Exhibit 10.4

  

SUBORDINATION AGREEMENT

 

THIS SUBORDINATION AGREEMENT (“Agreement”) is entered into as of March 8, 2016,
among Superior Drilling Products, Inc., a Utah corporation (“Superior”),
Superior Drilling Solutions, LLC, a Utah limited liability company (“Drilling”),
Hard Rock Solutions, LLC, a Utah limited liability company (“Hard Rock”),
Extreme Technologies, LLC, a Utah limited liability company (“Extreme”, and
together with Superior, Drilling and Hard Rock, “Borrower” or “Borrowers”),
FEDERAL NATIONAL PAYABLES, INC., a Delaware corporation doing business as
Federal National Commercial Credit (“Lender”) and the noteholder whose name and
address is set forth on the signature page to this Agreement (hereinafter
collectively called “Noteholder”).

 

WHEREAS, Lender has extended or agreed to extend financing to Borrower under a
Loan and Security Agreement dated on or about March 8, 2016 (as amended,
revised, restated, or supplemented from time to time, hereinafter referred to as
the “Financing Documents”); and

 

WHEREAS, any and all indebtedness, liabilities, and obligations of every kind or
nature, whether now existing or hereafter arising, due or to become due, matured
or contingent, joint or several, of Borrower to Lender, including, without
limitation, interest accruing after the commencement of bankruptcy or similar
insolvency proceedings, is collectively referred to herein as the “Senior Debt”;
and

 

WHEREAS, Borrower is indebted to Noteholder under a certain Founders Note dated
on or about May 29, 2014, in the principal amount of $2,000,000.00 (as amended,
revised, restated, or supplemented from time to time, hereinafter called the
“Subordinated Note”); and

 

WHEREAS, any and all indebtedness, liabilities, and obligations of every kind or
nature, whether now existing or hereafter arising, due or to become due, matured
or contingent, joint or several, of Borrower to Noteholder including, without
limitation, the Subordinated Note, and further including, without limitation,
interest accruing after the commencement of bankruptcy or similar insolvency
proceedings, is collectively referred to herein as the “Subordinated Debt”; and

 

WHEREAS, Lender is willing to enter into and provide financing to the Borrower
under the Financing Documents subject to Noteholder entering into this
Agreement.

 

NOW, THEREFORE, THIS AGREEMENT WITNESSETH, that in consideration of the premises
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:

 

1. Any terms not otherwise defined herein shall have the respective meanings
ascribed to such terms in the Financing Documents.

 

2. The payment of any and all Subordinated Debt is expressly subordinated to the
Senior Debt to the extent and in the manner set forth in this Agreement:

 

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(a) While the Senior Debt remains outstanding and any commitment to extend
financing under the Financing Documents has not been terminated Borrower may not
make and Noteholder may not receive or accept any payments or prepayments of any
kind (by voluntary payment, acceleration, setoff or otherwise) of interest,
principal, costs, fees or expenses with respect to the Subordinated Debt,
without the prior written consent of Lender first obtained;

 

(b) In the event Noteholder at any time incurs any obligation to pay money to
Borrower, Noteholder hereby irrevocably agrees that it shall pay such obligation
in cash or cash equivalents in accordance with the terms of the contract
governing such obligation and shall not deduct from or setoff against any
amounts owed by the Noteholder to Borrower in connection with any such
transaction any amounts Noteholder claims are due to it with respect to the
Subordinated Debt.

 

(c) Notwithstanding anything in the Agreement or in Section (a) above, Borrower
may make the following “Permitted Payments”: Borrower may make and Noteholder
may receive and retain any payments of principal and/or interest, on an
unaccelerated basis, in respect of the Subordinated Note in accordance with the
terms of the Subordinated Note as in effect on the date hereof; provided, that
no Event of Default shall have occurred and be continuing or will occur upon the
making such Permitted Payment.

 

3. Any payments on the Subordinated Debt received by Noteholder in contravention
of the terms of this Agreement or at any time that Noteholder is in violation of
its undertakings or obligations under this Agreement shall be held in trust for
Lender, and Noteholder will immediately turn over any such payments to Lender,
without further notice or demand, in the form received, to be applied to the
Senior Debt as determined by Lender.

