Superior Drilling Products, Inc.
Q2 2015 Earnings Call Transcript

Published: 14 Aug 2015

[Operator:]

Greetings and welcome to the Superior Drilling Products, Inc second quarter 2015 financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Deborah Pawlowski, Investor Relations for Superior Drilling Products, Inc. Thank you. You may begin.

[Deborah Pawlowski:]

Thanks, Matt and good day, everyone. We certainly appreciate your interest in Superior Drilling Products, Inc and for taking the time to join us here today. On the call with me are Troy Meier, our Chairman and CEO; Annette Meier, our President and COO; and Chris Cashion, our Chief Financial Officer. Troy and Chris are going to review the results for the second quarter as well as provide an update on the company’s progress and strategic activities. You should have a copy of the financial results that were released before the market this morning. If not, you can access it on our website at www.sdpi.com. There are also slides that are accompanying this teleconference that should be available on the website as well. As you are aware, we may make some forward-looking statements during the formal discussion, as well as during the Q&A. 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 from what is stated here today. These risks and uncertainties and other factors are provided in the earnings release, as well as with other documents filed by the Company with the Securities and Exchange Commission. These documents can be found on the website as well or at sec.gov. So with that, I’ll turn it over to Troy to begin.

[Troy Meier:]

Thanks, Deb. Hi, everyone and thanks for joining us today. We had some challenges in the quarter, but we also accomplished quite a bit and I’m excited to share that with you as we go through this slide deck. Let’s go ahead and get started, let’s go to slide four in the slide deck. On page number four, you’ll see that the refurbishment and manufacturing is down measurably. This is the service that we provide with Baker Hughes on the bit refurb. Although the bit refurb wasn’t down as much as what the rig count was, so it was down 25% versus the 35% in rig count. The other part of this is the, our manufacturing. And we made a very conscious decision last fall to wind down the third party manufacturing that we were doing for other companies because we found that this was really putting us in a bind on getting our own stuff, our own products out. So what we’ve done is with this part of the business being wound down, we are now tooling up and we’re getting the programs down, bringing the tooling in, and getting all the jigs and fixtures made to produce our own products. So you can see that’s down 1.1. So about half of the 2.5 that we were down. The good point about this slide is that you’ll see the market share, the gaining that we’re getting with the Drill-N-Ream. Even though there was a 35% reduction from the trailing quarter, we’ve only seen a 6% decline. Our sales team is doing a wonderful job, I should say our sales and engineering team, I mean they’re both working together very well with customers and bringing on new customers and strengthening the old customers that we have. So you can see there the runs 185, 174; month average, 62 to 58. So we feel that’s very positive. So we’ve had some more customer growth in this quarter. We brought on four new customers, the tool continues to exhibit some great performance and these customers are realizing that. We’ve actually had customers share this information with other customers. We’ve been able to enter in to a new basin with a current customer with another part of our product lines that we’re excited about, we know that we have a great opportunity within our customer base to sell them on drilling and completions and not just drilling like we’ve been doing. The pricing pressure was stronger than what we thought it was going to be. I think we hit the rig count pretty close. The decline in rig count, we were very good there, but the pricing pressure was tougher than we thought it was going to be. But so far in Q3, all indications are that it’s stabilized and we are managing that very well. We’ve also been able to strengthen our sales organization here. We’ve strengthened city sales. We’ve got some stuff going on in our Oklahoma City sales that our team there has done a fantastic job, the MidCon and now starting into down to West Texas area. The Rocky Mountain sales team has been supported now with essentially a new city sales there as well, and these people are very, very familiar with city sales and they do a great job. So let’s move on to the -- what everybody is anticipating as far as our new products. We’ve talked about this quite a bit in the past, but we’ve been able to deploy the Strider. We had our first field run a few weeks ago. It was very, very encouraging. It was everything and then some of what we were shooting for. We just sent out the set of tools for the next run which is actually today. They will be going in the hole today. We’ve sent them out of our shop yesterday and they are stacked up on the rig floor and so they are – we will be see more encouraging results there with Strider. The V-Stream that we’ve talked about, it’s essentially me too tool. This is something as we’ve tried to, as we are getting into these customers and we are trying to convince them of the benefits that Strider or the Drill N Ream offers. This gives us a reason to be on that rig. This gives us something to give them until we can convince them and upsell them to the Drill N Ream. And the V-Stream is then deployed. It had a very successful first run. Again, this was just two weeks ago and we now have those tools upon several locations, over the next week we will start seeing the performance of that. It’s performed very well. The tool -- system out in the hole is doing really well and did its job. We are getting the dedicated reamer runs. Again, we have customers that are still running their drilling program. Then we have been also convinced them to change over to the Strider or the Drill N Ream yet. So we are dedicated reamer runs and so we’ve got our DR Stringer, our dedicated reamer system, we’ve been able to go out there and get our reaming assembly on to some of our customers and it’s proved out very well for them and again this is just a tool that we are out there to upsell them into our drill marine, because we think that it’s been far, far better value. The OrBIT, as you all know, we’ve been – we bought this product and what we did is we’ve gone back and we’ve had to reengineer the cutting structure on it, so we found that the product that we purchased fits one particular type of plug very, very well, but only there is one type of plug, it was actually an Obsidian plug and so we took that product line back to the engineering state so that we could introduce something that would cut a wide variety of plugs. So we weren’t so much concerned about what types of plug our customer has got to have in the hole, to know if our product is going to perform well or not, we are designing the tool than can actually cut the plugs that are in the marketplace today. And we’ve designed this current one using the roughest, toughest plugs we could find in the industry and designed to that. And we cut that plug in our test facility very, very well, numerous times with our current cutting structure that we’ve engineered on OrBIT. We are now in the stage of making those, we’ve got some of those products out to the field and we’ve actually got a really good – a really big operator that’s going to be putting one of those products in the hole tomorrow, Saturday. So we are excited to see the results of that. So, we continue to get strong positive feedback from our customers all the products that we’ve introduced to them but we just started getting our new products out. But what they’ve seen so far, they really like and they’re still very, very happy with the performance of Drill-N-Ream. So with that, I’m going to go ahead and turn it over to Chris Cashion. Go ahead Chris.

