Superior Drilling Products, Inc. Revenue Increased 7% to $5.1 Million in Third Quarter 2019

  • Contract Services revenue increased 34% over prior-year period
  • Middle East revenue up 44% over the trailing quarter
  • Generated $1.0 million in cash from operations in the quarter
  • Long-term debt reduced 46% to a pro forma $3.4 million in 2019, following payment on Hard Rock note subsequent to end of quarter

VERNAL, Utah--()--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, 2019. Prior-year periods are restated to reflect the write-down of the Tronco loan asset as of August 2017.

Troy Meier, Chairman and CEO, noted, “We made significant progress in the Middle East during the quarter, expanding the fleet of our patented Drill-N-Ream® (DNR) well bore conditioning tool and building up our team in the region. We have agreements with three oil field services companies to represent the tool in the Middle East North Africa region (“MENA”) and are in discussions with others to extend our reach into that market. Demand for the DNR has grown quickly as the tool gains acceptance in the region and as more operators experience the value that our tool generates.”

He added, “In the U.S., our expanded relationship with our long-time legacy customer continues to drive increased Contract Services revenue. We are also involved in productive dialogue with this customer to expand our relationship to include their representing the DNR in North America and MENA as well. In the meantime, while the U.S. drill rig count has declined 24% since the beginning of the year, the Drill-N-Ream continues to be deployed by many of the major operators, primarily in the Permian Basin. Here, as in MENA, we believe that the DNR provides measurable cost savings and improved drilling efficiencies, which is driving demand for the tool.”

Third Quarter 2019 Review ($ in thousands, except per share amounts) (See at “Definitions” the composition of product/service revenue categories.)

($ in thousands, except per share amounts)                              
  Q3 2019     Q3 2018   $Y/Y
Change
    % Y/Y
Change
    Q2 2019   $ Seq.
Change
  % Seq.
Change
Tool sales/rental

 $    1,361

   

 $    1,655

 

 $      (294)

   

 (17.8)%

   

 $   1,000

 

 $      361

 

36.1%

Other Related Tool Revenue

       1,834

   

       1,706

 

          128

   

7.5%

   

      1,573

 

         261

 

16.6%

Tool Revenue

       3,195

   

       3,361

 

         (166)

   

 (4.9)%

   

      2,573

 

         622

 

24.2%

Contract Services

       1,881

   

       1,404

 

          477

   

34.0%

   

      1,970

 

         (89)

 

 (4.5)%

Total Revenue

 $    5,076

   

 $    4,765

 

 $       311

   

6.5%

   

 $   4,543

 

 $      533

 

11.7%

When compared with the prior-year period, revenue grew 6.5% driven by increased Contract Services and Other Related Tool Revenue. Contract services revenue was up 34% to $1.9 million as demand from the Company’s legacy customer was up for drill bit and other tool refurbishment and contract manufacturing. Other Related Tool revenue increased by 7.5% as the continued growth in tool runs strengthened royalty revenue, and as the durability of the DNR extended the tool life. This resulted in additional repair and refurbishments on the existing DNR fleets maintained by our primary distributor. The extended tool life has delayed the requirement for replacement tools resulting in lower tool sales. This was partially offset by increased rental revenue from the Middle East which was up $283 thousand to $288 thousand in the quarter.

Third Quarter 2019 Operating Expenses

($ in thousands, except per share amounts) Q3 2019     Q3 2018
restated
  $ Y/Y
Change
    % Y/Y
Change
    Q2 2019   $ Seq.
Change
  % Seq.
Change
Cost of revenue

 $    2,063

   

 $    1,666

 

 $       397

   

23.8%

   

 $   2,014

 

 $        49

 

2.4%

As a percent of sales

40.6%

   

35.0%

             

40.6%

       
Selling, general & administrative

       2,502

   

       1,867

 

          635

   

34.0%

   

      1,816

 

686

 

37.8%

As a percent of sales

49.3%

   

