Superior Drilling Products, Inc. Reports $2.3 Million In Revenue For Third Quarter 2016

VERNAL, Utah, Nov. 14, 2016 (GLOBE NEWSWIRE) -- Superior Drilling Products, Inc. (NYSE MKT:SDPI) ("SDP" or the "Company"), a designer and manufacturer of drilling tool technologies, today reported financial results for the third quarter ended September 30, 2016. 

Troy Meier, CEO of Superior Drilling Products, commented, "The third quarter is a clear demonstration of the success of our Drill-N-Ream ® well bore conditioning tool, the change in our go-to-market strategy and the improving conditions in the U.S. oil & gas industry.  Operators want new technologies that improve production efficiencies and reduce costs.  We believe our innovative tools will increasingly become critical components of a new standard in drill string configurations." 

Third Quarter 2016 Financial Summary ($ in thousands, except per share amounts)
  Q3 2016   Q3 2015   Y/Y Change   Y/Y % Change   Q2 2016   Seq. Change   Seq. % Change
Revenue $ 2,261     $ 3,018       (756 )     (25.1 )%   $ 1,114       1,147       103.0 %
Operating loss   (963 )     (1,592 )     629       39.5 %     (2,956 )     1,993       67.4 %
Operating margin       (42.6 )%       (52.7 )%               (265.4 )%        
Net loss $ (1,173 )   $ (1,940 )     767       39.5 %   $ (3,056 )     1,883       61.6 %
Diluted loss per share $ (0.07 )   $ (0.11 )   $ 0.05       41.1 %   $ (0.18 )   $ 0.11       63.6 %
                           

Third Quarter 2016 Overview

Compared with the prior-year period, revenue of $2.3 million declined because of the significant reductions in overall oilfield activity.  In recent months, the rig count, as reported by Baker Hughes, has begun a modest recovery, reflecting the stabilization of commodity prices and drill rig operators' progress in lowering their cost to develop oil and natural gas.  Sequentially, revenue more than doubled over the trailing second quarter of 2016.

Tool revenue was $1.85 million in the quarter.  While down $145 thousand compared with the 2015 third quarter, it more than doubled from the trailing second quarter, up $956 thousand.  Tool revenue for the third quarter of 2016 was comprised of $1.63 million in tool sales, $93 thousand in tool rental and $119 thousand in other related revenue.

Contract Services revenue was $417 thousand, down $611 thousand when compared with the prior-year period.  When compared with the trailing second quarter, contract services revenue increased by $191 thousand, or 84%.  Contract services is primarily the refurbishment of drill bits for an exclusive customer for which the Company is contracted to service the Rocky Mountain region, which includes the hard-hit Bakken formation, and any overflow work provided from other U.S. basins. 

Net loss of $1.17 million improved approximately 40% over the prior-year period.  Significant changes in the Company's operating structure and business model enabled this improvement while facing the 25% decline in revenue.  See attached tables for a reconciliation of GAAP net loss to adjusted net loss.

Third Quarter 2016 Operational Review ($ in thousands) 
  Q3 2016   Q3 2015   Y/Y Change   Y/Y % Change   Q2 2016   Seq. Change   Seq. % Change
Cost of revenue $ 972     $ 1,522     $ (550 )     (36.1 )%   $ 1,332       (360 )     (27.0 )%
As a percent of sales   43.0 %     50.4 %             119.6 %        
Selling, general & administrative   1,320       1,867     $ (547 )     (29.3 )%     1,539       (219 )     (14.3 )%
As a percent of sales   58.4 %     61.9 %             138.2 %        
Depreciation & amortization $ 932     $ 1,221     $ (288 )     (23.6 )%   $ 1,200       (268 )     (22.3 )%
                           

The 7.4 point reduction in cost of revenue as a percent of sales compared with the prior-year period reflects the Company's new business structure and the effectiveness of the cost reduction initiatives.  When compared with the trailing second quarter, excluding an asset impairment charge, cost of revenue as a percent of sales improved by 44 points demonstrating the strong operating leverage gained from higher volume.  The trailing second quarter was impacted by a $362 thousand asset impairment charge pertaining to the write-off of certain Strider assets. 

The significant reduction in selling, general and administrative expense, including research and engineering (SG&A) compared with the prior-year and trailing quarters was the result of the reduction in staffing, change in the business model, and other cost cutting measures.     

Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization and non-cash stock compensation expense, was $176 thousand.  Adjusted EBITDA improved over both the prior-year and trailing quarters.  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.  See the attached tables for important disclosures regarding SDP's use of adjusted EBITDA, as well as a reconciliation of net income to adjusted EBITDA.

First Nine Months 2016 Review ($ in thousands, except per share amounts)
  Q3 2016 YTD   Q3 2015 YTD   Change   % Change
Revenue $ 4,820     $ 9,974       (5,153 )     (51.7 )%
Cost of revenue   3,325       5,026       (1,701 )     (33.8 )%
As a % of sales   69.0 %     50.4 %        
Selling, general & administrative   4,149       5,706       (1,557 )     (27.3 )%
As a % of sales   86.1 %     57.2 %        
Depreciation & amortization   3,379       3,526       (147 )     (4.2 )%
Total operating expenses   10,853       14,258       (3,405 )     (23.9 )%
Operating loss   (6,033 )     (4,285 )     (1,748 )     40.8 %
Operating margin       (125.2 )%       (43.0 )%        
Net loss $ (6,515 )   $ (5,219 )     (1,296 )     (24.8 )%
Diluted loss per share $ (0.37 )   $ (0.30 )   $ (0.07 )     (22.8 )%
               

Lower revenue for the year-to-date period was the result of the significant decline in drill rigs, due to the contraction of the oil and gas industry.  Tool revenue of $3.69 million decreased by 38% from the prior-year period.  Tool revenue was comprised of $2.06 million in tool sales, $1.41 million in tool rental and $214 thousand in other related revenue.  Contract Services revenue was $1.13 million, down by 72% when compared with the prior-year period due to the significant decline in the PDC bit refurbishment business, as was noted in the third quarter discussion. 

Adjusted EBITDA was a $1.53 million loss, compared with an $81 thousand loss in the corresponding 2015 period.  The Company believes that when used in conjunction with measures prepared in accordance with GAAP, adjusted EBITDA, which is a non-GAAP measure, helps in the understanding of its operating performance.  See the attached tables for important disclosures regarding SDP's use of adjusted EBITDA, as well as a reconciliation of net income to adjusted EBITDA.

Balance Sheet and Liquidity

Cash and equivalents was $332 thousand at September 30, 2016.  Total debt at the end of the third quarter was $19.72 million, down slightly from $20.06 million at June 30, 2016.

Also during the quarter the company amended and restated its seller's note for the Hard Rock acquisition.  Under the amended and restated agreement, the company issued 700,000 restricted shares at an agreed upon value of $1.43 per share, as payment for $1 million of principal on the seller note and also filed a registration statement with the SEC to register the resale of the 700,000 shares of restricted stock. 

Subsequent to the end of the quarter on October 5, 2016 SDP completed its public offering of 5.75 million shares of its common stock at $1.00 per share.  The company received net proceeds of $5.1 million which were used to repay $1.0 million for a bridge financing, $868 thousand for a revolver and term loan and $606 towards a seller's note for the Hard Rock acquisition.  The remaining proceeds will be used for growth working capital.  On a pro forma basis, total debt was $17.42 million.  Cash on November 10, 2016 was approximately $2.1 million.

During the third quarter the Company had no capital expenditures.  The Company anticipates capital expenditures will be approximately $50 thousand in the fourth quarter of 2016, primarily related to the build-out of the Coiled Tubing Strider tool fleet. 

Outlook

Mr. Meier, added, "The demand that we are seeing for our Drill-N-Ream tool continues at a very strong pace.  We are also excited about the opportunities that our Strider technology presents for us in the drilling and completions markets.  Our two new tools are being well received in both of these applications.  We now have a stronger balance sheet and the financial flexibility to meet increasing demand and grow the business."

Webcast and Conference Call The Company will host a conference call and live webcast tomorrow, Tuesday November 15 th, at 12 noon MT (2:00 pm ET) to review the operating results for its third quarter 2016.  The discussion will be accompanied by a slide presentation that can be found 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 on Superior Drilling Products' website at www.sdpi.com/events.  To listen to the archived call, dial (844) 512-2921 and enter replay number 13647442.  A telephonic replay will be available from 3:00 pm MT (5:00 pm ET) on the day of the call through Tuesday, November 22, 2016.  A transcript of the call will be available for download from the SDP website 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, sells and rents drilling tools.  SDP drilling solutions include the patented Drill-N-Ream ® well bore conditioning tool and the patent-pending Strider TM Drill String Oscillation System.  In addition, SDP is a manufacturer and refurbisher of PDC (polycrystalline diamond compact) drill bits for a leading oil field services company.  SDP operates a state-of-the-art drill tool fabrication facility, manufacturing for its customer's custom products and solutions for the drilling industry.  The Company's strategy is to leverage its technological expertise in drill tool technology and innovative, precision machining to broaden its drill tool technology offerings for rent or sale, while operating an effective sales and logistics infrastructure through which it can provide proprietary tools to exploration and production companies, oilfield services companies and rental tool companies. 

Additional information about the Company can be found at its website:  www.sdpi.com.

Cautionary Statement Regarding Forward Looking Statements This news release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than historical facts, that address activities  that the Company assumes, plans, expects, believes, intends or anticipates (and other similar expressions) will, should or may occur in the future are forward-looking statements.  The forward-looking statements are based on management's current beliefs, based on currently available information, as to the outcome and timing of future events. These forward-looking statements involve certain risks and uncertainties that could cause the results to differ materially from those expected by the Company's management. Information concerning these risks and other factors can be found in the Company's filings with the Securities and Exchange Commission, including its Annual Reports on Form 10-K, available on the Company's website or the SEC's website at www.sec.gov.
 
Superior Drilling Products, Inc.
Consolidated Condensed Statements of Operations
(unaudited)
       
  For the Three Months   For the Nine Months
  Ended September 30,   Ended September 30,
    2016       2015       2016       2015  
               
Revenue $ 2,261,310     $ 3,017,720     $ 4,820,405     $ 9,973,709  
               
Operating costs and expenses              
Cost of revenue   972,400       1,521,972       3,324,975       5,026,021  
Selling, general & administrative   1,319,686       1,866,791       4,149,136       5,706,431  
Depreciation & amortization   932,250       1,220,548       3,379,215       3,526,028  
Total operating expenses   3,224,336       4,609,311       10,853,326       14,258,480  
               
Operating loss     (963,026 )       (1,591,591 )       (6,032,921 )       (4,284,771 )
Operating margin   -42.6 %     -52.7 %     -125.2 %     -43.0 %
               
Other income (expense)              
               
Interest income   78,650       73,318       234,969       219,886  
Interest expense   (373,335 )     (421,341 )     (1,101,412 )     (1,463,024 )
Other income   49,975       56,726       158,926       185,811  
Gain (loss) on sale of assets   4,003       (10,202 )     195,453       (93,088 )
Unrealized gain on warrant derivative   28,301       -       28,301       -  
Total other expense   (212,406 )     (301,499 )     (483,763 )     (1,150,415 )
               
Loss before income taxes   (1,175,432 )     (1,893,090 )     (6,516,684 )     (5,435,186 )
Income tax expense (benefit)   (2,000 )     47,223       (2,000 )     (216,090 )
               
Net loss $     (1,173,432 )   $     (1,940,313 )   $     (6,514,684 )   $     (5,219,096 )
               
Basic and diluted loss per common share $ (0.07 )   $ (0.11 )   $ (0.37 )   $ (0.30 )
Basic and diluted weighted average common shares outstanding   17,891,786       17,432,274       17,606,324       17,317,780  
               
Diluted loss per common share $ (0.07 )   $ (0.11 )   $ (0.37 )   $ (0.30 )
Diluted weighted average common shares outstanding   17,891,786       17,432,274       17,606,324       17,317,780  
                               

Superior Drilling Products, Inc.
Consolidated Condensed Balance Sheets
(unaudited)
       
