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Superior Drilling Products, Inc. Reports Third Quarter 2020 Results

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  • Diversification strategy drove 49% growth in International revenue to $429 thousand; sequentially, International revenue was up 28%

  • Drill-N-Ream active in Kuwait, Ukraine, Oman, the UAE and Qatar

  • Total annualized cost reductions of approximately $3.5 million implemented year-to-date in response to industry conditions

  • Latest cost reduction efforts reduced cash break even to $700 thousand per month

  • Expects to achieve cash breakeven entering into 2021

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, 2020.

Troy Meier, Chairman and CEO, commented, "We are taking measures to provide for liquidity while keeping our sights on the long term. Importantly, our results demonstrate that the value of our Drill-N-Ream® well bore conditioning tool has been gaining traction internationally even against the temporary headwinds of current industry conditions. We are now operating in five countries outside of North America, as we are pulled into more regions by global oil field service companies who benefit from the economic value of the DNR technology. In addition, given the documented increase of drilling efficiencies when using the DNR, we believe it also contributes to the reduction of environmental impact while drilling for fossil fuels."

Third Quarter 2020 Review ($ in thousands, except per share amounts) (See at "Definitions" the composition of product/service revenue categories.)

($ in thousands, except per share amounts)

September 30,
2020

June 30,
2020

September 30,
2019

Change Sequential

Change Year/Year

North America

1,118

1,689

4,788

(33.8

)%

(76.6

)%

International

429

335

289

27.9

%

48.7

%

Total Revenue

$

1,547

$

2,024

$

5,076

(23.6

)%

(69.5

)%

Tool Sales/Rental

$

549

$

371

$

1,361

48.1

%

(59.7

)%

Other Related Tool Revenue

642

973

1,834

(34.0

)%

(65.0

)%

Tool Revenue

1,191

1,343

3,195

(11.4

)%

(62.7

)%

Contract Services

357

681

1,881

(47.6

)%

(81.0

)%

Total Revenue

$

1,547

$

2,024

$

5,076

(23.6

)%

(69.5

)%

Year-over-year revenue was down $3.5 million, or 70%. Sequentially, revenue declined about 24%, or $0.5 million demonstrating improving market conditions given the August 2020 low point in U. S. rig count. The market was driven to its low point due to the initial impacts of COVID-19 and the geopolitically driven imbalance of supply and demand in the global oil market. Even as production activity declined around the world, International revenue grew $141 thousand, or 49%, to $429 thousand. This supported total Tool revenue, which was down just 11.4%, a much lower rate than the overall market. The Company attributes these results to the value created from improved drilling efficiencies provided by the DNR.

International revenue grew to 28% of total revenue in the quarter compared with 6% the prior-year period.

Additionally, the Company recognized $41 thousand in other income related to a machine tool lease under an SBA loan that was forgiven as part of the CARES act.

Third Quarter 2020 Operating Costs

($ in thousands, except per share amounts)

September 30,
2020

June 30,
2020

September 30,
2019

Change Sequential

Change Year/Year

Cost of revenue

$

871

$

1,100

$

2,063

(20.8

)%

(57.8

)%

As a percent of sales

56.3

%

54.3

%

40.6

%

Selling, general & administrative

$

1,530

$

1,340

$

2,502

14.2

%

(38.9

)%

As a percent of sales

98.9

%

66.2

%

49.3

%

Depreciation & amortization

$

693

$

680

$

739

1.9

%

(6.1

)%

Total operating expenses

$

3,094

$

3,120

$

5,303

(0.8

)%

(41.7

)%

Operating loss

$

(1,546

)

$

(1,096

)

$

(227

)

NM

NM

As a % of sales

(99.9

)%

(54.1

)%

(4.5

)%

Other (expense) income including
income tax (expense)

$

(185

)

$

(146

)

$

(191

)

26.9

%

(3.0

)%

Net loss

$

(1,731

)

$

(1,242

)

$

(418

)

NM

NM

Diluted loss per share

$

(0.07

)

$

(0.05

)

$

(0.02

)

NM

NM

Adjusted EBITDA(1)

$

(607

)

$

(222

)

$

1,083

NM

NM

(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.

The cost of revenue decreased approximately $1.2 million over the prior-year period reflecting lower volume and lower costs resulting from the execution of the first two phases of the Company’s plans to reduce costs to better align with current demand. As a percentage of revenue, cost of sales was 56% compared with 41% for prior-year period. The increase reflects lower absorption of overhead costs on reduced volume.

The 39% decline in selling, general and administrative expense (SG&A), which includes research and development projects, was primarily due to Phases I and II of cost reduction measures initiated in April 2020.

The Company has reduced its monthly cash burn rate to approximately $700 thousand through further payroll reductions beginning October 23, 2020. This is down 22% from the previous level of approximately $200 thousand per month. The Company expects that at this rate, and given expected improvements in monthly revenue, it will achieve cash break even entering into 2021.

Net loss for the quarter was $1.7 million, compared with a net loss of $418 thousand in the third quarter of 2019. 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 a negative $607 thousand.

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.

Year-to-Date Review

Revenue in the first nine months of 2020 was $8.9 million, compared with $14.0 million in the same period in 2019. International revenue increased 121% in the first nine months, and U.S. revenue was down just 47%, while the average U.S. rig count market declined by 52%. The first nine months of 2020 were impacted by the effect COVID-19 has had on the demand for oil and gas which resulted in a significant reduction in drilling activity in the U.S.

Tool revenue was $6.1 million, down 33%, or $3.1 million, from the prior-year period. Contract Services revenue decreased approximately $2.7 million, or 49%, to $2.8 million. Net loss for the first nine months of 2020 was $2.8 million, or $(0.11) per diluted share. Adjusted EBITDA(1) for the first nine months of 2020 was $391 thousand. Adjusted EBITDA margin was 4.4% in 2020, compared with 22.9% in 2019.

Balance Sheet and Liquidity

Cash at the end of the quarter was $1.4 million, up from $1.2 million at the end of 2019, but down from $2.5 million at the end of the second quarter of 2020. Cash used in operations in the third quarter of 2020 was $842 thousand.

Total debt at the end of the third quarter was $6.7 million, down $0.2 million, or 3.6%, compared with $6.9 million at June 30, 2020.

Strategy and outlook

Mr. Meier concluded, "We expect that as the DNR is actively employed in new basins around the world and we further diversify our customer base, revenue should improve from here. We are working to develop the logistical and partnership structures to continue to penetrate international markets and globally improve how fossil fuels are produced."

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 results of the quarter and discuss its corporate strategy and outlook. The discussion will be accompanied by a slide presentation that will be made available 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 Friday, November 13, 2020. To listen to the archived call, please call (412) 317-6671 and enter conference ID number 13710951, 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, including, without limitations, the continued impact of COVID-19 on the business, the Company’s 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, and ability to outperform 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, the duration of the COVID-19 pandemic and related impact on the oil and natural gas industry, the effectiveness of success at expansion in the Middle East, options available for market channels in North America, the deferral of the 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; 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 Quarter Ended September 30, 2020 and 2019

(unaudited)

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

2020

2019

2020

2019

Revenue

North America

$

1,118,404

$

4,787,693

$

7,387,847

$

13,957,666

International

429,038

288,522

1,541,746

698,337

Total revenue

$

1,547,442

$

5,076,215

$

8,929,593

$

14,656,003

Operating cost and expenses

Cost of revenue

870,655

2,062,803

4,284,716

6,119,429

Selling, general, and administrative expenses

1,529,887

2,501,970

4,887,999

6,387,205

Depreciation and amortization expense

693,259

738,555

2,134,398

2,680,070

Total operating costs and expenses

3,093,801

5,303,328

11,307,113

15,186,704

Operating loss

(1,546,359

)

(227,113

)

(2,377,520

)

(530,701

)

Other income (expense)

Interest income

145

12,080

5,775

52,444

Interest expense

(126,482

)

(196,582

)

(450,210

)

(590,805

)

Impairment on asset held for sale

-

(6,143

)

(30,000

)

(6,143

)

Loan forgiveness

41,403

-

41,403

-

Gain on disposition of assets

-

-

142,234

14,147

Total other expense

(84,934

)

(190,645

)

(290,798

)

(530,357

)

Loss before income taxes

(1,631,293

)

(417,758

)

(2,668,318

)

(1,061,058

)

Income tax expense

(99,979

)

-

(106,414

)

-

Net loss

$

(1,731,272

)

$

(417,758

)

$

(2,774,732

)

$

(1,061,058

)

Basic loss earnings per common share

$

(0.07

)

$

(0.02

)

$

(0.11

)

$

(0.04

)

Basic weighted average common shares outstanding

25,555,167

25,074,466

25,469,609

25,042,577

Diluted loss per common share

$

(0.07

)

$

(0.02

)

$

(0.11

)

$

(0.04

)

Diluted weighted average common shares outstanding

25,555,167

25,074,466

25,469,609

25,042,577

Superior Drilling Products, Inc.

