Superior Drilling Products, Inc.
Q3 2017 Earnings Call Transcript

Published: 11 Nov 2017

[Operator:]

Greetings and welcome to the Superior Drilling Products Incorporated Third Quarter 2017 Financial Results. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] It is now my pleasure to turn the conference over to your host Deborah Pawlowski, Investor Relations. Thank you. You may begin.

[Deborah Pawlowski:]

Thank you, Rob, and hello everyone. We certainly appreciate your time today and your interest in Superior Drilling Products. On the conference call with me are Troy Meier, our Chairman and CEO; and Chris Cashion, our Chief Financial Officer. Troy and Chris are going to review the results of the third quarter as well as our outlook for the remainder of the year. You should have a copy of the financial results that were released before the markets opened this morning and you should also have the slides that will accompany our conversation today. You can access both on our website at www.sdpi.com. As you are aware, we may make some forward-looking statements during the formal discussion as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release as well as in other documents filed by the Company with the Securities and Exchange Commission. You can find these documents on our website or at sec.gov. I’d like to also point out that during today’s call, we will discuss some non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of non-GAAP to comparable GAAP measures in the tables accompanying the earnings release as well as in the slide deck. So with that, let me turn it over to Troy to begin. Troy?

[Troy Meier:]

Thanks, Deb, and thanks everyone for joining us today for our third quarter 2017 earnings call. I'd like to start today with talking about some strong revenue growth with exceptional operating leverage. As you'll see our revenue has more than doubled when we look at prior year, you’ll look at this and you'll see that at $4.4 million. You're also going to see today as we get talking about this, you're going to notice that the strong operating leverage that drives – been driven by the high revenue conversion and you'll see that as Chris talks about that. We're going to be talking about the fleet of Drill N Ream tools that is now being deployed and we've always talked about this program that we entered into a year and a half ago and giving us the opportunity to grow legs. And that's what you're going to start seeing though. You're going to start seeing a fleet that is getting larger in North America. You're going to see a fleet that needs to be maintained and you're going to start seeing the fleet that needs to be replaced as it ages. And you'll see how those numbers are coming about. We also are seeing a tool that when we introduced this tool to the market, it was a tool that was for the laterals. When you look at the horizontal wells that are being drilled, the Drill-N-Ream was designed to address those needs and eliminate the dedicated reamer runs, but it's become much, much more than that. And so as we go through the presentation today keep in mind that this tool is now finding a home in the curve, not just in the lateral, so if you can imagine a well being drilled, you've got the vertical section, the curve section and the lateral section. And what we've always talked about is the lateral, the horizontal section. And this tool is now finding a good home in the curve and we're also finding a good home in the vertical section. So multiple tools for well and we'll talk about that in the opportunities at the end. You'll see the – when we talk about the bit refurbishment, what's going on there, the year-over-year, we've got – when you look at the rig count that's what drives these numbers, if you look at last year's rig count to this year's rig count and you'll see how that supports the number of repairs on the drill bits we have coming in on our shop. That also supports our third-party manufacturing. We do – in our third-party manufacturing we do drilling tools in there for some large companies whether it's casing shoes or drill bits. We make that stuff new and that's also a direct – directly reflected of the rig count. We're currently renegotiating our contract in this area. We have some new people that we that we deal with. You're all familiar with the GE buyout of Baker Hughes and a merger. And so there were some – people being changed around. We have some familiar faces that we deal with, but there's also some new ones and some positions have changed and we feel good that we’ll get this contract done. We feel that we provide them with a great service and we feel that that they need us to continue to keep doing that. So we're good about the – we feel good about the contract and where we are right now and negotiating the contract. You'll also see some revenue that’s starting to come in from another tool that we have patent pending on called V-Stream. This is a tool that we designed a few years back, really haven’t promoted the tool, we wanted to find, you know, make sure the tool had – we had the right home for this tool, but this tool is a stabilizer, which a lot of your well bores have – in their BHA they have a stabilization system or stabilization tool. And V-Stream was a tool that we designed based off of a report from Exxon Mobil on the goods and bads of stabilization in well bores and we've got some patent pending technology on this tool, but we believe it can starts contributing to our top-line revenue as we go forward. We continue to advance the Strider. We have some good runs in the coiled tubing side of the business. The Open-Hole, the tool is right now in its testing, closed-loop testing is performing very, very well and we feel that we’ll be able to roll that tool out and we’ll talk about that in the opportunities as well. But with that said, I am going to turn the time over to Chris.

