What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-16 compared with 2020-08-17 · 148 added, 109 removed, 167 unchanged (61% of the section changed)

13 unchanged sentences

Rental amounts are billed monthly in advance and include maintenance of our rented compressors.

As of June 30, 2020, we had 1,273 natural gas compressors totaling 284,373 horsepower rented to 84 customers compared to 1,374 natural gas compressors totaling 247,879 horsepower rented to 97 customers at June 30, 2019.

As of September 30, 2020, we had 1,278 natural gas compressors totaling 286,488 horsepower rented to 82 customers compared to 1,401 natural gas compressors totaling 270,222 horsepower rented to 93 customers at September 30, 2019.

We also fabricate natural gas compressors for sale to our customers, designing compressors to meet unique specifications dictated by well pressures, production characteristics, and particular applications for which compression is sought.

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During the first quarter of 2020, we saw a substantial decline in the prices for oil and natural gas.

During the second quarter of 2020, oil prices partially recovered and stabilized somewhat.

Oil prices partially recovered and stabilized somewhat during the second quarter of 2020, and then remained relatively stable throughout the third quarter of 2020.

Activity levels of exploration and production companies have been and will be dependent not only on commodity prices, but also on their ability to generate sufficient operational cash flow to fund their activities.

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economic conditions.

This significant drop in economic activity has caused global demand for crude oil to drastically decline.

This significant drop in economic activity caused global demand for crude oil to drastically decline.

According to the International Energy Agency’s (“IEA”) Oil Market Report for July 2020, global crude oil demand during the second quarter of 2020 declined 16.4 million barrels per day (“MMbpd”) compared to the second quarter of 2019, a decrease of more than 15%.

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As states throughout the U.S., as well as many other countries around the world, began to lift restrictions and reopened their economies to varying degrees, global demand for crude oil partially recovered.

This increased demand, combined with the production cuts mentioned above, have resulted in the oil markets coming back into balance.

After trading below $20 per barrel

in the second half of April and averaging $28.53 per barrel in May, WTI crude oil has averaged approximately $40 per barrel since June 1 with greatly reduced price volatility.

This increased demand, combined with

the production cuts mentioned above, resulted in the oil markets coming back into balance.

After trading below $20 per barrel in the second half of April and averaging $28.53 per barrel in May, WTI crude oil has averaged approximately $40 per barrel from June 1 through early November with greatly reduced price volatility.

While oil markets have remained in balance, crude oil supply and demand grew significantly during July and August.

According to IEA's Oil Market Reports for August and September 2020, global supply grew by a combined 3.6 MMbpd, while according to IEA’s Oil Market Report for October 2020, global demand in July increased 3.4 MMbpd from June.

These issues discussed above resulted in an increasing number of unit returns and shut-in notices from our customers during April and May 2020, which primarily impacted our small (125 HP or less) and medium (126 HP – 399 HP) horsepower units.

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As a result, our rental revenue, unit utilization, and horsepower utilization declined 6.0 %, 5.2 % and 4.5 %, respectively, in the second quarter when compared to the first quarter of 2020.

In addition, unit utilization remained steady in July compared to June, and unit pricing has stabilized.

While we continued to receive several additional restart notices in July and August for wells that were recently shut-in, our utilization has remained stable from June through September.

Compared to the second quarter, the Company’s rental revenue declined 1.8 %, while the Company’s unit utilization and horsepower utilization remained steady ( 0.1 % and 0.2 % increases, respectively) in the third quarter.

Unit pricing has also been stable since June.

Nevertheless, risks remain high in this environment.

As restrictions have been reduced in many states and countries, the rate of COVID-19 infections, hospitalizations and deaths has increased, particularly in the U.S.

This has resulted in a reinstatement of some restrictions in several states, including Texas.

As restrictions have been reduced in many states and countries, the rate of COVID-19 infections, hospitalizations and deaths has increased.

Since October, the rate of infections has risen very quickly in several countries, with the U.S.

setting new records for daily infections in November.

This has resulted in a reinstatement, to varying degress, of restrictions in several states and countries, including several European countries.

If states and countries need to put further restrictions in place to help prevent the spread of the virus, crude oil demand could decline again.

In addition, according to IEA’s August report, global oil supply rose by 2.5 MMbpd in July after Saudi Arabia ended its 1 MMbpd additional voluntary production cut and U.S.

production increased.

Additional shut-in production could be restored, and completion activities by domestic producers are likely to increase somewhat during the second half of 2020 to offset production declines.

These risks to both supply and demand could negatively impact oil prices, which would impact our utilization, rental revenues and overall financial performance during the remainder of 2020 as well as 2021.

