Market Overview

Superior Drilling Products, Inc. Reports 33% Revenue Growth, Triples Net Income for Second Quarter 2018

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  • Strong tool revenue drove total sales to $5.4 million
  • Strong operating leverage resulted in 2.6x operating income
  • Net income more than tripled to $1.0 million
  • Generated $1.6 million in cash from operations for the quarter
    and $2.1 million year-to-date

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

Troy Meier, Chairman and CEO, noted, "We had strong growth in the
quarter supported by excellent tool sales that were also complemented by
initial revenue generated in the Middle East. The value of our
Drill-N-Ream® ("DnR") well bore conditioning tool is becoming
more broadly understood globally in the oil & gas industry as the
operating fleet expands. In fact, the deployment of the DnR in the
Middle East is demonstrating it can deliver incremental improvements to
their drilling operations. And, importantly, we believe our Strider™
oscillation system technology continues to demonstrate value as we are
evaluating channel partnership opportunities."

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

     

Q2
2018

   

Q2
2017

   

$Y/Y
Change

   

% Y/Y
Change

   

Q1
2018

   

$ Seq.
Change

   

% Seq.
Change

Tool sales/rental $ 2,506 $ 1,609 $ 897 55.8 % $ 1,992 $ 515 25.8 %
Other related tool revenue   1,547         877         670       76.4 %       1,533         14     0.9 %
Tool Revenue 4,053 2,486 1,567 63.1 % 3,525 528 15.0 %
Contract Services         1,346         1,564         (218 )     (13.9 )%       1,075         270     25.1 %
Total Revenue       $ 5,399       $ 4,049       $ 1,349       33.3 %     $ 4,600       $ 799     17.4 %
Operating income (loss) 1,088 421 667 158.4 % 168 920 548.7 %
As a % of sales         20.1 %       10.4 %                   3.6 %            
Net income (loss)       $ 1,005       $ 307       $ 698       227.5 %     $ 69       $ 936     1,366 %
Diluted earnings (loss) per share $ 0.04 $ 0.01 $ 0.03 215.2 % $ - $ 0.04 NM
 

Revenue growth was primarily the result of higher sales and rental of
the DnR in North America and the Middle East. Lower contract services
revenue was the result of the decline in other contract services
activity in the quarter which was mostly offset by higher refurbishment
volume. Sequentially, contract services improvement reflects the
increase in refurbishment volume which was driven by continued drilling
activity in the U.S. and the Company's expanded contract services
agreement.

Tool sales in the quarter increased 56%, or $0.9 million, over the
prior-year period primarily as a result of market share gains and an
increase in horizontal drill rigs. Sequential growth of almost 26%
represents an expansion of the DnR fleet. Other related tool revenue,
which is comprised of royalty fees and tool maintenance and repair,
increased over the prior-year period, but was relatively unchanged
compared with the trailing first quarter as fleet expansion outpaced
tool deployment.

Net income of $1.0 million improved by $0.7 million over the second
quarter of 2017 from higher volume and resulting operating leverage.

Second Quarter 2018 Operational Review

($ in thousands)      

Q2
2018

   

Q2
2017

   

$ Y/Y
Change

   

% Y/Y
Change

   

Q1
2018

   

$ Seq.
Change

   

% Seq.
Change

Cost of revenue $ 1,943 $ 1,491 $ 451 30.3 % $ 1,799 144 8.0 %
As a percent of sales 36.0 % 36.8 % 39.1 %
Selling, general & administrative $ 1,427 $ 1,237 $ 190 15.3 % $ 1,698 (271 ) (15.9 )%
As a percent of sales 26.4 % 30.6 % 36.9 %
Depreciation & amortization       $ 942       $ 899       $ 42     4.7 %     $ 936       6       0.6 %
Total operating expenses       $ 4,311       $ 3,628       $ 683     18.8 %     $ 4,433       (121 )     (2.7 )%
 

The reduction in the cost of revenue as a percent of sales was due to
the leverage gained from higher volume.

The increase in selling, general and administrative expense (SG&A) over
the prior-year period primarily reflects investments in research and
development and in our international market expansion, which was
partially offset by a reduction in professional fees. As a percentage of
sales, SG&A decreased compared with the prior-year period from operating
leverage gained from higher volume.

Chris Cashion, Chief Financial Officer, noted, "Due to the timing of
certain costs, SG&A was lower in the quarter than we had originally
planned. However, we expect that those costs will be realized in the
latter half of the year, which includes our establishment of a repair
operation in Texas."

