- Established channels with three tool providers in the Middle
East market as runs with the Drill-N-Ream® increase
- Strengthened relationship with legacy partner drove Contract
Services revenue up 46.4% over prior-year period and 23.7% over
sequential quarter
Superior Drilling Products, Inc. (NYSE American: SDPI) (“SDP” or
the “Company”), a designer and manufacturer of drilling tool
technologies, today reported preliminary financial results for the
second quarter ended June 30, 2019. Preliminary financial results
reflect the impact of the write-down of the Tronco Loan, effective
September 30, 2017. (See the “Decision to Restate Financials to
Reflect Write-down of Tronco Loan” section of this press release
for more information.)
Troy Meier, Chairman and CEO, noted, “We made great headway in
the Middle East. We now engage three oil field services companies
to represent our patented Drill-N-Ream® (DNR) well bore
conditioning tool. We expect the adoption rate to increase over the
next several months and that the success of our efforts will be
demonstrated in our results by year end.”
He added, “Domestically, our current North American channel
partner is gaining new customers even as the number of rigs has
declined, including major oil companies. Our expanded relationship
with our long-time legacy customer also drove the increase in
Contract Services revenue by increasing bit repair, expanding to
include repair and refurbishment of other drill tools and by adding
contract manufacturing of new products.”
Mr. Meier noted, “Importantly, we have a number of opportunities
that we expect to solidify over the next few months that will drive
our future growth by measurably expanding our relationship with our
long-time legacy customer.”
Second Quarter 2019 Preliminary Review ($ in thousands,
except per share amounts) (See at “Definitions” the composition of
product/service revenue categories.)
Q2 2019
Q2 2018
$Y/Y Change
% Y/Y Change
Q1 2019
$ Seq. Change
% Seq. Change
Tool Sales/Rental
$
1,000
$
2,506
$
(1,506
)
(60.1
)%
$
1,753
$
(753
)
(43.0
)%
Other Related Tool Revenue
1,573
1,547
26
1.7
%
1,691
(118
)
(7.0
)%
Tool Revenue
2,573
4,053
$
(1,480
)
(36.5
)%
3,444
$
(871
)
(25.3
)%
Contract Services
1,970
1,346
624
46.4
%
1,592
378
23.7
%
Total Revenue
$
4,543
$
5,399
$
(856
)
(15.8
)%
$
5,036
$
(493
)
(9.8
)%
When compared with the prior-year period, the increase in
Contract Services revenue was mostly the result of increased demand
of dill bit refurbishment as well as additional services provided
for repair of and refurbishment of other tools and contract
manufacturing. The durability and resiliency of the DNR has
extended its tool life, delaying the requirement for replacement
tools. This decrease in DNR tool sales was partially offset by the
increase in Contract Services revenue. The primary distributor of
the DNR in the U.S. is modestly building market share and gaining
new customers, while also facing the decline in drilling activity
in the U.S. that has resulted in fewer operating rigs. The Company
expects that the addition of new channels to market in the U.S. and
expansion in the Middle East will drive growth in tool revenue
toward the end of 2019 and into 2020 and beyond.
Second Quarter 2019 Preliminary Operating Expenses
($ in thousands)
Q2 2019
Q2 2018 restated
$ Y/Y Change
% Y/Y Change
Q1 2019 restated
$ Seq. Change
% Seq. Change
Cost of revenue
$
2,014
$
1,943
$
71
3.7
%
$
2,043
$
(29
)
(9.8
)%
As a percent of sales
44.3
%
36.0
%
40.6
%
Selling, general & administrative
$
1,816
$
1,427
$
389
27.3
%
$
2,069
$
(253
)
(12.2
)%
As a percent of sales
40.0
%
26.4
%
41.1
%
Depreciation & amortization
$
930
$
942
$
(12
)
(1.2
)%
$
1,011
$
(81
)
(8.0
)%
Total operating expenses
$
4,760
$
4,311
$
449
10.4
%
$
5,123
$
(363
)
(7.1
)%
Operating (loss) income
$
(216
)
$
1,088
$
(1,304
)
NM
$
(87
)
$
(129
)
NM
As a % of sales
(4.8
)%
20.1
%
(1.7
)%
Net (loss) income
$
(397
)
$
913
$
(1,260
)
NM
$
(246
)
$
(151
)
NM
Diluted (loss) earnings per share
$
(0.02
)
$
0.04
$
(0.06
)
NM
$
(0.01
)
$
(0.01
)
NM
Adjusted EBITDA(1)
$
1,074
$
2,133
$
(1,059
)
(49.7
)%
$
1,194
$
(120
)
(10.0
)%
The cost of revenue as a percentage of sales increased as a
result of lower absorption from the combination of reduced
production volume and increased production capacity in Texas,
international start-up investments, and a $136 thousand impairment
of obsolete inventory.
