Superior Drilling Products, Inc. Revenue Increased 25% to $4.3 Million in Fourth Quarter 2019

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 fourth quarter and full-year ended December 31, 2019

Troy Meier, Chairman and CEO, noted, "Revenue from the increased use of our leading technology, the Drill-N-Ream® well bore conditioning tool ("DNR”), in the Middle East drove growth in the quarter. And in fact, North America revenue grew in the quarter despite the dramatic reduction of drilling activity in the U.S., driven by increased tool sales and greater demand for contract services. We believe that this demonstrates continued building of demand for the DNR and further market penetration, as well as the success of our strategy to expand our relationship and opportunities with our leading legacy customer.”

Fourth Quarter 2019 Review ($ in thousands, except per share amounts) (See at "Definitions” the composition of product/service revenue categories.)

When compared with the prior-year period, revenue grew 24.7% driven by the increase in Tool Sales and Rental from strong growth in the rental of the DNR in the Middle East, increased tool sales in the U.S. and higher Contract Services revenue as demand from the Company’s legacy customer increased to serve the larger geographic area, additional types of tools being repaired and more custom manufacturing requirements.

Fourth Quarter 2019 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 as a percentage of sales decreased 50 basis points over the prior-year period on higher volume, offset by the current higher cost of International revenue as the Company creates greater scale in that market.

The decline in selling, general and administrative expense (SG&A) was the result of higher noncash bonus expense in the prior-year’s fourth quarter, the difference in timing which more than offset higher legal expenses and the cost of international market development efforts in the 2019 fourth quarter.

Net income for the quarter was $125 thousand, up from a net loss of $1.1 million in the fourth quarter of 2018. Adjusted EBITDA⁽¹⁾, a non-GAAP measure defined as earnings before interest, taxes, depreciation and amortization, non-cash stock compensation expense and unusual items, expanded as a percent of revenue by 760 basis points to 14.3% compared with the fourth quarter of 2018.

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.

Full Year 2019 Review

⁽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 growth in 2019 was the result of increased Middle East tool rental revenue, more DNR maintenance and royalty revenue as the tool continues to demonstrate its resiliency, and higher demand from the Company’s legacy customer for drill bit and other tool refurbishment and contract manufacturing. This more than offset lower Tool Sales and Rental revenue which reflected a reduction in tool sales.

The increase in operating expenses in 2019 was primarily due to incremental costs associated with the Middle East expansion, the addition of a Texas service center and higher annual noncash bonus expense. Operating loss was $0.9 million in 2019, compared with operating income in 2018 of $0.3 million.

Net loss for 2019 was $0.9 million, or $(0.04) per diluted share. Adjusted EBITDA⁽¹⁾ for 2019 was $4.0 million. Adjusted EBITDA margin was 21% in 2019, compared with 27% in 2018.

Balance Sheet and Liquidity

Cash at the end of the quarter was $1.2 million and working capital was $0.8 million. Capital expenditures were $0.1 million in the quarter and $0.5 million in 2019.

Total debt at the end of the year was $8.0 million, down $2.9 million, or 26.9%, compared with $10.9 million at December 31, 2018. Subsequent to the end of the year, the Company made a $750,000 principal payment on the Hard Rock note. Three remaining payments of $750 thousand in principal are due 2020.

In December 2019, SDP entered into an amended lending agreement which reloaded and expanded its term loan to $1.0 million for total funds to the Company of $350,000. In February 2020, SDP sold an aircraft asset for a gain of $146 thousand and subsequently paid off the $212 thousand remaining on the loan related to the aircraft, resulting in net cash of $117 thousand. The Company believes that cash on hand and cash generated from operations will provide sufficient liquidity for the year to meet its obligations.

2020 Outlook:

Mr. Meier concluded, "2020 has begun strong both in the U.S. and Middle East, and we are making solid progress on discussions to build out our distribution channels in both markets to further our market reach with additional strategic partnerships. However giving the sudden turn of event in the oil and gas industry we are hesitant to provide a forecast at this time. Nonetheless, given our solid business model, strong cost discipline and leading drilling technologies, we believe we can outperform against the headwinds of the industry.”

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 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, March 19, 2020. To listen to the archived call, please call (412) 317-6671 and enter conference ID number 13697748, 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, 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, success at expansion in the Middle East, options available for market channels in North America, 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

⁽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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