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, 2017March 31, 2022

[  ]☐ 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)

1583 South 1700 East

Vernal, Utah84078

(Address of principal executive offices)

435-789-0594435-789-0594

(Issuer’s telephone number)

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

Securities Registered Pursuant to Section 12(b) of the Exchange Act:

Securities Registered Pursuant to Section 12(g) of the Exchange Act: None

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 ☒

Yes [  ] No [X]

There were 24,313,31228,235,001 shares of common stock, $0.001 par value, issued and outstanding as of November 9, 2017.May 13, 2022.

Superior Drilling Products, Inc.

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2017March 31, 2022

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION.

Item 1. Financial Statements

Superior Drilling Products, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

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

Superior Drilling Products, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

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

Superior Drilling Products, Inc.

Condensed Consolidated Statements Of Cash Flowsof Shareholders’ Equity

(Unaudited)

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

Superior Drilling Products, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2017March 31, 2022

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

Superior Drilling Products, Inc. (the “Company”, “SDPI”, “we”, “our” or “us”) is aan innovative drilling and completion tool technology company providing cost saving solutions that drive production efficiencies for the oil and natural gas drilling industry. TheOur 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 designs, engineers, manufactures, sells,is a manufacturer and repairsrefurbisher 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. Our headquarters and completion tools.manufacturing operations are located in Vernal, Utah.

Our subsidiaries include (a) Superior Drilling Solutions, LLC (previously known as Superior Drilling Products, LLC), a Utah limited liability company (“SDS”), together with its wholly owned subsidiary Superior Design and Fabrication, LLC, a Utah limited liability company (“SDF”), (b) Extreme Technologies, LLC, a Utah limited liability company (“ET”), (c) Meier Properties Series, LLC, a Utah limited liability company (“MPS”), (d) Meier Leasing, LLC, a Utah limited liability company (“ML”), and (e) HR.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). These exemptions will apply for a period of five years following the completion of our IPO, which occurred in May 2014, although if the market value of our common stock that is held by nonaffiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31.

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 earn royalty commission revenue when our customer invoices their customer for the use of the tools. The Company may act as an agent by billing and collecting its customers’ tool rental revenue. When we are an agent for our customer, revenue is presented in the statement of operations on a net basis. At September 30, 2017, there was approximately $80,850 of accounts receivable and approximately $94,000 of accounts payable related to transactions we performed as an agent for our customer. At September 30, 2016, there was approximately $270,000 of accounts receivable and approximately $321,000 of accounts payable related to transactions we performed as an agent for our customer.

Unaudited Interim Financial Presentation

These unaudited interim condensed consolidated condensed financial statements for the three and nine months ended September 30, 2017March 31, 2022 and 2016,2021, and the related footnote disclosures included herein, are unaudited. However, in the opinion of management, these unaudited condensed consolidated 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, 2017March 31, 2022 are not necessarily indicative of the results of operations expected for the year ended December 31, 2017.2022. These unaudited interim condensed consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the yearsyear ended December 31, 2016 and 20152021 and the notes thereto, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2021, filed with the Securities and Exchange Commission (the “SEC”).

Segment Reporting

We operate as a single operating segment, which reflects how we manage our business. We operate in North America and the Middle East. See note 9.

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.

Concentrations of Credit Risk

The Company has two significant customers that represented 90% and 85% of its revenue for the three months ended March 31, 2022 and 2021, respectively. These customers had approximately $2,137,000 and $846,000 in accounts receivable as of March 31, 2022 and 2021, respectively.

The Company had two vendors that represented 13% of its purchases for the three months ended March 31, 2022. These vendors had approximately $122,000 in accounts payable as of March 31, 2022 and purchases in the three months of ended March 31, 2022 from these vendors totaled approximately $274,000. The Company had two vendors that represented 22% of its purchases for the three months ended March 31, 2021. These vendors had approximately $221,000 in accounts payable as of March 31, 2021 and purchases in the three months ended March 31, 2021 from these vendors totaled approximately $239,000.

Restatement of the Consolidated Financial Statements

The purpose of this restatement is to correct an error in the Company’s previously issued financial statements for the year ended March 31, 2021 in connection with the classification of $65,720 of inventory converted to property, plant and equipment reported within the Supplemental Information section of the Statement of Cash Flows. The $65,720 in inventory converted to property, plant and equipment has now been re-classified to purchases of property, plant and equipment in the Cash Flows from Investing Activities section of the Statement of Cash Flows.

There was no effect of the restatement to the Company’s condensed consolidated balance sheet, condensed consolidated statement of operations and condensed consolidated statement of shareholders’ equity for the quarter ended March 31, 2021.

In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality (“SAB 99”) and Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), the Company has determined that the impact of adjustments relating to the correction of this accounting error are not material to previously issued annual audited and unaudited interim financial statements.

The effects of the restatement on the Company’s consolidated statement of cash flows for the quarter ended March 31, 2021 are as follows:

SCHEDULE OF RESTATEMENT OF CONSOLIDATED STATEMENT OF CASH FLOWS

There was no impact to net cash provided from financing activities within our consolidated statement of cash flows nor was there an impact on the net change in cash resulting from restatement.

Uncertain Tax Matters

The Company believes it has appropriately accrued for the expected outcome of uncertain tax matters and believes such liabilities represent a reasonable provision for taxes ultimately expected to be paid; however, these liabilities may need to be adjusted as new information becomes known and as tax examinations continue to progress, or as settlements or litigations occur.

Recent Accounting StandardsPronouncements

There are no recently issued accounting pronouncements that we have not yet adopted that we believe will have a material effect on our financial statements.

Income Tax Expense

The Company recorded income tax expense during the quarter of $31,384 with income before income taxes of $181,221. In the U.S. the Company has not generated a tax liability due to incurring taxable losses.

In May 2014,NOTE 2. REVENUE

Our revenue is derived from short-term contracts. Revenue is recognized when we satisfy a performance obligation by transferring control of the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidanceour customers at a point in U.S. GAAP when it becomes effective. In August 2015,time, in an amount that reflects the FASB issued ASU No. 2015-14,consideration the Company expects to be entitled to in exchange for those goods or services. We also assess our customer’s ability and intention to pay, which is based on a variety of factors including our customer’s historical payment experience and financial condition. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 days.

Revenue generally does not include right of return or other significant post-delivery obligations. Revenue is recognized net of any taxes collected from Contracts with Customers (“ASU 2015-14”), which deferred the effective date of ASU 2014-09 for all entities by one year.The Company will adopt this guidance on January 1, 2019.ASU 2015-14 permits the use of either the retrospective or cumulative effect transition method. We have not yet selected a transition method nor has the effect of the standard on ongoing financial reporting been determined.

In February 2016, the FASB issued ASU No. 2016-02, “Leases,” which introduces the recognition of lease assets and lease liabilities by lessees for all leasescustomers, which are subsequently remitted to governmental authorities. We elected to treat shipping and handling costs as a fulfillment cost instead of as a separate performance obligation. We recognize the cost for shipping and handling when incurred as an expense in cost of sales.

All of our contracts are less than one year in duration. We do not short-term in nature. The new standard requires a modified retrospective transitiondisclose the value of unsatisfied performance obligations for capital(i) contracts with an original expected length of one year or operating leases existingless and (ii) contracts for which we recognize revenue at or entered into after the beginning ofamount to which we have the earliest comparative period presented in the financial statements. The Company will adopt this guidance on January 1, 2019. The Company is currently evaluating the impact the pronouncement will have on the consolidated financial statements and related disclosure.right to invoice for services performed.

NOTE 2. LIQUIDITY

Disaggregation of Revenue

Approximately 91% of our revenue is from North America and approximately 9% is from the Middle East for the three months ended March 31, 2022. For the three months ended March 31, 2021, approximately 86% of our revenue was from North America and approximately 14% was from the Middle East.

Revenue disaggregated by revenue source are as follows:

SCHEDULE OF REVENUE DISAGGREGATED BY REVENUE

Contract Costs

We do not incur any material costs of obtaining contracts.

Contract Balances

Under our sales contracts, we invoice customers after our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under ASC 606.

At September 30, 2017, we had a working capital deficit of approximately $1,800,000. The Company’s manufacturing facility is financed by a commercial bank loan with principal of $4,200,000 due August 15, 2018 (see Note 7 – Long-Term Debt). The classification of this debt from long-term to short-term resulted in a working capital deficit at September 30, 2017. The Company plans to work with its lender to refinance its commercial bank loan in the first half of 2018. Additionally, approximately $626,000 is included in accrued liabilities related to the exercise of the option to purchase machinery under our expired capital lease agreement (see Note 7 – Long-Term Debt). Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. Our operational and financial strategies include managing our operating costs, working capital and debt to enhance liquidity. We will continue to work to grow revenue and review additional cost containment measures and be cash flow positive in 2017. If we are unable to do this 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

NOTE 3. INVENTORIES

Inventories isare comprised of the following:

SCHEDULE OF INVENTORIES

NOTE 4. 4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are comprised of the following:

SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT

The Company sold its airplane hangar for a gain of $10,000 in February 2021.

Depreciation expense related to property, plant and equipment for the three and nine months ended September 30, 2017March 31, 2022 and 2021 was $296,170$369,066 and $910,232, respectively, and for the three and nine months ended September 30, 2016 was $320,583 and $1,544,215,$398,408, respectively.

NOTE 5. 5. INTANGIBLE ASSETS

Intangible assets are comprised of the following:

SCHEDULE OF INTANGIBLE ASSETS

Amortization expense related to intangible assets for the three and nine months ended September 30, 2017March 31, 2022 and September 30, 20162021 was $611,667$41,667 and $1,835,000,$291,666, 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, 2017, the Company reviewed the net balance of the intangible assets and determined no impairment was needed.

NOTE 6. 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,Tronco is an entity owned by Troy and Annette Meier. Effective August 2017, the Company fully reserved the related party note receivable of $6,979,043, which reduced the related party note receivable balance to $0. The Company will record a recovery of the loan upon our fullreceiving repayment of the note or interest in other income. On July 7, 2020, the Company entered into an amended and restated loan agreement and note with Tronco loan fromchanging the proceeds ofpayment terms on the Offering,note. As amended, the lender would assign to us all of its rights under the Tronco loan, including all of the collateral documents. On May 30, 2014, we closed our purchase of the Tronco loan for a total payoff of $8.3 million, including principal, interest, and early termination fees. As a result of that purchase, we became Tronco’s senior secured lender, and as a result are entitled to receive all proceeds from sales of the Tronco-owned collateral, as discussed below.

The interest rate on the note is 4.5%. We earned interest of $87,867 and $251,600 for the three and nine months ended September 30, 2017, respectively, and interest of $78,421 and $233,558 for the three and nine months ended September 30, 2016, respectively.

On March 28, 2017, the Company and Tronco finalized an agreement with a third party and pursuant to this agreement, the third party acquired all of the Ohio assets of Tronco for $550,000. As Tronco’s senior secured lender, we agreed to release our lien and security interest on these assets in accordance with the agreement. fixed at 2% per annum. The Company agreed to a non-cash receipt of the $550,000 from Tronco by reducing our bonus accrual liabilities, which was earned by the Meiers in 2014 but not paid, and was recorded in other long-term liability. As a result of this agreement, we reduced both the other long-term liability and the Tronco related party note receivable during the first quarter of 2017.

On August 8, 2017, the Board of Directors agreed to extend the terms of the Tronco loan to interest only payments due December 31, 2017, 2018, 2019, 2020, and 2021,matures 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.2022. The Tronco loannote balance, including accrued interest, as of March 31, 2022 was approximately $6,783,000 and December 31, 2021 was approximately $6,749,000. The Company 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 theirhold 8,267,860 shares of our commonthe Company’s 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 Company holds 8,267,860 shares and 530,725 restricted stock units as collateral for the Tronco note as of September 30, 2017.collateral.

NOTE 7. 7. LONG-TERM DEBT

Long-term debt is comprised of the following:

SCHEDULE OF LONG-TERM DEBT INSTRUMENTS

Real Estate Loans

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

On February 9, 2017, the Company sold real estate to Superior Auto Body (“SAB”), a related party, for the net proceeds of $2.5 million. The cash received from the sale was used to pay down the $2.5 million loan balance on the property. As part of the sale, the Company released 547,000 shares of the Meiers common stock from the collateral for the Tronco note (see Note 6 – Related Party Note Receivable).