[Chris Cashion:]

Thank you Troy and good morning to everyone. Let’s continue our review by looking at page 8, titled adjusting to market conditions. As this market continues to be as challenging as it is, we have continued to look at our operating expenses, our operating costs, and continue to what we’re calling rightsizing the cost structure. You can see that on a trailing quarter basis, we’ve brought the operating expenses down 14%. And then if you look at what we’ve done since Q4 of 2014, and your slide may say 2015, that’s a typo, just know that we’re referencing to Q4 2014, those expenses have come down 25%. So we continue to make cost cutting moves as required by this marketplace. You saw earlier, we’re a bit refurbishment business and manufacturing business on page 4. On trailing quarter basis that was down $800,000. As Troy mentioned, roughly half of that decline was a result of our strategic decision to exit the third-party manufacturing business and the other half of that decline was in the refurb business and then so that’s where we -- we were actually pleased, as Troy mentioned that the revenues are down 25% versus a rig count decline of 35%. As that business continues to decline, I think as most everyone knows that’s a high variable cost business and so we continue to take out, reduce the headcount as the revenues declined in that business. R&D spending, once again as Troy just mentioned, we’re moving into the commercialization phase with these tools that we’ve been designing and building prototypes 4 in the first half of the year. So we continued -- we are able to decline -- decrease our R&D costs as we move out a two prototyping phase into more of a product development commercialization phase, so those costs continue to come down. If you take a look at the current quarter compared to the prior-year period, we see three bullet points which I think everyone is pretty much familiar with by now. We were a different company in Q3 2014, we IPOed in May, the end of May of that year and so, when you look at Q4 2014 versus -- excuse me Q2 2014 versus Q2 2015, you see that we’re up in operating expenses, that’s the result of the building of our distribution centers, the investments that we’ve been making over the last year, we did not have that cost for the full quarter and the prior quarter -- prior year quarter, additionally, the SG&A increases in personnel, processes and the cost that we incurred of being a public company, a full quarter of those costs, this quarter in 2015 versus one month of those costs in Q2 2014. And then, of course the depreciation and amortization is up and that’s the result of the acquisition of Hard Rock, which was closed after the conclusion of IPO last year. If we turn to Page 9, our focus on cash flow that’s where obviously we spend a lot of time looking at the ramp in our revenues around new products, continuing to look at our cost base and adjusting our cost structure and you saw the results of that through Q2 of this year and we’re making some more moves in Q3. So we got some additional headcount reductions in Q3. You saw the earlier press release where our CTO, we eliminated that position, our focus in on the product -- continued product development and commercialization of the tools that we have. Research efforts are not necessary right now, so we are not doing those kinds of things, we are focusing on just continuing to engineer existing products and get those tools into the field. So that will not hurt us from a company performance perspective. Another position that we have eliminated is the controller position, I will be assuming those responsibilities, and that’s – we are doing a lot of that around here, a lot of those are wearing multiple hats in this environment and we can do that and it doesn’t hurt our capabilities. This right-sizing effort is probably getting the size of the company that we are, and so we can continue to do these kinds of things and cut cost out and not hurt our abilities to perform, not hurt our abilities to – for financial reporting to be continuing to be accurate and complete, so there is no concern whatsoever. We can see at the bottom part of the chart on the left hand side, we look at adjusted net income of Q2 2015. I want to make a point about that. At $1.6 million loss for the quarter, we did not apply what we would call a normalized tax