UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended September 30, 2021March 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, 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)

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically 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 such files).

Yes ☒ 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 ☒ Emerging growth company ☐

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 ☒

There were 28,169,08628,235,001 shares of common stock, $0.001 par value, issued and outstanding as of November 12, 2021.May 13, 2022.

Superior Drilling Products, Inc.

FORM 10-Q

QUARTER ENDED September 30, 2021March 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 Shareholders’ Equity

(Unaudited)

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

Superior Drilling Products, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

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

Superior Drilling Products, Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2021March 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 an innovative drilling and completion tool technology company providing cost saving solutions that drive production efficiencies for the oil and natural gas drilling industry. Our headquarters and manufacturing operations are located in Vernal, Utah. 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 and other tools for a leading oil field services company and other customers including other oil field service companies and operators.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 for other applications.products. Our headquarters and 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) 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.

Unaudited Interim Financial Presentation

These unaudited interim condensed consolidated condensed financial statements for the three and nine months ended September 30,March 31, 2022 and 2021, and 2020, 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, 2021March 31, 2022 are not necessarily indicative of the results of operations expected for the year ended December 31, 2021.2022. 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, 2020 and 20192021 and the notes thereto, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,2021, 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 86%90% and 81%85% of its revenue for the ninethree months ended September 30,March 31, 2022 and 2021, and 2020, respectively. These customers had approximately $1,081,0002,137,000 and $432,000846,000 in accounts receivable at September 30,as of March 31, 2022 and 2021, and 2020, respectively.

The Company had two vendors that represented 12% 13% of its purchases for the ninethree months ended September 30,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 $176,000221,000 in accounts payable at September 30,as of March 31, 2021 and purchases in the ninethree months ofended March 31, 2021 from these vendors totaled approximately $546,000. The Company had one vendor that represented 14% of its purchases for the nine months ended September 30, 2020. This vendor had approximately $218,000 in accounts payable at September 30, 2020 and purchases in the nine months ended September 30, 2020 from this vendor totaled approximately $772,000239,000.

ImpactRestatement of COVID-19the Consolidated Financial Statements

The COVID-19 pandemic has impacted and may further impactpurpose 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 operationsquarter 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’s suppliers and vendors, as a result of quarantines, facility closures, and travel and logistics restrictions. The extent to whichCompany has determined that the COVID-19 pandemic will continue to impact the Company’s business, financial condition and results of operations will depend on future developments, which are highly uncertain and depend on, among other things, the duration, spread, severity, and impact of adjustments relating to the COVID-19 pandemiccorrection of this accounting error are not material to previously issued annual audited and the success and speed of vaccination efforts both in the United States and globally, theunaudited interim financial statements.

The effects of the COVID-19 pandemicrestatement on the Company’s customers, suppliers, and vendors andconsolidated statement of cash flows for the remedial actions and stimulus measures adopted by local and federal governments, andquarter ended March 31, 2021 are as follows:

SCHEDULE OF RESTATEMENT OF CONSOLIDATED STATEMENT OF CASH FLOWS

There was no impact to what extent normal economic and operating conditions can resume. Therefore,net cash provided from financing activities within our consolidated statement of cash flows nor was there an impact on the Company cannot reasonably estimate future impacts of the COVID-19 pandemic at this time.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.

Certain prior year amounts have been reclassified to the balance sheet to conform to the current year presentation. The reclassifications were within accounts payable and income tax payable and did not impact net income.

Recent Accounting Pronouncements

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 $39,32731,384 with income before income taxes of only $33,117181,221. The reason The Company has income tax expense greater than income before income taxes is due to the Company having taxable income in a foreign tax jurisdiction. In the U.S. the Company ishas not subject to U.S. taxesgenerated a tax liability due to having aincurring taxable loss.losses.

NOTE 2.LIQUIDITY

We believe that our cash on hand, cash generated from operations and our borrowing capacity under our current credit facility will be sufficient to fund our operations for the next 12 months. To enhance liquidity, our operational and financial strategies include managing our operating costs, accelerating collections of international receivables, and reducing working capital requirements. If we are unable to do this, we may not be able to, among other things, (i) maintain our revised 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, if at all.

In 2020, the Company filed a Form S-3 Shelf Registration that will allow the Company to offer and sell, from time to time, up to $20,000,000 of securities. We believe maintaining an active Shelf Registration provides additional financial flexibility to access the capital markets. In October 2021, the Company completed an equity offering of 1,739,131 shares of common stock at a price of $1.15 per share. Net proceeds from the equity offering were $1,739,103 (See Note 13 – Subsequent Events).

