OREANDA-NEWS. Superior Drilling Products, Inc. (NYSE:SDPI) (“SDP” or the “Company”), a designer and manufacturer of drilling tool technologies, today reported financial results for the second quarter ended June 30, 2016. 

Troy Meier, Chairman and CEO of Superior Drilling Products, commented, “While these have been challenging times in the oilfield services industry, we believe that we are advantaged by our technologies that directly address the absolute necessity for oil and gas operators to lower their cost of production.  In fact, our tools are especially relevant in this market and the value of our tools are substantiated by the partnerships we have established with well-known suppliers to the industry, the increasing number of rigs on which our Drill-N-Ream® well bore conditioning system is operating and the step-change in drilling performance our tools deliver in the field.  Although the second quarter was tough, we are beginning to see positive results with our expanded market channel strategy and modestly improving conditions in the industry.” 

Mr. Meier concluded, “We remain excited about our future and our tool offerings.  The adoption rate of the Drill-N-Ream has accelerated and we believe it is becoming a standard operating requirement for a major operator in the Permian Basin.  Also, our Strider™ Oscillation System has been redesigned to address a larger variety of drilling conditions such as the Permian Basin.  In addition to expanding our market reach, we are concentrating on increasing productivity in development and manufacturing processes, supporting our channel partners and creating new, innovative technologies.”

Second Quarter 2016 Financial Summary
($ in thousands, except per share amounts)

    Q2 2016   Q2 2015   Change   % Change
  
Revenue   $ 1,114     $ 2,881       (1,767 )     (61.3 )%  
Operating loss     (2,956 )     (1,654 )     (1,302 )     (78.7 )%  
Operating margin     (265 )%     (57 )%        
Net loss     (3,056 )     (2,236 )     (820 )     (36.7 )%  
Diluted loss per share   $ (0.18 )   $ (0.13 )   $ (0.05 )     (36.6 )%  
                                   

Second Quarter 2016 Overview (Narrative compares with prior year period unless otherwise noted)

The decline in revenue for the period was the result of measurably lower activity levels in the North American oilfield industry compared with the prior-year period.  The Bakken formation was especially hard hit because of the higher cost of production in that region.  It was subject to a 69% decline in rig count in the quarter.  SDP has a concentration of customers based in the Bakken and the Company’s largest customer in the region cut their activity by 71%.  The impact of this industry-wide decline was mitigated by the Company’s strategic shift to using established oilfield service companies and distributors as broader channels to market for its products.  With this expanded market reach, we believe the Company has greater opportunity for its tools to be used in all operating basins. 

Tool revenue from the sale, rental and repair of the Company’s drilling tools was $891 thousand, down $887 thousand compared with the 2015 second quarter, and down from $954 thousand in the trailing first quarter of 2016. 

The Company’s manufacturing and PDC drill bit refurbishing business for its exclusive customer was down to $223 thousand, compared with $1.10 million in the prior-year period.  SDP provides its refurbishment services to this customer for primarily the Rocky Mountain region which includes the hard-hit Bakken formation.  When compared with the trailing first quarter, manufacturing and refurbishing revenue was down $267 thousand.

The Company recorded a net gain on sale of assets of $105 thousand, which included $72 thousand from the sale of used, but functional, Drill-N-Ream tools to its largest distributor. 

Non-GAAP adjusted net loss was $2.12 million, or $0.12 per diluted share, in the 2016 quarter, compared with a $1.59 million loss, or $0.09 per share, in the prior-year period.  Strong cost discipline and cost cutting measures helped to contain net loss.  See attached tables for a reconciliation of GAAP net loss to adjusted net loss.

Second Quarter 2016 Operational Review
($ in thousands)

    Q2 2016   Q2 2015   Change   % Change  
Cost of revenue   $ 1,332     $ 1,585       (253 )     (16.0 )%  
As a percent of sales     120 %     55 %        
Selling, general & administrative   $ 1,539     $ 1,781       (242 )     (13.6 )%  
As a percent of sales     138 %     62 %        
Depreciation & amortization   $ 1,200     $ 1,170       30       2.6 %  
                                   

Lower cost of revenue was the result of cost cutting measures and lower volume.  The Company also recorded a $362 thousand asset impairment charge for its fleet of brine-limited Strider tools which the Company has elected to no longer manufacture and rent. 

Troy Meier noted, “We believe our new Strider tool designs better address the needs of our customers because these tools operate in multiple drilling fluid applications including brine and silica sands.  Also, the newer design simplifies our tool inventory and manufacturing processes while reducing the potential for application error.”

The increase in cost of revenue as a percent of sales was due to lower volume and reduced absorption of fixed costs.    

Selling, general and administrative expense, including research and engineering (SG&A) was down from the prior-year period due to reductions in staffing and cost discipline.  The Company continues to maintain operational staffing at a level necessary to meet expected demand resulting from new channel partner agreements.  Compared with the trailing first quarter, SG&A increased $248 thousand from higher professional fees and services, as well as investments in research and engineering for tool development.   

Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization and non-cash stock compensation expense, was a loss of $1.15 million.  The loss was greater than both the prior-year and trailing periods as a result of lower revenue.  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 Half 2016 Review (Narrative compares with prior-year period unless otherwise noted)
($ in thousands, except per share amounts)

               
  1H 2016     1H 2015   Change  
Revenue $ 2,559       $ 6,956       (4,397 )  
Cost of revenue   2,353         3,504       (1,151 )  
As % of revenue   92 %       50 %      
Selling, general & administrative   2,829         3,840       (1,011 )  
As % of revenue   111 %       55 %      
Depreciation & amortization   2,435         2,319       116    
Total operating expenses   7,617         9,663       (2,047 )  
Operating loss   (5,057 )       (2,707 )     (2,350 )  
Operating margin   (198 )%       (39 )%      
Net loss   (5,299 )       (3,279 )     (2,020 )  
Diluted loss per share $ (0.30 )     $ (0.19 )     (0.11 )  
                           

The decline in revenue in the first half of 2016 was a direct result of the severe downturn in oilfield activity.  The asset impairment and inventory reduction previously noted in the quarter also impacted the first half.  Cost cutting measures resulted in significant reductions in cost of revenue and SG&A. 

Adjusted EBITDA for the first half of 2016 was a $1.70 million loss, compared with a
$154 thousand loss in the first half of 2015.  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

Property, plant and equipment, net, declined $1.23 million from the end of 2015 as a result of ongoing depreciation, the used tool sales and the asset impairment charge.    

Cash and equivalents was $212 thousand at June 30, 2016.  Total debt at the end of the second quarter was $20.06 million, down slightly from $20.25 million at March 31, 2016.

The Company previously announced on August 11, 2016, the amendment to the seller note associated with the May 2014 acquisition of Hard Rock Solutions, LLC, which included the payment of $1.0 million in principal with common stock.   The Company also previously announced on August 11, 2016, that it had entered into a $1.0 million privately-placed bridge loan. 

During the second quarter, SDP held capital expenditures to $26 thousand as part of its cash management efforts.  The Company anticipates capital expenditures will be approximately
$180 thousand in the second half of 2016.  The capital will be used primarily for Strider tool production. 

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 operating results for its second 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 (858) 384-5517 and enter replay number 13640548.  A telephonic replay will be available from 1:00 pm MT (3:00 pm ET) on the day of the call through Friday, August 19, 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 StriderTM 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.

Safe Harbor Regarding Forward Looking Statements
This news release contains “forward-looking statements” within the meaning of the safe harbor provisions, 15 U.S.C. § 78u-5, of the Private Securities Litigation Reform Act of 1995. 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 future operating results and cash flow, scheduled, budgeted and other future capital expenditures, working capital requirements, the availability of expected sources of liquidity, the introduction to the market of the Company’s future products, the market for the Company’s future products, The Company’s ability to develop new applications for its technologies, the exploration, development and production activities of the Company’s customers, compliance with present and future environmental regulations and costs associated with environmentally related penalties, capital expenditures, remedial actions and proceedings, effects of pending legal proceedings, changes in customers’ future product and service requirements that may not be cost effective or within the Company’s capabilities, and future operations, financial results, business plans and cash needs.  These statements reflect the current 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 volatility of oil and natural gas prices, the cyclical nature of the oil and gas industry, availability of financing, flexibility in restructuring existing debt and access to capital markets, consolidation within our customers’ industries, competitive products and pricing pressures, our reliance on significant customers, specifically, Baker Hughes, our limited operating history, fluctuations in our operating results, our dependence on key personnel, costs of raw materials, our dependence on third party suppliers, unforeseen risks in our manufacturing processes, the need for skilled workers, our ability to successfully manage our growth strategy, unanticipated risks associated with, and our ability to integrate, acquisitions, current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries, terrorist threats or acts, war and civil disturbances, our ability to protect our intellectual property, impact of environmental matters, including future environmental regulations, implementing and complying with safety policies, breaches of security in our information systems, related party transactions with our founders, and risks associated with our common stock.  These and other factors could adversely affect the outcome and financial effects of the Company’s plans and described herein. Therefore, you should not rely on any of these forward-looking statements.  Any forward-looking statement made by the Company in this news release is based only on information currently available to the Company and speaks only as of the date on which it is made. The Company undertakes no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.

 
Superior Drilling Products, Inc.
Consolidated Condensed Statements of Operations
(unaudited)
 
    For the Three Months   For the Six Months
    Ended June 30,   Ended June 30,
      2016       2015       2016       2015  
                 
Revenue   $ 1,114,469     $ 2,881,372     $ 2,559,095     $ 6,955,990  
                 
Operating costs and expenses                
Cost of revenue     1,331,985       1,585,018       2,352,597       3,504,050  
Selling, general & administrative     1,538,824       1,780,649       2,829,427       3,840,423  
Depreciation & amortization     1,200,085       1,170,204       2,434,510       2,318,701  
Total operating expenses     4,070,894       4,535,871       7,616,534       9,663,174  
                 
Operating loss       (2,956,425 )       (1,654,499 )       (5,057,439 )       (2,707,184 )
Operating margin     -265.3 %     -57.4 %     -197.6 %     -38.9 %
                 
Other income (expense)                
                 
Interest income     77,952       73,293       156,319       146,569  
Interest expense     (334,819 )     (467,252 )     (698,288 )     (1,027,680 )
Other income     52,225       57,026       108,951       129,085  
Gain (loss) on sale of assets     104,599       (27,666 )     191,450       (82,886 )
Total other expense     (100,043 )     (364,599 )     (241,568 )     (834,912 )
                 
Loss before income taxes     (3,056,468 )     (2,019,098 )     (5,299,007 )     (3,542,096 )
Income tax expense (benefit)     -       216,599       -       (263,313 )
                 
Net loss   $  (3,056,468 )   $  (2,235,697 )   $  (5,299,007 )   $  (3,278,783 )
                 
Basic and diluted loss per common share   $ (0.18 )   $ (0.13 )   $ (0.30 )   $ (0.19 )
Basic and diluted weighted average common shares outstanding     17,464,443       17,291,646       17,462,024       17,291,646  
                 
Diluted loss per common share   $ (0.18 )   $ (0.13 )   $ (0.30 )   $ (0.19 )
Diluted weighted average common shares outstanding     17,464,443       17,291,646       17,462,024       17,291,646  
 
Superior Drilling Products, Inc.
Consolidated Condensed Balance Sheets
(unaudited)
 
    June 30,
2016		   December 31,
2015
ASSETS        
Current assets        
Cash   $ 211,917     $ 1,297,002  
Accounts receivable     473,799       1,861,002  
Prepaid expenses     81,245       179,450  
Inventory     1,280,507       1,410,794  
Other current assets     184,486       -  
Total current assets     2,231,954       4,748,248  
Property, plant and equipment, net     13,430,075       14,655,502  
Intangible assets, net     9,802,778       11,026,111  
Note receivable     8,296,717       8,296,717  
Other assets     17,554       28,321  
Total assets     33,779,078       38,754,899  
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities        
Accounts payable     776,662       638,593  
Accrued expenses     806,388       809,765  
Line of credit, net     241,876       -  
Income tax payable     2,000       2,000  
Current portion of capital lease obligation     350,133       332,185  
Current portion of related party debt     781,921       555,393  
Current portion of long-term debt, net     5,230,270       2,636,241  
Total current liabilities     8,189,250       4,974,177  
Other long-term liability     880,032       880,032  
Capital lease obligation, less current portion     94,739       246,090  
Related party debt, less current portion     -       271,190  
Long-term debt, less current portion, net     13,362,568       16,208,699  
Total liabilities     22,526,589       22,580,188  
Commitments and contingencies        
Stockholders' equity        
Common stock - $0.001 par value; 100,000,000 shares authorized; 17,466,275 and 17,459,605 shares issued and outstanding, respectively     17,466       17,460  
Additional paid-in-capital     31,756,300       31,379,520  
Retained deficit     (20,521,277 )     (15,222,269 )
Total stockholders' equity     11,252,489       16,174,711  
Total liabilities and stockholders' equity   $ 33,779,078     $ 38,754,899  
 

 

Superior Drilling Products, Inc.
Consolidated Statements of Cash Flows
(unaudited)
 
    For the Six Months Ended
    June 30,
      2016       2015  
Cash Flows From Operating Activities        
Net loss   $ (5,299,007 )   $ (3,278,783 )
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization expense     2,446,967       2,318,701  
Amortization of debt discount     69,768       411,969  
Deferred tax benefit     -       (264,313 )
Share-based compensation expense     376,785       105,155  
Gain on disposition of assets     22,652       82,886  
Changes in operating assets and liabilities:        
Accounts receivable     1,387,203       2,274,470  
Inventory     130,287       (259,416 )
Prepaid expenses and other current assets     (86,281 )     (146,677 )
Other assets     (62,466 )     68,069  
Accounts payable and accrued expenses     134,691       (889,780 )
Net Cash (Used in) Provided by Operating Activities     (879,401 )     422,281  
         
Cash Flows From Investing Activities        
Purchases of property, plant and equipment     (171,609 )     (558,355 )
Sale of property, plant and equipment     150,750       -  
Net cash Used in Investing Activities     (20,859 )     (558,355 )
         
Cash Flows From Financing Activities        
Principal payments on debt     (1,023,806 )     (2,816,469 )
Principal payments on related party debt     (44,662 )     (241,471 )
Principal payments on capital lease obligations     (133,403 )     (142,266 )
Proceeds received from long-term debt     1,000,000       -  
Proceeds from sale of subsidiary     50,700      
Proceeds from payments on note receivable     22,533      
Debt issuance costs     (56,188 )    
Net Cash Used in Financing Activities     (184,826 )     (3,200,206 )
         
Net Decrease in Cash     (1,085,086 )     (3,336,280 )
Cash at Beginning of Period     1,297,002       5,792,388  
Cash at End of Period   $ 211,916     $ 2,456,108  
         
Superior Drilling Products, Inc.
Adjusted EBITDA(1) Reconciliation 
(unaudited)
  Three Months Ended
  June 30, 2016   March 16, 2016   June 30, 2015
           
GAAP net loss $ (3,056,468 )   $ (2,242,540 )   $ (2,235,697 )
Add back:          
Depreciation and amortization   1,200,085       1,234,424       1,170,204  
Asset impairment   362,000       -       -  
Interest expense, net   256,867       285,100       393,959  
Share-based compensation   119,476       257,309       52,578  
(Gain) loss on sale of assets   (104,599 )     (86,852 )     27,666  
Functional Drill-N-Ream sales   72,000       -       -  
Income tax benefit   -       -       216,599  
           
Non-GAAP adjusted EBITDA(1) $ (1,150,639 )   $ (552,559 )   $ (374,691 )
   
         
  Six Months Ended  
  June 30, 2016   June 30, 2015  
         
GAAP net loss $ (5,299,007 )   $ (3,278,783 )  
Add back:        
Depreciation and amortization   2,434,510       2,318,701    
Interest expense, net   541,969       881,111    
Share-based compensation   376,785       105,155    
Asset impairment   362,000       -    
(Gain) loss on sale of assets   (191,450 )     82,886    
Functional Drill-N-Ream sales   72,000       -    
Income tax benefit   -       (263,313 )  
         
Non-GAAP Adjusted EBITDA(1) $ (1,703,193 )   $ (154,243 )  
                       
(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.