- 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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20181108005104/en/
For more information, contact investor relations:Deborah
K. PawlowskiKei Advisors LLC(716)
843-3908dpawlowski@keiadvisors.com
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