Entered into a definitive agreement to be
acquired by Drilling Tools International Corp.
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, 2023. In a separate news
release dated March 7, 2024, Drilling Tools International Corp.
(“DTI”) (Nasdaq: DTI) and SDP jointly announced they have entered
into a definitive agreement under which DTI agreed to acquire SDP
for total consideration of approximately $32.2 million. In the
transaction, SDP shareholders may elect to receive, subject to the
election, proration and adjustment mechanics more fully set forth
in such definitive agreement, (i) $1.00 in cash, without interest
and subject to withholding, per share of SDP common stock, or (ii)
0.313 shares of DTI common stock per share of SDP common stock. The
closing of the transaction is expected to occur in the third
quarter of 2024.
Troy Meier, Chairman and CEO, commented, “We are excited to
merge with DTI. We have a long history working with them as our
North American distributor and believe that together we can drive
more value for our shareholders and broader stakeholders. The
combination of our patented technology and cutting-edge
manufacturing capabilities with DTI’s powerful sales and marketing
will enable us to accelerate our growth and bring our drilling
solutions to more customers in more parts of the world.
“Ultimately, we believe this transaction will provide our
employees with expanded opportunities in a larger organization,
allow us to continue to deliver the high-value services and
solutions that our customers have come to expect, provide enhanced
scale and management depth to accelerate growth and deliver value
to our stockholders.”
Fourth Quarter 2023 Revenue Review (See at “Definitions”
the composition of product/service revenue categories.)
($ in thousands)
December 31,2023 September 30,2023
December 31,2022 ChangeSequential
ChangeYear/Year North America
$
3,639
$
4,469
$
4,529
(18.6
)%
(19.6
)%
International
633
583
726
8.7
%
(12.7
)%
Total Revenue
$
4,273
$
5,052
$
5,254
(15.4
)%
(18.7
)%
Tool (DNR) Revenue
$
2,512
$
3,256
$
3,348
(22.9
)%
(25.0
)%
Contract Services
1,761
1,796
1,906
(1.9
)%
(7.6
)%
Total Revenue
$
4,273
$
5,052
$
5,254
(15.4
)%
(18.7
)%
The Company’s North America revenue related to tool sales were
down, specifically as it relates to the Drill-N-Ream® (“DNR”),
given the timing of orders from the Company’s North American
distributor. Lower drilling rig activity impacted demand for
contract services. The average U.S. rig count of 621 in the fourth
quarter of 2023 was down 154 rigs, or 20%, from the prior-year
period, and down 29 rigs, or 4%, sequentially.
International revenue grew 9% as the Company further advances
its operations in the Middle East (“ME”) and the ME market
continues to build post-pandemic. The international rig count
increased from 900 rigs at the end of 2022 to 955 rigs at the end
of 2023.
For the fourth quarter of 2023, North America revenue comprised
approximately 85% of total revenue, with remaining sales all within
the Middle East.
Fourth Quarter 2023 Operating Results
($ in thousands, except per share amounts)
December 31,2023
September 30,2023 December 31,2022
ChangeSequential ChangeYear/Year Cost of revenue
$
1,939
$
2,004
$
2,163
(3.3
)%
(10.4
)%
As a percent of sales
45.4
%
39.7
%
41.2
%
Selling, general & administrative
$
2,263
$
2,585
$
2,062
(12.5
)%
9.7
%
As a percent of sales
53.0
%
51.2
%
39.2
%
Depreciation & amortization
$
344
$
338
$
328
2.0
%
5.0
%
Total operating expenses
$
4,546
$
4,926
$
4,553
(7.7
)%
-0.2
%
Operating (loss) income
$
(273
)
$
126
$
701
NM
NM
As a % of sales
-6.4
%
2.5
%
13.3
%
Other (expense) including income tax
$
5,859
$
(112
)
$
(368
)
NM
NM
Net Income
$
5,586
$
14
$
333
NM
1576.9
%
Diluted earnings per share
$
0.18
$
-
$
0.01
Adjusted EBITDA¹
$
439
$
784
$
1,350
(44.0
)%
(67.4
)%
As a % of sales
10.3
%
15.5
%
25.7
%
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
decreased 13% sequentially, which reflected a $130 thousand
decrease in patent infringement related legal fees and a roughly
$200 thousand decrease in R&D expense. SG&A expenses
increased 10% 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 the fourth quarter SG&A was $123
thousand in fees as part of the Company’s strategic review
process.