[Chris Cashion:]

Okay, thank you, Troy, and welcome everyone to today's call. Let's continue our review of the quarter by going to Slide number 6. And you can see on this slide that what Troy was alluding to, how we – we nearly doubled our current quarter revenue versus the prior year period revenue and you can also see that it was across both our tool revenue business as well as our contract services business. As Troy mentioned, the rig count was up that that contributed as well as when we think about the contract services and the bit refurb business, we saw an increase that was somewhat more than the rig count and a lot of that higher volume coming from our non-contracted areas and bit refurbishment with Baker Hughes. So I'm really pleased with how both year-over-year and sequentially revenues have grown Q3 versus previous periods. Let's turn to Slide number 7 and looking a little more detail at the tool revenue breakdown. Here's a slide that we show each time we rollout earnings and the purpose of this slide is that – as you would like to see that have a tool sales are growing relative to what we call the other related revenue and in that category just to remind you what's in that category that's the refurbishment of the Drill N Ream and the repair revenue we get from that as well as the - the royalty revenue from Drill N Ream. And so, we're really pleased with how both of those lines have grown. You can see in the chart below that tool sales are up nicely both prior year period and trailing quarter just a little over $12 million in sales versus $1.6 million in Q2 trailing quarter and then prior year period $1.7 million. The other revenue is once again that repair revenue that royalty revenue that's a nice recurring revenue stream. And as Troy mentioned that's a function of how the fleet of tools continues to grow. So the repair revenue and royalty are directly related to that. And you can see that over the prior year period, the revenues have grown 10 x. We're looking at just under $1.2 million in revenues from those areas in the current quarter versus a little over $100,000 a year ago and as Troy mentioned it was the middle of Q2 2016 when we entered into our distribution agreement with DTI. So we're really pleased with how that's working out. And as I think most of you know DTI has a market share hurdle that they were working toward 12.5% market share by the end of this calendar year. So let's look at Page – Slide 8 now and look at – take a look at operating expenses and operating income. And you can see that we've managed to keep good strong cost discipline over the last four, five quarters. Operating expenses are up slightly over the trailing quarter and over the prior period. But as compared to revenue, the percent of expense to revenue is down significantly. And so, you really see that when you look at the operating income chart, bottom left hand side of this page, and you can see that in the current quarter, we had $700,000 of operating income, 16.2% of revenue. We're really pleased with that that number in an absolute sense as well as the growth of that number. You can see that looking back a year ago that's roughly $1.8 million improvement in operating income. And so that's a testament to the growth in revenue and keeping a strong focus on costs. Let's go to Slide number 9 and take a look at adjusted EBITDA. We think that's a meaningful way to look at our business. And as Deb mentioned, we do have reconciliations to how we get to adjusted EBITDA at the end of this slide deck. But what you can see is as at the top part of this particular page, net income – net income almost doubled from the trailing quarter to the current quarter of $300,000, up to just under $600,000 of net income. And we're really pleased with that. You can see what it has looked like over the three quarters prior to these two quarters, Q2 and Q3 to this year and once again some strong significant improvement over the prior year period. The chart below that one adjusted EBITDA almost $1.8 million of adjusted EBITDA in the current quarter and compared to the prior year period about a 10 x improvement on that number. We've always said when folks ask what our cost base looks like and try to dig into the details that hey our operating leverage is strong in this business and when we get some volume, we get some strong, as Troy mentioned, a strong conversion of that volume, those sales into cash. And you can see if you just look at the change in revenue, Q2, Q3 this year versus change in EBITDA you will see that that conversion is tracking in the high 60s roughly 69% of adjusted EBITDA on an incremental basis to incremental revenue. So we're seeing that volumes really, really help our top-line and those volumes really help the fall through of the conversion to the cash line. So we're really, really pleased with how that's coming together. And then as you know from the press release, we’ve managed to generate $1.7 million in cash from operations in Q3, really, really pleased with that. On the next Slide, we just take a look at the balance sheet