Superior Drilling Products, Inc. Reports $0.6 Million in Net Income for Third Quarter 2017

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, 2017.

Troy Meier, Chairman and CEO, noted, "We delivered another quarter of solid growth as our Drill-N-Ream^® ("DnR”) well bore conditioning tool continued to gain market share combined with the effectiveness of our go to market strategy and the year-over-year improvement in the oil & gas industry. We believe the market appreciates the value of the unique capabilities of the DnR and as a result we are seeing it being used in a widening scope of applications. Importantly, our results clearly demonstrated the significant operating leverage we gain on higher volume. We plan to use the cash we generate to develop new technologies designed to lower the costs to drill and complete oil and gas wells.”

Compared with the prior-year period, revenue increased 97% to $4.4 million. Higher tool revenue was driven by increasing repair and royalty revenue from the larger fleet of deployed DnRs as well as new demand for SDP’s patent pending V-Stream technology. Contract services revenue improvement year-over-year was the result of the strengthened oil & gas industry.

Tool revenue, which is comprised of tool sales and rentals and other related tool revenue, grew to $3.2 million, up 72% over the prior-year period. Higher tool revenue year-over-year was primarily the result of the increased numbers of tools deployed which drove the $1.1 million increase in other related tool revenue, which is comprised of royalty fees and tool maintenance and repair. Tool sales in the quarter also improved as the result of market share growth.

Contract services revenue more than tripled over the prior-year period to $1.3 million. This outpaced the 97% increase in rig count over the same period as the Company is supporting drill bit refurbishment beyond its contracted area and providing other contract manufacturing services.

When compared with the trailing second quarter of 2017, total revenue was up 9.8% from increased tool revenue of $0.7 million partially offset by $0.3 million lower contract services revenue.

Net income of $586 thousand improved by $1.8 million over the prior-year period as a result of higher revenue driven by the success of the DnR, the improvement in the oil & gas industry and operating leverage from higher volume.

Lower cost of revenue as a percent of sales was primarily a result of higher volume and improved productivity.

Selling, general and administrative expense (SG&A) declined from the prior-year period from lower research and development costs and professional fees. SG&A decreased when compared with the trailing second quarter for the same reasons.

Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, non-cash stock compensation expense and unusual items, improved to $1.8 million, or 39.9% of revenue. Compared with the prior-year period, Adjusted EBITDA improved 10 times, or $1.6 million over prior-year period and $0.3 million, or 18.7% over the trailing second quarter from higher volume and reduced costs.

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.

Revenue in the first nine months of 2017 increased 2.5 times when compared with the same period last year. The Company changed its go to market strategy in May 2016 which, combined with the improved industry dynamics, has driven revenue growth. Strong operating leverage from higher volume combined with the lower cost structure of the new business model and cost discipline enabled the measurable improvement in operating income and margin.

Net income for the first nine months of 2017 was $0.5 million compared with a net loss of $6.5 million for the same period in the prior-year. Adjusted EBITDA for the nine-month period was $4.2 million, a significant improvement over the prior-year period of $(1.5) million.

Balance Sheet and Liquidity

Cash and cash equivalents was $2.7 million at September 30, 2017, up from $2.2 million at the end of 2016 and $1.3 million at the end of June 2017. Cash generated from operations in the quarter was $1.7 million, compared with $0.6 million of cash used in operations in the prior-year period. For the nine-month period, cash generated from operations was $1.4 million, substantially improved over cash used in operations in the prior-year period of $1.5 million.

Total debt at the end of the quarter was $13.6 million, down $3.1 million, or 18%, compared with $16.7 million at December 31, 2016.

For the first nine months of calendar year 2017, the Company had capital expenditures of $220 thousand. In addition, during the quarter, the Company exercised its option under a capital lease to purchase a machining center for $690 thousand. SDP is negotiating a new capital lease and as of September 30, 2017, recognized the amount due to the current lessor as accrued expense.

Outlook:

Mr. Meier added, "We remain excited about our prospects for continuing growth. We have many product initiatives in process, and are encouraged with our progress identifying quality channel partners to take our DnR to international markets. We believe our international conversations indicate a strong interest in many active basins around the world, as it appears our tools would offer value in those markets. Our intent remains to methodically expand our reach around the globe with select channel partners in order to retain tool maintenance and quality control, which is imperative for the DnR’s continued success. We are also advancing discussions with several channel partners regarding our Strider technology for both the open hole and completion markets.”

The Company expects SG&A to be approximately $1.4 million in the fourth quarter from higher incentive compensation and investments in new product development and international expansion. SDP also expects SG&A to increase further in 2018 from investments related to staffing for international growth, related professional fees and product development spending for the manufacture of Open Hole Strider prototype tools for field testing.

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 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 2:00 p.m. MT (4:00 p.m. ET) the day of the teleconference until Thursday, November 16, 2017. To listen to the archived call, dial (412) 317-6671 and enter conference ID number 13671792, 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^TM 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.

⁽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.

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