Superior Drilling Products, Inc. (Form: 10-Q, Received: 05/11/2018 15:31:03)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2018

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-36453

Superior Drilling Products, Inc.

(Exact name of registrant as specified in its charter)

Utah

46-4341605

(State or other jurisdiction of
incorporation or organization)

(IRS Employer

Identification No )

1583 South 1700 East

Vernal, Utah 84078

(Address of principal executive offices)

435-789-0594

(Issuer’s telephone number)

(Former name, address, and fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, during the preceding 12 months (or such shorter period that the Registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] Emerging growth company [X]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

There were 24,535,155 shares of common stock, $0.001 par value, issued and outstanding as of May 11, 2018.

Superior Drilling Products, Inc.

FORM 10-Q

QUARTER ENDED MARCH 31, 2018

TABLE OF CONTENTS

		Page

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheet (Unaudited) at March 31, 2018 and December 31, 2017		3

Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2018 and 2017		4

Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2018 and 2017		5

Notes to Condensed Consolidated Financial Statements (Unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 4. Controls and Procedures		18

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		19

Item 1A. Risk Factors		19

Item 6. Exhibits		22

Signatures		23

PART I - FINANCIAL INFORMATION.

Item 1. Financial Statements

Superior Drilling Products, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

	March 31, 2018			December 31, 2017
ASSETS
Current assets
Cash	$	2,175,342		$	2,375,179
Accounts receivable, net		3,223,046			2,667,042
Prepaid expenses		80,934			111,530
Inventories		1,162,462			1,196,813
Other current assets		86,287			-
Total current assets		6,728,071			6,350,564
Property, plant and equipment, net		8,578,802			8,809,348
Intangible assets, net		5,521,111			6,132,778
Related party note receivable		7,367,212			7,367,212
Other noncurrent assets		15,254			15,954
Total assets	$	28,210,450		$	28,675,856
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	1,086,383		$	1,021,469
Accrued expenses		416,731			543,758
Current portion of long-term debt, net of discounts		7,552,460			6,101,678
Total current liabilities		9,055,574			7,666,905
Long-term debt, less current portion, net of discounts		4,646,749			6,706,375
Total liabilities		13,702,323			14,373,280
Commitments and contingencies (Note 8)
Shareholders’ equity
Common stock - $0.001 par value; 100,000,000 shares authorized; 24,535,155 shares issued and outstanding		24,535			24,535
Additional paid-in-capital		39,044,881			38,907,864
Accumulated deficit		(24,561,289	)		(24,629,823	)
Total shareholders’ equity		14,508,127			14,302,576
Total liabilities and shareholders’ equity	$	28,210,450		$	28,675,856

The accompanying notes are an integral part of these consolidated condensed financial statements.

Superior Drilling Products, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

	For the Three Months
	Ended March 31,
	2018			2017

Revenue	$	4,600,293		$	3,369,612

Operating costs and expenses
Cost of revenue		1,798,944			1,180,733
Selling, general and administrative expenses		1,697,663			1,497,517
Depreciation and amortization expense		936,027			938,022

Total operating costs and expenses		4,432,634			3,616,272

Operating income (loss)		167 ,659			(246,660	)

Other income (expense)
Interest income		92,428			81,859
Interest expense		(191,553	)		(259,025	)
Other income		-			43,669
L oss on sale of assets		-			(5,828	)
Total other expense		(99,125	)		(139,325	)

Net income (loss)	$	68 ,534		$	(385,985	)

Basic income (loss) earnings per common share	$	0.00		$	(0.02	)
Basic weighted average common shares outstanding		24,535,155			24,196,299
Diluted income (loss) per common share	$	0.00		$	(0.02	)
Diluted weighted average common shares outstanding		25,140,646			24,196,299

The accompanying notes are an integral part of these consolidated condensed financial statements.

Superior Drilling Products, Inc.

Condensed Consolidated Statements Of Cash Flows

(Unaudited)

	For the Three Months
	Ended March 31,
	2018			2017
Cash Flows From Operating Activities
Net income (loss)	$	68,534		$	(385,985	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		936,027			938,022
Amortization of debt discount		17,061			20,452
Share based compensation expense		137,017			175,380
Impairment of inventories		41,396			-
Gain on sale of assets		-			5,828
Changes in operating assets and liabilities:
Accounts receivable		(556,004	)		(1,617,149	)
Inventories		(6,079	)		(183,963	)
Prepaid expenses and other noncurrent assets		(54,991	)		(53,229	)
Accounts payable and accrued expenses		(62,113	)		282,329
Other long-term liabilities		-			(17,490	)
Net Cash Provided by (Used in) Operating Activities		520,848			(835,805	)
Cash Flows From Investing Activities
Purchases of property, plant and equipment		(94,780	)		(132,583	)
Proceeds from sale of fixed assets		-			2,483,158
Net Cash Provided by (Used in) Investing Activities		(94,780	)		2,350,575
Cash Flows From Financing Activities
Principal payments on debt		(625,905	)		(2,616,815	)
Principal payments on related party debt		-			(49,716	)
Principal payments on capital lease obligations		-			(60,297	)
Net Cash Used in Financing Activities		(625,905	)		(2,726,828	)
Net decrease in Cash		(199,837	)		(1,212,058	)
Cash at Beginning of Period		2,375,179			2,241,902
Cash at End of Period	$	2,175,342		$	1,029,844
Supplemental information:
Cash paid for Interest	$	210,065		$	295,910
Non-cash payment of other long-term liability by offsetting related-party note receivable	$	-		$	550,000

The accompanying notes are an integral part of these consolidated condensed financial statements.

Superior Drilling Products, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2018

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

Superior Drilling Products, Inc. (the “Company”, “SDPI”, “we”, “our” or “us”) is a drilling and completion tool technology company providing solutions for the oil and natural gas drilling industry. The Company, designs, engineers, manufactures, sells, and repairs drilling and completion tools.

Our subsidiaries include (a) Superior Drilling Solutions, LLC (previously known as Superior Drilling Products, LLC), a Utah limited liability company (“SDS”), together with its wholly owned subsidiary Superior Design and Fabrication, LLC, a Utah limited liability company (“SDF”), (b) Extreme Technologies, LLC, a Utah limited liability company (“ET”), (c) Meier Properties Series, LLC, a Utah limited liability company (“MPS”), (d) Meier Leasing, LLC, a Utah limited liability company (“ML”), and (e) Hard Rock Solutions, LLC (“HR” or “Hard Rock”).

Basis of Presentation

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Superior Drilling Products Inc. and all of its wholly-owned subsidiaries. All significant intercompany accounts have been eliminated in consolidation. The Company does not have investments in any unconsolidated subsidiaries.

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for implementing new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to nonissuers. We have elected to delay such adoption of new or revised accounting standards, and as a result, we may not implement new or revised accounting standards on the relevant dates on which adoption of such standards is required for other issuer companies.

Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions, including without limitation, providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 and implementing any requirement that may be adopted regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700.0 million as of June 30, (ii) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than $1.0 billion in non-convertible debt in a three-year period or (iv) January 1, 2020.

Revenue Recognition

We are a drilling and completion tool technology company and we generate revenue from the manufacturing, repair, and sale of drilling and completion tools. Our manufactured products are produced in a standard manufacturing operation, even when produced to our customer’s specifications. We also earn royalty fees under certain arrangements for the tools we sell. In May 2016, the Company entered into an agreement with DTI to be our exclusive distributor of the Drill-N-Ream tool in the United States and Canada.

Unaudited Interim Financial Presentation

These interim consolidated condensed financial statements for the three months ended March 31, 2018 and 2017, and the related footnote disclosures included herein, are unaudited. However, in the opinion of management, these unaudited interim financial statements have been prepared on the same basis as the audited financial statements, and reflect all adjustments necessary to fairly state the results for such periods. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results of operations expected for the year ended December 31, 2018. These interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the years ended December 31, 2017 and 2016 and the notes thereto, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (the “SEC”).

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant items subject to estimates and assumptions include the carrying amount and useful lives of property and equipment and intangible assets, impairment assessments, share-based compensation expense, and valuation allowances for accounts receivable, inventories, and deferred tax assets.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued an accounting standards update for “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Topic 605, Revenue Recognition.” This accounting standard update provides new guidance concerning recognition and measurement of revenue and requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from contracts with customers. This new guidance permits adoption through the use of either a full retrospective approach or a modified retrospective approach for annual reporting periods beginning on or after December 15, 2016, with early adoption not permitted. In August 2015, FASB delayed the effective date one year, and is effective for the Company’s fiscal year beginning January 1, 2019. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosure and will adopt this standard on January 1, 2019.

In February 2016, the FASB issued ASU No. 2016-02, “ Leases ,” which introduces the recognition of lease assets and lease liabilities by lessees for all leases which are not short-term in nature. The new standard requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosure and will adopt this standard on January 1, 2020.

