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.)

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

⁽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.

⁽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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