  September 30, 2016   December 31, 2015
ASSETS      
Current assets      
Cash $ 332,248     $ 1,297,002  
Accounts receivable   1,212,456       1,861,002  
Accounts receivable - stock subscription   5,297,500       -  
Prepaid expenses   84,612       179,450  
Inventory   1,547,783       1,410,794  
Other current assets   264,819       -  
Total current assets   8,739,418       4,748,248  
Property, plant and equipment, net   12,713,465       14,655,502  
Intangible assets, net   9,191,111       11,026,111  
Note receivable   8,296,717       8,296,717  
Other assets   15,954       28,321  
Total assets   38,956,665       38,754,899  
LIABILITIES AND STOCKHOLDERS' EQUITY      
Current liabilities      
Accounts payable   1,243,631       638,593  
Accrued expenses   701,358       809,765  
Warrant liability   112,024       -  
Line of credit   490,607       -  
Short term bridge loan (net of debt discount)   863,976       -  
Income tax payable   -       2,000  
Current portion of capital lease obligation   333,812       332,185  
Current portion of related party debt obligation   781,921       555,393  
Current portion of long-term debt, net   2,688,921       2,636,241  
Total current liabilities   7,216,250       4,974,177  
Other long-term liability   880,032       880,032  
Capital lease obligation, less current portion   -       246,090  
Related party debt, less current portion   -       271,190  
Long-term debt, less current portion, net   14,562,222       16,208,699  
Total liabilities   22,658,504       22,580,188  
Commitments and contingencies      
Stockholders' equity      
Common stock - $0.001 par value; 100,000,000 shares authorized; 18,211,631 and 17,459,605 shares issued and outstanding, respectively   18,212       17,460  
Common stock subscribed   5,750       -  
Additional paid-in-capital   38,011,151       31,379,520  
Retained deficit   (21,736,952 )     (15,222,269 )
Total stockholders' equity   16,298,161       16,174,711  
Total liabilities and stockholders' equity $ 38,956,665     $ 38,754,899  
       

Superior Drilling Products, Inc.
Consolidated Statements of Cash Flows
(unaudited)
       
  For the Nine Months Ended
  September 30,
    2016       2015  
Cash Flows From Operating Activities      
Net loss $ (6,514,684 )   $ (5,219,096 )
Adjustments to reconcile net loss to net cash provided by operating activities:      
Depreciation and amortization expense   3,379,215       3,526,028  
Amortization of debt discount   93,172       516,646  
Deferred tax benefit   (2,000 )     (216,090 )
Share-based compensation expense   534,051       436,652  
Unrealized gain on warrant derivative   (28,301 )    
Write-off of Strider asset   361,903       -  
(Gain) loss on disposition of assets   (195,453 )     93,088  
Changes in operating assets and liabilities:      
Accounts receivable   648,546       2,467,174  
Inventory   (73,733 )     (238,861 )
Prepaid expenses and other current assets   (169,981 )     (198,433 )
Other assets   (10,936 )     82,638  
Accounts payable and accrued expenses   496,629       (672,713 )
Net Cash (Used in) Provided by Operating Activities   (1,481,572 )     577,033  
       
Cash Flows From Investing Activities      
Purchases of property, plant and equipment   (315,101 )     (901,627 )
Sale of property, plant and equipment   483,217       -  
Net cash Provided by (Used in) Investing Activities   168,116       (901,627 )
       
Cash Flows From Financing Activities      
Principal payments on debt   (1,226,339 )     (3,004,718 )
Principal payments on related party debt   (44,662 )     (365,749 )
Principal payments on capital lease obligations   (244,461 )     (216,418 )
Proceeds received from debt borrowings   1,500,000       47,298  
Net proceeds received from line of credit   637,992       -  
Proceeds from sale of subsidiary   50,700       -  
Proceeds from payments on note receivable   22,533       -  
Stock offering expenses   (193,418 )     -  
Debt issuance costs   (153,643 )     -  
Net Cash Provided by (Used in) Financing Activities   348,702       (3,539,587 )
       
Net Decrease in Cash   (964,754 )     (3,864,181 )
Cash at Beginning of Period   1,297,002       5,792,388  
Cash at End of Period $ 332,248     $ 1,928,207  
       

 
S uperior Drilling Products, Inc.
Additional Information
 
Tool Revenue by Category
($ in thousands) (unaudited)
                     
    Q3 2015   Q4 2015   Q1 2016   Q2 2016   Q3 2016
Tool sales   $ -     $ -     $ -     $ 427     $ 1,633  
Tool rental     1,831       1,623       902       419       93  
Other related revenue     159       137       52       42       119  
Total tool revenue   $     1,990     $     1,760     $     954     $     888     $     1,845  
                     

S uperior Drilling Products, Inc.
Adjusted EBITDA (1) Reconciliation
(unaudited)
   
  Three Months Ended
  September 30, 2016   June 30, 2016   September 30, 2015
           
GAAP net loss $   (1,173,432 )   $   (3,056,468 )   $   (1,940,313 )
Add back:          
Depreciation and amortization     932,250         1,200,085         1,220,548  
Asset impairment     -         362,000         -  
Interest expense, net     294,685         256,867         348,023  
Share-based compensation     157,266         119,476         331,496  
(Gain) loss on sale of assets     (4,003 )       (104,599 )       10,202  
Functional Drill-N-Ream sales     -         72,000         -  
Income tax (benefit) expense     (2,000 )       -         47,223  
Employee severance     -         -         45,000  
Unrealized gain on warrant derivative      (28,301 )       -         -  
           
Non-GAAP adjusted EBITDA (1) $   176,465     $   (1,150,639 )   $   62,179  
           
           
  Nine Months Ended  
  September 30, 2016   September 30, 2015  
           
GAAP net loss $   (6,514,684 )   $   (5,219,096 )    
Add back:        
Depreciation and amortization     3,379,215         3,526,028      
Interest expense, net     866,443         1,243,138      
Share-based compensation     534,051         436,652      
Asset impairment     362,000         -      
(Gain) loss on sale of assets     (195,453 )       93,088      
Functional Drill-N-Ream sales     72,000         -      
Income tax benefit     (2,000 )       (216,090 )  
Employee severance     -         55,000      
Unrealized gain on warrant derivative      (28,301 )       -      
         
Non-GAAP Adjusted EBITDA (1) $   (1,526,729 )   $   (81,280 )    
           

(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.

 
 
Superior Drilling Products, Inc.
GAAP Net Loss to Non-GAAP Adjusted Net Loss Reconciliation
(unaudited)
                 
  Three Months Ended  
  September 30, 2016   June 30, 2016   September 30, 2015
  $ per diluted share   $ per diluted share   $ per diluted share
GAAP net loss $ (1,173,432 ) $ (0.07 )   $ (3,056,468 ) $ (0.18 )   $ (1,940,313 ) $ (0.11 )
Add back:                
Intangible amortization   611,667     0.04       611,667     0.04       611,667     0.04  
Asset impairment   -     -       362,000     0.02       -     -  
(Gain) loss on sale of assets   (4,003 )   -       (104,599 )   (0.01 )     10,202    
Functional Drill-N-Ream sales   -     -       72,000     0.01       -     -  
Employee severance   -     -       -     -       45,000     -  
Unrealized gain on warrant derivative   (28,301 )   -       -     -       -     -  
                 
Non-GAAP adjusted net loss $ (594,069 ) $ (0.03 )   $ (2,115,400 ) $ (0.12 )   $ (1,273,444 ) $ (0.07 )
                 
                 
  Nine Months Ended        
  September 30, 2016   September 30, 2015      
  $ per diluted share   $ per diluted share      
GAAP net loss $ (6,514,684 ) $ (0.37 )   $ (5,219,096 ) $ (0.30 )      
Add back:                
Intangible amortization   1,835,000     0.11       1,835,000     0.11        
Asset impairment   362,000     0.02       -     -        
(Gain) loss on sale of assets   (195,453 )   (0.01 )     93,088     -        
Functional Drill-N-Ream sales   72,000     -       -     -        
Employee severance   -     -       55,000     -        
Unrealized gain on warrant derivative   (28,301 )   -       -     -        
                 
Non-GAAP adjusted net loss $ (4,441,137 ) $ (0.25 )   $ (3,291,008 ) $ (0.19 )      
                 

For more information, contact investor relations:Deborah K. Pawlowski / Garett K. GoughKei Advisors LLC(716) 843-3908 / (716) 846-1352dpawlowski@keiadvisors.com / ggough@keiadvisors.com

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