What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-03-31 compared with 2020-03-31 · 124 added, 187 removed, 231 unchanged (57% of the section changed)

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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.

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.

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Year Ended December 31,

2019 2018 2017

(in thousands)

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We typically experience a decline in demand during periods of low crude oil and natural gas prices.

Low crude oil and natural gas prices experienced throughout 2016 continued into mid-2017.

In the latter half of 2017, we saw an increase in oil prices and activity that continued during most of 2018.

During 2019, we witnessed a moderation of crude oil prices as well as drilling and completion activity levels.

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We believe that cash on hand and cash flows from operations will be sufficient to satisfy our capital and liquidity requirements through 2021.

If we require additional capital to fund any significant unanticipated expenditures, including any material acquisitions of other businesses, joint ventures or

other opportunities, this additional capital could exceed our current resources, might not be available to us when we need it, or might not be on acceptable terms.

If we require additional capital to fund any significant unanticipated expenditures, including any material acquisitions of other businesses, joint ventures or other opportunities, this additional capital could exceed our current resources, might not be available to us when we need it, or might not be on acceptable terms.

Critical Accounting Policies and Practices

We have identified the policies below as critical to our business operations and the understanding of our results of operations.

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States.

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting

of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States.

Actual results could differ significantly from those estimates under different assumptions and conditions.

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• estimating the allowance for doubtful accounts receivable;

• accounting for operating leases;

• accounting for income taxes;

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The Company adopted ASC 606, Revenue from Contracts with Customers ("ASC 606") on January, 1, 2018.

As a result, the Company has changed its accounting policy for revenue recognition as detailed below.

Revenue is measured based on a consideration specified in a customer’s contract, excluding any sale incentives and taxes collected on behalf of third parties (i.e.

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As part of the process of preparing our financial statements, we are required to estimate our federal income taxes as well as income taxes in each of the states in which we operate.

This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes.

This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting

These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet.

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The majority of our property and equipment, including rental equipment, is a direct cost to generating revenue.

In January 2019, the Company reviewed the estimated useful lives of its rental equipment.

This review indicated that the actual lives of its larger horsepower rental equipment were longer than the estimated useful lives used for depreciation purposes in the Company’s financial statements.

These units incorporate newer technology and heavier, more robust castings and forging, which allows for complete overhauls at longer cycles when compared to its older, lower horsepower units.

We assess the impairment of rental equipment and property and equipment whenever events or changes in circumstances indicate that the net recorded amount may not be recoverable.

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An impairment loss is recognized if the future undiscounted cash flows associated with the asset (or asset group) and the estimated fair value of the asset are less than the asset's carrying value.

The COVID-19 pandemic has caused a significant economic decline during the first quarter of 2020.

In addition, the pandemic and recent actions by Saudi Arabia and Russia have resulted in a significant decline in oil prices during the same time period.

If economic and industry conditions do not improve, an impairment review during 2020 could be triggered.

Goodwill (Including Impairment During 2019)

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Our policy is to review intangibles that are being amortized for impairment when indicators of impairment are present.

In addition, it is our policy to review indefinite-lived intangible assets for impairment annually or when indicators of impairment are present.

In addition, it is our policy to review indefinite-lived intangible assets for impairment annually or when indicators of

impairment are present.

We review intangibles through an assessment of the estimated future cash flows related to such assets.

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Given its concerns about the industry backdrop, Company management determined during 2019 that an increase of its inventory allowance was necessary.

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, management recorded an increase of $3.4 million in the inventory allowance reserve for costs that may not be recoverable in the future.

Management later identified another $408,000 of slow moving or obsolete inventory, which was written off.

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, management recorded a charge of $3.8 million to write-off obsolete inventory from the balance sheet.

For the year ended December 31, 2020, inventory allowance and write-off totaled $0.3 million.

We ended 2020 with an inventory allowance balance of $221,000.

The COVID-19 pandemic has caused a significant economic decline during the first quarter of 2020.

In addition, the pandemic and recent actions by Saudi Arabia and Russia have resulted in a significant decline in oil prices during the same time period.

If economic and industry conditions do not improve, an additional review of our inventory for excess and obsolete items during 2020 could be necessary.

Our Performance Trends and Outlook

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In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

During this time, the market began to experience a decline in oil prices in response to oil demand concerns due to the

global economic impacts of COVID-19.