Net income for the 2023 fourth quarter reflected the release of
$6.4 million of deferred tax asset valuation allowance.
Full Year 2023 Review
($ in thousands, except per share amounts)
December 31,2023
December 31,2022 $ Change % Change Tool (DNR)
Revenue
$
13,574
$
12,352
$
1,222
9.9
%
Contract Services
7,399
6,746
654
9.7
%
Total Revenue
$
20,974
$
19,098
$
1,876
9.8
%
Operating expenses
19,197
17,161
2,036
11.9
%
Operating income
$
1,777
$
1,937
$
(160
)
(8.2
)%
As a percent of sales
8.5
%
10.1
%
Net income
$
7,436
$
1,065
$
6,371
598.1
%
Diluted income per share
$
0.25
$
0.04
$
0.21
526.0
%
Adjusted EBITDA(1)
$
4,456
$
4,720
$
(264
)
(5.6
)%
As a percent of sales
21.2
%
24.7
%
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.
Revenue in North America, while up 6%, was constrained by the
declining rig count and reduced tools sales in the fourth quarter.
International revenue growth was 41%, demonstrating the Company’s
successful execution of its international strategy, improved
staffing within its ME operations, and the increasing rig counts in
the ME region.
Full year SG&A expenses increased 32% to $9.6 million
largely due to the Company’s international expansion. Included in
the full year 2023 SG&A were $1.2 million of legal expenses due
to continuing litigation for the Company’s patent infringement
lawsuit. This compared with $600 thousand of similar legal expenses
in the prior-year period. The Company also incurred $204 thousand
in fees as part of its strategic review process in 2023.
Net income for 2023 included the $6.4 million valuation
allowance release during the fourth quarter.
Balance Sheet and Liquidity
Cash generated by operations was $3.2 million in 2023 compared
with $3.5 million in 2022. Cash at year-end was $2.7 million, up
$0.5 million from the end of 2022.
Capital expenditures of $3.7 million in 2023 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.
Total debt at year-end was $2.2 million.
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.
Additional Information for Superior
Drilling Products, Inc. Shareholders and Where to Find
It This press release relates to a proposed acquisition
of Superior Drilling Products, Inc. (“SDP”) by Drilling Tools
International Corporation (“DTI”). In connection with the
transaction, DTI will file a registration statement on Form S-4
which will include a document that serves as a prospectus of DTI
and a proxy statement of SDP (the “joint proxy
statement/prospectus”), and each party will file other relevant
documents regarding the transaction with the Securities and
Exchange Commission (the “SEC”). INVESTORS AND SECURITY HOLDERS ARE
URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS AND OTHER
RELEVANT DOCUMENTS FILED WITH THE SEC CAREFULLY AND IN THEIR
ENTIRETY, INCLUDING THE SCHEDULE 13E-3, WHEN THEY BECOME AVAILABLE
BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. A definitive joint
proxy statement/prospectus will be sent to shareholders of SDP.
Investors and security holders will be able to obtain free copies
of the registration statement and the joint proxy
statement/prospectus and other relevant documents filed with the
SEC through the website maintained by the SEC at
http://www.sec.gov. Copies of the documents filed with the SEC by
DTI will be available free of charge on the DTI website at
www.drillingtools.com or by contacting DTI by email at
InvestorRelations@drillingtools.com or by mail at 3710 Briarpark
Drive, Suite 150, Houston, TX 77042. Copies of the documents filed
with the SEC by SDP will be available free of charge on the SDP
website at https://sdpi.com or by contacting SDP by email at
dpawlowski@keiadvisors.com or by mail at 1583 S. 1700 E., Vernal UT
84078.
Participants in the
Solicitation DTI and SDP and their respective directors
and executive officers and other members of management and
employees may be deemed to be participants in the solicitation of
proxies from the SDP shareholders in connection with the proposed
transaction. Information about the directors and executive officers
of DTI is set forth in its Annual Report on Form 10-K for the year
ended December 31, 2022, which was filed with the SEC on March 21,
2023, its Proxy Statement for its 2023 Annual Meeting Stockholders,
which was filed with the SEC on May 18, 2023 and in other documents
filed with the SEC by DTI and its executive officers and directors.
Information about the directors and executive officers of SDP is
set forth in its Annual Report on Form 10-K for the year ended
December 31, 2022, which was filed with the SEC on March 16, 2023,
its Proxy Statement for its 2023 Annual Meeting Stockholders, which
was filed with the SEC on June 30, 2023, its Quarterly Report on
Form 10-Q for the quarter ended September 30, 2023, which was filed
with the SEC on November 14, 2023, and in other documents filed
with the SEC by SDP and its executive officers and directors.
These documents can be obtained free of charge from the sources
indicated above. Additional information regarding the participants
in the proxy solicitation and a description of their direct and
indirect interests, by security holdings or otherwise, will be
contained in the joint proxy statement/prospectus and Schedule
13e-3 and other relevant materials in connection with the
transaction to be filed with the SEC when they become available.
Information concerning the interests of the participants in the
solicitation, which may, in some cases, be different than those of
SDP’s shareholders generally, will be set forth in the joint
prospectus/proxy statement relating to the proposed transaction and
the Schedule 13e-3 when they become available. Investors should
read the proxy statement/prospectus and Schedule 13e-3 carefully
before making any voting or investment decisions.
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
limitation, statements regarding the proposed transaction, 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,” “plan or “will,” 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; general economic conditions; the conditions to the
completion of the proposed transaction, including obtaining Company
shareholder approval and the regulatory approvals required for the
transaction on the anticipated schedule or at all, financing for
the transaction may not be obtained by DTI on favorable terms or at
all, the closing of the proposed transaction may not occur or could
be delayed, either as a result of litigation related to the
transaction or otherwise or result in significant costs of defense,
indemnification, and liability, the risk that the cost savings and
any other synergies from the transaction may not be fully realized
by DTI or may take longer or cost more to be realized than
expected, including that the transaction may not be accretive to
DTI within the expected timeframe or the extent anticipated,
completing the transaction may distract DTI and Company management
from other important matters, the possibility that any or all of
the various conditions to the consummation of the proposed
transaction may not be satisfied or waived, including the failure
to receive any required regulatory approvals from any applicable
governmental entities (or any conditions, limitations or
restrictions placed on such approvals), the possibility that
competing offers or acquisition proposals for the Company will be
made, the occurrence of any event, change or other circumstance
that could give rise to the termination of the definitive
transaction agreement relating to the proposed transaction,
including in circumstances, which would require a party to pay a
termination fee, the effect of the announcement or pendency of the
proposed transaction on the Company’s ability to attract, motivate
or retain key executives and employees, its ability to maintain
relationships with its customers, suppliers and other business
counterparties, or its operating results and business generally,
risks related to the proposed transaction diverting management’s
attention from the Company’s or DTI’s ongoing business operations,
the amount of costs, fees and expenses related to the proposed
transaction, the risk that the Company’s or DTI’s stock price may
decline significantly if the proposed transaction is not
consummated, the risk of shareholder litigation in connection with
the proposed transaction, including resulting expense or delay.
These and other risks and uncertainties separately provided to you
and indicated from time to time described in filings and potential
filings by the Company with the Securities and Exchange Commission
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
Superior Drilling Products,
Inc.
Consolidated Condensed
Statements of Operations
(unaudited)
Three Months Ended December
31
Twelve Months Ended December
31
2023
2022
2023
2022
Revenue North America
$
3,639,379
$
4,528,513
$
17,908,909
$
16,917,259
International
633,405
725,623
3,064,642
2,180,428
Total Revenue
$
4,272,784
$
5,254,136
$
20,973,551
$
19,097,687
Operating cost and expenses Cost of revenue
$
1,938,584
$
2,163,091
$
8,195,501
$
8,330,877
Selling, general, and administrative expenses
2,262,623
2,062,120
9,643,647
7,326,384
Depreciation and amortization expense
344,323
327,825
1,357,438
1,503,976
Total operating cost and expenses
$
4,545,530
$
4,553,036
$
19,196,586
$
17,161,237
Operating income
(272,746
)
701,100
1,776,965
1,936,450
Other income (expense) Interest income
21,024
12,955
60,950
26,675
Interest expense
(205,007
)
(161,917
)
(689,449
)
(572,624
)
Other (income)
(198,894
)
-
-
-
Other expense
-
-
(43,000
)
-
Recovery of related party note receivable
-
-
350,262
-
Gain (Loss) on sale or disposition of assets
(70,664
)
(1,550
)
(70,664
)
-
Impairment of Asset
-
(130,375
)
-
(130,375
)
Total other (expense)
(453,542
)
(280,887
)
(391,901
)
(676,324
)
Income before income taxes
(726,288
)
420,213
1,385,064
1,260,126
Income tax benefit (expense)
6,312,108
(87,117
)
6,050,981
(194,969
)
Net income
$
5,585,820
$
333,096
$
7,436,045
$
1,065,157
Earnings per common share - basic
$
0.18
$
0.01
$
0.25
$
0.04
Weighted average common shares outstanding - basic
30,391,240
29,245,080
29,698,498
28,643,464
Earnings per common share - diluted
$
0.18
$
0.01
$
0.25
$
0.04
Weighted average common shares outstanding - diluted
30,391,240
29,276,716
29,772,498
28,675,100
Superior Drilling Products,
Inc.
Consolidated Condensed Balance
Sheets
(unaudited) December 31, 2023 December 31,
2022 ASSETS Current Assets Cash
$
2,670,626
$
2,158,025
Accounts receivable
2,670,361
3,241,221
Prepaid expenses
335,152
367,823
Inventories
2,706,491
2,081,260
Other current assets
373,587
140,238
Total current assets
8,756,217
7,988,567
Property, plant and equipment, net
11,242,251
8,576,851
Intangible assets, net
-
69,444
Right of use assets (net of amortization)
451,094
638,102
Other noncurrent assets
6,587,056
111,519
Assets held for sale
-
216,000
Total assets
$
27,036,618
$
17,600,483
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities Accounts payable
$
1,547,619
$
1,043,581
Accrued expenses
870,060
891,793
Accrued income tax
626,455
351,618
Current portion of operating lease liability
54,034
44,273
Current portion of financial obligation
83,648
74,636
Current portion of long-term debt, net of discounts
635,273
1,125,864
Other current liabilities
-
216,000
Total current liabilities
3,817,089
3,747,765
Operating lease liability, less current portion
325,480
523,375
Long-term financial obligation, less current portion
3,954,373
4,038,022
Long-term debt, less current portion, net of discounts
1,609,868
529,499
Deferred income
675,000
675,000
Total liabilities
10,381,810
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
45,074,723
43,943,928
Accumulated deficit
(28,450,306
)
(35,886,351
)
Total shareholders’ equity
16,654,808
8,086,822
Total liabilities and shareholders’ equity
$
27,036,618
$
17,600,483
Superior Drilling Products,
Inc.
Consolidated Statements of
Cash Flows
(unaudited)
Twelve Months Ended December
31,
2023
2022
Cash Flows from Operating Activities Net income
$
7,436,045
1,065,157
Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation and amortization expense
1,357,437
1,503,976
Amortization of right-of-use assets
211,935
131,093
Share-based compensation expense
926,639
873,737
Loss on sale or dispositon of assets
21,709
-
Loss on disposition of rental fleet
48,956
Impairment on asset held for sale
-
130,375
Amortization of deferred loan cost
10,618
18,524
Changes in operating assets and liabilities: Accounts receivable
570,860
(369,289
)
Inventories
(625,231
)
(906,625
)
Prepaid expenses and other current assets
(6,676,215
)
(62,946
)
Accounts payable, accrued expenses, and other liabilities
(363,657
)
127,274
Income Tax expense
274,837
145,128
Other current liabilities
-
216,000
Deferred Income
-
675,000
Net cash provided by operating activities
$
3,193,933
$
3,547,404
Cash Flows From Investing Activities Purchases of
property, plant and equipment
(3,741,419
)
(3,330,206
)
Proceeds from recovery of related party note receivable
350,262
-
Net cash used in investing activities
$
(3,391,157
)
$
(3,330,206
)
Cash Flows from Financing Activities Principal
payments on debt
(660,706
)
(1,694,730
)
Proceeds received from debt borrowings
2,072,406
997,134
Payments on revolving loan
(1,645,427
)
(817,113
)
Proceeds received from revolving loan
828,626
-
Payments on deferred loan costs
(90,376
)
-
Proceeds from exercised options
6,408
-
Disgorgement of profits
198,894
633,436
Net cash used in financing activities
$
709,825
$
(881,273
)
Net increase (decrease) in cash
512,601
(664,075
)
Cash at beginning of period
2,158,025
2,822,100
Cash at end of period
$
2,670,626
$
2,158,025
Superior Drilling Products,
Inc.
Adjusted EBITDA
Reconciliation
(unaudited)
Three Months Ended December 31, 2023
September 30, 2023 December 31, 2022 GAAP
net income
$
5,585,820
$
13,839
$
333,096
Add back: Depreciation and amortization
344,322
337,653
327,825
Interest expense, net
183,984
191,213
148,962
Share-based compensation
237,373
232,446
232,921
Net non-cash compensation
88,200
88,200
88,200
Income tax (benefit) expense
(6,312,108
)
76,861
87,117
Recovery of Related Party Note Receivable
198,894
(198,894
)
-
Debt termination fee
-
43,000
-
Impairment of asset
-
-
130,375
Employee Severance Cost
42,294
-
-
Loss on disposition of assets
70,663
-
1,550
Non-GAAP adjusted EBITDA¹
$
439,442
$
784,318
$
1,350,046
GAAP Revenue
$
4,272,784
$
5,052,203
$
5,254,136
Non-GAAP Adjusted EBITDA Margin
10.3
%
15.5
%
25.7
%
Year Ended December 31, 2023 December 31,
2022 GAAP net income
$
7,436,045
$
1,065,157
Add back: Depreciation and amortization
1,357,438
1,503,977
Interest expense, net
628,499
545,950
Share-based compensation
926,639
873,740
Net non-cash compensation
352,800
352,800
Income tax (benefit) expense
(6,050,981
)
194,969
Recovery of Related Party Note Receivable
(350,262
)
-
Employee Severance Cost
42,294
-
Impairment of asset
-
183,452
Loss on disposition of assets
113,663
-
Non-GAAP adjusted EBITDA(1)
$
4,456,135
$
4,720,045
GAAP Revenue
$
20,973,551
$
19,097,687
Non-GAAP Adjusted EBITDA Margin
21.2
%
24.7
%
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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20240307756109/en/
For more information, contact investor relations:
Deborah K. Pawlowski / Craig P. Mychajluk Kei Advisors LLC
716-843-3908 / 716-843-3832 dpawlowski@keiadvisors.com /
cmychajluk@keiadvisors.com
Superior Drilling Products (AMEX:SDPI)
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