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 September 30, 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 24,550,979 shares of common stock, $0.001 par value, issued and outstanding as of November 9, 2018.

 

 

 

     
 

 

Superior Drilling Products, Inc.

FORM 10-Q

 

QUARTER ENDED SEPTEMBER 30, 2018

 

TABLE OF CONTENTS

 

    Page
     
PART I-FINANCIAL INFORMATION    
     
Item 1. Financial Statements    
     
Condensed Consolidated Balance Sheet (Unaudited) at September 30, 2018 and December 31, 2017   3
     
Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2018 and 2017   4
     
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 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

 

  2  
 

 

PART I - FINANCIAL INFORMATION.

 

Item 1. Financial Statements

 

Superior Drilling Products, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

 

   

September 30,

2018

   

December 31,

2017

 
ASSETS                
Current assets                
Cash   $ 4,275,063     $ 2,375,179  
Accounts receivable, net     2,628,892       2,667,042  
Prepaid expenses     224,833       111,530  
Interest receivable     275,614       -  
Inventories     1,034,899       1,196,813  
Other current assets     161,996       -  
Total current assets     8,601,297       6,350,564  
Property, plant and equipment, net     8,006,462       8,809,348  
Intangible assets, net     4,297,778       6,132,778  
Related party note receivable     7,367,212       7,367,212  
Other noncurrent assets     48,727       15,954  
Total assets   $ 28,321,476     $ 28,675,856  
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities                
Accounts payable   $ 658,561     $ 1,021,469  
Accrued expenses     725,151       543,758  
Current portion of long-term debt, net of discounts     8,443,430       6,101,678  
Total current liabilities     9,827,142       7,666,905  
Long-term debt, less current portion, net of discounts     2,521,021       6,706,375  
Total liabilities     12,348,163       14,373,280  
Commitments and contingencies (Note 8)                
Shareholders’ equity                
Common stock - $0.001 par value; 100,000,000 shares authorized; 24,550,979 and 24,535,155 shares, respectively     24,551       24,535  
Additional paid-in-capital     39,280,059       38,907,864  
Accumulated deficit     (23,331,297 )     (24,629,823 )
Total shareholders’ equity     15,973,313       14,302,576  
Total liabilities and shareholders’ equity   $ 28,321,476     $ 28,675,856  

 

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

 

  3  
 

 

Superior Drilling Products, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

 

    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2018     2017     2018     2017  
                         
Revenue   $ 4,765,361     $ 4,446,540     $ 14,764,577     $ 11,865,648  
                                 
Operating costs and expenses                                
Cost of revenue     1,665,774       1,716,740       5,407,389       4,388,860  
Selling, general and administrative expenses     1,866,833       1,102,373       4,991,481       3,837,218  
Depreciation and amortization expense     942,473       907,837       2,820,183       2,745,232  
                                 
Total operating costs and expenses     4,475,080       3,726,950       13,219,053       10,971,310  
                                 
Operating income     290,281       719,590       1,545,524       894,338  
                                 
Other income (expense)                                
Interest income     113,555       90,959       305,694       255,327  
Interest expense     (178,642 )     (224,510 )     (552,692 )     (698,638 )
Other income     -       -       -       43,669  
Loss on sale of assets     -       -       -       12,167  
Total other expense     (65,087 )     (133,551 )     (246,998 )     (387,475 )
                                 
Net income   $ 225,194     $ 586,039       1,298,526     $ 506,863  
                                 
Basic income earnings per common share   $ 0.01     $ 0.02       0.05     $ 0.02  
Basic weighted average common shares outstanding     24,542,551       24,261,272       24,537,647       24,218,477  
Diluted income per common share   $ 0.01     $ 0.02       0.05     $ 0.02  
Diluted weighted average common shares outstanding     25,162,445       24,261,272       25,156,629       24,218,477  

 

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

 

  4  
 

 

Superior Drilling Products, Inc.

Condensed Consolidated Statements Of Cash Flows

(Unaudited)

 

    For the Nine Months  
    Ended September 30,  
    2018     2017  
Cash Flows From Operating Activities                
Net income   $ 1,298,526     $ 506,863  
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization expense     2,820,183       2,745,232  
Amortization of debt discount     43,459       59,766  
Share based compensation expense     372,211       498,384  
Impairment of inventories     41,396       -  
Gain on sale of assets     -       (12,167 )
Changes in operating assets and liabilities:                
Accounts receivable     38,150       (1,493,995 )
Interest receivable     ( 275,614 )     ( 251,600 )
Inventories     121,484       (9,220 )
Prepaid expenses and other assets     (308,072 )     (64,245 )
Accounts payable and accrued expenses     (181,515 )     (610,936 )
Other long-term liabilities     -       (17,490 )
Net Cash Provided by Operating Activities     3,970,208       1,350,592  
Cash Flows From Investing Activities                
Purchases of property, plant and equipment     (183,263 )     (220,101 )
Proceeds from sale of fixed assets     -       2,483,921  
Net Cash Provided by (Used in) Investing Activities     (183,263 )     2,263,820  
Cash Flows From Financing Activities                
Principal payments on debt     (1,887,061 )     (2,858,882 )
Principal payments on related party debt     -       (74,293 )
Principal payments on capital lease obligations     -       (217,302 )
Net Cash Used in Financing Activities     (1,887,061 )     (3,150,477 )
Net increase in Cash     1,899,884       463,935  
Cash at Beginning of Period     2,375,179       2,241,902  
Cash at End of Period   $ 4,275,063     $ 2,705,837  
Supplemental information:                
Cash paid for Interest   $ 488,112     $ 617,565  
Non-cash payment of other long-term liability by offsetting related-party note receivable   $ -     $ 550,000  
Acquisition of equipment by issuance of note payable   $ -     $ 16,557  
Purchases of property, plant and equipment included in accrued expenses   $ -     $ 626,000  

 

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

 

  5  
 

 

Superior Drilling Products, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 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 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 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.

 

Unaudited Interim Financial Presentation

 

These interim consolidated condensed financial statements for the three and nine months ended September 30, 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 and nine months ended September 30, 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.

 

  6  
 

 

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. In August 2015, FASB delayed the effective date one year, which is now 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 September 30, 2018, we had a working capital deficit of approximately $1,200,000. The Company’s manufacturing facility is financed by a commercial bank loan mortgage with principal of $4,200,000 due February 15, 2019 (see Note 7 – Long-Term Debt). The classification of this debt from long-term to short-term resulted in a working capital deficit at September 30, 2018. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. We continue to 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:

 

   

September 30,

2018

   

December 31,

2017

 
Raw material   $ 778,570     $ 1,040,795  
Work in progress     208,194       77,702  
Finished goods     48,135       78,316  
    $ 1,034,899     $ 1,196,813  

 

The Company recorded an impairment loss in the cost of sales of $41,396 in the first quarter of 2018 relating to steel inventory unrelated to the Company’s primary operations. During the second quarter of 2018, the Company sold this unrelated inventory to a third-party wholesaler for approximately $248,000. No gain or loss was recorded upon the sale.

 

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment are comprised of the following:

 

   

September 30,

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     8,341,098       8,216,237  
Furniture and fixtures     510,181       507,557  
Transportation assets     811,378       811,378  
      16,110,470       15,980,598  
Accumulated depreciation     (8,104,008 )     (7,171,250 )
    $ 8,006,462     $ 8,809,348  

 

  7  
 

 

Depreciation expense related to property, plant and equipment for the three and nine months ended September 30, 2018 was $330,806 and $985,183, respectively, and for the three and nine months ended September 30, 2017 was $296,170 and $910,232, respectively.

 

NOTE 5. INTANGIBLE ASSETS

 

Intangible assets are comprised of the following:

 

    September 30,
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     (10,602,222 )     (8,767,222 )
    $ 4,297,778     $ 6,132,778  

 

Amortization expense related to intangible assets for the three and nine months ended September 30, 2018 and September 30, 2017, was $611,667 and $1,835,000, 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 September 30, 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 5.25%. We earned interest of $97,489 and $275,614 for the three and nine months ending September 30, 2018, respectively, and interest of $87,867 and $251,000 for the three and nine months ended September 30, 2017, respectively.

 

On August 8, 2017, the Board of Directors agreed to extend the terms of the Tronco loan to interest only payments due December 31, 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 as collateral for the Tronco note as of September 30, 2018. On April 27, 2018, the Company released the 530,725 restricted stock units we previously held as additional collateral for the Tronco note. The Company believes the market value of the 8,267,860 shares is sufficient collateral for the note.