and how that cash is getting converted into the ending cash balances and you can see that that Q2 this year, end of this year, end of Q2 to the end of Q3, we more than doubled cash from $1.3 million in cash to $2.7 million. And so that's where the rubber meets the road. We get the strong revenue, good control of costs and the conversion into cash really nice this quarter. So we're net cash flow positive. You can see that we’re bringing debt down and we continue to work on that. And we're in good position with making debt service payments on the Hard Rock Note. As most of you know that – we start those principal payments in January 2018, four of them total of $2 million. And we feel so good about that that the ability to make those payments that we're going to pull forward the payment of the January, payment to Hard Rock at first 500,000. We’re going to pull that forward and make that payment in the middle of this month as a matter of fact. We've earned very little on this cash that we have and the interest rate on that debt is 5.75%, so we can save some money or paying that a little bit early. So we feel really good about how cash is being generated. And one of our action items that we'll be focusing on here in the first half of 2018 is refinancing the mortgage that's on our Vernal campus that's about a $4.2 million number that's it terms in August 15th of 2018. And so when you look at our working capital, you see that our current liabilities went up, driven primarily from the reclassification of that from a long-term to a current. So that would be – we’ll be focused on getting that mortgage refinanced and getting that done before August of next year. So now let’s start – let's continue our discussions by looking at Page 11 and just another way to look at the numbers. This is a twelve-month basis kind of a look and pretty much the same story, revenues up strong more than right at doubling. Operating expenses pretty flat and so it gives the – what you saw previously on the quarterly look, nice strong improvement in our net loss and then nice strong move in adjusted EBITDA, so just another way of looking at the numbers and the story is consistent. Now let's go to Page 12 and look at our guidance for 2017. On the revenue side, we're guiding in the $15 million, $15.5 million range. We had $14 million to $16 million kind of a range in August. And so with this quarter, we feel confident that we can tighten that up a bit and you can see that we're kind of coming in on the high side of that range back in August. Operating margin 2% to 3% and you may have noticed that – when we spoken of guidance before we've taken a look at operating margin without the impact of goodwill. And so, we've converted that to a GAAP basis, which includes goodwill. And so we’re positive 2% to 3% is what we're kind of looking at for the year. Depreciation about the same number $1.3 million, amortization $2.4 million. You see while we – we sort of look at operating with that that amortization number. It's a big non-cash number. And so – but we have loaded that into this operating margin calculation now. Interest expense about $900,000 and then CapEx about $1 million and as you may recall the $700,000 of that was the buyout of our largest machining center. We exercised an option at the end of our capital lease to purchase that machining center, so that's not new equipment, that's our existing equipment and we bought that out, that's about $700,000 of that roughly $1 million CapEx number. We do will make a point that as we move forward and look at Q4 this year and 2018, we're moving into a phase where we're making investments in our international expansion. And so, Troy will talk a little bit more about that. We've been talking about the international channel partner and how those discussions are going and they're going very well by the way. And so that's going to lead to us making some investments internationally and that's going to increase our – some of our SG&A spending. In R&D, we are rolling the Strider prototype tools out this quarter into field testing mode. And what that means is building those prototype tools is going to increase our R&D. So we've got increased investments in R&D associated with the commercialization Strider and vestments in international as we expand internationally and those – and what that looks like. So we're looking at about $1.4 million of SG&A and just remind everyone SG&A includes that R&D spending for us. So that's going to get back up to about what we've been looking at for the year, $1.4 million in Q4 2017 and then we'll be stepping that up again in SG&A when we have a full quarter's worth or full year’s worth of investments in R&D and international. And so, we're looking at 2018 SG&A being up about $1.5 million to $1.7 million over that spending in 2017. And those are the two big areas. CapEx in 2018 is going to be about the same million dollars as we look at – as we look out and instead of a machining center, which was the bulk of the spending in 2017, we're going to be opening up a couple of repair facilities