Also in 2020, the Company received notification from the NYSE American to the Company indicating that, as a result of the Company’s stockholders’ equity of $4.7 million as of September 30, 2020, and reported losses for each of the last five fiscal years, the Company was not in compliance with the stockholders’ equity standards for continued listing on the NYSE American. On January 28, 2021, the Company received notice that the NYSE American had accepted the Company’s plan that was submitted on December 18, 2020, to regain compliance with the continued listing standards of the NYSE American.

NYSE American Regulations staff will review the Company periodically for compliance with the initiatives outlined in the plan. If the Company does not make progress consistent with the plan during the plan period, NYSE Regulation staff may initiate delisting proceedings as appropriate. The Company’s first quarterly plan update was submitted to the NYSE American in April 2021 and was subsequently approved by the NYSE compliance committee on May 21, 2021. On August 16, 2021, the Company submitted its second quarterly plan update which was approved by the NYSE on September 10, 2021.

NOTE 3. REVENUE

Our revenue is derived from short-term contracts. Revenue is recognized when we satisfy a performance obligation by transferring control of the promised goods or services to our customers at a point in time, in an amount that reflects the 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 customers, 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.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer under Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts with customers contain a single performance obligation to provide agreed-upon products or services. For contracts with multiple performance obligations, we allocate revenue to each performance obligation based on its relative standalone selling price. In accordance with Topic 606, we do not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.

All of our contracts are less than one year in duration. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.performed.

Disaggregation of Revenue

Approximately 85% 91% of our revenue is from North America and approximately 15%9% is from the Middle East for the three months ended September 30, 2021.March 31, 2022. For the ninethree months ended September 30,March 31, 2021, approximately 86%86% of our revenue was from North America and approximately 14%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 TopicASC 606.

NOTE 4.3. INVENTORIES

Inventories are comprised of the following:

 SCHEDULE OF INVENTORIES

NOTE 5.4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are comprised of the following:

SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT

The Company sold its airplane for a gain of approximately $142,000 in February 2020 and the Company sold its hangar for a gain of $10,000 in March 2021, both of which were in assets held for sale at the end of 2019. The increase in machinery and equipment was mostly the result of the Company’s increased rental tool fleet for the Middle East operations.February 2021.

Depreciation expense related to property, plant and equipment for the three and nine months ended September 30,March 31, 2022 and 2021 was $363,558369,066 and $1,139,137, respectively and for the three and nine months ended September 30, 2020 was $401,592 and $1,259,398398,408, respectively.

NOTE 6.5. 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,March 31, 2022 and 2021 was $41,667 and $541,667, respectively, and for the three and nine months ended September 30, 2020 was $291,667 and $875,000291,666, respectively. Full amortization was realized for the Company’s patent at the end of April 2021. This decreases the 2021 expense compared to 2020.

NOTE 7.6. 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’ sTronco’s senior secured lender. 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 continues to hold the 8,267,860 shares of the Company’s common stock as collateral. The Company will record a recovery of the loan if and when consideration or paymentsupon receiving repayment of the loan are madenote or interest in the future.other income. On July 7, 2020, the Company entered into an amended and restated loan agreement and note with Tronco changing the payment terms on the note. As amended, the interest rate on the note is fixed at 2%2% per annum. Interest only is due December 31, 2021,The note matures with a balloon payment of all unpaid interest and principal due upon maturity on December 31, 2022.2022. The Tronco note 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 hold 8,267,860 shares of the Company’s stock as collateral.

NOTE 8.7. LONG-TERM DEBT

Long-term debt is comprised of the following:

SCHEDULE OF LONG-TERM DEBT INSTRUMENTS

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.

The Hard Rock Note has a remaining balance of $750,000 as of September 30, 2021,March 31, 2022, accrues interest at 8.00%8.00% per annum and is due in full byfully payable on October 5, 2022. In October 2021,The Company paid an interest payment on the Company made a paymentnote on January 20, 2022 of $15,12317,589 relatedand is obligated to accrued interest. Under the amended terms of the Hard Rock Note, we are required to make the following additional payments: accruedpay interest payments on January 5, April 5, 2022 and July 5, and October 5 in 2022; with2022 prior to the remaining balance of principal and accrued interest on the Hard Rock Notefull payment due on October 5, 2022. For the nine months ended September 30, 2021, In April, the Company has made a totalthe accrued interest payment of $89,75412,328.77 in interest payments related to the Hard Rock Note..

Credit Agreement

In February 2019, the Company entered into a Loan and Security Agreement (the “Credit Agreement”) with Austin Financial Services, Inc. (“AFS”). The Credit Agreement provides a $4,500,0004,300,000 credit facility, which includes a $1,000,000800,000 term loan (the “Term Loan”) and a $3,500,000 revolverline of credit (the “Revolving Loan”“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 September 30, 2021,March 31, 2022, we had approximately $416,662250,000 outstanding on the Term Loan and approximately $1,000,4621,000,000 outstanding on the Revolving Loan.LOC. Amounts outstanding under the Revolving LoanLOC 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.AFSAmounts outstanding on the Revolving Loan as of September 30, 2021, may not exceed $1,000,000, which is based on a calculation applying 85% of accounts receivable and 50% of inventory..