Hard Rock Note

In 2014, the Company purchased all of the interests of Hard Rock Solutions, LLC (“Hard Rock”). Consideration consisted of $12.5$12.5 million paid in cash at closing and a $12.5$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 in the closing of theto Hard Rock acquisition. At issuance, the fair value of theRock.

The Hard Rock Note was determined to be $11,144,000, which is less than the face value due tohas a below-market interest rate. The resulting discountremaining balance of $1,356,000 will be amortized to interest expense using the effective interest method, totaling approximately $19,657 and $59,766 for the three and nine months ended September 30, 2017, respectively.

On August 10, 2016, certain$750,000 as 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 NoteMarch 31, 2022, accrues interest at 5.75%8.00% per annum and matures and is fully payable on January 15, 2020. Under the current terms of the Hard Rock Note, we are required to make the following remaining payments: $2,000,000 in total principal plus accruedOctober 5, 2022. The Company paid an interest in 2018 through four $500,000 in principal plus accrued interest paymentspayment on each of January 15, March 15, May 15 and July 15, 2018, and $1,000,000 in principal plus accrued interest on each of January 15, March 15, May 15 and July 15, 2019 for a total of $4,000,000 in principal and accrued interest. The remaining balance of principal of $2,000,000 and accrued interest on the Hard Rock Note are due on January 15, 2020. During 2017, we made accrued interest payments related to the note on January 15, 2017, March 15, 2017, May 15, 2017,20, 2022 of $17,589 and is obligated to pay interest payments on April 5, 2022 and July 15, 20175, 2022 prior to the full payment due on October 5, 2022. In April, the Company made the accrued interest payment of $129,808, $74,356, $76,877, and $76,877, respectively.$12,328.77.

Capital Lease

Credit Agreement

In 2012, weFebruary 2019, the Company entered into a leaseLoan and Security Agreement (the “Credit Agreement”) with Austin Financial Services, Inc. (“AFS”). The Credit Agreement provides a $4,300,000 credit facility, which includes a $800,000 term loan (the “Term Loan”) and a $3,500,000 line of credit (the “LOC”). The Credit Agreement matures on February 20, 2023, subject to early termination pursuant to the terms of the agreement or extension as may be agreed by the parties.

As of March 31, 2022, we had approximately $250,000 outstanding on the Term Loan and approximately $1,000,000 outstanding on the LOC. Amounts outstanding under the LOC at any time may not exceed the sum of: (a) up to 85% of accounts receivable or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect (less a dilution reserve as determined by AFS in its sole good faith discretion), plus (b) the lesser of (i) up to 50% of inventory or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect, or (ii) the inventory sublimit, minus (c) the borrowing base reserve as may be determined from time to time by AFS.

The Credit Agreement contains various restrictive covenants that, among other things, limit or restrict the ability of the borrowers to incur additional indebtedness; incur additional liens; make dividends and other restricted payments; make investments; engage in mergers, acquisitions and dispositions; make optional prepayments of other indebtedness; engage in transactions with affiliates; and enter into restrictive agreements. The Credit Agreement does not include any financial covenants. If an event of default occurs, the lenders are entitled to accelerate the advances made thereunder and exercise rights against the collateral. Borrowing under the LOC is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause. As of March 31, 2022, we were in compliance with the covenants in the Credit Agreement.

The interest rate for machinerythe Term Loan and the LOC is prime plus 2%. As of March 31, 2022, the interest rate for the Term Loan was 9.10%, which was capitalizedincludes a 3.6% management fee rate. Even if our borrowings under the LOC are less than $1,000,000, we still pay interest as if we had borrowed $1,000,000. As of March 31, 2022, we had approximately $10,000 of accrued interest. The obligations of the Company under the Credit Agreement are secured by a security interest in substantially all of the tangible and intangible assets of the Company, other than any assets owned by the Company and accordingly, the machinery and the related obligation under the lease were includedthat constitute real property (and fixtures affixed to such real property), certain excluded equipment or intellectual property. A collateral management fee is payable monthly on the used portion of the LOC and Term Loan.

NOTE 8. FINANCING OBLIGATION

On December 7, 2020, the Company entered into a sale agreement (the “Sale Agreement”). Pursuant to the terms of the Sale Agreement, the Company sold land and property related to the Company’s balance sheet. Theheadquarters and manufacturing facility in Vernal, Utah (the “Property”) for a purchase price of $4,448,500. Concurrent with the sale of the Property, the Company entered into a fifteen-year lease had a five-year termagreement (the “Lease Agreement”), whereby the Company will lease back the Property at an annual rate of $311,395 with payments made monthly, subject to annual rent increases of 1.5%. Under the Lease Agreement, the Company has an option to buyextend the asset or renewterm of the lease. On August 31, 2017,lease and to repurchase the Property. Due to this repurchase option, the Company exercisedwas unable to account for the option to purchasetransfer as a sale under ASC Topic 842, Leases, and as such, the machinerytransaction is a failed sale-leaseback that is accounted for $690,000, which is due in November 2017. Asas a financing transaction.

The Company received cash of September 30, 2017, the Company owed $626,000$1,622,106, retired real estate debt of $2,638,773 and recorded a financing obligation liability of $4,260,879 related to the original lessortransaction. There was no gain recorded since sale accounting was precluded. The financing obligation has an implied interest rate of 6.0%. At the conclusion of the fifteen-year lease period, the financing obligation residual is estimated to be $2,188,710, which corresponds to the carrying value of the property. The balance of the financing obligation as of March 31, 2022 and December 31, 2021 was included in accrued expenses.$4,161,539 and $4,178,336, respectively.