The improvement in second quarter 2018 Adjusted EBITDA, or earnings
before interest, taxes, depreciation and amortization, non-cash stock
compensation expense and unusual items, was the result of strong
operating leverage. Adjusted EBITDA was $2.1 million, or 40% of revenue
in the quarter up $0.6 million and $0.9 million over the 2017 second
quarter and sequential 2018 first 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)
     

YTD
2018

   

YTD
2017

   

$
Change

   

%
Change

 
Revenue $ 9,999 $ 7,419   2,580 34.8 %
Operating expenses   8,744   7,244     1,500 20.7 %
Operating income (loss)   1,255   175     1,080 618.3 %
Net income (loss) $ 1,073 $ (79 )   1,153 NM  
Diluted income (loss) per share $ 0.04 $ 0.00 0.04 NM
 

Revenue in the first six months of 2018 increased nearly 35% when
compared with the same period last year. The growth reflects higher tool
revenue supported by U.S. drilling activity and contributions from
penetration into the Middle East. Strong operating leverage from higher
volume and cost discipline enabled the measurable improvement in
operating income and margin.

Net income for the first six months of 2018 was $1.1 million compared
with a net loss of $79 thousand for the same period in the prior-year.
Adjusted EBITDA for the six-month period was $3.4 million, or 34% of
sales, compared with $2.4 million, or 32% of sales, for the first half
of 2017.

Balance Sheet and Liquidity

Cash and cash equivalents was $3.1 million at June 30, 2018, up from
$2.4 million at the end of 2017. Cash generated from operations in the
quarter was $1.6 million, compared with $0.5 million in the prior-year
period.

In the second quarter of 2018 the Company had capital expenditures of
$37 thousand.

Total debt at the end of the quarter was $11.6 million, down $1.2
million, or 9.5%, compared with $12.8 million at December 31, 2017.

At June 30, 2018, we had a working capital deficit of approximately $1.4
million. The Company's manufacturing facility is financed by a
commercial bank loan with principal of $4.2 million due February 15,
2019 as the result of an extension executed on August 1, 2018. The debt
has been reclassified to short-term and results in a working capital
deficit at June 30, 2018.

Mr. Cashion added, "Our $4.3 million mortgage on our property in Vernal,
Utah has been extended for six-months as we continue to evaluate various
financing options to include restructuring our total debt to provide
improved liquidity."

Outlook:

The Company has raised the lower end of its revenue expectations for
2018:

Revenue:     Tightened to $20 million to $22 million from $18 million to $22
million
    Represents 35% growth at midpoint of range.
Operating Margin: Tightened to 8% to 10% from 5% to 10% At midpoint of range, operating income reaches $1.9 million, up
$1.7 million from prior year
Interest Expense: Unchanged from approximately $750 thousand Down from $906 thousand in 2017 on lower debt balances
Depreciation and Amortization: Unchanged at slightly under $4.0 million Compares with $3.7 million in 2017
Capital Expenditures: 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, August 9, 2018. To listen
to the archived call, dial (412) 317-6671 and enter conference ID number
13680958, 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 Strider™ 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 Six Months Ended June 30, 2018 and 2017

(unaudited)

 
For the Three Months For the Six Months
Ended June 30, Ended June 30,
       
2018 2017 2018 2017
 
Revenue $ 5,398,923 $ 4,049,497 $ 9,999,216 $ 7,419,109
 
Operating cost and expenses
 
Cost of revenue 1,942,671 1,491,383 3,741,615 2,672,116
Selling, general, and administrative expenses 1,426,985 1,237,335 3,124,648 2,734,852
Depreciation and amortization expense   941,683   899,373   1,877,710   1,837,395
 
Total operating costs and expenses   4,311,339   3,628,091   8,743,973   7,244,363
 
Operating income (loss)   1,087,584   421,406   1,255,243   174,746
 
Other income (expense)
Interest income 99,711 82,509 192,139 164,368
Interest expense (182,497) (215,103) (374,050) (474,128)
Other income - - - 43,669
Gain on sale of assets   -   17,995   -   12,167
Total other expense   (82,786)   (114,599)   (181,911)   (253,924)
 
Income (loss) before income taxes $ 1,004,798 $ 306,807 $ 1,073,332 $ (79,178)
 
Income tax benefit - - - -
Net income (loss) $ 1,004,798 $ 306,807 $ 1,073,332 $ (79,178)
 
Basic income (loss) earnings per common share $ 0.04 $ 0.01 $ 0.04 $ (0.00)
 
Basic weighted average common shares outstanding   24,535,155   24,197,148   24,535,155   24,196,726
 
Diluted income (loss) per common Share $ 0.04 $ 0.01 $ 0.04 $ (0.00)
 
Diluted weighted average common shares outstanding   25,140,467   24,197,148   25,140,467   24,196,726
 
         

Superior Drilling Products, Inc.

Consolidated Condensed Balance Sheets

(unaudited)

 
June 30, 2018 December 31, 2017
Assets
Current assets:
Cash $ 3,083,897 $ 2,375,179
Accounts receivable, net 3,208,598 2,667,042
Prepaid expenses 152,818 111,530
Inventories 945,015 1,196,813
Other current assets   178,125   -
 
Total current assets 7,568,453 6,350,564
 
Property, plant and equipment, net 8,285,721 8,809,348
Intangible assets, net 4,909,444 6,132,778
Related party note receivable 7,367,212 7,367,212
Other noncurrent assets   15,889   15,954
Total assets $ 28,146,719 $ 28,675,856
 
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 340,094 $ 1,021,469
Accrued expenses 603,502 543,758
Current portion of long-term debt, net of discounts 8,001,810 6,101,678
 
Total current liabilities $ 8,945,406 $ 7,666,905
 
Long-term debt, less current portion, net of discounts 3,585,061 6,706,375
Total liabilities $ 12,530,467 $ 14,373,280
 
Stockholders' equity
Common stock (24,535,155 and 24,535,155) 24,535 24,535
Additional paid-in-capital 39,148,208 38,907,864
Accumulated deficit   (23,556,491)   (24,629,823)
Total stockholders' equity $ 15,616,252 $ 14,302,576
Total liabilities and shareholders' equity $ 28,146,719 $ 28,675,856
 
         

Superior Drilling Products, Inc.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2018 and 2017

(unaudited)

 
June 30, 2018 June 30, 2017
Cash Flows From Operating Activities
Net Income (Loss) $ 1,073,332 $ (79,178)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization expense 1,877,711 1,837,395
Amortization of debt discount 31,281 40,110
Share - based compensation expense 240,344 350,741
Impairment of inventories 41,396 -
Gain on sale of assets - (12,167)
Changes in operating assets and liabilities:
Accounts receivable (541,556) (1,836,466)
Inventories 211,368 (118,046)
Prepaid expenses and other noncurrent assets (219,348) (151,549)
Accounts payable and accrued expenses (621,631) (328,992)
Other long-term liabilities   -   (17,490)
Net Cash Provided By (Used In) Operating Activities $ 2,092,897 $ (315,642)
 
Cash Flows From Investing Activities
Purchases of property, plant and equipment (131,716) (141,137)
Proceeds from sale of fixed assets   -   2,483,921
Net Cash Provided By (Used In) Investing Activities   (131,716)   2,342,784
 
Cash Flows From Financing Activities
Principal payments on debt (1,252,463) (2,740,140)
Principal payments on related party debt - (74,293)
Principal payments on capital lease obligations   -   (153,720)
Net Cash Used In Financing Activities

 

(1,252,463)   (2,968,153)
 
Net Increase (Decrease) in Cash 708,718 (941,011)
Cash at Beginning of Period   2,375,179   2,241,902
Cash at End of Period $ 3,083,897 $ 1,300,891
 
Supplemental information:
Cash paid for interest $ 340,891 $ 460,842
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
 
     

Superior Drilling Products, Inc.

Adjusted EBITDA(1) Reconciliation

(unaudited)

 
Three Months Ended
June 30, 2018     June 30, 2017     March 31, 2018
       
GAAP net income (loss) $ 1,004,798 $ 306,807 $ 68,534
Add back:
Depreciation and amortization 941,683 899,373 936,027
Interest expense, net 82,786 132,594 99,125
Share-based compensation 103,327 175,361 137,017
(Gain) loss on sale of assets   -   (17,995)   -
Non-GAAP adjusted EBITDA(1) $ 2,132,594 $ 1,496,140 $ 1,240,703
 
GAAP Revenue $ 5,398,923 $ 4,049,497 $ 4,600,293
Non-GAAP EBITDA Margin 39.5% 36.9% 27.0%
 
 
Six Months Ended
June 30, 2018 June 30, 2017
 
GAAP net income (loss) $ 1,073,332 $ (79,178)
Add back:
Depreciation and amortization 1,877,710 1,837,395
Share-based compensation 240,344 350,741
Interest expense, net 181,911 309,760
(Gain) loss on sale of assets   -   (12,167)
Non-GAAP Adjusted EBITDA(1) $ 3,373,297 $ 2,406,551
 
GAAP Revenue $ 9,999,216 $ 7,419,109
Non-GAAP EBITDA Margin 33.7% 32.4%
 
(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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