The Credit Agreement contains various restrictive covenants that, among other things, limit or restrict the ability of the Companyborrowers 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 Revolving LoanLOC is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause. At September 30, 2021,As of March 31, 2022, we were in compliance with the covenants in the Credit Agreement.

The interest rate for the Term Loan and the Revolving LoanLOC is prime plus 2%2%. At September 30, 2021,As of March 31, 2022, the interest rate for the Term Loan was 8.85%9.10%, which includes a 3.6%3.6% management fee rate. The effective interest rate for the Revolving Loan for the quarter ending September 30, 2021 was 9.78%. Even if our borrowings under the LOC are less than $1,000,000,$1,000,000, we still pay interest as if we had borrowed $1,000,000$1,000,000.. At September 30, 2021, As of March 31, 2022, we had approximately $12,00010,000 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 that constitute real property (and fixtures affixed to such real property), certain excluded equipment or intellectual property, or aircraft.property. A collateral management fee is payable monthly on the used portion of the Revolving LoanLOC and Term Loan. 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.

NOTE 9.8. 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 headquarters 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 agreement (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%1.5%. Under the Lease Agreement, the Company has an option to extend the term of the lease and to repurchase the Property. Due to thethis repurchase option, the Company accountedwas unable to account for the transaction as a financing transaction and nottransfer as a sale under ASC Topic 842, Leases., and as such, the transaction is a failed sale-leaseback that is accounted for as a financing transaction.

The Company received cash of $1,622,106, retired real estate debt of $2,638,773 and recorded a financing obligation liability of $4,260,879 related to the transaction. There was no gain recorded since sale accounting was precluded. The financing obligation has an implied interest rate of 6.0%6.0%. At the conclusion of the fifteen-year lease period, the financing obligation residual willis estimated to be $2,160,2422,188,710, which will correspondcorresponds to the carrying value of the property. The Company paidbalance of the financing obligation as of March 31, 2022 and December 31, 2021 was $25,9504,161,539 of principal in 2020 that was prorated for the month of December.and $4,178,336, respectively.

The financing obligation is summarized below:

SCHEDULE OF FINANCING OBLIGATION 

NOTE 10.9. 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 11.10. COMMITMENTS AND CONTINGENCIES

We are subject to litigation that arises from time to time in the ordinary course of our business activities. In February 2019, the Company filed a patent infringement lawsuit in the United States District Court for the Western District of Louisiana, Lafayette Division, asserting that Stabil Drill Specialties, LLCLLC’s (“Stabil Drill”) infringedSmoothbore Eccentric Reamer infringes the patents of Extreme Technologies, LLC (one of our subsidiaries) on our patent that covers the Company’spatented Drill-N-Ream well bore conditioning tool, the Drill-N-Ream.tool. The lawsuit was subsequently moved from Louisiana to the United States District Court for the Southern District of Texas, Houston Division. Additionally, on May 20, 2019, Extreme Technologies, LLC sued Short Bit & Tool Co. and Lot William Short, Jr. (“Defendants”) in the Northern District of Texas-Dallas Division. Extreme suedDivision for patent infringement based ontheir work manufacturing the same patents discussed in theSmoothbore Eccentric Reamer for Stabil Drill litigation. On December 23, 2019, the CourtDrill. The Dallas lawsuit is stayed Extreme’s patent infringement claim against Defendants pending resolution of the Southern District of Texas Stabil Drill case. The court ordered the Company to serve discovery requests upon Stabil Drill and gave Stabil Drill deadlines to respond and produce documents and permit product inspection. Stabil Drill filed a motion for summary judgement for non-infringement.first-filed, Houston suit. On October 1, 2020, Superior Energy Services, Stabil Drill’s parent company, filed for bankruptcy, which resulted in a brief, automatic stay of the litigation. Superior Energy Services announced on February 2, 2021, that it successfully completed its financial restructuring and emerged from Chapter 11 bankruptcy.bankruptcy, but this bankruptcy did not affect Extreme Technologies claims against Stabil Drill. On March 9, 2021, the Court lifted the automatic bankruptcy stay. Onstay, and on May 12, 2021, the Court denied Stabil Drill’s non-infringementdrill’s motion for summary judgment motion.of non-infringement. The parties are preparing this case for trial and expect a jury trial setting in 2022. We are not currently involved in any other litigation which management believes could have a material effect on our financial positionlate 2022 or results of operations.early 2023.

NOTE 12.11. SHAREHOLDERS’ EQUITY

On August 9,The Company is authorized to issue 100,000,000 shares of common stock, par value $0.001. As of March 31, 2022 and December 31, 2021, the Boardnumber of Directors grantedcommon shares issued and outstanding was 434,64128,235,001 restricted.