The financing obligation is summarized below:

SCHEDULE OF FINANCING OBLIGATION

NOTE 9. GEOGRAPHICAL OPERATIONS INFORMATION

The following summarizes revenue by geographic location:

SCHEDULE OF REVENUE AND PROPERTY, PLANT AND EQUIPMENT BY GEOGRAPHIC LOCATION

The following summarizes net property, plant and equipment by geographic location:

SCHEDULE OF NET PROPERTY, PLANT AND EQUIPMENT BY GEOGRAPHIC LOCATION

NOTE 8. 10. COMMITMENTS AND CONTINGENCIES

We are subject to litigation that arises from time to time in the ordinary course of our business activities. We are not currently involvedIn February 2019, the Company filed a patent infringement lawsuit in any litigation which management believes could have a material effectthe United States District Court for the Western District of Louisiana, Lafayette Division, asserting that Stabil Drill Specialties, LLC’s (“Stabil Drill”) Smoothbore Eccentric Reamer infringes the patents of Extreme Technologies, LLC (one of our subsidiaries) on our financial position or resultspatented Drill-N-Ream well bore conditioning tool. The lawsuit was subsequently moved from Louisiana to the United States District Court for the Southern District of operations, except as follows:

Del Rio Suit

In October 2013, Del-Rio Resources, Inc.Texas, Houston Division. Additionally, on May 20, 2019, Extreme Technologies, LLC sued Short Bit & Tool Co. and Lot William Short, Jr. (“Del-Rio”Defendants”) filed suit, on its own behalf and derivatively on behalf of Philco Exploration, LLC (“Philco”), against the following co-defendants (a) Tronco Ohio, LLC and Tronco, (b) the lender on the Tronco loan, ACF Property Management, Inc. (p.k.a. Fortuna Asset Management, LLC,) (“ACF”), (c) Troy and Annette Meier personally, and several of their family trusts, (d) Meier Family Holding Company, LLC and Meier Management Company, LLC, and (e) SDS and MPS in the Eighth JudicialNorthern District Court, Uintah County, Utah Cause #130800125 (the “Suit”). On May 11, 2017, pursuant to a mediation proceeding, allof Texas-Dallas Division for their work manufacturing the Smoothbore Eccentric Reamer for Stabil Drill. The Dallas lawsuit is stayed pending resolution of the plaintiffs and remaining defendantsfirst-filed, Houston suit. On October 1, 2020, Superior Energy Services, Stabil Drill’s parent company, filed for bankruptcy, which resulted in the Suit executed a Settlement Agreement whereby eachbrief, automatic stay of the parties have released all of theirlitigation. Superior Energy Services announced on February 2, 2021, that it successfully completed its financial restructuring and emerged from Chapter 11 bankruptcy, but this bankruptcy did not affect Extreme Technologies claims against Stabil Drill. On March 9, 2021, the otherCourt lifted the automatic bankruptcy stay, and on May 12, 2021, the Court denied Stabil drill’s motion for summary judgment of non-infringement. The parties are preparing this case for trial and expect a jury trial setting in late 2022 or early 2023.

NOTE 11. SHAREHOLDERS’ EQUITY

The Company is authorized to the Suit without liability, effective asissue 100,000,000 shares of common stock, par value $0.001. As of March 31, 2022 and December 31, 2021, the number of common shares issued and outstanding was 28,235,001.

The Company did not grant stock options or stock awards during the three months ended March 31, 2022 and 2021, respectively.

NOTE 12. SUBSEQUENT EVENTS

On March 22, 2017. Such release includes2022, the Company’s two subsidiaries that wereCompany entered into an agreement with Mazak to purchase a partynew CNC machine for $956,000. A down payment of $286,800 was used to secure the Suit, SDSasset. The machine was received on 4/14/2022 and, MPS, as well as Troy and Annette Meier personally and all of their family trusts named as defendants in the Suit. As a resultupon acceptance of the execution of the Settlement Agreement, a Stipulated Motion for Dismissal with Prejudice was filed with the Court which includes a form of Order of Dismissal with Prejudice (the “Court Order”). On May 15, 2017, the Court Order was executed by the judge and the Suit was formally dismissed with prejudice.

NOTE 9. RELATED PARTY TRANSACTIONS

In 2014, the Company issued notes payable to related parties in the amount of $2 million. The notes bear interest at 7.5% and were scheduled to mature on January 2, 2017. The Company made principal payments of $50,000 in January 2017 and $24,000 in May 2017. Based on an informal agreement,machine, the Company will continue to reducefinance the remaining balance on the note in 2017 against the interest due to the Company on the Tronco related party note receivable (see Note 6 – Related Party Note Receivable) instead of repaying the note.$669,200.

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, 2017,March 31, 2022, and our results of operations for the three and nine months ended September 30, 2017March 31, 2022 and 2016.2021. 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, 20162021 and 2015,2020, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2021, 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). These exemptions will apply for a period of five years following the completion of our IPO, which occurred in May 2014, although if the market value of our common stock that is held by nonaffiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31.

Forward -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. TheseThe forward-looking statements include the following types of information and statements as they relate to the Company:

These statementscontained in or incorporated by reference into this Form 10-K are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and analyses in consideration of the Company’s experience and perception of historical trends, currentassumptions reflect our best judgment based on currently known market 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 naturefactors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve substantiala number of risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements.are beyond our control, including:

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, 2016 and the following:

Many of suchthese factors are beyond the Company’sour ability to control or predict. AnyThese factors are not intended to represent a complete list of the general or specific factors or a combination of these factors, could materiallythat may affect the Company’s future results of operationsus. The events in Ukraine, Russia, and the ultimate accuracy ofsurrounding areas may result in political instability and may add a potential risk.

In addition, management’s assumptions about future events may prove to be inaccurate. All readers are cautioned that the forward-looking statements. Management cautions against putting undue reliancestatements contained in this Quarterly Report on Form 10-Q are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or that the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements or projecting any future results baseddue to factors described in “Item 1A. Risk Factors” in our annual report on suchform 10-K for the year ended December 31, 2021 and in our subsequent SEC filings. All forward-looking statements or present or prior earnings levels. Every forward-looking statement speaksspeak only as of the date of the particular statement, and the Company undertakes no obligationthey are made. We do not intend to publicly update or revise any forward-looking statement.statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

OverviewExecutive Summary

Superior Drilling Products, Inc. (the “Company”, “SDPI”, “we”, “our” or “us”) is an innovativeWe innovate, design, engineer, manufacture, sell, and repair drilling and completion tool technology company providing cost saving solutions that drive production efficiencies fortools in 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”)United States, Canada, and the patented Strider™ Drill String Oscillation System technology (“Strider technology”). In addition, the Company is a manufacturer and refurbisher of PDC (polycrystalline diamond compact) drill bits for a leading oil field services company. We operate a state-of-the-art drill tool fabrication facility, where we manufacture solutions for the drilling industry, as well as customers’ custom products. The Company’s strategy for growth is to leverage its expertise in innovative drill tool technology and precision machining in order to broaden its product offerings and solutions for the oil and gas industry.Middle East.

