What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-05-14 compared with 2020-11-16 · 90 added, 212 removed, 103 unchanged (75% of the section changed)

13 unchanged sentences

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.

As of March 31, 2021, we had 1,265 natural gas compressors totaling 287,914 horsepower rented to 80 customers compared to 1,383 natural gas compressors totaling 298,143 horsepower rented to 92 customers at March 31, 2020.

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.

21 unchanged sentences

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.

We recognized this need in recent 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.

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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

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.

Given the current economic and industry backdrop, we still expect compressor sales to be low for the remainder of 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 of 2020.

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.

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

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

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

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.

Remote work and work process adjustments related to COVID-19 have not impacted our ability to maintain our service operations or caused us to incur significant additional 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

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,

Three months ended March 31, 2021, compared to the three months ended March 31, 2020.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended March 31, 2021 and 2020.

Three months ended March 31,

(in thousands)

3 unchanged sentences

Total $ 18,397 $ 17,890

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.

Total revenue increased 2.8% to $18.4 million for the three months ended March 31, 2021 compared to $17.9 million for the three months ended March 31, 2020.

This increase was primarily a result of higher sales revenue (87% increase) during 2021 mainly due to higher compressor sales offset by lower rental revenue (4.7% decrease).

Rental revenue decreased to $15.3 million for the three months ended March 31, 2021 compared to $16.1 million for the same period in 2020.

This decrease during the first quarter of 2021 was attributable to decline in our rented units due to a significant drop in oil prices resulting from the COVID-19 pandemic and crude oil demand reduction.

As of March 31, 2021, we had 2,238 compressor packages in our fleet, down from 2,316 units at March 31, 2020 due to the retirement of 122 units during the fourth quarter of 2020.

The Company's total unit horsepower increased by 1.0% to 441,911 horsepower at March 31, 2021 compared to 437,750 horsepower at March 31, 2020, which reflects the addition to the Company's fleet of 18 high horsepower compressors with 13,880 horsepower over the past 12 months.

As of March 31, 2021, we had 1,265 natural gas compressors with a total of 287,914 horsepower rented to 80 customers, compared to 1,383 natural gas compressors with a total of 298,143 horsepower rented to 92 customers as of March 31, 2020.

As a result, our total rented horsepower as of March 31, 2021 decreased by 3.4% over the prior twelve months.

Our rental fleet had unit utilization as of March 31, 2021, and 2020, respectively, of 56.5% and 59.7%, and our horsepower utilization for the same periods, respectively, was 65.2% and 68.1%.

While both our total rented horsepower and total rented units declined during the period, our total rented horsepower only declined by 3.4% contrasted against an 8.5% decline in total rented units.

This illustrates the strong demand for our high horsepower units while the demand for our smaller and medium horsepower units has decreased with recent lower commodity prices.

Sales revenue increased to $2.7 million for the three months ended March 31, 2021 compared to $1.5 million for the three months ended March 31, 2020.

This increase is mostly attributable to increased compressor sales and, to a lesser extent, increased parts sales during the first quarter of 2021 compared to the same period in 2020.

These increased sales reflect marginally improving industry activity levels due to recently stabilized commodity prices and easing of 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

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.

Cost of rentals decreased to $7.2 million during the three months ended March 31, 2021 compared to $7.9 million during the three months ended March 31, 2020.

While rental revenues declined 4.7%, this 9.4% decline in costs of rentals is due to additional cost containment efforts related to the industry downturn.

Cost of sales increased 50.4% to $2.6 million during the three months ended March 31, 2021 compared to $1.7 million during the three months ended March 31, 2020.

This increase was primarily due to higher compressor sales and, to a lesser degree, higher parts sales during the period.

This increase was partially offset by 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 increased 22.5% to $2.6 million for the three months ended March 31, 2021 compared $2.2 million during the same period in 2020.

This increase in SG&A expenses was primarily attributable to an increase in our deferred compensation liability which resulted in increased SG&A expense.

In the first quarter of 2020 we had a decrease in the liability resulting in a recognized gain, thus reducing our SG&A expense.

These changes

increased SG&A by approximately $468,000.

This increase was partially offset by lower professional fees and various other expenses.

Depreciation and amortization expense increased marginally to $6.3 million for the three months ended March 31, 2021 compared to $6.2 million for the three months ended March 31, 2020.

This increase was the result of larger horsepower units being added to the fleet partially offset by unit retirements in the fourth quarter of 2020.

We recorded an income tax expense of approximately $125,000 for the three months ended March 31, 2021 compared to an income tax benefit of $4.5 million for the three months ended March 31, 2020.

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 with the period ended March 31, 2020 being significantly impacted by prior year amended returns related to the CARES Act.

Our estimated annual effective tax rate differs from the U.S.

federal statutory rate of 21%.

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,

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 non-cash stock compensation, 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 (loss) 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:

Three months ended March 31,

(in thousands)

$ 46,092 90.3 % $ 41,393 70.5 %

3,994 7.8 % 15,816 26.9 %

Service and Maintenance

974 1.9 % 1,529 2.6 %

$ 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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.

Net income (loss) $ (394) $ 4,082

Interest expense 1 3

Income tax expense (benefit) 125 (4,543)

Depreciation and amortization 6,297 6,240

Non-cash stock compensation expense 474 502

Adjusted EBITDA $ 6,503 $ 6,284

For the three months ended March 31, 2021, Adjusted EBITDA increased $219,000 due primarily to increased sales margins compared to the three months ended March 31, 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,

Our working capital positions as of March 31, 2021 and December 31, 2020 are set forth below:

March 31, December 31,

(in thousands)

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Total working capital $ 63,203 $ 61,857

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.

For the three months ended March 31, 2021, we invested $5.0 million in rental and property and other equipment.

During the first quarter of 2021, we added $4.5 million in new equipment to our rental fleet and $0.5 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-process related to our rental fleet jobs at the beginning of the period compared to the end of the period.

Our rental work-in-process decreased by $1.0 million during the three months ended March 31, 2021.

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

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.

At March 31, 2021, we had cash and cash equivalents of $30.7 million compared to $28.9 million at December 31, 2020.

Our cash flows from operating activities of $7.4 million were partially offset by capital expenditures of $5.0 million during the three months ended March 31, 2021.

We had working capital of $63.2 million at March 31, 2021 compared to $61.9 million at December 31, 2020.

On December 31, 2020, we had outstanding debt of $417,000, which was all related to our line of credit.

We generated cash flows from operating activities of $7.4 million during the first three months of 2021 compared to cash flows provided by operating activities of $8.3 million for the first three months of 2020.

The decline in cash flows from operating activities was primarily driven by lower cash receipts on accounts receivable during the first three months of 2021 as well as higher SG&A expenses.

These increases were partially offset by slightly higher rental and sales margins.

For the remainder of 2021, given the state of the economy and our industry during the COVID-19 pandemic, our plan is to continue to keep our expenses low.

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

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

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

For the remainder of 2021, our forecasted capital expenditures are not anticipated to exceed our internally generated cash flows and our cash on hand.

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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

$ 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.

We have a senior secured revolving credit agreement the ("Credit Agreement") with Texas Capital Bank, National Association.

(the "Lender") with an initial commitment of $20 million, and an accordion feature that would increase the maximum commitment to $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 $30 million on the aggregate commitment;

provided however, the aggregate commitment amount is not permitted to exceed $50 million.

The maturity date of the Credit Agreement is May 11, 2026.

For further information, see Part II Item 5 - Other Information .

Critical Accounting Policies and Practices

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

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

As of March 31, 2021, the off-balance sheet arrangements and transactions that we have entered into include operating lease agreements and purchase agreements.

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

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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.

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, 2020 filed with the SEC.

2 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis