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Superior Drilling Products Reports Third Quarter 2023 Results

  • Third quarter revenue was $5.1 million
  • Strengthened international technical support group to capitalize on significant

    near- and long-term opportunities
  • Creating greater value of underlying operations to drive value for strategic initiatives effort
  • Generated strong cash from operations of $3.2 million in the quarter and $4.1 million year-to-date compared with $1.3 million during the prior-year period
  • Reaffirmed 2023 outlook

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, 2023.

Troy Meier, Chairman and CEO, commented, “Our results were solid considering the significant decline in U.S. rig count throughout the year. On the international front, we grew year-over-year and remain excited about the many opportunities to drive future growth. During the quarter, we continued to improve our international technical support group, advanced our international ISO quality standards to enable expansion to the U.A.E. and Saudi Arabia, and are preparing our new localized service and technology center for future bit refurbishment work. Ultimately, our efforts are to create the underlying foundation to better position the Company to capture opportunities and support our strategic review efforts as we evaluate options that will drive the greatest value for all stakeholders.”

He added, “Given the continued pressure on the U.S. market, at the beginning of the fourth quarter we rationalized our domestic operations to better match expected near-term demand. These changes are expected to result in annual expense savings of approximately $600 thousand, with one-time severance expenses to be recognized in the fourth quarter of 2023.”

Third Quarter 2023 Revenue Review (See at “Definitions” the composition of product/service revenue categories.)

($ in thousands) September 30,

2023
June 30,

2023
September 30,

2022
Change

Sequential
Change

Year/Year
North America

$

4,469

$

4,325

$

4,623

3.3

%

(3.3

)%

International

 

583

 

1,042

 

550

(44.1

)%

6.0

%

Total Revenue

$

5,052

$

5,367

$

5,173

(5.9

)%

(2.3

)%

 
Tool (DNR) Revenue

$

3,256

$

3,552

$

3,343

(8.3

)%

(2.6

)%

Contract Services

 

1,796

 

1,815

 

1,829

(1.0

)%

(1.8

)%

Total Revenue

$

5,052

$

5,367

$

5,173

(5.9

)%

(2.3

)%

The Company’s North America revenue has been pressured by a continuing decline in the U.S. rig count, which impacted Drill-N-Ream® (DNR) tool sales and contract services work. The average U.S. rig count of 650 in the third quarter of 2023 was down 111 rigs, or 15%, from the prior-year period. After the end of the third quarter of 2023, the U.S. rig count further declined to 618.

For the third quarter of 2023, North America revenue comprised approximately 88% of total revenue, with remaining sales all within the Middle East.

Timing of revenue growth from the Company’s Middle East strategy contributed to sequential revenue decline for the quarter. While the U.S. rig count has continued to decline through the year, the international rig count has increased from 900 rigs at the end of 2022 to 962 rigs at the end of October 2023.

Third Quarter 2023 Operating Results

($ in thousands, except per share amounts) September 30,

2023
June 30,

2023
September 30,

2022
Change

Sequential
Change

Year/Year
Cost of revenue

$

2,004

 

$

2,013

 

$

2,231

 

(0.5

)%

(10.2

)%

As a percent of sales

 

39.7

%

 

37.5

%

 

43.1

%

Selling, general & administrative

$

2,585

 

$

2,459

 

$

1,723

 

5.1

%

50.0

%

As a percent of sales

 

51.2

%

 

45.8

%

 

33.3

%

Depreciation & amortization

$

338

 

$

349

 

$

363

 

(3.4

)%

(6.9

)%

Total operating expenses

$

4,926

 

$

4,821

 

$

4,317

 

2.2

%

14.1

%

Operating Income

$

126

 

$

546

 

$

856

 

(76.9

)%

(85.3

)%

As a % of sales

 

2.5

%

 

10.2

%

 

16.5

%

Other (expense) income including income tax

$

(112

)

$

(223

)

$

(217

)

NA NA
Net Income

$

14

 

$

323

 

$

639

 

(95.7

)%

(97.8

)%

Diluted earnings per share

$

-

 

$

0.01

 

$

0.02

 

(100.0

)%

(100.0

)%

Adjusted EBITDA¹

$

784

 

$

1,213

 

$

1,525

 

(35.4

)%

(48.6

)%

As a % of sales

 

15.5

%

 

22.6

%

 

29.5

%

1Adjusted EBITDA is a non-GAAP measure defined as earnings before interest, taxes, depreciation, and amortization, non-cash stock compensation expense, and unusual items. 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.