We currently have three basic operations:

FromOur strategy for growth is to expand the global market penetration of our headquarterscurrent drilling tool solutions and to leverage our expertise in Vernal, Utah, we operate a technologically-advanced PDC drill bit refurbishing facility, as well as a state-of-the-art, high-tech drilling tool technologies and completion tool engineering design and manufacturing operation. We manufactureprecision machining in order to broaden 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.

Our co-founder, Troy Meier, developed the first commercially-viable process for refurbishing PDC drill bits after a successful 13-year career with a predecessor of Baker Hughes Inc. For the past 21 years, we have exclusively provided our PDC drill bit refurbishing services for the Rocky Mountain, California and Alaska regions of Baker Hughes’s oilfield operations. In addition, we have expanded our offerings and our customer base by demonstrating our engineering, design and manufacturing expertise to develop our own down-hole drilling tools. We continuously work with our customers to develop new products and enhancements to existing products, improve efficiency and safety, and solve complex drilling tool problems.

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

Oil and Gas Drilling Industry

Overview

Drilling and completion of oil and gas wells are upstream operations in the oil & 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 and Stabilization; Industry Volatility.Our business is highly dependent upon the vibrancy of the oil and gas industry, as well as other industries that require precision machining and quality. We believe through our patented technologies, as well as technologies under development, that we can offer the oil and gas industry the solutions it demands to improve drilling efficiencies and reduce production costs.

Recent Developments and Trends

Currently we are experiencing raw material delays and difficulties in hiring and retaining direct laborers. The COVID-19 pandemic has caused and continues to cause disruption to the U.S. and global economies, including the impact of government and company actions to reduce the spread of the virus and consumer behavior in response to the same; and, although the United States and other countries have continued to roll out vaccinations, it is uncertain how quickly and effectively such vaccinations will be distributed or help to control the spread of COVID-19 and its variants. We continue to actively monitor the impacts and potential impacts of the COVID-19 pandemic in all aspects of our business. Although we are unable to predict the total impact of the COVID-19 pandemic on our business, results of operations, liquidity or capital resources at this time, we expect we may be negatively affected if the pandemic and related public health measures result in substantial manufacturing or supply chain problems, disruptions in local and global future economies, volatility in the U.S. Worldwide military, politicalglobal financial markets, overall reductions in demand, delays in payment, restrictions on the shipment of our products, or other ramifications. These current conditions are a result of COVID-19.

The Russia – Ukraine conflict is a global concern. The Company does not have any direct exposure to Russia or Ukraine through its operations, employee base, investments or sanctions. The Company does not receive goods or services sourced from those countries, does not anticipate any disruption in its supply chain and economic eventshas no business relationships, connections to or assets in Russia, Belarus or Ukraine. No impairments to assets have contributedbeen made due to the conflict. The global oil industry has been impacted by this situation, but the Company’s operations and natural gas price volatility and are likely to continue to do sobusiness in the future. Very soon after the completion of our initial public offeringMiddle East has not been disrupted to date. The increase in late May 2014 and through early 2016, oil prices dramatically declinedproducing activities in the United States and as a result,has benefitted the number of operating drill rigs was measurably reduced. The NYMEX-WTI oil price was as low as $26.19 in February 2016, whileCompany’s operations. We are unable at this time to know the NYMEX-Henry Hub natural gas price was as low as $1.49 per MMBtu in March 2016. The Baker Hughes weekly rotary rig count decreased over 70% from the high of 1,931 on September 13, 2014 to a historic low of 404 as of May 27, 2016.

During the downturn in 2015 and 2016, our business with Baker Hughes decreased measurably as a resultfull ramifications of the decline in drilling activity. This severely impacted both pricingRussia – Ukraine conflict and volume for drill bit refurbishment. We are contracted with Baker Hughes to serve the Rocky Mountain region that includes the Bakken shale formation in North Dakota. This region is higher cost production and as such, the drill rig count reduction was more dramatic than the overall U.S rig count decline. During the second half of calendar year 2016 and into 2017, theits effects on our business.

The total U.S. rig count began to increase from the historic low in May 2016 to 913 as of October 20, 2017. With this increase in market activity, we have seen an increase in demand for our product and services, however we have not seen an increase in pricing. The rate of growth in rig count stabilized in July 2017 and is expected to not increase at the same rate as it has over the last twelve months.

Lower oil and natural gas prices combined with the advent of horizontal drilling requires new technologies. We believe the value of our Drill-N- Ream tool and Strider technology combined with our low market penetration provide us sales opportunities in soft as well as robust markets.

The oil and gas industry is increasingly using directional (e.g., horizontal) drilling in their exploration and production activities because of measurably improved recovery rates that can be achieved with these methods. With the rise of this type of drilling, traditional drill string tools used for vertical drilling do not necessarily provide the best performance or are not well suited for directional drilling.

We believe that our Drill-N-Ream tool and Strider technology have proven to provide significant operational efficiencies and costs savings for horizontal drilling activity. In addition, we are developing additional technologies to take advantage of the oil and gas industry’s significant shift to horizontal/directional drilling and its resulting need for new drill string tools and technology.

We expect that with our extensive knowledge and experience in the oilfield industry, we can identify additional challenges with directional drilling, and then design and develop tools that will help our customers with their drilling challenges. Further development of additional drill string components, such as our Drill-N-Ream and Strider technology, will become increasingly important to our business as we continue to grow through both organic expansion and strategic acquisitions.

GE Oil & Gas to merge with Baker Hughes. In October 2016, GE Oil and Gas and Baker Hughes announced an agreement to combine their businesses. Currently, Baker Hughes is our sole customer for our bit refurbishment business and we do not know how this merger may impact our business. Despite this, we intend to continue developing our long-time relationship with Baker Hughes. In January 2016, the Company entered into an agreement with Baker Hughes to supply them with the Strider technology with our Open Hole Strider tool and related services. Tool shipments associated with the agreement are expected to begin in early 2018. The agreement has no set expiration date or minimum shipment requirement. It will remain in force until it is canceledreported by either us or Baker Hughes as stipulated inof April 29, 2022 was 698 rigs, an increase of 112 rigs from the agreement. rig count as of December 31, 2021. We expect North American onshore activity to continue to improve throughout 2022 compared with 2021.

