Contract Costs

We do not incur any material costs of obtaining contracts.

Contract Balances

Under our sales contracts, we invoice customers after our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our contracts do not give rise to contract assets or liabilities under ASC 606.

NOTE 4. INVENTORIES

Inventories isare comprised of the following:

NOTE 4.5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are comprised of the following:

In 2019, the Company decided to sell the Company airplane and related hangar. Accordingly, these assets were reported as assets held for sale on our balance sheet as of December 31, 2019 at their carrying value, which was lower than the expected fair value less costs to sell. In February 2020, the Company sold the airplane for a gain of approximately $142,000. The Company recorded a $30,000 impairment related to the hangar in March 2020 and expects a sale of the hangar to be completed in the next 12 months.

Depreciation expense related to property, plant and equipment for the three and nine months ended September 30, 20172020 was $296,170$401,592 and $910,232,$1,259,398, respectively and for the three and nine months ended September 30, 20162019 was $320,583$446,888 and $1,544,215,$1,271,737, respectively.

NOTE 5.6. INTANGIBLE ASSETS

Intangible assets are comprised of the following:

Amortization expense related to intangible assets for the three and nine months ended September 30, 20172020 was $291,667 and $875,000, respectively and for the three and nine months ended September 30, 20162019 was $611,667$291,667 and $1,835,000,$1,408,333, respectively.

Annually, and more often as necessary, we will perform an evaluation of our intangible assets for indications of impairment. If indications exist, we will perform an evaluation of the fair value of the intangible assets and, if necessary, record an impairment charge. As of September 30, 2017,2020, the Company reviewed the net balance of the intangible assets and determined no impairment was needed.

NOTE 6.7. RELATED PARTY NOTE RECEIVABLE

In January 2014, we entered into a Note Purchase and Sale Agreement under which we agreed to purchase a loan made to Tronco Energy Corporation (“Tronco”), a party related to us through common control, in order to take over the legal position as Tronco’sTronco’ s senior secured lender. That agreement provided that,Effective August 2017, the Company fully reserved the related party note receivable of $6,979,043, which reduced the related party note receivable balance to $0. The Company continues to hold the 8,267,860 shares of the Company’s common stock as collateral. The Company will record a recovery of the loan upon our fullreceiving repayment of the note or interest in other income. On July 7, 2020, the Company entered into an amended and restated loan agreement and note with Tronco loan fromchanging the proceeds ofpayment terms on the Offering,note. As amended, the lender would assign to us all of its rights under the Tronco loan, including all of the collateral documents. On May 30, 2014, we closed our purchase of the Tronco loan for a total payoff of $8.3 million, including principal, interest, and early termination fees. As a result of that purchase, we became Tronco’s senior secured lender, and as a result are entitled to receive all proceeds from sales of the Tronco-owned collateral, as discussed below.

The interest rate on the note is 4.5%. We earned interest of $87,867 and $251,600 for the three and nine months ended September 30, 2017, respectively, and interest of $78,421 and $233,558 for the three and nine months ended September 30, 2016, respectively.

On March 28, 2017, the Company and Tronco finalized an agreement with a third party and pursuant to this agreement, the third party acquired all of the Ohio assets of Tronco for $550,000. As Tronco’s senior secured lender, we agreed to release our lien and security interest on these assets in accordance with the agreement. The Company agreed to a non-cash receipt of the $550,000 from Tronco by reducing our bonus accrual liabilities, which was earned by the Meiers in 2014 but not paid, and was recorded in other long-term liability. As a result of this agreement, we reduced both the other long-term liability and the Tronco related party note receivable during the first quarter of 2017.

On August 8, 2017, the Board of Directors agreed to extend the terms of the Tronco loan to interestfixed at 2% per annum. Interest only paymentsis due December 31, 2017, 2018, 2019, 2020,2021 and 2021,2022, with a balloon payment of all unpaid interest and principal due upon full maturity on December 31, 2022.

NOTE 8. LEASES

The Tronco loan continues to be secured by the first position liens on all of Tronco assets, as well as by the guarantees of Troy and Annette Meier (the “Meier Guaranties”), which are directly payable to and legally enforceable by us. In addition, the Meiers have provided us with stock pledges in which they pledge all of their shares of our common stock held by their family entities (the “Meier Stock Pledge”), as collateral for the Meiers guaranties until full repayment of Tronco loan. The pledged shares, which are subject to insider timing requirements and volume limitations under Rule 144Company determines whether a contract is a lease, or contains a lease, at inception of the Securities Actcontract and required periodic black-out periods, are being held in third-party escrow until full repaymentwhether that lease meets the classification criteria of the Tronco loan.a finance or operating lease. The Company holds 8,267,860 sharesdiscounts lease payments based on an estimate of its incremental borrowing rate as the Company’s leases do not provide a readily determinable implicit rate.

The Company leases certain facilities in Texas, Utah and 530,725 restricted stock units as collateral forDubai under long-term operating leases with lease terms of one year to two years. Effective January 1, 2020, the Tronco noteCompany adopted the provision of ASC 842 Leases.

The table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheet as of September 30, 2017.2020:

The lease expense and the cash paid under operating leases for the three and nine months ended September 30, 2020 was $26,827 and $141,817, respectively. At September 30, 2020, the weighted average remaining lease terms were 1.84 years and the weighted average discount rate was 7.25%.

The following is the aggregate future lease payments for operating leases as of September 30, 2020:

NOTE 7.9. LONG-TERM DEBT

Long-term debt is comprised of the following:

Real Estate Loans

Our manufacturing facility is financed byOn February 1, 2019, we signed a loan agreement for $3,129,861 refinancing our commercial bank loan requiringwhich is secured by the land and buildings at our Vernal, Utah campus. We paid $1,000,000 towards the previous loan that was scheduled to mature on February 15, 2019, upon refinancing. The loan requires monthly payments of approximately $39,000,$43,000, including principal and interest at 5.25%.7.25%, and is secured by the land and buildings at our Vernal, Utah Campus. A lump sum principalballoon payment of approximately $4.2 million$2,500,000 is due at theupon maturity date of this loan on AugustFebruary 15, 2018.2021.

Hard Rock Note

In 2014, the Company purchased all of the interests of Hard Rock Solutions, LLC (“Hard Rock”).Rock. Consideration consisted of $12.5 million paid in cash at closing and a $12.5 million seller’s note (the “Hard Rock Note”). The Hard Rock Note and subsequent amendments are secured by all of the patents, patents pending, other patent rights, and trademarks transferred in the closing of theto Hard Rock acquisition. At issuance, the fair value of the Hard Rock Note was determined to be $11,144,000, which is less than the face value due to a below-market interest rate. The resulting discount of $1,356,000 will be amortized to interest expense using the effective interest method, totaling approximately $19,657 and $59,766 for the three and nine months ended September 30, 2017, respectively.Rock.

On August 10, 2016, certainThe Company paid $803,630 of our subsidiaries entered into an amendedprincipal and restated note withaccrued interest on January 5, 2020, and $790,223 of principal and accrued interest on April 5, 2020. In April 2020, the seller in our acquisition of Hard Rock. AsCompany amended and restated the Hard Rock Note accrues interest at 5.75% per annum and matures and is fully payable on January 15, 2020.Note. Under the currentamended terms of the Hard Rock Note, we are required to make the following remaining payments: $2,000,000 in total principal plus accrued interest in 2018 through four $500,000 in principal plus accrued interest payments on each of January 15, March 15, May 15 and July 15, 2018, and $1,000,000 in principal$750,000 plus accrued interest on eachJuly 5, 2021 and October 5, 2022. Interest accrues at a rate of 8% per annum. The Company paid $29,759 of accrued interest on July 5, 2020 and $30,247 of accrued interest on October 5, 2020. Accrued interest only payments will also be due on the fifth day of January, 15, March 15, May 15April and October 2021 and January, April and July 15, 2019 for a total of $4,000,000 in principal and accrued interest.2022. The remaining principal balance of principal of $2,000,000 and accrued interest on the Hard Rock Note are due on January 15, 2020. During 2017, we made accrued interest payments related to the note on January 15, 2017, March 15, 2017, May 15, 2017, and July 15, 2017 of $129,808, $74,356, $76,877, and $76,877, respectively.is $1,500,000.

Capital LeaseCredit Agreement

In 2012, weFebruary 2019, the Company entered into a lease for machineryLoan and Security Agreement (the “Credit Agreement”) with Austin Financial Services, Inc. (“AFS”). The Credit Agreement provides a $4,500,000 credit facility, which was capitalized by the Companyincludes a $1,000,000 term loan (the “Term Loan”) and accordingly, the machinery and the related obligation under the lease were included on the Company’s balance sheet. The lease had a five-year term with an option to buy the asset or renew the lease. On August 31, 2017, the Company exercised the option to purchase the machinery for $690,000, which is due in November 2017.$3,500,000 revolver (the “Revolving Loan”). As of September 30, 2017,2020, $359,916 was outstanding on the Revolving Loan. Amounts outstanding under the Revolving Loan at any time may not exceed the sum of: (a) up to 85% of accounts receivable or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect (less a dilution reserve as determined by AFS in its sole good faith discretion), plus (b) the lesser of (i) up to 50% of inventory or such lesser percentage as AFS in its sole discretion may deem appropriate if it determines that there has been a material adverse effect, or (ii) the inventory sublimit, minus (c) the borrowing base reserve as may be determined from time to time by AFS. Amounts outstanding on the Revolving Loan as of September 30, 2020, may not exceed $511,791, which is based on a calculation applying 85% of accounts receivable and 50% of inventory. A collateral management fee is payable monthly on the used portion of the Revolving Loan and Term Loan. Even if our borrowings are less than $1,000,000, we still pay interest as if we had borrowed $1,000,000. At September 30, 2020, we had approximately $9,456 of accrued interest.

The Credit Agreement contains various restrictive covenants that, among other things, limit or restrict the ability of the borrowers to incur additional indebtedness; incur additional liens; make dividends and other restricted payments; make investments; engage in mergers, acquisitions and dispositions; make optional prepayments of other indebtedness; engage in transactions with affiliates; and enter into restrictive agreements. The Credit Agreement does not include any financial covenants. If an event of default occurs, the lenders are entitled to accelerate the advances made thereunder and exercise rights against the collateral. Borrowing under the Revolving Loan is classified as current debt as a result of the required lockbox arrangement and the subjective acceleration clause. At September 30, 2020, we were in compliance with the covenants in the Credit Agreement.

The interest rate for the Term Loan and the Revolving Loan is prime plus 2%. At September 30, 2020, the interest rate was 8.85%, which includes a 3.6% management fee rate. The obligations of the Company owed $626,000under the agreement are secured by a security interest in substantially all of the tangible and intangible assets of the borrowers, other than any assets owned by the Company that constitute real property (and fixtures affixed to such real property), certain excluded equipment, intellectual property, or aircraft. The Credit Agreement matures on February 20, 2023, subject to early termination pursuant to the original lessor which was includedterms of the agreement or extension as may be agreed by the parties.

Paycheck Protection Program

On April 21, 2020, the Company received loan proceeds of $891,600 under a promissory note from its existing commercial bank (the “PPP Loan”). The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after eight weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels.

The application for these funds required the Company to, in accrued expenses.good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. Some of the uncertainties related to the Company’s operations that are directly related to COVID-19 include, but are not limited to, the severity of the virus, the duration of the outbreak, governmental, business or other actions (which could include limitations on operations or mandates to provide products or services), impacts on the supply chain, and the effect on customer demand or changes to operations. In addition, the health of the Company’s workforce, and its ability to meet staffing needs to continue to build, repair and distribute drilling tools, and other critical functions, are uncertain and is vital to its operations.

The PPP Loan certification further requires the Company to take into account our current business activity and our ability to access other sources of liquidity sufficient to support ongoing operations in a manner that is not significantly detrimental to the business. The Company had approximately $341,000 of available credit under the Credit Agreement as of April 21, 2020. Further, the Company has a limited market capitalization and the Company’s shares have limited trading volume and as a result, the Company believes it met and continues to meet the certification requirements.

The term of the Company’s PPP Loan is two years. The annual interest rate on the PPP Loan is 1% and no payments of principal or interest are due during the six-month period beginning on the date of the PPP Loan.

NOTE 10. TOTAL EQUITY

A summary of changes in total equity for the nine months ended September 30, 2020 and 2019 is presented below:

On August 7, 2020, the Board of Directors recommended and the Company’s shareholders approved an additional 2,543,448 shares of the Company’s common stock to be added to the 2015 Incentive Plan. Subject to adjustment as provided in the 2015 Incentive Plan, the maximum aggregate number of shares of the Company’ s common stock that may be issued with respect to awards under the 2015 Incentive Plan is 5,536,353.

Also on  August 7, 2020, the Board of Directors granted 259,765 restricted stock units to Troy Meier, Chairman and Chief Executive Officer, 199,219 restricted stock units to Annette Meier, President and Chief Operating Officer, 140,625 restricted stock units to Chris Cashion, Chief Financial Officer, and 87,891 restricted stock units to each of the three independent members of the Board of Directors. In addition, the Board of Directors authorized 675,000 restricted stock units to be granted to employees of the company other than Mr. and Mrs. Meier and Mr. Cashion.  These restricted stock units will vest over three years from the date of grant.

NOTE 11. GEOGRAPHICAL OPERATIONS INFORMATION

The following summarizes revenue by geographic location:

The following summarizes net property, plant and equipment by geographic location:

NOTE 8.12. COMMITMENTS AND CONTINGENCIES

We are subject to litigation that arises from time to time in the ordinary course of our business activities. In February 2019, the Company filed a patent infringement lawsuit in the United States District Court for the Western District of Louisiana Lafayette Division asserting Stabil Drill Specialties, LLC (“Stabil Drill”) infringed on our patent that covers the Company’s well bore conditioning tool, the Drill-N-Ream. The lawsuit was subsequently moved from Louisiana to the United States District Court for the Southern District of Texas, Houston Division. The court ordered the Company to serve discovery requests upon Stabil Drill and gave Stabil Drill deadlines to respond and produce documents and permit product inspection. Stabil Drill filed a motion for summary judgement and the Company responded and cross-moved for patent infringement. The parties are awaiting the judge’s decision. On October 1, 2020, Superior Energy Services, Stabil Drill’s parent company, filed for bankruptcy, which may result in a delay in the resolution of this litigation. We cannot predict the outcome of this matter, but our legal costs could have a material effect on our financial position or results of operations in future periods. We are not currently involved in any other litigation which management believes could have a material effect on our financial position or results of operations, except as follows:operations.

Del Rio Suit

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Introduction

The following discussion and analysis was prepared to supplement information contained in the accompanying financial statements and is intended to provide certain details regarding our financial condition as of September 30, 2017,2020, and our results of operations for the three and nine months ended September 30, 20172020 and 2016.2019. It should be read in conjunction with the unaudited financial statements and notes thereto contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”) as well as our audited financial statements for the years ended December 31, 20162019 and 2015,2018, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2019, which was filed with the Securities and Exchange Commission (the “SEC”).

Unless the context requires otherwise, references to the “Company” or to “we,” “us,” or “our” and other similar terms are to Superior Drilling Products, Inc. and all of its subsidiaries.

Jumpstart Our Business Startups Act of 2012

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for implementing new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to nonissuers. We have elected to delay such adoption of new or revised accounting standards, and as a result, we may not implement new or revised accounting standards on the relevant dates on which adoption of such standards is required for other issuer companies.

Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions, including without limitation, providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 and implementing any requirement that may be adopted regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). These exemptions will apply for a period of five years following the completion of our IPO, which occurred in May 2014, although if the market value of our common stock that is held by nonaffiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31.

Forward - Looking Statements

This Quarterly Report on Form 10-Q includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements contained in all parts of this document that are not historical facts are forward-looking statements that involve risks and uncertainties that are beyond the control of the Company. You can identify the Company’s forward-looking statements by the words “anticipate,” “estimate,” “expect,” “may,” “project,” “believe” and similar expressions, or by the Company’s discussion of strategies or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, no assurances can be given that these expectations will prove to be correct. These forward-looking statements include the following types of information and statements as they relate to the Company:

These statements are based on assumptions and analyses in consideration of the Company’s experience and perception of historical trends, current conditions, expected future developments and other factors the Company believes were appropriate in the circumstances when the statements were made. Forward-looking statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such statements.

While it is not possible to identify all factors, the Company continues to face many risks and uncertainties. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed under “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20162019, our subsequent filings with the SEC, and the following:

Many of such factors are beyond the Company’s ability to control or predict. Any of the factors, or a combination of these factors, could materially affect the Company’s future results of operations and the ultimate accuracy of the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels. Every forward-looking statement speaks only as of the date of the particular statement, and the Company undertakes no obligation to publicly update or revise any forward-looking statement.

OverviewExecutive Summary

Superior Drilling Products, Inc. (the “Company”, “SDPI”, “we”, “our” or “us”) is an innovativeWe innovate, design, engineer, manufacture, sell, and repair drilling and completion tool technology company providing cost saving solutions that drive production efficiencies fortools in the oilUnited States, Canada, Middle East and natural gas drilling industry. The Company innovates, designs, engineers, manufactures, sells, and repairs drilling and completion tools. Our drilling solutions include the patented Drill-N-Ream® well bore conditioning tool (“Drill-N-Ream tool”) and the patented Strider™ Drill String Oscillation System technology (“Strider technology”). In addition, the Company is a manufacturer and refurbisher of PDC (polycrystalline diamond compact) drill bits for a leading oil field services company. We operate a state-of-the-art drill tool fabrication facility, where we manufacture solutions for the drilling industry, as well as customers’ custom products. The Company’s strategy for growth is to leverage its expertise in innovative drill tool technology and precision machining in order to broaden its product offerings and solutions for the oil and gas industry.Eastern Europe.

We currently have three basic operations:

FromOur strategy for growth is to expand our headquartersglobal market penetration of our current drill tool technology and to leverage our expertise in Vernal, Utah, we operate a technologically-advanced PDC drill bit refurbishing facility,tool technology and precision machining in order to broaden our product offerings and solutions for the oil and gas industry, as well as a state-of-the-art, high-techother industries that require precision machining and quality. We believe through our patented technologies, as well as technologies under development, that we can offer the oil and gas industry the solutions it demands to improve drilling efficiencies and completion tool engineering designreduce production costs.

Recent Developments and manufacturing operation. We manufacture our drill string enhancement tools,Trends

Our business and operations have been adversely affected by and are expected to continue to be adversely affected by the COVID-19 pandemic. The COVID-19 pandemic greatly reduced global oil demand as social distancing and travel restrictions were implemented across the world. The timeline and potential magnitude of the COVID-19 outbreak and its consequences are currently unknown. The continuation or amplification of this virus could continue to more broadly affect the United States and global economy, including the patented Drill- N-Ream tooldemand for oil and the patented Strider technology, and conduct our new product research and development from this facility.gas.

Our co-founder, Troy Meier, developedFurther disrupting the first commercially-viable process for refurbishing PDC drill bits afteroil and gas industry was the lifting by the Organization of the Petroleum Exporting Countries (“OPEC”) of supply curtailments. This resulted in an increase in the global supply of oil in an environment of rapidly contracting demand. As a successful 13-year career with a predecessorresult, the price of Baker Hughes Inc. For the past 21 years, we have exclusively provided our PDC drill bit refurbishing services for the Rocky Mountain, California and Alaska regions of Baker Hughes’s oilfield operations. In addition, we have expanded our offerings and our customer base by demonstrating our engineering, design and manufacturing expertise to develop our own down-hole drilling tools. We continuously work with our customers to develop new products and enhancements to existing products, improve efficiency and safety, and solve complex drilling tool problems.

We employ a senior work force with specialized training and extensive experience related to drill bit refurbishing and tooling manufacturing. They produce our products and services using a suite of highly technical, purpose-built equipment, much of which we design and manufacture for our proprietary use. Our manufacturing equipment and products use advanced technologies that enable us to increase efficiency, enhance product integrity, improve efficiency and safety, and solve complex drilling tool problems.

Oil and Gas Drilling Industryoil declined significantly in April 2020 as storage capacity became limited.

Overview

Drilling and completionOverall, the significant decline in oil demand due to COVID-19 coupled with a global over supply of oil drove down oil prices. This has resulted in our customers announcing significant reductions to their capital expenditure budgets for 2020. This is evidenced by the significant decline in U.S. onshore rig counts from the beginning of the year. At the end of 2019, the U.S. onshore rig count as reported by Baker Hughes was 781 rigs. As of September 30, 2020, the U.S. onshore rig count was 266 rigs compared with 855 rigs as of September 30, 2019. We expect oil and gas wells are upstream operationsrelated markets to continue to experience significant weakness for the remainder of 2020 and into 2021. Despite these current challenges, the oil and gas industry is beginning to experience slight improvements including an increase in the oil & gas industry served bynumber of active rigs in the oilfield services group within the energy industry. The drilling industry is often segmentedU.S. from third quarter lows, and we expect additional rig count improvement to occur into the North American market and the International market. These markets share common exposure to the same macro environment, but also exhibit unique factors that drive the dynamics of each market.year-end.

Oilfield services companies drill the wells for hydrocarbon exploration and production (“E&P”) companies. Demand for onshore drilling is a functionThe reduction of the willingnessU.S. onshore rig count has negatively affected our results of E&P companies to make operating and capital expenditures to explore for, develop and produce hydrocarbons. When oil or natural gas prices increase, E&P companies generally increase their capital expenditures, resulting in greater revenue and profits for both drillers and equipment manufacturers. Likewise, significant decreases in the prices of those commodities may lead E&P companies to reduce their capital expenditures, which decreases the demand for drilling equipment.

Trends in the Industry

Recent Rig Count Improvement and Stabilization; Industry Volatility.Ouroperations as our business is highly dependent upon the vibrancy of the oil and gas drilling operations in the U.S. Worldwide military, political and economic eventsIn an effort to offset the reduction in revenue resulting from the weakened macroeconomic environment, we have contributedimplemented certain cost reduction measures during 2020. These measures included, but were not limited to, oil and natural gas price volatility and are likely to continue to do so in the future. Very soon after the completionfollowing:

We have also entered into amended agreements with certain of our initial public offeringcustomers as discussed below in late May 2014more detail, reduced our planned capital expenditures for 2020 and through early 2016, oil prices dramatically declineddecided to defer further investment in new technology development, including our Strider technology, for the United Statesforeseeable future. Management is working diligently with vendors to achieve amended price concessions and as a result, the numberterms of operating drill rigs was measurably reduced. The NYMEX-WTI oil price was as low as $26.19 in February 2016, while the NYMEX-Henry Hub natural gas price was as low as $1.49 per MMBtu in March 2016. The Baker Hughes weekly rotary rig count decreased over 70% from the high of 1,931 on September 13, 2014 to a historic low of 404 as of May 27, 2016.

During the downturn in 2015 and 2016, our business with Baker Hughes decreased measurably as a result of the decline in drilling activity. This severely impacted both pricing and volume for drill bit refurbishment. We are contracted with Baker Hughes to serve the Rocky Mountain region that includes the Bakken shale formation in North Dakota. This region is higher cost production and as such, the drill rig count reduction was more dramatic than the overall U.S rig count decline. During the second half of calendar year 2016 and into 2017, the U.S. rig count began to increase from the historic low in May 2016 to 913 as of October 20, 2017. With this increase in market activity, we have seen an increase in demand for our product and services, however we have not seen an increase in pricing. The rate of growth in rig count stabilized in July 2017 and is expected to not increase at the same rate as it has over the last twelve months.

Lower oil and natural gas prices combined with the advent of horizontal drilling requires new technologies.payables. We believe the valueU.S. onshore activity for the remainder of 2020 will remain at depressed levels and continue to be constrained. We will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our Drill-N- Ream toolemployees, customers, partners, suppliers, and Strider technology combined with our low market penetration provide us sales opportunities in softstakeholders, or as well as robust markets.

The oil and gas industry is increasingly using directional (e.g., horizontal) drilling in their exploration and production activities because of measurably improved recovery rates that can be achieved with these methods. With the rise of this type of drilling, traditional drill string tools used for vertical drilling do not necessarily provide the best performancerequired by federal, state, or are not well suited for directional drilling.

We believe that our Drill-N-Ream tool and Strider technology have proven to provide significant operational efficiencies and costs savings for horizontal drilling activity. In addition, we are developing additional technologies to take advantage of the oil and gas industry’s significant shift to horizontal/directional drilling and its resulting need for new drill string tools and technology.local authorities.

We expect thathave placed a priority on protecting our employees during this pandemic while continuing to provide essential services to our customers. We operate under an emergency response plan specific to the global pandemic. This plan is reviewed and revised quarterly based on the latest federal and state government information provided, best practice, and consultation with local health departments. This plan includes disinfecting on a regular basis, the elimination of overlap between shifts, and a strict procedure for handling potential cases within the processes outlined in the Families First Coronavirus Response Act. Employees are also required to perform self-health evaluations at the start of every shift. These measures continue to act as a barrier to the spread of the virus on company property and among its employees. To date, these precautions have had an immaterial impact on the normal costs associated with our extensive knowledge and experience in the oilfield industry, we can identify additional challenges with directional drilling, and then design and develop tools that will help our customers with their drilling challenges. Further development of additional drill string components, such as our Drill-N-Ream and Strider technology, will become increasingly important to our business as we continue to grow through both organic expansion and strategic acquisitions.operations.

GE Oil & Gas to merge with Baker Hughes. In October 2016, GE Oil and Gas and Baker Hughes announced an agreement to combine their businesses. Currently, Baker Hughes is our sole customer for our bit refurbishment business and we do not know how this merger may impact our business. Despite this, we intend to continue developing our long-time relationship with Baker Hughes. In January 2016,Effective April 1, 2020, the Company through its Hard Rock subsidiary entered into ana First Amendment to Amended and Restated Distribution Agreement (the “DTI Amendment”) with Drilling Tools International, Inc. (“DTI”), amending the agreement between Hard Rock and DTI dated August 30, 2016. Under the DTI Amendment, all charges for repair rates the Company provides to DTI are reduced by 10%. These rate changes are applicable through September 30, 2020, unless extended on, or prior to, the expiration date by mutual written agreement. The Company hopes to extend the DTI Agreement prior to year-end 2020.

Effective May 1, 2020, we entered into a First Amendment to Vendor Agreement (the “Baker Hughes Amendment”) with Baker Hughes Oilfield Operations LLC (“Baker Hughes”), amending their existing Vendor Agreement dated April 1, 2018. Under the Baker Hughes Amendment, we may engage in other activity not related to supply themor in competition with the Strider technology with our Open Hole Strider tool and related services. Tool shipments associated with the agreement are expected to begin in early 2018. The agreement has no set expiration date or minimum shipment requirement. It will remain in force until it is canceled by either us orbusiness of Baker Hughes as stipulated into the agreement. The Company’s current agreement withextent that such other activity shall not be considered a breach of the Vendor Agreement. Also, under the Baker Hughes regardingAmendment, charges for repair rates that we provide to Baker Hughes are reduced by 10%. Lastly, Baker Hughes agreed to remove the exclusivity restrictions that prevented us from providing drill bit refurbishment has been extended until January 28, 2018. The Company is currently negotiating an agreement renewal with Baker Hughes that is expected to replace the existing agreement.repair for other entities, which broadens our market opportunity.

CONSOLIDATED RESULTS OF OPERATIONS

RESULTS OF OPERATIONSThree and Nine Months Ended September 30, 2020 Compared with the Three and Nine Months Ended September 30, 2019

The following table represents our condensedsummary consolidated statement of operationsoperating results for the periods indicated: