Superior Drilling Products, Inc. Reports 33% Revenue Growth, Triples Net Income for Second Quarter 2018

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, 2018.

Troy Meier, Chairman and CEO, noted, "We had strong growth in the quarter supported by excellent tool sales that were also complemented by initial revenue generated in the Middle East. The value of our Drill-N-Ream^® ("DnR”) well bore conditioning tool is becoming more broadly understood globally in the oil & gas industry as the operating fleet expands. In fact, the deployment of the DnR in the Middle East is demonstrating it can deliver incremental improvements to their drilling operations. And, importantly, we believe our Strider™ oscillation system technology continues to demonstrate value as we are evaluating channel partnership opportunities.”

Revenue growth was primarily the result of higher sales and rental of the DnR in North America and the Middle East. Lower contract services revenue was the result of the decline in other contract services activity in the quarter which was mostly offset by higher refurbishment volume. Sequentially, contract services improvement reflects the increase in refurbishment volume which was driven by continued drilling activity in the U.S. and the Company’s expanded contract services agreement.

Tool sales in the quarter increased 56%, or $0.9 million, over the prior-year period primarily as a result of market share gains and an increase in horizontal drill rigs. Sequential growth of almost 26% represents an expansion of the DnR fleet. Other related tool revenue, which is comprised of royalty fees and tool maintenance and repair, increased over the prior-year period, but was relatively unchanged compared with the trailing first quarter as fleet expansion outpaced tool deployment.

Net income of $1.0 million improved by $0.7 million over the second quarter of 2017 from higher volume and resulting operating leverage.

The reduction in the cost of revenue as a percent of sales was due to the leverage gained from higher volume.

The increase in selling, general and administrative expense (SG&A) over the prior-year period primarily reflects investments in research and development and in our international market expansion, which was partially offset by a reduction in professional fees. As a percentage of sales, SG&A decreased compared with the prior-year period from operating leverage gained from higher volume.

Chris Cashion, Chief Financial Officer, noted, "Due to the timing of certain costs, SG&A was lower in the quarter than we had originally planned. However, we expect that those costs will be realized in the latter half of the year, which includes our establishment of a repair operation in Texas.”

The improvement in second quarter 2018 Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, non-cash stock compensation expense and unusual items, was the result of strong operating leverage. Adjusted EBITDA was $2.1 million, or 40% of revenue in the quarter up $0.6 million and $0.9 million over the 2017 second quarter and sequential 2018 first quarter, respectively.

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 six months of 2018 increased nearly 35% when compared with the same period last year. The growth reflects higher tool revenue supported by U.S. drilling activity and contributions from penetration into the Middle East. Strong operating leverage from higher volume and cost discipline enabled the measurable improvement in operating income and margin.

Net income for the first six months of 2018 was $1.1 million compared with a net loss of $79 thousand for the same period in the prior-year. Adjusted EBITDA for the six-month period was $3.4 million, or 34% of sales, compared with $2.4 million, or 32% of sales, for the first half of 2017.

Balance Sheet and Liquidity

Cash and cash equivalents was $3.1 million at June 30, 2018, up from $2.4 million at the end of 2017. Cash generated from operations in the quarter was $1.6 million, compared with $0.5 million in the prior-year period.

In the second quarter of 2018 the Company had capital expenditures of $37 thousand.

Total debt at the end of the quarter was $11.6 million, down $1.2 million, or 9.5%, compared with $12.8 million at December 31, 2017.

At June 30, 2018, we had a working capital deficit of approximately $1.4 million. The Company’s manufacturing facility is financed by a commercial bank loan with principal of $4.2 million due February 15, 2019 as the result of an extension executed on August 1, 2018. The debt has been reclassified to short-term and results in a working capital deficit at June 30, 2018.

Mr. Cashion added, "Our $4.3 million mortgage on our property in Vernal, Utah has been extended for six-months as we continue to evaluate various financing options to include restructuring our total debt to provide improved liquidity.”

Outlook:

The Company has raised the lower end of its revenue expectations for 2018:

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 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 1:00 p.m. MT (3:00 p.m. ET) the day of the teleconference until Thursday, August 9, 2018. To listen to the archived call, dial (412) 317-6671 and enter conference ID number 13680958, 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, 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.

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