Increased selling, general and administrative expense (SG&A)
over the prior-year periods reflected higher research and
development costs related to the Strider™ oscillation system
technology, international sales and marketing expenses,
professional fees, stock compensation expense and accrued
bonuses.
Net loss for the quarter was $397 thousand, while 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 $1.1 million.
The Company believes that when used in conjunction with measures
prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”), Adjusted EBITDA, which is a non-GAAP measure,
helps in the understanding of its operating performance. (1)See the
attached tables for important disclosures regarding SDP’s use of
Adjusted EBITDA, as well as a reconciliation of net loss to
Adjusted EBITDA.
Year-to-Date Preliminary Review
($ in thousands, except per share amounts)
YTD 2019 preliminary
YTD 2018 restated
$ Change
% Change
Tool Sales/Rental
$
2,753
$
4,498
$
(1,745
)
(38.8
)%
Other Related Tool Revenue
3,264
3,103
161
5.2
%
Tool Revenue
6,017
7,601
(1,584
)
(20.8
)%
Contract Services
3,562
2,398
1,164
48.5
%
Total Revenue
$
9,580
$
9,999
$
(419
)
(4.2
)%
Operating expenses
9,883
8,744
1,139
13.0
%
Operating (loss) income
(304
)
1,255
(1,559
)
NM
Net (loss) income
$
(643
)
$
895
$
(1,538
)
NM
Diluted (loss) income per share
$
(0.03
)
$
0.04
$
(0.07
)
NM
Adjusted EBITDA(1)
$
2,268
$
3,373
$
(1,105
)
(32.8
)%
Revenue in the first six months of 2019 decreased 4%, or $0.4
million, compared with 2018. Contract Services revenue grew as the
Company gained more business from a major customer under an
enhanced contract. Other Related Tool Revenue was up slightly from
the drilling activity related to deployed DNR tools. Tool
Sales/Rental declined as drilling activity in the U.S. slowed and
the primary distributor of the tool nominally increased market
share. 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 $1.1 million from
the prior year due to incremental costs associated with the Middle
East expansion, addition of the Texas service center and the
development of the Strider™ oscillation system technology. Lower
revenue and higher operating expenses led to an operating loss of
$0.3 million in the first half of 2019, compared with operating
income in 2018 of $1.3 million.
Net loss for the first six months of 2019 was $0.6 million, or
$(0.03) per diluted share. Adjusted EBITDA(1) for the first six
months of 2019 was $2.3 million. Adjusted EBITDA margin was 24% in
2019, compared with 34% in 2018.
Preliminary Balance Sheet and Liquidity
The cash balance at the end of the quarter was $3.2 million and
working capital was $1.4 million. Cash provided by operations was
$0.9 million in the first half of 2019, compared with $2.1 million
in the first half of 2018.
Capital expenditures were $567 thousand in the second quarter
and were primarily for DNR tools to support the expansion in the
Middle East and deposits on two pieces of equipment.
Total debt at the end of the second quarter was $9.9 million,
down $1.0 million, or 9.2%, compared with $10.9 million at December
31, 2018. Total principal payments in 2019 on the Hard Rock note
through July 15, 2019 were $2.25 million. The remaining principal
balance on the note following the July payment was $3.75 million.
In February 2019, the Company secured a new $4.3 million credit
facility which included 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 second quarter,
there was approximately $872 thousand outstanding on the revolver
with a capacity of $1.7 million based on the asset base
available.
Financial Information Is Preliminary and May Be Subject To
Change
The unaudited interim financial information presented in this
press release is preliminary. The final financial results reported
for this period may differ from the results reported in this
release as a result of the work necessary for the preparation of
financial statements taking into account the results of the
restatement of financials related to the write-down of the Tronco
Loan.
Decision to Restate Financials to Reflect Write-down of
Tronco Loan
After a thorough review and interpretation of accounting
standards that a typical bank would use for the definition of an
impaired loan and the accounting of such, the Company came to the
conclusion that it was necessary to revise its financial statements
to reflect the write-down of the note receivable, or the $7.7
million “Tronco Loan”, as of September 30, 2017. The timing of the
write-down is related to the 2017 extension of payment terms. As a
result of the restatement, the financial statements and other
financial disclosures for the periods including September 30, 2017
through March 31, 2019, for such financial information that
pertains to the Tronco Loan, should not be relied upon.
The non-cash charge primarily impacts the balance sheet and the
timing of recognition of investment income. It does not impact
revenue and operating costs, nor does it impact total cash flows
from operating, investing and financing. The Company will pursue
full repayment of the note and continues to hold the 8,267,860
shares of the Company’s common stock as collateral. Upon receiving
repayment of the note, the Company will record a recovery of the
loan.
2019 Outlook and Guidance Estimates:
Mr. Meier concluded, “We are extremely encouraged with the
progress we are making to grow the DNR’s global market share. We
expect the expansion of our channels to market in the U.S. and the
Middle East to drive growth, ramping in the second half of this
year and on into 2020. Nevertheless, we recognize the depressed
state of the North American oil & gas industry and are reducing
our outlook for this year. We have on going potential for greater
growth with continued expansion of our market share in the U.S.,
the measurable opportunity for international growth and the
introduction of the Strider Technology™ oscillation system, which
we expect to have rapid market acceptance.”
Revenue:
$19 million to $20 million
Gross margin:
58% to 61%
SG&A expenses:
$7.5 million to $8.0 million
D&A:
Approximately $3.5 million
Interest Expense:
Approximately $800 thousand
Capital Expenditures:
Approximately $3.0 to $3.5 million
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 Thursday, August 8, 2019.
To listen to the archived call, dial (412) 317-6671 and enter
conference ID number 13692056, 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, 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, statements regarding the Company’s intent
to restate its prior consolidated financial statements for the
Non-Reliance Periods, the estimated impact of adjustments to the
financial statements for the Non-Reliance Periods, the anticipated
timing for filing the restated financial information and related
matters, 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; the risk that the process of preparing the restated
consolidated financial statements or other subsequent events would
require the Company to make additional adjustments to its financial
statements and the time and effort required to complete the
restatement of its consolidated financial statements and file the
restated financial information, 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.
Superior Drilling Products,
Inc.
Consolidated Condensed
Statements of Operations
for the Periods Ended June 30,
2019 and 2018
(unaudited)
For the Three Months
For the Six Months
Ended
Ended June 30,
Ended June 30,
2019 preliminary
2018 restated
2019 preliminary
2018 restated
Revenue
$
4,543,442
$
5,398,923
$
9,579,788
$
9,999,216
Operating cost and expenses Cost of revenue
2,013,598
1,942,671
4,056,626
3,741,615
Selling, general, and administrative expenses
1,816,195
1,426,985
3,885,235
3,124,648
Depreciation and amortization expense
930,410
941,683
1,941,515
1,877,710
Total operating costs and expenses
4,760,203
4,311,339
9,883,376
8,743,973
Operating (loss) income
(216,761
)
1,087,584
(303,588
)
1,255,243
Other income (expense) Interest income
21,431
7,873
40,364
14,014
Interest expense
(216,241
)
(182,497
)
(394,223
)
(374,050
)
Gain (loss) on sale or disposition of assets
14,147
-
14,147
-
Total other expense
(180,663
)
(174,624
)
(339,712
)
(360,036
)
(Loss) income before income taxes
$
(397,424
)
$
912,960
$
(643,300
)
$
895,207
Income tax expense
-
-
-
-
Net (loss) income
$
(397,424
)
$
912,960
$
(643,300
)
$
895,207
Basic (loss) income earnings per common share
$
(0.02
)
$
0.04
$
(0.03
)
$
0.04
Basic weighted average common shares outstanding
25,034,580
24,535,155
25,026,384
24,535,155
Diluted (loss) income per common Share
$
(0.02
)
$
0.04
$
(0.03
)
$
0.04
Diluted weighted average common shares outstanding
25,034,580
25,140,467
25,026,384
25,140,467
Superior Drilling Products,
Inc.
Consolidated Condensed Balance
Sheets
(unaudited)
June 30, 2019preliminary
December 31, 2018restated Assets
Current assets:
Cash
$
3,214,651
$
4,264,767
Accounts receivable, net
3,092,772
2,273,189
Prepaid expenses
235,358
133,607
Inventories
1,162,504
1,003,623
Asset held for sale
258,847
-
Other current assets
220,558
-
Total current
assets
8,184,690
7,675,186
Property, plant and
equipment, net
8,172,914
8,226,009
Intangible assets, net
2,569,445
3,686,111
Other noncurrent assets
58,278
51,887
Total assets
$
18,985,327
$
19,639,193
Liabilities and
Shareholders' Equity Current
liabilities: Accounts
payable
$
780,652
$
717,721
Accrued expenses
1,197,524
631,860
Income tax payable
3,640
3,640
Current portion of long-term debt, net of discounts
4,820,299
4,578,759
Total current
liabilities
$
6,802,115
$
5,931,980
Long-term debt, less
current portion, net of discounts
5,098,326
6,296,994
Total liabilities
$
11,900,441
$
12,228,974
Stockholders' equity
Common stock (25,018,098 and
24,535,334)
25,035
25,018
Additional paid-in-capital
39,758,560
39,440,611
Accumulated deficit
(32,698,709
)
(32,055,410
)
Total stockholders' equity
$
7,084,886
$
7,410,219
Total liabilities and shareholders' equity
$
18,985,327
$
19,639,193
Superior Drilling Products,
Inc.
Consolidated Statements of
Cash Flows
For the Periods Ended June 30,
2019 and 2018
(unaudited)
June 30, 2019preliminary
June 30, 2018restated Cash Flows From Operating
Activities Net (loss) income
$
(643,300
)
$
895,207
Adjustments to reconcile net loss to net cash provided by operating
activities: Depreciation and amortization
expense
1,941,515
1,877,711
Amortization of debt discount and deferred loan cost
6,178
31,281
Share based compensation expense
317,967
240,344
Income tax expense
-
-
Impairment of
inventories
-
41,396
Loss (gain) on sale of assets
(14,147
)
-
Changes in operating assets and liabilities:
Accounts receivable
(819,583
)
(541,556
)
Inventories
(158,881
)
211,368
Prepaid expenses and other current assets
(328,700
)
(41,223
)
Accounts payable and accrued expenses
628,595
(621,631
)
Net Cash Provided By Operating Activities
$
929,644
$
2,092,897
Cash Flows From Investing Activities
Purchases of property, plant and equipment
(957,192
)
(131,716
)
Proceeds from sale of fixed assets
-
-
Net Cash Used In Investing Activities
(957,192
)
(131,716
)
Cash Flows From Financing Activities
Principal payments on debt
(2,895,957
)
(1,252,463
)
Proceeds from debt borrowings
1,071,578
-
Principal payments on revolving loans
(437,922
)
-
Prroceeds from revolving loans
1,309,836
-
Debt issuance costs
(70,103
)
-
Net Cash Used In Financing Activities
(1,022,568
)
(1,252,463
)
Net (Decrease) Increase in
Cash
(1,050,116
)
708,718
Cash at Beginning of Period
4,264,767
2,375,179
Cash at End of Period
$
3,214,651
$
3,083,897
Supplemental information: Cash
paid for interest
$
466,976
$
340,891
Acquisition of equipment by issuance of note payable
$
59,262
$
-
Superior Drilling Products,
Inc.
Adjusted EBITDA(1)
Reconciliation
(unaudited)
Three Months Ended June 30,
2019preliminary June 30, 2018restated
March 31, 2019restated GAAP
net (loss) income
$
(397,424
)
$
912,960
$
(245,876
)
Add back: Depreciation and amortization
930,410
941,683
1,011,105
Inventory write off
136,000
-
-
Interest expense, net
194,810
174,624
159,049
Share-based compensation
136,115
103,327
181,852
Net non-cash compensation
88,200
-
88,200
Gain on disposition of assets
(14,147
)
-
-
Income tax expense (benefit)
-
-
-
Non-GAAP adjusted EBITDA(1)
$
1,073,964
$
2,132,594
$
1,194,330
GAAP Revenue
$
4,543,442
$
5,398,923
$
5,036,346
Non-GAAP Adjusted EBITDA Margin
23.6
%
39.5
%
23.7
%
Six Months
Ended June 30, 2019preliminary June 30,
2018restated GAAP net (loss)
income
$
(643,300
)
$
895,207
Add back: Depreciation and amortization
1,941,515
1,877,711
Impairment of assets
136,000
-
Share-based compensation
317,967
240,344
Net non-cash compensation
176,400
-
Interest expense, net
353,859
360,036
(Gain) loss on disposition of assets
(14,147
)
-
Income tax expense (benefit)
-
-
Non-GAAP Adjusted EBITDA(1)
$
2,268,294
$
3,373,298
GAAP Revenue
$
9,579,788
$
9,999,216
Non-GAAP Adjusted EBITDA Margin
23.7
%
33.7
%
(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: https://www.businesswire.com/news/home/20190731006001/en/
For more information, contact investor relations: Deborah
K. Pawlowski, Kei Advisors LLC (716) 843-3908,
dpawlowski@keiadvisors.com
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