 

  8  
 

 

NOTE 7. LONG-TERM DEBT

 

Long-term debt is comprised of the following:

 

   

September 30,

2018

   

December 31,

2017

 
Real estate loans   $ 4,313,510     $ 4,518,424  
Hard Rock Note, net of discount     5,965,818       7,422,912  
Machinery loans     374,955       513,317  
Transportation loans     310,168       353,400  
      10,964,451       12,808,053  
Current portion of long-term debt     (8,443,430 )     (6,101,678 )
Long-term debt, less current portion   $ 2,521,021     $ 6,706,375  

 

Real Estate Loans

 

Our manufacturing facility is financed by a commercial bank loan requiring monthly payments of approximately $43,000, including principal and interest. On August 1, 2018, we entered into an agreement with our lender to extend the due date of the commercial real estate loan from August 15, 2018 to February 15, 2019. The interest rate for the loan extension is 7.1%.

 

  9  
 

 

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 $12,178 and $43,459 for the three and nine months ended September 30, 2018, respectively, and $19,657 and $59,766 for the three and nine months ended September 30, 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. We have made all the required principal and accrued interest payments related to the note for 2018. For 2019, we are required to pay $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 is due on January 15, 2020.

 

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.

 

  10  
 

 

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 September 30, 2018, and our results of operations for the three and nine months ended September 30, 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

 

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.

 

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

 

  11  
 

 

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 in our subsequent Exchange Act filings 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.

 

  12  
 

 

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 based on current financial performance. 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 former 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 exclusively for Baker Hughes. The agreement has a four-year term and allows for modifications in the event of market deterioration. 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 have a pipeline of concepts of more horizontal drill string tools, each of which addresses a different technical challenge presented by today’s horizontal drilling designs. We are developing our relationships with our customers and the industry to understand the markets needs in order to develop new products and design 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. 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. We are currently negotiating a new agreement and metrics with DTI to grow the market share of the Drill-N-Ream.

 

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 dependent upon the timing of the commercialization of the Strider technology. 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 was extended through December 31, 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.

 

  13  
 

 

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. As we expand into international markets, we will become more subject to changes in the industry in the countries in which we operate, such as Saudi Arabia, Kuwait and Oman. 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.

 

The oil and natural gas industry has recovered from its low in January 2016 when prices were just about $26 per barrel to today’s prices of nearly $70 per barrel. Correspondingly, the U.S. rig count increased from its low 404 rigs in May of 2016 to 1,067 as of October 19, 2018. The rate of growth in rig count stabilized in July 2017 and has increased at a slower rate from then to approximately 1,068 rigs as of October 26, 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, current and expected 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 has 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. Early results of our Strider technology have also delivered a similar outcome.

 

  14  
 

 

RESULTS OF OPERATIONS

 

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

 

    Three-Months Ended September 30,     Nine-Months Ended September 30,  
(in thousands)   2018     2017     2018     2017  
Tool revenue   $ 3,361       71 %   $ 3,182       72 %   $ 10,962       74 %   $ 7,938       67 %
Contract services     1,404       29 %     1,265       28 %     3,803       26 %     3,928       33 %
Revenue   $ 4,765       100 %   $ 4,447       100 %   $ 14,765       100 %   $ 11,866       100 %
Operating costs and expenses     4,475       94 %     3,727       84 %     13,219       90 %     10,971       92 %
Income from continuing operations     290       6 %     720       16 %     1,546       10 %     894       8 %
Other expense     65       1 %     134       3 %     247       2 %     387       4 %
Net income   $ 225       5 %   $ 586       13 %   $ 1,299       8 %   $ 507       4 %

 

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

 

  15  
 

 

For the three months ended September 30, 2018, as compared with the three months ended September 30, 2017

 

Revenue . Our revenue increased approximately $318,000, during the three months ended September 30, 2018. Tool revenue increased $179,000 to $3,361,000 from approximately $3,182,000 in the prior-year period. Tool revenue in the third quarter of 2018 was comprised of approximately $1,655,000 of tool rental and sales revenue and approximately $1,706,000 of other related revenue. Tool revenue in the prior-year period was comprised of approximately $2,012,000 of tool rental and sales revenue and approximately $1,170,000 of other related revenue.

 

Tool revenue for the third quarter 2018 grew as a result of an increase in other related revenue, which includes royalty fees and repair of tools, which was driven by the increase in U.S. drilling activity from 2017 to 2018 and our distributor’s increase in market share. This increase was partially offset by a decline in tool sales/rental revenue.