[Troy Meier:]

Thanks, Chris. So as we look at opportunities, one thing that I want everybody to understand is we've built the very strong foundation and we understand what it is, we do well. And so as we go to grow this business, we first look at the Drill N Ream and we say what are the opportunities in Drill N Ream. And as we start seeing more and more customers using more tools per well that's very exciting for us and that's – that's tools that got to be made, got to be repaired; there's a great opportunity there. There's – Drill N Ream has proven itself out for a quality well bore and everybody should be concerned with the quality well bore and its hands down the best tool in the marketplace. We've got a large part of the domestic market here is still untouched. There's 85% out there that we still need to address and that's just in the horizontal that's not including the curve and the vertical. As we look at our international opportunities, we've got several proposals that we're currently working on to identify that channel partner as we go into the Mideast for start and we're excited about where those talks are at. And we think that's going to be a great opportunity for Superior Drilling Products, not just for Drill N Ream, but other tools that we’ll be bringing on in the future. So expect that we'll announce something by year-end on how that's going to roll out over there. We look at Strider. It’s the tool that you’ve heard us talking about. We look at where we're at with that tool. We've got a tool that's proven itself up in the coiled tubing markets. We're identifying those channel partners in that in the coiled tubing, but we're also proving it out in the Open-Hole, the tools that we're testing right now and as we roll that out get those tools being deployed in throughout 2018. I think that everyone would be very pleased with what the revenue stream that that they can produce. So we're excited about where we're at. We've got some really good value engineering when we start looking at our tools. We've got to model this belt that we know the margins that we shoot for. We tackle the manufacturing costs. We tackle material costs. This is all been put in place before we start rolling out tools. So the team is doing a great job. We're very proud of the team that we have now and we're ready to move forward with it. With that being said, let's turn it over to some Q&A.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Jason Wangler with Imperial Capital. Please proceed with your question.

[Jason Wangler:]

Good afternoon everybody.

[Troy Meier:]

Hi, Jason.

[Chris Cashion:]

Hi, Jason.

[Jason Wangler:]

I was curious on – just firstly on the guidance obviously a nice third quarter revenue run. I think in the – when you talked about the third quarter back on the second quarter call, there were some one-time thing that kind of were in their specifically contract services. Is there anything we should be thinking about looking at fourth quarter just because it does look like it would be according to guidance even though hanging down a bit on the revenue line?

[Chris Cashion:]

Yeah, what we're expecting here for Q4 Jason is a little softening as we get to the year end. In the oilfield that most years it softens between the Thanksgiving and January first holidays. It’s been some years when things have gotten stronger. So it's kind of a wildcard, but one of the things that we're seeing is these – these operators get faster at drilling the oil and gas wells. They get more efficient. We think we’re seeing them kind of spend those budgets a little faster than what they may be thought they were going to spend. And so, we’re kind of guiding down Q4 revenue a little bit just because we see an overall softening in the marketplace.

[Jason Wangler:]

Okay. So we should just think about it more from a seasonality perspective…

[Deborah Pawlowski:]

Seasonality…

[Jason Wangler:]

Pretty difficult.

[Chris Cashion:]

Absolutely.

[Deborah Pawlowski:]

Yes.

[Jason Wangler:]

Okay, that's fair. And hey, Troy, I am just curious in talking with some folks that specifically operate in the stack area. Those have been some more difficult wells to drill and complete and as you mentioned a quality of wellbore there has been a big topic conversation. I was curious your exposure there and just kind of what you're seeing if anything there it seems like the Drill N Ream would be a great product for that area?

[Troy Meier:]

We are seeing some exposure there. The Drill N Ream as you know was broke out in the Rockies. And when the market crashed, but the only place left with rigs was West Texas. So that's where the Drill N Ream went next. And it's saturating that – the West Texas market very well. But, yes, it is moving into the scoop and the stack and we've got operators over there. It's becoming a buzzword now when you talk about quality wellbore. And believe it or not just a few years ago, even a year ago, I mean you didn't hear any talk about the quality of the well bore, but now we drill so much faster and faster we drill the more spiral, the more helical pattern we put into these wells. And we're not talking to an engineer the other day that said hey we didn't have – we didn't have an issue with quality well bore 30 years ago and I said well – and we were drilling 8, 12 foot an hour, the bit had plenty of time to sit and make a well bore. I said we're doing 250 foot an hour now. So, yeah, the faster we drill, the more complex wells that we're doing, you've got to have quality well bore and scoop and the stack is need not just as bad as everywhere else.