rate against that quarterly loss before taxes. We had been doing that in previous quarters, but in discussions with our auditors and just looking at conservative accounting principles. We stopped booking deferred tax assets, which results in picking a credit in the provision and the P&L. So if we had done that, if we had normalized the tax rate, if we had booked a preferred tax credit in the P&L, that would have been $700,000 of credit, which would have reduced that loss from $1.6 million to $900,000. So that gives you a little more comparable for the loss in Q1. Once again, up through Q1, we were booking those credits and we made a decision to stop booking those credits going forward. NOLs have a carry forward of 20 years. We fully expect that we will be making money and we will utilizing those NOLs, so this is just conservative accounting treatment to what we have done here in the current quarter. Lastly, our breakeven on a GAAP net income basis is $5.5 million of quarterly revenue and that’s a net income GAAP basis, so that’s where we are -- that’s what we are working toward. The next slide is 10, balance sheet. You can see that cash were down $3.3 million from March to June 2015, that’s primarily driven by Capex in the quarter of $300,000, principal payments on debt $2.8 million, so $3.1 million of that $3.3 million decline is in Capex and debt repayments. And as most of you know, $2.5 million of that $2.8 million was the payment on the Hard Rock loan which we made May 29 this year. Capex for the rest of the year, we are looking at for the total year of about $1.2 million to $1.4 million. Year-to-date we are at $600,000, so we are looking at another $600,000 to $800,000 of Capex for the remainder of the year and that’s the Drill-N-Ream and Strider tools. And then you can see from a cash net service perspective for the second half of the year, we are looking at $1 million, that’s interest and principal. And I want to just remind everyone that when you look at our P&L, we have got some non-cash interest that we booked on that line is specifically relates to the amortization of the Hard Rock loan discount and so I’d just want to remind everyone of that, that’s non-cash item. For the quarter, quarter two, that’s $185,000 and don’t think I want to remind folks that that amortization is a function of the debt as is currently structured. That leads to stringent financial flexibility section on this page. We are negotiating or in negotiations to further restructure the Hard Rock loan. As you know, we have restructured that line in April and we’re in negotiations to restructure that note again and as a kind of a formal reminder, the owners of the Hard Rock loan have a long standing relationship with ours [ph]. The second thing we’re doing is we’re in the process of negotiating a sale and leaseback of an existing asset that we have, it’s specifically the machining center that we talked about last year. We bought that, roughly $1.5 million is what we paid and so we’re looking at that sale and we’re leasing that back. Page 11, now take a look at our market outlook and our goals for the rest of calendar year 2015. We’re updating our guidance for 2015. We’re saying revenue for the year between $14 million and $16 million. This assumes that the US land oil and gas rig count stays in the roughly 825 to 850 range, which is where it’s been over the last month and a half. As a matter of a fact, last Friday, it was at 884 and Baker Hughes would be coming up today with an update, they update that weekly. So assuming that the rigs hang in there about where they’ve been over the last month and a half and assuming the commercialization of our Strider and Orbit continues as we expect in Q3 and you heard the good results that we’ve started off this quarter with Detroit, assuming that that commercialization efforts continue, then we see the majority of our revenue growth for the rest of the year happen in Q4. From an SG&A perspective, we will continue to take that number down, we did $1.8 million in Q2 and we’re targeting $1.6 million to $1.7 million. So we continue to adjust those costs. So for EBITDA for the full year, we’re saying approximately 5% to 10% of revenue and EBITDA for the calendar year. With that, I’m going to go ahead and turn this presentation back over to Troy and he’ll kind of walk us through the market outlook.

