

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status to a publicly traded company, (c) our planned acquisition of the Tronco Note, and (d) our planned acquisition of Hard Rock. We will monitor our capital requirements to ensure our needs are in line with available capital resources.

We believe our experienced employees and management team are our most valuable resources. Attracting, training, and retaining key personnel have been and will remain critical to our success. To achieve our human capital goals, we intend to remain focused on providing our personnel with entrepreneurial opportunities to increase client contact within their areas of expertise and to expand our business within our product offerings.

We will have broad discretion over the use of the net proceeds in this offering. As of the date of this prospectus, we currently intend to use the net proceeds for the purposes set forth in “Use of Proceeds” with the remainder to be used primarily for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of the net proceeds to expand our current business through other acquisitions or investments in other complementary strategic businesses. However, we have no commitments with respect to any other acquisitions at this time. To the extent any net proceeds are used to repay any debt obligations, the aggregate outstanding balance of our notes payable as of December 31, 2013 was approximately $14.3 million with interest rates ranging from 0.0% to 12.0%.

Contractual Obligations

Baker Hughes Contract.   In October 2013, Baker Hughes renewed the Vender Agreement under which we provide them with our remanufacturing services for an additional four years. Under this renewed Vendor Agreement, Baker Hughes has agreed to pay us an amount equal to their cost of remanufacturing at their internal remanufacturing facilities, plus 10%. In addition, we have a right of first refusal to provide remanufacturing services to all of Baker Hughes operations in the western United States, except Texas and Oklahoma, and agree not to perform drill bit remanufacturing services for any other party in the oil, gas, water and geothermal drilling industries. Baker Hughes agrees to provide us with all the PDC diamond cutters needed to remanufacture their drill bits, and they retain a security interest in all of those PDC cutters. The Vendor Agreement also grants Baker Hughes the right, for up to 60 days after termination of the Vendor Agreement, to purchase our Vernal manufacturing facility and the remanufacturing machinery located in our remanufacturing facility, for a to-be-determined fair market value, and subject to certain other requirements and conditions. The Vendor Agreements also include a non-competition provision that precludes us from performing remanufacturing or other services relating to PDC drill bits used in the oil, gas, water and geothermal drilling industries, except to the extent that we were already conducting a line of business before the customer entered into that line of business.

Manufacturing Equipment Leases and Loans .   We have entered into a number of leases of and loans to purchase equipment and machinery used in our new manufacturing operations.

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Facilities Loans.

Manufacturing Facility.   Our main Vernal, Utah manufacturing facility ( see “Business — Properties”) is titled to MPS, with two buildings leased to SDP, one building leased to SDF, and the one building leased to Baker Hughes. This property is subject to a first Deed of Trust loan in the current principal amount of $4.6 million, which accrues interest at 5.25 per year, requires monthly payments of $33,900, and matures in full in August 2015. We also have granted junior liens on this property as additional collateral for the Tronco Loan and for another commercial loan in the current principal amount of approximately $696,000, which will be repaid from the proceeds of this offering ( see “Off-Balance Sheet and Contingent Obligations — Tronco-Related Loans”, below). In addition, in 2012, we purchased one acre and a commercial building that are contiguous to our manufacturing facility, which we currently use for storage, but which is usable for expansion of portions of our business operations. See “Business — Properties”. This contiguous property is subject to a first Deed of Trust loan which is also guaranteed by Mr. Meier and Ms. Meier in the current principal amount of $217,000 which accrues interest at higher of prime + 2.0% or 5.5% per year, requires monthly payments of approximately $2,600, and a balloon payment at maturity in July 2022. This loan additionally requires that the intercompany leases on our main facilities remain intact.

Bakersfield Property .  In 2012, we received funding for expansion of our business into California under the EB-5 program of the United States Citizenship and Immigration Services. In order to obtain funding under this program, our expansion into California had certain job creation and capital investment requirements both in an area targeted by the program for development. We have obtained three loans under the program which bear interest at 2.25 – 5.5% and are collateralized by land, buildings and equipment owned by us and located in Bakersfield, California. Two loans totaling $1,127,000 were completed as of December 31, 2012, and cumulatively require monthly payments of approximately $7,100, including principal and interest. The first loan in the amount of $650,000 has a final maturity date of April 1, 2022, and the second in the amount of $477,000 has a final maturity date October 1, 2032. The current principal amounts are $632,000 and $459,000, respectively. The third loan is for tenant improvements and was still in the construction phase as of December 31, 2012. In July 2013, the third loan was revised to monthly interest only payments of approximately $3,300, and has a final maturity date of May 1, 2017.

Investment Real Estate Loans

Superior Auto Body (SAB) Loans .  Beginning in July 2008, we became co-borrowers with SAB, a related party, for development of an auto body shop located in Riverton, Utah, to be operated by the related party. The auto body shop is titled in MPS and rented to SAB under a lease agreement which requires the co-borrower to make the $17,700 monthly payments on this loan in satisfaction of its lease obligation. Two loans originally totaling approximately $2.8 million were obtained for the purchase of the real property and construction of the facilities. Of that amount, approximately $1,663,000 is currently outstanding under a first Deed of Trust loan which accrues interest at 6%, requires monthly payments of approximately $10,600, and matures in March 2017. The remaining amount was issued under a second Deed of Trust loan, purchased by the SBA which has a current principal balance of $1,095,000, accrues interest at 2.42%, requires monthly payments of approximately $6,100, and matures in July 2032. The purchased real property and constructed improvements are the primary collateral for both loans. See also , “Certain Relationships and Related Party Transactions”.

Naples Property Loan .  This loan is secured by approximately 11 unimproved acres in Naples Utah for a now-terminated property development venture conducted by a now-defunct limited liability company in which Mr. Meier was an investor of the loan on the property. When the venture failed, we took title to the property and assumed this loan. This loan has a current principal balance of approximately $1,297,000, accrues interest at the rate of 7% per year, requires monthly payments of approximately $12,800, and matures in November 2014 with a final balloon payment of approximately $680,000. This loan is secured by the purchased property.

Other Raw Land Loan .  This loan was used to purchase approximately 47 unimproved acres in Vernal Utah that is contiguous to the Meier’s residence for $700,000. Originally, this loan did not bear interest, and was due in full on December 2008. After that maturity date, this loan was orally amended to accrue interest at 8% per year, require monthly payments of $5,000, and mature in December 2018 with a final balloon payment

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of approximately $358,000. This loan is secured by the purchased property. The loan will be eliminated through distribution of the property before effectiveness of this offering.

Commercial Loans

Bridge Loan .  In connection with this offering, we have entered into a $2 million bridge loan with a private lender. Upon the effectiveness of this offering, this loan would automatically convert into shares of our restricted common stock, upon closing of this offering, at 70% of per share price in this offering, and a warrant to purchase an equivalent number of shares of our common stock at 100% of per share price in this offering. This loan accrues interest at 5% per year starting in November 2014, at which time it will require monthly payments of approximately $50,500, with a balloon payment at maturity in February 2016, if not previously converted under additional conversion provisions of the loan. This bridge loan is secured by a junior blanket lien on our and SDP’s accounts. A portion of the proceeds of this loan was used to repay two commercial loans, totaling approximately $790,000, and the remainder will be used for working capital until closing of this offering, with the balance expected to be used to repay other debt obligations.

Company Plane.   Commercial loan for purchase of company plane. This loan has a current principal balance of approximately $339,000, accrues interest at the rate of 7.35% per year, requires monthly payments of approximately $3,500, matures in May 2026, and is secured by the plane.

Vehicle Loans.   We have also entered into loans to fund vehicle purchases totaling $339,713, with interest rates ranging from 0% to 12%, and maturity dates ranging from February 2014 to December 2020.

Tronco-Related Loans .  In order to fund several large lump-sum payments due on the Tronco Loan before its most recent renewal, we borrowed under a number of secured commercial loans and lines of credit. See “Off-Balance Sheet and Contingent Arrangements — Tronco-Related Loans”, below. Those loans have a total outstanding principal balances of $1,084,000, accrue interest at 7% to require total payments of $13,160 per month, and have maturity dates of October 2014 to November 2014. We repaid $696,000 of those loans from the Bridge Loan discussed above, and intend to repay the remaining $388,000 from the proceeds of this offering.

Contractual Obligations.   The following table presents our contractual obligations and contingent commitments by period as of December 31, 2013. 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. See “Use of Proceeds.”

		Payments Due by Period
		Total				Less than 1 year				1 – 3 years				3 – 5 years				More than 5 years
			(in thousands)
Long-term debt and capital lease obligations (1)		$	19,781			$	7,970			$	5,835			$	3,008			$	2,968
Interest payments (2)			2,726				870				953				393				510
Non-cancelable operating leases			530				265				265				0				0
Total		$	23,037			$	9,105			$	7,053			$	3,401			$	3,478

Off-Balance Sheet and Contingent Arrangements

Tronco-Related Loans

Loan Guarantee.   We have guaranteed a loan of Tronco Energy Corporation (“ Tronco ”), a party related through common control. The Tronco loan, as amended, effective January 1, 2014 has a current principal balance of $6.89 million, accrues interest at 11% per year, requires monthly interest payments of approximately $63,000, and has four six-month extensions which if exercised, will result in the Tronco loan to mature in December 2015, along with a deferred interest obligation of approximately $1.37 million (the

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“ Tronco Loan ”). The Tronco Loan is secured by substantially all the oil and gas properties and reserves of Tronco, and in addition to our guarantee, a personal guarantee of Mr. Meier, Ms. Meier and their personal trusts, and a junior Deed of Trust lien on our Vernal campus. The Tronco Loan also is partially secured by a pledge of all of SDP’s limited liability company membership interests granted by its members, Meier Management Company, LLC and Meier Family Holding Company, LLC, before our Reorganization, and of all of SDF’s limited liability company membership interests granted by its sole member, Meier Management Company, LLC. The lender has consented to the Reorganization in exchange for our pledge of the SDP and SDF limited liability company interests after we acquire them in the Reorganization.

In 2009, it became probable that we would assume responsibility for the repayment of the Tronco Loan. Therefore we recorded an accrual for the estimated amount of the loss. In addition, as of January 1, 2014, we entered into a Note Purchase and Sale Agreement under which the lender agrees to sell us the Tronco Note and supporting loan documents. Upon closing of that transaction, which we intend to fund from the proceeds of this offering, we would step into the lender’s lien position on the collateral securing the Tronco Loan, and would release our guaranty, the guaranty of Mr. Meier, Ms. Meier, and their personal trusts, the limited liability company membership interest pledges and the junior Deeds of Trust against our Vernal Campus.

Upon closing of a sale of the Tronco properties, and our receipt of the proceeds as the then-senior secured lender, we will apply the proceeds against the Tronco Loan. We estimate that our probable loss after application of the sales proceeds would have been as follows if those proceeds had been received as of December 31, 2013:

(Rounded)		December 31, 2013
Principal and deferred interest outstanding		$	8,262,000
Estimated recoverable amount of Tronco’s assets			(3,866,000	)
Approximate probable loss		$	4,396,000

Meiers’ Personal Loans.   In order to fund several large lump-sum payments due on the Tronco Loan before its most recent renewal, the Meiers obtained three loans collateralized by liens on residential real property owned by the Meier’s personally. The Meier’s have made all payments due on these loans from distributions to them from Meier Management Company, LLC and Meier Family Holding Company, LLC. It is our current intent to repay these loans, which total approximately $2 million, from the proceeds of this offering. These loans bear interest at 3.25% to 7.88%, require aggregate monthly payments of approximately $9,100, and have maturity dates of 2036 to 2037. “Use of Proceeds” and “MD&A — Off Balance Sheet and Contingent Arrangements.” However, we may elect to repay two of those loans, equaling approximately $1.3 million, from the currently unused proceeds of the bridge loan before closing this offering, which would be accounted for as a distribution to our members before the Reorganization.