The Middle East market is a softer market due to the COVID-19 impact. Although this segment of our business is rebounding, the improvements are at a slower rate compared with the Company’s current agreement with Baker Hughes regarding drill bit refurbishment has been extended until January 28, 2018. The Company is currently negotiating an agreement renewal with Baker Hughes that is expected to replace the existing agreement.domestic market.

CONSOLIDATED RESULTS OF OPERATIONS

Three Months Ended March 31,2022 Compared with the Three Months Ended March 31, 2021

The following table represents our condensedsummary consolidated statement of operationsoperating results for the periods indicated:

Material changes of certain items in our statements of operations included in our financial statements for the comparative periods are discussed below. Comparisons are to the prior-year period unless stated otherwise.

During 2016, the Company changed its revenue model from primarily renting tools to primarily selling tools. In May 2016, the Company entered into a distribution agreement with Drilling Tools International, Inc., (“DTI”), under which they purchase our Drill-N-Ream tool for their rental tool business. As part of this agreement, DTI also hired much of our field sales team and purchased the related vehicles associated with our previous rental tool business in the second half of 2016. In order to maintain exclusivity of the Drill-N-Ream Tool in the U.S. and Canada, the agreement required DTI to achieve 10% market share, defined as 10% of the average horizontal rig count in the 30 days prior to June 30, 2017. As a result of DTI’s successful efforts to achieve this 10% market share, our sales grew measurably when compared

Three Months Ended March 31, 2022 Compared with the prior-year period.Three Months Ended March 31, 2021

For the three months ended September 30, 2017, as compared with the three months ended September 30, 2016

Revenue. Our revenue increased approximately $2,186,000, during the three months ended September 30, 2017 compared with the same period in 2016.$1,705,000 or 70%. Tool revenue increased $1,105,000 or 66% from the prior-year period while contract services increased $600,000 or 79%. Revenue increased as the Company had improved capacity to meet growing demand for third quarter 2017 was $3,182,000 which was comprised of approximately $2,012,000 of tool rentalbit and sales revenue and approximately $1,170,000 of other related revenue. Other related revenue includes royalty fees, maintenance and repair of tools. Tool revenue for third quarter 2016 was approximately $1,845,000 which was comprised of approximately $1,726,000 of tool rental and sales revenue and approximately $119,000 of other related revenue. Tool revenue for the third quarter 2017 grewtoll manufacturing services as a result of thewell as continued increase in U.S. drilling activity from 2016 to 2017, and the Company’s channel partner’s efforts to retain its exclusivitygrowth in the U.S.number of end users and Canada by achieving its increasing market share targets.percentage of rigs using our Drill-N-Ream tool. Higher Contract servicesServices revenue also grew with improved capacity to deliver on increased 204% to approximately $1,264,000 for the three months ended September 30, 2017 compared with approximately $417,000 for the same period in 2016 as a result of the increase in drilling activity in 2017, which drove demandvolume for drill bit and other toll refurbishment as well asservices. Demand growth reflects customers increasing the Company receiving overflow drill bituse of outsource manufacturing and refurbishment work from outside its contracted territory.services and increased drilling activity driven by improved market conditions for the oil & gas industry.

Operating Costs and Expenses. Total operating costs and expenses increased approximately $503,000 during$444,000 for the three monthsthree-month period ended September 30, 2017 compared with the same period in 2016.March 31, 2022.

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

ForIncome Tax Expense. Income tax expense increased by approximately $14,000 from the nine months ended September 30, 2017 as compared with the nine months ended September 30, 2016prior year due to increased foreign income taxes due to increased revenues from foreign sources.

Revenue. Our revenue increased approximately $7,046,000, during the nine months ended September 30, 2017 compared with the same period in 2016. Tool revenue for the nine months ended September 30, 2017 was approximately $7,938,000 which was comprised

Liquidity and Capital Resources

As of March 31, 2022, we had working capital of approximately $5,257,000 of tool rental and sales revenue and approximately $2,681,000 of other related revenue. Other related revenue includes royalty fees, maintenance and repair of tools and agency fees. Tool revenue for the nine months ended September 30, 2016 was approximately $3,687,000 which was comprised of approximately $3,474,000 of tool rental and sales revenue and approximately $213,000 of other related revenue Tool revenue for the nine months of 2017 grew as a result of the Company’s shift in business model in May 2016 from a rental tool business to a tool sales business, the increase in U.S. drilling activity from 2016 to 2017 and the Company’s channel partner’s efforts to retain its exclusivity in the U.S. and Canada by achieving its increasing market share targets. Contract services revenue increased 247% to approximately $3,927,000 for the nine months ended September 30, 2017 compared with approximately $1,133,000 for the same period in 2016 as a result of the increase in drilling activity in 2017 driving demand for its drill bit refurbishment capabilities.

Operating Costs and Expenses. Total operating costs and expenses increased approximately $118,000 during the nine months ended September 30, 2017 compared with the same period in 2016.

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

Liquidity

At September 30, 2017, we had a working capital deficit of approximately $1,800,000. The Company’s manufacturing facility is financed by a commercial bank loan with principal of $4,200,000 due August 15, 2018 (see Note 7 – Long-Term Debt). The classification of this debt from long-term to short-term resulted in a working capital deficit at September 30, 2017. The Company plans to work with its lender to refinance its commercial bank loan in the first half of 2018. Additionally, approximately $626,000 is included in accrued liabilities related to the exercise of the option to purchase machinery under our expired capital lease agreement (see Note 7 – Long-Term Debt).$3,094,000. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments. In February 2017, the Company received approximately $2,483,000 related to the sale of the SAB facilities, and we used the proceeds to repay the mortgage related to the SAB property of approximately $2,500,000. Our operational and financial strategies include managing our operating costs and capital spending to reflect revenue trends, accelerating collections of international receivables, and controlling our working capital and debt to enhance liquidity. We will continue to work to grow revenue and review additional cost containment measuresmanage costs and expect to be cash flow positive in 2017.2022. If we are unable to do this, 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.

Public Offering: On September 30, 2016, we priced

The Hard Rock Note had a follow-on public offeringremaining balance of common stock$750,000 as of March 31, 2022, accrues interest at $1.008.00% per share. The transaction closedannum and is fully payable with accrued interest on October 5, 2016. Net2022.

Our Credit Agreement facilitated by Austin Financial Services (“AFS”) is comprised of underwriting expenses$800,000 Term Loan and $3,500,000 Line of $452,500, stock offering expenses of $256,419, net proceeds were approximately $5.0 million. The Company used the proceeds to repay its $1 million bridge financing entered into the summer of 2016, Federal National Commercial Credit (“FNCC”) indebtedness of $868,000 and pay the remaining $500,000 plus accrued interest on the Hard Rock Note. We have used the remaining $2.6 million from the offering to service on going debt obligations, which include real property leases and equipment loans, as well as for general corporate purposes, including growth working capital. The Bridge Financing Agreement and the FNCC lending agreement were both terminated upon the repayment on October 5, 2016.

Hard Rock Note: On August 10, 2016, certain of our subsidiaries entered into an amended and restated note with the seller in our acquisition of Hard Rock Solutions, LLC (as so amended and restated, the “Hard Rock Note”LOC”). As amendedof March 31, 2022, we had approximately $250,000 outstanding on the Term Loan and restated,approximately $1,000,000 outstanding on the Hard Rock Note accruesLOC. Amounts outstanding under the LOC at any time may not exceed the sum of: (a) up to 85% of accounts receivable or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect (less a dilution reserve as determined by AFS in its sole good faith discretion), plus (b) the lesser of (i) up to 50% of inventory or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect, or (ii) the inventory sublimit, minus (c) the borrowing base reserve as may be determined from time to time by AFS. A collateral management fee is payable monthly on the used portion of the LOC and Term Loan. If our borrowings are less than $1,000,000, we still pay interest at 5.75% per annumas if we had borrowed $1,000,000. As of March 31, 2022 we had approximately $10,000 of accrued interest combined between the two loans.

The interest rate for the Term Loan and the LOC is prime plus 2%. As of March 31, 2022 the interest rate for both loans was 9.10%, which includes a 3.6% management fee rate. The obligations of the Company under the agreement are secured by a security interest in substantially all of the tangible and intangible assets of the Company, other than any assets owned by the Company that constitute real property (and fixtures affixed to such real property), certain excluded equipment, intellectual property, or aircraft. The Credit Agreement matures on January 15, 2020. UnderFebruary 20, 2023, and the current terms ofCompany plans to refinance this credit facility.

Cash Flows

Three-Months Ended March 31, 2022 Compared with the Hard Rock Note, we are required to make the following remaining payments: $500,000 in principal plus accrued interest on each of January 15,Three- Months Ended March 15, May 15 and July 15, 2018, and $1,000,000 in principal plus accrued interest on each of January 15, March 15, May 15 and July 15, 2019. The remaining principal balance of $2,000,000 and accrued interest on the Hard Rock Note are due on January 15, 2020. During 2017, we made accrued interest payments related to the note on January 15, 2017, March 15, 2017, May 15, 2017 and July 15, 2017 of $129,808, $74,356, $76,877 and $76,877, respectively.31, 2021

Cash Flow

Operating Cash Flows

For the nine months ended September 30, 2017, netNet cash provided by our operating activities was approximately $1,351,000. The$1,083,000 and $205,000 for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022, the Company had approximately $507,000$152,000 of net income, approximately $1,494,000$308,000 increase in accounts receivable, a decrease in accounts payablethe changes of the current assets and accrued expenses of approximately $611,000 and a decrease inliabilities accounts, depreciation, and amortization expense of approximately $634,000.

Investing Cash Flows

$411,000. For the ninethree months ended September 30, 2017,March 31, 2021 the Company had approximately $1,102,000 of net loss approximately $455,000 increase in the change in current assets and liabilities accounts, and depreciation and amortization expense of approximately $690,000.

Net cash provided by ourused in investing activities for the three months ended March 31, 2022 was approximately $2,264,000. The Company received approximately $2,484,000 related to$919,000, which includes a down payment for new equipment and an investment in our Middle East tools, compared with $25,000 for the three months ended March 31, 2021 for the purchase of equipment net of proceeds from the sale of the SAB facilities. The Company used approximately $220,000company’s airplane hangar of $50,000 in investing activities for property, plant and equipment purchases.2021.

Financing Cash Flows

For the nine months ended September 30, 2017, netNet cash used in our financing activities was approximately $3,150,000 primarily attributable to a $2,500,000 loan repayment related to$132,000 for the SAB property thatthree months ended March 31, 2022. Net cash provided by financing activities was soldapproximately $121,000 for the three months ended March 31, 2021. Net borrowings on the line of credit was approximately $256,000 during the three months ended March 31, 2021 compared with zero in February 2017.the same period of 2022.

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,revenue, costs and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those discussed below. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. While we believe that the estimates and assumptions used in the preparation of our consolidated 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 not effective as of September 30, 2017 due to certain material weaknesses.March 31, 2022.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a possibility that a material misstatement in our interim financial statements will not be prevented or detected on a timely basis. During the course of our assessment, management identified that the Company has a lack of staffing and appropriate accounting expertise within its accounting department. Management believes the lack of accounting and financial personnel amounts to a material weakness in its internal control over financial reporting and their ability to adequately prepare financial statements and disclosures, and a lack of accounting expertise to appropriately apply GAAP for complex and non-routine transactions. As a result, at September 30, 2017 and on the date of this Report, its internal control over financial reporting is not effective.

To remediate these issues, management has retained the services of additional third party accounting personnel as well as to modify existing disclosure controls and procedures in a manner designed to ensure future compliance.

Changes in Internal Controls over Financial Reporting

NoneThere has been no change in our internal control over financial reporting that occurred during the first quarter of 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Internal Controls and Procedures

This quarterly report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the Company’ s registered public accounting firm due to a transaction period established by the rules of the Securities and Exchange Commission for newly public companies. Under these rules, we will not be required to include an attestation report for so for as long as we are an “emerging growtha “smaller reporting company” pursuant to the provisionsas defined in Rule 12b-2 of the JOBSExchange Act.

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 involvedIn February 2019, the Company filed a patent infringement lawsuit in any litigation which management believes could have a material effectthe United States District Court for the Western District of Louisiana, Lafayette Division, asserting that Stabil Drill Specialties, LLC’s (“Stabil Drill”) Smoothbore Eccentric Reamer infringes the patents of Extreme Technologies, LLC (one of our subsidiaries) on our financial position or resultspatented Drill-N-Ream well bore conditioning tool. The lawsuit was subsequently moved from Louisiana to the United States District Court for the Southern District of operations, except as follows:

In October 2013, Del-Rio Resources, Inc.Texas, Houston Division. Additionally, on May 20, 2019, Extreme Technologies, LLC sued Short Bit & Tool Co. and Lot William Short, Jr. (“Del-Rio”Defendants”) filed suit, on its own behalf and derivatively on behalf of Philco Exploration, LLC (“Philco”), against the following co-defendants (a) Tronco Ohio, LLC and Tronco, (b) the lender on the Tronco loan, ACF Property Management, Inc. (p.k.a. Fortuna Asset Management, LLC,) (“ACF”), (c) Troy and Annette Meier personally, and several of their family trusts, (d) Meier Family Holding Company, LLC and Meier Management Company, LLC, and (e) SDS and MPS in the Eighth JudicialNorthern District Court, Uintah County, Utah Cause #130800125 (the “Suit”). On May 11, 2017, pursuant to a mediation proceeding, allof Texas-Dallas Division for their work manufacturing the Smoothbore Eccentric Reamer for Stabil Drill. The Dallas lawsuit is stayed pending resolution of the plaintiffs and remaining defendantsfirst-filed, Houston suit. On October 1, 2020, Superior Energy Services, Stabil Drill’s parent company, filed for bankruptcy, which resulted in the Suit executed a Settlement Agreement whereby eachbrief, automatic stay of the parties have released all of theirlitigation. Superior Energy Services announced on February 2, 2021, that it successfully completed its financial restructuring and emerged from Chapter 11 bankruptcy, but this bankruptcy did not affect Extreme Technologies, LLC’s claims against the other parties to the Suit without liability effective as ofSuperior’s subsidiary Stabil Drill. On March 22, 2017. Such release includes the Company’s two subsidiaries that were a party to the Suit, SDS and MPS, as well as Troy and Annette Meier personally and all of their family trusts named as defendants in the Suit. As a result of the execution of the Settlement Agreement, a Stipulated Motion for Dismissal with Prejudice was filed with9, 2021, the Court which includes a form of Order of Dismissal with Prejudice (the “Court Order”). Onlifted the automatic bankruptcy stay, and on May 15, 2017,12, 2021, the Court Order was executed by the judgedenied Stabil Drill’s motion for summary judgment of non-infringement. The parties are preparing this case for trial and the Suit was formally dismissed with prejudice.expect a jury trial setting in late 2022 or early 2023.

Item 1A. Risk Factors

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

At December 31, 2016, we had working capitalAs of approximately $2.1 million. On September 30, 2016, we priced a public offeringthe date of common stock at $1.00 per share. The transaction closed on October 5, 2016. Net of underwriting and stock offering expenses of approximately $709,000, proceedsthis filing, the Company remains subject to the Company were approximately $5.0 million. The Company used the proceeds to pay offrisk factors previously disclosed in Part I, Item 1A “Risk Factors” in our 2021 Annual Report on Form 10-K.

We are a $1 million Bridge Financing completed on August 5, 2016,smaller reporting company and the $868,000 indebtedness on our $3 million credit facility with Federal National Commercial Credit (“FNCC”) as well as for general corporate purposes, including working capital. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures and debt service payments.

As amended and restated effective August 10, 2016, the Hard Rock Note accrues interest at 5.75% per annum and matures and is fully payable on January 15, 2020. Under the current terms of Hard Rock Note, and after the payment described below, we arenot required to make the following remaining payments: equal payments totaling $2,000,000 of principal plus accrued interest on each of January 15, March 15, May 15 and July 15, 2018, and 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. During 2017, we made the accrued interest payments related to the note on January 15, 2017, March 15, 2017, May 15, 2017, and July 15, 2017 of $129,808, $74,356, $76,877 and $76,877, respectively.

The Company’s manufacturing facility is financed by a commercial bank loan with principal of $4,200,000 due August 15, 2018 (see Note 7 – Long-Term Debt). The classification ofpresent this debt from long-term to short-term resulted in a working capital deficit of approximately $1.8 million at September 30, 2017. The Company plans to work with its lender to refinance its commercial bank loan in the first half of 2018.information.

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. For example, to conserve cash, we implemented a salary for stock options program during the first quarter of 2016 for senior management and our board of directors. With the success we are having with our distributor agreement with DTI and the opportunity with our new CTS tool, we believe we should have sufficient capital to support our opportunities in 2017.

We expect to be cash flow positive in 2017. If we are unable to do this, we may not be able to, among other things, (i) maintain our current general and administrative spending levels; (ii) fund certain obligations as they become due; and (iii) respond to competitive pressures or unanticipated capital requirements. In order to make our debt payments in 2018, we may need additional capital to support additional growth. We cannot provide any assurance that financing will be available to us in the future on acceptable terms.

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

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

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

As noted above, we are required to make payments on the Hard Rock Note of $2.0 million (plus accrued interest) in 2018 and $4.0 million (plus accrued interest) for 2019, with the balance of $2.0 million due on maturity in January 2020. Interest will continue to accrue on the Hard Rock Note based on the $1,000,000 value of the shares of common stock until such shares are registered. In addition, we are required to make monthly payments of approximately $100,000 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 96% of our total revenue. It is likely that we will continue to derive a portion of our revenue from a relatively small number of customers in the future. If a major customer decided not to continue to use our services or significantly reduces its drilling plans, or if we are unable to expand our channels to market or further commercialize, our revenue would decline and our operating results and financial condition could be harmed. In addition, we are subject to credit risk due to the concentration of our customer base. Any increase in the nonpayment of and nonperformance by our counterparties, either as a result of changes in financial and economic conditions or otherwise, could have a material effect on our business, results of operations and financial condition and could adversely affect our liquidity.

Item 6. Exhibits

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

** Furnished herewith.

* Filed herewith.

SIGNATURES

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.