NOTE 2. LIQUIDITY

At March 31, 2018, we had a working capital deficit of approximately $2,300,000. The Company’s manufacturing facility is financed by a commercial bank loan with principal of $4,200,000 due August 15, 2018 (see Note 7 – Long-Term Debt). The classification of this debt from long-term to short-term resulted in a working capital deficit at March 31, 2018. The Company is working with its lender and others to refinance or restructure its commercial bank loan in the first half of 2018. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. Our operational and financial strategies include managing our operating costs, working capital and debt to enhance liquidity. We will continue to work to grow revenue and review additional cost containment measures and expect to be cash flow positive in 2018. If we are unable to manage our working capital requirements and successfully refinance our commercial bank loan that is collateralized by our property, we may not be able to, among other things, (i) maintain our current general and administrative spending levels; (ii) fund certain obligations as they become due; and (iii) respond to competitive pressures or unanticipated capital requirements. We cannot provide any assurance that financing will be available to us in the future on acceptable terms.

NOTE 3. INVENTORIES

Inventories are comprised of the following:

	March 31, 2018		December 31, 2017
Raw material	$	973 ,923	$	1,040,795
Work in progress		135,487		77,702
Finished goods		53,052		78,316
	$	1,162,462	$	1,196,813

The Company recorded an impairment loss in the cost of sales of $41,396 during the three month period ended March 31, 2018 relating to steel inventory unrelated to the Company’s primary operations. On May 4, 2018, the Company sold this unrelated inventory to a third party wholesaler for approximately $248,000.

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are comprised of the following:

	March 31, 2018			December 31, 2017
Land	$	880,416		$	880,416
Buildings		4,847,778			4,847,778
Building improvements		719,619			717,232
Machinery and equipment		8,258,789			8,216,237
Furniture and fixtures		510,181			507,557
Transportation assets		811,378			811,378
		16,028,161			15,980,598
Accumulated depreciation		(7,449,359	)		(7,171,250	)
	$	8,578,802		$	8,809,348

Depreciation expense related to property, plant and equipment for the three months ended March 31, 2018 and 2017 was $324,360 and $326,356, respectively.

NOTE 5. INTANGIBLE ASSETS

Intangible assets are comprised of the following:

	March 31, 2018			December 31, 2017
Developed technology	$	7,000,000		$	7,000,000
Customer contracts		6,400,000			6,400,000
Trademarks		1,500,000			1,500,000
		14,900,000			14,900,000
Accumulated amortization		(9,378,889	)		(8,767,222	)
	$	5,521,111		$	6,132,778

Amortization expense related to intangible assets was $611,667 and $611,666 for the three months ended March 31, 2018 and 2017, respectively.

Annually, and more often as necessary, we will perform an evaluation of our intangible assets for indications of impairment. If indications exist, we will perform an evaluation of the fair value of the intangible assets and, if necessary, record an impairment charge. As of March 31, 2018, the Company reviewed the net balance of the intangible assets and determined no impairment was needed.

NOTE 6. RELATED PARTY NOTE RECEIVABLE

In January 2014, we entered into a Note Purchase and Sale Agreement under which we agreed to purchase a loan made to Tronco Energy Corporation (“Tronco”), a party related to us through common control, in order to take over the legal position as Tronco’s senior secured lender. That agreement provided that, upon our full repayment of the Tronco loan from the proceeds of the Offering, the lender would assign to us all of its rights under the Tronco loan, including all of the collateral documents. On May 30, 2014, we closed our purchase of the Tronco loan for a total payoff of $8.3 million, which included principal, interest, and early termination fees. As a result of that purchase, we became Tronco’s senior secured lender, and as a result are entitled to receive all proceeds from sales of the Tronco-owned collateral, as discussed below.

The interest rate on the note is 4.75%. We earned interest of $86,287 and $81,831 in the three months ending March 31, 2018 and 2017, respectively, and these amounts are included in other current assets in the consolidated balance sheets .

On August 8, 2017, the Board of Directors agreed to extend the terms of the Tronco loan to interest only payments due December 31, 2017, 2018, 2019, 2020, and 2021, with a balloon payment of all unpaid interest and principal due upon full maturity on December 31, 2022.

We have the direct legal right to enforce the collateral and guaranty agreements entered into in connection with the Tronco loan and to collect Tronco’s collateral sales proceeds, in order to recover the loan purchase amount. The Tronco loan continues to be secured by the first position liens on all of Tronco assets, as well as by the guarantees of Troy and Annette Meier (the “Meier Guaranties”), which are directly payable to and legally enforceable by us. In addition, the Meiers have provided us with stock pledges in which they pledge all of their shares of our common stock held by their family entities (the “Meier Stock Pledge”), as collateral for the Meiers guaranties until full repayment of Tronco loan. The pledged shares, which are subject to insider timing requirements and volume limitations under Rule 144 of the Securities Act and required periodic black-out periods, are being held in third-party escrow until full repayment of the Tronco loan, the balance of which is $7,367,212. The Company holds 8,267,860 shares and 530,725 restricted stock units as collateral for the Tronco note as of March 31, 2018. On April 27, 2018, the Company released the 530,725 restricted stock units as collateral for the Tronco note. The Company believes the market value of the 8,267,860 shares is sufficient collateral for the note.

NOTE 7. LONG-TERM DEBT

Long-term debt is comprised of the following:

	March 31, 2018			December 31, 2017
Real estate loans	$	4,454,030		$	4,518,424
Hard Rock Note, net of discount		6,939,420			7,422,912
Machinery loans		466,932			513,317
Transportation loans		338,827			353,400
		12,199,209			12,808,053
Current portion of long-term debt		(7,552,460	)		(6,101,678	)
Long-term debt, less current portion	$	4,646,749		$	6,706,375

Real Estate Loans

Our manufacturing facility is financed by a commercial bank loan requiring monthly payments of approximately $39,000, including principal and interest at 5.25%. A lump sum principal payment of approximately $4.2 million is due at the maturity date of this loan on August 15, 2018.

Hard Rock Note

In 2014, the Company purchased all of the interests of Hard Rock Solutions, LLC (“Hard Rock”). Consideration consisted of $12.5 million paid in cash at closing and a $12.5 million seller’s note (the “Hard Rock Note”). The Hard Rock Note and subsequent amendments are secured by all of the patents, patents pending, other patent rights, and trademarks transferred to Hard Rock. At issuance, the fair value of the Hard Rock Note was determined to be $11,144,000, which is less than the face value due to a below-market interest rate. The resulting discount of $1,356,000 will be amortized to interest expense using the effective interest method, totaling $17,061 and $20,452 for the three months ended March 31, 2018 and 2017, respectively.

On August 10, 2016, certain of our subsidiaries entered into an amended and restated note with the seller in our acquisition of Hard Rock. As amended and restated, the Hard Rock Note accrues interest at 5.75% per annum and matures on January 15, 2020. The following remaining payments are required under the current terms of the Hard Rock Note: in 2018, $500,000 in principal plus accrued interest on each of May 15 and July 15, 2018 and in 2019, $1,000,000 in principal plus accrued interest on each of January 15, March 15, May 15 and July 15, 2019. The remaining $2,000,000 balance of principal plus accrued interest on the Hard Rock Note are due on January 15, 2020. In December 2017, we made a $500,000 payment for the principal due in January 2018. In January 2018, we made a $500,000 payment for the principal due in March 2018. On May 7, 2018, we made a $500,000 payment for the principal due on May 15, 2018. Additionally in 2018, we have made the accrued interest payments related to the note on January 15, 2018, March 16, 2018, and May 7, 2018 of $70,890, $65,062, and $57,342, respectively.

NOTE 8. COMMITMENTS AND CONTINGENCIES

We are subject to litigation that arises from time to time in the ordinary course of our business activities. We are not currently involved in any litigation which management believes could have a material effect on our financial position or results of operations.

NOTE 9. SUBSEQUENT EVENTS

On May 7, 2018, the Company sold inventory at book value to a third party wholesaler.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Introduction

The following discussion and analysis was prepared to supplement information contained in the accompanying financial statements and is intended to provide certain details regarding our financial condition as of March 31, 2018, and our results of operations for the three months ended March 31, 2018 and 2017. It should be read in conjunction with the unaudited financial statements and notes thereto contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”) as well as our audited financial statements for the years ended December 31, 2017 and 2016, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the Securities and Exchange Commission (the “SEC”).

Unless the context requires otherwise, references to the “Company” or to “we,” “us,” or “our” and other similar terms are to Superior Drilling Products, Inc. and all of its subsidiaries.

Jumpstart Our Business Startups Act of 2012

Forward - Looking Statements

This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements contained in all parts of this document that are not historical facts are forward-looking statements that involve risks and uncertainties that are beyond the control of the Company. You can identify the Company’s forward-looking statements by the words “anticipate,” “estimate,” “expect,” “may,” “project,” “believe” and similar expressions, or by the Company’s discussion of strategies or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurances can be given that these expectations will prove to be correct. These forward-looking statements include the following types of information and statements as they relate to the Company:

	●	future operating results and cash flow;

	●	scheduled, budgeted and other future capital expenditures;

	●	working capital requirements;

	●	the availability of expected sources of liquidity;

	●	the transition of our business to primarily selling tools;

	●	the introduction into the market of the Company’s future products;

	●	the market for the Company’s existing and future products;

	●	the Company’s ability to develop new applications for its technologies;

	●	the exploration, development and production activities of the Company’s customers;

	●	compliance with present and future environmental regulations and costs associated with

	●	future operations, financial results, business plans and cash needs

	●	environmentally related penalties, capital expenditures, remedial actions and proceedings;

	●	effects of potential legal proceedings;

	●	changes in customers’ future product and service requirements that may not be cost effective or within the Company’s capabilities; and

	●	future operations, financial results, business plans and cash needs

These statements are based on assumptions and analyses in consideration of the Company’s experience and perception of historical trends, current conditions, expected future developments and other factors the Company believes were appropriate in the circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements.

While it is not possible to identify all factors, the Company continues to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed under “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and the following:

	●	the volatility of oil and natural gas prices;

	●	the cyclical nature of the oil and gas industry;

	●	availability of financing, flexibility in restructuring existing debt and access to capital markets;

	●	consolidation within our customers’ industries;

	●	competitive products and pricing pressures;

	●	our reliance on significant customers;

	●	our limited operating history;

	●	our ability to develop and commercialize new and/or innovative drilling and completion tool technologies;

	●	fluctuations in our operating results;

	●	our dependence on key personnel;

	●	costs of raw materials;

	●	our dependence on third party suppliers;

	●	unforeseen risks in our manufacturing processes;

	●	the need for skilled workers;

	●	our ability to successfully manage our growth strategy;

	●	unanticipated risks associated with, and our ability to integrate, acquisitions;

	●	current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries;

	●	terrorist threats or acts, war and civil disturbances;

	●	our ability to protect our intellectual property;

	●	impact of environmental matters, including future environmental regulations;

	●	implementing and complying with safety policies;

	●	breaches of security in our information systems and other cybersecurity risks;

	●	related party transactions with our founders; and

	●	risks associated with our common stock

Many of such factors are beyond the Company’s ability to control or predict. Any of the factors, or a combination of these factors, could materially affect the Company’s future results of operations and the ultimate accuracy of the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. Every forward-looking statement speaks only as of the date of the particular statement, and the Company undertakes no obligation to publicly update or revise any forward-looking statement.

Overview

Superior Drilling Products, Inc. (the “Company”, “SDPI”, “we”, “our” or “us”) is an innovative drilling and completion tool technology company providing cost saving solutions that drive production efficiencies for the oil and natural gas drilling industry. The Company innovates, designs, engineers, manufactures, sells, and repairs drilling and completion tools. Our drilling solutions include the patented Drill-N-Ream® well bore conditioning tool (“Drill-N-Ream tool”) and the patented Strider™ Drill String Oscillation System technology (“Strider technology” or “Strider”). In addition, the Company is a manufacturer and refurbisher of PDC (polycrystalline diamond compact) drill bits for a leading oil field services company. We operate a state-of-the-art drill tool fabrication facility, where we manufacture solutions for the drilling industry, as well as customers’ custom products.

We currently have three basic operations:

	●	Our PDC drill bit and other tool refurbishing and manufacturing service,

	●	Our emerging technologies business that manufactures the Drill-N-Ream tool, our innovative drill string enhancement tool, the Strider technology and other tools, and

	●	Our new product development business that conducts our research and development, and designs our horizontal drill string enhancement tools, other down-hole drilling technologies, and drilling tool manufacturing technologies.

Our strategy for growth is to leverage our expertise in drill tool technology and precision machining in order to broaden our product offerings and solutions for the oil and gas industry. We believe through our patented technologies, as well as technologies under development, that we can offer the industry the solutions it demands to improve drilling efficiencies and reduce production costs.

Our co-founder, Troy Meier, developed the first commercially-viable process for refurbishing PDC drill bits after a successful 13-year career with a predecessor of Baker Hughes Inc. He was also co-inventor of the Drill-N-Ream tool. We made a major strategic shift in 2016 to focus on our core competencies of innovation in manufacturing technologies, creation of solution for the upstream oil and gas industry, drilling tool fleet maintenance and repair and the development engineering and manufacture of new tools and technologies.

For the past 22 years, we have manufactured and refurbished PDC drill bits exclusively for Baker Hughes’s oilfield operations in the Rocky Mountain, California and Alaska regions, as well as other areas as needed to support their internal operations. Effective April 1, 2018, we entered into a new Vendor Agreement (the “Agreement”) with Baker Hughes Oilfield Operations LLC (“Baker Hughes”), replacing our existing Vendor Agreement, which expired on March 31, 2018. Under the agreement, we will now serve an expanded market throughout the U.S., receive a base minimum volume in drill bit refurbishment and continue to provide our drill bit refurbishment services for Baker Hughes exclusively. The agreement has a four year term and allows for modifications in the event of market deterioration and either party has the right to cancel the agreement with 6-months’ notice.

We have been expanding our offerings and broadening our customer base and the end-users of our technologies by demonstrating our engineering, design and manufacturing expertise of down-hole drilling tools. In addition to the patented Drill-N-Ream tool, our products include the Strider technology, the V-Stream Advanced Conditioning System and the Dedicated Reamer Stinger. We 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. In addition, we work with our customers to develop new products and enhancements to existing products in order to improve efficiency and safety and solve complex drilling tool problems.

We manufacture our solutions, as well as custom products, in our state-of-the-art drill tool fabrication facility where we operate a technologically-advanced PDC drill bit refurbishing facility, as well as a state-of-the-art, high-tech drilling and completion tool engineering design and manufacturing operation. We manufacture our drill string enhancement tools, including the patented Drill- N-Ream tool and the patented Strider technology, and conduct our new product research and development from this facility.

We employ a senior work force with specialized training and extensive experience related to drill bit refurbishing and drill and completion tool manufacturing. They produce our products and services using a suite of highly technical, purpose-built equipment, much of which we designed and manufactured for our proprietary use. Our manufacturing equipment and products use advanced technologies that enable us to increase efficiency, enhance product integrity, improve safety, and solve complex drilling tool problems.

In May 2016, the Company entered into an agreement with Drilling Tools International (“DTI”), under which DTI had a requirement to purchase our Drill-N-Ream tool for their rental tool business and achieve market share requirements in order to maintain exclusive marketing rights for the Drill-N-Ream. This agreement began the shift of our business model from a rental tool company to a manufacturer that designs, builds and sells tools. DTI, has exclusive rights to market the Drill-N-Ream in the U.S. and Canada, both onshore and offshore. It must achieve defined market share goals with our tool that started in June 2017 and increase through the end of 2020. We receive revenue from DTI for tool sales, tool repairs and a royalty fee based on the tools usage.

Also in 2016, the Company entered into a non-exclusive agreement with Baker Hughes to supply them with the Strider technology and related services. Tool shipments under the agreement are expected to begin mid-2018. The agreement has no set expiration date or minimum shipment requirement. It will remain in force until it is canceled by either us or Baker Hughes, as stipulated in the agreement.

In December 2017, the Company entered into an agreement with Weatherford U.S., L.P. (“Weatherford”) to launch a joint market development program to introduce our Drill-N-Ream tool in the Middle East. Under the development agreement, Weatherford and SDPI will demonstrate the Drill-N-Ream’s capabilities with large Middle East operators in Saudi Arabia, Kuwait and Oman. The program is planned to continue through June 30, 2018. SDPI and Weatherford each employ a local resident Product Champion to execute the pilot test program of 18 Drill-N-Ream tools. Upon the technology being proven in the region, the parties plan to enter into a long-term commercial agreement.

Oil and Gas Drilling Industry

Overview

Drilling and completion of oil and gas wells are upstream operations in the oil and gas industry served by the oilfield services group within the energy industry. The drilling industry is often segmented into the North American market and the International market. These markets share common exposure to the same macro environment, but also exhibit unique factors that drive the dynamics of each market.

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

Trends in the Industry

Recent Rig Count Improvement; Industry Volatility. Our business is highly dependent upon the vibrancy of the oil and gas drilling operations in the U.S. Worldwide military, political and economic events have contributed to oil and natural gas price volatility and are likely to continue to do so in the future. Soon after the completion of our initial public offering in late May 2014 and through early 2016, oil prices dramatically declined in the United States and as a result, the number of operating drill rigs was measurably reduced. The Baker Hughes weekly U.S. rotary rig count decreased over 70% from the high of 1,931 on September 13, 2014 to a historic low of 404 as of May 27, 2016.

The recovery in the industry began during the second half of calendar year 2016 and into 2017, as the U.S. rig count more than doubled from mid-2016 to mid-2017. The rate of growth in rig count stabilized in July 2017 and has increased at a slower rate from then to approximately 1,013 rigs as of April 20, 2018. Production of oil and gas in the U.S. has increased to record levels and has grown at a faster rate than the increased rig count because of better rig technology and higher rates of productivity per rig. With the increase in market activity, we have seen an increase in demand for our product and services, although we have not seen an increase in pricing.