Effects of Inflation

Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.

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OIL AND GAS DRILLING INDUSTRY

Overview

Our revenue is dependent on the following three business categories:

Customer demand in these categories is dependent on a number of factors, including our customers’ forecasts of future energy demand, their expectations for future energy prices, their access to resources to develop and produce oil and natural gas, their ability to fund their capital programs, and the impact of new government regulations.

Drilling Industry Background

Drilling is part of the oilfield services group within the energy industry. The drilling industry is often segmented into the North American market and the international market. These markets share common exposure to the same macro environment, but also exhibit unique factors that drive the dynamics of each market.

Oilfield services companies drill the wells for hydrocarbon exploration and production companies (“E&P” companies). Demand for onshore drilling is a function of the willingness of E&P companies to make operating and capital expenditures to explore for, develop and produce hydrocarbons. When oil or natural gas prices increase, E&P companies generally increase their capital expenditures, resulting in greater revenues and profits for both drillers and equipment manufacturers. Likewise, significant decreases in the prices of those commodities typically lead E&P companies to reduce their capital expenditures, which decreases the demand for drilling equipment.

Most oil and gas operators do not own their own rigs and instead rely on specialized rig contractors to provide the rig and the crew. Drilling contractors typically provide the rig and the operating crews to E&P companies on a day-rate basis. In the U.S., drilling contracts are normally by well or a short-term period ( e.g., 90 days). Internationally, the contracts are normally one to three years. International contracts are longer because the E&P company usually owns a larger field and the mobilization costs are prohibitive for anything less than a one-year term.

The drilling industry is highly fragmented and highly dependent on the level of drilling activity. Despite the fact that there are between 200 and 300 land drilling contractors in North America, the top six contractors account for 46% of the rigs. Internationally, most countries have no more than five to ten land drilling contractors in each country, not including the in-house drilling contractors of some national oil companies.

Drill Bits

Historical .  The first drill bits used in the oil drilling industry were “fish tail” bits that were relatively durable but very slow. In 1909, Howard Hughes Sr., patented the first two-cone rotary bit. In 1931, two Hughes engineers invented the “Tricone”, a roller cone drill bit with three cones. The Hughes patent for the Tricone bit lasted until 1951, after which other companies made similar bits. By the early 1980s, the “PDC” (polycrystalline diamond compact) fixed cutter drill bit had gained market traction. PDC fixed cutter bits have no rolling cones or other moving parts. Instead they have ridges studded with synthetic black diamond “cutters” or PDCs, and drilling occurs due to shearing the rock as the bit is rotated by the drill string. The vast majority of drilling today is with PDC bits. The rapid growth of PDC bit usage is partly the result of the remanufacturing process developed by Troy Meier and now conducted by SDP.

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Hybrid Drill Bit — Cutting Mechanics .  Today’s modern hybrid drill bit, combines the Tricone roller configuration with PDC fixed cutter framework. These hybrid bits provide “rolling torque” management: the dual action cutting structures balance down-hole dynamics for greatly enhanced stability, bit life, and drilling efficiency. Baker Hughes is the leader in hybrid bit technology and is utilizing the capabilities of SDP to grow this business.

Source: Baker Hughes

Cyclicality and Volatility

The drilling industry is cyclical, and past cycles have been driven primarily by alternating periods of ample supply or shortage of oil and natural gas relative to demand. Oil and natural gas prices rose to record levels in 2008. Prices began to decline in late 2008 in conjunction with the widespread economic recession. While the price of oil rebounded somewhat in 2009 and continued to rise throughout 2010 and 2011, the price of natural gas has remained depressed since 2009 largely due to discoveries of vast new natural gas resources in the U.S. During 2011, oil prices generally remained high due to increased demand, generally flattening international supply and geopolitical tensions. Gas prices trended upwards in the latter half of 2012, followed by a sharp rise due to a cold winter at the end of 2013. Prices, as of April 1, 2014, are above $4.27 per mmbtu.

As global drilling activity has steadily recovered since the 2009 economic downturn, there has been a corresponding increase in new-build rig activity as operators require newer technology to meet increasingly challenging drilling conditions, with a focus on mobility, drilling efficiency, power and safety. We believe this trend will continue to fuel a high level of capital investment in drilling rigs, which presents an opportunity for both capital equipment manufacturers and for value added component suppliers, such as us.

The worldwide level of capital spending by oil and gas companies for exploration, development and production is projected to increase 6% from 2013 to 2014. This increased level of spending is partly driven by the current and expected prices for oil and gas as well as the perceived stability and sustainability of those current and expected prices. Despite continuing macroeconomic concerns and the recent volatility in global commodity prices, expectations for worldwide growth remain favorable.

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Drilling Industry Changes and Trends

As more conventional reservoirs have been discovered and depleted from years of production, operators must increasingly turn to unconventional resources, including tight sands, shales and coal-bed methane.

The dramatic growth in the development of unconventional shale and tight sand formations, primarily in North America, is causing increased development of horizontal wells, the well path best suited to developing shale and tight sands. Horizontal wells are typically used in conjunction with hydraulic fracturing, which is used even more frequently as the number of fracturing stages increases.

The reason horizontal drilling has become the predominate method of drilling is because the horizontal section of the well is actually in the producing formation for up to 15,000 ft. Historically, the placement of vertical and directional wells would be able to intersect and produce only from several pay zones. The production from one horizontal well could easily replace the production of a number of conventional vertical or directional wells, and horizontal wells are therefore far more economical.

The increasing growth in horizontal and hydraulic fracturing activity is placing increasing demands on drilling rigs. Greater demand and wear on drilling equipment resulting from increased horizontal drilling requires investment in new equipment to address these unique demands and results in shorter replacement cycles for capital equipment, driving maintenance and refurbishment activity.

Overall service intensity continues to increase in North America as customers are demanding key technologies, such as advanced directional drilling, more complex completion systems and pressure pumping

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to develop the unconventional plays with liquids content. This change in development activity requires investment in new drilling rigs and related equipment to address the unique demands of these resource plays and places a much greater strain on drilling and completion equipment. These changes have resulted in shorter replacement cycles for capital equipment and increased demand for maintenance and refurbishment of existing equipment. As the industry adapts to these increased demands, we believe that there will be significant opportunities to bring new products and equipment to market, such as the Drill N Ream, that have been designed and engineered with these new challenges in mind.

In the U.S., 64% of the active land rigs, as of March 15, 2013, were drilling horizontal wells, compared to 20% of the active land rigs five years ago, according to data from Baker Hughes. Source: Baker Hughes

Another factor is that, in response to the current commodity environment of high oil prices relative to gas prices, a number of E&P companies have announced that they are reducing dry natural gas drilling and production and redirecting their activities and capital toward currently more economic liquids-rich plays. The slowdown in the spending directly related to natural gas development has been largely offset by incremental investment to develop unconventional plays with crude oil and natural gas liquids content. Liquids-rich plays are those that are characterized by the production of predominantly oil and natural gas liquids, such as ethane, propane, butane and iso-butane, which are used as energy sources and manufacturing feedstocks, the prices of which have historically been highly correlated with oil prices rather than natural gas prices.

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Current Oil and Gas Industry Economic Drivers

While we believe that these trends will benefit us, our markets may be adversely affected by industry conditions that are beyond our control. Any prolonged substantial reduction in oil and gas prices would likely affect oil and gas drilling and production levels and therefore would affect demand for the products and services provided by us. For more information on this and other risks to our business and the industry in which we operate, see Item IA. Risk Factors — “Risks Related to Our Business and Industry.” The primary drivers expected to impact the 2013 drilling industry business environment include the following:

Worldwide Economic Growth  — In general there is a strong linkage between overall economic activity, growth and the demand for hydrocarbons. The outlook for 2013 has been one of gradual strengthening of economic activity amidst ongoing concerns fueled by sovereign debt issues in Europe, a slowdown in the Chinese economy, and the moderate rate of the economic growth in the U.S. However, this growth may be hampered by weakness or further deterioration of the global economy, particularly in China and Europe.

Oil Production  — The EIA January 2013 Short-Term Energy Outlook projected that non-OPEC oil production would increase in 2013 over 2012. This expected increase in demand for oil, mainly driven by countries outside the OECD, is expected to support higher expenditures within the oil and gas sector. This increase is largely due to continued production growth from U.S. tight oil formations and Canadian oil sands, fostered by sustained higher oil prices. Global OPEC surplus oil capacity, overwhelmingly concentrated in Saudi Arabia, is anticipated to increase in 2013, while at the same time, OPEC oil production is anticipated to fall significantly in 2013. While significant investments are expected to be required to support increases in production capacity, price volatility driven by global economic and geopolitical uncertainties may lead to delays in operator investment decisions across the rest of the world.

Oil Prices  — At current oil trading prices, most oil developments globally are expected to continue to provide adequate returns to encourage incremental investment. New midstream infrastructure in the U.S. is expected during 2013 which should help to narrow the price gap between WTI and Brent. Based on oil supply forecasts and modest anticipated economic growth globally, we would expect oil prices to remain relatively strong throughout 2013 barring any major macro-economic events.

Natural Gas Production  — Natural gas is an increasingly important hydrocarbon to meet the world’s energy needs. Worldwide natural gas production continues to grow. Despite this overall trend, low natural gas prices in North America have resulted in a reduction in the natural gas-directed rig and completion activity in this region. This began to impact North America natural gas production in 2012, resulting in a gradual increase in Henry Hub spot gas prices in the second half of 2012, but a relatively mild winter season in key consuming regions in the U.S. has pressured natural gas prices downward since November 2012. Overall, worldwide natural gas production will, however, tend to be more stable as high natural gas prices in places such as Europe and Asia encourage sustained global growth of natural gas production. In addition, the announced shift away from nuclear power generation by several countries and the development of natural gas projects in the OECD outside North America is expected to further support natural gas prices.

Natural Gas Prices  — With natural gas prices trading, during 2012, at prices which were particularly low when compared to oil on a Btu-equivalent basis, many industry participants believe that the economics of most dry natural gas-directed investments in North America have become marginal. This is primarily due to the abundant supplies available from the unconventional plays in North America, including natural gas produced in association with unconventional oil wells, which is expected to remain high in 2013. The EIA said in its January 2013 Short-term Energy Outlook that working natural gas inventories remain at near record high levels. The EIA, however, expects natural gas prices in North America to increase in 2013 as a result of the reduction in natural gas-directed drilling activity.

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developed custom software to control all aspects of the drill bit remanufacturing process. Attention was paid as well to addressing safety, health and environmental issues during the manufacturing process.

By fall 2007, we had built and moved into a new SMART facility located in the new Ropers Business Park Vernal, Utah that allowed for future expansion with our occupying two additional buildings, one to house our precision machining and a third to house over flow of both remanufacturing and machining in subsequent years. In 2010, we added another building that is currently leased to Baker Hughes. We now operate from a modern facility with custom features and solutions unlike any other in the industry. We employ a senior work force with special training and extensive experience related to drill bit remanufacturing and tooling manufacture to produce our products and services using a suite of highly technical, computer controlled, purpose-built equipment, much of which we design and manufacture for our proprietary use. Most of our manufacturing equipment and products now use advanced, patent-pending technologies that enable us to increase efficiency, enhance drill bit integrity, and improve safety. Our improvements and efficiencies have increased production capacity from 90 repairs per week in 2008 during a three-shift, seven-day work week, to more than 200 repairs per week in 2013 during only two shifts during a seven-day work week. Baker Hughes now consistently brings its customers to our facilities to showcase our services.

With our new manufacturing platform in place, in 2012, we began designing and manufacturing new steel-body drill bits for Baker Hughes, which is completely separate from our refurbishment contract. Baker Hughes has a large demand for its steel body bits and we can produce those bits in substantially less time due to our enhanced manufacturing capacity. Additional demand has come from Baker’s bit designers who have recognized our precision work and unique capabilities and are sending prototype fabrication requests to us. additional computerized five-axis Multus machining centers (state-of-the-art milling and turning machines), our capacity and the quantity of new drill bits being ordered by Baker Hughes is continually increasing. Additional divisions within Baker Hughes and other oil service industry suppliers, that need specialized precision fabrication also have learned of our new capabilities enabling us to expand our customer base and more rapidly grow this part of our business.

Currently, increased drilling activity in North Dakota, and throughout the Rocky Mountain regions, California, Alaska, and Mid-Continent is creating greater demand for our refurbishment services and new steel-body drill bits to Baker Hughes and other customers we are servicing.

Our Horizontal Drilling Tools

Recently, challenging new horizontal oil and gas well designs and construction have substantially increased the technical demands on drill bit and drill string components. This change in development activity requires investment in new drilling equipment to address the unique demands of this new drilling environment. See “Industry”.

Drill N Ream Well Bore Conditioning Tool .  As a first response to the horizontal drilling challenge, HRSI designed and manufactured the Drill N Ream well bore conditioning tool. The Drill N Ream is a dual-section reaming tool which is located behind the bottom hole assembly (BHA) to smooth and slightly enlarge the well bore in the curved and horizontal sections of horizontal wells, in both oil and water based mud. The Drill N Ream is available in multiple sizes and can be custom manufactured to fit any hole size.

The Drill N Ream removes the well bore tortuosity brought about from the drill bit geo-steering, and from directional drilling overcorrections and formation interactions. As a result, the Drill N Ream extends the horizontal distance of the well bore by (a) smoothing out ledges and doglegs left by the bit, which allows the drill string to move through a conditioned well bore with less friction and stress, (b) reducing tool joint damages and trip time (i.e. the time required to pull up and resend the drill string), and (c) enhancing the power available to drive the drill bit assembly. Each time a drilling operator has to retract a drill string and replace a bit or other drill string component it costs the operator substantial time and money, so anything that allows each run to extend further is of great value to our customers. Each Drill N Ream unit has an average life of 12 runs. As a result, the Drill N Ream tool has been used in over 850 wells and appears to have

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achieved significant initial industry acceptance in a fairly short period of time. We are currently manufacturing between two to four to ten Drill N Ream units per month. However, we have the capacity to manufacture between 40 to 45 units per month so we believe that there is substantial opportunity for growth in this product line.

Specifically,

We spent $282,207 and $68,007 in 2013 and 2012, respectively, on research and development with respect to both improving our existing products and developing new products. Our R&D costs are built into our pricing models for products and services, and are not directly borne by any of our customers.

Other Horizontal Drill String Tools .  We are developing a suite of other horizontal drill string tools, using our unique facility and technology platform, and exploiting our additional capacity and manufacturing expertise. Our new product delivery goal is to bring to market at least one new tool per year. Our subsidiary, Extreme Technology (ET) currently has 4 new projects in the pipeline. Each of these pending drill string tools addresses a different technical challenge affecting today’s horizontal drilling designs. We expect our next pending drill string stimulation tool to be released in third quarter 2014. The drill string stimulation tool 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 string and well bore greatly enhancing drill rates. Additional new design products are anticipated to be ready for field testing during the first quarter of 2015.

Clean Out Bits:   There is a need in the industry for an inexpensive bit that can be used for the purpose of drilling out plugs or debris left in the production casing after the completion process. Our manufacturing technology allows us to produce products that are ideal for this purpose and very competitive in price.

Effect on Remanufacturing Business .  Our manufacturing initiatives are expected to increase our remanufacturing business significantly. We project that 50% of our new steel body bits and horizontal drilling tools will be sent back to us for refurbishment. We estimate that each bit or tool can be repaired approximately six times before it can no longer be repaired.

Hard Rock Acquisition

Under our existing agreement with HRSI, we produce the Drill N Ream units and HRSI markets them to well operators on a rental basis. This arrangement allows the well operator to switch out Drill N Ream tools when theirs becomes dull, and HRSI then returns the dull tools to us for refurbishing. We now have the opportunity to purchase HRSI’s interest in the Drill N Ream business, including the Drill N Ream patents and tool inventory.

Immediately after closing this offering, we will close our purchase of Hard Rock from HRSI. Hard Rock’s primary business is renting the Drill N Ream tool directly to oilfield operators. HRSI was organized

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and began operations in 2001. HRSI’s president and Mr. Meier are currently the co-owners of the patents pending covering the Drill N Ream tool. HRSI is the sole authorized distributor and sales agent for the Drill N Ream tool, which we manufacture, under a profit sharing arrangement. In 2013, HRSI formed Hard Rock as a wholly-owned subsidiary, and transferred its tool rental business to Hard Rock, in order to facilitate our purchase transaction. We intend to use a portion of this offering’s proceeds to purchase Hard Rock, at which time it will become our wholly-owned subsidiary.

In order to effect that transaction, SDP and HRSI have signed a Membership Interest Purchase Agreement (MIPA) which includes a $25 million purchase price, with half payable at closing, and the other half payable under a seller-held note payable in annual installments over three years. See “MD&A — Hard Rock Acquisition”. Each of Mr. Meier and HRSI’s president has transferred their respective 50% interest in the Drill N Ream patents pending to a new limited liability company, under the terms of a Intellectual Property Protection Agreement (IPPA), and that entity will transfer all of the patents pending to us at closing of our purchase of Hard Rock. The signed MIPA and PPA are being held in third-party escrow pending closing of this offering and the purchase transaction. SDP will assign its interest in the MIPA and PPA to us in connection with our corporate reorganization immediately before closing this offering.

Growth Strategies

We intend to pursue the following growth strategies as we seek to expand our market share and solidify our position as a leading drill bit and drill string component manufacturer:

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Other drill bit manufacturers also have in-house remanufacturing units, but they are not our competitors since we have an exclusive contract with Baker Hughes.

Drill String Tools .  The primary competitors for our Drill N Ream tool are several single-section reaming tool manufacturers, including Baker Oil Tools (a division of Baker Hughes), NOV, and Schlumberger each priced between $15,000 – $30,000 per unit on a rental basis for each run. However, we believe that the Drill N Ream tool is the only dual-section or dual cutting structure drill string reamer on the market today. It is priced at $20,000 to $25,000 per unit per run, with most runs extending for five to ten thousand feet. We believe that distinction will allow us to continue building on the Drill N Ream tool’s first-mover advantage once we complete our acquisition of Hard Rock upon closing of this offering. We believe that our other pending drill string tools are at the forefront of drill string tool technological development for horizontal drilling. Consequently, potential competitors who may be developing similar technology are currently unknown. There are existing tools that would compete with the drill string stimulation tool, such as the Agitator tool marketed by NOV. However, we believe our technology in the drill string stimulation tool offers significant advantages over the Agitator and we believe will be rapidly accepted in the drilling market.

Competitive Strengths

We believe that we differentiate ourselves from our competitors on the basis of the quality and reliability of our products and services, our proprietary technology, and our ability to rapidly respond with products that meet the most demanding needs of our customers.

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Trends in the Industry

We believe that the following trends will positively affect the oilfield drilling industry, and consequently the demand for our products in the coming years. Also see “Industry”.

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Customers

The increasing growth in horizontal and hydraulic fracturing activity is placing ever increasing demands and wear on drilling rigs and drilling equipment. These demands shorten the replacement cycles for capital equipment, and increase the demand for maintenance and refurbishment of existing equipment.

Drill Bit Remanufacturing.   Our sole customer for our drill bit remanufacturing services is Hughes Christensen, the division of Baker Hughes responsible for drill bits, under our exclusive long-term contract with them. For the past 18 years, we have serviced the Rocky Mountain, California and Alaska oilfields exclusively for Baker Hughes’ substantial number of oilfield operations and customers. 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. Baker has also approached us to handle all of the bit remanufacturing for its north east customers and to accept overflow work from Mid-Continent facility, or to manage those facilities for them.

Drill String Tools.   E&P operators, our customers, are demanding key technologies, such as advanced directional drilling and more complex completion systems. As the industry adapts to these increased demands, we believe that there will be significant opportunities to bring new products and equipment to market, such as our Drill N Ream tool, that have been designed and engineered with these new challenges in mind. We also believe that this product expansion will drive substantial growth in our remanufacturing service offerings as each of these drill string tools cycle through the refurbishment process up to 12 times through the life of the tool, as opposed to only six refurbishment cycles for a drill bit.

The US currently has approximately 1,800 oil and gas drilling rigs in operation, and internationally there are approximately another 2,000 rigs in operation. Our goal is to first capture an economically significant percentage of the U.S. market for each of our newly released, innovative products before market competition sets in, and then move on to identify the best international markets on which to focus our sales efforts.

New Product Development and Intellectual Property

Our sales and earnings are influenced by our ability to provide the high-level service that our customers demand successfully, which in turn relies on our ability to develop new processes, technology, and products. Much of our product development occurs in response to specific customer requests, in which case we are typically able to pass costs along to the customer. However, we have also historically dedicated additional resources toward the development of new technology and equipment to enhance the effectiveness, safety, and efficiency of the products and services we provide. Although certain of our competitors may spend greater amounts on research and development, we believe that our product development efforts are greatly enhanced by the investments of management time and energy we make to improve our customer service and to work with our customers on their specific product needs and challenges. We spent $282,207 and $68,007 on our research and development projects in 2013 and 2012, respectively. Our R&D costs are built into our pricing models for our products and services, and are not directly borne by any of our customers.

Of greatest importance to our development efforts is our ability to preserve excellent customer relations and stay close enough to our customers’ operations so that we can observe opportunities to make changes to our service offerings (and the products that support them) that would yield the maximum benefit to our customers. Although we highly value our proprietary products and technology, we also depend on our technological capabilities, customer service oriented culture, and application of our know-how to distinguish ourselves from our competitors. We also consider the services we provide to our customers, and the technical knowledge and skill of our personnel, to be more important than our registered intellectual property in our ability to compete. While we stress the importance of our research and development programs, the technical challenges and market uncertainties associated with the development and successful introduction of new and updated products are such that we cannot assure you that we will realize any particular amount of future revenue from the services and related products resulting from our research and development programs.

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Although in the aggregate our intellectual property is important to us, we currently do not regard any single component as critical or essential to our business as a whole. However, upon our acquisition of Hard Rock, the suite of patents pending that cover the Drill N Ream tool will be significant to our post-offering business. Also see “Proprietary Rights”, below.

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.

Marketing and Sales

We do not engage in any marketing or sales efforts for our PDC drill bits in the oil and gas industry because we are under an exclusive contract with Baker Hughes for those services.

For the Drill N Ream tool, HRSI has conducted substantially all of the sales and marketing efforts to date under our manufacturing and licensing arrangement. To date, the Drill N Ream tool has been deployed largely in North Dakota’s Bakken oil field, and in Utah, Oklahoma, and Texas. Our goal is to expand the Drill N Ream tool’s coverage by targeting a substantially expanded sales and marketing effort in the Ohio, Pennsylvania, Oklahoma, Texas, California, and Utah oil fields, among others. Upon our acquisition of Hard Rock from the proceeds of this offering, we intend to build a strong sales and marketing team to market the Drill N Ream tool to oilfield operators, as well as our other pending drill string tools once they are brought to market.

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.

Our ability to obtain suitable quality raw materials and components, such as PDC’s, steel and flux, solder, heating elements, is critical to our ability to remanufacture Baker Hughes drill bits, and to manufacture the Drill N Ream tool and other pending drill line products. In order to purchase raw materials and components in timely and cost effective manner, we have developed both domestic and international sourcing connections and arrangements. We maintain quality assurance and testing programs to analyze and test these raw materials and components in order to assure their compliance with our rigorous specifications and standards. We generally try to purchase our raw materials from multiple suppliers so we are not dependent on any one supplier, but this is not always possible.

One of the challenges with our new drilling tool manufacturing division has been getting steel at a good price, accurate specifications, and on time delivery. We have experienced increased costs in recent years due to rising steel prices. Since Baker Hughes pays the cost of materials and supplies used in our drill bit remanufacturing process, cost increases are not as critical a short-term financial component for that line of business. We cannot assure that we will be able to continue to purchase these raw materials on a timely basis or at historical prices.

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We designed and build 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.

The following is a summary of the more significant existing environmental, health and safety laws and regulations to which our business operations are subject and for which compliance could have a material adverse impact on our capital expenditures, results of operations or financial position.

Hazardous Substances and Waste.   The Resource Conservation and Recovery Act (“ RCRA ”) and comparable state statutes, regulate the generation, transportation, treatment, storage, disposal and cleanup of hazardous and non-hazardous wastes. Under the auspices of the EPA, the individual states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. We are required to manage the transportation, storage and disposal of hazardous and non-hazardous wastes in compliance with RCRA.

The Comprehensive Environmental Response, Compensation, and Liability Act (“ CERCLA ”), also known as the Superfund law, imposes joint and several liability, without regard to fault or legality of conduct, on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include the owner or operator of the site where the release occurred, and anyone who disposed or arranged for the disposal of a hazardous substance released at the site. We currently own, lease, or operate numerous properties that have been used for manufacturing and other operations for many years. We also contract with waste removal services and landfills. These properties and the substances disposed or released on them may be subject to CERCLA, RCRA and analogous state laws. Under such laws, we could be required to remove previously disposed substances and wastes, remediate contaminated property, or perform remedial operations to prevent future contamination. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances released into the environment.

Environmental reviews done in connection with a new housing project contiguous to our Vernal facility identified some petroleum incursions. However, it has been determined that the source of the incursions is not from our property.

Water Discharges.   The Federal Water Pollution Control Act (the “ Clean Water Act ”) and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants 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

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regulations under Title III of the federal Superfund Amendment and Reauthorization Act and comparable state statutes require that information be maintained concerning hazardous materials used or produced in our operations and that this information be provided to employees, state and local government authorities and the public. Substantial fines and penalties can be imposed and orders or injunctions limiting or prohibiting certain operations may be issued in connection with any failure to comply with laws and regulations relating to worker health and safety.

There is no assurance that any present or future noncompliance with Environmental Laws will not have a material adverse effect on the Company’s results of operations or financial condition. See “Risk Factors — Environmental Matters.”

Insurance and Risk Management

We maintain insurance coverage of types and amounts that we believe to be customary and reasonable for companies of our size and with similar operations. In accordance with industry practice, however, we do not maintain insurance coverage against all of the operating risks to which our business is exposed. Therefore, there is a risk our insurance program may not be sufficient to cover any particular loss or all losses.

Currently, our insurance program includes, among other things, general liability, umbrella liability, sudden and accidental pollution, personal property, vehicle, workers’ compensation, and employer’s liability coverage. Our insurance includes various limits and deductibles or retentions, which must be met prior to or in conjunction with recovery.

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MANAGEMENT

Executive Officers, Directors, and Director-Nominees

The following table sets forth information regarding our executive officers, directors, and director-nominees.

Name		Age		Position
G. Troy Meier		52		Board Chair and Chief Executive Officer
Annette Meier		51		Director, President, and Chief Operating Officer
Christopher D. Cashion		58		Chief Financial Officer
Rich Mahoney		50		Vice President of Finance
David Gale		38		Vice President of Operations
Joshua J Smith		32		Vice President of Manufacturing
Terrance Cryan		51		Director — Nominee
Robert Iversen		59		Director — Nominee

Troy Meier. Co-Founder, Board Chair and Chief Executive Officer. Mr. Meier has over 33 years of experience in the oil and gas industry. Mr. Meier and co-founder Annette Meier founded the company that is now SDP in 1999. Since that time through the present, Mr. Meier has spearheaded the development of our new manufacturing business conducted by SDF, and our research and development activities conducted by ET. 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 SDP’s predecessor, 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 five 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 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.

Annette Meier. Co-Founder, Director, President, and Chief Operating Officer. Ms. Meier has over 20 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 SDP’s predecessor, Rocky Mountain Diamond. As the co-founder, Ms. Meier for the last five 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.

Christopher D. Cashion. Chief Financial Officer. 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 a Houston based hydraulic frac equipment manufacturing company. Previously, from

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January 2005 till 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. 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.

Rich Mahoney. Vice President of Finance. Mr. Mahoney has over 28 years of experience in the field of accounting and finance. Mr. Mahoney has worked in various positions over the past 28 years including serving as Staff Accountant, Accounting Manager, Controller and Operations Manager. Mr. Mahoney has worked in multiple industries, as well as served as an accountant for publicly traded companies. From June 2009 to August 2011, Mr. Mahoney served as the Office Manager at Mainstreet Tax and Accounting, an accounting firm. From August 2011 to the present, Mr. Mahoney has served as our Vice President of Finance. Mr. Mahoney received a Bachelor of Science in Accounting followed by a Master in Science in Taxation from California State University. Mr. Mahoney was subsequently Certified as a Certified Public Accountant in the State of Washington.

David Gale. Vice President of Operations. Mr. Gale joined us in August 2007 as the Information Technology Manager. During his short tenure at Superior Drilling he has successfully managed and updated the technology in the Company, including servers, SQL databases, in-house software, computer hardware, and peripherals. Additionally, Mr. Gale, with Ms. Annette Meier, co-created, designed, and programmed “CHUCK”, a complete shop management and inventory program. Mr. Gale is also the principal designer for Superior Drilling’s paperless system using SQL database server networking and touch monitors and web services, including a real-time customer-driven inventory tracking system web-based satellite access for customer base. Mr. Gale has also been able to successfully utilize his media background to develop marketing campaigns and materials for Superior Drilling in various mediums including but not limited to: web sites, long and short form commercials, instructional video, brochures, business cards, power point presentations. Mr. Gale graduated from Brigham Young University with a Bachelors of Arts degree in Journalism and is the recipient of the Edward R. Murrow journalism award.

Joshua J Smith. Vice President of Manufacturing. Mr. Smith is the Vice President of Manufacturing for Superior Drilling Products. Mr. Smith joined us in January, 2011. Previously, Mr. Smith, from 2009 to 2011, was the Applications Manager at Primary Weapons Systems where he successfully established an infrastructure that would support the operator-free processes necessary for premium firearm manufacturing. Prior to that, Mr. Smith served as Programming Lead at the General Products Machine Shop from 2004 to 2009, in Idaho. Mr. Smith has significant experience transitioning existing machine shops to become state of the art manufacturing facilities. Mr. Smith has a background in CNC machining, application engineering, and “lights out” operation. Mr. Smith frequently advises on challenging applications for customers and third parties. Mr. Smith obtained his certification in Computerized Machine Technology from Idaho State University in 2004.

Terence J. Cryan. Director Nominee. Mr. Cryan has over 20 years of international business experience as an investment banker based in both the United States and Europe. In 2001, Mr. Cryan co-founded Concert Energy Partners, an investment and private equity firm based in New York City, and continues to serve as Managing Director. He also served as President and Chief Executive Officer of Medical Acoustics LLC from April 2007 through April 2010. Prior to 2001, Mr. Cryan was a Senior Managing Director in the Investment Banking Division at Bear Stearns. Earlier in his career, Mr. Cryan served as Managing Director, Energy & Natural Resources Industry Group Head and member of the Investment Banking Operating Committee at Paine Webber. Mr. Cryan joined Paine Webber following its acquisition of Kidder, Peabody in 1994. Mr. Cryan has been an adjunct professor at the Metropolitan College of New York Graduate School of Business and serves as a director of a number of international companies, including public companies such as Global Power Equipment Corporation (February 2008 to present), Uranium Resources, Inc. (October 2006 to present) and Ocean Power Technologies Corporation (October 2012 to present). From September 2012 to April 2013, Mr. Cryan also served as interim President and CEO of Uranium Resources, Inc. Mr. Cryan is a member of the National Association of Corporate Directors and is a frequent speaker at finance and energy

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industry gatherings. Mr. Cryan holds a Master of Science degree in Economics from the London School of Economics and a Bachelor of Arts degree from Tufts University.

Mr. Cryan was selected to serve as a director because of his extensive expertise in financing, mergers and acquisitions. He also has a broad energy industry background and executive-level experience. Mr. Cryan has over 20 years of experience in international business as an investment banker in the United States and Europe. As a co-founder of Concert Energy Partners and as former Managing Director, Energy & Natural Resources Industry Group at Paine Webber, Mr. Cryan has in depth knowledge of the energy industry. In addition, Mr. Cryan brings extensive board-level experience, serving on the boards of a number of international companies.

Robert E. Iversen, Director Nominee. 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 a partner and president of C T I 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 Troy Meier as a partner and senior vice president in Tronco Energy Services from 2008 – 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.

Board Composition

Our board of directors directs the management of our business and affairs, as provided by the Utah Revised Business Corporation Act. Mr. Meier and Ms. Meier serve as our initial board of directors. Our board of directors has approved amended and restated Bylaws, to be effective immediately before closing of this offering, that authorize no less than four and no more than seven directors, a majority of whom, at any given time, must qualify as “independent” under NYSE MKT’s listing standards. See “— Director Independence”, below. Our initial shareholders have approved resolutions specifying that our post-offering board of directors will consist of four directors, comprised of Mr. Meier, Ms. Meier and our two director-nominees, Messrs. Cryan and Iversen, effective upon the closing of this offering with one vacant Board seat to be filled as soon as practicable following completion of this offering.

Classified Board of Directors.   Our initial shareholders and Board of Directors have also approved amended and restated Articles of Incorporation, to be effective immediately before closing of this offering. Those amended and restated Articles of Incorporation specify that our board of directors will be divided into three classes with staggered three-year terms, after initial terms of one year, two years, and three years, respectively. Only one class of directors will be elected at each annual meeting of shareholders, with the other classes continuing for the remainder of their respective three-year terms. Our current directors will be divided among the three classes as follows:

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Each director’s term will continue until the election and qualification of the director’s successor, or earlier death, resignation or removal. Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of our directors. This classification of our board of directors may have the effect of delaying or preventing changes in control of our company.

Director Independence.   Our board of directors has undertaken a review of the independence of each director nominee and has affirmatively determined that each of them is “independent”, as defined by the Rules of the NYSE MKT Stock Market (“ Rules” ). Under the Rules, a director can be independent only if (a) the director does not trigger a categorical bar to independence and (b) our board of directors affirmatively determines that the director does not have a relationship which, in the opinion of our board of directors, would interfere with the exercise of independent judgment by the director in carrying out the responsibilities of a director. Based on information provided by each director concerning his background, employment and affiliations, our board of directors has determined that Messrs. Cryan, and Iversen do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under NYSE MKT’s listing standards. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with us, and all other facts and circumstances our board of directors deemed relevant in determining independence, including any beneficial ownership of our capital stock by each non-employee director, and any transactions involving them as described in “Certain Relationships and Related Party Transactions.”

Lead Independent Director.   We do not currently separate the roles of Chief Executive Officer and Board Chair. Our board of directors has determined, in connection with our adoption of certain corporate governance principles in connection with this offering, that one of our independent directors should serve as a lead director at any time when the title of Board Chair is held by an employee director or there is no current Board Chair.

Prior to the completion of this offering, our board of directors will adopt corporate governance guidelines. Our corporate governance guidelines will provide that one of our independent directors should serve as our Lead Independent Director at any time when our Chief Executive Officer serves as the Chairman of our board of directors, or if the Chairman is not otherwise independent. Because Mr. Meier is our Chairman, our board of directors intends to appoint Mr. Cryan to serve as our Lead Independent Director effective upon the closing of this offering. As Lead Independent Director, Mr. Cryan will preside over periodic meetings of our independent directors, serve as a liaison between our Chairman and our independent directors and perform such additional duties as our board of directors may otherwise determine and delegate.

Committees of the Board of Directors

Our board of directors has established three standing committees: an audit committee, a compensation committee, and a nominating and corporate governance committee, to be effective upon closing of this offering. In addition, from time to time, special committees may be established under the direction of the board of directors when necessary to address specific issues. Members will serve on these committees until their resignation or until as otherwise determined by our board of directors. The composition of the board committees will comply, when required, with the applicable rules of the exchange on which our common stock is listed and applicable law. Our board of directors will adopt a written charter for each of the standing committees. These charters will be available on our website following the completion of the offering.

The composition and responsibilities of each of the standing committees of our board of directors, when effective, will be as follows:

Audit committee.   Our audit committee will be 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 will be directly responsible for, among other things, the appointment, compensation, retention, and oversight of our independent registered public accounting firm. The oversight 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

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financial reporting with our independent registered public accounting firm and relevant financial management. The members of this committee will be Mr. Cryan and Mr. Iversen, with Mr. Iversen initially serving as committee chair. Our board of directors has determined that Mr. Cryan qualifies as an “audit committee financial expert”, as defined by the rules under the Exchange Act.

Compensation committee.   Our compensation committee will consist solely of directors who are “independent”, as defined under and required by NYSE MKT’s Rules, “non-employee directors” under Section 16 of the Exchange Act, and “outside directors” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “ Code ”). The compensation committee will be responsible for, among other things, supervising and reviewing our affairs as they relate to the compensation and benefits of our executive officers and non-employee directors. In carrying out these responsibilities, the compensation committee will review all components of executive compensation for consistency with our compensation philosophy and with the interests of our shareholders. The members of this committee will be Messrs. Cryan, and Iversen, with Mr. Cryan initially serving as committee chair.

Nominating and governance committee.   Our nominating and governance committee will consist solely of “independent” directors, as defined under and required by NYSE MKT’s Rules. The nominating and governance committee will be responsible for, among other things, identifying individuals qualified to become board members; selecting, or recommending to the board of directors, director-nominees for each election of directors; developing and recommending to the board of directors criteria for selecting qualified director candidates; considering committee member qualifications, appointments, and removals; recommending corporate governance principles, codes of conduct, and compliance mechanisms; providing oversight in the evaluation of the board of directors and each committee; and developing an appropriate succession plan for our chief executive officer. The members of this committee will be Messrs. Cryan, and Iversen, with Mr. Iverson initially serving as committee chair.

Board of Directors’ Role in Risk Oversight

One of the key functions of our board of directors is informed oversight of our risk management process. Our board of directors will not have a standing risk management committee, but rather intends to administer this oversight function directly through our board of directors as a whole, as well as through various board of directors standing committees that address risks inherent in their respective areas of oversight. In particular, our board of directors is responsible for monitoring and assessing strategic risk exposure, and our audit committee will have the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures. The audit committee also will have the responsibility to issue guidelines and policies to govern the process by which risk assessment and management is undertaken, monitor compliance with legal and regulatory requirements, and oversee the performance of our internal audit function. Our nominating and corporate governance committee will monitor the effectiveness of our corporate governance guidelines, including whether they are successful in preventing illegal or improper liability-creating conduct. Our compensation committee will assess and monitor whether any of our compensation policies and programs have the potential to encourage excessive risk-taking.

Limitation of Liability and Indemnification

For information concerning limitation of liability and indemnification applicable to our directors, executive officers, and, in certain cases, employees, please see “Description of Capital Stock” located elsewhere in this prospectus.

Code of Business Conduct and Ethics

In connection with this offering, our board of directors will adopt a code of business conduct and ethics that will apply to all of our employees, officers, and directors. Upon completion of this offering, the full text of our code of business conduct and ethics will be available on our website at www.sdpteam.com. Following adoption of the code of business conduct and ethics, any change to, or waiver from, that code may be made only by our Board of Directors and will be promptly disclosed as required by applicable U.S. federal securities laws and NYSE MKT’s corporate governance rules.

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Corporate Governance Guidelines

Before closing of this offering, our Board of Directors will adopt corporate governance guidelines in accordance with NYSE MKT’s corporate governance rules.

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EXECUTIVE COMPENSATION

Compensation of Named Executive Officers

The following table sets forth the total compensation earned for services rendered during fiscal year 2013 by our named executive officers who consist of our principal executive officers, our principal financial officer, and our two other most highly compensated executive officers. Our named executive officers are set forth in the table below.

		Year				Salary ($)				Bonus ($)				Stock Awards ($)				Option Awards ($)				Non-Equity Incentive Plan Compensation ($)				All Other Compensation ($)				Total ($)
Troy Meier (1) (2) Board Chair and Chief Executive Officer			2013				—				—				—				—				—			$	20,175			$	20,175
Annette Meier (1) (3) President and Chief Operating Officer			2013				—				—				—				—				—			$	22,175			$	22,175
Christopher Cashion (4) Chief Financial Officer			2013				—				—				—				—				—				—				—
Rich Mahoney Vice President of Finance			2013			$	120,000			$	2,000				—				—				—			$	9,008			$	131,008
David Gale Manager of Information Technology			2013			$	77,000			$	4,000				—				—				—			$	15,984			$	96,984
Joshua J Smith Vice President of Manufacturing			2013			$	100,000			$	2,000				—				—				—			$	6,132			$	108,132

(1)

Each of Troy Meier and Annette Meier have historically received a salary of $69,000 per year from Meier Family Holding Company, LLC, SDP’s current majority parent entity. In addition, together they have received S-corporation distributions from Meier Family Holding Company, LLC of $10,000 in 2013 and $15,000 in 2012, respectively, and from Meier Management Company, LLC of $755,842 in 2013 and $1,498,842 in 2012.

(2)

The Board of Directors has approved an annual salary to Mr. Meier of $475,000 for his service as our Chief Executive Officer effective upon the completion of this offering.

(3)

The Board of Directors has approved an annual salary to Ms. Meier of $425,000 for her service as our President effective upon the completion of this offering.

(4)

The Board of Directors has approved an annual salary to Mr. Cashion of $300,000 for his service as our Chief Financial Officer effective upon the completion of this offering.

Outstanding Equity Awards

There are currently no outstanding equity awards to any of the named officers or any other employee.

Employment Agreements

We will enter into written employment agreements with our Named Executives, which will be effective upon completion of this offering. Those Agreements 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 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,

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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 of our board of directors.

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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 executive’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’s employment, equal to 1 year, and (b) the executive’s equity awards, if any, shall immediately vest. “ Change in Control ” means approval by our stockholders of

(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.

Troy Meier’s and Annette Meier’s agreements 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 (as defined below), (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 executives for, and subject to each executives’ adherence to, the above covenants and limitations, we have agreed to continue to pay the executive’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’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 that portion of their respective annual base salary that have accrued and remain unpaid through the effective date of the executive’s termination, and (b) we have no further obligation whatsoever to the executive 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.

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Certain Tax Considerations Related to Executive Compensation

As a result of Section 162(m) of the Internal Revenue Code, if the Company pays more than $1,000,000 in compensation to a “covered employee” (the chief executive officer and the next four highest paid employees) in a single year, then the Company’s deduction for such compensation could be limited to $1,000,000.

Pension Benefits and Nonqualified Deferred Compensation

We do not provide a pension plan for our employees, and none of our named executive officers participated in a nonqualified deferred compensation plan at any time.

Other Change in Control, Severance, and Employment Provisions

We have not adopted a company-wide severance policy. Except for the executive Employment Agreements discussed above, all of our employees are considered at-will and their employment can be terminated by either us or the employee upon 30 days written notice. None of our employment agreements provide for post-termination benefits unrelated to a Change in Control, except for the Meiers’ employment agreements and the payments to other named executive officers during the one-year non-competition period.

The following table sets forth information with respect to the value of payments or vesting acceleration, as applicable, our named executive officers would be entitled to receive assuming a qualifying termination or Change in Control, as applicable, as of December 31, 2013:

		Severance Amount ($)				Early Vesting of Stock Options ($)				Early Vesting of Restricted Stock ($)				Continuation of Benefits ($)				Unused Vacation ($)				Total ($)
Troy Meier			—				—				—			$	677			$	5,308			$	5,985
Board Chair and Chief Executive Officer
Annette Meier			—				—				—			$	677			$	5,308			$	5,985
President and Chief Operating Officer
Christopher Cashion			—				—				—				—				—				—
Chief Financial Off|ficer
Rich Mahoney			—				—				—			$	780			$	4,615			$	5,395
Vice President of Finance
David Gale			—				—				—			$	606			$	2,962			$	3,568
Manager of Information Technology
Joshua J Smith			—				—				—			$	532			$	3,846			$	4,378
Vice President of Manufacturing

Benefit Plans

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Eligible Recipients.   The Compensation Committee may award incentive stock options (“ ISOs ”) to employees, and may award non-qualified stock options (“ NSOs ”) and restricted stock awards to employees and certain non-employees (other than non-employee directors) who have important relationships with us or our Subsidiaries. Awards are nonassignable and nontransferable, except by will or by the laws of descent and distribution at the time of the recipient’s death in accordance with the Employee Plan.

Stock Option Grants.   The Compensation Committee may grant options, as either ISOs and NSOs, under the Employee Plan. With respect to each option grant, the Compensation Committee determines the number of shares subject to the option, the option price, the period of the option, the time or times at which the option may be exercised (including whether the option will be subject to any vesting requirements and whether there will be any conditions which the recipient must satisfy before being permitted to exercise the option), and the other terms and conditions of the option.

In general, vested options and any related rights may only be exercised when (a) the recipient is employed by us or in our service as a consultant or independent contractor, (b) within 12 months following termination of employment by reason of death or disability, or (c) within three months following termination for any other reason except for cause. We will not issue any shares upon the exercise of an option until the full exercise price has been paid. After we issue shares upon exercise of an option, the number of shares reserved for issuance under the Employee Plan will be reduced by the number of shares issued upon exercise of that option.

ISOs are subject to special terms and conditions. On the date an ISO is granted, the aggregate fair market value of the Common Stock issuable under ISOs available for exercise during any calendar year, may not exceed $100,000. ISOs must expire ten years from the date of grant, and the exercise price must equal the fair market value of the underlying shares of Common Stock at the date of grant. ISOs may not be granted to employees holding more than 10% of the Company’s total voting power unless (a) the exercise price is at least 110% of the Common Stock’s fair market value on the date of grant, and (b) the option is not exercisable until five years after the date of grant.

Restricted Stock Bonus Awards .  The Compensation Committee may award shares of restricted stock as a stock bonus under the Employee Plan. The Compensation Committee may determine the recipients of stock bonuses, the number of shares to be awarded, and the timing of the award. Stock received as a stock bonus is subject to the terms, conditions, and restrictions determined by the Compensation Committee at the time the stock is awarded. Each recipient of a restricted stock bonus award will be a shareholder of record with respect to those shares of restricted stock, whether or not those shares are subject to a risk of forfeiture or repurchase. No recipient may transfer any interest in shares of restricted stock to any person other than to the Company.

Restricted Stock Unit Awards .  The Compensation Committee may award restricted stock units (RSUs) under the Employee Plan. RSUs are bookkeeping entries representing an amount equal to the fair market value of one share of our common stock. Subject to the provisions of our Employee Plan, the administrator determines the terms and conditions of RSUs, including the vesting criteria (which may include accomplishing specified performance criteria or continued service to us) and the form and timing of payment. Notwithstanding the foregoing, the administrator, in its sole discretion, may accelerate the time at which any restrictions will lapse or be removed.

Changes in Capital Structure.   The Employee Plan provides that if the outstanding Common Stock of the Company is increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any recapitalization, stock split or certain other transactions, appropriate adjustment will be made by the Compensation Committee in the number and kind of shares available for grants under the Employee Plan. In addition, the Compensation Committee will make appropriate adjustments in the number and kind of shares as to which outstanding options will be exercisable. In the event of a merger, consolidation or other fundamental corporate transformation, the Board may, in its sole discretion, permit outstanding options to remain in effect in accordance with their terms; to be converted into options to purchase stock in the surviving or acquiring corporation in the transaction; or to be exercised, to the extent then exercisable, during a 30-day period prior to the consummation of the transaction.

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Independent Director Compensation.

Following the completion of this offering, we intend to implement a formal policy pursuant to which our non-employee directors would be eligible to receive annual cash retainers, as well as equity awards under an Independent Director Equity Compensation Plan (“ Director Plan ”), for service on our board of directors and committees of our board of directors. Directors who are also our employees will not be eligible to receive additional compensation for their service as directors.

Form S-8 Registration Statement.

The Company intends to file a Form S-8 Registration Statement in upon expiration of the Lock-Up Period covering the shares reserved for issuance under the Employee Plan and the Director Plan.

Non-Equity Incentive Awards

There have been no non-equity awards to any of the named officers or any other employee.

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$9,100, and have maturity dates of 2036 to 2037. “Use of Proceeds” and “MD&A — Off Balance Sheet and Contingent Arrangements.” However, we may elect to repay two of those loans, equaling approximately $1.3 million, from the currently unused proceeds of the bridge loan before closing this offering, which would be accounted for as a distribution to our members before the Reorganization.

Land Development Loan.   This loan was used to purchase approximately 47 unimproved acres in Vernal Utah that is contiguous to the Meiers’ residence for $700,000. Originally, this loan did not bear interest, and was due in full on December 2008. After that maturity date, this loan was orally amended to accrue interest at 8% per year, require monthly payments of $5,000, and mature in December 2018 with a final balloon payment of approximately $358,000. This loan is secured by the purchased property. We intend that this loan will be eliminated through distribution of the property and the loan to the Meiers personally, before effectiveness of this offering.

Naples Property Loan.   This loan is secured by approximately 11 unimproved acres in Naples, Utah for a terminated property development venture, conducted by a now-defunct limited liability company in which Mr. Meier was an investor and a guarantor of the loan on the property. When the venture failed, MPS took title to the property and assumed this loan. This loan has a current principal balance of approximately $1,286,000, accrues interest at the rate of 7% per year, requires monthly payments of approximately $12,800, and matures in November 2014 with a final balloon payment of approximately $680,000. This loan is secured by the purchased property. We intend that this loan will be eliminated through distribution of the property and the loan to the Meiers personally, before effectiveness of this offering.

Personal Guarantees.   The Meiers have provided personal guarantees to the lenders on the Tronco Loan, the land development loan, and the Naples property loan discussed above, and on the SAB loans discussed below, as well as (a) the loans for our Vernal manufacturing facility and our Bakersfield property ( see “MD&A — Facilities Loans), (b) the Bridge Loan, our plane loan, and certain Tronco-related commercial loans ( see “MD&A — Commercial Loans), and (c) our capital equipment lease (see MD&A — Manufacturing Equipment Leases and Loans).

Our Cessna T206H aircraft was purchased by Mr. Meier on June 30, 2006, primarily for our use in moving persons and products in and out of Vernal where those deliveries need to be expedited, or for deliveries to locations with no commercial air transportation. The purchase was financed by a commercial bank through an aircraft loan to the Meiers personally. The loan is secured by the plane, bears interest at 7.35%, requires monthly payments of approximately $3,500, and matures in June 2026. The current balance of that loan is approximately $339,000. In 2009, the Meiers transferred the plane’s title to ML, and ML assumed the aircraft loan. Since that date, all expenses related to the plane, including maintenance, fuel, repairs, insurance and depreciation, have been incurred by ML. However, the title transfer documents reflecting ML as the plane’s owner of record inadvertently were not filed with the Federal Aviation Administration at that time, and are now in the process of being filed to correct the oversight.

Guarantees and Co-Borrowings

Superior Auto Body (SAB) Loans.   Beginning in July 2008, MPS became a co-borrower with SAB, a related party, for development of an auto body shop located in Riverton, Utah, to be operated by the related party. The auto body shop is titled in MPS and rented to SAB under a lease agreement which requires the co-borrower to make the $17,700 monthly payments on this loan in satisfaction of its lease obligation. Two loans totaling approximately $2.6 million were obtained for the purchase of the real property and construction of the facilities. Of that amount, approximately $1.7 million is currently outstanding under a first Deed of Trust loan which accrues interest at 6%, requires monthly payments of approximately $10,600, and matures in March 2017. The remaining $1.1 million was issued under a second Deed of Trust loan purchased the current principal amounts are $1,095,000 and $1,663,000, respectively, by the SBA which accrues interest at 2.42%, requires monthly payments of approximately $6,100, and matures in July 2032. The purchased real property and constructed improvements are the primary collateral for both loans.

Indemnification Agreements

In connection with this offering, we intend to enter into indemnification agreements with each of our directors and our executive officers. These agreements will provide that we will indemnify each of our directors and such officers to the fullest extent permitted by law and by our charter and bylaws.

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A person (or persons whose shares are aggregated) who is deemed to be an affiliate of ours and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of our common stock or the average weekly trading volume of our common stock reported through the Nasdaq during the four calendar weeks preceding such sale. Such sales are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us.

Rule 701

In general, under Rule 701 of the Securities Act, most of our employees, consultants or advisors who receive shares from us in the future under the Employee Plan or other written plan or agreement will be eligible to resell those shares 90 days after the date of this prospectus in reliance on Rule 144, but without compliance with the holding period or certain other restrictions contained in Rule 144.

Registration Rights

Under the Bridge Loan, the Bridge Lender and permitted third party transferees will also be entitled to piggyback registration rights with respect to future registration statements that we file for an underwritten public offering of our securities at any time following the expiration or release of the 180-day lock-up period described above. Upon the effectiveness of such a registration statement, all shares covered by the registration statement will be freely transferable. If these rights are exercised and the Bridge Lender or permitted third party transferees sell a large number of shares of common stock, the market price of our common stock could decline. See “MD&A — Bridge Loan” for a more detailed description of these registration rights.

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owner of those shares, and references in this prospectus to any “shareholder” or “holder” of those shares means only the depositary or its nominee. Persons who hold beneficial interests in our shares through a depositary will not be registered or legal owners of those shares and will not be recognized as such for any purpose. For example, only the depositary or its nominee will be entitled to vote the shares held through it, and any dividends or other distributions to be paid, and any notices to be given, in respect of those shares will be paid or given only to the depositary or its nominee. Owners of beneficial interests in those shares will have to look solely to the depositary with respect to any benefits of share ownership, and any rights they may have with respect to those shares will be governed by the rules of the depositary, which are subject to change from time to time. We have no responsibility for those rules or their application to any interests held through the depositary.

Anti-Takeover Provisions in Our Articles of Incorporation and Bylaws

Our Articles of Incorporation and Bylaws include a number of provisions that may have the effect of encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. These provisions include the items described below.

Removal of directors and filling board vacancies.   Our Bylaws provide that directors may be removed with or without cause by the affirmative vote of the holders of a majority of the voting power of all the outstanding shares of capital stock entitled to vote generally in the election of directors voting together as a single class. Furthermore, any vacancy on our board of directors, however occurring, including a vacancy resulting from an increase in the size of our board, may be filled by the affirmative vote of a majority of the shareholders, or by a majority of our directors then in office even if less than a quorum.

Meetings of shareholders.   Our Bylaws (a) provide that only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of shareholders, and (b) limit the business that may be conducted at an annual meeting of shareholders to those matters properly brought before the meeting.

Advance notice requirements.   Our Bylaws establish advance notice procedures with regard to shareholder proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of our shareholders. These procedures provide that notice of shareholder proposals must be timely given in writing to our corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at our principal executive offices not earlier than the close of business on the 120 ^th day, nor later than the close of business on the 90 ^th day, prior to the first anniversary date of the annual meeting for the preceding year. The notice must contain certain information specified in the Bylaws.

Amendment to Bylaws and Articles of Incorporation.   Except as otherwise required by Utah law, any amendment of our Articles of Incorporation must first be approved by a majority of our board of directors and, if required by law or our Articles of Incorporation, thereafter be approved by a majority vote of the outstanding shares entitled to vote on the amendment, and a majority of the outstanding shares of each class entitled to vote thereon as a class, except that the amendment of the provisions relating to shareholder action, directors, indemnification and the amendment of our Bylaws and Articles of Incorporation must be approved by no less than 66 2/3% of the voting power of all of the shares of capital stock issued and outstanding and entitled to vote generally in any election of directors, voting together as a single class. Our Bylaws may be amended by the affirmative vote of a majority vote of the directors then in office, subject to any limitations set forth in the Bylaws; and may also be amended by the affirmative vote of at least a majority of the voting power of all of the shares of capital stock issued and outstanding and entitled to vote generally in any election of directors, voting together as a single class.

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Blank check preferred stock.   The existence of our authorized but unissued shares of preferred stock may enable our board of directors to make it more difficult or discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest, or otherwise. For example, if in the due exercise of its fiduciary obligations, our board of directors were to determine that a takeover proposal is not in the best interests of us or our shareholders, our board of directors could cause shares of preferred stock to be issued without shareholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent shareholder or shareholder group. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of our common stock or other classes of preferred stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring, or preventing a change in control.

Utah Control Shares Acqusition Act

We are organized under Utah law. Some provisions of Utah law may delay or prevent a transaction that would cause a change in our control. Under our Articles of Incorporation we have opted that Section 61-6-1, et seq. of the Utah Code Annotated, as amended (the “ Control Shares Acqusition Act ”), an anti-takeover law, will not apply to us.