Consolidated Condensed Balance Sheets

(Unaudited)

September 30, 2020

December 31, 2019

Assets

Current assets:

Cash

$

1,412,370

$

1,217,014

Accounts receivable, net

1,441,783

3,850,509

Prepaid expenses

73,785

139,070

Inventories

943,870

924,032

Asset held for sale

40,000

252,704

Other current assets

-

252,178

Total current assets

3,911,808

6,635,507

Property, plant and equipment, net

7,859,200

8,045,692

Intangible assets, net

1,111,111

1,986,111

Right of use assets

146,450

-

Deferred tax asset

34,692

-

Other noncurrent assets

83,114

93,619

Total assets

$

13,146,375

$

16,760,929

Liabilities and Owners' Equity

Current liabilities:

Accounts payable

$

663,090

$

945,414

Accrued expenses

843,197

683,832

Customer deposits

-

61,421

Income tax payable

98,028

15,880

Current portion of operating lease liability

108,104

-

Current portion of long-term debt, net of discounts

4,760,252

4,102,543

Total current liabilities

6,472,671

5,809,090

Operating lease liability

38,346

-

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

1,937,271

3,848,863

Total liabilities

8,448,288

9,657,953

Shareholders’ equity

Common stock - $0.001 par value; 100,000,000 shares authorized;
25,434,776 and 25,418,126 shares issued and outstanding

25,617

25,418

Additional paid-in-capital

40,439,035

40,069,391

Accumulated deficit

(35,766,565)

(32,991,833)

Total shareholders’ equity

4,698,087

7,102,976

Total liabilities and shareholders' equity

$

13,146,375

$

16,760,929

Superior Drilling Products, Inc.

Consolidated Condensed Statement of Cash Flows

For The Nine Months Ended September 30, 2020 and 2019

(Unaudited)

September 30, 2020

September 30, 2019

Cash Flows From Operating Activities

Net loss

$

(2,774,732

)

$

(1,061,058

)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Depreciation and amortization expense

2,134,398

2,680,070

Share based compensation expense

369,843

473,717

Impairment on asset held for sale

30,000

6,143

Gain on disposition of assets

(142,234

)

(14,147

)

Gain on forgiveness of loan

(41,403

)

-

Amortization of deferred loan costs

13,894

10,561

Changes in operating assets and liabilities:

Accounts receivable

2,408,726

(1,825,347

)

Inventories

(942,831

)

(539,586

)

Prepaid expenses and other noncurrent assets

327,968

(39,998

)

Accounts payable, accrued expenses and income tax payable

(18,728

)

1,531,085

Other noncurrent assets

(34,692

)

-

Other long term liabilities

(61,421

)

-

Net Cash From Operating Activities

1,268,788

1,221,440

Cash Flows From Investing Activities

Purchases of property, plant and equipment

(154,475

)

(392,691

)

Proceeds from sale of fixed assets

117,833

-

Net Cash From Investing Activities

(36,642

)

(392,691

)

Cash Flows From Financing Activities

Principal payments on debt

(2,167,539

)

(3,813,443

)

Proceeds received from debt borrowings

964,120

800,000

Payments on revolving loan

(1,018,690

)

(735,019

)

Proceeds received on revolving loan

1,185,319

1,517,005

Debt issuance costs

-

(70,103

)

Net Cash From Financing Activities

(1,036,790

)

(2,301,560

)

Net Change in Cash

195,356

(1,472,811

)

Cash at Beginning of Period

1,217,014

4,264,767

Cash at End of Period

$

1,412,370

$

2,791,956

Supplemental information:

Cash paid for Interest

$

460,640

$

673,251

Acquisition of equipment by issuance of note payable

-

183,378

Inventory converted to property, plant and equipment

922,993

582,879

Reduction of debt with sale of asset

211,667

-

Superior Drilling Products, Inc.

Adjusted EBITDA(1) Reconciliation

(unaudited)

($, in thousands)

Three Months Ended

September 30,
2020

September 30,
2019

June 30, 2020

GAAP net loss

$

(1,731,272

)

$

(417,758

)

$

(1,241,506

)

Add back:

Depreciation and amortization

693,259

738,555

680,375

Inventory write off

-

6,143

-

Interest expense, net

126,337

184,502

145,528

Share-based compensation

157,842

155,749

105,005

Net non-cash compensation

88,200

415,438

88,200

Income tax expense

99,979

-

225

Gain on disposition of assets

(41,403

)

-

-

Non-GAAP adjusted EBITDA(1)

$

(607,058

)

$

1,082,629

$

(222,173

)

GAAP Revenue

$

1,547,442

$

5,076,215

$

2,024,388

Non-GAAP Adjusted EBITDA Margin

-39.2

%

21.3

%

-11.0

%

Nine Months Ended

September 30,
2020

September 30,
2019

GAAP net loss

$

(2,774,732

)

$

(1,061,058

)

Add back:

Depreciation and amortization

2,134,398

2,680,070

Inventory write off

-

142,143

Interest expense, net

444,435

538,361

Share-based compensation

369,843

473,717

Net non-cash compensation

264,600

591,838

Income tax expense

106,414

-

Gain on disposition of assets

(153,637

)

(14,147

)

Non-GAAP adjusted EBITDA(1)

$

391,321

$

3,350,924

GAAP Revenue

$

8,929,593

$

14,656,003

Non-GAAP Adjusted EBITDA Margin

4.4

%

22.9

%

(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/20201106005091/en/

Contacts

For more information, contact investor relations:
Deborah K. Pawlowski, Kei Advisors LLC
(716) 843-3908, dpawlowski@keiadvisors.com