 

Contract services revenue was approximately $1,404,000 for the three months ended September 30, 2018 compared with approximately $1,265,000 for the three months ended September 30, 2017. The increase in contract services revenue was due to an increase in drill bit refurbishment activity.

 

Operating Costs and Expenses . Total operating costs and expenses increased approximately $748,000 during the three months ended September 30, 2018 compared with the same period in 2017.

 

 

Cost of revenue decreased approximately $51,000 in the third quarter of 2018 compared with the prior-year period due to a decrease in tool sales/rental volume. As a percentage of revenue, cost of sales was 35% compared with 39% in the prior-year period. The improvement in the margin was the result of higher contract services volume and the associated operating leverage as well as higher other related tool revenue, which includes royalty fees that have no associated cost of revenue.

     
  Selling, general and administrative expenses increased approximately $764,000 for the three months ended September 30, 2018. The increase was primarily due to an increase in research and development costs, costs associated with our international market development, and higher salaries.

 

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

 

  Interest Income. For the three months ended September 30, 2018 and 2017, interest income was approximately $114,000 and $91,000, respectively, and related primarily to interest received from the Tronco related party note receivable.
     
  Interest Expense. Interest expense for the three months ended September 30, 2018 and 2017 was approximately $179,000 and $225,000, respectively. Lower interest expense was due primarily to the reduction in the balance outstanding on the Hard Rock Note.

 

For the nine months ended September 30, 2018 as compared with the nine months ended September 30, 2017

 

Revenue . Our revenue increased approximately $2,899,000, or 24% as a result of the $3,024,000, or 38%, increase in tool revenue, which more than offset the decline in Contract Services. Tool revenue grew to $10,962,000 primarily due to the $2,127,000 increase in Other related revenue and the $897,000 increase in tool rental and sales. Tool rental and sales were approximately $6,153,000 and Other related revenue was approximately $4,809,000. Tool revenue for the nine months ended September 30, 2017 was approximately $7,938,000 which was comprised of approximately $5,257,000 of tool rental and sales revenue and approximately $2,681,000 of other related revenue.

 

Tool revenue for the nine months ended September 30, 2018 grew as a result of an increase in Drill-N-Ream purchases from our distributor, the increase in other related revenue, which was driven by the increase in U.S. drilling activity from 2017 to 2018 and our distributor’s increase in market share.

 

Contract services revenue was approximately $3,803,000 compared with approximately $3,928,000 for the nine months ended September 30, 2017. The decrease in contract services revenue was the result of a reduction in manufacturing custom orders.

 

Operating Costs and Expenses . Total operating costs and expenses increased approximately $2,248,000 during the nine months ended September 30, 2018 compared with the same period in 2017.

 

  Cost of revenue increased approximately $1,019,000 as a result of higher volume. As a percentage of revenue, cost of sales was 37% for each of the nine months ended September 30, 2018 and 2017.
     
  Selling, general and administrative expenses increased approximately $1,154,000. The increase was primarily due to an increase in research and development expense, costs associated with our international market development, and higher salaries.

 

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 nine months ended September 30, 2018.
     
  Interest Income. For the nine months ended September 30, 2018 and 2017 interest income was approximately $306,000 and $255,000, respectively, and related primarily to interest received from the Tronco related party note receivable.
     
  Interest Expense. Interest expense for the nine months ended September 30, 2018 and 2017 was approximately $553,000 and $699,000, respectively. Lower interest expense was due primarily to the reduction in the balance outstanding on the Hard Rock Note.

 

Liquidity

 

At September 30, 2018, we had a working capital deficit of approximately $1,200,000. The Company’s manufacturing facility is financed by a commercial bank loan mortgage with principal of $4,200,000 due February 15, 2019 (see Note 7 – Long-Term Debt). The classification of this debt from long-term to short-term resulted in a working capital deficit at September 30, 2018.

 

Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. We continue to 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.

 

  16  
 

 

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. We have made all the required principal and accrued interest payments related to the note for 2018. For 2019, we are required to pay $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 is due on January 15, 2020.

 

Cash Flow

 

Operating Cash Flows

 

For the nine months ended September 30, 2018, net cash provided by our operating activities was approximately $3,970,000. The Company had approximately $1,299,000 of net income and approximately $244,000 increase in prepaid expenses and other assets, which was offset by a decrease in accounts payable and accrued expenses of approximately $429,000.

 

Investing Cash Flows

 

For the nine months ended September 30, 2018, net cash used in our investing activities was approximately $183,000 and related to property, plant and equipment purchases.

 

Financing Cash Flows

 

For the nine months ended September 30, 2018, net cash used in our financing activities was approximately $1,887,000 and related to principal payments on debt.

 

  17  
 

 

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 September 30, 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 as long as we are an “emerging growth company” pursuant to the provisions of the JOBS Act.

 

  18  
 

 

PART II

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

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

 

At September 30, 2018, we had a working capital deficit of approximately $1,200,000. The Company’s manufacturing facility is financed by a commercial bank mortgage loan with principal of $4,200,000 due February 15, 2019. If we are unable to refinance the mortgage, the bank could foreclose on our property.

 

  19  
 

 

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, we are required to pay 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. We have made all the required principal and accrued interest payments related to the note for 2018. For 2019, we are required to pay $1,000,000 in principal plus accrued interest on each of January 15, March 15, May 15 and July 15, 2019. If we are unable to make the payments required, we could lose our rights to market the Drill-N-Ream.

 

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.

 

  20  
 

 

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 $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 mortgage loan with principal of $4,200,000 due in February 2019. 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 95% 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.

 

Possible new tariffs could have a material adverse effect on our business.

 

The United States has recently announced the implementation of new tariffs on imported steel, and is also considering tariffs on additional items. There is a concern that the imposition of additional tariffs by the United States could result in the adoption of additional tariffs by other countries as well. Any resulting trade war could negatively impact the global market for oil field products and services and could have a significant adverse effect on our business. While it is too early to predict how the recently enacted tariffs on steel will impact our business, the imposition of tariffs on items we import from other countries could increase our costs and could result in lowering our gross margin on products sold.

 

  21  
 

 

Item 6. Exhibits

 

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

 

Exhibit No.   Description
     
10.1  

Commercial Lease between Alan Pitts & Mikaela Allmand and Hard Rock Solutions, LLC dated August 27,2018 (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 10-Q filed on August 30, 2018).

     
10.2*   Form of Stock Option Agreement under 2015 Long Term Incentive Plan.
     
10.3*   Form of Restricted Stock Unit Agreement under 2015 Long Term Incentive Plan.
     
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.

 

  22  
 

 

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.
     
November 9, 2018 By:   /s/ G. TROY MEIER
   

G. Troy Meier, Chief Executive Officer

( Principal Executive Officer)

     
November 9, 2018 By: /s/ CHRISTOPHER CASHION
   

Christopher Cashion, Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

 

  23  
 

 

 

SUPERIOR DRILLING PRODUCTS, INC.

NonSTATUTORY Stock Option AGREEMENT

 

(E mployee, Consultant)

 

1. Grant of Stock Option . As of the Grant Date [[ GRANTDATE]] Superior Drilling Products, Inc., a Utah corporation (the “ Company ”), hereby grants a Nonstatutory Stock Option (the “ Option ”) to the Optionee [[FIRSTNAME]] [[LASTNAME]] an [Employee/Consultant] of the Company, to purchase [[SHARESGRANTED]] shares of the Company’s common stock, $ 0.001 par value per share (the “ Stock ”), subject to the terms and conditions of this agreement (the “ Agreement ”) and the Superior Drilling Products, Inc. 2015 Long Term Incentive Plan (the “ Plan ”) which is hereby incorporated herein in its entirety by reference and is attached as Exhibit A. The Option is not an “incentive stock option” as defined in Section 422 of the Internal Revenue Code.

 

2. Definitions . All capitalized terms used herein shall have the meanings set forth in the Plan unless otherwise specifically provided herein. The Award Notice sets forth meanings for various capitalized terms used in this Agreement.

 

3. Option Term . The Option shall commence on the Grant [[GRANTDATE]] and terminate on the date immediately prior to the tenth (10 th ) anniversary of the Grant Date. The period during which the Option is in effect and may be exercised is referred to herein as the “ Option Period.”

 

4. Option Price . The Option Price per share of Stock is [[GRANTPRICE]].

 

5. Vesting . This Option may be exercised for the total number of shares Stock subject to this Option in accordance with the Vesting Schedule as follows: 33.3% on the Grant Date, 33.3% on the first anniversary of the Grant Date and 33.4% on the second anniversary of the Grant Date provided that the Optionee is continuously providing Services to the Company or an Affiliate through the applicable vesting date. The Stock may be purchased at any time after they become vested, in whole or in part, during the Option Period; provided, however, the Option may only be exercisable to acquire whole Stock. The right of exercise provided herein shall be cumulative so that if the Option is not exercised to the maximum extent permissible after vesting, the vested portion of the Option shall be exercisable, in whole or in part, at any time during the Option Period.

 

6. Method of Exercise . The Option is exercisable by delivery of an electronic notice to a designated representative of the Company Maxim Group LLC (“Maxim”), subject to the Maxim Broker agreement by the Optionee, specifying the number of shares of Stock to be acquired on, and the effective date of, such exercise.

 

7. Restrictions on Exercise . The Option may not be exercised if the issuance of such Stock or the method of payment of the consideration for such Stock would constitute a violation of any applicable federal or state securities or other laws or regulations, including any laws or regulations or Company policies respecting blackout periods, or any rules or regulations of any stock exchange on which the Stock may be listed.

 

     
 

 

8. Termination of Employment/Engagement . Voluntary or involuntary termination of the Optionee as an Employee/Consultant of the Company and its Affiliates shall affect Optionee’s rights under the Option as follows:

 

  a. Termination for Cause or Breach of Noncompetition or Confidentiality Agreement . The vested and non-vested portions of the Option shall expire on 12:01 a.m. (CST) on the date of termination of employment/engagement or the date of the breach, as applicable and shall not be exercisable to any extent if Optionee’s employment/engagement is terminated for Cause or the Optionee breaches a noncompetition and/or confidentiality agreement between Optionee and the Company or any of its Affiliates at any time.
     
  b. Death or Disability . If Optionee’s employment/engagement is terminated by death or Disability (as determined by the Committee at the time of such termination as a member of the Company’s Board of Directors), then the unvested portion of any Award shall be forfeited and terminated and vested portion of an Option may be exercised by the Participant or the applicable of his guardian or legal representative or estate for a period of three (3) months after the date on which the participant’s Service terminated due to Disability or one (1) Year after the date on which the Participant’s Services terminated due to death, respectively, but in any event no later than the date of expiration of the option’s term, which in no event shall exceed ten (10) years from the date of grant, as set forth in the Award Agreement evidencing such Option, except as provided in section 6.2 9a)(i) of the Long Term incentive plan for a Nonstatutory Stock Option or SAR (the “Option Expiration Date”).
     
  c. Other Involuntary Termination . If Optionee’s employment with the Company and its Affiliates is terminated by the Company for any reason other than for Cause, death or Disability, then (i) the non-vested portion of the Option shall immediately expire on the date of termination of employment and (ii) the vested portion of the Option shall expire to the extent not exercised six (6) months after the date of such termination of employment/engagement. In no event may the Option be exercised by anyone after the earlier of (i) the expiration of the Option Period or (ii) six (6) months after the date of termination.
     
  d. Other Voluntary Termination . If Optionee’s employment with the Company and its Affiliates is terminated by the Optionee for any reason other than for death or Disability, then (i) the non-vested portion of the Option shall immediately expire on the date of termination of employment and (ii) the vested portion of the Option shall expire to the extent not exercised three (3) months after the date of such termination of employment/engagement. In no event may the Option be exercised by anyone after the earlier of (i) the expiration of the Option Period or (ii) three (3) months after the date of termination.
     
  e. Change in Control . Notwithstanding the vesting provisions in this Agreement, in the event of a “Change in Control” of the Company, vesting of the Option shall be accelerated and the entire Option shall automatically become 100% vested as of the day of the Change in Control date and the Option shall otherwise be affected as provided in the Plan.

 

     
 

 

9. Independent Legal and Tax Advice . Optionee acknowledges that the Company has advised Optionee to obtain independent legal and tax advice regarding the grant and exercise of the Option and the disposition of any Stock acquired thereby.

 

10. No Rights in Stock . Subject to the terms of the Plan, Optionee shall have no rights as a stockholder until the Optionee becomes the record holder of such Stock, or upon a Change in Control, with respect to the Stock.

 

11. Investment Representation . Optionee will enter into such written representations, warranties and agreements as Company may reasonably request in order to comply with any federal or state securities law. Moreover, any stock certificate for any Stock issued to Optionee hereunder may contain a legend restricting their transferability as determined by the Company in its discretion. Optionee agrees that Company shall not be obligated to take any affirmative action in order to cause the issuance or transfer of Stock hereunder to comply with any law, rule or regulation that applies to the Stock subject to the Option.

