SDPI Superior Drilling Products Inc

• Royalty and fleet maintenance revenue increased 46%
• Contract services increased 11%
• Year-to-date revenue grew 24% and net income increased to $1.3 million from $0.5 million
• Generated $4.0 million in cash from operations year-to-date

Superior Drilling Products, Inc. (NYSE American: SDPI) (“SDP” or the “Company”), a designer and manufacturer of drilling tool technologies, today reported financial results for the third quarter ended September 30, 2018.

Troy Meier, Chairman and CEO, noted, “We made measurable progress on several fronts this last quarter. Some of our accomplishments included the following:

• Opened our Abilene, Texas facility. We are processing tool repairs there, improving tool turnaround time and reducing transportation costs for our distributor by localizing our presence where demand is strong.
• Finalizing a new, mutually beneficial distribution agreement with our exclusive U.S. distributor.
• Engaged a servicing partner in the Middle East and expect them to be fully up and running by January 2019.
• Expanding market channels in the Middle East. In final stages of negotiations with a sophisticated, global oilfield service company to represent the Drill-N-Ream® well bore conditioning tool (“DnR”) in the Middle East, while also addressing additional inquiries by others.
• Refinancing our debt to recapitalize our balance sheet.”

He added, “The DnR’s operating performance is continuing to garner strong acceptance in the Middle East. In one country, the DnR is approved for use and is the preferred wellbore conditioning tool and, in a second country, the tool is advancing through that country’s stage-gate approval process. Tool revenue improved in the quarter even as tool sales in the U.S. were softer. As final terms of the distribution agreement were being developed, this delayed purchases by our distributor. Tool revenue in the Middle East was light due to logistics inefficiencies. We believe this reinforces the importance of an additional sales channel partners for that region as well as the need for our servicing partner.”

He concluded, “Our first nine months of 2018 have been very strong and, while we expect that a typical seasonal slowdown combined with the finalization of channel partner relationships will somewhat dampen the fourth quarter, we believe this sets us up for a very strong start in 2019.”

                             

Third Quarter 2018 Financial Summary ($ in thousands, except per share amounts)

Q32018

Q32017

$Y/YChange

% Y/YChange

Q22018

$ Seq.Change

% Seq.Change

Tool sales/rental $1,655 $ 2,012 $ (357) (17.8)% $2,506 $ (851) (34.0) % Other related tool revenue 1,706     1,170     536     45.8%     1,547     160     10.3 % Tool Revenue 3,361 3,182 179 5.6% 4,053 (692) (17.1) % Contract Services       1,404     1,265     140     11.1%     1,346     58     4.3 % Total Revenue       $4,765     $ 4,447     $ 319     7.2%     $5.399     $ (634)     (11.7) % Operating income (loss) 290 720 (429) (59.7)% 1,088 (797) (73.3)% As a % of sales       6.1%     16.2%                 20.1%             Net income (loss)       $ 225     $ 586     $ (361)     (61.6)%     $ 1,005     $ (780)     (77.6)% Diluted earnings (loss) per share $ 0.01 $ 0.02 $ (0.02) (62.9)% $ 0.04 $ (0.03) (77.6)%  

Revenue growth was driven by the increase in deployed tools resulting in higher royalty and fleet maintenance revenue as well as higher contract services revenue that improved with more drill bit refurbishment activity. These improvements more than offset lower tool sales/rental revenue. The decline in tool sales/rental revenue was the result of both distributor contract negotiations and the durability of the DnR tools. The tools durability has extended its useful life and reduced near term replacement tool sales, although in the long term, the durability improves life-of-tool economics.

Net income declined $0.4 million compared with the prior year period as a result of increased investments in research and development, as well as domestic and Middle East expansion efforts.

                             

Third Quarter 2018 Operational Review

($ in thousands)

 

Q32018

Q32017

$ Y/YChange

% Y/YChange

Q22018

$ Seq.Change

% Seq.Change

Cost of revenue $1,666 $1,717 $ (51) (3.0) % $1,943 (277) (14.3) % As a percent of sales 35.0% 38.6% 36.0% Selling, general & administrative $1,867 $1,102 $ 764 69.3 % $1,427 440 30.8 % As a percent of sales 39.2% 24.8% 26.4% Depreciation & amortization       $ 942     $ 908     $ 35     3.8 %     $ 942     1     0.1 % Total operating expenses       $4,475     $3,727     $ 748     20.1 %     $4,311     164     3.8 %  

The cost of revenue as a percentage of sales improved 360 basis points due to the change in mix, primarily reflecting increased contract services revenue and royalty income.

The $0.8 million increase in selling, general and administrative expense (SG&A) over the prior-year period primarily reflects investments in research and development, expansion into Abilene, Texas with a new repair facility and international market expansion. As a percentage of sales, SG&A increased 14.4 points compared with the prior-year period and 12.8 points over the sequential second quarter.

The decline in third quarter 2018 Adjusted EBITDA, a non-GAAP measure defined as earnings before interest, taxes, depreciation and amortization, non-cash stock compensation expense and unusual items, reflects the investments in R&D and domestic and international expansion efforts. Adjusted EBITDA in the quarter was $1.4 million, or 28.6% of revenue, down $0.4 million and $0.8 million compared with the 2017 third quarter and trailing 2018 second quarter, respectively.

The Company believes that when used in conjunction with measures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), Adjusted EBITDA, which is a non-GAAP measure, helps in the understanding of its operating performance. (1)See the attached tables for important disclosures regarding SDP’s use of adjusted EBITDA, as well as a reconciliation of net loss to adjusted EBITDA.

                 

Year-to-Date Review

($ in thousands, except per share amounts)

YTD2018

YTD2017

$Change

%Change

Revenue $ 14,765 $11,866 2,899 24.4 % Operating expenses 13,219 10,971 2,248 20.5 % Operating income (loss) 1,546 894 651 72.8 % Net income (loss) $ 1,299 $ 507 792 156.2 % Diluted income (loss) per share $ 0.05 $ 0.02 0.03 146.6 %  

Revenue in the first nine months of 2018 increased 24% when compared with the same period last year. The growth reflects higher tool revenue supported by increasing market share, U.S. drilling activity and contributions from penetration into the Middle East. Strong operating leverage from higher volume enabled the measurable improvement in operating income and margin.

Net income for the first nine months of 2018 increased 2.5 times to $1.3 million compared with

$0.5 million for the same period in the prior-year. Adjusted EBITDA(1) for the nine-month period was $4.7 million, or 32.1% of sales, compared with $4.2 million, or 35.2% of sales, for the first nine months of 2017.

Balance Sheet and Liquidity

Cash and cash equivalents was $4.3 million at September 30, 2018, up from $2.4 million at the end of 2017 and $3.1 million at the end of the trailing second quarter. Cash generated from operations in the quarter was $1.9 million, compared with $1.7 million in the prior-year period.

In the third quarter of 2018, the Company had capital expenditures of $52 thousand.

Total debt at the end of the quarter was $11.0 million, down $1.8 million, or 14.4%, compared with $12.8 million at December 31, 2017.

At September 30, 2018, SDP had a working capital deficit of approximately $1.2 million. The Company’s manufacturing facility is financed by a commercial bank loan with principal of $4.2 million due February 15, 2019. The debt was reclassified to short-term and results in a working capital deficit at September 30, 2018.

Chris Cashion, Chief Financial Officer, noted, “We are currently in the process of refinancing our mortgage and Hard Rock seller’s note, which combined total approximately $10 million. We expect the refinancing to be completed before the end of the year after which our current ratio will revert to a much improved 2 to 1. Also, the term for our debt will be extended over several years with debt maturities more evenly matching our operating cash flow.”