[Troy Meier:]

Thanks, Chris. So looking forward, our sales team is gaining some great strength and flexibility with the packaging of tools, which is something that our customers have been wanting us to do and it’s going to be a great option for them. We continue to build on our customer base, we’ve got some fantastic relationships, we’ve got a great sales and engineering staff that are in contact with their customers and providing a great service to them. Early signs of sales in Q3 are very positive. We’re liking what we’re seeing and we’re also excited about the new tools that we’re launching in the second half. Early indications on those, the runs have been great runs, we’ve learned a lot about the tools that we’re sending out to the field and we’re making a few modifications to the tools that we’ve run to strengthen the tools, perform better for our customers and we’re very excited about the new products that we’ve talked about and what the second half of the year is going to bring to us. The sales and engineering has been supported by a very strong database that is proving our value proposition to our customers. Lane and his team have been working with some great operators that were able to tap in to their database, were able to show what our tools do, why the performance of our tools bring in this value proposition. So, with that being said --

[Deborah Pawlowski:]

Do you want to open it up for questions now?

[Troy Meier:]

Yeah. Let’s do that.

[Deborah Pawlowski:]

Okay.

[Operator:]

[Operator Instructions] The first question comes from line of Thomas Stephens from Wunderlich Securities. Please proceed with your question. I’m sorry Thomas, please proceed with your question.

[Thomas Stephens:]

Hi Tom Stephens, how are you all doing, Wunderlich Securities.

[Troy Meier:]

Good Tom, how are you?

[Annette Meier:]

Good Tom.

[Thomas Stephens:]

Good. Yeah, we had a little dead spot there, sorry if I was missing for a second. So, we understand in terms of the modeling, the OrBIT and Strider were looking to get off the ground in 3Q but would we assume contributions would be exclusively in 4Q or might we see something worth talking about in Q3 for contributions to the top line?

[Troy Meier:]

No, there will be some -- there will also be some contributions in the third quarter for sure.

[Thomas Stephens:]

Okay. And then a couple of follow-ons. In terms of your sort of me too products to get us on the rig, how do we, what is the competitive landscape for those and how do customers chose us to kind of get us going on the rig as opposed to whoever the other primary competitors are or what are we replacing in terms of those couple of products?

[Troy Meier:]

So what we’re replacing is, if you look at the BHA, the bottom hole assembly, a lot of customers will run stabilization, and what we’ve done is, we’ve looked at the traditional stabilizers that have been around for a long, long time. But we’ve also looked at all of the data that has come around very, very recent with -- what a stabilizer, a bottom hole assembly should look like and how it -- how much fluid should go past the blades and how much stabilization it should have. So we were able to tap into some very recent findings from some very, very large operators and we designed our tools around that. And not only do our tools stabilize very, very well but we also have got some cutting abilities that do not come out to gauge because these customers are looking for stabilization not so much cutting they just they don’t want to cut the well body just want to stabilize the tools in the well bore but you still have some ledges and some doglegs and so we were able to go ahead and put some cutting structuring on the upside and downside of these blades to smooth that out without increasing any torque. So, initial performance on this tool has been very good.

[Thomas Stephens:]

Okay that’s helpful and is there -- do we anticipate any patents on those and while we are at it, what would be the patent status be on Drill-N-Ream, Strider, and OrBIT currently?

[Troy Meier:]

The patent status for this tool, there are some. Our team has looked at it, we’ve actually put in some disclosures with our patent attorneys. We feel there are some very good features on our tool that nobody else in the industry is using. Matter of fact, we’ve never even seen them before, so we’re happy with -- we think we can get some patents on our value line. In regards to Drill-N-Ream, we’ve been -- the patents that we’ve been issued on that have been very, very strong, we’re at three now and we anticipate the fourth, we get comments back and forth but we feel that’s a very strong patent. The OrBIT, we’re still waiting for some feedback on that, that’s -- as you well know that that was a process that the prior company had had, Tenax and then we were able to purchase the right to that patent, I should say the agreement to buy the rights to that patent. And that’s moving forward, I mean, it takes time but we feel that we should be starting to hear some in Q4 and definitely by Q1 in regards to the OrBIT but that’s all still pending. And in regards to Strider, we feel we’ve got a very strong position on – the Strider is a very uniquely designed tool that we know of nothing out there in the marketplace that’s even close to it. If you look at traditional agitating tools, they will either run with the PDM and they will talk about rotational vibration and we’ve gone out in a totally different way. And so going from the gear systems to the closure system to propeller system everything that we’ve done in this tool we feel that’s very unique and performs very, very well. So I guess we feel really good about what we’ve got filed for Strider as well.

[Thomas Stephens:]

Okay, great. I could back up if there is, but I have a couple of further follow-ons I can pass in.

[Deborah Pawlowski:]

Okay, go ahead, Tom.

[Thomas Stephens:]

Alright. On the sales, what is our current sales headcount and then are we in all the basins we want to be in currently or are we – any ones we have not kind of traded that we would to like have some representation on?

[Troy Meier:]

The current sales force right now are out to 10 and what we’ve done is we’ve been able to move one of our sales team into a city sales position. We’ve seen a slowdown in one of the basins, we were able to take one of our field guys there, moving into another basin. So a very strong city sales from that basin and put him into the city sales. As far as the basins that we are looking at, we’ve still got one major basin. There is two, but we are into the West Texas basin and we are getting stronger there, but there is a big play in the northeast that we have no penetration at all. So we are going to get back there. We’ve got some customers that use us very good in the Rockies, we have penetrated back there with the OrBIT product line with the customer that uses it here in the Rockies and so that basin there is just in its infancy for us. You look at the Eagle Ford, we have nothing going on there yet, so that’s a very big basin that we would like to get into as well. But right now there is so much opportunity with where we are at, especially as we bring on these additional tools that we have really got to focus on – our sales team out there is same. Give us these tools, we can get them in the hole as we start seeing the Strider move along, the V-Stream move along, so there are still plenty of opportunity in the current basins we are at and we still have a very, very long way to go.

[Thomas Stephens:]

Okay. And one last micro question. Can you explain the packaging of the tools issue, what’s different about that and what the customer likes about what we are doing on the packaging side?

[Troy Meier:]

Yeah, so essentially you are going out there. And there is multiple tools that a customer needs to run. And so when you go out there it’s nice to be able to -- customer always wants to negotiate and when we just have one tool, we don’t have any flexibility. And so you may get some competition that comes in and says, hey, we will give you bit and a motor and then quote for a reamer for nothing. And even though that reamer may not perform as well and they are still on the dedicated reamer run, it’s tough for them to look away at price of zero. So what we’ve been able to do now is we are able to go in there and say, okay, we can give you, let’s start looking at Strider, let’s start looking at your bottom hole stabilization and let’s start looking at your well bore conditioning. And now we can start to negotiate and be flexible with our customer, but it’s also a detriment to our competition, because we are no longer just a one trick pony.

[Thomas Stephens:]

Yeah. Okay, alright. Thanks very much.

[Operator:]

The next question comes from the line of Reid Walker from Hard 4 Holdings. Please proceed with your question.

[Reid Walker:]

Hi, guys, just wanted to follow-up a little bit on Tom’s questions about the Strider. First of all on just kind of the roll out or where we are, you said some improvements into the second ring that’s still using it, is it same customer or same basin or is it a different customer in different basin?

[Troy Meier:]

It’s same customer in same basin. We have got – this customer has just been a great ally with us say, they are top – we believe that they are the top performing customer out there in this particular basin, and pretty much anywhere they go they have got a great, great management crew and they realize the value. But what we did Reid is we have got that first run and we got to see all of the data that we have – did we help our customers slide [ph] what was its feed rate during the slide, what was its feed rate during rotation what was the pressure drop across the tool, how much benefit was this to them and we are very, very happy with what we saw and our customer was as well. And we brought that tool back in house, we have seen somewhere in places that we saw, we see it, we know where the weakest points are of this tool, because we have run it so many times in our test loop and we want to strengthen that, we want a tool that our customers can run again, again, and again before it need to be brought in in service. And that’s our goal right now is to duplicate or enhance the performance that our customer received on that first one, but we can just get in these weaknesses out that may cost us margins down the road if we have to bring it in after we run and repair.

[Reid Walker:]

Right, but what are your modification that worry that it’s not commercially ready to roll, but it sounds like it is ready to be used, which is those ways to improve it, so that your – the maintenance on it, it will go down, but the customer was happy and satisfied and you guys feel like it’s a successful to ready roll out.

[Troy Meier:]

Yeah, customers was happy and satisfied, we were very happy with what we have seen, but this was the first time that it has actually been in a downhole application, 10,000 foot lateral, so this was the first time we really got to put this tool in a race. And so we looked at it and we know where [indiscernible] modifications, we don’t want to be in this continuous R&D stage, that’s not what we are doing. What we are doing is saying, okay, that was weak there and that was weak there, but the mechanics of the tool were very strong and what the tool kit was awesome, so we are not changing that, we are just making sure that every time we send this out to our customer, it performs as well or better than the time before.

[Reid Walker:]

And maybe some -- even I don’t understand some of it, but as I understand that Strider is competing, primarily with NOV Agitator and hopefully, or maybe this is my hope that you have already been at kind of a price point out there, so what the Agitator is being used at, so if you have got a better tool, a hopefully a better tool that has the ability to pull the innards out, so you don’t lose the whole bottom hall assembly if you ever get start. But also, do you think as you guys analyze the market that there is -- that pricing umbrella that really can get some of the proprietary margins that Drill N Ream has had in the past and any talk on the size or revenue per run that you have seen from NOV or the size of that market would be helpful I think to the investors?

[Troy Meier:]

You know, there is a price point that’s been set and NOV is definitely the front runner with drill string agitation. There are other tools out there, again, they – I think when you look at the way these tools performed, they are always looking at rotational vibration and we went totally away from that. And I think we’ll be able to prove that out over time that what our tools does, using trust will be very, very positive and I don’t think there is going to be room to go in there and actually say, hey, our tool is performing excellent or better, so give us these much greater margins. It’s going to be a tool that performs very well, it’s going to complement the other tools that we have and it gives our customers that option to, hey, you guys bring this out these tools and get that worry away from our customer. I think it’s going to be the best performing tool in the marketplace, everything else we’ve seen with the exception of the NOV tool. To me, it’s really not that impressive and I think the NOV tool is very harsh and violent with what it does. But we’ll see as we move forward, we’ll see how well our customers like the performance of the tool and the decreased pressure drop across the tool, the size of the tool, I think we’ve done our homework there and I think we’ve got a lot of advantages that our customers are going to like?

[Reid Walker:]

What is the market share would you say on directional drills, agitator, how many -- what percentage of wells in the basin that you guys know or use the agitator type product?

[Troy Meier:]

Well, it seems that it has something to do with the length of the lateral. So if you look at the basins that are drilled, short lateral, 3,000, 4000 foot lateral, there is some agitation tools that go in there or stimulation tools that go in there, but it doesn’t seem to be as plentiful. The big benefit is pulling that and helping that drill pipe, stimulating that drill pipe in these longer laterals where you have all the friction and what gravity is doing in the wellbore, what it’s doing, their slides become so difficult as they get out there longer. So as these basins are growing longer and longer laterals, the agitation, the stimulation of drill string becomes more and more necessary, but if you were to look at it and say overall I mean, like if we’re at the Bakken, I thought when we first stated in this project that everybody in the Bakken would run one and that’s not so. I thought that very few in the Wattenberg would run them and I found out more people in the Wattenberg are running them that I thought they were. So it’s kind of operator preference and to say, it’s -- 65%, 75% of the horizontal wells are being drilled. I really don’t know, I can’t answer that question right now with really good sense of what the percentage is. But I do know the customers that we’re calling on with Drill-N-Ream like and run agitation tools.

[Reid Walker:]

Okay. Well, thanks. Keep up the good work in those difficult times, but keep striving.

[Operator:]

Our next question comes from the line of Richard Dearnley from Longport Partners. Please proceed with your question.

[Richard Dearnley:]

Good morning. You used the term in talking about the sales man moving one to city sale. What is that?

[Troy Meier:]

So what we have is, you have -- guys in the field, I know the guys that are going out to the rig that are dropping off tools that are talking with the drilling foreman out of the rig, and so that’s what we call our field sales. And we’ve been very fortunate to have a very educated field sales staff. Some of these individuals were very, very good city sales staff, prior to joining our team. City sales is that salesmen that’s going to be working directly with the drilling engineers, the managers of these rigs right in the office level, whether it’s Denver, Oklahoma City, Dallas or Houston.

[Richard Dearnley:]

Okay. Thank you. And then your decision to get out of the third party manufacturing, it sounded like it was because you didn’t have capacity back when things were tighter?

[Troy Meier:]

We have some capacity, we definitely have capacity right now, but the issue is we have to be able to design quick and we have to build quickly and we have to turn around parts very, very rapidly. And what we find is we’ve a test part in our simulator at R&D even though we have a phenomenal team of R&D that’s got their own CNC equipment. We need that support from our manufacturing as we start to bring these products on, say like with Orbit. And we were always trying to figure out a date to get these products done and we were taking a back seat to our customers on the third-party stage. And when we looked at that and the complications it was creating for us to hit our own due dates and we looked at the margins that’s in a third-party machine facility, we felt it was best to focus in on our stuff, we have a very good reputation in this industry of turning extremely high-quality parts and also delivery in our customer parts when they need them and we didn’t want to lose that by starting to move due dates and telling customers sorry we couldn’t get it on March 27 because we put our stir [ph] up ahead you. So we didn’t feel that it was worth the margins that we are making on those parts and the determent it was doing to us, getting our own parts designed, tested and out to the field. So it was just -- it was simpler for us to just essentially clean the slate in our manufacturing facility and say, we need these parts on this date, no excuses.

[Richard Dearnley:]

And then, a direct sales force is expensive. What is the -- how many salesmen do you really need to penetrate this market and then what kind of revenue in your business is necessary to cover that expense nut generally speaking.

[Troy Meier:]

If you look at our sales force, we are way, way under staffed with our sales force, we need to increase that. We don’t want to do it today, because we have got to let our manufacturing ramp up and support the sales staff that we currently have. You’re out there and you’re doing, if you look at the field sales, you’re dealing with these customers 24/7, it’s not a 9 to 5 job, you’re taking tools out of the rig at 2’0 clock in the morning, you’re bringing tools back to your shop at 4’0 clock and you’re inspecting them, you’re getting them back out. As we try to keep our inventory levels to where they’re appealing to Chris and his group, we also got to make sure that we don’t burnout our sales staff that we currently have. And I mean, they’ve been working very hard and doing a very good job but we’re way, way under. For the markets that we’re in right now, as we start to build on -- bring on more tools and just increase the inventory levels of the tools that we currently have, and the customers that are using these tools, we will definitely need to hire more sales staff. I mean, essentially we don’t even have a city sales yet in some of the major cities, whether it’s Houston or Dallas, or support in those areas by you know Trent’s is doing a very good job of getting down into those areas but that day-to-day contact of meeting these people and counting your success is very important to them there -- have those city sales there, I mean it’s extremely important.

[Richard Dearnley:]

Right, okay thank you.

[Operator:]

Management, it appears there are no further questions at this time, would you like to have any closing remarks?

[Deborah Pawlowski:]

Troy?

[Troy Meier:]

Yes. So, let me just finish off my closing comments by saying, I want to thank everybody for joining us today on this call. Our team has been doing a great job under these challenging market conditions and I want to thank them all as well. We’ve got an awesome, awesome team. We’re making great progress as we grow our customer base and further penetrate existing customers with the Drill-N-Ream. The strong database that Lane and his team have been building has become a powerful tool in explaining to our customers and showing our customers the value proposition that we give them. And of course, I’m really excited about bringing on the Strider and the OrBIT, getting them out to the field and the early indications with these tools proved to be another powerful cost savings to our customers. So that being said, thank you and enjoy the rest of your summer.

[Operator:]

This concludes today’s conference. Thank you for your participation; you may disconnect your lines at this time.