Advancing Production Technologies. The oil and gas industry is increasingly using directional (e.g., horizontal) drilling in their exploration and production activities because of significantly improved recovery rates that can be achieved with these methods. With the rise of this type of drilling, traditional drill string tools used for vertical drilling do not necessarily provide the best performance or are not well suited for directional drilling. In addition, lower oil and natural gas prices combined with more technically challenging horizontal drilling has driven the demand for new technologies. We believe the value of our Drill-N-Ream tool and Strider technology have proven to provide significant operational efficiencies and costs savings for horizontal drilling activity and, combined with our low market penetration, provide us sales opportunities in soft as well as robust markets.

GE Oil & Gas merger with Baker Hughes . On July 3, 2017, GE Oil Gas and Baker Hughes announced they had combined their businesses. Currently Baker Hughes is our sole customer for our bit refurbishment business. We intend to continue developing our long-time relationship with Baker Hughes including our agreement with Baker Hughes to supply the Strider technology with our OHS tool and related services.

RESULTS OF OPERATIONS

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

	Three-Months Ended March 31,
(in thousands)	2018				2017
Revenue	$	4,600	100	%	$	3,369		100	%
Operating costs and expenses		4,433	96	%		3,616		107	%
Income (loss) from continuing operations		167	5	%		(247	)	(7	)%
Other expense		99	2	%		139		4	%
Net income (loss)	$	68	1	%	$	(386	)	(11	)%

Material changes of certain items in our statements of operations included in our financial statements for the comparative periods are discussed below.

For the three months ended March 31, 2018 (first quarter 2018), as compared with the three months ended March 31, 2017 (first quarter 2017)

Revenue . Our revenue increased approximately $1,231,000, during the three months ended March 31, 2018 compared with the same period in 2017. Tool revenue for first quarter 2018 was $3,525,000 which was comprised of approximately $1,992,000 of tool rental and sales revenue and approximately $1,533,000 of other related revenue. Other related revenue includes royalty fees, maintenance and repair of tools. Tool revenue for first quarter 2017 was approximately $2,269,000 which was comprised of approximately $1,634,000 of tool rental and sales revenue and approximately $635,000 of other related revenue.

Tool revenue for the first quarter 2018 grew as a result of an increase in purchases from DTI, the increase in sales of other tools and technologies, supported by the increase in U.S. drilling activity from 2017 to 2018, and the continued success of the Company’s shift in business model in 2016 from a rental tool business to a tool sales business.

Contract services revenue remained consistent at approximately $1,075,000 for the three months ended March 31, 2018 compared with approximately $1,100,000 for the three months ended March 31, 2017.

Operating Costs and Expenses . Total operating costs and expenses increased approximately $816,000 during the three months ended March 31, 2018 compared with the same period in 2017.

	●	Cost of revenue increased approximately $618,000 in the first quarter of 2018 compared with the prior-year period due to an increase in volume. As a percentage of revenue, cost of sales was 39%.

	●	Selling, general and administrative expenses increased approximately $200,000 for the three months ended March 31, 2018 compared with the same period in 2017. The increase was primarily due to an increase in research and development expense and payroll for officers being restored to 2016 rates partially offset by a reduction in professional fees.

Other Income (Expenses) . Other income and expense primarily consists of rent income, interest income, interest expense and loss on disposition of assets.

	●	Other Income. In the first quarter 2017, we received $44,000 rental income for the lease on the SAB facilities up until it was sold in February 2017. As result of the sale, we did not have other income for the three months ended March 31, 2018.

	●	Interest Income. For the three months ended March 31, 2018 and 2017 interest income was approximately $92,000 and $82,000, respectively, and relates to interest received from the Tronco related party note receivable.

	●	Interest Expense. The interest expense for the three months ended March 31, 2018 and 2017 was approximately $192,000 and $259,000, respectively. The decline in interest expense was due primarily to the reduction in the balance outstanding on the Hard Rock Note.

Liquidity

At March 31, 2018, we had a working capital deficit of approximately $2,300,000. The Company’s manufacturing facility is financed by a commercial bank loan with principal of $4,200,000 due August 15, 2018 (see Note 7 – Long-Term Debt in our consolidated financial statements). The classification of this debt from long-term to short-term resulted in a working capital deficit at March 31, 2018. The Company is working with its lender and others to refinance or restructure its commercial bank loan in the first half of 2018. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. Our operational and financial strategies include managing our operating costs, working capital and debt to enhance liquidity. We will continue to work to grow revenue and review additional cost containment measures and expect to be cash flow positive in 2018. If we are unable to manage our working capital requirements and successfully refinance our commercial bank loan that is collateralized by our property, we may not be able to, among other things, (i) maintain our current general and administrative spending levels; (ii) fund certain obligations as they become due; and (iii) respond to competitive pressures or unanticipated capital requirements. We cannot provide any assurance that financing will be available to us in the future on acceptable terms.

Cash Flow

Operating Cash Flows

For the three months ended March 31, 2018, net cash provided by our operating activities was approximately $520,000. The Company had approximately $68,000 of net income and approximately $556,000 increase in accounts receivable, which was offset by a decrease in accounts payable and accrued expenses of approximately $62,000.

Investing Cash Flows

For the three months ended March 31, 2018, net cash used in our investing activities was approximately $94,000 and related to property, plant and equipment purchases.

Financing Cash Flows

For the three months ended March 31, 2018, net cash used in our financing activities was approximately $626,000 and related to principal payments on debt.

Critical Accounting Policies

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2018.

Changes in Internal Controls over Financial Reporting

None

Internal Controls and Procedures

This quarterly report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the Company’ s registered public accounting firm due to a transaction period established by the rules of the Securities and Exchange Commission for newly public companies. Under these rules, we will not be required to include an attestation report for so for as long as we are an “emerging growth company” pursuant to the provisions of the JOBS Act.

PART II

Item 1. Legal Proceedings

Item 1A. Risk Factors

We may be unable to maintain adequate liquidity and make payments on our debt.

At March 31, 2018, we had a working capital deficit of approximately $2,300,000. The Company’s manufacturing facility is financed by a commercial bank mortgage loan with principal of $4,200,000 due August 15, 2018. The classification of this debt from long-term to short-term resulted in a working capital deficit at December 31, 2017. The Company plans to work with its lender and others to refinance or restructure its commercial bank loan in the first half of 2018.

As amended and restated effective August 10, 2016, the Hard Rock Note accrues interest at 5.75% per annum and matures and is fully payable on January 15, 2020. Under the current terms of Hard Rock Note, and after the payment described below, we are required to make the following remaining payments: equal payments totaling $2,000,000 of principal plus accrued interest on each of January 15, March 15, May 15 and July 15, 2018, and July 15, 2018, and equal principal payments totaling $4,000,000 (plus accrued interest) on each of January 15, March 15, May 15 and July 15, 2019, with the remaining $2,000,000 balance of principal and accrued interest on the Hard Rock Note due on January 15, 2020. In December 2017, we made a $500,000 payment for the principal due in January 2018. In January 2018, we made a $500,000 payment for the principal due in March 2018. On May 7, 2018, we made a $500,000 payment for the principal due on May 15, 2018. Additionally in 2018, we have made the accrued interest payments related to the note on January 15, 2018, March 16, 2018, and May 7, 2018 of $70,890, $65,062, and $57,342, respectively.

Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. Our operational and financial strategies include lowering our operating costs and capital spending to match revenue trends, managing our working capital and debt to enhance liquidity. With the success we are having with our distributor agreement with DTI and the opportunity with our new CTS tool, we believe we should have sufficient capital to support our opportunities in 2018.

We expect to be cash flow positive in 2018. If we are unable to do this, we may not be able to, among other things, (i) maintain our current general and administrative spending levels; (ii) fund certain obligations as they become due; and (iii) respond to competitive pressures or unanticipated capital requirements. In order to make our debt payments in 2018, we may need additional capital to support additional growth. We cannot provide any assurance that financing will be available to us in the future on acceptable terms.

Failure to generate sufficient revenue to make payments on the Hard Rock Note could result in our loss of the patents securing such note .

The Hard Rock Note is secured by all of the patents, patents pending, other patent rights, and the Drill-N-Ream trademark purchased in the Hard Rock acquisition (the “Drill-N-Ream Collateral”). If we do not have the funds necessary to make the future payments under the Hard Rock Note and fail to make any payments as required thereunder, and we are unsuccessful in amending or restructuring the payment terms, the holder of the Hard Rock Note could conduct a foreclosure sale on the Drill-N-Ream Collateral in order to apply the proceeds thereof toward repayment of the Hard Rock Note and all foreclosure costs, and our subsidiary Superior Drilling Solutions, LLC would be liable for any shortfall or receive any excess from the sales proceeds. The failure to retain and use the Drill-N-Ream Collateral in our business could cause a significant loss of our investment and might have a material adverse effect on our financial condition and results of operation, as well as our ability to grow our drill string tool business.

Our level of indebtedness could adversely affect our future ability to raise additional capital to fund growth, limit our ability to react to changes in our business or our industry and place us at a competitive disadvantage.