Outlook:

Given the delays with contract negotiations for tool sales in the U.S. and the timing related to plans to add another channel partner in the Middle East, the Company has slightly lowered its revenue and operating margin guidance for 2018. In addition, investments in service facilities ahead of expected revenue is anticipated to impact gross margin in the fourth quarter with an approximate $150 thousand increase in costs related to the Texas facility start up and Middle East expansion efforts:

Revenue:

      $18 million to $21 million       Represents 15% to 35% growth

Operating Margin:

      5% to 8%      

Reflects investments in facilities expansionin Texas and servicing in the Middle East, aswell as staffing and professional fees forMiddle East expansion

Interest Expense:

     

Unchanged fromapproximately $750 thousand

     

Down from $906 thousand in 2017 on lowerdebt balances

Depreciation andAmortization:

     

Unchanged at slightly under$4.0 million

      Compares with $3.7 million in 2017

CapitalExpenditures:

     

Unchanged at approximately$1 million

      Similar to 2017            

Webcast and Conference Call

The Company will host a conference call and live webcast today at 10:00 am MT (12:00 pm ET) to review the financial and operating results for the quarter and discuss its corporate strategy and outlook. The discussion will be accompanied by a slide presentation that will be made available immediately prior to the conference call on SDP’s website at www.sdpi.com/events. A question-and-answer session will follow the formal presentation.

The conference call can be accessed by calling (201) 689-8470. Alternatively, the webcast can be monitored at www.sdpi.com/events.

A telephonic replay will be available from 1:00 p.m. MT (3:00 p.m. ET) the day of the teleconference until Thursday, November 15, 2018. To listen to the archived call, dial (412) 317-6671 and enter conference ID number 13683889, or access the webcast replay at www.sdpi.com, where a transcript will be posted once available.

About Superior Drilling Products, Inc.

Superior Drilling Products, Inc. is an innovative, cutting-edge drilling tool technology company providing cost saving solutions that drive production efficiencies for the oil and natural gas drilling industry. The Company designs, manufactures, repairs and sells drilling tools. SDP drilling solutions include the patented Drill-N-Ream® well bore conditioning tool and the patented StriderTM oscillation system technology. In addition, SDP is a manufacturer and refurbisher of PDC (polycrystalline diamond compact) drill bits for a leading oil field service company. SDP operates a state-of-the-art drill tool fabrication facility, where it manufactures its solutions for the drilling industry, as well as customers’ custom products. The Company’s strategy for growth is to leverage its expertise in drill tool technology and innovative, precision machining in order to broaden its product offerings and solutions for the oil and gas industry.

Additional information about the Company can be found at: www.sdpi.com.

Safe Harbor Regarding Forward Looking Statements

This news release contains forward-looking statements and information that are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact included in this release, regarding our strategy, future operations, financial position, estimated revenue and losses, projected costs, prospects, plans and objectives of management, are forward-looking statements. The use of words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project”, “forecast,” “should” or “plan, and similar expressions are intended to identify forward-looking statements, although not all forward -looking statements contain such identifying words. Certain statements in this release may constitute forward-looking statements, including statements regarding the Company’s financial position, market success with specialized tools, effectiveness of its sales efforts, success at developing future tools, and the Company’s effectiveness at executing its business strategy and plans. These statements reflect the beliefs and expectations of the Company and are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties include, among other factors, our business strategy and prospects for growth; our cash flows and liquidity; our financial strategy, budget, projections and operating results; the amount, nature and timing of capital expenditures; the availability and terms of capital; competition and government regulations; and general economic conditions. These and other factors could adversely affect the outcome and financial effects of the Company’s plans and described herein.

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

September 30,2018

December 31,2017

Assets Current assets: Cash $ 4,275,063 $ 2,375,179 Accounts receivable, net 2,628,892 2,667,042 Prepaid expenses 224,833 111,530 Interest Receivable 275,614 - Inventories 1,034,899 1,196,813 Other current assets   161,996   -   Total current assets 8,601,297 6,350,564   Property, plant and equipment, net 8,006,462 8,809,348 Intangible assets, net 4,297,778 6,132,778 Related party note receivable 7,367,212 7,367,212 Other noncurrent assets   48,727   15,954 Total assets $ 28,321,476 $ 28,675,856   Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 658,561 $ 1,021,469 Accrued expenses 725,151 543,758 Current portion of long-term debt, net of discounts 8,443,430 6,101,678   Total current liabilities $ 9,827,142 $ 7,666,905   Long-term debt, less current portion, net of discounts 2,521,021 6,706,375 Total liabilities $ 12,348,163 $ 14,373,280   Stockholders' equity Common stock (24,550,979 and 24,535,155) 24,551 24,535 Additional paid-in-capital 39,280,059 38,907,864 Accumulated deficit   (23,331,297)   (24,629,823) Total stockholders' equity $ 15,973,313 $ 14,302,576 Total liabilities and shareholders' equity $ 28,321,476 $ 28,675,856               Superior Drilling Products, Inc. Consolidated Condensed Statement of Cash Flows For The Nine Months Ended September 30, 2018 and 2017 (Unaudited)       September 30, 2018         September 30, 2017 Cash Flows From Operating Activities Net Income $ 1,298,526 $ 506,863 Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization expense 2,820,183 2,745,232 Amortization of debt discount 43,459 59,766 Share - based compensation expense 372,211 498,384 Impairment of inventories 41,396 - Gain on sale of assets - (12,167) Changes in operating assets and liabilities: Accounts receivable 38,150 (1,493,995) Interest receivable (275,614) (251,600) Inventories 121,484 (9,220) Prepaid expenses and other noncurrent assets (308,072) (64,245) Accounts payable and accrued expenses (181,515) (610,936) Other long-term liabilities   -         (17,490) Net Cash Provided By Operating Activities $ 3,970,208       $ 1,350,592   Cash Flows From Investing Activities Purchases of property, plant and equipment (183,263) (220,101) Proceeds from sale of fixed assets   -         2,483,921 Net Cash Provided By (Used In) Investing Activities   (183,263)         2,263,820   Cash Flows From Financing Activities Principal payments on debt (1,887,061) (2,858,882) Principal payments on related party debt - (74,293) Principal payments on capital lease obligations   -         (217,302) Net Cash Used In Financing Activities # (1,887,061)         (3,150,477)   Net Increase in Cash 1,899,884 463,935 Cash at Beginning of Period   2,375,179         2,241,902 Cash at End of Period $ 4,275,063       $ 2,705,837   Supplemental information: Cash paid for interest $ 488,112 $ 617,565 Non-cash payment of other long-term liability by offsetting related party note receivable $ - $ 550,000 Acquisition of equipment by issuance of note payable $ - $ 16,557 Lease equipment renewal $ - $ 626,000                    

Superior Drilling Products, Inc.

Adjusted EBITDA(1) Reconciliation

(unaudited)

  Three Months Ended September 30, 2018       September 30, 2017       June 30, 2018   GAAP net income $ 225,194 $ 586,039

 

$ 1,004,798 Add back: Depreciation and amortization 942,473 907,837

 

941,683 Interest expense, net 65,087 133,551

 

82,786 Share-based compensation 131,867 147,643

 

103,327 (Gain) loss on sale of assets   -     -  

 

      -   Non-GAAP adjusted EBITDA(1) $ 1,364,621 $ 1,775,070

 

$ 2,132,594   GAAP Revenue $ 4,765,361 $ 4,446,540

 

$ 5,398,923 Non-GAAP EBITDA Margin 28.6 % 39.9 % 39.5 %     Nine Months Ended September 30, 2018 September 30, 2017   GAAP net income $ 1,298,526 $ 506,863 Add back: Depreciation and amortization 2,820,183 2,745,232 Share-based compensation 372,211 498,384 Interest expense, net 246,998 443,311 (Gain) loss on sale of assets   -     (12,167 ) Non-GAAP Adjusted EBITDA(1) $ 4,737,918   $ 4,181,623     GAAP Revenue $ 14,764,577 $ 11,865,648 Non-GAAP EBITDA Margin 32.1 % 35.2 %  

(1) Adjusted EBITDA represents net income adjusted for income taxes, interest, depreciation and amortization and other items as noted in the reconciliation table. The Company believes Adjusted EBITDA is an important supplemental measure of operating performance and uses it to assess performance and inform operating decisions. However, Adjusted EBITDA is not a GAAP financial measure. The Company’s calculation of Adjusted EBITDA should not be used as a substitute for GAAP measures of performance, including net cash provided by operations, operating income and net income. The Company’s method of calculating Adjusted EBITDA may vary substantially from the methods used by other companies and investors are cautioned not to rely unduly on it.

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For more information, contact investor relations:Deborah K. PawlowskiKei Advisors LLC(716) 843-3908dpawlowski@keiadvisors.com