[Jason Wangler:]

Okay. And then maybe one for if I could for you Chris. You mentioned kind of a couple of good balance sheet moves here coming up with refinancing the mortgage and things of that nature. As you add this cash and you're pulling forward the first payment to, I guess, this month, how do you see this looking at debt repayment? Is there anything else you'd like to attack just because it looks like you’re going to start have some cash. And then just on that as well, you've mentioned in the past about maybe at some point looking for a credit facility of some sort just kind of have at liquidity for working capital needs? Do you still see that as something you need or are you kind of being with the cash that you're generating now, is that something you don't really need as much?

[Chris Cashion:]

Yeah, well, thanks, Jason. It's not as critical this working capital on, but we still put one place. As we go forward where we're expecting – as DTI continues to march towards our market penetration goals, the 12.5% goal, the end of this year that goal goes to 17.5% at the end of next year. So, we see continued revenue growth. As Troy mentioned, we've got Strider coming up. We've got international on the horizon in 2018. So we're going to need a facility where we can finance this revenues/accounts receivable growth. So that's important for us. The timing on that is probably looking at that line early next year. Our numbers are obviously improving nicely. We were pleased with how that’s working. But we really need probably – when we talked to financial institutions, have a good calendar year, numbers, revenue, EBITDA et cetera in order to work the best deal we can from a cost of capital perspective. So, yeah, line of credit is so important, but that’s an agenda item for us and it's probably – it's probably as we get the calendar year close and we'll sit down with folks try to get that done. As far as the payment in the Hard Rock Note with the cash, as I just said, we're comfortable with taking care of that and that's a couple million dollars in the first half of next year. And so, we don't anticipating problems with that. As I did mention SG&A, which includes engineering, that's going to be drifting up a bit next year, so we need to be able to finance that with this – with the cash that we're generating so on and then of course refinancing that mortgage that's a big agenda item for us when you get that done. So I believe we are – those are the things we're working on and we feel pretty good about it as we go forward.

[Jason Wangler:]

Same here. Thanks a lot. I'll turn it back.

[Troy Meier:]

Thanks.

[Chris Cashion:]

Yeah, thanks, Jason.

[Operator:]

Our next question is from Joseph Reagor with Roth Capital Partners. Pleased proceed with your question.

[Joseph Reagor:]

Good morning guys. Thanks for taking my questions.

[Troy Meier:]

Hey, Joe.

[Chris Cashion:]

Hey, Joe.

[Joseph Reagor:]

So I guess first thing for Chris. You mentioned G&A for next year might be up, I think, the numbers you gave was $1.5 million to $1.7 million.

[Chris Cashion:]

Yes.

[Joseph Reagor:]

And assuming the $1.4 million in Q4. I just want to make sure that I got the right number in the model here. We're looking at something in the $6.6 million to $6.8 million level for G&A next year.

[Chris Cashion:]

Yeah, if you take that Q4 annualized that’s about $5.6 million, that's pretty close to what we’ll come in at for 2017. And then yeah, add about another $1.5 million or so $1.6 million to add to that number and that puts you in that mix 6s.

[Joseph Reagor:]

Okay. And then with all this expenditure, how soon do you think we can get some guidance from you guys on the potential revenue impact of that expenditure? I know it's a bit early to talk 2018 guidance, but you know like how fast, just give me the turnaround in this extra investment? Are we talking late 2018? Are we talking 2019? How to speak about that?

[Chris Cashion:]

Yeah, we're talking second half of 2018 that's when we’ll expecting to start see some of that. So we'll be investing in that in the first half of 2018 and we’ll start seeing some revenue in the second half.

[Joseph Reagor:]

Okay. And then on the contract with Baker Hughes, I read the letter and the 8-K you guys filed on that. And it seemed and it may just been poor wording by them like they were suggesting you guys would ask for some meaningful changes to the structure of the agreement? Or were they just referring to the fact that they are going through changes, so they need more time?

[Troy Meier:]

Well we're asking for some changes and they're going through changes as well. But yeah there are some – with the GE come into play, there have 120 days on payables and that doesn't set very well with us. So where that's one of the issues that we don't like and we're trying to work around that. So, you know, we went with them last night for a little while and talks are going good. I mean it's nobody wants to separate by any means. We're just trying to figure out this new structure and how it can work for both parties.

[Joseph Reagor:]

And in the unlikely event that there is no agreement reached by the new deadline, which I believe is in January. What do you think is the next course of action after that? Is that that you guys would lose the revenue? Or is it that you'd extended again why you continue to negotiate like what are you getting as a sense from them on that end?

[Troy Meier:]

We've extended I would imagine. We don't – unless it’s just get to a point where we're just butted heads, but it's not there right now. I'm sure it would probably be an extension of our existing contract. In the past I mean we've been doing this for 21 years and we've gone through multiple extensions. So…

[Troy Meier:]

It's not that unusual.

[Troy Meier:]

No.

[Joseph Reagor:]

Okay. Yeah, I just want to get some additional color there, so you know for adding comfort. I know a couple people were concerned when they saw the letter and I want to be able to combat. Other than that the revenue guide for the rest of the year, but what was the thought process behind tightening it up? I mean given how much budgets can fluctuate in the fourth quarter? You could have a surprisingly good quarter. You could have a surprisingly bad quarter, outside of your control. Do you think is there something that you guys are seeing or are some conversations you had with DTI where you’re going to have a good idea that you were able to tighten that up? Or is it more a matter of where you guys are forecasting yourselves you felt that it was in your best interest to tighten it up?

[Troy Meier:]

Well, it's in our best interest to tighten it up. We've seen – in the past, what we've seen with the efficiencies been gained with tools such as the Drill N Ream. They put in at – if you look at I mean widening has got a good report out right now that they talk about these deficiencies. I think they put it out yesterday how they used to take fourteen days to drill a well, now they're down to nine. And so what happens is they start to hear it off going to drill 36 wells or whatever that number may be. And we get into October and those wells are drilled up because of those efficiencies. And so people kind of kick it in neutral for a little while, wait till the new budgets come out and it usually by the third week in January, they're screaming for stop again. In the few - going a few years back, those efficiency gains were much greater than they are now. They're getting smaller as everybody is getting better at drilling these horizontal wells and predicted in their [indiscernible]. So instead of being October when it laid down, we're predicting November-December a little bit of the lay down, but – and next year might only just be December, but we do think we're going to see a little slowdown. And it'll pick back up again in third week of January.

[Joseph Reagor:]

Okay, thanks for the color. I'll turn it over.

[Troy Meier:]

Thanks, Joe.

[Chris Cashion:]

You bet.

[Operator:]

[Operator Instructions] Our next question comes from John Stoltzfus with Oppenheimer and Company. Please proceed with your question.

[John Stoltzfus:]

Thank you. Very nice quarter, gentlemen.

[Troy Meier:]

Thank you, John.

[John Stoltzfus:]

I was curious about V-Stream, which really wasn't mentioned very much a couple quarters ago. Is that going to be – are you going to roll that out roughly with the same type of structure as you do with Drill N Ream?

[Troy Meier:]

No, John, V-Stream is a tool that’s – it’s in a different part of the drill stream than Drill N Ream.

[John Stoltzfus:]

Right.

[Troy Meier:]

It's a stabilization tool that they put in the BHA. We have never – really we developed this tool few years back and we looked at the tool and we’re seeing the tools that were in that competitive space and the cost to make that tool then we knew it was a very good tool. There are companies like Continental running it and they really liked it. But we needed to figure out how to manufacture it better. We needed to get our cost down because what that competitive space gives you per run just wasn't that appealing. And we're able to look at that today and see a tool that we can make and be very competitive with as we offer this to channel partners. You’ve seen us where we shed cost with – we’re losing the sales and marketing and also getting our manufacturing cost down and material cost down. We believe we have a tool that now we look at that becomes – it becomes appealing for us to get out there into the marketplace. It's not going to be an aggressive rollout like Drill N Ream, but we think that there's customers out there that would love to have this in their well bore and could help them out and customers running both Drill N Ream ends and V-Stream would be a good stable conditioned well. So, we think there's opportunity there. We haven't identified how much opportunity yet, but yeah we think it can – it can add to some top-line revenue growth.

[John Stoltzfus:]

Well, I curious about is – would this be a, I am going to say this [indiscernible] would this be a sale, a rental stream or royalty stream and repair model as in Drill N Ream?

[Troy Meier:]

It’s a sell, correct. And it’s a reaper…

[John Stoltzfus:]

Okay…

[Troy Meier:]

But we have not structured any royalty into it.

[John Stoltzfus:]

Got it, okay. On the Drill N Ream, I am just curious, are you making different models, manufacturing different models to the vertical, the curve, versus the lateral?

[Troy Meier:]

No. No. What we have is if you look at the Drill N Ream, there's been three iterations of Drill N Ream. The first model we came out with four years ago then we made some upgrades and we're on what we call Version three now, which allows some things to happen out of the field. So the tool can get turned around and put back in the hole much quicker. But it’s the – if you're running, I guess, the difference is being the bigger diameter. So when you look at the surface, the intermediate, that's all larger stuff 12-inch, 8-inch tools.

[John Stoltzfus:]

Right.

[Troy Meier:]

The curve is typically looking at the 8-inch tool. And then when you go into the horizontal, you're looking at typically the 6-inch series.

[John Stoltzfus:]

Right.

[Troy Meier:]

So it's just – it's bigger tools. I guess is the best way to put that.

[John Stoltzfus:]

So you have different sized tools. So it's not like one tool can run the whole business?

[Troy Meier:]

No, no. We've got – you do have some monobores stuff that people will run. Typically, the 8-inch section in the northeast you'll see and run monobores, but they'll run one hole size all the way, but most of the country does multiple stages and cement stuff and get that behind pipe.

[John Stoltzfus:]

Right, right, okay and so the – our international expansion, I'm assuming, are you going to try to run the same say a royalty and repair model for that?

[Troy Meier:]

Correct, correct.

[John Stoltzfus:]

It seems very successful...

[Troy Meier:]

Yes, yes.

[John Stoltzfus:]

And just one minor point, it was the Q3 2016, that was a lumpy – that was a sale of number of units in that particular quarter. So if you look at the way I'm looking at it and just correct me if I'm wrong. It’s around $1.7 million total, I think, revenue for that quarter.

[Troy Meier:]

Correct.

[John Stoltzfus:]

That was your first sale to DTI. Afterwards they are the basically follow up and gives – I think gives us a better sense of trend line if you can [indiscernible] that particular quarter, would that be correct?

[Troy Meier:]

If I look at it John, it was up. The initiation of a critical mass of a fleet…

[John Stoltzfus:]

Right.

[Troy Meier:]

So we’re making right out of the box over five or – four five months and ordered a number of tools. So they established a fleet. And then as times goes on, they improved their logistics with that fleet and they see some efficiencies as the fleet gets larger. So it’s not the – it was not the same kind of a multiple of increase time. So it’s an upfront investment to get a small fleet established, but that’s exactly right.

[John Stoltzfus:]

Okay, thank you. That’s all for me, nice quarter, and nice to see a pay ahead on the Hard Rock.

[Troy Meier:]

Well, thank you, John.

[Chris Cashion:]

Thank you, John.

[Operator:]

Our next question is from Mike Breard with Hodges Capital. Please proceed with your question.

[Mike Breard:]

It was good quarter. I was wondering on your Drill N Ream sales, how many of – what percentage of those were to new customers versus old customers?

[Troy Meier:]

Well, so the sales all go to DTI and then they rent those tools to the customer base. And you know if we look at how many new customers are bringing on; it's something that we could try to figure out with their market share gains, but to be honest with you I don't – I don't have that information right here.

[Chris Cashion:]

Yeah, it's something like this, I think that over the last year, they done – DTI has done a very good job of increasing the number of existing customers’ volume, picking up more of those rigs. So there is an operator that has 20 rigs operating in the early days, Drill N Ream was on two, three, four and then over the last year or so the Drill N Ream now becomes of almost on all of the operator mix and that’s grown. So probably – and once again, Troy was absolutely right. We don't have that absolute breakdown at our disposal, but the – what has increased over the year is expansion within existing customers primarily. Now that's not to say that they have not brought on new customers because they have, but being able to break that down and give you that what percent, we don’t have that data.

[Troy Meier:]

And remember that that increase that market shares you’re tracking by rig.

[Mike Breard:]

Yeah, okay. Okay, that’s a good golden confidence by the existing customers. Thank you.

[Troy Meier:]

Thank you.

[Operator:]

Our next question is from John Bair with Ascend Wealth Advisors. Please proceed with your question.

[John Bair:]

Thank you for taking my call. I got a question with regards to your international expansion efforts and specifically wondering if you're going to target specific geographical locations or is it going to be more of a broad based approach in active either offshore basins onshore basis whatever? How are you going to approach that?

[Troy Meier:]

Well we want to be very structured in our approach. We get requests from different parts of the world one to run the Drill N Ream whether it’s South America or Asia Far East and we have – we want to do this very, very structured. So, right now, we're looking at the Mideast and we're looking at three countries within the Mideast to roll this out in. And once we get that established and see how that feels and how it operates then we'll look at other parts of the world. But, yeah, these customers that – these potential channel partners that we're dealing with now, they express the need for this tool in other places in the Mideast, but we're just – we're really just trying to stay focused right now on the Mideast.

[John Bair:]

Okay. And then the customer base would that probably be more multinational companies as opposed to what you would consider mid-tier independents here in the U.S.?

[Troy Meier:]

Yeah, it’d be in the Middle East you’re dealing with national oil companies and in Saudi Arabia that's Aramco, in Kuwait that’s Tailsea [ph]. But also in some of the countries, particularly Oman, you've got multinationals that operate there. So, yes, it's very much in overseas and multi-nationals.

[John Bair:]

Okay. And then I'm assuming or can you share with us whether or not the terms of payment are going to be comparable what you try to do here in the U.S. I mean kind of notorious over there seeing companies get into a little trouble with that delayed payment or receivables. So I am just wondering how your approach in that part of it?

[Troy Meier:]

Yeah, we're looking as, as Troy mentioned, once again what we call channel partners. There will be someone else that does the customer – direct customer interfacing and those partners are the ones were talking to our U.S. customers. So we would deal with the U.S. entities as far as selling tools and absolutely expect payment to be U.S. terms. That's a very good question. But our invoicing would go would be to U.S. channel partner as opposed to straight to Aramco or KLC.

[John Bair:]

Okay, that's good. And then one last question, I guess, conceptually you would have build out of a repair, refurbishment base in that area. Is that a reasonable thought process there as opposed to shipping it over there?

[Troy Meier:]

Correct. In the startup, there will be some transportation going to and from the U.S. to the Mideast, but our goal is to setup a repair facility somewhere in the Mideast.

[John Bair:]

And do you expect how – well, how rapidly do you think you might make that a cash flow positive endeavor or…

[Chris Cashion:]

We expect that second half of 2018. We’ll make the investments in the first half and we expect late Q3, early Q4.

[John Bair:]

Okay. And I think you alluded to that earlier. I just want to clarify that. Great, thanks a lot. See you next week in Dallas.

[Troy Meier:]

Thank you.

[Chris Cashion:]

All right, thank you.

[Operator:]

Ladies and gentlemen, we’ve reached the end of the question-and-answer period. I would like to turn the call back to management for closing comments.

[Troy Meier:]

Well, we thanks everyone for joining us and we look forward to finishing out the year and growing the company and producing – getting some good solid filled data on the Strider tool and be able to enter into 2018 on a very positive note. And just want to thank everybody for joining us and have a have a wonderful day.

[Chris Cashion:]

Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.