In addition, recent events concerning OPEC and Russia resulted in Saudi Arabia significantly discounting the price of its crude oil, as well as Saudi Arabia and Russia significantly increasing their oil supply.

These actions have led to significant weakness in oil prices and ensuing reductions of exploration and production company capital and operating budgets.

As of March 31, 2020, the full impact of the COVID-19 outbreak continues to evolve daily.

With the significant decline in oil prices as well as the general economic decline caused by the impacts of COVID-19, we expect utilization to decline among our smaller horsepower and medium horsepower units during the remainder of 2020 after a minimal decline during the first quarter of 2020.

During this time, the market began to experience a decline in oil prices in response to oil demand concerns due to the global economic impacts of COVID-19.

These developments have led to significant weakness in oil prices and ensuing reductions of exploration and production company capital and operating budgets.

With the significant decline in oil prices as well as the general economic decline caused by the impacts of COVID-19, we expect utilization to continue to decline among our smaller horsepower and medium horsepower units during the remainder of 2021 after a minimal decline during 2020.

In terms of sales, we expect minimal compressor sales for the year due to much lower capital expenditure budgets throughout the industry, including those of our major customers.

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Nevertheless, if any of these circumstances change, our business could be adversely affected.

While management anticipates that the industry and economic impact of the pandemic and OPEC’s actions will have a negative effect on its results of operations in 2020 and perhaps beyond, the degree to which these factors will impact our business remains uncertain.

While management anticipates that the industry and economic impact of the pandemic will have a negative effect on its results of operations in 2021 and perhaps beyond, the degree to which these factors will impact our business remains uncertain.

Please read Item 1A, Risk Factors, in this report.

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Total $ 68,055 $ 78,444

Total revenue increased to $78.4 million from $65.5 million, or 19.8%, for the year ended December 31, 2019 compared to 2018.

This increase was mainly a result of higher rental revenue (18.7% increase) primarily due to a greater number of large horsepower units being rented as well as higher sales revenue (21.5% increase) primarily due to increased compressor sales.

Total revenue decreased to $68.1 million from $78.4 million, or 13.2%, for the year ended December 31, 2020 compared to 2019.

This decrease was mainly a result of lower sales revenue (71.4% decrease) primarily due to decreased compressor sales partially offset by increased rental revenue (7.3% increase) primarily due to a greater number of large horsepower units being rented.

Rental revenue increased to $60.8 million from $56.7 million for the year ended December 31, 2020 compared to 2019.

As of December 31, 2019, we had 2,304 natural gas compressors in our rental fleet, down from 2,567 units at year end 2018 due 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 7.7% to 429,650 at December 31, 2019 compared to 398,765 horsepower year end 2018, which reflects the addition of 54 high horsepower compressors with 70,020 horsepower to the Company's fleet during 2019.

As of December 31, 2020, we had 2,224 natural gas compressors in our rental fleet, down from 2,304 units at year end 2019.

Despite this decrease, the Company's total unit horsepower increased by 2.1% to 438,524 at December 31, 2020 compared to 429,650 horsepower year end 2019, which reflects the addition of 24 high horsepower compressors with 20,600 horsepower to the Company's fleet during 2020.

As of December 31, 2020, we had 1,274 natural gas compressors totaling 287,646 horsepower rented to 80 customers, compared to 1,419 natural gas compressors totaling 299,836 horsepower rented to 95 customers as of December 31, 2019.

The rental fleet had a unit utilization as of December 31, 2020 and 2019, respectively, of 57.3% and 61.6% while our horsepower utilization for the same periods, respectively, was 65.6% and 69.8%.

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 increased to $19.8 million from $16.3 million for the year ended December 31, 2019, compared to 2018.

This increase in largely attributable to an increase in compressor sales partially offset by a decrease in flare sales.

The decline in both utilization metrics was mainly the result of the decline in demand for our lower horsepower units.

Sales revenue decreased to $5.7 million from $19.8 million for the year ended December 31, 2020, compared to 2019.

This decrease in largely attributable to a decrease in compressor sales primarily driven by reductions in capital spending from our customers due to a weakened oil and natural gas price environment during 2020.

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

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.

Given its concerns about the industry backdrop, Company management determined during 2019 that an increase of its inventory allowance was necessary.

Management later identified another $408,000 of slow moving or obsolete inventory, which was written off.

For the year ended December 31, 2019, inventory allowance and write-off totaled $3.8 million.