Other Provisions of Our Articles of Incorporation and Bylaws

Our Articles of Incorporation provide that, immediately following the closing of an IPO (as defined below) and subject to the rights of any issued Preferred Stock, our board of directors will be a staggered board of directors consisting of different terms designated as Class I, Class II and Class III, respectively. The Board of Directors is authorized to assign members of the Board of Directors already in office to such classes at the time the classification becomes effective. At the first annual meeting of shareholders following the closing of the IPO, the term of office of the initial Class I directors shall expire and the successor Class I directors shall be elected for a full term of three years. At the second annual meeting of shareholders following the IPO, the term of office of the initial Class II directors shall expire and the successor Class II directors shall be elected for a full term of three years. At the third annual meeting of shareholders following the IPO, the term of office of the initial Class III directors shall expire and the successor Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of shareholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. We believe that classification of our board of directors will help to assure the continuity and stability of our business strategies and policies as determined by our board of directors.“IPO” means the corporation’s first firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of its common stock.

Since there is no cumulative voting in the election of directors, this classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult. At least two annual meetings of shareholders, instead of one, will generally be required to effect a change in a majority of our board of directors. Thus, the classified board provision could increase the likelihood that incumbent directors will retain their positions. The staggered terms of directors may delay, defer or prevent a tender offer or an attempt to change control of us, even though a tender offer or change in control might be believed by our shareholders to be in their best interest. Pursuant to our Articles of Incorporation, shares of our preferred stock may be issued from time to time, and the board of directors is authorized to determine and alter all rights, preferences, privileges, qualifications, limitations and restrictions without limitation, which could impact the ability to remove directors as currently contemplated. See “— Preferred Stock.”

Ability of Our Shareholders to Act

Our Bylaws provide that any shareholder or shareholders holding at least 10% of the total voting power may call special shareholders meetings. Written notice of any special meeting so called shall be given to each shareholder of record entitled to vote at such meeting not less than 10 or more than 60 days before the date of such meeting, unless otherwise required by law.

Our Bylaws provide that nominations of persons for election to our board of directors may be made at any annual meeting of our shareholders, or at any special meeting of our shareholders called for the purpose of electing directors, (a) by or at the direction of our board of directors or (b) by any of our shareholders.

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In addition to any other applicable requirements, for a nomination to be properly brought by a shareholder, such shareholder must have given timely notice thereof in proper written form to our Secretary. To be timely, a shareholder’s notice must be delivered to or mailed and received at our principal executive offices (a) in the case of an annual meeting of shareholders, not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that if the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by a shareholder in order to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of our shareholders called for the purpose of electing directors, not later than the close of business on the tenth day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs.

Our Bylaws provide that no business may be transacted at any annual meeting of our shareholders, other than business that is either (a) specified in the notice of meeting given by or at the direction of our board of directors, (b) otherwise properly brought before the annual meeting by or at the direction of our board of directors or (c) otherwise properly brought by any of our shareholders. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, such shareholder must have given timely notice thereof in proper written form to our Secretary. To be timely, a shareholder’s notice must be delivered to or mailed and received at our principal executive offices not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that if the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by a shareholder in order to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure of the date of the annual meeting was made, whichever first occurs.

Limitations of Director Liability and Indemnification of Directors, Officers, and Employees

Our Articles of Incorporation provide that to the fullest extent permitted by the bylaws or the Utah Revised Business Corporation Act (the “Act”), or any other applicable law, as either may be amended, a director shall have no liability to the Corporation or its shareholders for monetary damages for conduct, any action taken, or any failure to take any action as a director. As permitted by the Act, directors will not be personally liable to us or our shareholders for monetary damages as a director except liability for (a) the amount of a financial benefit received by a director to which he’s not entitled; (b) an intentional infliction of harm on the corporation or its shareholders; (c) an unlawful distribution in violation of Section 16-10a-842 of the Act; or (d) an intentional violation of criminal law.

These limitations of liability do not alter director liability under the federal securities laws and do not affect the availability of equitable remedies, such as an injunction or rescission.

In addition, our Bylaws provide that:

Contemporaneous with the completion of this offering, we intend to enter into indemnification agreements with each of our executive officers and directors. These agreements provide that, subject to limited exceptions and among other things, we will indemnify each of our executive officers and directors to the fullest extent permitted by law and advance expenses to each indemnity in connection with any proceeding in which a right to indemnification is available.

We also intend to maintain general liability insurance that covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers, including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act

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may be permitted to directors, officers, or persons who control our company, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

These provisions may discourage shareholders from bringing a lawsuit against our directors for breach of their fiduciary duty, or may have the practical effect in some cases of eliminating our shareholders’ ability to collect monetary damages from our directors and executive officers. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our shareholders. Furthermore, a shareholder’s investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. We believe that these provisions, the indemnification agreements and the insurance are necessary to attract and retain talented and experienced directors and officers.

At present, there is no pending litigation or proceeding involving any of our directors or officers where indemnification will be required or permitted. We are not aware of any threatened litigation or proceedings that might result in a claim for such indemnification.

Application for NYSE — MKT Listing

Before the date of this prospectus, there has been no public market for our common stock. We have applied to have our common stock approved for listing on the NYSE MKT, subject to notice of issuance, under the symbol “SDPI”.

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BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table sets forth certain information regarding the beneficial ownership of our common stock as of December 31, 2013, and as adjusted to reflect the sale of the shares offered by this prospectus, by:

The information in the following table has been presented in accordance with the rules of the Securities and Exchange Commission. Under those rules, beneficial ownership of a class of capital stock includes any shares of that class as to which a person, directly or indirectly, has or shares voting power or investment power, and also any shares as to which a person has the right to acquire voting or investment power within 60 days through the exercise of any stock option, warrant, or other right. If two or more persons share voting power or investment power with respect to specific securities, each such person is deemed to be the beneficial owner of such securities. Except as we otherwise indicate below and under applicable community property laws, we believe that the beneficial owners of the common stock listed below, based on information they have furnished to us, have sole voting and investment power with respect to the shares shown. Except as otherwise indicated, each shareholder named in the table is assumed to have sole voting and investment power with respect to the number of shares listed opposite the shareholder’s name. Except as otherwise indicated, the address of each of the individuals and entities named below is 1240 E. 2100 S. Suite 300, Salt Lake City, UT 84106.

The calculations of beneficial ownership in this table are based on          shares of common stock outstanding at December 31, 2013, and assume that we will issue      shares in this offering.

Directors and Executive Officers:

		Amount and Nature of Beneficial Ownership (1)				Percentage of Common Stock (2)
Name and Address of Beneficial Owner:						Before the Offering				After the Offering
G. Troy Meier (3)							%				%
Annette Meier (3)							%				%
Christopher Cashion			0				0	%			0	%
Terence J. Cryan 2 Hamphire Road Bronxville, NY 10708			0				0	%			0	%
Robert E. Iverson 4928 FM 1374 Road Huntsville, Texas 77340			0				0	%			0	%
All executive officers and directors as a group (five persons)								%				%

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If the Underwriter commences these activities, it may discontinue them at any time without notice. The Underwriter may carry out these transactions on the NYSE MKT or otherwise.

Indemnification

We have agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the Underwriter may be required to make in respect of those liabilities.

Underwriter’s Compensation

We have agreed to sell the shares of common stock to the Underwriter at the initial offering price of $     per share, which represents the initial public offering price of the shares of common stock set forth on the cover page of this prospectus less the 6% underwriting discount.

We have also agreed to reimburse the Underwriter for certain out-of-pocket expenses incurred by it, including fees and disbursements of their counsel, up to an aggregate of $135,000 with respect to this offering.

We estimate that expenses payable by us in connection with the offering of our common stock, other than the underwriting discounts and commissions and the counsel fees and disbursement reimbursement provisions referred to above, will be approximately $        .

The following table summarizes the underwriting discount we will pay to the Underwriter and the non-accountable expense allowance we will pay to the Underwriter. These amounts are shown assuming both no exercise and full exercise of the Underwriter’s over-allotment option.

Per Share

Total without Over-Allotment Option

Total with Over-Allotment Option

Total underwriting discount to be paid by us

$

$

$

Lock-Up Agreements

Our executive officers, directors and certain of our stockholders, which represent in the aggregate 98% of our currently outstanding shares of common stock, have agreed to a 180-day “lock-up” from the effective date of this prospectus of shares of common stock that they beneficially own, including the issuance of common stock upon the exercise of currently outstanding convertible securities and options and options which may be issued. This means that, for a period of 180 days following the effective date of this prospectus, such persons may not offer, sell, pledge or otherwise dispose of these securities without the prior written consent of the Underwriter. The lock-up period described in the preceding paragraph will be extended if we cease to be an “emerging growth company” at any time prior to the expiration of the lock-up period and if (1) during the last 17 days of the lock-up period we issue an earnings release or material news or a material event relating to us occurs or (2) prior to the expiration of the lock-up period we announce that we will release earnings results during the 16-day period beginning on the last day of the lock-up period, in which case the lock-up period will be extended until the expiration of the 18-day period beginning on the date of issuance of the earnings release or the occurrence of the material news or material event.

The Underwriter has no present intention to waive or shorten the lock-up period; however, the terms of the lock-up agreements may be waived at its discretion. In determining whether to waive the terms of the lockup agreements, the Underwriter may base its decision on its assessment of the relative strengths of the securities markets and companies similar to ours in general, and the trading pattern of, and demand for, our securities in general.

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In addition, the underwriting agreement provides that we will not, for a period of 180 days following the effective date of this prospectus, offer, sell or distribute any of our securities, without the prior written consent of the Underwriter.

No Public Market

Prior to this offering, there has not been a public market for our common stock. The public offering price of the shares of common stock offered by this prospectus has been determined by negotiation between us and the Underwriter. See “Determination of Offering Price”. The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the shares of common stock. We offer no assurances that the initial public offering price will correspond to the price at which our common stock will trade in the public market subsequent to this offering or that an active trading market for our common stock will develop and continue after this offering.

Listing

The Company has applied to list the common stock on the NYSE MKT, subject to notice of issuance, under the symbol “SDPI.”

Electronic Distribution

A prospectus in electronic format may be made available on websites or through other online services maintained by the Underwriter of this offering, or by its affiliates. Other than the prospectus in electronic format, the information on the Underwriter’s website and any information contained in any other website maintained by an Underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or the Underwriter in its capacity as Underwriter, and should not be relied upon by investors.

Other Relationships

The Underwriter and its affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.

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Non-U.S. Holder Defined .  For purposes of this discussion, you are a non-U.S. holder, if you are any holder other than a partnership or other entity classified as a partnership for U.S. federal income tax purposes, or:

Distributions.   We have not made any distributions on our common stock. However, if we do make distributions on our common stock, those payments will constitute dividends for U.S. tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed both our current and our accumulated earnings and profits, they will constitute a return of capital and will first reduce your basis in our common stock, but not below zero, and then will be treated as gain from the sale of stock.

Any dividend paid to you generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable income tax treaty. In order to receive a reduced treaty rate, you must provide us with an IRS Form W-8BEN or other appropriate version of IRS Form W-8, including a U.S. taxpayer identification number, certifying qualification for the reduced rate. A non-U.S. holder of shares of our common stock eligible for a reduced rate of U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS. If the non-U.S. holder holds the stock through a financial institution or other agent acting on the non-U.S. holder’s behalf, the non-U.S. holder will be required to provide appropriate documentation to the agent, which then will be required to provide certification to us or our paying agent, either directly or through other intermediaries.

Dividends received by you that are effectively connected with your conduct of a U.S. trade or business (and, if an income tax treaty applies, that are attributable to a permanent establishment maintained by you in the U.S.), are exempt from such withholding tax. In order to obtain this exemption, you must provide us with an IRS Form W-8ECI or other applicable IRS Form W-8 properly certifying such exemption. Such effectively connected dividends, although not subject to withholding tax, generally are taxed at the same graduated rates applicable to U.S. persons, net of certain deductions and credits. In addition, if you are a corporate non-U.S. holder, dividends you receive that are effectively connected with your conduct of a U.S. trade or business may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty.

Gain on Disposition of Our Common Stock.   You generally will not be required to pay U.S. federal income tax on any gain realized upon the sale or other disposition of our common stock unless:

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We believe that we are not currently and will not become a USRPHC. However, because the determination of whether we are a USRPHC depends on the fair market value of our U.S. real property relative to the fair market value of our other business assets, there can be no assurance that we will not become a USRPHC in the future. Even if we become a USRPHC, however, as long as our common stock is regularly traded on an established securities market, such common stock will be treated as U.S. real property interests only if you actually or constructively hold more than 5% of such regularly traded common stock at any time during the shorter of the five-year period preceding your disposition of, or your holding period for, our common stock.

If you are a non-U.S. holder described in the first bullet above, you will be required to pay tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates, and a corporate non-U.S. holder described in the first bullet above also may be subject to the branch profits tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty. If you are an individual non-U.S. holder described in the second bullet above, you will be required to pay a flat 30% tax on the gain derived from the sale, which tax may be offset by U.S.-source capital losses for the year. You should consult any applicable income tax or other treaties that may provide for different rules.

Federal Estate Tax.   Our common stock beneficially owned by an individual who is not a citizen or resident of the United States (as defined for U.S. federal estate tax purposes) at the time of their death will generally be includable in the decedent’s gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

Backup Withholding and Information Reporting.   Generally, we must report annually to the IRS the amount of dividends paid to you, your name and address, and the amount of tax withheld, if any. A similar report will be sent to you. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available to tax authorities in your country of residence.

Payments of dividends on or of proceeds from the disposition of our common stock made to you may be subject to additional information reporting and backup withholding at a current rate of 28% unless you establish an exemption, for example, by properly certifying your non-U.S. status on a Form W-8BEN or another appropriate version of IRS Form W-8. Notwithstanding the foregoing, backup withholding and information reporting may apply if either we or our paying agent has actual knowledge, or reason to know, that you are a U.S. person.

Backup withholding is not an additional tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the required information is furnished to the IRS in a timely manner.

Legislation Affecting Taxation of our Common Stock Held by or through Foreign Entities.   The Foreign Account Tax Compliance Act (“FATCA”), a legislation enacted in 2010, generally will impose a U.S. federal withholding tax of 30% on dividends on and the gross proceeds of a disposition of our common stock, paid to a “foreign financial institution” (as specially defined under these rules), unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding the U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners) or otherwise establishes an exemption. The legislation also generally will impose a U.S. federal withholding tax of 30% on dividends on and the gross proceeds of a disposition of our common stock paid to a non-financial foreign entity unless such entity provides the withholding agent with a certification identifying certain substantial direct and indirect U.S. owners of the entity, certifies that there are none or otherwise establishes an exemption. This withholding obligation under this legislation with respect to dividends on our common stock will not begin until July 1, 2014 and with respect to the gross proceeds of a sale or other disposition of our common stock will not begin until January 1, 2017. Under certain circumstances, a non-U.S. holder might be eligible for refunds or credits of such taxes. An intergovernmental agreement between the United States and an applicable foreign country may modify the requirements described in this paragraph. Prospective investors are encouraged to consult with their own tax advisors regarding the possible implications of this legislation on their investment in our common stock.

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Each prospective investor should consult its own tax advisor regarding the particular U.S. federal, state and local and non-U.S. tax consequences of purchasing, holding and disposing of our common stock, including the consequences of any proposed change in applicable laws.

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SD COMPANY, INC.
 
INDEX TO FINANCIAL STATEMENTS

		Page
SD Company, Inc.:
Audited Financial Statements:
Report of Independent Registered Public Accounting Firm			F-2
Balance Sheet as of December 31, 2013			F-3
Notes to Financial Statements			F-4
Superior Drilling Products, et.al.:
Audited Combined and Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm			F-5
Combined and Consolidated Balance Sheets as of December 31, 2013 and 2012			F-6
Combined and Consolidated Statements of Operations for the years ended December 31, 2013 and 2012			F-7
Combined and Consolidated Statements of Owners’ Equity (Deficit) for the years ended December 31, 2013 and 2012			F-8
Combined and Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012			F-9
Notes to Combined and Consolidated Financial Statements			F-10
Hard Rock Solutions, Inc:
Audited Financial Statements:
Report of Independent Registered Public Accounting Firm			F-21
Balance Sheets as of December 31, 2013 and 2012			F-22
Statements of Income for the years ended December 31, 2013 and 2012			F-23
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013 and 2012			F-24
Statements of Cash Flows for the years ended December 31, 2013 and 2012			F-25
Notes to Financial Statements for the years ended December 31, 2013 and 2012			F-26
Pro Forma Combined and Consolidated Financial Statement (Unaudited):
Unaudited Pro Forma Combined and Consolidated Balance Sheets as of December 31, 2013			F-32
Unaudited Pro Forma Combined and Consolidated Statements of Operations for the year ended December 31, 2013			F-33
Notes to Unaudited Pro Forma Combined and Consolidated Financial Statements			F-34

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SD Company, Inc.
 
Balance Sheet

		December 31, 2013
Assets
Current assets:
Cash		$	—
Total current assets			—
Total assets		$	—
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	—
Total current liabilities			—
Total liabilities			—
Stockholders' equity
Preferred stock; par value $0.001; 20,000,000 shares authorized, no shares issued and outstanding			—
Common stock: par value $0.001; 100,000,000 shares authorized, 1,000 shares issued and outstanding			1
Stock subscription receivables			(1	)
Retained earnings			—
Total stockholders' equity			—
Total liabilities and stockholders' equity		$	—

 
 
The accompanying notes are an integral part of these financial statements

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SD Company, Inc.
 
Notes to Financial Statements

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

SD Company, Inc. (“SDC”, the “Company”, we”, “our” or “us”), which was incorporated on December 10, 2013, to facilitate the reorganization of the combined and consolidated companies of Superior Drilling Products, et. al. The Company’s headquarters are located in Vernal, Utah.

Basis of Presentation

The accompanying financial statements of SD Company, Inc. include the accounts of SD Company, Inc. (“SDC”, a Utah Corporation). The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

NOTE 2 — EQUITY

On the date of inception of December 10, 2013, a stock subscription was received for 1,000 shares of $0.001 par value common shares from the founders. As these shares had not been funded as of December 31, 2013, the receivable for this subscription is reflected in the stockholder’s equity section of the balance sheet.

NOTE 3 — SUBSEQUENT EVENTS

Hard Rock MIPA. In January 2014, Superior Drilling Products, LLC entered into a membership interest purchase agreement (“ MIPA ”) with Hard Rock Solutions, Inc. (HRSI), which provides for the purchase of 100% of the limited liability company membership interest of its wholly-owned subsidiary, Hard Rock Solutions, LLC, a Utah limited liability company. Closing of the Hard Rock acquisition is scheduled to occur promptly after completion of our pending initial public offering on a Form S-1 registration statement (“IPO”), and subsequent assignment of the MIPA to SD Company, Inc. The Hard Rock purchase price is $25 million, consisting of $12.5 million in cash at closing, and a seller-carried promissory note for $12.5 million (the “ Hard Rock Note ”). The Hard Rock Note will mature three years from the closing date, and accrue interest at the JP Morgan Chase Bank, N.A. annual prime rate. Under the terms of the Hard Rock Note, we will pay two annual principal installments of $5 million plus accrued interest and one final payment of $2.5 million plus interest, on each subsequent anniversary date of the Hard Rock Note date. The Hard Rock Note will be secured by all of the patents, patents pending, other patent rights, and trademarks to be owned by Hard Rock after our acquisition of Hard Rock under the MIPA. After that acquisition, Hard Rock will conduct operations as our wholly-owned subsidiary.

Bridge Loan. On February 24, 2014, we closed a $2 million bridge loan with a private lender. Upon the effectiveness of the IPO, the bridge loan would automatically convert into shares of our restricted common stock and a four-year warrant to purchase an equivalent number of shares of our common stock at a to-be-determined price. The bridge loan accrues interest at 5% per year, and starting in November 2014, will require monthly payments of approximately $50,500, with a balloon payment at maturity in February 2016, if not previously converted under additional voluntary conversion provisions of the loan. The bridge loan is secured by a junior blanket lien on SDC, and Superior Drilling Products, LLC’s accounts.

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Superior Drilling Products, et al.
  
Combined and Consolidated Balance Sheets

		December 31,
		2013				2012
Assets
Current assets:
Cash		$	11,256			$	70,188
Accounts receivable			2,978,666				1,154,494
Prepaid expenses			182,530				184,131
Other current assets			157,066				74,616
Total current assets			3,329,518				1,483,429
Property, plant and equipment, net			15,048,871				15,262,034
Real estate investments			2,187,926				2,187,926
Other assets			194,935				116,767
Total assets		$	20,761,250			$	19,050,156
Liabilities and Owners' Equity (Deficit)
Current liabilities:
Accounts payable		$	445,947			$	231,393
Accrued expenses			277,579				195,171
Current portion of capital lease obligation			258,235				349,741
Guaranteed debt obligation			4,395,637				—
Long-term debt – related party			—				53,925
Current portion of long-term debt			3,316,578				944,169
Total current liabilities			8,693,976				1,774,399
Capital lease obligation			871,252				1,463,042
Guaranteed debt obligation			—				4,737,532
Long-term debt			10,939,216				12,457,248
Total liabilities			20,504,444				20,432,221
Commitments and contingencies – see notes 4, 5 and 6
Owners' equity (deficit)			256,806				(1,382,065	)
Total liabilities and owners' equity (deficit)		$	20,761,250			$	19,050,156

 
 
The accompanying notes are an integral part of these combined and consolidated financial statements

TABLE OF CONTENTS

Superior Drilling Products, et al.
  
Combined and Consolidated Statements of Operations

		For the Year Ended December 31,
		2013				2012
Revenues:
Remanufacturing		$	8,678,172			$	6,740,582
Manufacturing			1,558,413				933,156
Reamer royalties			1,686,384				2,281,354
Total revenues			11,922,969				9,955,092
Costs of goods sold:
Cost of remanufacturing			2,851,707				2,156,840
Cost of manufacturing			2,003,336				1,530,372
Depreciation and amortization expense			1,207,288				902,784
Total costs of goods sold			6,062,331				4,589,996
Gross profit			5,860,638				5,365,096
General and administrative expenses			2,168,350				1,261,259
Operating income			3,692,288				4,103,837
Other income (expenses):
Rental income			344,472				464,905
Other income			129,840				107,554
Gain (loss) on sale of property, plant and equipment			(54,205	)			9,309
Interest expense			(786,140	)			(993,776	)
Change in guaranteed debt obligation			341,895				(206,643	)
Total other income (expenses)			(24,138	)			(618,651	)
Net income		$	3,668,150			$	3,485,186
Supplemental pro forma information:
Pro forma income tax expense		$	1,403,579			$	1,359,223
Pro forma net income		$	2,264,571			$	2,125,963
Pro forma basic and diluted:
Weighted average earnings per share		$	0.20			$	0.19
Weighted average shares outstanding			11,442,619				11,442,619