Superior Drilling Products, Inc. Delivered 9.5% Revenue Growth and Generated $1.0 Million in Cash for First Quarter 2019

May 9, 2019 ALE

Revenue grew 9.5% over the prior year and 44.7% over the
sequential quarter
Cash generated from quarter operations nearly doubled to $1.0
million
Making progress in Middle East market as runs with the
Drill-N-Ream® increase

VERNAL, Utah–(BUSINESS WIRE)–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 first quarter ended March 31,
2019.

Troy Meier, Chairman and CEO, noted, “Our performance during the first
quarter showed continued progress despite the challenges in the domestic
oil and gas industry. Revenue growth in the quarter of 9.5% compared
with the prior-year period was primarily due to improved contract terms
with our legacy customer that resulted in greater volumes and higher
prices being realized by Contract Services. In addition, the Middle East
market’s adoption of our patented Drill-N-Ream (“DNR”) well bore
conditioning tool is continuing to advance. While early in our
international expansion efforts, we are excited by this market’s
potential and the impact we expect it will have on 2019 results and
beyond.”

He added, “We are furthering our relationships with our market channel
partners in the Middle East as we build data validating the significant
value proposition of the DNR. Similarly, the DNR continues to
demonstrate its economic value in North America and in particular in the
Permian Basin, where it has gained significant market share. Given
industry conditions and efforts to grow market share, we are evaluating
options to broaden our North American channels to market as well.”

First Quarter 2019 Review ($ in thousands, except per share
amounts)

Q1
2019

Q1
2018

$Y/Y
Change

% Y/Y
Change

Q4
2018

$ Seq.
Change

% Seq.
Change

Tool sales/rental

$ 1,753

$ 1,992

$ (239)

(12.0)%

$ 426

$ 1,326

311.1 %

Other Related
Tool Revenue

1,691

1,533

158

10.3%

1,754

(62)

(3.5) %

Tool Revenue

3,444

3,525

(81)

(2.3)%

2,180

1,264

58.0 %

Contract Services

1,592

1,075

517

48.1%

1,301

291

22.4 %

Total Revenue

$ 5,036

$ 4,600

$ 436

9.5%

$3,481

$ 1,556

44.7 %

When compared with the prior-year period, the increase in Contract
Services revenue, which is comprised of drill bit and other repair and
manufacturing services, was mostly the result of an enhanced contract
with a major customer. Other Related Tool Revenue, which is comprised of
royalties and fleet maintenance fees, increased due to an increasingly
larger fleet of deployed DNR tools being actively used in drilling
operations. These increases were partially offset by a decrease in Tool
sales/rental. While tool rentals increased from activity in the Middle
East, total tool sales/rental revenue declined on fewer DNR tool sales
in the U.S. Additionally, the DNR is demonstrating a longer than
previously expected tool life which has the effect of delaying new tool
sales, but adds additional refurbishments per tool.

First Quarter 2019 Operating Expenses

($ in thousands)

Q1
2019

Q1
2018

$ Y/Y
Change

% Y/Y
Change

Q4
2018

$ Seq.
Change

% Seq.
Change

Cost of revenue

$ 2,043

$ 1,799

$ 244

13.6 %

$ 1,670

$ 373

22.3 %

As a percent of sales

40.6 %

39.1 %

48.0 %

Selling, general &
administrative

$ 2,069

$ 1,698

$ 371

21.9 %

$ 2,116

$ (47)

(2.2)%

As a percent of sales

41.1 %

36.9 %

60.8 %

Depreciation &
amortization

$ 1,011

$ 936

$ 75

8.0 %

$ 940

$ 71

7.6 %

Total operating
expenses

$ 5,123

$ 4,433

$ 691

15.6 %

$ 4,726

$ 397

8.4 %

Operating income
(loss)

$ (87)

$ 168

$ (254)

$ (1,245)

$ 1,158

As a % of sales

(1.7)%

3.6%

(35.8)%

Net income (loss)

$ (141)

$ 69

$ (210)

$ (1,357)

$ 1,215

Diluted earnings
(loss) per share

$ (0.01)

$ 0.00

$ (0.01)

$ (0.05)

$ 0.05

Adjusted EBITDA⁽¹⁾

$ 1,106

$ 1,241

$ (135)

(10.8)%

$ 219

$ 887

404.6 %

The cost of revenue as a percentage of sales increased as a result of
international start-up investments and the new repair facility in
Abilene, Texas that were offset somewhat by higher Contract Services
volume.

The $371 thousand increase in selling, general and administrative
expense (SG&A) over the prior-year period reflects higher professional
fees, stock compensation expense and accrued bonuses.

Net loss for the quarter was $141 thousand, while 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 $1.1 million.

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.

Balance Sheet and Liquidity

The cash balance at the end of the quarter was $4.3 million and working
capital was $2.1 million. Cash generated from operations was $1.0
million, compared with $0.5 million in the first quarter of 2018.

Capital expenditures were $339 thousand in the first quarter and was
primarily for DNR tools to support the expansion in the Middle East.

Total debt at the end of the first quarter was $10.4 million, down $0.5
million, or 4.6%, compared with $10.9 million at December 31, 2018.
Total principal payments in 2019 on the Hard Rock note through April 5,
2019 was $1.5 million. The remaining principal balance on the note
following the April payment was $4.5 million. In February 2019, the
Company secured a new $4.3 million credit facility which included a $0.8
million term loan and a $3.5 million revolver at prime plus 2% and
certain fees. The credit facility matures on February 20, 2023. At the
end of the first quarter, there was approximately $700 thousand
outstanding on the revolver with a capacity of $1.7 million based on the
asset base available.

2019 Outlook and Guidance estimates:

Mr. Meier concluded, “We are focused on the significant market
opportunities for our DNR and Strider Technology™ oscillation system. We
believe our success at developing tools that increase drilling
efficiencies and improve well economics will continue to be a driver of
growth this year and beyond. We have potential with continued expansion
of our market share in the U.S., the measurable opportunity for
international growth and the introduction of the Strider, which we
expect to have rapid market acceptance.”


Revenue:					$21 million to $23 million
Gross margin:					58% to 61%
SG&A expenses:					$8.0 million to $9.0 million
D&A:					$4.0 million to $4.3 million
Interest Expense:					Approximately $780 thousand
Capital Expenditures:					Approximately $2.8 million

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, May 16, 2019. To listen to
the archived call, dial (412) 317-6671 and enter conference ID number
13689835, 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, 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; 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.


Superior Drilling Products, Inc.
Consolidated Condensed Statements Of Operations
For the Quarter Ended March 31, 2019 and 2018
(unaudited)

	For the Three Months
	Ended March 31,

	2019		2018

Revenue	$	5,036,346	$	4,600,293

Operating cost and expenses

Cost of revenue		2,043,028		1,798,944
Selling, general, and administrative expenses		2,069,040		1,697,663
Depreciation and amortization expense		1,011,105		936,027

Total operating costs and expenses		5,123,173		4,432,634

Operating income (loss)		(86,827)		167,659

Other income (expense)
Interest income		123,386		92,428
Interest expense		(177,982)		(191,553)
Total other expense		(54,596)		(99,125)

Income (loss) before income taxes	$	(141,423)	$	68,534

Income tax expense		–		–
Net (loss) income	$	(141,423)	$	68,534

Basic income (loss) earnings per common share	$	(0.01)	$	0.00

Basic weighted average common shares outstanding		25,018,098		24,535,155

Diluted income (loss) per common Share	$	(0.01)	$	0.00

Diluted weighted average common shares outstanding		25,018,098		25,140,467


Superior Drilling Products, Inc.
Consolidated Condensed Balance Sheets
(Unaudited)



			March 31, 2019		December 31, 2018
Assets
Current assets:
	Cash		$	4,346,466	$	4,264,767
	Accounts receivable, net			2,778,901		2,273,189
	Prepaid expenses			110,869		133,607
	Interest Receivable			104,453		–
	Inventories			1,231,753		1,003,623
	Other current assets			158,131		–

		Total current assets		8,730,573		7,675,186

Property, plant and equipment, net				8,165,336		8,226,009
Intangible assets, net				3,074,444		3,686,111
Related party note receivable				7,367,212		7,367,212
Other noncurrent assets				51,887		51,887
		Total assets	$	27,389,452	$	27,006,405

Liabilities and Shareholders’ Equity
Current liabilities:
	Accounts payable		$	1,341,800	$	717,721
	Accrued expenses			904,687		631,860
	Income tax payable			3,640		3,640
	Current portion of long-term debt, net of discounts			4,357,957		4,578,759

		Total current liabilities	$	6,608,084	$	5,931,980

Long-term debt, less current portion, net of discounts				5,963,508		6,296,994
		Total liabilities	$	12,571,592	$	12,228,974

Stockholders’ equity
	Common stock (25,018,098 and 24,535,334)			25,018		25,018
	Additional paid-in-capital			39,622,463		39,440,611
	Accumulated deficit			(24,829,621)		(24,688,198)
Total stockholders’ equity			$	14,817,860	$	14,777,431
		Total liabilities and shareholders’ equity	$	27,389,452	$	27,006,405


Superior Drilling Products, Inc.
Consolidated Condensed Statement of Cash Flows
For The Quarter Ended March 31, 2019 and 2018
(Unaudited)


			March 31, 2019		March 31, 2018
Cash Flows From Operating Activities
	Net Loss	$	(141,423)	$	68,534
Adjustments to reconcile net loss to net cash provided by operating activities:
	Depreciation and amortization expense		1,011,105		936,027
	Amortization of debt discount and deferred loan cost		1,603		17,061
	Share based compensation expense		181,852		137,017
	Income tax expense		–		–
	Impairment of inventories		–		41,396
	Loss (gain) on sale of assets		–		–
Changes in operating assets and liabilities:
	Accounts receivable		(505,712)		(556,004)
	Inventories		(228,130)		(6,079)
	Prepaid expenses and other current assets		(239,846)		(54,991)
	Accounts payable and accrued expenses		896,906		(62,113)
	Other long-term liabilities		–		–
Net Cash Provided By Operating Activities		$	976,355	$	520,848

Cash Flows From Investing Activities
	Purchases of property, plant and equipment		(338,765)		(94,780)
	Proceeds from sale of fixed assets		–		–
Net Cash Provided By (Used In) Investing Activities			(338,765)		(94,780)

Cash Flows From Financing Activities
	Principal payments on debt		(1,993,172)		(625,905)
	Proceeds from debt borrowings		800,000		–
	Principal payments on revolving loans		(301,969)		–
	Prroceeds from revolving loans		1,000,000		–
	Debt issuance costs		(60,750)		–
Net Cash Used In Financing Activities		#	(555,891)		(625,905)

Net Increase in Cash			81,699		(199,837)
Cash at Beginning of Period			4,264,767		2,375,179
Cash at End of Period		$	4,346,466	$	2,175,342

Supplemental information:
	Cash paid for interest	$	247,865	$	210,065


Superior Drilling Products, Inc. Adjusted EBITDA⁽¹⁾ Reconciliation (unaudited)

	Three Months Ended
	March 31, 2019		March 31, 2018		December 31, 2018

GAAP net income	$	(141,423)	$	68,534	$	(1,356,901)
Add back:
Depreciation and amortization		1,011,105		936,027		940,048
Interest expense, net		54,596		99,125		93,929
Share-based compensation		181,852		137,017		146,745
Net non-Cash compensation		–		–		377,746
Loss on disposition of assets		–		–		14,013
Income tax expense (benefit)		–		–		3,640
Non-GAAP adjusted EBITDA⁽¹⁾	$	1,106,130	$	1,240,703	$	219,220

GAAP Revenue	$	5,036,346	$	4,600,293	$	3,480,635
Non-GAAP Adjusted EBITDA Margin		22.0%		27.0%		6.3%

⁽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.

Contacts

For more information, contact investor relations:
Deborah K.
Pawlowski
Kei Advisors LLC
(716) 843-3908
dpawlowski@keiadvisors.com

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