 

12. No Guarantee of Employment, Engagement or Services . The Option shall not confer upon Optionee any right to continued employment, engagement or Services with the Company or any Affiliate.

 

13. Withholding of Taxes . The Option is subject to and the Company shall have the right to take any action as may be necessary or appropriate to satisfy any federal, state, or local (foreign and domestic) tax and withholding obligations upon exercise of the Option.

 

14. General .

 

(a) Notices . All notices under this Agreement shall be delivered electronically to the parties at their respective e-mail addresses set forth beneath their signatures below or at such other address as may be designated in writing by either of the parties to one another. Notices shall be effective upon receipt.

 

(b) Nontransferability of Option . The Option granted pursuant to this Agreement is not transferable other than by will or by the laws of descent and distribution or by a qualified domestic relations order (as defined in Section 4l4(p) of the Internal Revenue Code). The Option will be exercisable during Optionee’s lifetime only by Optionee or by Optionee’s legal representative in the event of Optionee’s Disability. No right or benefit hereunder shall in any manner be liable for or subject to any debts, contracts, liabilities, obligations or torts of Optionee.

 

(c) Amendment and Termination . No amendment, modification or termination of the Option or this Agreement shall be made at any time without the written consent of Optionee and Company.

 

(d) No Guarantee of Tax Consequences, Legal Consult . The Company and the Committee make no commitment or guarantee that any federal or state tax treatment will apply or be available to any person eligible for benefits under the Option. The Optionee has been advised and been provided the opportunity to obtain independent legal and tax advice regarding this Award including, without limitation, with respect to the grant and exercise of the Option and the disposition of any Stock acquired thereby.

 

(e) Severability . In the event that any provision of this Agreement shall be held illegal, invalid, or unenforceable for any reason, such provision shall be fully severable, but shall not affect the remaining provisions of the Agreement, and the Agreement shall be construed and enforced as if the illegal, invalid, or unenforceable provision had not been included herein.

 

(f) Supersedes Prior Agreements . This Agreement shall supersede and replace all prior agreements and understandings, oral or written, between the Company and the Optionee regarding the grant of the Options covered hereby.

 

15. Counterparts : This Agreement may be executed in multiple original counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument.

 

[SIGNATURE PAGE FOLLOWS]

 

     
 

 

IN WITNESS WHEREOF, the Company, as of the Grant Date has caused this Agreement to be executed on its behalf by its duly authorized officer and Optionee has hereunto executed this Agreement as of the same date.

 

  SUPERIOR DRILLING PRODUCTS, INC.
     
  By: (Signature on File)
  Name:   Annette Meier
  Title: Chief Operating Officer

 

  Address for Notices:
   
  [[ RESADDR1]] [[RESADDR2]]
  [[RESCITY]] [[RESSTATEORPROV]]
  [[RESPOSTALCODE]] [[RESCOUNTRYCODE]]

 

  Attention: [[FIRSTNAME]] [[LASTNAME]]

 

  OPTIONEE :
   
  [[SIGNATURE]]
  Signature
   
   
  [[FIRSTNAME]] [[LASTNAME]]

  Address:  
     
     

 

     
 

 

 

SUPERIOR DRILLING PRODUCTS, INC.

AWARD OF RESTRICTED STOCK

 

In this Award, Superior Drilling Products, Inc. (the “ Company ”) grants to [[FIRSTNAME]] [[LASTNAME]] (the “ Participant ”), Restricted Stock under the Superior Drilling Products, Inc. 2015 Long Term Incentive Plan (“ Plan ”). This Award of Restricted Stock is governed by the terms of this Award document and the Plan. All capitalized terms not defined in this Award shall have the meaning of such terms as provided in the Plan.

 

  1. The “ Date of Grant ” is [[GRANTDATE]].
     
  2. The total number of shares of Restricted Stock granted is [[SHARESGRANTED]].
     
  3. The Vesting Dates for the Restricted Stock granted in this Award are as follows:

 

Subject to item 4 below, Participant shall not become vested in any of the Restricted Stock granted unless he or she is continuously providing Services to the Company or an Affiliate from the Date of Grant through the applicable Vesting Date, and Participant may not sell, assign, transfer, exchange, pledge, encumber, gift, devise, hypothecate or otherwise dispose of any Restricted Stock until such Restricted Stock become Vested as provided herein. The transfer restrictions and substantial risk of forfeiture imposed in the foregoing sentence shall lapse on the following applicable dates (each a “ Vesting Date ”): as to 33.3% of the Restricted Stock on the first anniversary of the Grant Date, 33.3% of the Restricted Stock on the second anniversary of the Date of Grant, and 33.4% on the third anniversary of the Date of Grant. The Restricted Stock as to which such restrictions so lapse are referred to as “ Vested .”

