NATURAL GAS SERVICES GROUP INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The discussion and analysis of our financial condition and results of operations are based on, and should be read in conjunction with, our condensed, consolidated financial statements and the related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC. This report and our Annual Report on Form 10-K contain certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, and information pertaining to us, our industry and the oil and natural gas industry that is based on the beliefs of our management, as well as assumptions made by and information currently available to our management. All statements, other than statements of historical facts contained in this report as well as our Annual Report on Form 10-K, including statements regarding our future financial position, growth strategy, budgets, projected costs, plans and objectives of management for future operations, are forward-looking statements. We use the words “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “intend,” “plan,” “budget” and other similar words to identify forward-looking statements. You should read statements that contain these words carefully and should not place undue reliance on these statements because they discuss future expectations, contain projections of results of operations or of our financial condition and/or state other “forward-looking” information. We do not undertake any obligation to update or revise publicly any forward-looking statements. Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations or assumptions will prove to have been correct. Please read Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2019, as it contains important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements. Overview We fabricate, manufacture, rent, and sell natural gas compressors and related equipment. Our primary focus is on the rental of natural gas compressors. Our rental contracts typically provide for initial terms of six to 24 months, with our larger horsepower units having contract terms of up to 60 months. After the initial term of our rental contracts, many of our customers have continued to rent our compressors on a month-to-month basis. Rental amounts are billed monthly in advance and include maintenance of our rented compressors. 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. Fabrication of compressors involves our purchase of engines, compressors, coolers, and other components, and our assembling of these components on skids for delivery to customer locations. The major components of our compressors packages are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently require lead times between two to three months with delivery dates scheduled to coincide with our estimated production schedules. Although we do not have formal continuing supply contracts with any major supplier, we believe we have adequate alternative sources available. In the past, we have not experienced any sudden and dramatic increases in the prices of the major components for our compressors; however, the occurrence of such an event could have a material adverse effect on the results of our operations and financial condition, particularly if we were unable to increase our rental rates and sales prices proportionate to any such component price increases. We also manufacture a proprietary line of compressor frames, cylinders and parts, known as our CiP (Cylinder-in-Plane) product line. We use finished CiP component products in the fabrication of compressor units for sale or rental by us or sell the finished component products to other compressor fabricators. We also design, fabricate, sell, install, and service flare stacks and related ignition and control devices for onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. To provide customer support for our compressor and flare sales businesses, we stock varying levels of replacement parts at our Midland, Texas facility and at field service locations. We also provide an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this business. We provide service and maintenance to our customers under written maintenance contracts or on an as-required basis in the absence of a service contract. Maintenance agreements typically have terms of six months to one year and require payment of a monthly fee. 22 The oil and natural gas equipment rental and services industry is cyclical in nature. The most critical factor in assessing the outlook for the industry is the worldwide supply and demand for oil and natural gas and the corresponding changes in commodity prices. As demand and prices increase, oil and natural gas producers typically increase their capital expenditures for drilling, development and production activities, although recent equity capital constraints and demands from institutional investors to keep spending within operating cash flow have meaningfully restrained capital expenditure budgets of domestic exploration and production companies. Generally, increased capital expenditures ultimately result in greater revenues and profits for service and equipment companies. In general, we expect our overall business activity and revenues to track the level of activity in the oil and natural gas industry, with changes in crude oil and condensate production and consumption levels and prices affecting our business more than changes in domestic natural gas production and consumption levels and prices. In recent years we have increased our rentals and sales in unconventional oil shale plays, which are more dependent on crude oil prices. With this shift towards oil production, the demand for overall compression services and products is driven by two general factors; an increased focus by producers on artificial lift applications, e.g., production enhancement with compression assisted gas lift; and declining reservoir pressure in maturing natural gas producing fields, especially unconventional production. These types of applications have historically been serviced by wellhead size compressors, and continue to be, but there has also been an economic move by our customers towards centralized drilling and production facilities, which have increased the market need for larger horsepower compressor packages. We recognized this need over the past two to three years and have been shifting our cash and fabrication resources towards designing, fabricating and renting gas compressor packages that range from 400 horsepower up to 1,380 horsepower. While this is a response to market conditions and trends, it also provides us with the opportunity to compete as a full-line compression provider. We typically experience a decline in demand during periods of low crude oil and natural gas prices. Compared to 2018, we witnessed a moderation of crude oil prices as well as drilling and completion activity levels during 2019. During the first quarter of 2020, we saw a substantial decline in the prices for oil and natural gas. 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. Generally, though, we feel that production activities (in which we are involved) will fare better than drilling activity. Recent Events On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus known as COVID-19 due to the risks it imposes on the international community as the virus spreads globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The effects of the COVID-19 outbreak, including actions taken by businesses and governments to contain the spread of the virus, resulted in a significant, rapid decline in global and U.S. economic conditions. 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%. In March 2020, discussion between OPEC and Russia (“OPEC+”) resulted in Saudi Arabia significantly discounting the price of its crude oil, as well as Saudi Arabia and Russia significantly increasing their oil supply in April 2020. The dramatic decline in crude oil demand combined with this increase in supply resulted in unprecedented storage issues and a resulting severe lack of takeaway capacity for oil producers. As a result, crude oil prices reached record or multi-year lows in April. West Texas Intermediate (“WTI”) crude oil traded below $20 per barrel and Brent crude oil traded below $30 per barrel during the second half of April, including an anomalous trading day where WTI traded at negative values on low volume close to the end of a contract trading month. In April 2020, OPEC+ agreed to cut production by 9.7 MMbpd starting in May 2020, while Saudi Arabia voluntarily cut another 1 MMbpd starting in June 2020. Meanwhile, oil production dropped dramatically in non-OPEC countries, including the U.S. Burdened by low prices and takeaway issues, U.S. producers (including several of our customers) shut in production to varying degrees in April and May, and drilling and completion activities dramatically declined. According to IEA’s Oil Market Report for August 2020, U.S. production in May dropped 2 MMbpd from April and 2.9 MMbpd from its all-time high in November 2019. According to IEA’s July report, global oil supply fell to a nine-year low of 86.9 MMbpd in June. 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 23 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. In late May and throughout June as oil prices partially recovered and stabilized, we received restart notices for several wells that were recently shut in. 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. 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. 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. 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. 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. To date, our field operations have continued largely uninterrupted, as the U.S. Department of Homeland Security designated our industry as part of our country’s critical infrastructure. Remote work and work process adjustments related to COVID-19 have not impacted our ability to maintain of service operations or caused us to incur significant costs. In addition, we have not experienced any supply chain issues in connection with the COVID-19 outbreak. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company's financial condition, liquidity, and future results of operations. 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 24 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 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) 2020 2019 Rental $ 14,861 94.3 % $ 14,434 69.2 % Sales 536 3.4 % 5,877 28.2 % Service and Maintenance 368 2.3 % 541 2.6 % Total $ 15,765 $ 20,852 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. 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. 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 25 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. 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. Our estimated annual effective tax rate differs from the U.S. federal statutory rate of 21%. 26 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) 2020 2019 Rental $ 46,092 90.3 % $ 41,393 70.5 % Sales 3,994 7.8 % 15,816 26.9 % Service and Maintenance 974 1.9 % 1,529 2.6 % Total $ 51,060 $ 58,738 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. 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 $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 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 27 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. 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. 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 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. 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 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. Our estimated annual effective tax rate differs from the U.S. federal statutory rate of 21%. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the economic impact caused the COVID-19 pandemic. 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. 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. 28 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 September 30, 2020 and December 31, 2019 are set forth below: September 30, December 31, 2020 2019 (in thousands) Current Assets: Cash and cash equivalents $ 27,559 $ 11,592 Trade accounts receivable, net 10,384 9,106 Inventory 17,125 21,080 Federal income tax receivable 11,083 — Prepaid income taxes 127 40 Prepaid expenses and other 596 597 Total current assets 66,874 42,415 Current Liabilities: Accounts payable 2,045 1,975 Accrued liabilities 4,391 2,287 Line of credit 417 417 Current operating leases 203 189 Deferred income 583 640 Total current liabilities 7,639 5,508 Total working capital $ 59,235 $ 36,907 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. Cash flows 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. Strategy 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 29 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 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. Bank Borrowings We have a senior secured revolving credit agreement the ("Amended Credit Agreement") with JP Morgan Chase Bank, N.A. (the "Lender") with an aggregate commitment of $30 million, subject to collateral availability. 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 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. Contractual Obligations and Commitments 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 September 30, 2020: Obligations Due in Period ( in thousands) Cash Contractual Obligations 2020 (1) 2021 2022 2023 2024 Thereafter Total Line of credit (secured) $ 417 $ — $ — $ — $ — $ — $ 417 Interest on line of credit (2) 2 — — — — — 2 Purchase obligations (3) 18 250 250 79 — — 597 Other long-term liabilities — — 39 — — — 39 Lease liabilities (including interest) 54 198 65 38 38 168 561 Total $ 491 $ 448 $ 354 $ 117 $ 38 $ 168 $ 1,616 (1) For the three months remaining in 2020. (2) Assumes an interest rate of 1.44% and no additional borrowings. (3) Vendor exclusive purchase agreement related to paint and coatings. Critical Accounting Policies and Practices There have been no changes in the critical accounting policies disclosed in the Company's Form 10-K for the year ended December 31, 2019. Recently Issued Accounting Pronouncements Please read Note 2, Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements in our condensed consolidated financial statements in this report. Off-Balance Sheet Arrangements From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. 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. 30 Special Note Regarding Forward-Looking Statements Except for historical information contained herein, the statements in this report are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise; 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; and new governmental safety, health and environmental regulations, which could require us to make significant capital expenditures. The forward-looking statements included in this Form 10-Q are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. A discussion of these and other risk factors is included in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC. Item 3. Quantitative and Qualitative Disclosures about Market Risk There have been no changes in the market risks disclosed in the Company's Form 10-K for the year ended December 31, 2019.