 

4. Noteholder covenants and agrees that it shall not take or accept any liens or
security interests in any property of Borrower, whether now owned or hereafter
acquired, as security for the Subordinated Debt.

 

5. Until such time as the Senior Debt has been paid in full in cash and any
commitment to make advances have been terminated Noteholder will not commence
any lawsuit, action or proceeding of any kind against Borrower to recover all or
any part of the Subordinated Debt.

 

6. Noteholder will not join with any creditor in bringing any proceeding against
Borrower under any liquidation, conservatorship, bankruptcy, reorganization,
rearrangement, or other insolvency law now or hereafter existing, unless and
until the Senior Debt has been paid in full in cash and any commitment to make
advances under the Senior Debt has been terminated.

 

7. In the event of any liquidation, conservatorship, bankruptcy, rearrangement,
or other insolvency proceedings of Borrower, Noteholder will, at Lender’s
request, file any claims, proofs of claim, or other instruments of similar
character necessary to enforce the obligations, if any, of Borrower with respect
to the Subordinated Debt and will hold in trust for Lender and pay over to
Lender in the form received, to be applied against the Senior Debt as determined
by Lender, any and all money, dividends or other assets received in any such
proceedings on account of the Subordinated Debt, unless and until the Senior
Debt has been paid in full in cash and any commitment to make advances has been
terminated. Lender may, as attorney-in-fact for Noteholder, take such action (in
Lender’s discretion but without any duty or obligation to do so) on behalf of
Noteholder and Noteholder hereby irrevocably appoints Lender as attorney-in-fact
for Noteholder, to demand, sue for, collect, and receive any and all such money,
dividends or other assets and to file any claim, proof of claim or other
instrument of similar character and to take such other proceedings in Lender’s
name or in the name of Noteholder as Lender may deem necessary or advisable for
the enforcement of this Agreement. Noteholder will execute and deliver to Lender
such other and further powers of attorney or other instruments as Lender may
request in order to accomplish the foregoing.

 

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8. Subject at all time to the terms of this Agreement, Lender may, at any time
and from time to time, without the consent of or notice to Noteholder, without
incurring responsibility to Noteholder and without impairing or releasing any of
Lender’s rights, or any of the obligations of Noteholder hereunder:

 

(a) Change the amount, manner, place or terms of payment or change or extend the
time of payment of or increase, renew or alter the Senior Debt or any part
thereof, waive nonperformance by Borrower of or amend, alter, supplement or
replace the Financing Documents and/or the notes issued thereunder or agreements
related thereto, in any manner or enter into or amend in any manner any other
agreement relating to the Senior Debt or the Financing Documents; and

 

(b) Sell, exchange, release or otherwise enforce Lender’s rights against or deal
with all or any part of any real or personal property at any time pledged or
mortgaged to Lender, or in which Lender has been granted a security interest, by
any party to secure or securing the Senior Debt, or any part thereof; and

 

(c) Release or compromise claims against Borrower or any other party liable in
any manner for the payment or collection of the Senior Debt; and

 

(d) Exercise or refrain from exercising any rights against Borrower or others
(including Noteholder) or exercise rights against Borrower, its property or any
other party at any time and in any order.

 

9. Noteholder will advise each future holder of all or any part of the
Subordinated Debt that the Subordinated Debt is subordinated to the Senior Debt
in the manner and to the extent provided herein. Noteholder represents that no
part of the Subordinated Debt or any instrument evidencing the same has been
transferred or assigned and Noteholder will not transfer or assign, except to
Lender, any part of the Subordinated Debt or any instrument evidencing the same
while any Senior Debt remain outstanding, unless such transfer or assignment is
made expressly subject to this Agreement.

 

10. If Noteholder violates any of the terms of this Agreement, in addition to
any remedies at law, in equity or otherwise, Lender may restrain such violation
in any court of law or equity and may interpose this Agreement as a defense in
any action by Noteholder.

 

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11. This Agreement is solely for the benefit of Lender, and its personal
representatives, successors and assigns, and neither Borrower nor any other
person or entities are intended to be third party beneficiaries hereunder or to
have any right, benefit, priority or interest under, or because of the existence
of, or to have any right to enforce, this Agreement.

 

12. This Agreement contains the entire agreement between the parties regarding
the subject matter hereof and may only be amended, revised, restated,
supplemented or modified by written instrument executed by Borrower, Lender, and
Noteholder.

 

13. Noteholder represents and warrants that Noteholder has the power, capacity
and authority to enter into this Agreement and that neither the execution or
delivery of this Agreement nor fulfillment of nor compliance with the terms and
provisions hereof will conflict with, or result in a breach of the terms,
conditions, or provisions of or constitute a default under any agreement or
instrument to which Noteholder or any of its assets is now subject.

 

14. This Agreement may be assigned by Lender in connection with any assignment
or transfer of any portion of the Senior Debt.

 

15. When all of the Obligations of Borrower under the Financing Documents are
fully paid, this Agreement shall be terminated.

 

16. This Agreement shall be binding upon Noteholder, his, her, or its, heirs,
personal representatives, successors and assigns. Upon the reasonable request of
any successor or assignee of Lender, or of any financial institution replacing
the Senior Debt, Noteholder shall execute a substantially similar subordination
of the Subordinated Debt.

 

17. THIS AGREEMENT SHALL IN ALL RESPECTS BE INTERPRETED, CONSTRUED AND GOVERNED
BY THE SUBSTANTIVE LAWS OF THE STATE OF MARYLAND. NOTEHOLDER (i) SUBMITS TO THE
JURISDICTION OF THE COURTS OF THE STATE OF MARYLAND FOR THE PURPOSES OF
RESOLVING ANY CONTROVERSY RELATING HERETO AND (ii) TOGETHER WITH LENDER, WAIVE
THE RIGHT TO A JURY TRIAL FOR THE PURPOSE OF RESOLVING ANY CONTROVERSY HEREUNDER
OR ENFORCING OR DEFENDING ANY RIGHT TO CLAIM HEREUNDER OR IN CONNECTION
HEREWITH.

 

18. For the purposes of this Agreement, written notices shall be sent by United
States first class certified mail, return receipt requested, postage prepaid,
addressed to the notified party at its address set forth below its signature
line or such other address specified by the party with like notice, and shall be
deemed received three (3) Business Days after deposit in the United States mail,
on the first Business Day after transmittal by nationally recognized overnight
courier or on the day of transmittal by personal delivery, facsimile, telex,
cable or other electronic communication device capable of providing a written
record.

 

19. Noteholder shall not be subrogated to, or be entitled to any assignment of
any Senior Debt or Subordinated Debt or of any collateral or guarantees or
evidence of any thereof. Noteholder hereby waives any and all rights to have any
collateral or any part thereof marshaled upon any foreclosure or other
disposition of such collateral by Lender or Borrower.

 

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20. This Agreement may be executed in one or more counterparts, each one of
which when so executed shall be deemed to be an original, and all of which taken
together shall constitute one and the same agreement.

 

 

[SIGNATURES ON THE FOLLOWING PAGE]

 

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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed under
seal on the day and year first above written.

 

  FEDERAL NATIONAL PAYABLES, INC.         By: /s/ William Seibold     William
Seibold     Chief Credit Officer         SUPERIOR DRILLING PRODUCTS, INC.      
  By: /s/ Troy Meier     Troy Meier, President         Address: 1583 South 1700
East     Vernal, UT 84078         SUPERIOR DRILLING SOLUTIONS, LLC         By:
/s/ Troy Meier     Troy Meier, President         Address: 1583 South 1700 East  
  Vernal, UT 84078         HARDROCK SOLUTIONS, LLC         By: /s/ Troy Meier  
  Troy Meier, President         Address: 1583 South 1700 East     Vernal, UT
84078         EXTREME TECHNOLOGIES, LLC         By: /s/ Troy Meier     Troy
Meier, President         Address: 1583 South 1700 East     Vernal, UT 84078    
    NOTEHOLDER   Meier Management Company LLC         By: /s/ Annette Meier    
Annette Meier, Manager

 

 

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