Given the current economic and industry backdrop, we still expect compressor sales to be low for the remainder of 2020, as exploration and production companies have significantly reduced their capital expenditures budgets.

Due to the resurgence of COVID-19 in Europe and the United States, the IEA (in its November Oil Market Report) lowered its near-term global demand outlook for the remainder of 2020 and the first quarter of 2021.

While positive news about potential vaccines has provided some support for oil prices, the IEA notes that vaccines are unlikely to significantly boost oil demand until well into 2021.

All of these risks could negatively impact oil prices, which would impact our utilization, rental revenues and overall financial performance during the remainder of 2020 as well as 2021.

Given the current economic and industry backdrop, we still expect compressor sales to be low for the remainder of 2020 and early 2021, as exploration and production companies have significantly reduced their capital expenditures budgets.

In regards to our costs, we implemented various cost cutting measures with respect to operating expenses and capital expenditures during the second quarter.

Our operating expense reductions included reductions in our headcount from both layoffs and attrition, wage freezes, centralization of certain processes for better cost control, and the enlistment of our suppliers in our cost cutting efforts.

We expect these cost cutting measures to continue to benefit our financial performance through the remainder of 2020.

In addition, as we have done during prior downturns, we have reduced our capital expenditures budget.

We invested $11.0 million in capital expenditures during the first six months of 2020.

After recently securing new rental orders from one of our larger customers, we plan to only incur another $8-$10 million in capital expenditures for the remainder of 2020, bringing our 2020 capital expenditures budget to $19-$21 million, down from $69.9 million in 2019.

Finally, in keeping with current commercial precautions and practices in our industry, we implemented new guidelines to mitigate health risks to our employees and customers during this outbreak.

We adopted remote and staggered work processes at our Midland headquarters.

After reopening our headquarters in Midland, Texas on June 1, Midland experienced a significant increase in COVID-19 infections, including a verified positive test among the Company’s professional staff.

As a result, the Company was forced to close its corporate headquarters for a second time on June 29, 2020.

The Company’s corporate headquarters remains closed as of the date of this filing.

The office closure - which was dictated by positive testing and subsequent quarantines - and staffing challenges resulted in delays in our collection and assimilation of financial data related to the completion of our interim financial statements required for this filing.

With remote and staggered work processes back in place, we do not anticipate such issues going forward.

These cost cutting measures helped our financial performance and liquidity during the third quarter, and we expect these cost cutting measures to continue to benefit our financial performance through the remainder of 2020 and into 2021.

In addition, as we have done during prior downturns, we have significantly reduced our capital expenditures budget.

We invested $ 12.0 million in capital expenditures during the first nine months of 2020, including $ 1.0 million during the third quarter of 2020.

Depending on customer needs, we plan to incur another $7-$9 million in capital expenditures during the fourth quarter of 2020, bringing our 2020 capital expenditures budget to $19-$21 million, down from $ 69.9 million in 2019.

Finally, in keeping with current commercial precautions and practices in our industry, we have continued to implement guidelines to mitigate health risks to our employees and customers during this outbreak.

We adopted remote work processes at our Midland headquarters.

Due to continued and resurgent positive COVID-19 cases in the Midland area, including exposure and positive tests among the Company’s professional staff and immediate families, the Company’s corporate headquarters has remained closed through the date of this filing, and is staffed at minimum levels throughout the past and present quarter.

Our continued office closure and staffing challenges resulted in delays in our collection and assimilation of financial data related to the completion of our interim financial statements required for this filing.

In addition, we adapted our field and fabrication work processes as well.

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Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce.

Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity during the remainder of 2020 or 2021.

Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the

Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity during the remainder of 2020 or 2021.

Results of Operations

Three months ended June 30, 2020, compared to the three months ended June 30, 2019.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended June 30, 2020 and 2019.

Three months ended June 30,

Three months ended September 30, 2020, compared to the three months ended September 30, 2019.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended September 30, 2020 and 2019.

Three months ended September 30,

(in thousands)

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Total $ 15,765 $ 20,852

Total revenue decreased 12.5% to $17.4 million for the three months ended June 30, 2020 compared to $19.9 million for the three months ended June 30, 2019.

This decline was primarily a result of lower sales revenue (65.5% decrease) during the second quarter of 2020 mainly due to lower compressor sales offset by higher rental revenue (11.5% increase).

Rental revenue increased to $15.1 million for the three months ended June 30, 2020 compared to $13.6 million for the same period ended June 30, 2019.

This increase during the second quarter of 2020 was attributable to a greater number of large horsepower units being rented offset by shut-ins, rate reductions and returns due to a significant drop in oil prices resulting from the COVID-19 pandemic and crude oil demand destruction.

Total revenue decreased 24.4% to $15.8 million for the three months ended September 30, 2020 compared to $20.9 million for the three months ended September 30, 2019.