 

4. Termination of Employment/Engagement . Voluntary or involuntary termination of the Participant as an Employee/Consultant of the Company and its Affiliates shall affect Participants rights under the Restricted Stock Award as follows:

 

(a) Termination for Cause or Breach of Noncompetition or Confidentiality Agreement . The non-vested portions of the Award shall expire on 12:01 a.m. (CST) on the date of termination of employment/engagement or the date of the breach, as applicable.

 

(b) Death or Disability . If Participants employment/engagement is terminated by death or Disability (as determined by the Committee at the time of such termination as a member of the Company’s Board of Directors), then the unvested portion of any Award shall be forfeited and terminated.

 

(c) Other Involuntary Termination . If Participant’s employment with the Company and its Affiliates is terminated by the Company for any reason other than for Cause, death or Disability, then (i) the non-vested portion of the Award shall immediately expire on the date of termination.

 

(d) Other Voluntary Termination . If Participant’s employment with the Company and its Affiliates is terminated by the Participant for any reason other than for death or Disability, then the non-vested portion of the Award shall immediately expire on the date of termination.

 

(e) Change in Control . Notwithstanding the vesting provisions in this Agreement, in the event of a “Change in Control” of the Company, vesting of the Award shall be accelerated and the entire Award shall automatically become 100% vested as of the day of the Change in Control date and the Award shall otherwise be affected as provided in the Plan.

 

 
 

 

5. Other Terms and Conditions:

 

(f) No Fractional Shares . All provisions of this Award concern whole shares of Stock. If the application of any provision hereunder would yield a fractional share, such fractional share shall be rounded down to the next whole share.

 

(g) Not an Employment or Service Agreement . This Award is not an employment agreement, and this Award shall not be, and no provision of this Award shall be construed or interpreted to create any right of Participant to continue employment with or provide Services to the Company or any of its Affiliates.

 

(h) Independent Tax Advice and Acknowledgments . Participant has been advised and Participant hereby acknowledges that he or she has been advised to obtain independent legal and tax advice regarding this Award, the grant of the Restricted Stock and the disposition of such shares, including, without limitation, the election available under Section 83(b) of the Internal Revenue Code. Participant acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Award subject to all the terms and provisions of the Plan and this Award.

 

(i) Notices . All notices under this Award shall be delivered electronically to the parties at their respective email addresses or set forth through their use of the provided Certent/Maxim portal account. Notices shall be effective upon receipt.

 

(j) No Guarantee of Tax Consequences, Legal Consult . The Company and the Committee make no commitment or guarantee that any federal or state tax treatment will apply or be available to any person eligible for benefits under this Award.

 

(k) Severability . In the event that any provision of this Award shall be held illegal, invalid, or unenforceable for any reason, such provision shall be fully severable, but shall not affect the remaining provisions of the Award, and the Award shall be construed and enforced as if the illegal, invalid, or unenforceable provision had not been included herein.

 

(l) Supersedes Prior Agreements . This Award shall supersede and replace all prior agreements and understandings, oral or written, between the Company and the Participant regarding the grant of the Restricted Stock covered by this Award.

 

(m) Counterparts . This Award may be executed in multiple original counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument.

 

The Restricted Stock granted hereunder will be subject to all applicable federal, state and local taxes domestic and foreign taxes and withholdings required by law. The Participant hereby agrees to accept as binding, conclusive, and final all decisions or interpretations of the Committee or the Board, as appropriate, upon any questions arising under the Plan or this Award.

 

 
 

 

  PARTICIPANT:
     
  Signature: [[SIGNATURE]]
  Date:
     
  SUPERIOR DRILLING PRODUCTS, INC
     
  By: Annette Meier
  Title: Chief Operating Officer
  Signature: On File
     
  Date: [[SIGNATURE_DATE]]

 

 
 

 

 

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: November 9, 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: November 9, 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 September 30, 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: November 9, 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 September 30, 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: November 9, 2018  
   
  /s/ Christopher Cashion
  Christopher Cashion
  Chief Financial Officer

 

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