Company management routinely reviews its inventory balances for obsolescence.

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, management recorded an increase of $251,000 in the inventory allowance reserve for costs that may not be recoverable in the future.

We ended 2020 with an inventory allowance balance of $221,000.

Given its concerns about the current industry backdrop, Company management determined during the third quarter of 2019 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.

Company management routinely reviews its rental fleet to determine which units are no longer of the type, configuration, make or model that our customers are demanding or that are not cost efficient to refurbish, maintain and/or operate.

As a result of this review, we determined 216 units should be retired from our rental fleet.

Accordingly, we recorded a $1.5 million loss on retirement of rental equipment during the year ended December 31, 2019.

Operating loss increased to $15.2 million for the year ended December 31, 2019 compared to an operating loss of $0.5 million for the year ended December 31, 2018.

The increase in operating loss was mainly due to the inventory allowance and write-off, loss on the retirement of rental units, and a goodwill impairment charge that totaled $15.3 million, partially offset by higher rental revenues and compressor sales.

Selling, general, and administrative expenses increased to $10.7 million for the year ended December 31, 2019, as compared to $9.1 million for 2018.

This 17.7% increase was primarily the result of increases in officer bonuses ($0.5 million), deferred compensation ($0.4 million, most of which was non-cash), professional services ($0.3 million), and stock compensation ($0.2 million).

Accordingly, we recorded a $291,000 loss on retirement of rental equipment during the year ended December 31, 2020.

Operating loss decreased to $3.6 million for the year ended December 31, 2020 compared to an operating loss of $15.2 million for the year ended December 31, 2019.

The decrease in operating loss was mainly due to a $10.0 million goodwill impairment charge in 2019 as well as lower losses on inventory allowance and write-off and reduced charges related to retirement of rental units.

These decreases were partially offset by lower sales revenues.

Selling, general, and administrative expenses decreased to $10.6 million for the year ended December 31, 2020, as compared to $10.7 million for 2019.

This 1.5% decrease was primarily the result of decreases in deferred compensation expense (approximately $187,000) and expenses related to stock options (approximately $100,000) partially offset by increased insurance costs ($86,0000).

Depreciation and amortization expense increased to $25.2 million from $23.3 million, or 8.3%, for the year ended December 31, 2020, compared to 2019.

The increase is the result of larger horsepower units being added to the fleet.

We added 82 units (approximately 74,000 horsepower) to our fleet over the past twelve months.

Fifty-four of those units were 400 horsepower or larger (including 49 at 1,380 horsepower), representing approximately 95% of the horsepower added.

Income tax benefit increased to $0.7 million from a $72,000 expense for the year ended December 31, 2019 compared to 2018.

As shown in Note 9 to these financial statements, our effective tax rate for both years differs from the U.S.

The increase is the result of higher capital expenditures for larger horsepower units being added to the fleet.

We added 42 units (approximately 23,265 horsepower) to our fleet during the twelve month period ended December 31, 2020.

Twenty-four of those units were 400 horsepower or larger (including 10 at 1,380 horsepower), representing approximately 89% of the horsepower added.

Income tax benefit increased to $4.8 million from $0.7 million for the year ended December 31, 2020 compared to 2019.

Our effective tax rate for both years 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 and 2019 during 2020.

Accordingly, 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, along with year end provision adjustments, reduced its federal income tax receivable to $11.9 million on its consolidated balance sheet as of December 31, 2020.

In addition, the Company recorded a current income tax benefit of $4.8 million on its consolidated statement of operations for the year ended December 31, 2020.

Our income tax benefit in 2019 was largely due to our net loss of $13.7 million but was largely offset by a difference in goodwill impairment for tax purposes as well as an adjustment to our state tax rates that increased our deferred income tax expense by approximately $0.8 million.

The Company's 2018 income tax expense was impacted by the Company discovering a potentially uncertain tax position attributable deductibility of certain executive compensation expense for federal income tax purposes totaling approximately $168,000, $149,000 and $230,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

As a result, in accordance with ASC Topic 740, during the fourth quarter of 2018, the Company recorded a tax adjustment of $547,000 and accrued penalty and interest expense of $55,000 attributable to the uncertain tax position.

The Company filed amended tax returns during 2019 for the years ended 2015, 2016 and 2017 and has recognized certain offsetting deductions, thus removing the large majority of its uncertain tax position reserve as of December 31, 2019.

Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017

The table below shows our revenue and percentage of total revenues for each of our product lines for the years ended December 31, 2018 and December 31, 2017.

Year Ended December 31,

(dollars in thousands)

Rental $ 47,766 73.0 % $ 46,046 68.0 %

Sales 16,269 24.8 % 20,208 29.9 %

Service & Maintenance 1,443 2.2 % 1,439 2.1 %

Total $ 65,478 .

Total revenue decreased to $65.5 million from $67.7 million, or 3.3%, for the year ended December 31, 2018, compared to 2017.

This was the result of a 19.5% decrease in sales revenue, which was offset by a 3.7% increase in rental revenue and a 0.3% increase in service and maintenance revenue.

Rental revenue increased to $47.8 million from $46.0 million, or 3.7%, for the year ended December 31, 2018, compared to 2017.

This increase is due to an increase in the average oil and natural prices for the year ended December 31, 2018, resulting in units being deployed, as well as a rise in the demand for our higher horsepower units.

As of December 31, 2018, we had 2,572 natural gas compressors in our rental fleet totaling 398,765 horsepower, as compared to 2,546 natural gas compressors totaling 369,961 horsepower as of December 31, 2017.

As of December 31, 2018, we had 1,361 natural gas compressors totaling 230,089 horsepower rented to 94 customers, compared to 1,259 natural gas compressors totaling 184,382 horsepower rented to 87 customers as of December 31, 2017.

The rental fleet had a utilization of 53.0% as of December 31, 2018 as compared to 49.5% at December 31, 2017.

Sales revenue decreased to $16.3 million from $20.2 million, or 19.5%, for the year ended December 31, 2018, compared to 2017.

Our sales activity can fluctuate depending on the demand from our customers' investments in non-conventional shale plays which require compression for producing natural gas and scheduling of projects in our fabrication facility.

Due to economic uncertainty and continued tight credit markets, the energy industry continued to encounter reduced capital spending.

While our strategy is to maintain our rental revenues so that they are a larger component of total revenue, we will continue to build and sell custom fabricated equipment.

In support of this, we intend to cultivate new sales oriented customers and are actively pursuing small, medium and large reciprocating compressor fabrication projects, as well as, building rotary screw-type equipment of any size.

Sales include:

(1) compressor unit sales, (2) flare sales, (3) parts sales and (4) compressor rebuilds.

Operating income of $1.5 million for the year ended December 31, 2017 decreased to a $0.5 million loss for the year ended December 31, 2018.

This decrease is attributed to a 6.4% drop in our rental margins, due to costs incurred in deploying units.

During the fourth quarter of 2018, management performed a review of our rental compressor units and determined there were 13 units fully depreciated in our rental fleet which needed to be retired, representing total horsepower of 1,360.

Selling, general, and administrative expenses decreased to $9.1 million for the year ended December 31, 2018, as compared to $10.1 million for 2017.

This 9.8% decrease is primarily a result in a decrease in stock compensation of $1.7 million.

Depreciation and amortization expense increased to $22.1 million from $21.3 million, or 3.6%, for the year ended December 31, 2018, compared to 2017.

The increase is the result of larger horsepower units being added to the fleet.

We added 31 units (approximately 29,508 horsepower) to our fleet over the past twelve months.

Twenty-seven of these were 400 horsepower or larger, representing 99% of the horsepower added.

Income tax expense decreased to $72,000 from a $18.3 million benefit for the year ended December 31, 2018 compared to 2017.

As discussed in Note 9 to these financial statements, during the fourth quarter of 2018, the Company discovered a potentially uncertain tax position attributable deductibility of certain executive compensation expense for federal income tax purposes aggregating approximately $168,000, $149,000, $230,000 for the years ended December 31, 2017, 2016 and 2015, respectively.

In 2017, the $18.3 million tax benefit was the result of the $18.4 million income tax benefit recorded in connection with the 2017 Tax Act, due to the remeasurement of our deferred tax assets and liabilities at the new federal statutory rate.

Adjusted Gross Margin Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

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Total $ 32,624 47.9 % $ 34,134 43.5 %

(1) For a reconciliation of adjusted gross margin to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read "Item 6.

Selected Financial Data - Non-GAAP Financial Measures" in this Report.

Our overall adjusted gross margin percentage dropped to 43.5% for the year ended December 31, 2019 compared to 46.8% for the year ended December 31, 2018, exclusive of depreciation and amortization.

Our drop in gross margins is mainly due to a 2.8% drop in rental revenue margins, which decreased to 51.4% for the year ended December 31, 2019 compared to 54.2% during 2018.

This decrease was due to an increased bad debt allowance as well as increased maintenance and repair costs, particularly "make-ready" jobs on units being placed back into service.

Sales margin decreased to 18.5% in 2019 from 22.8% in 2018 due to higher payroll and lower labor and overhead efficiency in our fabrication facilities.

(1) For a reconciliation of adjusted gross margin to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read "Non-GAAP Financial Measures" below.

Our overall adjusted gross margin percentage increased to 47.9% for the year ended December 31, 2020 compared to 43.5% for the year ended December 31, 2019, exclusive of depreciation and amortization.

Our increase in gross margins is mainly due to an increase in total revenue related to our rental revenue.

Rental revenues comprised 89% of our total revenues for the year ended December 31, 2020 compared to 72% of total revenues for the year ended December 31, 2019.

As our rental activity inherently realizes higher adjusted gross margins, the increase in revenue concentrations will increase our overall adjusted gross margins.

Sales margin decreased to (9.8)% in 2020 from 18.5% in 2019 due to significant declines in sales revenues (71.4%).

While many sales costs are variable, certain costs such as labor are less variable as a certain staff level is retained to meet demand when market forces shift.

Third party service and maintenance margins decreased to 54.6% from 68.2% for the year ended December 31, 2020 compared to 2019.

Service and maintenance only represents 2.3% of our revenue in 2019, providing minimal impact on our overall adjusted gross margin.

Adjusted Gross Margin Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017

The table below shows our adjusted gross margin and related percentages for each of our product lines for the years ended December 31, 2018 and December 31, 2017.

Adjusted gross margin is the difference between revenue and cost of revenues, exclusive of depreciation and amortization expense.

Adjusted Gross Margin (1)

Non-GAAP Financial Measures

Our definition and use of Adjusted EBITDA

“Adjusted EBITDA” is a non-GAAP financial measure that we define as earnings (net (loss) income) before interest, taxes, depreciation and amortization, as well as impairment of goodwill, an increase in inventory allowance and inventory write-offs, and retirement of rental equipment.

This term, as used and defined by us, may not be comparable to similarly titled

measures employed by other companies and is not a measure of performance calculated in accordance with GAAP.

Adjusted EBITDA should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.

However, management believes Adjusted EBITDA is useful to an investor in evaluating our operating performance because:

• it is widely used by investors in the energy industry to measure a company’s operating performance without regard to items excluded from the calculation of Adjusted EBITDA, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;

• it helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of our capital structure and asset base from our operating structure;

• it is used by our management for various purposes, including as a measure of operating performance, in presentations to our Board of Directors, as a basis for strategic planning and forecasting, and as a component for setting incentive compensation.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under generally accepted accounting principles.

Some of these limitations are:

• Adjusted EBITDA does not reflect our cash expenditures, future requirements for capital expenditures, or contractual commitments;

• Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

• Adjusted EBITDA does not reflect the cash requirements necessary to service interest or principal payments on our debts;

• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any capital expenditures for such replacements.

There are other material limitations to using Adjusted EBITDA as a measure of performance, including the inability to analyze the impact of certain recurring items that materially affect our net income or loss, and the lack of comparability of results of operations of different companies.

Please read the table below under “Reconciliation” to see how Adjusted EBITDA reconciles to our net income, the most directly comparable GAAP financial measure.

Reconciliation

The following table reconciles our net (loss) income, the most directly comparable GAAP financial measure, to Adjusted EBITDA:

Year Ended December 31,

(dollars in thousands)

Rental $ 25,906 54.2 % $ 27,886 60.6 %

Sales 3,705 22.8 % 4,186 20.7 %

Service & Maintenance 1,058 73.3 % 1,069 74.3 %

Total $ 30,669 46.8 % $ 33,141 49.0 %

(1) For a reconciliation of adjusted gross margin to its most directly comparable financial measure calculated and presented in accordance with GAAP, please read "Item 6.

Selected Financial Data - Non-GAAP Financial Measures" in this Report.

The overall adjusted gross margin percentage dropped to 46.8% for the year ended December 31, 2018 compared to 49.0% for the year ended December 31, 2017, exclusive of depreciation and amortization.

Our drop in gross margins is mainly due to the drop in rental revenue margins due to costs incurred in deploying units.

Rental margins decreased to 54.2% for the year ended December 31, 2018 compared to 60.6% during 2017 .

Sales margin increased to 22.8% from 20.7% for the year ended 2018 compared to 2017.

Third party service and maintenance margins decreased to 73.3% for the year ended December 31, 2018 compared to 74.3% in 2017.

Service and maintenance represents 2.2% of our revenue in 2018, providing minimal impact on our overall adjusted gross margin.

(in thousands)

Net income (loss) $ 1,808 $ (13,864)

Interest expense 14 15

Income tax (benefit) expense (4,792) (693)

Depreciation and amortization 25,198 23,268

Impairment of goodwill — 10,039

Inventory allowance 184 3,758

Retirement of rental equipment 291 1,512

Adjusted EBITDA $ 22,703 $ 24,035

Our definition and use of Adjusted Gross Margin

We define “Adjusted Gross Margin” as total revenue less costs of revenues (excluding depreciation and amortization expense).

Adjusted gross margin is included as a supplemental disclosure because it is a primary measure used by our management as it represents the results of revenue and costs (excluding depreciation and amortization expense), which are key components of our operations.

Adjusted gross margin differs from gross margin, in that gross margin includes depreciation expense.

We believe adjusted gross margin is important because it focuses on the current operating performance of our operations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in those operations.

Depreciation expense does not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs from current operating activity.

Rather, depreciation expense reflects the systematic allocation of historical property and equipment values over the estimated useful lives.

Adjusted gross margin has certain material limitations associated with its use as compared to gross margin.

These limitations are primarily due to the exclusion of depreciation expense, which is material to our results of operations.

Because we use capital assets, depreciation expense is a necessary element of our costs and our ability to generate revenue.

In order to compensate for these limitations, management uses this non-GAAP measure as a supplemental measure to other GAAP results to provide a more complete understanding of our performance.

As an indicator of our operating performance, adjusted gross margin should not be considered an alternative to, or more meaningful than, gross margin as determined in accordance with GAAP.

Our adjusted gross margin may not be comparable to a similarly titled measure of another company because other entities may not calculate adjusted gross margin in the same manner.

Reconciliation

The following table calculates gross margin, the most directly comparable GAAP financial measure, and reconciles it to adjusted gross margin:

Year Ended December 31,

(in thousands)

Total revenue $ 68,055 $ 78,444

Costs of revenue, exclusive of depreciation and amortization (35,431) (44,310)

Depreciation allocable to costs of revenue (24,578) (22,908)

Gross margin 8,046 11,226

Depreciation allocable to costs of revenue 24,578 22,908

Adjusted gross margin $ 32,624 $ 34,134

Liquidity and Capital Resources

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Inventory, net 19,926 21,080

Federal income tax receivable 11,538 —

Prepaid income taxes 66 40

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For the year ended December 31, 2020, we invested approximately $15.3 million in rental equipment, property and other equipment.

During the year, the Company added $63.7 million in new equipment to our rental fleet, $3.8 million in payments related to the construction of our new corporate office, and $2.4 million in vehicles, office furniture and equipment.

During the year, the Company added $13.0 million in new equipment to our rental fleet and $2.2 million in other property and equipment.

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

Our rental work-in-progress decreased by $4.0 million during 2020.

We financed our investment in rental equipment, property and other equipment with cash on hand during 2019.

We financed our investment in rental equipment, property and other equipment with cash flows from operations during 2020.

At December 31, 2020, we had cash and cash equivalents of $28.9 million compared to $11.6 million at year end 2019.

Our cash flow from operations of $29.4 million was offset by capital expenditures of $69.9 million during 2019.

Our cash flow from operations of $32.6 million was partially offset by capital expenditures of $15.3 million during 2020.

We also had working capital of $61.9 million at December 31, 2020 compared to $36.9 million at December 31, 2019.

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We had net cash flow from operating activities of $32.6 million during 2020 compared $29.4 million during 2019.

Our cash flow from operating activities of $29.4 million was primarily the result adding back non-cash items of depreciation of $23.3 million, a goodwill impairment charge of $10.0 million, an increased inventory allowance and write-off of $3.8 million, stock-based compensation of $2.6 million, a loss on retirement of rental equipment of $1.5 million, a bad debt allowance of $0.7 million, and a net positive change in working capital and various other items of $2.1 million.

These positive impacts were partially offset by a net loss of $13.9 million and a decrease in cash flows related to a reduction in deferred income taxes of $0.7 million.

At December 31, 2018, we had cash and cash equivalents of $52.6 million, working capital of $84.0 million and total debt of $417,000, under our credit agreement which is due in 2020.

Our cash flow from operating activities of $32.6 million was primarily the result of our rental and sales revenues partially offset by associated costs of sales as well as a federal income tax refund of approximately $4.1 million.

At December 31, 2019, we had cash and cash equivalents of $11.6 million, working capital of $36.9 million and total debt of $417,000, under our credit agreement which was due on March 31, 2020.

Our cash and cash equivalents decreased from 2018, due to an increase on our capital program for contracted new large horsepower compressor builds and the construction of our new corporate office.

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This was primarily from a net loss of $0.5 million and non-cash items of depreciation and amortization of $23.3 million, $2.6 million related to stock-based compensation, a decrease in deferred income taxes of $0.3 million and a decrease in cash flows related to working capital and other items of $0.2 million.

Contractual Obligations and Commitments

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

The following table is a summary of our significant cash contractual obligations (in thousands):

Cash Contractual Obligations 2020 2021 2022 2023 2024 Thereafter Total

Line of credit $ 417 $ — $ — $ — $ — $ — $ 417

Interest on line of credit 17 — — — — — 17

Purchase obligations 250 250 160 — — — 660

Lease liabilities (including interest) 208 172 46 38 38 168 670

Other long term liabilities — — 41 — — — 41

Total $ 892 $ 422 $ 247 $ 38 $ 38 $ 168 $ 1,805

The Company also has a remaining contractual obligation related to the construction of a new corporate office of approximately $375,000, which we intend to finance with cash on hand.

Construction of a new office began in late 2017 and was completed in 2019.

Senior 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).

Borrowing Base .

At any time before the maturity of the Amended Credit Agreement, we may draw, repay and re-borrow amounts available under the borrowing base up to the maximum aggregate availability discussed above.

Generally, the borrowing base equals the sum of (a) 80% of our eligible accounts receivable plus (b) 50% of the book value of our eligible general inventory (not to exceed 50% of the commitment amount at the time) plus (c) 75% of the book value of our eligible equipment inventory.

JPMorgan Chase Bank (the “Lender”) may adjust the borrowing base components if material deviations in the collateral are discovered in future audits of the collateral.

Interest and Fees .

Under the terms of the Amended Credit Agreement, we have the option of selecting the applicable variable rate for each revolving loan, or portion thereof, of either (a) LIBOR multiplied by the Statutory Reserve Rate (as defined in the Amended Credit Agreement), with respect to this rate, for Eurocurrency funding, plus the Applicable Margin (“LIBOR-based”), or (b) CB Floating Rate, which is the Lender’s Prime Rate less the Applicable Margin;

provided, however, that no more than three LIBOR-based borrowings under the agreement may be outstanding at any one time.

For purposes of the LIBOR-based interest rate, the Applicable Margin is 1.50%.

For purposes of the CB Floating Rate, the Applicable Margin is 1.25%.

Accrued interest is payable monthly on outstanding principal amounts, provided that accrued interest on LIBOR-based loans is payable at the end of each interest period, but in no event less frequently than quarterly.

In addition, fees and expenses are payable in connection with our requests for letters of credit (generally equal to the Applicable Margin for LIBOR-related borrowings multiplied by the face amount of the requested letter of credit) and administrative and legal costs.

The maturity date of the Amended Credit Agreement is December 31, 2020, at which time all amounts borrowed under the agreement will be due and outstanding letters of credit must be cash collateralized.

The agreement may be terminated early upon our request or the occurrence of an event of default.

The obligations under the Amended Credit Agreement are secured by a first priority lien on all of our inventory and accounts and leases receivables, along with a first priority lien on a variable number of our leased compressor equipment the book value of must be maintained at a minimum of 2.00 to 1.00 commitment coverage ratio (such ratio being equal to (i) the amount of the borrowing base as of such date to (ii) the amount of the commitment as of such date.)

The Amended Credit Agreement contains customary representations and warranties, as well as covenants which, among other things, limit our ability to incur additional indebtedness and liens;

enter into transactions with affiliates;

make acquisitions in excess of certain amounts;

pay dividends;

redeem or repurchase capital stock or senior notes;

make investments or loans;

make negative pledges;

consolidate, merge or effect asset sales;

or change the nature of our business.

In addition, we also have certain financial covenants that require us to maintain a leverage ratio less than or equal to 2.50 to 1.00 as of the last day of each fiscal quarter.

Events of Default and Acceleration.

The Amended Credit Agreement contains customary events of default for credit facilities of this size and type, and includes, without limitation, payment defaults;

defaults in performance of covenants or other agreements contained in the transaction documents;

inaccuracies in representations and warranties;

certain defaults, termination events or

similar events;

certain defaults with respect to any other Company indebtedness in excess of $50,000;

certain bankruptcy or insolvency events;

the rendering of certain judgments in excess of $150,000;

certain ERISA events;

certain change in control events and the defectiveness of any liens under the secured revolving credit agreement.

Obligations under the Amended Credit Agreement may be accelerated upon the occurrence of an event of default.

As of December 31, 2019, we were in compliance with all covenants in our Amended Credit Agreement.

A default under our Amended Credit Agreement could trigger the acceleration of our bank debt so that it is immediately due and payable.

Such default would have a material adverse effect on our liquidity, financial position and operations if we were to borrow a significant amount under our facility.

We had a senior secured revolving credit agreement the ("Amended Credit Agreement") with JP Morgan Chase Bank, N.A (the "Lender") that expired on March 31, 20201.

We have decided not to renew the Amended Credit Agreement and on March 17, 2021, we repaid the outstanding principal balance.

No further amounts or obligations are owed on the Amended Credit Agreement.

We are in the process of negotiating a new credit facility which we expect to complete by the end of April 2021, although no guarantee can be made that we will be successful in finalizing and securing a new credit facility.

Components of Our Principal Capital Expenditures

Capital expenditures for the three years ended December 31:

Capital expenditures for the two years ended December 31:

Expenditure Category 2020 2019

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However, our financing capacity could be negatively impacted by the COVID-19 pandemic.

Please see Note 19 of our Consolidated Financial Statements and Item 1A, Risk Factors, of this report.

Please see Item 1A, Risk Factors, of 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 December 31, 2019, we have an off-balance sheet arrangement and transaction.

We do not believe that this arrangement is reasonably likely to materially affect our liquidity or availability of, or requirements for, capital resources.

We entered into a purchase agreement with a vendor in July 2008 pursuant to which we agreed to purchase up to $4.8 million of our paint and coating requirements exclusively from the vendor.

In connection with the execution of the agreement, the vendor paid us a $300,000 fee which is considered to be a discount toward future purchases from the vendor.

As of December 31, 2019, we had met $4.1 million of this obligation.

The $300,000 payment we received is recorded as a long-term liability and will decrease as the purchase commitment is fulfilled.

The long-term liability remaining as of December 31, 2019 was $41,000.

As of December 31, 2020, we did not have any material off-balance sheet arrangements.

Recently Issued Accounting Pronouncements

See Notes to Consolidated Financial Statements on page F-12.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (ASC Topic 740), which simplifies accounting for income taxes by removing certain exceptions to various tax accounting principles and clarifies other existing guidance in order to improve consistency of application.

These amendments are effective for public entities for interim and annual periods beginning after December 15, 2020.

We are currently evaluating the impact of ASU 2019-12 on our consolidated financial statements and note disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (ASC Topic 326):

Measurement of Credit Losses on Financial Instruments.

The amendments to ASC Topic 326 require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including trade receivables.

For companies that qualify as smaller reporting companies, the amendments in this update are effective for interim and annual periods beginning after January 1, 2023.

We are currently evaluating the impact of ASU 2016-13 on our consolidated financial statements and note disclosures.

Environmental Regulations

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Compliance with such laws and regulations increases our overall cost of business, but has not had a material adverse effect on our operations or financial condition.

It is not anticipated, based on current laws and regulations, that we will be required in the near future to expend amounts that are material in relation to our total expenditure budget in order to comply with environmental laws and regulations but such laws and regulations are frequently changed and we are unable to predict the ultimate cost of

We also could incur costs related to the cleanup of sites to which we send equipment and for damages to natural resources or other claims related to releases of regulated substances at such sites.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and supplementary financial data are included in this Annual Report on Form 10-K beginning on page F-1.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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-K

Item 7. Management’s Discussion and Analysis