We are required to make remaining payments on the Hard Rock Note of $500,000 (plus accrued interest) in 2018 and $4.0 million (plus accrued interest) for 2019, with the balance of $2.0 million due on maturity in January 2020. We have a commercial bank loan with principal of $4,200,000 due in August 2018. We plan to refinance the loan in the first half of 2018. In addition, we are required to make monthly payments of approximately $68,000 on our other indebtedness.

Our level of debt and debt service requirements could have important consequences. For example, it could (i) result in a foreclosure upon our key assets, (ii) increase our vulnerability to general adverse economic and industry conditions, (iii) limit our ability to fund future capital expenditures and working capital, to engage in future acquisitions or development activities, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a substantial portion of our cash flow from operations to payments on our debt, (iv) increase our cost of borrowing, (v) restrict us from making strategic acquisitions or causing us to make non-strategic divestitures, (vi) limit our flexibility in planning for, or reacting to, changes in our business or industry in which we operate, placing us at a competitive disadvantage compared with our competitors who are less leveraged and (vii) impair our ability to obtain additional financing in the future.

Our customer base is concentrated and the loss of, or nonperformance by, one or more of our significant customers, or our failure to expand our channels to market and further commercialize could cause our revenue to decline substantially.

We have two large customers that currently comprise 97% of our total revenue. It is likely that we will continue to derive a portion of our revenue from a relatively small number of customers in the future. If a major customer decided not to continue to use our services or significantly reduces its drilling plans, or if we are unable to expand our channels to market or further commercialize, our revenue would decline and our operating results and financial condition could be harmed. In addition, we are subject to credit risk due to the concentration of our customer base. Any increase in the nonpayment of and nonperformance by our counterparties, either as a result of changes in financial and economic conditions or otherwise, could have a material effect on our business, results of operations and financial condition and could adversely affect our liquidity.

Item 6. Exhibits

The exhibits listed below are filed as part of this report:

Exhibit No.		Description

10.1*++		Vendor Agreement dated effective April 1, 2018 between Superior Drilling Solutions, LLC and Baker Hughes Oilfield Operations LLC.

31.1*		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for G. Troy Meier.

31.2*		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Christopher D. Cashion.

32.1**		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for G. Troy Meier.**

32.2**		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Christopher D. Cashion.**


101.INS *		XBRL Instance

101.XSD *		XBRL Schema

101.CAL *		XBRL Calculation

101.DEF *		XBRL Definition

101.LAB *		XBRL Label

101.PRE *		XBRL Presentation

** Furnished herewith.

* Filed herewith.

++ Portions of this exhibit have been omitted pursuant to a request for confidential treatment submitted to the Securities and Exchange Commission and this exhibit has been filed separately with the Securities and Exchange Commission in connection with such request.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	*SUPERIOR DRILLING PRODUCTS, INC.*

May 11, 2018	By:	/s/ G. TROY MEIER
		G. Troy Meier, Chief Executive Officer ( Principal Executive Officer)

May 11, 2018	By:	/s/ CHRISTOPHER CASHION
		Christopher Cashion, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

VENDOR AGREEMENT

This Vendor Agreement (the “Agreement”) is made effective as of the 1st day of April, 2018 (the “Effective Date”), by and between Baker Hughes Oilfield Operations LLC, a California corporation, with a place of business at 9110 Grogans Mill Road, The Woodlands, Texas 77380 (“Baker Hughes”) and Superior Drilling Solutions, LLC formerly known as Superior Drilling Products, LLC, a Utah corporation, with its principal place of business at 1583 South 1700 East, Vernal, Utah 84078 (“Superior”). Baker Hughes and Superior may be referred to herein collectively as the “Parties” or each singularly as a “Party”.

WITNESSETH:

WHEREAS , Superior has certain expertise in the manufacture, repair and reconditioning of earth boring drill bits, core bits, eccentric or bicenter bits, and concentric bits (the “Tools”) that employ polycrystalline diamond compact (PDC) cutters for the oil and gas drilling industry (the “Work”);

WHEREAS, Superior desires to continue to perform the Work for Baker Hughes and Baker Hughes desires to have Superior perform the Work;

NOW, THEREFORE, the Parties hereby agree to the following terms and conditions governing the Work hereunder;

1. Baker Hughes Purchases from Superior

1.1 Baker Hughes shall maintain a minimum of two hundred forty (240) repair activities per month (the “Minimum Threshold”). Should activities decline below the Minimum Threshold, on average during any quarter, , the Parties will endeavor to identify mutually agreeable alternate activities provided, however, that notwithstanding Section 2.1, Superior shall have the right to terminate this Agreement with three (3) months written notice. Should market conditions deteriorate; the Minimum Threshold may be reduced due to total repair volume reductions.

1.2. The standard hours of work shall be in accordance with the standard hour schedule posted in SAP and on Exhibit A. Baker Hughes shall bear all freight charges for shipping the bits to and from the Superior Facility where the Work is performed. Adjustments to the standard schedule within SAP, outside a five percent (5%) variance, shall be agreed by the Parties.

1.3 Superior shall not be responsible for invoicing customers of Baker Hughes for any Work performed hereunder.

1.4 Terms of payment to Superior for the Work shall be found in Exhibit B.

1.5 Superior shall provide to Baker Hughes a weekly report describing the extent of the repair activity. Contents of the report will be as defined by Baker Hughes.

2. Term and Termination

2.1 The Term of this Agreement shall be for four (4) years from the Effective Date hereof (“Initial Term”). During the Initial Term or subsequent annual renewals, this Agreement can be terminated by either Party with a six (6) month notice in writing prior to such termination date.

2.2 Notwithstanding any other provision in this Agreement, during the Initial Term of this Agreement and during the term of any subsequent renewal thereof, should the quality of the Work provided by Superior fall below the quality of Baker Hughes’ standards, as reasonably determined by Baker Hughes, Baker Hughes shall advise Superior in writing of the problem and make recommendations to correct the problem. If Superior does not correct the quality problem to Baker Hughes’ satisfaction within thirty (30) days after notice from Baker Hughes, Baker Hughes shall have the right to immediately terminate this Agreement.

2.3 Following termination of this Agreement, for whatever reason, the parties will take such steps to ensure that property and Confidential information is returned to its rightful owner and that neither Party is unduly disadvantaged. Any disputes arising will be resolved in accordance with the provisions of Article 15.

2.4 Termination of this Agreement does not affect the terms and conditions of Articles 4, 5, 6, 8, 9, 13, 14, 15, 17, 18 and 19 of this Agreement.

3. Equipment and Training; Baker Hughes Security Interest

3.1 Baker Hughes will provide, at no cost to Superior, training and technical support to qualify and certify personnel of Superior in Baker Hughes’ processes and shall be able to conduct periodic audits of Superior in order for Superior to maintain such certification.

3.2 Baker Hughes will provide, at no cost to Superior, an inventory of PDC Cutters to be used in the performance of the Work to be performed by Superior. Baker Hughes will also supply bit boxes and nozzles to Superior. Baker Hughes shall retain title to all PDC Cutter inventories, new and used, and supply of bit boxes and nozzles. Baker Hughes will contact relevant vendors and request that those vendors consider extending Baker Hughes’ pricing to Superior. No vendor’s decision regarding what pricing to extend to Superior shall in any way affect the validity of this Agreement.

3.3 At the request of Baker Hughes, Superior will provide any necessary documentation, or assist Baker Hughes, with the filing of appropriate documentation (e.g., UGC Financing Statements, etc.) required to establish and evidence the Baker Hughes title and retained interest in the PDC Cutter inventories, new and used, and supply of bit boxes and nozzles inventory.

4. Ownership of Work

4.1 Superior agrees all Work performed for Baker Hughes shall be the property of Baker Hughes. Notwithstanding the foregoing, Superior understands and agrees that Superior is an independent contractor and controls and assumes full responsibility for all Work performed under the Agreement. Superior further understands and acknowledges that Baker Hughes does not control the Work but is relying on the skill and expertise of Superior in performing such Work.

4.2 Superior agrees that all programs, drawings, tracings, specifications, technical notations, calculations, data, memoranda, cutter inventories, bit boxes, nozzles, notes and other information or material, including all copies and excerpts thereof, comprising all or any part of the Work or containing information of the type set forth hereunder which (i) come into the possession and custody of Superior’s employees or agents, or (ii) are prepared or compiled by Superior or any of its employees or agents at any time during the term of this Agreement, shall be delivered to Baker Hughes upon request of Baker Hughes.

5. Confidential information

5.1 The following is a definition of confidential information as used in the Agreement (“Confidential information”):

Confidential information is highly sensitive, confidential information or other proprietary information, either written or oral, of Baker Hughes or Superior. Such information may include, but is not limited to, ideas, concepts, research or development, development plans for new or improved products or processes, data, formulae, techniques, designs, sketches know-how, photographs, plans, cutters, cutter designs, nozzles, drawings, facts or knowledge concerning the processes, specifications, samples, test specimens, report., scientific studies or analyses, details of training methods, new products or new uses for old products, refining technology, merchandising and selling techniques, contracts and licenses, purchasing, accounting, business systems and computer programs, long-range planning, financial plans and results, pricing or price lists, and customer lists, findings, studies, inventions, designs, costs, strategic and industry analyses, advertising and marketing plans and other information relating to the business of Baker Hughes or Superior that is not generally available to the public. This list is merely illustrative and Confidential Information is not limited to these illustrations.

5.2 Either Baker Hughes or Superior may disclose or exchange Confidential Information to the other Party (hereinafter the disclosing Party is sometimes referred to as the “Discloser”). Either Baker Hughes or Superior may receive Confidential Information from the other Party (hereinafter the receiving Party is sometimes referred to as the “Receiver”).

5.3 The Receiver hereby covenants and agrees that it shall not (either directly or indirectly) reveal or disclose or allow any Confidential Information to be obtained by any other third party person, partnership, association, or corporation; it shall not use such information for any purpose whatsoever without the prior written consent of Discloser, except as expressly contemplated by this Agreement; it shall treat all such Confidential Information received from the Discloser as a trade secret proprietary in nature to the Discloser and will use its best efforts to safeguard the secrecy of the Confidential Information.

5.4 Property in all Confidential Information shall remain vested in the Discloser and nothing in this Agreement shall be construed as granting any rights of license to use or deal with the Confidential Information in any way other than permitted by this Agreement. The Confidential Information and all copies or notes relating thereto will be returned by the Receiver immediately on the request of the Discloser.

5.5 Nothing herein above contained shall deprive the Receiver the right to use or disclose any information:

	(a)	which is, at the time of disclosure, known to the trade or the public;

	(b)	which becomes at a later date known to the trade or the public through no fault of the Receiver and then only after said later date;

	(c)	which is possessed by the Receiver, as evidenced by written records, before receipt thereof from the Discloser;

	(d)	which is disclosed to the Receiver in good faith by a third party who has an independent right to such information.

	(e)	which is developed by employees of Receiver independently of any knowledge of the Confidential Information of Discloser.

5.6 Each Party hereto agrees that all Confidential Information furnished by the Discloser to the Receiver or which is developed by one Party for the other whether taking place before, after or in contemplation of a Work Order or Purchase Order, will be Confidential Information.

5.7 Upon termination, the Receiver shall remain obligated under the provisions of this Paragraph 5 to maintain the Confidential Information of the Discloser and not use same for their own benefit or the benefit of third parties.

5.8 In the event that the Receiver or any of its Affiliates or Representatives become legally compelled (by deposition, interrogatory, request for document, subpoena, civil investigative demand or similar process) to disclose any of such Confidential Information, the Receiver shall provide the Discloser with prompt prior written notice of such requirement so that the Discloser may seek a protective order or other appropriate remedy or waive compliance with the terms of this Agreement. In the event that such protective order or other remedy is not obtained, or that the Discloser waives compliance with the provisions hereof, the Receiver agrees to furnish only that portion of such Confidential Information that the Receiver is advised by written opinion of counsel is legally required and to exercise its best efforts to obtain assurance that confidential treatment will be accorded such Confidential Information.

5.9 The Receiver of Confidential Information understands and agrees that the unauthorized use or disclosure of any Confidential Information by Receiver and its employees or agents in violation of this Agreement may cause severe and irreparable damage to the Discloser and agrees that money damages would not be a sufficient remedy for any breach of this Agreement. The Receiver understands and agrees further that the Discloser is entitled and authorized, in the event of any breach of this Agreement, to seek a restraining order and/or injunction from any competent court of equity to enjoin and restrain Receiver and its employees or agents from any disclosure of proprietary and Confidential Information of the Discloser without the necessity of complying with the provisions of Article 15 regarding resolution of disputes. Such equitable remedies shall be in addition to and not in lieu of any damages to which the Discloser may be entitled by law. The Receiver shall notify the Discloser immediately, and cooperate with the Discloser, upon the Receiver’s discovery of any loss or compromise of the Discloser’s Confidential Information.

6. Patents, Trademarks, Copyrights and other Intellectual Property

6.1 Superior shall promptly and freely disclose to Baker Hughes any and all intellectual property, including conceptions, inventions, improvements, suggestions for improvements and valuable discoveries, whether patentable or not, which are conceived or made by Superior solely or jointly with another or others during the term of this Agreement and which are a derivative of Superior’s Work on a Tool for Baker Hughes specifically under this Agreement or which Superior conceives solely as a result of the Work rendered to Baker Hughes, and Superior hereby assigns, and agrees to assign, all interests and related rights therein to Baker Hughes or its nominee. Superior understands and agrees that all copyrights, patents, trademarks, trade secrets or other intellectual property rights associated with any ideas, concepts, techniques, inventions, processes, or works of authorship developed or created by Superior or its personnel exclusively in or as a result of performing the Work for Baker Hughes’s shall belong exclusively to Baker Hughes. Nothing herein contained shall be construed as granting or implying any right to Supplier under any intellectual property rights of Baker Hughes, including Confidential Information, Letters Patent or trademark or copyright rights, or to use any Confidential Information, any invention, mark or copyrighted work covered thereby except as expressly contemplated by this Agreement.

6.2 Superior automatically assigns and shall cause his personnel automatically to assign, at the time of creation of the Work, without any requirement of further consideration, any rights, title, or interest it or they may have in such intellectual property, including any patents, copyrights, or any other intellectual property rights pertaining thereto. Upon request above by Baker Hughes, Superior shall take such further actions, and shall cause its personnel to take such further actions, including execution and delivery of instruments of conveyance which Baker Hughes shall deem necessary to be executed in order to apply for and obtain patents, copyrights, or other intellectual property protection in the United States or any foreign country, or to protect otherwise Baker Hughes’s interest therein

7. Warranties

In the event that Superior’s Work fails to conform to the specifications of Baker Hughes set forth in the relevant scope of work document, then as Baker Hughes’ sole remedy for such nonconformance, Superior shall repair or replace such defective Work brought to Superior’s attention by Baker Hughes within a period of six (6) months from delivery of any equipment or date of first use, whichever is earlier. Except as otherwise provided in this Paragraph, Superior makes no warranty, either express or implied (including without limitation, implied warranties of merchantability or fitness for a particular purpose). Notwithstanding anything to the contrary in the Agreement, Superior’s warranty obligations are strictly limited to the reperformance of any Work once any defective or non-conforming Tool has been delivered to Superior’s designated facility.

8. Indemnity

8.1 SUPERIOR HEREBY INDEMNIFIES, DEFENDS AND AGREES TO HOLD BAKER HUGHES, AND BAKER HUGHES’S PARENT, SUBSIDIARY AND AFFILIATED COMPANIES, AND ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES OR INVITEES (COLLECTIVELY, “BAKER HUGHES GROUP”) HARMLESS AGAINST ANY AND ALL CLAIMS, JUDGMENTS, SETTLEMENTS, FINES, PENALTIES, EXPENSES (INCLUDING BUT NOT LIMITED TO ATTORNEY FEES AND COURT COSTS), COSTS AND LIABILITIES AS A RESULT OF OR RELATING TO PERSONAL INJURY, BODILY INJURY, ILLNESS, DEATH OR DESTRUCTION OR LOSS OF PROPERTY OR ANY OTHER THEORY OF LOSS OR LIABILITY (COLLECTIVELY, “CLAIMS”) ARISING FROM OR RELATING TO THE NEGLIGENCE, ACTIONS, OMISSIONS, STRICT LIABILITY, PRODUCTS LIABILITY OR OTHER FAULT OR RESPONSIBILITY OF SUPERIOR, OR ARISING FROM OR RELATING TO, DIRECTLY OR INDIRECTLY FROM, SUPERIOR’S PERFORMANCE, THE SUBJECT MATTER OR BREACH OF THIS AGREEMENT, OR FROM ANY CLAIMS RELATING TO INFRINGEMENT, THEFT OR UNAUTHORIZED USE OF ANY PATENTS, COPYRIGHTS, TRADEMARKS, TRADE SECRETS OR INTELLECTUAL PROPERTY OR PROPRIETARY RIGHTS OF ANY PERSON. IN ADDITION, SUPERIOR SHALL INDEMNIFY, RELEASE, DEFEND AND HOLD BAKER HUGHES AND THE OTHER MEMBERS OF THE BAKER HUGHES GROUP HARMLESS FROM ANY CLAIMS (AS DEFINED ABOVE) ASSERTED BY (ON BEHALF OF), ARISING IN FAVOR OF OR RELATING TO ANY EMPLOYEES, AGENTS, REPRESENTATIVES OR INVITEES OF SUPERIOR, (AND RELATING TO BAKER HUGHES, WITH REGARD TO SUPERIOR’S OWN PROPERTY OR LOSSES), REGARDLESS OF THE NEGLIGENCE, STRICT LIABILITY, BREACH OF CONTRACT, PREMISES LIABILITY, PRODUCTS LIABILITY OR OTHER FAULT OR RESPONSIBILITY OF SUPERIOR, BAKER HUGHES, ANY OTHER MEMBER OF BAKER HUGHES GROUP OR ANY OTHER PERSON OR PARTY. THIS INDEMNITY SHALL BE BINDING UPON THE SUCCESSORS, ASSIGNS AND HEIRS OF SUPERIOR.

8.2 BAKER HUGHES HEREBY INDEMNIFIES, DEFENDS AND AGREES TO HOLD SUPERIOR, AND SUPERIOR’S PARENT, SUBSIDIARY AND AFFILIATED COMPANIES, AND ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES OR INVITEES (COLLECTIVELY, “SUPERIOR GROUP”) HARMLESS AGAINST ANY AND ALL CLAIMS, JUDGMENTS, SETTLEMENTS, FINES, PENALTIES, EXPENSES (INCLUDING BUT NOT LIMITED TO ATTORNEY FEES AND COURT COSTS), COSTS AND LIABILITIES AS A RESULT OF OR RELATING TO PERSONAL INJURY, BODILY INJURY, ILLNESS, DEATH OR DESTRUCTION OR LOSS OF PROPERTY OR ANY OTHER THEORY OF LOSS OR LIABILITY (COLLECTIVELY, “CLAIMS”) ARISING FROM OR RELATING TO THE NEGLIGENCE, ACTIONS, OMISSIONS, STRICT LIABILITY, PRODUCTS LIABILITY OR OTHER FAULT OR RESPONSIBILITY OF BAKER HUGHES, OR ARISING FROM OR RELATING TO, DIRECTLY OR INDIRECTLY FROM, BAKER HUGHES’S PERFORMANCE, THE SUBJECT MATTER OR BREACH OF THIS AGREEMENT, OR FROM ANY CLAIMS RELATING TO INFRINGEMENT, THEFT OR UNAUTHORIZED USE OF ANY PATENTS, COPYRIGHTS, TRADEMARKS, TRADE SECRETS OR INTELLECTUAL PROPERTY OR PROPRIETARY RIGHTS OF ANY PERSON. IN ADDITION, BAKER HUGHES SHALL INDEMNIFY, RELEASE, DEFEND AND HOLD SUPERIOR AND THE OTHER MEMBERS OF THE SUPERIOR GROUP HARMLESS FROM ANY CLAIMS (AS DEFINED ABOVE) ASSERTED BY (ON BEHALF OF), ARISING IN FAVOR OF OR RELATING TO ANY EMPLOYEES, AGENTS, REPRESENTATIVES OR INVITEES OF BAKER HUGHES, (AND RELATING TO SUPERIOR, WITH REGARD TO BAKER HUGHES’S OWN PROPERTY OR LOSSES), REGARDLESS OF THE NEGLIGENCE, STRICT LIABILITY, BREACH OF CONTRACT, PREMISES LIABILITY, PRODUCTS LIABILITY OR OTHER FAULT OR RESPONSIBILITY OF BAKER HUGHES, SUPERIOR, ANY OTHER MEMBER OF SUPERIOR GROUP OR ANY OTHER PERSON OR PARTY, THIS INDEMNITY SHALL BE BINDING UPON THE SUCCESSORS, ASSIGNS AND HEIRS OF BAKER HUGHES.

9. Non-competition

9.1 Superior agrees that during the term of this Agreement, Superior will not perform the Work for any party other than Baker Hughes.

9.2 Superior may engage in other activity not related to or in competition with the business of Baker Hughes to the extent that such other activity shall not be considered a breach of this Agreement. If Superior is already in a line of business or developing products that Baker Hughes is also in or Baker Hughes later enters, Superior shall be permitted to operate such business line without any restriction. If a court of competent jurisdiction concludes that the parameters of this restrictive covenant are over-broad and thereby unenforceable, the parties agree that the court may reform the parameters so as to make the agreement enforceable.

10. Insurance

10.1 At all times when Superior is performing Work pursuant to this Agreement, Superior agrees to procure and maintain and Superior agrees to have its agents, contractors or subcontractors maintain, the following insurance coverages:

	(a)	Commercial General Liability covering bodily injury and property damage with a limit of not less than $2,000,000 for each occurrence;

	(b)	Workers’ Compensation insurance (or maintenance of a legally permitted and governmentally approved program of self-insurance) covering Superior’s employees pursuant to applicable state workers’ compensation laws for work related injuries suffered by employees of Superior; and

	(c)	Employers Liability insurance with limits of not less than $1,000,000 for each accident.

10.2 Superior agrees to provide Baker Hughes with a Certificate of Insurance evidencing that the above coverages are in full force and effect.

10.3 To the extent of the indemnity and release obligations expressly assumed by Superior hereunder, Superior agrees that all insurance policies it carries: (i) will be primary to Baker Hughes Group’s insurance, (ii) will name Baker Hughes Group as an additional insured party (only on the Commercial General Liability policy described above), and (iii) be endorsed to waive subrogation against Baker Hughes Group.

11. Compliance with Laws

Each Party represents, warrants and covenants that all work performed hereunder shall be conducted in accordance with all applicable governmental safety regulations, standards, procedures and precautions, and that in connection therewith it employs all necessary or required protective equipment and devices. Each Party agrees to abide by and be bound under the other Party’s policies governing the conduct and safety of personnel having access to the other Party’s facilities or its customers facilities, including without limitation, the other Party’s policies regarding illegal and unauthorized articles, and drug and alcohol policies, but shall have no responsibility for the adequacy of such policies; provided that only such policies of a Party provided to the other Party in writing shall be applicable to the other Party, and in the absence of such written policies, the other Party shall be required to comply with its own policies and the highest industry and HSE standards governing the matters listed above. Without limiting the generality of the foregoing, Superior agrees to notify Baker Hughes in writing in the event that Superior discovers any hazardous materials in connection with performing the Work hereunder

12. Notices

All notices, authorizations and requests in connection with this Agreement shall be deemed given on the day they are (i) deposited in the mail, postage prepaid, certified or registered, return receipt requested; (ii) sent by air express courier (e.g., DHL, Federal Express or Airborne), charges prepaid, return receipt requested, and addressed as set forth below or (iii) on the business day after delivery if notice is given by email of a PDF document (with confirmation of transmission):

Superior:	Superior Drilling Products, LLC
	P.O. Box 1656
	Vernal, UT 84078
	telephone: 435.789.0594
	e-mail: annette@teamsdp.com
	Attn: Annette Meier, President

Baker Hughes:	Baker Hughes Oilfield Operations LLC
	9110 Grogans Mill Road
	The Woodlands, TX 77380
	telephone: 281.363.6934
	e-mail: doug.brewer@bakerhughes.com
	Attn: Doug Brewer, AMO Manager

13. Consequential Damages and Maximum Liability

13.1 Consequential Damages. EXCEPT WITH REGARD TO A BREACH BY SUPERIOR OR BAKER HUGHES WITH RESPECT TO PARAGRAPHS 5 OR 6 BUT NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT TO THE CONTRARY, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR AND EACH PARTY HEREBY AGREES TO RELEASE, INDEMNIFY, DEFEND, AND HOLD HARMLESS THE OTHER PARTY’S GROUP (AS DEFINED IN ARTICLE 8) FROM AND AGAINST ANY AND ALL CLAIMS ASSERTED BY OR IN FAVOR OF ANY MEMBER OF THE INDEMNIFYING PARTY’S GROUP FOR INDIRECT, SPECIAL, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES, INCLUDING, BUT NOT LIMITED TO, DAMAGES FOR LOST PRODUCTION, LOST REVENUE, LOST PRODUCT, LOST PROFITS OR LOST BUSINESS OR BUSINESS INTERRUPTIONS, FROM ANY CAUSE WHATSOEVER, INCLUDING, BUT NOT LIMITED TO, THE NEGLIGENCE OR BREACH OF DUTY (STATUTORY OR OTHERWISE), STRICT LIABILITY, PRODUCT LIABILITY OR OTHER FAULT OR RESPONSIBILITY OF EITHER PARTY OR ANY MEMBER OF ITS GROUP, AND EACH PARTY HEREBY RELEASES THE OTHER IN THIS REGARD.

13.2 Maximum Liability. EXCEPT FOR OBLIGATIONS TO MAKE PAYMENT UNDER THIS AGREEMENT, LIABILITY FOR INDEMNIFICATION IN SECTIONS 8 OR 13.1, LIABILITY FOR BREACH OF CONFIDENTIALITY, OR LIABILITY FOR INFRINGEMENT OR MISAPPROPRIATION OF INTELLECTUAL PROPERTY RIGHTS, IN NO EVENT SHALL CONTRACTOR’S AGGREGATE LIABILITY ARISING OUT OF OR RELATED TO ANY ORDER ISSUED PURSUANT TO THIS AGREEMENT, WHETHER ARISING OUT OF OR RELATED TO BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE OF ANY KIND) OR OTHERWISE, EXCEED $1,000,000 USD.

14. Ancillary Provisions

14.1 No waiver, modification or amendment of any term, condition or provision of this Agreement nor any addition thereto shall be valid or of any force or effect unless made in writing and signed by an authorized representative of the Parties.

14.2 Superior shall not assign this Agreement without prior written approval of Baker Hughes. Any attempt to so assign shall be void. Assignment without such approval shall not operate to relieve Superior of any of its obligations under this Agreement.

14.3 Superior is and shall remain an independent contractor in its performance of this Agreement. Notwithstanding anything herein that may be construed to the contrary, this Agreement shall not constitute, create, or in any way be interpreted as, a joint venture, partnership or formal business organization of any kind and nothing contained in this Agreement shall be construed as establishing any joint obligations between the parties. Each Party hereto retains the right to conduct its own business as it sees fit and each Party shall act as an independent contractor of the other and shall not, except as specifically authorized hereunder, act as an agent or representative of the other Party for any purpose whatsoever. Except as expressly provided herein, (a) no Party shall have the authority to bind the other Party or make any commitment or incur any costs or expenses for or in the name of the other Party, and (b) no Party hereto shall be responsible in any way for any obligation or liability incurred or assumed by any other Party. None of the parties’ employees shall be deemed to be the employees or servants of the other Party for any purpose. No Party shall have any fiduciary duty to the other, no special relationship between the parties shall be deemed to exist, and no duties not specifically set forth in this Agreement shall exist.

14.4 This Agreement shall be interpreted under the laws of the State of Texas, excluding conflicts of law and choice of law statutes.

14.5 If any provision of this Agreement shall be held by a court of competent jurisdiction to be illegal, invalid or unenforceable, the remaining provisions shall remain in full force and effect. No waiver of any breach of any provision of this Agreement shall constitute a waiver of any other breach of the same or any other provisions hereof, and no waiver shall be effective unless made in wilting and signed by an authorized representative of the waiving Party.

14.6 Neither Party shall be responsible for any failure or delay in complying with the terms of this Agreement where such failure or delay is due to causes beyond its reasonable control. These causes shall include, but not be restricted to, fire, storm, flood, earthquake, explosion, accident, acts of the public enemy, war, rebellion, insurrection, sabotage, epidemic, quarantine restrictions, labor disputes, labor shortages, transportation embargoes or failures or delays in transportation, inability to secure necessary raw materials or machinery, acts of God, acts of any government, whether national, municipal or otherwise, or any agency thereof, and judicial action. The Party so affected by the force majeure shall notify the other Party as soon as practicable of its existence. The parties shall then meet and endeavor to alleviate the effect and extent thereof. If the force majeure persists for a period in excess of 180 days either Party may terminate this Agreement by giving the other Party 90 days’ written notice thereof.

14.7 This Agreement, including any and all Schedules attached hereto, constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all previous agreements and understandings, whether oral or written, express or implied. The Parties specifically intend to replace and supersede the previous Vendor Agreement between Baker Hughes and Superior, dated October 28, 2013 as amended by that certain Amendment No. 1 to the Vendor Agreement dated effective as of September 28, 2015 and terminated effective as of the Effective Date. To the extent the terms and conditions of this Agreement are in conflict with any terms or conditions in any Schedule, Confidentiality Agreement, work order, proposal, purchase order, invoice or other terms and conditions in any other document, the terms and conditions of this Agreement shall control. This Agreement may not be altered, amended, or modified except by written instrument signed by the duly authorized representatives of all parties. The terms on any Work Order, Purchase Order or other form submitted by Superior to Baker Hughes shall not apply to this Agreement.

15. Conciliation/Arbitration

15.1 Any disputes, claims or controversies connected with, arising out of, or related to, this Agreement and the rights and obligations created herein, or the breach, validity, existence or termination hereof (the ‘Dispute”), shall first be submitted to the respective representatives of the parties for resolution. If those designated representatives are unable to resolve such dispute, claim or controversy within thirty (30) days of such submission, the dispute, claim or controversy shall then be submitted to the Presidents of the respective parties for resolution. If the respective Presidents of the parties are unable to resolve such dispute, claim or controversy within thirty (30) days of submission, the dispute, claim or controversy shall then be submitted to mandatory, binding arbitration in accordance with Clause 15.2 below.

15.2 Any Dispute arising out of or connected with this Agreement which cannot be resolved utilizing the procedures set forth In Clause 15.1 above, shall be referred to and finally resolved by arbitration. Upon notice by either Party to the other, all disputes, claims, questions, or differences (including issues relating to the formation of the agreement and the validity of this arbitration clause) shall be finally settled by binding arbitration administered by the American Arbitration Association (“AAA”) in accordance with the provisions of its Commercial Arbitration Rules, as well as the Federal Rules of Civil Procedure and the Federal Rules of Evidence, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

15.3 The arbitration Panel shall consist of a single arbitrator, unless otherwise agreed to by the parties. The place of arbitration shall be Houston, Texas. If the parties are not able to decide upon a neutral third party arbitrator within thirty (30) days of the request for arbitration, then the AAA shall select an arbitrator having at least twenty (20) years of experience in intellectual property matters. All proceedings will be conducted in English.

The parties agree to hold the entirety of the arbitration proceedings, including knowledge of the existence of any dispute or controversy, completely confidential except for such disclosures as might be required by law

This arbitration agreement does not limit or affect the right of either Party to seek from any court having jurisdiction any interim, interlocutory, or provisional relief that is necessary to protect the rights or property of that Party. Alternatively, either Party may apply to the AAA pursuant to the AAA Optional Rules for Emergency Measures seeking injunctive relief until the arbitration award is rendered or the controversy is otherwise resolved.

16. Power and Authority

Each Party hereto represents that it has full power and authority (corporate or otherwise) to execute this Agreement and bind the Party on whose behalf it is signing.

17. Multiple Counterparts

This Agreement may be executed in any number of counterparts (including by electronic delivery of signed signature pages) and by different Parties in separate counterparts, each of which counterparts, when so executed and delivered, will be deemed to be an original and all of which counterparts, taken together, will constitute but one and the same agreement.

18. Drafting

Both Parties hereto acknowledge that each Party was actively involved in the negotiation and drafting of this Agreement and that no law or rule of construction shall be raised or used in which the provisions of this Agreement shall be construed in favor or against either Party hereto because one is deemed to be the author thereof.

19. Prevailing Party

If any legal action or other proceeding is brought for the enforcement of this Agreement or any document executed in connection with, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement or any document, instrument or agreement executed in connection herewith, the successful prevailing Party shall be entitled to recover reasonable attorney’s fees, court costs and all other costs and expenses incurred in that action or proceeding from the non-prevailing Party.

SIGNATURES ON FOLLOWING PAGE

IN WITNESS WHEREOF , this Agreement has been executed on behalf of each Party as of the day and year set forth at its beginning.

	SUPERIOR DRILLING PRODUCTS, LLC

	By	*/s/ Annette Meier*
	Title	President

	BAKER HUGHES OILFIELD OPERATIONS LLC

	By	*/s/ Scott Schmidt*
	Title	Vice President – Drill Bits

EXHIBIT A

Superior’s hourly rate will be $+++.

The Baker Hughes USL standard hour rate is adjusted based on a balance sheet calculation maintaining a cost neutral P&L for USL AMO.

Repair Charge Example

Inspection Fee:	All Sized	$+++	+++ Hours

Setup Charges:	‹ 9”	$+++	+++ Hours
	‹ 13”	$+++	+++ Hours
	‹ 18”	$+++	+++ Hours

Cutter Rotation:	3/8	$+++	+++ Hours
	1/2	$+++	+++ Hours
	5/8 & 3/4	$+++	+++ Hours

Cutter Replacement:	3/8	$+++	+++ Hours
	1/2	$+++	+++ Hours
	5/8 & 3/4	$+++	+++ Hours

Pocket Repair:	3/8	$+++	+++ Hours
	1/2	$+++	+++ Hours
	5/8 & 3/4	$+++	+++ Hours

Box Prep:		$+++	+++ Hours

Used Reclaimed Nozzles:		All sizes	$+++/each

Used Reclaimed Cutters:		All Sizes	$+++/each

Shop Rate:	Per Hour	$ +++

+++ This information has been omitted in reliance upon Rule 24b-2 under the Securities Exchange Act of 1934, as amended, and has been filed separately with the Securities and Exchange Commission.

EXHIBIT B

Terms of payment to Superior for the Work shall be the GE Accelerated Payment Program with details found in Addendum to Purchase Orders with Superior Drilling Solutions, LLC.

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT

I, G. Troy Meier, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Superior Drilling Products, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or other persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2018

	/s/ G. Troy Meier
	G. Troy Meier
	President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT

I, Christopher Cashion, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Superior Drilling Products, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or other persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2018

	/s/ Christopher Cashion
	Christopher Cashion
	Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Superior Drilling Products, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, G. Troy Meier, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 11, 2018

	/s/ G. Troy Meier
	G. Troy Meier
	President and Chief Executive Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Superior Drilling Products, Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Christopher Cashion, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 11, 2018

	/s/ Christopher Cashion
	Christopher Cashion
	Chief Financial Officer