39.2%

             

41.1%

       
Depreciation & amortization

          739

   

          942

 

         (204)

   

 (21.6)%

   

         930

 

(191)

 

 (20.6)%

Total operating expenses

       5,303

   

       4,475

 

          828

   

18.5%

   

      4,760

 

         543

 

11.4%

Operating (loss) income

        (227)

   

          290

 

         (517)

   

NM

   

       (217)

 

         (10)

 

NM

As a % of sales

 (4.5)%

   

6.1%

             

 (1.7)%

       
Net (loss) income per share

        (418)

   

          128

 

         (545)

   

NM

   

       (397)

 

         (21)

 

NM

Diluted (loss) earnings per share

       (0.02)

   

         0.01

 

        (0.02)

   

NM

   

      (0.02)

 

        0.00

 

NM

Adjusted EBITDA(1)

 $    1,083

   

 $    1,365

 

 $      (282)

   

NM

   

 $   1,074

 

 $          9

 

0.8%

(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.

The cost of revenue as a percentage of sales increased on lower absorption with increased production capacity in Texas, higher tool maintenance and logistics costs associated with the MENA operations and product mix.

Increased selling, general and administrative expense (SG&A) over the prior-year and trailing period was primarily related to an increase in international sales and marketing expenses, professional fees, stock compensation expense and long-term incentive compensation.

Net loss for the quarter was $418 thousand, down from net income of $128 thousand in the third quarter of 2018. Adjusted EBITDA(1), a non-GAAP measure defined as earnings before interest, taxes, depreciation and amortization, non-cash stock compensation expense and unusual items, was $1.1 million, similar to the prior-year period.

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.

Year-to-Date Review

($ in thousands, except per share amounts) YTD 2018
restated
$ Y/Y
Change
    % Y/Y
Change
  YTD 2019    
Tool sales/rental

 $    4,114

 $    6,153

 $   (2,039)

   

 (33.1)%

Other Related Tool Revenue

       5,099

   

       4,809

 

          290

   

6.0%

Tool Revenue

       9,212

   

     10,962

 

      (1,750)

   

 (16.0)%

Contract Services

       5,444

   

       3,803

 

       1,641

   

43.2%

Total Revenue

     14,656

   

     14,765

 

         (109)

   

 (0.7)%

Operating expenses

     15,187

   

     13,219

 

       1,968

   

14.9%

Operating (loss) income

        (531)

   

       1,546

 

      (2,076)

   

NM

Net(loss) income

     (1,061)

   

       1,023

 

      (2,084)

   

NM

Diluted (loss) earnings per share

       (0.04)

   

         0.04

 

        (0.08)

   

NM

Adjusted EBITDA(1)

 $    3,351

   

 $    4,738

 

 $   (1,387)

   

 (29.3)%

(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.

Revenue in the first nine months of 2019 was relatively unchanged from the prior-year period. Growth in Contract Services and Other Related Tool Revenue was up for similar reasons as the quarter and more than offset lower Tool Sales/Rental revenue. While tool rentals increased from activity in the Middle East, total tool sales/rental revenue declined on fewer DNR tool sales in the U.S.

Operating expenses increased $2.0 million over the prior-year period due to incremental costs associated with the Middle East expansion, addition of the Texas service center and the timing of long term incentive compensation. Operating loss was $0.5 million in the first nine months of 2019, compared with operating income in 2018 of $1.5 million.

Net loss for the first nine months of 2019 was $1.1 million, or $(0.04) per diluted share. Adjusted EBITDA(1) for the first nine months of 2019 was $3.4 million. Adjusted EBITDA margin was 23% in 2019, compared with 32% in 2018.

Balance Sheet and Liquidity

Cash at the end of the quarter was $2.8 million and working capital was $0.8 million. Capital expenditures were $0.2 million in the quarter and $0.4 million for the first nine months of 2019. In addition, approximately $0.6 million of tool inventory was converted to property, plant and equipment for DNR tools to support the expansion in MENA for the nine-month period. Also, the Company acquired a new machine tool turning center to enhance productivity that was directly financed for $0.2 million.

Total debt at the end of the third quarter was $8.8 million, down $2.1 million, or 19.2%, compared with $10.9 million at December 31, 2018. Subsequent to the end of the third quarter, the Company made its final 2019 payment on the Hard Rock note of $750 thousand in principal plus interest. Following this payment, pro forma long term debt was $3.4 million, down $2.9 million or 46% from the end of December 2018. The remaining principal balance on the Hard Rock note following the October payment was $3.0 million.

In February 2019, the Company secured a new $4.3 million credit facility comprised of a $0.8 million term loan and a $3.5 million revolver at prime plus 2% and certain fees. The credit facility matures on February 20, 2023. At the end of the third quarter, there was approximately $782 thousand borrowed on the revolver with a capacity of $1.8 million on the available asset base.

2019 Outlook and Guidance Estimates/ 2020 Preliminary Expectations:

The Company is refining its expectations for 2019 as noted below.

Revenue:

 

Approximately $19 million to $19.5 million, about 4%+ increase over 2018

Gross margin:

 

58% to 61%

SG&A expenses:

 

Approximately $8.5 million including non-cash bonus compensation

D&A:

 

Approximately $3.5 million

Interest Expense:

 

Approximately $800 thousand

Capital Expenditures:

 

Approximately $2.0 to $2.5 million, including inventory conversion and
direct financing (Approximately $0.6 to $0.7 million as capex in Statement
of Cash Flows)

Mr. Meier concluded, “We are extremely encouraged with the progress we have made this year to introduce the Drill-N-Ream into the Middle East. We believe this progress, combined with our expanded relationship with our long-term legacy customer will more than offset the depressed state of the North American oil & gas industry. We consider ourselves in a good position for growth as we head into 2020. Our preliminary expectations for 2020 are for revenue to increase 15% to 20% and for EBITDA margin to be in the 25% to 30% range.”

Definitions and Composition of Product/Service Revenue:

Contract Services Revenue is comprised of drill bit and other repair and manufacturing services.

Other Related Tool Revenue is comprised of royalties and fleet maintenance fees.

Tool Sales/Rental revenue is comprised of revenue from either the sale of tools or tools rented to customers.

Tool Revenue is the sum of Other Related Tool Revenue and Tool Sales/Rental revenue.

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 Friday, November 15, 2019. To listen to the archived call, please call (412) 317-6671 and enter conference ID number 13694910, 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, success at developing future tools, the Company’s effectiveness at executing its business strategy and plans, 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. 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, success at expansion in the Middle East, options available for market channels in North America, commercialization of the Strider technology, the success of the Company’s business strategy and prospects for growth; the market success of the Company’s specialized tools, effectiveness of its sales efforts, its cash flow and liquidity; financial projections and actual 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. The Company undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date hereof.

FINANCIAL TABLES FOLLOW.

Superior Drilling Products, Inc.
Consolidated Condensed Statements Of Operations
For the Quarter Ended September 30, 2019 and 2018
(unaudited)
 
For the Three Months For the Nine Months Ended
Ended September 30, Ended September 30,
 

2019

2018
restated

2019

2018
restated
 
Revenue

 $    5,076,215

 $  4,765,361

 $  14,656,003

 $14,764,577

 
Operating cost and expenses
 
Cost of revenue

       2,062,803

     1,665,774

       6,119,429

     5,407,389

Selling, general, and administrative expenses

       2,501,970

     1,866,833

       6,387,205

     4,991,481

Depreciation and amortization expense

          738,555

        942,473

       2,680,070

     2,820,183

 
Total operating costs and expenses

       5,303,328

     4,475,080

     15,186,704

   13,219,053

 
Operating (loss) income

         (227,113)

        290,281

         (530,701)

     1,545,524

 
Other income (expense)
   Interest income

            12,080

          16,066

            52,444

          30,080

   Interest expense

         (196,582)

       (178,642)

         (590,805)

       (552,692)

   Fixed asset impairment

             (6,143)

                  -  

             (6,143)

                  -  

   Gain on sale or disposition of assets

                    -  

                  -  

            14,147

                  -  

Total other expense

         (190,645)

       (162,576)

         (530,357)

       (522,612)

 
(Loss) income before income taxes

 $      (417,758)

 $     127,705

 $   (1,061,058)

 $  1,022,912

 
   Income tax expense

                    -  

                  -  

                    -  

                  -  

Net (loss) income

 $      (417,758)

 $     127,705

 $   (1,061,058)

 $  1,022,912

 
Basic (loss) income earnings per common share

 $            (0.02)

 $           0.01

 $            (0.04)

 $           0.04

 
Basic weighted average common shares outstanding

     25,074,466

   24,542,551

     25,042,577

   24,537,647

 
Diluted (loss) income per common Share

 $            (0.02)

 $           0.01

 $            (0.04)

 $           0.04

 
Diluted weighted average common shares outstanding

     25,074,466

   25,162,445

     25,042,577

   25,156,629

Superior Drilling Products, Inc.
Consolidated Condensed Balance Sheets
(Unaudited)
               
               
               
      September 30,
2019
  December 31, 2018
restated
Assets          
Current assets:          
   Cash 

 $ 

            2,791,956

 

 $ 

            4,264,767

   Accounts receivable, net   

            4,098,536

   

            2,273,189

   Prepaid expenses   

               167,464

   

               133,607

   Inventories   

               960,330

   

            1,003,623

   Asset held for sale   

               252,704

   

                         -  

             
     Total current assets   

            8,270,990

   

            7,675,186

             
Property, plant and equipment, net  

            7,868,520

   

            8,226,009

Intangible assets, net  

            2,277,778

   

            3,686,111

Other noncurrent assets  

                 58,028

   

                 51,887

     Total assets 

 $ 

          18,475,316

 

 $ 

          19,639,193

             
Liabilities and Shareholders' Equity        
Current liabilities:        
   Accounts payable 

 $ 

            1,270,401

 

 $ 

               717,721

   Accrued expenses   

            1,610,265

   

               631,860

   Income tax payable   

                   3,640

   

                   3,640

   Current portion of long-term debt, net of discounts   

            4,591,811

   

            4,578,759

             
     Total current liabilities 

 $ 

            7,476,117

 

 $ 

            5,931,980

             
Long-term debt, less current portion, net of discounts  

            4,176,321

   

            6,296,994

     Total liabilities 

 $ 

          11,652,438

 

 $ 

          12,228,974

             
Stockholders' equity        
   Common stock (25,018,098 and 24,535,334)   

                 25,098

   

                 25,018

   Additional paid-in-capital   

          39,914,248

   

          39,440,611

   Accumulated deficit   

        (33,116,468)

   

        (32,055,410)

Total stockholders' equity

 $ 

            6,822,878

 

 $ 

            7,410,219

     Total liabilities and shareholders' equity 

$

          18,475,316

 

$

          19,639,193

Superior Drilling Products, Inc.
Consolidated Condensed Statement of Cash Flows
For The Nine Months Ended September 30, 2019 and 2018
(Unaudited)
 
 
September 30, 2019     September 30, 2018
restated
Cash Flows From Operating Activities
 Net (loss) income 

 $ 

                (1,061,058)

 $ 

                 1,022,912

 Adjustments to reconcile net loss to net cash provided by operating activities: 
 Depreciation and amortization expense 

                 2,680,070

                 2,820,183

 Amortization of debt discount and deferred loan cost 

                      10,561

                      43,459

 Share based compensation expense 

                    473,717

                    372,211

 Income tax expense 

                              -  

                              -  

 Impairment of property, plant and equipment 

                        6,143

                              -  

 Impairment of inventories 

                              -  

                      41,396

 Gain on sale of assets 

                     (14,147)

                              -  

 Changes in operating assets and liabilities: 
 Accounts receivable 

                (1,825,347)

                      38,150

 Inventories 

                   (539,586)

                    121,484

 Prepaid expenses and other current assets 

                     (39,998)

                   (308,072)

 Accounts payable and accrued expenses 

                 1,531,085

                   (181,515)

Net Cash Provided By Operating Activities

 $ 

                 1,221,440

 

 $ 

                 3,970,208

 
Cash Flows From Investing Activities
 Purchases of property, plant and equipment 

                   (392,691)

                   (183,263)

Net Cash Used In Investing Activities  

                   (392,691)

   

                   (183,263)

 
Cash Flows From Financing Activities
 Principal payments on debt 

                (3,813,443)

                (1,887,061)

 Proceeds from debt borrowings 

                    800,000

                              -  

 Principal payments on revolving loans 

                   (735,019)

                              -  

 Proceeds from revolving loans 

                 1,517,005

                              -  

 Debt issuance costs 

                     (70,103)

                              -  

Net Cash Used In Financing Activities #

                (2,301,560)

   

                (1,887,061)

   
Net (Decrease) Increase in Cash

                (1,472,811)

                 1,899,884

Cash at Beginning of Period

                 4,264,767

                 2,375,179

Cash at End of Period

 $ 

                 2,791,956

 

 $ 

                 4,275,063

 
Supplemental information:
Cash paid for interest

 $ 

673,251

 $ 

488,112

Acquisition of equipment by issuance of note payable

 $ 

                    183,378

 $ 

                              -  

Inventory converted to property, plant and equipment

 $ 

                    582,879

 $ 

                              -  

Superior Drilling Products, Inc.

Adjusted EBITDA(1) Reconciliation
(unaudited)

Three Months Ended
September 30, 2019   September 30, 2018
restated
June 30, 2019
 
GAAP net (loss) income

 $                  (417,758)

 $                   127,705

 $                  (397,424)

Add back:
Depreciation and amortization

                      738,555

                      942,473

                     930,410

Impairment of assets

                          6,143

 - 

                     136,000

Interest expense, net

                      184,502

                      162,576

                     194,810

Share-based compensation

                      155,749

                      131,867

                     136,115

Net non-cash compensation

                      415,438

                                -

                       88,200

Gain on disposition of assets

 - 

                                -

                      (14,147)

Income tax expense (benefit)

                                 -

                                -

                                -

Non-GAAP adjusted EBITDA(1)

 $                 1,082,629

 $                1,364,621

 $                1,073,964

 
GAAP Revenue

 $                 5,076,215

 $                4,765,361

 $                4,543,442

Non-GAAP Adjusted EBITDA Margin

21.3%

28.6%

23.6%

 
 
Nine Months Ended
September 30, 2019
September 30, 2018
restated
 
GAAP net (loss) income

 $                (1,061,058)

 $                1,022,912

Add back:
Depreciation and amortization

                   2,680,070

                   2,820,183

Impairment of assets

                      142,143

                                -

Share-based compensation

                      473,717

                      372,211

Net non-cash compensation

                      591,838

                                -

Interest expense, net

                      538,361

                      522,612

(Gain) loss on disposition of assets

                       (14,147)

                                -

Income tax expense (benefit)

                                 -

                                -

Non-GAAP Adjusted EBITDA(1)

 $                 3,350,924

 $                4,737,918

 
GAAP Revenue

 $               14,656,003

 $              14,764,577

Non-GAAP Adjusted EBITDA Margin

22.9%

32.1%

(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.

Contacts

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

Release Summary

Superior Drilling Products, Inc. (NYSE American: SDPI) reports revenue increase of 7% to $5.1 million in Third Quarter 2019.

Contacts

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