Selling, general and administrative (SG&A) expenses increased 50% year-over-year largely due to the Company’s international expansion, which included the hiring of technical sales and business development personnel and significant travel-related expenses in support of the business development activities. Also included in SG&A were legal expenses of $260 thousand due to continuing litigation for the Company’s patent infringement lawsuit over violations of the patents on its DNR tool and $80 thousand in fees as part of the Company’s strategic review process.

Depreciation and amortization expense decreased as a result of fully amortizing intangible assets and fully depreciating manufacturing center equipment.

During the third quarter of 2023, the Company received $199 thousand from a non-management shareholder due to short-swing SEC profit rules. The funds were recognized as other income. Partially offsetting those gains was a $43 thousand expense due to an early redemption fee as part of the Company’s debt refinancing during the quarter.

Balance Sheet and Liquidity

On July 28, 2023, the Company executed a new credit agreement with Vast Bank, National Association, which included a 5-year, $1.7 million term loan, a 2-year, $750,000 revolving credit line, and a program whereby the lender can purchase certain accounts receivable. The proceeds from the receivables program were used to repay the full amount outstanding under the Company’s prior credit agreement. Total debt at quarter-end was $2.5 million.

Year-to-date cash generated by operations was $4.1 million compared with $1.3 million in the year-ago period. Cash at the end of the quarter was $4.3 million, double the balance from year-end 2022, reflecting improved working capital and the timing associated with the program whereby the Company’s lender had purchased certain accounts receivables. After quarter end, in October, SDP made a $1.2 million payment to its lender as part of the accounts receivable lending program.

Capital expenditures of $3.1 million year-to-date were largely in support of the Company’s Middle East operations, which included the DNR rental tool fleet and the new service and technology center that opened in the second quarter. The Company expects capital spending for fiscal 2023 to range between $3.5 million to $4.0 million.

Reaffirmed 2023 guidance (As of November 9, 2023)

Revenue

$22.0 million to $24.0 million

SG&A expense

$9.0 million to $9.5 million

(includes approximately $1.2 million

in legal expenses for ongoing patent infringement litigation)

Adjusted EBITDA1

$5.5 million to $6.5 million

1See “Forward Looking Non-GAAP Financial Measures” below for additional information about this non-GAAP measure.

Webcast and Conference Call

The Company will host a conference call and live webcast today at 10:00 am Mountain Time (12:00 pm Eastern Time) 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 pm MT (4:00 pm ET) the day of the teleconference until Thursday, November 23, 2023. To listen to the archived call, please call (412) 317-6671 and enter conference ID number 13741632 or access the webcast replay at www.sdpi.com, where a transcript will be posted once available.

Definitions and Composition of Product/Service Revenue:

Tool (DNR) Revenue is the sum of tool sales/rental revenue and other related tool revenue, which is comprised of royalties and fleet maintenance fees.

Contract Services revenue is comprised of repair and manufacturing services for drill bits and other tools or products for customers.

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 leading oil field service companies. 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 Company’s strategic review process, 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 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; the duration of the COVID-19 pandemic and related impact on the oil and natural gas industry; 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.

Forward Looking Non-GAAP Financial Measures

Forward-looking adjusted EBITDA is a non-GAAP measure. The Company is unable to present a quantitative reconciliation of these forward-looking non-GAAP financial measures to their most directly comparable forward-looking GAAP financial measure because such information is not available, and management cannot reliably predict the necessary components of such GAAP measures without unreasonable effort largely because forecasting or predicting our future operating results is subject to many factors out of our control or not readily predictable. In addition, the Company believes that such reconciliations would imply a degree of precision that would be confusing or misleading to investors. The unavailable information could have a significant impact on the Company’s fiscal 2023 and future financial results. This non-GAAP financial measure is a preliminary estimate and is subject to risks and uncertainties, including, among others, changes in connection with purchase accounting, quarter-end, and year-end adjustments. Any variation between the Company’s actual results and preliminary financial data set forth in this presentation may be material.

FINANCIAL TABLES FOLLOW

Superior Drilling Products, Inc.

Consolidated Condensed Statements of Operations

(unaudited)

Three Months Ended September 30, Nine Months Ended September 30,

 

2023

 

 

 

2022

 

 

 

2023

 

 

 

2022

 

Revenue
North America

$

4,469,415

 

$

4,622,614

 

$

14,269,529

 

$

12,388,746

 

International

 

582,788

 

 

549,931

 

 

2,431,237

 

 

1,454,806

 

Total Revenue

$

5,052,203

 

$

5,172,545

 

$

16,700,766

 

$

13,843,552

 

 


Operating cost and expenses
Cost of revenue

$

2,003,791

 

$

2,230,705

 

$

6,256,918

 

$

6,114,705

 

Selling, general, and administrative expenses

 

2,584,740

 

 

1,723,221

 

 

7,381,020

 

 

5,264,270

 

Depreciation and amortization expense

 

337,653

 

 

362,773

 

 

1,013,116

 

 

1,176,151

 

Total operating cost and expenses

$

4,926,184

 

$

4,316,699

 

$

14,651,054

 

$

12,555,126

 

Operating income

$

126,019

 

$

855,846

 

$

2,049,712

 

$

1,288,426

 

 
Other income (expense)
Interest income

 

9,272

 

 

10,544

 

 

39,926

 

 

13,720

 

Interest expense

 

(200,485

)

 

(154,108

)

 

(484,442

)

 

(410,707

)

Other income

 

198,894

 

 

-

 

 

198,894

 

 

-

 

Other expense

 

(43,000

)

 

-

 

 

(43,000

)

 

-

 

Recovery of related party note receivable

 

-

 

 

-

 

 

350,262

 

 

-

 

Loss on sale or disposition of assets

 

-

 

 

(29,381

)

 

-

 

 

(51,527

)

Total other (expense) income

 

(35,319

)

 

(172,945

)

 

61,640

 

 

(448,514

)

 
Income before income taxes

 

90,700

 

 

682,901

 

 

2,111,352

 

 

839,912

 

Income tax expense

 

(76,861

)

 

(44,169

)

 

(261,127

)

 

(107,852

)

Net income

$

13,839

 

$

638,732

 

$

1,850,225

 

$

732,060

 

 
Earnings per common share - basic

$

-

 

$

0.02

 

$

0.06

 

$

0.03

 

Weighted average common shares outstanding - basic

 

29,895,347

 

 

28,845,456

 

 

29,409,602

 

 

28,440,722

 

.
Earnings per common share - diluted

$

-

 

$

0.02

 

$

0.06

 

$

0.03

 

Weighted average common shares outstanding - diluted

 

29,965,145

 

 

28,855,456

 

 

29,479,400

 

 

28,450,722

 

Superior Drilling Products, Inc.

Consolidated Condensed Balance Sheets

(unaudited)
September 30, 2023 December 31, 2022
ASSETS
Current Assets
Cash

$

4,314,674

 

$

2,158,025

 

Accounts receivable

 

2,438,674

 

 

3,241,221

 

Prepaid expenses

 

533,329

 

 

367,823

 

Inventories

 

3,219,033

 

 

2,081,260

 

Other current assets

 

307,161

 

 

140,238

 

Total current assets

 

10,812,871

 

 

7,988,567

 

 
Property, plant and equipment, net

 

11,099,485

 

 

8,576,851

 

Intangible assets, net

 

-

 

 

69,444

 

Right of use assets (net of amortization)

 

505,739

 

 

638,102

 

Other noncurrent assets

 

199,816

 

 

111,519

 

Assets held for sale

 

-

 

 

216,000

 

Total assets

$

22,617,911

 

$

17,600,483

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable

$

2,910,443

 

$

1,043,581

 

Accrued expenses

 

945,248

 

 

891,793

 

Accrued income tax

 

553,177

 

 

351,618

 

Current portion of operating lease liability

 

53,066

 

 

44,273

 

Current portion of financial obligation

 

81,259

 

 

74,636

 

Current portion of long-term debt, net of discounts

 

753,334

 

 

1,125,864

 

Other current liabilities

 

-

 

 

216,000

 

Total current liabilities

 

5,296,527

 

 

3,747,765

 

 
Operating lease liability, less current portion

 

334,410

 

 

523,375

 

Long-term financial obligation, less current portion

 

3,976,278

 

 

4,038,022

 

Long-term debt, less current portion, net of discounts

 

1,702,976

 

 

529,499

 

Deferred income

 

675,000

 

 

675,000

 

Total liabilities

 

11,985,191

 

 

9,513,661

 

 
Shareholders’ equity
Common stock - $0.001 par value; 100,000,000 shares authorized;
29,245,080 shares issued and outstanding

 

30,391

 

 

29,245

 

Additional paid-in-capital

 

44,638,455

 

 

43,943,928

 

Accumulated deficit

 

(34,036,126

)

 

(35,886,351

)

Total shareholders’ equity

 

10,632,720

 

 

8,086,822

 

Total liabilities and shareholders’ equity

$

22,617,911

 

$

17,600,483

 

 

Superior Drilling Products, Inc.

Consolidated Statements of Cash Flows

(unaudited)

Nine Months Ended September 30,

 

2023

 

 

2022

 

Cash Flows from Operating Activities
Net income

$

1,850,225

 

 

732,060

 

Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense

 

1,013,115

 

 

1,176,151

 

Share-based compensation expense

 

689,265

 

 

640,816

 

Loss on sale or dispositon of assets

 

-

 

 

28,515

 

Loss on dispositon of rental fleet

 

-

 

 

23,012

 

Right-of-use amortization

 

157,291

 

 

-

 

Amortization of deferred loan cost

 

(84,277

)

 

13,893

 

Changes in operating assets and liabilities:
Accounts receivable

 

802,547

 

 

(1,211,713

)

Inventories

 

(1,137,773

)

 

(446,866

)

Prepaid expenses and other current assets

 

(420,726

)

 

(777,457

)

Accounts payable, accrued expenses, and other liabilities

 

1,022,423

 

 

1,100,571

 

Income tax payable

 

201,559

 

 

57,591

 

Net cash provided by operating activities

 

4,093,649

 

 

1,336,573

 

 
Cash Flows From Investing Activities
Purchases of property, plant and equipment

 

(3,123,770

)

 

2,600,902

 

Proceeds from recovery of related party note receivable

 

350,262

 

 

-

 

Net cash used in investing activities

 

(2,773,508

)

 

2,600,902

 

 
Cash Flows from Financing Activities
Principal payments on debt

 

(425,505

)

 

(508,146

)

Proceeds received from debt borrowings

 

2,072,406

 

 

997,134

 

Payments on revolving loan

 

(1,645,427

)

 

(633,440

)

Proceeds from exercised options

 

6,408

 

 

-

 

Proceeds received from revolving loan

 

828,626

 

 

633,435

 

Net cash used in financing activities

 

836,508

 

 

488,983

 

 
Net increase (decrease) in cash

 

2,156,649

 

 

(775,346

)

Cash at beginning of period

 

2,158,025

 

 

2,822,100

 

Cash at end of period

$

4,314,674

 

$

2,046,754

 

Superior Drilling Products, Inc.

Adjusted EBITDA Reconciliation

(unaudited)

Three Months Ended
September 30, 2023 June 30, 2023 September 30, 2022
 
GAAP net income (loss)

$

13,839

 

$

323,167

 

$

638,732

 

Add back:
Depreciation and amortization

 

337,653

 

 

349,446

 

 

362,773

 

Interest expense, net

 

191,213

 

 

116,111

 

 

143,564

 

Share-based compensation

 

232,446

 

 

229,671

 

 

218,217

 

Net non-cash compensation

 

88,200

 

 

88,200

 

 

88,200

 

Income tax expense

 

76,861

 

 

106,654

 

 

44,169

 

Disgorgement of short-swing profits

 

(198,894

)

 

-

 

 

-

 

Debt termination fee

 

43,000

 

 

-

 

 

-

 

Loss on disposition of assets

 

-

 

 

-

 

 

29,381

 

Non-GAAP adjusted EBITDA¹

$

784,318

 

$

1,213,249

 

$

1,525,036

 

 
GAAP Revenue

$

5,052,203

 

$

5,367,350

 

$

5,172,545

 

Non-GAAP Adjusted EBITDA Margin

 

15.5

%

 

22.6

%

 

29.5

%

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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