This decline was primarily a result of lower sales revenue (90.9% decrease) during the third quarter of 2020 mainly due to no compressor sales offset by higher rental revenue (3.0% increase).

Rental revenue increased to $14.9 million for the three months ended September 30, 2020 compared to $14.4 million for the same period in 2019.

This increase during the third quarter of 2020 was attributable to a greater number of large horsepower units being rented offset by shut-ins, rate reductions and returns due to a significant drop in oil prices resulting from the COVID-19 pandemic and crude oil demand destruction.

Toward the end of the second quarter of 2020, a partial recovery and greater stability in oil prices resulted in restarts of many previously shut-in wells.

As of June 30, 2020, we had 2,335 compressor packages in our fleet, down from 2,572 units at June 30, 2019, due to the retirement of 327 units (with 39,758 horsepower) during the third quarter of 2019.

Despite this decrease due to unit retirement, the Company's total unit horsepower increased by 8.0% to 446,805 horsepower at June 30, 2020 compared to 413,785 horsepower at June 30, 2019, which reflects the addition to the Company's fleet of 58 high horsepower compressors with 68,500 horsepower over the past 12 months.

As of June 30, 2020, we had 1,273 natural gas compressors totaling 284,373 horsepower rented to 84 customers, compared to 1,374 natural gas compressors totaling 247,897 horsepower rented to 97 customers as of June 30, 2019.

The rental fleet had a unit utilization as of June 30, 2020, and 2019, respectively, of 54.5% and 53.4%, while our horsepower utilization for the same periods, respectively, was 63.6% and 59.9%.

The rise in both utilizations was mainly the result of the rise in demand for our higher horsepower units as well as unit retirements during the third quarter of 2019.

Sales revenue decreased to $2.0 million for the three months ended June 30, 2020 compared to $5.8 million for the same period ended June 30, 2019.

This decrease in mostly attributable to a large decrease in compressor sales and, to a lesser extent, parts sales.

Crude oil prices and our utilization have remained relatively stable from June 2020 through the end of the third quarter of 2020.

As of September 30, 2020, we had 2,339 compressor packages in our fleet, up from 2,277 units at September 30, 2019.

The Company's total unit horsepower increased by 10.4% to 449,133 horsepower at September 30, 2020 compared to 406,763 horsepower at September 30, 2019, which reflects the addition to the Company's fleet of 37 high horsepower compressors with 40,700 horsepower over the past 12 months.

As of September 30, 2020, we had 1,278 natural gas compressors with a total of 286,488 horsepower rented to 82 customers, compared to 1,401 natural gas compressors with a total of 270,222 horsepower rented to 93 customers as of September 30, 2019.

As a result, our total rented horsepower as of September 30, 2020 increased by 6.0% over the prior twelve months.

Our rental fleet had unit utilization as of September 30, 2020, and 2019, respectively, of 54.6% and 61.5%, while our horsepower utilization for the same periods, respectively, was 63.8% and 66.4%.

The contrast of the increase in rented horsepower compared to decreases in utilization over the same time frame illustrates the strong demand for our high horsepower units while the demand for our smaller and medium horsepower units has decreased somewhat with recent lower commodity prices.

Sales revenue decreased to $0.5 million for the three months ended September 30, 2020 compared to $5.9 million for the three months ended September 30, 2019.

This decrease is mostly attributable to no compressor sales and, to a lesser extent, lower parts and other sales during the third quarter of 2020 compared to the same period in 2019.

These reduced sales reflect significantly reduced industry activity levels due to the COVID-19 pandemic, lower commodity prices and severe capital constraints on exploration and production companies.

Sales are subject to fluctuations in timing of industry activity related to capital projects and, as such, can vary substantially between periods.

Despite an 11.5% increase in rental revenue during the second quarter of 2020 compared to the same period in 2019, cost of rentals remained flat at $6.6 million during the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

When compared to the second quarter of 2019, an increase in maintenance and repairs expense ($0.5 million) during the second quarter of 2020 that corresponded with our increase in rental revenue was mostly offset by lower payroll and benefits expenses as well as lower vehicle expenses.

Cost of sales decreased 57.9% to $1.9 million during the three months ended June 30, 2020 compared to $4.4 million during the three months ended June 30, 2019.

This decrease during the second quarter of 2020 was primarily due to a large decrease in compressor sales and, to a lesser degree, parts sales.

This decrease during the second quarter of 2020 also reflects lower labor efficiency due to much lower activity levels at our fabrication facilities that was partially offset by lower payroll and benefits expenses.

Selling, general, and administrative ("SG&A") expenses remained flat at $2.7 million for the three months ended June 30, 2020 compared to the same period in 2019.

SG&A expenses during the second quarter of 2020 included an unrealized loss

on deferred compensation ($0.2 million) due to an increase in our deferred compensation liability that reflected an improvement in the broader equity markets during the quarter.

This loss along with an increase to other long-term incentive compensation ($0.1 million) was offset by lower bonus ($0.2 million) and stock compensation ($0.1 million) expenses.

Depreciation and amortization expense increased 10.2% to $6.3 million for the three months ended June 30, 2020 compared to $5.7 million for the three months ended June 30, 2019.

Cost of rentals remained relatively flat at $6.8 million during the three months ended September 30, 2020 compared to $6.7 million during the three months ended September 30, 2019, despite a 3.0% increase in rental revenue over the same time frame.

When compared to the third quarter of 2019, an increase in bad debt allowance ($0.2 million) and various other costs were offset by lower payroll and benefits expenses, lower maintenance and repair expenses, and lower vehicle expenses during the third quarter of 2020.

Cost of sales decreased 77.3% to $1.0 million during the three months ended September 30, 2020 compared to $4.4 million during the three months ended September 30, 2019.

This decrease during the third quarter of 2020 was primarily due to

no compressor sales and, to a lesser degree, lower parts and other sales during the third quarter of 2020.

This decrease during the third quarter of 2020 also reflects lower labor efficiency due to much lower activity levels at our fabrication facilities partially offset by lower payroll and benefits expenses.

Selling, general, and administrative ("SG&A") expenses decreased 10.7% to $2.5 million for the three months ended September 30, 2020 compared $2.8 million during the same period in 2019.

This decrease in SG&A expenses was attributable to lower bonus ($242,000), stock compensation ($80,000) and various other expenses during the third quarter of 2020 compared to the same quarter in 2019.

When compared to the third quarter of 2019, these lower expenses were partially offset by an increase in other long-term incentive compensation ($126,000) during the third quarter of 2020 as well as an increase in unrealized losses on deferred compensation ($77,000) due to an increase in our deferred compensation liability that reflected an improvement in the broader equity markets.

Depreciation and amortization expense increased 6.7% to $6.3 million for the three months ended September 30, 2020 compared to $5.9 million for the three months ended September 30, 2019.

This increase was the result of larger horsepower units being added to the fleet.

We added 65 units (approximately 44,500 horsepower) to our fleet over the past 12 months.

Fifty-eight of those units were 400 horsepower or larger (including 45 at 1,380 horsepower), representing 92% of the horsepower added.

We had an operating loss of $148,000 for the three months ended June 30, 2020 compared to operating income of $302,000 for the three months ended June 30, 2019.

This decrease was mainly due to lower sales revenue and higher depreciation expense partially offset by higher rental revenues during the second quarter of 2020.

Our other income increased $193,000 to $370,000 for the three months ended June 30, 2020 compared to $177,000 for the same period in 2019.

This increase was attributable to a gain on sale or disposal of assets ($206,000) as well as an unrealized loss on company-owned life insurance ($170,000) during the second quarter of 2020.

Other income during the second quarter of 2019 included approximately $150,000 in interest income.

We recorded an income tax expense of approximately $57,000 for the three months ended June 30, 2020 compared to income tax expense of $152,000 for the three months ended June 30, 2019.

Thirty-seven of those units were 400 horsepower or larger (including 25 at 1,380 horsepower), representing 91% of the horsepower added.

During the third quarter of 2019, the Company examined various qualitative factors to determine if a quantitative goodwill impairment test was needed.

After examining various qualitative factors, the Company performed a goodwill impairment analysis as of September 30, 2019.

The analysis showed our carrying value of net assets exceeded its fair value, indicating that goodwill was fully impaired.

Accordingly, the Company recorded a goodwill impairment charge of $10.0 million during the third quarter of 2019.

During the third quarter of 2019, due to the slow moving nature or obsolescence of a portion of the Company's long-term inventory and inventory related to the retirement of rental equipment, the Company recorded an increase of $3.35 million to its inventory allowance for costs that may not be recoverable in the future.

The Company did not record an increase to its inventory allowance during the three months ended September 30, 2020.

During the third quarter of 2019, Company management determined which units were not of the type, configuration, make or model that our customers are demanding or that were not cost efficient to refurbish, maintain and/or operate.

As a result of this review, we determined 327 units should be retired from our rental fleet.

Accordingly, the Company recorded a $1.5 million loss on retirement of rental equipment during the three months ended September 30, 2019.

The Company did not record any retirements from its rental fleet during the three months ended September 30, 2020.

We had an operating loss of $941,000 for the three months ended September 30, 2020 compared to operating loss of $14.0 million for the three months ended September 30, 2019.

This reduction in operating loss is largely due to a goodwill impairment charge, an increased inventory allowance, and a loss on the retirement of rental units recorded in the third quarter of 2019 that totaled $14.9 million.

Higher rental revenue and lower G&A expenses during the third quarter of 2020 also contributed to a lower operating loss.

These factors were partially offset by lower sales revenue, lower service and maintenance revenue, and higher depreciation expense during the third quarter of 2020 compared to the same period in 2019.

Our other income increased $121,000 to $214,000 for the three months ended September 30, 2020 compared to $93,000 for the same period in 2019.

Our other income in the third quarter of 2020 included interest income ($133,000) related to our federal income tax refunds resulting from our carryback claims of our 2018 federal net operating losses, as well as an unrealized gain on company-owned life insurance ($73,000).

Other income during the third quarter of 2019 included approximately $98,000 in interest income.

We recorded an income tax benefit of approximately $167,000 for the three months ended September 30, 2020 compared to an income tax benefit of $1.35 million for the three months ended September 30, 2019.

For interim periods, our income tax benefit (expense) is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods.

1 unchanged sentence

federal statutory rate of 21%.

Six months ended June 30, 2020, compared to the six months ended June 30, 2019.

The table below shows our revenues and percentage of total revenues of each of our product lines for the six months ended June 30, 2020 and 2019.

Six months ended June 30,

Nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

The table below shows our revenues and percentage of total revenues of each of our product lines for the nine months ended September 30, 2020 and 2019.

Nine months ended September 30,

(in thousands)

4 unchanged sentences

$ 51,060 $ 58,738

Total revenue decreased 6.8% to $35.3 million for the six months ended June 30, 2020 compared to $37.9 million during the six months ended June 30, 2019.

This decline was primarily a result of lower sales revenue (65.2% decrease) during the first six months of 2020 mainly due to lower compressor sales offset by higher rental revenue (15.8% increase).

Rental revenue increased to $31.2 million for the six months ended June 30, 2020 compared to $27.0 million during the six months ended June 30, 2019.

This increase during the first six months of 2020 was attributable to a greater number of large horsepower units being rented offset by shut-ins, rate reductions and returns due to a significant drop in oil prices resulting from the COVID-19 pandemic and crude oil demand destruction during the second quarter of 2020.

Total revenue decreased 13.1% to $51.1 million for the nine months ended September 30, 2020 compared to $58.7 million during the nine months ended September 30, 2019.

This decline was primarily a result of lower sales revenue (74.7% decrease) during the first nine months of 2020 mainly due to lower compressor sales offset by higher rental revenue (11.4% increase).

Rental revenue increased to $46.1 million for the nine months ended September 30, 2020 compared to $41.4 million during the nine months ended September 30, 2019.

This increase during the first nine months of 2020 was attributable to a greater number of large horsepower units being rented offset by shut-ins, rate reductions and returns due to a significant drop in oil prices resulting from the COVID-19 pandemic and crude oil demand destruction.

Toward the end of the second quarter of 2020, a partial recovery and greater stability in oil prices resulted in restarts of many previously shut-in wells.

The rental fleet had a unit utilization as of June 30, 2020, and 2019, respectively, of 54.5% and 53.4%, while our horsepower utilization for the same periods, respectively, was 63.6% and 59.9%.

The rise in both utilizations

was mainly the result of the rise in demand for our higher horsepower units as well as unit retirements during the third quarter of 2019.

Sales revenue decreased to $3.5 million for the six months ended June 30, 2020 compared to $9.9 million for the same period in 2019.

This decrease in mostly attributable to a large decrease in compressor sales and, to a lesser extent, parts and flares sales.

Crude oil prices and our utilization have remained relatively stable from June 2020 through the end of the third quarter of 2020.

As of September 30, 2020, we had 2,339 compressor packages in our fleet, up from 2,277 units at September 30, 2019.

As a result, our total rented horsepower as of September 30, 2020 increased by 6.0% over the prior twelve months.

Our rental fleet had unit utilization as of September 30, 2020, and 2019, respectively, of 54.6% and 61.5%, while our horsepower utilization for the same periods, respectively, was 63.8% and 66.4%.

Sales revenue decreased to $4.0 million for the nine months ended September 30, 2020 compared to $15.8 million for the same period in 2019.

This decrease in mostly attributable to a large decrease in compressor sales and, to a lesser extent, parts and other sales.

These reduced sales reflect significantly reduced industry activity levels due to the COVID-19 pandemic, lower commodity prices and severe capital constraints on exploration and production companies.

Sales are subject to fluctuations in timing of industry activity related to capital projects and, as such, can vary substantially between periods.

Cost of rentals increased 13.2% to $14.5 million during the six months ended June 30, 2020 compared to $12.8 million during the six months ended June 30, 2019.

This increase was a result of higher maintenance and repairs expense during the first six months of 2020 due to higher rental revenue (15.8% increase) as well as a large order from a new customer that required a significant number of make-ready jobs during the first quarter of 2020.

Cost of sales decreased 55.7% to $3.6 million during the six months ended June 30, 2020 compared to $8.1 million during the six months ended June 30, 2019.

This decrease during the first six months of 2020 was primarily due to a large decrease in compressor sales and, to a lesser degree, parts and flares sales.

This decrease during the first six months of 2020 also reflects lower labor efficiency due to much lower activity levels at our fabrication facilities that was partially offset by lower payroll and benefits expenses.

Selling, general, and administrative expenses decreased 6.8% to $4.8 million for the six months ended June 30, 2020 compared to $5.2 million for the same period in 2019.

SG&A expenses during the first six months of 2020 were impacted by a net unrealized gain ($0.1 million) on deferred compensation, while these expenses were impacted by an unrealized loss ($0.2 million) on deferred compensation during the first six months of 2019.

SG&A expenses during first six months of 2020 also included increases to other long-term incentive compensation ($0.1 million) and professional services ($0.1 million) expenses that were offset by lower bonus ($0.2 million) and stock compensation ($0.1 million) expenses.

Depreciation and amortization expense increased 11.0% to $12.5 million for the six months ended June 30, 2020 compared to $11.3 million for the six months ended June 30, 2019.

Cost of rentals increased 8.9% to $21.3 million during the nine months ended September 30, 2020 compared to $19.5 million during the nine months ended September 30, 2019.

This increase was primarily a result of higher maintenance and repairs expense ($1.6 million) during the first nine months of 2020 due to higher rental revenue (11.4% increase) as well as a large order from a new customer that required a significant number of make-ready jobs during the first quarter of 2020.

Cost of sales decreased 63.3% to $4.6 million during the nine months ended September 30, 2020 compared to $12.5 million during the nine months ended September 30, 2019.

This decrease during the first nine months of 2020 was primarily due to a large decrease in compressor sales and, to a lesser degree, parts and other sales.

This decrease during the first nine months of 2020 also reflects lower labor efficiency due to much lower activity levels at our fabrication facilities that was partially offset by lower payroll and benefits expenses.

Selling, general, and administrative expenses decreased 8.1% to $7.3 million for the nine months ended September 30, 2020 compared to $8.0 million for the same period in 2019.

SG&A expenses during the first nine months of 2020 were

impacted by a small unrealized gain ($28,000) on deferred compensation, while these expenses were impacted by an unrealized loss ($208,000) on deferred compensation during the first nine months of 2019.

Other factors contributing to this decrease in G&A expenses were lower bonus ($445,000), stock compensation ($151,000) and other expenses that were partially offset by other long-term incentive compensation ($252,000), higher professional services ($79,000), and various other increased expenses.

Depreciation and amortization expense increased 9.5% to $18.9 million for the nine months ended September 30, 2020 compared to $17.2 million for the nine months ended September 30, 2019.

This increase was the result of larger horsepower units being added to the fleet.

We added 65 units (approximately 44,500 horsepower) to our fleet over the past 12 months.

Fifty-eight of those units were 400 horsepower or larger (including 45 at 1,380 horsepower), representing 92% of the horsepower added.

We had an operating loss of $421,000 for the six months ended June 30, 2020 compared to operating income of $157,000 for the six months ended June 30, 2019.

This decrease was mainly due to lower sales revenue and higher depreciation expense partially offset by higher rental revenues and lower SG&A expenses during the first six months of 2020.

Our other income decreased $296,000 to $182,000 for the six months ended June 30, 2020 compared to $478,000 for the same period in 2019.

Other income for the first six months of 2020 included was a gain on sale or disposal of assets ($273,000) and an unrealized loss on company-owned life insurance ($92,000), while other income for the first six months of 2019 included an unrealized gain on company-owned life insurance ($131,000) and interest income ($352,000).

We recorded an income tax benefit of $4.5 million for the six months ended June 30, 2020 compared to income tax expense of $210,000 for the six months ended June 30, 2019.

Thirty-seven of those units were 400 horsepower or larger (including 25 at 1,380 horsepower), representing 91% of the horsepower added.

During the third quarter of 2019, the Company examined various qualitative factors to determine if a quantitative goodwill impairment test was needed.

After examining various qualitative factors, the Company performed a goodwill impairment analysis as of September 30, 2019.

The analysis showed our carrying value of net assets exceeded its fair value, indicating that goodwill was fully impaired.

Accordingly, the Company recorded a goodwill impairment charge of $10.0 million during the first nine months of 2019.

Due to the slow moving nature or obsolescence of a portion of the Company's long-term inventory and inventory related to the retirement of rental equipment, the Company recorded an increase of $3.35 million to its inventory allowance during the nine months ended September 30, 2019 for costs that may not be recoverable in the future.

The Company did not record an increase to its inventory allowance during the nine months ended September 30, 2020.

As a result of this review, we determined 327 units should be retired from our rental fleet.

Accordingly, the Company recorded a $1.5 million loss on retirement of rental equipment during the nine months ended September 30, 2019.

The Company did not record any retirements from its rental fleet during the nine months ended September 30, 2020.

We had an operating loss of $1.4 million for the nine months ended September 30, 2020 compared to operating loss of $13.9 million for the nine months ended September 30, 2019.

Higher rental revenue and lower G&A expenses during the first nine months of 2020 also contributed to a lower operating loss.

These factors were partially offset by lower sales revenue, lower service and maintenance revenue, and higher depreciation expense during the first nine months of 2020 compared to the same period in 2019.

Our other income decreased $172,000 to $407,000 for the nine months ended September 30, 2020 compared to $579,000 for the same period in 2019.

Other income for the first nine months of 2020 included a gain on sales or disposals of assets ($284,000);

interest income ($154,000), which included interest related to our federal income tax refunds ($133,000) resulting from our carryback claims of our 2018 federal net operating losses;

and an unrealized loss on company-owned life insurance ($19,000).

Other income for the first nine months of 2019 included an unrealized gain on company-owned life insurance ($145,000) and interest income ($450,000).

We recorded an income tax benefit of $4.7 million for the nine months ended September 30, 2020 compared to an income tax benefit of $1.1 million for the nine months ended September 30, 2019.

For interim periods, our income tax benefit (expense) is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods.

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The CARES Act allows federal net operating losses ("NOL") incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid federal income taxes.

The Company generated significant NOLs during 2018 and 2019, and plans to carryback these losses for five years.

Accordingly, the Company recorded a current income tax benefit of $4.9 million for the six months ended June 30, 2020, in addition to an increase to its prepaid income taxes of $15.0 million and an increase to its deferred income tax liability of $10.1 million as of June 30, 2020.

The Company generated significant NOLs during 2018 and 2019.

The Company filed its NOL carryback claims for 2018 during the second quarter of 2020, and plans to file its NOL carryback claims for 2019 prior to December 31, 2020.

Accordingly, as of March 31, 2020, the Company recorded a federal income tax receivable of $15.0 million and an increase to its deferred income tax liability of $10.1 million on its condensed consolidated balance sheet.

During the third quarter of 2020, the Company received refunds totaling $3.9 million related to its 2018 NOLs, which reduced its federal income tax receivable to $11.1 million on its condensed consolidated balance sheet as of September 30, 2020.

In addition, the Company recorded a current income tax benefit of $4.9 million on its condensed consolidated statement of operations for the nine months ended September 30, 2020.

This current income tax benefit was partially offset by a write-off of a deferred tax asset of approximately $0.4 million related to vesting of restricted stock during the first quarter of 2020.

Liquidity and Capital Resources

Our working capital positions as of June 30, 2020 and December 31, 2019 are set forth below:

June 30, December 31,

Our working capital positions as of September 30, 2020 and December 31, 2019 are set forth below:

September 30, December 31,

(in thousands)

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Total working capital $ 59,235 $ 36,907

For the six months ended June 30, 2020, we invested $11.0 million in rental equipment, property and other equipment.

During the first six months of 2020, we added $10.5 million in new equipment to our rental fleet, $335,000 related to the construction of our new corporate office, and $1.1 million mostly in vehicles as well as various other machinery and equipment.

Our investment in property and equipment also includes any changes to work-in-progress related to our rental fleet jobs at the beginning of the period compared to the end of the period.

Our rental work-in-progress decreased by $927,000 during the six months ended June 30, 2020.

For the nine months ended September 30, 2020, we invested $12.0 million in rental equipment, property and other equipment.

During the first nine months of 2020, we added $15.3 million in new equipment to our rental fleet, $335,000 related to the construction of our new corporate office, and $1.4 million mostly in vehicles as well as various other machinery and equipment.

Our investment in rental equipment, property and other equipment also includes any changes to work-in-progress related to our rental fleet jobs at the beginning of the period compared to the end of the period.

Our rental work-in-progress decreased by $5.0 during the nine months ended September 30, 2020.

We financed our investment in rental equipment, property and other equipment with cash flow from operations and cash on hand.

At June 30, 2020, we had cash and cash equivalents of $15.5 million compared to $11.6 million at December 31, 2019.

Our cash flows from operating activities of $14.8 million were partially offset by capital expenditures of $11.0 million during the six months ended June 30, 2020.

We had working capital of $54.2 million at June 30, 2020 compared to $36.9 million at December 31, 2019.

On June 30, 2020 and December 31, 2019, we had outstanding debt of $417,000, which is all related to our line of credit.

We generated cash flows from operating activities of $14.8 million during the first six months of 2020 compared to cash flows provided by operating activities of $6.8 million for the first six months of 2019.

Our cash flows from operating activities of $14.8 million were primarily the result of net income of $4.2 million, adding back non-cash items of depreciation and amortization of $12.5 million, stock-based compensation of $1.1 million, deferred income tax expense of $0.4 million, utilization of deferred tax assets through NOL carrybacks of $10.1 million, and a net positive change in various working capital and other items of $2.3 million against the negative impact of an increase in federal income tax receivable of $15.0 million, gain of sale of assets of $0.3 million, and a reduction in deferred income liability of $0.5 million.

For the remainder of 2020, given the state of the economy and our industry during the COVID-19 pandemic, our plan is to continue to keep our expenses and capital expenditures low.

The cost cutting measures that were implemented during the second quarter of 2020 will provide a continuing positive impact over the second half of the year.

At September 30, 2020, we had cash and cash equivalents of $27.6 million compared to $11.6 million at December 31, 2019.

Our cash flows from operating activities of $27.9 million were partially offset by capital expenditures of $12.0 million during the nine months ended September 30, 2020.

We had working capital of $59.2 million at September 30, 2020 compared to $36.9 million at December 31, 2019.

On September 30, 2020 and December 31, 2019, we had outstanding debt of $417,000, which is all related to our line of credit.

We generated cash flows from operating activities of $27.9 million during the first nine months of 2020 compared to cash flows provided by operating activities of $21.3 million for the first nine months of 2019.

Our cash flows from operating activities of $27.9 million were the result of net income of $3.7 million, adding back non-cash items of depreciation and amortization of $18.9 million, stock-based compensation of $1.6 million, deferred income tax expense of $0.2 million, bad debt allowance of $0.3 million, utilization of deferred tax assets through NOL carrybacks of $10.1 million, and a net positive change in various working capital and other items of $4.5 million against the negative impact of an increase in federal income tax receivable of $11.1 million and gain of sale of assets of $0.3 million.

For the remainder of 2020, given the state of the economy and our industry during the COVID-19 pandemic, our plan is to continue to keep our expenses low.

The cost cutting measures that were implemented during the second quarter of 2020

will provide a continuing positive impact over the remainder of the year.

For the remainder of 2020, our forecasted capital expenditures are not anticipated to exceed our internally generated cash flows and our cash on hand.

Any required capital will be for contracted, premium-priced additions to our compressor rental fleet and/or required service

Any required capital will be for contracted, premium-priced additions to our compressor rental fleet and/or required service vehicles.

We believe that cash flows from operations and our current cash position will be sufficient to satisfy our capital and liquidity requirements for the foreseeable future.

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We also have a right to request from the lender, on an uncommitted basis, an increase of up to $20 million on the aggregate commitment (which could potentially increase the commitment amount to $50 million).

We had $29.5 million borrowing base availability at June 30, 2020 under the terms of our Amended Credit Agreement, and our balance on the line of credit was $417,000.

We had $29.5 million borrowing base availability at September 30, 2020 under the terms of our Amended Credit Agreement, and our balance on the line of credit was $417,000.

The maturity date of the Amended Credit Agreement is December 31, 2020.

For further information, see Note 6, Credit Facility.

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We have contractual obligations and commitments that affect the results of operations, financial condition and liquidity.

The following table is a summary of our significant cash contractual obligations as of June 30, 2020:

The following table is a summary of our significant cash contractual obligations as of September 30, 2020:

Obligations Due in Period

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$ 491 $ 448 $ 354 $ 117 $ 38 $ 168 $ 1,616

(1) For the six months remaining in 2020.

(1) For the three months remaining in 2020.

(2) Assumes an interest rate of 1.44% and no additional borrowings.

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From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations.

As of June 30, 2020, the off-balance sheet arrangements and transactions that we have entered into include operating lease agreements and purchase agreements.

As of September 30, 2020, the off-balance sheet arrangements and transactions that we have entered into include operating lease agreements and purchase agreements.

We do not believe that these arrangements are reasonably likely to materially affect our liquidity or availability of capital resources.

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Those risks include, among other things, the loss of market share through competition or otherwise;

introduction of competing technologies by other companies;

the introduction of competing technologies by other companies;

a prolonged, substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our products and services;

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis