Aug 7, 2020   SOURCE: BusinessWire

Superior Drilling Products, Inc. Reports Second Quarter 2020 Results

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 second quarter ended June 30, 2020.

Troy Meier, Chairman and CEO, noted, “As we had indicated in May, our second quarter was heavily impacted by the severe downturn in the oil & gas industry due to the impacts of the stay-at-home mandates on oil demand, the resulting shut down of global economies combined with excess supply. Nonetheless, our year-over-year growth in international revenue further validated the traction our Drill-N-Ream® well bore conditioning tool is gaining in the Middle East, even as the region struggled like the U.S. with stay-at-home restrictions that caused drilling activity to stall heavily. Importantly, demand for our tool is driving expansion into more countries as we further our relationships with the largest international oil field service companies.”

Second 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) June 30,
2020		 March 31,
2020		 June 30,
2019		 Change
Sequential		 Change
Year/Year
Tool Sales/Rental

$

371

$

1,768

$

1,000

(79.0)%

(62.9)%

Other Related Tool Revenue

 

973

 

1,845

 

1,573

(47.3)%

(38.2)%

Tool Revenue

 

1,343

 

3,613

 

2,574

(62.8)%

(47.8)%

Contract Services

 

681

 

1,745

 

1,970

(61.0)%

(65.4)%

Total Revenue

$

2,024

$

5,358

$

4,543

(62.2)%

(55.4)%

The average U.S land rig count declined 60% year-over-year in the quarter reflecting the imbalance of supply and demand in the global oil industry, as well as the impact of the COVID-19 pandemic. This significant reduction in drilling activity was the primary driver of the $2.5 million, or 55%, decline in revenue compared with the prior-year period. Tool revenue declined at a lower rate than the overall market, which the Company attributes to the value created by the DNR. This is reflected in the increase in market share by the Company’s U.S. distributor. The tool is used to improve drilling efficiencies and reduce drilling costs.

North America revenue represented 83% of total revenue compared with 96% the prior-year period while International revenue grew to 17% compared with 4% the prior-year period.

Second Quarter 2020 Operating Costs

($ in thousands,except per share amounts) June 30,
2020		 March 31,
2020		 June 30,
2019		 Change
Sequential		 Change
Year/Year
Cost of revenue

$

1,100

$

2,315

$

2,014

(52.5)%

(45.4)%

As a percent of sales

 

54.3%

 

43.2%

 

44.3%

Selling, general & administrative

$

1,340

$

2,018

$

1,816

(33.6)%

(26.2)%

As a percent of sales

 

66.2%

 

37.7%

 

40.0%

Depreciation & amortization

$

680

$

761

$

930

(10.6)%

(26.9)%

Total operating expenses

$

3,120

$

5,093

$

4,760

(38.7)%

(34.5)%

Operating (loss) Income

$

(1,096)

$

265

$

(217)

NM

NM

As a % of sales

 

(54.1)%

 

4.9%

 

(4.8)%

Other (expense) income including
income tax (expense)

$

(146)

$

(67)

$

(181)

NM

NM

Net (loss) income

$

(1,242)

$

198

$

(397)

NM

NM

Diluted earnings (loss) per share

$

(0.05)

$

0.01

$

(0.02)

NM

NM

Adjusted EBITDA(1)

$

(222)

$

1,221

$

1,074

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 $914 thousand over the prior-year period reflecting lower volume and the impact of cost savings resulting from the Company’s April 2020 reduction in force. As a percentage of revenue, cost of sales was 54% compared with 44% for prior-year period. The increase reflects lower absorption of overhead costs on reduced volume.

The 26% decline in selling, general and administrative expense (SG&A), which includes research and development projects, was primarily due to the cost reduction measures implemented in April 2020 in an effort to offset the reduction in revenue.

Depreciation and amortization expense decreased approximately 27% to $680 thousand due to lower amortization expense as a result of fully amortizing a portion of intangible assets in May 2019.

Chris Cashion, Chief Financial Officer commented, “After completing phase two of our cost reduction plan, we are now running at a cash burn rate of approximately $900 thousand per month. We are evaluating the necessary actions for phase three cost reductions under the assumption that things will get worse before they get better. We continue to expect that the third quarter will be our low point for our domestic revenue and that demand, primarily international, will continue to improve from there.”

Net loss for the quarter was $1.2 million, compared with a net loss of $397 thousand in the second 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 $222 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 six months of 2020 decreased just 23%, or $2.2 million, compared with the same period in 2019. The decline in the first half was less than would be expected given the impact of COVID-19 on the oil & gas industry because of the very strong 2020 first quarter results that was driven by above market performance in both U.S. and International markets. International revenue increased 175% in the first half, and U.S. revenue was down just 31% while the overall U.S. rig count market declined by 41%.

Tool revenue was $5.0 million, down 18%, or $1.1 million, from the prior-year period. Contract Services revenue decreased approximately $1.1 million, or 32%, to $2.5 million. Net loss for the first six months of 2020 was $1.0 million, or $(0.04) per diluted share. Adjusted EBITDA(1) for the first six months of 2020 was $1.0 million. Adjusted EBITDA margin was 13.5% in 2020, compared with 24% in 2019.

Balance Sheet and Liquidity

Cash at the end of the quarter was $2.5 million, up from $1.2 million at the end of 2019, but down from $3.3 million at the end of the first quarter of 2020. Cash used in operations in the second quarter of 2020 was $72 thousand.

Total debt at the end of the second quarter was $6.9 million, down $0.7 million, or 9.2%, compared with $7.6 million at March 31, 2020.

Strategy and outlook

Mr. Meier concluded, “While we have confidence in our drilling tool technologies, the opportunity for the DNR to continue to further penetrate the global market and the opportunity for us to expand our drill bit remanufacturing capabilities internationally, we also recognize we need to leverage our resources and diversify our opportunities. We are in the process of obtaining ISO 9001 and AS 9100 certifications for our Vernal, Utah operations so we can address requests to provide precision machining services to the defense industry and for other critical industrial applications. Although we do not expect revenue from these efforts to be realized until later in 2021, as we expand with our drilling technologies, the opportunity for additional revenue streams will help to derisk our future.”

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 11:00 am MT (1:00 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 2:00 p.m. MT (4:00 p.m. ET) the day of the teleconference until Friday, August 14, 2020. To listen to the archived call, please call (412) 317-6671 and enter conference ID number 13705876, 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.

FINANCIAL TABLES FOLLOW.

Superior Drilling Products, Inc.

Consolidated Condensed Statements of Operations

for the Periods Ended June 30, 2020 and 2019

(unaudited)

 

For the Three Months

 

For the Six Months

Ended June 30,

 

Ended June 30,

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

 
Revenue
North America

$

1,688,933

 

$

4,341,696

 

$

6,269,443

 

$

9,169,973

 

International

 

335,455

 

 

201,746

 

 

1,112,708

 

 

409,815

 

Total revenue

$

2,024,388

 

$

4,543,442

 

$

7,382,151

 

$

9,579,788

 

 
Operating cost and expenses
Cost of revenue

 

1,099,553

 

 

2,013,598

 

 

3,414,061

 

 

4,056,626

 

Selling, general, and administrative expenses

 

1,340,213

 

 

1,816,195

 

 

3,358,112

 

 

3,885,235

 

Depreciation and amortization expense

 

680,375

 

 

930,410

 

 

1,441,139

 

 

1,941,515

 

 
Total operating costs and expenses

 

3,120,141

 

 

4,760,203

 

 

8,213,312

 

 

9,883,376

 

 
Operating loss

 

(1,095,753

)

 

(216,761

)

 

(831,161

)

 

(303,588

)

 
Other income (expense)
Interest income

 

942

 

 

21,431

 

 

5,630

 

 

40,364

 

Interest expense

 

(146,470

)

 

(216,241

)

 

(323,728

)

 

(394,223

)

Impairment on asset held for sale

 

-

 

 

-

 

 

(30,000

)

 

-

 

Gain on disposition of assets

 

-

 

 

14,147

 

 

142,234

 

 

14,147

 

Total other expense

 

(145,528

)

 

(180,663

)

 

(205,864

)

 

(339,712

)

 
Loss before income taxes

 

(1,241,281

)

 

(397,424

)

 

(1,037,025

)

 

(643,300

)

 
Income tax expense

 

(225

)

 

-

 

 

(6,435

)

 

-

 

Net loss

$

(1,241,506

)

$

(397,424

)

$

(1,043,460

)

$

(643,300

)

 
Basic loss earnings per common share

$

(0.05

)

$

(0.02

)

$

(0.04

)

$

(0.03

)

 
Basic weighted average common shares outstanding

 

25,434,593

 

 

25,034,580

 

 

25,202,104

 

 

25,026,384

 

 
Diluted loss per common share

$

(0.05

)

$

(0.02

)

$

(0.04

)

$

(0.03

)

 
Diluted weighted average common shares outstanding

 

25,434,593

 

 

25,034,580

 

 

25,202,104

 

 

25,026,384

 

 

Superior Drilling Products, Inc.

Consolidated Condensed Balance Sheets

(unaudited)

 
June 30, 2020 December 31, 2019
Assets
Current assets:
Cash $

2,532,940

 

$

1,217,014

 

Accounts receivable, net

1,414,774

 

3,850,509

 

Prepaid expenses

76,380

 

139,070

 

Inventories

1,302,181

 

924,032

 

Asset held for sale

40,000

 

252,704

 

Other current assets

-

 

252,178

 

 
Total current assets

5,366,275

 

6,635,507

 

 
Property, plant and equipment, net

7,755,738

 

8,045,692

 

Intangible assets, net

1,402,778

 

1,986,111

 

Right of use Asset (net of amortizaton)

177,303

 

-

 

Other noncurrent assets

93,619

 

93,619

 

Total assets $

14,795,713

 

$

16,760,929

 

 
Liabilities and Owners' Equity
Current liabilities:
Accounts payable $

647,091

 

$

945,414

 

Accrued expenses

729,113

 

683,832

 

Customer Deposits

-

 

61,421

 

Income tax payable

22,215

 

15,880

 

Current portion of operating lease liability

114,070

 

-

 

Current portion of long-term debt, net of discounts

3,990,716

 

4,102,543

 

 
Total current liabilities

5,503,205

 

5,809,090

 

 
Operating Lease Liability

63,233

 

-

 

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

2,957,758

 

3,848,863

 

Total liabilities

8,524,196

 

9,657,953

 

 
Shareholders’ equity
Common stock (25,434,776 and 25,418,126)

25,435

 

25,418

 

Additional paid-in-capital

40,281,375

 

40,069,391

 

Accumulated deficit

(34,035,293

)

(32,991,833

)

Total shareholders’ equity

6,271,517

 

7,102,976

 

Total liabilities and shareholders' equity $

14,795,713

 

$

16,760,929

 

 

Superior Drilling Products, Inc.

Consolidated Statements of Cash Flows

For the Periods Ended June 30, 2020 and 2019

(unaudited)

 
June 30, 2020 June 30, 2019
Cash Flows From Operating Activities
Net loss $

(1,043,460)

$

(643,300)

Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization expense

1,441,139

1,941,515

Share-based compensation expense

212,001

317,966

Loss / (Gain) on sale or disposition of assets

(142,234)

(14,147)

Impairment on asset held for sale

30,000

-

Amortization of deferred loan cost

9,263

6,179

Changes in operating assets and liabilities:
Accounts receivable

2,435,735

(1,040,141)

Inventories

(860,431)

(158,881)

Prepaid expenses and other noncurrent assets

314,868

(108,142)

Accounts payable and accrued expenses

(230,959)

628,595

Income Tax expense

6,335

-

Other long-term liabilities

(61,421)

-

Net Cash Provided By Operating Activities

2,110,836

929,644

 
Cash Flows From Investing Activities
Purchases of property, plant and equipment

(90,132)

(685,614)

Proceeds from sale of fixed assets

117,833

-

Net Cash Provided By (Used In) Investing Activities

27,701

(685,614)

 
Cash Flows From Financing Activities
Principal payments on debt

(1,953,673)

(2,895,957)

Proceeds received from debt borrowings

964,120

800,000

Payments on Revolving Loan

(842,880)

(437,922)

Proceeds received from Revolving Loan

1,009,822

1,309,836

Debt issuance costs

-

(70,103)

Net Cash Used In Financing Activities

(822,611)

(1,294,146)

 
Net change in Cash

1,315,926

(1,050,116)

Cash at Beginning of Period

1,217,014

4,264,767

Cash at End of Period $

2,532,940

$

3,214,651

 
Supplemental information:
Cash paid for interest $

340,027

$

466,976

Acquisition of equipment by issuance of note payable

-

330,840

Inventory converted to property, plant and equipment

482,282

-

Long term debt paid with Sale of Plane

211,667

-

 

Superior Drilling Products, Inc.

Adjusted EBITDA(1) Reconciliation

(unaudited)

 
($, in thousands) Three Months Ended
June 30,
2020		 June 30,
2019		 March 31, 2020
 
GAAP net income

$

(1,241,506

)

$

(397,424

)

$

198,046

 

Add back:
Depreciation and amortization

 

680,375

 

 

930,410

 

 

760,764

 

Inventory write off

 

-

 

 

136,000

 

 

-

 

Interest expense, net

 

145,528

 

 

194,810

 

 

172,570

 

Share-based compensation

 

105,005

 

 

136,115

 

 

106,996

 

Net non-cash compensation

 

88,200

 

 

88,200

 

 

88,200

 

Income tax expense

 

225

 

 

-

 

 

6,435

 

Loss on disposition of assets

 

-

 

 

(14,147

)

 

(112,234

)

Non-GAAP adjusted EBITDA(1)

$

(222,173

)

$

1,073,964

 

$

1,220,777

 

 
GAAP Revenue

$

2,024,388

 

$

4,543,442

 

$

5,357,763

 

Non-GAAP Adjusted EBITDA Margin

 

-11.0

%

 

23.6

%

 

22.8

%

 
Six Months Ended
June 30,
2020		 June 30,
2019
 
GAAP net income

$

(1,043,460

)

$

(643,300

)

Add back:
Depreciation and amortization

 

1,441,139

 

 

1,941,515

 

Inventory write off

 

-

 

 

136,000

 

Interest expense, net

 

318,098

 

 

353,859

 

Share-based compensation

 

212,001

 

 

317,966

 

Net non-cash compensation

 

176,400

 

 

176,400

 

Income tax expense

 

6,435

 

 

-

 

Loss on disposition of assets

 

(112,234

)

 

(14,147

)

Non-GAAP adjusted EBITDA(1)

$

998,379

 

$

2,268,293

 

 
GAAP Revenue

$

7,382,151

 

$

9,579,788

 

Non-GAAP Adjusted EBITDA Margin

 

13.5

%

 

23.7

%

(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.