ROHSTOFF INTERNATIONAL

12:30 | 09.11.2017
Superior Drilling Products, Inc. Reports $0.6 Million in Net Income for Third Quarter 2017

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, 2017.

Troy Meier, Chairman and CEO, noted, “We delivered another quarter of
solid growth as our Drill-N-Ream® (“DnR”) well bore
conditioning tool continued to gain market share combined with the
effectiveness of our go to market strategy and the year-over-year
improvement in the oil & gas industry. We believe the market appreciates
the value of the unique capabilities of the DnR and as a result we are
seeing it being used in a widening scope of applications. Importantly,
our results clearly demonstrated the significant operating leverage we
gain on higher volume. We plan to use the cash we generate to develop
new technologies designed to lower the costs to drill and complete oil
and gas wells.”
Third Quarter 2017 Financial Summary($ in thousands, except per share amounts)

 

 

 

 

 

 

 

Q3 2017
Q3 2016
$Y/Y Change
 
% Y/Y Change
Q2 2017
$ Seq. Change
% Seq. Change
Tool sales/rental

$

2,012

$

1,726

$

286

16.6

%

$

1,609

$

403

25.1

%

Other related tool revenue

1,171

119

1,052

881.8

%

877

294

33.5

%

Tool Revenue

3,183

1,845

1,338

72.5

%

2,486

697

28.0

%

Contract Services

 

 

1,264

 

 

 

416

 

 

 

848

 

203.8

%

 

 

1,564

 

 

 

(300

)

 

(19.2

)%
Total Revenue
 
$4,447
 

 
$2,261
 

 
$2,185
 
96.6%
 
$4,049
 

 
$397
 

 
9.8%
Operating income (loss)

720

(963

)

1,683

NM

421

298

70.8

%
As a % of sales
 

 
16.2%
 

 
NM
 

 

 

 

 

 

 
10.4%
 

 

 

 
Net income (loss)
 
$586
 

 
$(1,173)
 

$
1,759
 
NM
 

 
$307
 

 

$
279
 

 
91.1%
Diluted earnings (loss) per share

$

0.02

$

(0.07

)

$

0.09

NM

$

0.01

$

0.01

90.6

%

Compared with the prior-year period, revenue increased 97% to $4.4
million. Higher tool revenue was driven by increasing repair and royalty
revenue from the larger fleet of deployed DnRs as well as new demand for
SDP’s patent pending V-Stream technology. Contract services revenue
improvement year-over-year was the result of the strengthened oil & gas
industry.

Tool revenue, which is comprised of tool sales and rentals and other
related tool revenue, grew to $3.2 million, up 72% over the prior-year
period. Higher tool revenue year-over-year was primarily the result of
the increased numbers of tools deployed which drove the $1.1 million
increase in other related tool revenue, which is comprised of royalty
fees and tool maintenance and repair. Tool sales in the quarter also
improved as the result of market share growth.

Contract services revenue more than tripled over the prior-year period
to $1.3 million. This outpaced the 97% increase in rig count over the
same period as the Company is supporting drill bit refurbishment beyond
its contracted area and providing other contract manufacturing services.

When compared with the trailing second quarter of 2017, total revenue
was up 9.8% from increased tool revenue of $0.7 million partially offset
by $0.3 million lower contract services revenue.

Net income of $586 thousand improved by $1.8 million over the prior-year
period as a result of higher revenue driven by the success of the DnR,
the improvement in the oil & gas industry and operating leverage from
higher volume.
Third Quarter 2017 Operational Review($ in thousands)
 

 
Q3 2017
 
Q3 2016
 
$ Y/Y Change
 
% Y/Y Change
 
Q2 2017
 
$ Seq. Change
 
% Seq. Change
Cost of revenue

$

1,717

$

972

$

744

76.5

%

$

1,491

225

15.1

%
As a percent of sales

38.6%

43.0%

36.8%

Selling, general & administrative

$

1,102

$

1,320

$

(217

)

(16.5

)%

$

1,237

(135

)

(10.9

)%
As a percent of sales

24.8%

58.4%

30.6%

Depreciation & amortization

 

$

908

 

 

$

932

 

 

$

(24

)

 

(2.6

)%

 

$

899

 

 

8

 

 

0.9

%
Total operating expenses
 
$3,727
 

 
$3,224
 

 
$503
 

 
15.6%
 
$3,628
 

 
99
 

 
2.7%
Lower cost of revenue as a percent of sales was primarily a result of
higher volume and improved productivity.

Selling, general and administrative expense (SG&A) declined from the
prior-year period from lower research and development costs and
professional fees. SG&A decreased when compared with the trailing second
quarter for the same reasons.

Adjusted EBITDA, or earnings before interest, taxes, depreciation and
amortization, non-cash stock compensation expense and unusual items,
improved to $1.8 million, or 39.9% of revenue. Compared with the
prior-year period, Adjusted EBITDA improved 10 times, or $1.6 million
over prior-year period and $0.3 million, or 18.7% over the trailing
second quarter from higher volume and reduced costs.

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)

 

 

 

 

YTD 2017
YTD 2016
$ Change
% Change
Revenue

$

11,866

$

4,820

 

7,045

146.2

%

Operating expenses

 

10,971

 

10,853

 

 

118

1.1

%

Operating income (loss)

 

894

 

(6,033

)

 

6,927

114.8

%

Net income (loss)

$

507

$

(6,515

)

 

7,022

107.8

%

Diluted income (loss) per share

$

0.02

$

(0.37

)

0.39

105.4

%

Revenue in the first nine months of 2017 increased 2.5 times when
compared with the same period last year. The Company changed its go to
market strategy in May 2016 which, combined with the improved industry
dynamics, has driven revenue growth. Strong operating leverage from
higher volume combined with the lower cost structure of the new business
model and cost discipline enabled the measurable improvement in
operating income and margin.

Net income for the first nine months of 2017 was $0.5 million compared
with a net loss of $6.5 million for the same period in the prior-year.
Adjusted EBITDA for the nine-month period was $4.2 million, a
significant improvement over the prior-year period of $(1.5) million.
Balance Sheet and Liquidity
Cash and cash equivalents was $2.7 million at September 30, 2017, up
from $2.2 million at the end of 2016 and $1.3 million at the end of June
2017. Cash generated from operations in the quarter was $1.7 million,
compared with $0.6 million of cash used in operations in the prior-year
period. For the nine-month period, cash generated from operations was
$1.4 million, substantially improved over cash used in operations in the
prior-year period of $1.5 million.

Total debt at the end of the quarter was $13.6 million, down $3.1
million, or 18%, compared with $16.7 million at December 31, 2016.

For the first nine months of calendar year 2017, the Company had capital
expenditures of $220 thousand. In addition, during the quarter, the
Company exercised its option under a capital lease to purchase a
machining center for $690 thousand. SDP is negotiating a new capital
lease and as of September 30, 2017, recognized the amount due to the
current lessor as accrued expense.
Outlook:
Mr. Meier added, “We remain excited about our prospects for continuing
growth. We have many product initiatives in process, and are encouraged
with our progress identifying quality channel partners to take our DnR
to international markets. We believe our international conversations
indicate a strong interest in many active basins around the world, as it
appears our tools would offer value in those markets. Our intent remains
to methodically expand our reach around the globe with select channel
partners in order to retain tool maintenance and quality control, which
is imperative for the DnR’s continued success. We are also advancing
discussions with several channel partners regarding our Strider
technology for both the open hole and completion markets.”
Financial Estimates for Calendar Year 2017:
 

 

Revenue:

Approximately $15 million to $15.5 million

Operating margin (GAAP):

Approximately 2% to 3%

Depreciation:

Approximately $1.3 million

Amortization:

Approximately $2.4 million

Interest Expense:

Approximately $950 thousand

Capital Expenditures:

Approximately $1.1 million (including machining center)

The Company expects SG&A to be approximately $1.4 million in the fourth
quarter from higher incentive compensation and investments in new
product development and international expansion. SDP also expects SG&A
to increase further in 2018 from investments related to staffing for
international growth, related professional fees and product development
spending for the manufacture of Open Hole Strider prototype tools for
field testing.
Webcast and Conference Call
The Company will host a conference call and live webcast today at 11:00
am MT (1:00 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 2:00 p.m. MT (4:00 p.m. ET)
the day of the teleconference until Thursday, November 16, 2017. To
listen to the archived call, dial (412) 317-6671 and enter conference ID
number 13671792, 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(unaudited)

 

 

For the Three Months
For the Nine Months

Ended September 30,
Ended September 30,

2017
 
2016
2017
 
2016Revenue
$4,446,540

$2,261,310

$11,865,648

$4,820,405
Operating cost and expenses

Cost of revenue

1,716,740

972,400

4,388,860

3,324,975

Selling, general, and administrative expenses

1,102,373

1,319,686

3,837,218

4,149,136

Depreciation and amortization expense

 

907,837

 

 

932,250

 

 

2,745,232

 

 

3,379,215

 

Total operating costs and expenses

 

3,726,950

 

 

3,224,336

 

 

10,971,310

 

 

10,853,326

 
Operating income (loss)

 

719,590

 

 

(963,026

)

 

894,338

 

 

(6,032,921

)
Other income (expense)

Interest income

90,959

78,650

255,327

234,969

Interest expense

(224,510

)

(373,335

)

(698,638

)

(1,101,412

)

Other income

49,975

43,669

158,926

Gain on sale of assets

4,003

12,167

195,453

Unrealized gain on warrant derivative

 

 

 

28,301

 

 

 

 

28,301

 

Total other expense

 

(133,551

)

 

(212,406

)

 

(387,475

)

 

(483,763

)

Income (Loss) before income taxes

$

586,039

$

(1,175,432

)

$

506,863

$

(6,516,684

)

Income tax expense (benefit)

 

 

 

(2,000

)

 

 

 

(2,000

)
Net income (loss)
$586,039
 

$(1,173,432)
$506,863
 

$(6,514,684)Basic income (loss) earnings per common share

$

0.02

 

$

(0.07

)

$

0.02

 

$

(0.37

)
Basic weighted average common shares outstanding

 

24,261,272

 

 

17,891,786

 

 

24,218,477

 

 

17,606,324

 
Diluted income (loss) per common Share

$

0.02

 

$

(0.07

)

$

0.02

 

$

(0.37

)
Diluted weighted average common shares outstanding

 

24,261,272

 

 

17,891,786

 

 

24,218,477

 

 

17,606,324

 
Superior Drilling Products, Inc.Consolidated Condensed Balance Sheets(unaudited)
 

 

 

 

September 30, 2017
December 31, 2016

 
Assets

Current assets:

Cash

$

2,705,837

$

2,241,902

Accounts receivable, net

2,532,659

1,038,664

Prepaid expenses

154,018

76,175

Inventories

1,176,912

1,167,692

Asset held for sale

2,490,000

Other current assets

 

251,600

 

 

13,598

 

 

Total current assets

6,821,026

7,028,031

 

Property, plant and equipment, net

9,039,031

9,068,359

Intangible assets, net

6,744,444

8,579,444

Related party note receivable

7,746,717

8,296,717

Other noncurrent assets

 

15,954

 

 

15,954

 

Total assets

$
30,367,172
 

$32,988,505
 

 
Liabilities and Shareholders’ Equity

Current liabilities:

Accounts payable

$

658,390

$

1,066,514

Accrued expenses

1,125,359

449,004

Capital lease obligation

217,302

Related party debt

197,922

272,215

Current portion of long-term debt, net of discounts

 

6,647,944

 

 

2,905,682

 

 

Total current liabilities

$

8,629,615

$

4,910,717

 

Other long term liability

820,657

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

6,763,880

 

 

13,288,701

 

Total liabilities
$15,393,495
 

$19,020,075
 

 

Stockholders’ equity

Common stock (24,313,312 and 24,120,695)

24,313

24,120

Additional paid-in-capital

38,793,619

38,295,428

Accumulated deficit

 

(23,844,255

)

 

(24,351,118

)

Total stockholders’ equity

$

14,973,677

 

$

13,968,430

 

Total liabilities and shareholders’ equity
$30,367,172
 

$32,988,505
 
Superior Drilling Products, Inc.Consolidated Condensed Statement of Cash Flows(unaudited)
 

 

 

Nine Months Ended

September 30, 2017
September 30, 2016Cash Flows From Operating Activities

Net income (loss)

$

506,863

$

(6,514,684

)

Adjustments to reconcile net income to net cash used in operating
activities:

Depreciation and amortization expense

2,745,232

3,379,215

Amortization of debt discount

59,766

93,172

Deferred tax benefit

(2,000

)

Share – based compensation expense

498,384

534,052

Unrealized gain on warrant derivative

(28,301

)

Write-off Strider assets

361,903

Gain on sale of assets

(12,167

)

(195,453

)

Changes in operating assets and liabilities:

Accounts receivable

(1,493,995

)

648,546

Inventories

(9,220

)

(73,733

)

Prepaid expenses and other noncurrent assets

(315,845

)

(169,981

)

Other assets

(10,937

)

Accounts payable and accrued expenses

(610,936

)

496,629

Other long term liabilities

 

(17,490

)

 

 
Net Cash Provided By (Used In) Operating Activities

$
1,350,592
 

$
(1,481,572)

 
Cash Flows From Investing Activities

Purchases of property, plant and equipment

(220,101

)

(315,101

)

Proceeds from sale of fixed assets

 

2,483,921

 

 

483,217

 
Net Cash Provided By Investing Activities

 

2,263,820

 

 

168,116

 

 
Cash Flows From Financing Activities

Principal payments on debt

(2,858,882

)

(1,226,339

)

Principal payments on related party debt

 

(74,293

)

(44,662

)

Principal payments on capital lease obligations

(217,302

)

(244,461

)

Proceeds received from debt borrowings

1,500,000

Net Proceeds from line of credit

637,992

Proceeds from sale of subsidiary

50,700

Proceeds from payments on related party note receivable

22,533

Stock Offering Expenses

(193,418

)

Debt issuance Costs

 

 

 

(153,643

)
Net Cash Provided By (Used In) Financing Activities

 

(3,150,477

)

 

348,702

 

 
Net Increase (Decrease) in Cash

463,935

(964,754

)

Cash at Beginning of Period

 

2,241,902

 

 

1,297,002

 
Cash at End of Period

$

2,705,837

 

$

332,248

 

 

Supplemental information:

Cash paid for interest

$

617,565

$

1,194,498

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

$

Long term debt paid with stock

$

$

1,000,000

Accounts Receivable – Stock Subscription

$

$

5,297,500

Superior Drilling Products, Inc.Adjusted EBITDA(1) Reconciliation(unaudited)

 

 

 

 

 

Three Months Ended

September 30, 2017

 
June 30, 2017
 

September 30, 2016

 
GAAP net income (loss)
$586,039

$306,807

 

$(1,173,432)
Add back:

Depreciation and amortization

907,837

899,373

 

932,250

Interest expense, net

133,551

132,594

 

294,685

Share-based compensation

147,643

175,361

 

157,266

Unrealized gain on warrant derivative

 

(28,301

)

(Gain) loss on sale of assets

(17,995

)

 

(4,003

)

Income tax expense (benefit)

 

 

 

 

 

 

(2,000

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

$1,496,140

 

$176,465

 

GAAP Revenue

$

4,446,540

$

4,049,497

 

$

2,261,310

Non-GAAP EBITDA Margin

39.9%

36.9%

7.8%

 

Nine Months Ended

30-Sep-17

30-Sep-16

 
GAAP net income (loss)
$506,863

$(6,514,684)

Add back:

Depreciation and amortization

2,745,232

3,379,215

Share-based compensation

498,384

534,051

Interest expense, net

443,311

866,443

Impairment of assets

362,000

Functional Drill-N-Ream Sales

72,000

(Gain) loss on sale of assets

(12,167

)

(195,453

)

Unrealized gain on warrant derivative

(28,301

)

Income tax expense (benefit)

 

 

 

(2,000

)

Non-GAAP Adjusted EBITDA(1)
$4,181,623
 

$(1,526,729)

 

GAAP Revenue

$

11,865,648

$

4,820,405

Non-GAAP EBITDA Margin

35.2%

NM

(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.
View source version on businesswire.com: http://www.businesswire.com/news/home/20171109005410/en/


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