The Company did not grant stock units to Troy Meier, Chairman and Chief Executive Officer, granted 333,333 restrictedoptions or stock units to Annette Meier, President and Chief Operating Officer, granted 156,863 restricted stock units to Chris Cashion, Chief Financial Officer, and 98,039 restricted stock units to each ofawards during the three independent members of the Board of Directors. Stock price is based on the average price of the common stock on the date of the grant. In addition, the Board of Directors authorized 250,000 restricted stock unitsmonths ended March 31, 2022 and 75,000 stock options to be granted to employees of the Company other than Mr. and Mrs. Meier and Mr. Cashion. The 250,000 restricted stock units were to be granted to employees subject to a Board approved performance based bonus plan. The plan was never developed and implemented nor communicated to the employees. These restricted stock units will vest over three years.2021, respectively.

NOTE 13.12. SUBSEQUENT EVENTS

On October 19, 2021,March 22, 2022, the Company completedentered into an equity offering of 1,739,131 shares of our common stockagreement with Mazak to certain institutional investors, atpurchase a purchase pricenew CNC machine for $956,000. A down payment of $1.15286,800 per share.was used to secure the asset. The machine was received on 4/14/2022 and, upon acceptance of the machine, the Company paid approximatelywill finance the remaining balance of $261,000 in total offering costs. Net proceeds from the equity offering were approximately $1,700,000669,200.

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, 2021,March 31, 2022, and our results of operations for the three and nine months ended September 30, 2021March 31, 2022 and 2020.2021. 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, 20202021 and 2019,2020, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,2021, 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.

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 typescontained in or incorporated by reference into this Form 10-K are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of informationrisks and statements as they relate to the Company:uncertainties that are beyond our control, including:

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, 2020 and the following:

Many of these factors are beyond our ability to control or predict. These factors are not intended to represent a complete list of the general or specific factors that may affect us. The events in Ukraine, Russia, and the surrounding areas may result in political instability and may add a potential risk.

Many of such factorsIn addition, management’s assumptions about future events may prove to be inaccurate. All readers 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 ofcautioned 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.

Executive Summary

We innovate, design, engineer, manufacture, sell, and repair drilling and completion tools in the United States, Canada, and the Middle East.

We currently have three basic operations:

Our strategy for growth is to expand the global market penetration of our current drilling tool solutions and to leverage our expertise in drilling tool technologies and precision machining in order to broaden our product offerings and solutions for 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 global financial markets, overall reductions in demand, delays in payment, restrictions on the shipment of our products, or other ramifications. Currently we are experiencing raw material delays and difficulties in hiring and retaining direct laborers. 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 has no business relationships, connections to or assets in Russia, Belarus or Ukraine. No impairments to assets have been made due to the conflict. The global oil industry has been impacted by this situation, but the Company’s operations and business in the Middle East has not been disrupted to date. The increase in oil producing activities in the United States has benefitted the Company’s operations. We are unable at this time to know the full ramifications of the Russia – Ukraine conflict and its effects on our business.

The total U.S. rig count as reported by Baker Hughes as of OctoberApril 29, 20212022 was 544698 rigs, an increase of 248 rigs from a year ago, as well as an increase of 150112 rigs from the rig count as of December 31, 2020.2021. We expect North American onshore activity to continue to improve in 2021 and intothroughout 2022 compared with the fourth quarter of 2020.2021.

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 towith the Company’s domestic market.

CONSOLIDATED RESULTS OF OPERATIONS

Three and Nine Months Ended September 30, 2021ComparedMarch 31,2022 Compared with the Three and Nine Months Ended September 30, 2020March 31, 2021

The following table represents summary consolidated operating 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.

Three Months Ended September 30, 2021March 31, 2022 Compared with the Three Months Ended September 30, 2020March 31, 2021

Revenue. Our revenue increased approximately $2,014,000$1,705,000 or 130%70%. Tool revenue increased $1,155,000$1,105,000 or 97%66% from the prior-year period while contract services increased $859,000$600,000 or 241%79%. The increase in revenue was dueRevenue increased as the Company had improved capacity to increasedmeet growing demand fromfor bit and other toll manufacturing services as well as continued growth in the number of end users and percentage of rigs using our Drill-N-Ream tool combinedtool. Higher Contract Services revenue also grew with an improvement in market conditionsimproved capacity to deliver on increased volume for drill bit and other toll refurbishment services. Demand growth reflects customers increasing the use of outsource manufacturing and refurbishment services and increased drilling activity.activity driven by improved market conditions for the oil & gas industry.

Operating Costs and Expenses. Total operating costs and expenses increased approximately $272,000$444,000 for the September 30, 2021 three-month period.period ended March 31, 2022.