What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-14 compared with 2023-05-15 · 82 added, 51 removed, 124 unchanged (52% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis of our financial condition and results of operations are based on, and should be read in conjunction with, our condensed consolidated financial statements and the related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC.

This report and our Annual Report on Form 10-K contain certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, and information pertaining to us, our industry and the oil and natural gas industry that is based on the beliefs of our management, as well as assumptions made by and information currently available to our management.

All statements, other than statements of historical facts contained in this report as well as our Annual Report on Form 10-K, including statements regarding our future financial position, growth strategy, budgets, projected costs, plans and objectives of management for future operations, are forward-looking statements.

This report and our Annual Report, as amended, contain certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, and information pertaining to us, our industry and the oil and natural gas industry that is based on the beliefs of our management, as well as assumptions made by and information currently available to our management.

All statements, other than statements of historical facts contained in this report as well as our Annual Report, including statements regarding our future financial position, growth strategy, budgets, projected costs, plans and objectives of management for future operations, are forward-looking statements.

We use the words “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “intend,” “plan,” “budget” and other similar words to identify forward-looking statements.

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Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations or assumptions will prove to have been correct.

Please read Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2022, as it contains important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements.

Please read Item 1A, Risk Factors, in our Annual Report, as it contains important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements.

We fabricate, manufacture, rent, and sell natural gas compressors and related equipment.

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

As of March 31, 2023, we had 1,245 natural gas compressors totaling 335,314 horsepower rented to 74 customers compared to 1,276 natural gas compressors totaling 306,834 horsepower rented to 79 customers at March 31, 2022.

As of June 30, 2023, we had 1,249 natural gas compressors totaling 372,596 horsepower rented t o 75 customers compared to 1,281 natural gas compressors totaling 311,379 horsepower rented to 79 customers at June 30, 2022.

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

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and declining reservoir pressure in maturing natural gas producing fields, especially unconventional production.

These types of applications have historically been serviced by wellhead size compressors, and continue to be, but there has also been an economic move by our customers towards centralized drilling and production facilities, which have increased the market need for larger horsepower compressor packages.

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 has increased the market need for larger horsepower compressor packages.

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 2,500 horsepower.

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

Commodity prices stabilized during 2021 with a sharp increase in 2023.

Commodity prices stabilized somewhat during 2021 and increased in the first half of 2022 and declined in the second half of 2022 and began increasing so far in 2023.

Historically, activity levels of exploration and production companies have been dependent on commodity prices.

However, recent capital market focus on cash returns from exploration and production companies has restricted capital spending below levels that have historically been observed during higher commodity price environments.

Generally, though, we feel that production activities (in which we are involved) will fare better than drilling activity.

Generally, though, we believe that production activities (in which we are involved) will fare better than drilling activity.

This is reflected in both the stability of our rental revenues, which is driven by production activities, and the volatility of our compressor sales, which tends to fluctuate with capital allocations.

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Results of Operations

Three months ended March 31, 2023, compared to the three months ended March 31, 2022.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended March 31, 2023 and 2022.

Three months ended March 31,

Three months ended June 30, 2023, compared to the three months ended June 30, 2022.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended June 30, 2023 and 2022.

Three months ended June 30,

(in thousands)

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Total $ 26,957 $ 19,926

Total revenue increased 30.9% to $26.6 million for the three months ended March 31, 2023 compared to $20.3 million for the three months ended March 31, 2022.

Total revenue increased 35.3% to $27.0 million for the three months ended June 30, 2023 compared to $19.9 million for the three months ended June 30, 2022.

This increase was primarily a result of higher rental revenue (32.9% increase) during 2023.

Rental revenue increased to $22.7 million for the three months ended March 31, 2023 compared to $17.1 million for the same period in 2022.

This increase during the first quarter of 2023 was attributable to (i) an increase in high horsepower compression rentals as these units carry a higher rental revenue rate than our lower horsepower units and (ii) rental rate increases across a portion of our fleet intended to offset inflationary pressures related to the costs of our rental fleet.

As of March 31, 2023, we had 1,875 compressor packages in our fleet, down from 2,033 units at March 31, 2022 due to the retirement of units during the fourth quarter of 2022 and th e disposition of a small number of compressors from the fleet during this year.

The Company's total unit horsepower increased slightly to 433,013 horsepower at March 31, 2023 compared to 421,422 horsepower at March 31, 2022, due to the aforementioned unit retirements and dispositions partially offset by the addition to the Company's fleet of 42 high horsepower compressors over the past 12 months.

As of March 31, 2023, we had 1,245 natural gas compressors with a total of 335,314 horsepower rented to 74 customers, compared to 1,276 natural gas compressors with a total of 306,834 horsepower rented to 79 customers as of March 31, 2022.

As a result, our total rented horsepower as of March 31, 2023 increased by 9.3% over the last twelve months.

Our rental fleet had unit utilization as of March 31, 2023, and 2022, respectively, of 66.4% and 62.8%, and our horsepower utilization for the same dates increased to 77.4% from 72.8%.

Rental revenue increased to $24.1 million for the three months ended June 30, 2023 compared to $18.1 million for the same period in 2022.

This increase during the second quarter of 2023 was attributable to (i) an increase in high horsepower compression rentals as these units carry a higher rental revenue rate than our lower horsepower units and (ii) modest rental rate increases across a portion of our fleet intended to offset inflationary pressures related to the costs of our rental fleet.

As of June 30, 2023, we had 1,911 compressor packages in our fleet, down from 2,043 units at June 30, 2022 due to the retirement of units during the fourth quarter of 2022 and th e disposition of a small number of compressors from the fleet during this year.

The Company's total unit horsepower increased to 473,884 horsepower at June 30, 2023 compared to 426,811 horsepower at June 30, 2022, due to additions to the Company's fleet of 59 high horsepower compressors over the past 12 months.

As of June 30, 2023, we had 1,249 natural gas compressors with a total of 372,596 horsepower rented to 75 customers, compared to 1,281 natural gas compressors with a total of 311,379 horsepower rented to 79 customers as of June 30, 2022.

As a result, our total rented horsepower as of June 30, 2023 increased by 19.7% over the last twelve months.

Our rental fleet had unit utilization as of June 30, 2023, and 2022, respectively, of 65.4% and 62.7%, and our horsepower utilization for the same dates increased to 78.6% from 73.0%.

Our total rented horsepower increased by 19.7% contrasted against a 2.5% decrease in total rented units.

This illustrates the growing demand for our high horsepower units while the demand for our smaller and medium horsepower units has not recovered in line with recent commodity price increases.

Sales revenue increased 3.5% to $3.0 million for the three months ended March 31, 2023 compared to $2.9 million for the three months ended March 31, 2022.

This increase is primarily attributable to increased parts sales during the first quarter of 2023 compared to the same period in 2022.

Sales revenue increased 23.5% to $1.6 million for the three months ended June 30, 2023 compared to $1.3 million for the three months ended June 30, 2022.

This increase is primarily attributable to increased parts sales during the second quarter of 2023 compared to the same period in 2022.

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

Cost of rentals increased t o $11.6 million during the three months ended March 31, 2023 compared to $9.2 million during the three months ended March 31, 2022.

While rental revenues increased 32.7%, this 26.2% increase in costs of rentals is primarily due to inflationary pressures on labor and parts as well higher make ready charges accrued at quarter end.

While repair and maintenance expenses are customary in our business, the timing of such expenses can fluctuate between periods resulting in periods with larger than normal expenses.

Cost of sales increased 62.8% to $3.2 million during the three months ended March 31, 2023 compared to $2.0 million during the three months ended March 31, 2022.

Cost of rentals increased t o $11.3 million during the three months ended June 30, 2023 compared to $9.2 million during the three months ended June 30, 2022.

This 22.7% increase in costs of rentals is primarily due to more rented horsepower during 2023.

Cost of sales increased 30.3% to $1.9 million during the three months ended June 30, 2023 compared to $1.4 million during the three months ended June 30, 2022.

This increase was primarily due to an increase in the volume of parts sales at margins below our historical realizations.

Selling, general, and administrative ("SG&A") expenses increased 82.3% to $4.6 million for the three months ended March 31, 2023 compared $2.5 million during the same period in 2022.

This increase in SG&A expenses was primarily attributable to (i) $1.0 million of severance expenses related to the retirement agreement between NGS and Stephen C.

Taylor, our prior and current interim Chief Executive Officer, (ii) $200,000 increase in stock option compensation expenses, (iii) a $300,000 increase in executive recruiting charges.

Depreciation and amortization expense increased to $6.2 million for the three months ended March 31, 2023 compared to $6.1 million for the three months ended March 31, 2022.

We recorded an income tax expense of approximately $150,000 for the three months ended March 31, 2023 compared to an income tax benefit of $11,000 for the three months ended March 31, 2022.

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.

Selling, general, and administrative ("SG&A") expenses increased 110.4% to $4.9 million for the three months ended June 30, 2023 compared $2.3 million during the same period in 2022.

This increase in SG&A expenses was primarily attributable to (i) $612,000 of severance expenses related to the retirement agreement between NGS and Stephen C.

Taylor, our prior and current interim Chief Executive Officer, (ii) $800,000 increase in stock compensation expenses, (iii) and a one-time increase of $350,000 for reimbursement expenses related to our Cooperation Agreement with Mill Road Capital.

Depreciation and amortization expense increased to $6.4 million for the three months ended June 30, 2023 compared to $6.0 million for the three months ended June 30, 2022, due to increased capital expenditures.

We recorded an income tax expense of approximately $0.2 million for the three months ended June 30, 2023 compared to an income tax expense of $0.4 million for the three months ended June 30, 2022.

For interim periods, our income tax 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% primarily as a result of expenses not deductible for income tax purposes.

We recorded an impairment expense of $0.8 million related to capitalized software costs for the three months ended June 30, 2023.

Six months ended June 30, 2023, compared to the six months ended June 30, 2022.

The table below shows our revenues and percentage of total revenues of each of our product lines for the six months ended June 30, 2023 and 2022.

Six months ended June 30,

(in thousands)

Rental $ 46,828 87.4 % $ 35,274 87.6 %

Sales 4,587 8.6 % 4,184 10.4 %

Service and Maintenance 2,162 4.0 % 804 2.0 %

Total $ 53,577 $ 40,262

Total revenue increased 33.1% to $53.6 million for the six months ended June 30, 2023 compared to $40.3 million during the nine months ended June 30, 2022.

This increase was primarily a result of higher rental revenue (32.8% increase) and higher service and maintenance revenue during the first six months of 2023 (168.9% increase).

Rental revenue increased to $46.8 million for the six months ended June 30, 2023 compared to $35.3 million during the six months ended June 30, 2022.

This increase during the first six months of 2023 was attributable to an increase in high horsepower compression rentals as these units carry a higher rental revenue rate than our lower horsepower units and, to a lesser extent, rental rate increases across a portion of our fleet intended to offset inflationary pressures related to the costs of our rental fleet.

Sales revenue increased to $4.6 million for the six months ended June 30, 2023 compared to $4.2 million for the same period in 2022.

This increase is mostly attributable to an increase in compressor sales partially offset by a slight decrease in parts sales.

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 24.4% to $23.0 million during the six months ended June 30, 2023 compared to $18.5 million during the six months ended June 30, 2022.

This increase was primarily due to inflationary pressures on labor and parts as well as increased high horsepower units being placed into service.

While repair and maintenance expenses are customary in our business, the timing of such expenses can fluctuate between periods resulting in periods with larger than normal expenses.

Cost of sales increased 49.2% to $5.1 million during the six months ended June 30, 2023 compared to $3.4 million during the six months ended June 30, 2022.

This increase during the first six months of 2023 was primarily due to a increased fabrication cost in costs of sales attributable to costs from our fabrication shops.

Selling, general, and administrative expenses increased 95.8% to $9.4 million for the six months ended June 30, 2023 compared to $4.8 million for the same period in 2022.

SG&A expenses during the first six months of 2023 were impacted by (i) $ 1.2 million of severance expenses related to the retirement agreement between NGS and Mr.

Stephen Taylor, our prior Chief Executive Officer, (ii) a $800,000 increase in stock option compensation expense and (iii) $400,000 increase in legals costs associated with our cooperation agreement.

Depreciation and amortization expense increased 4.0% to $12.6 million for the six months ended June 30, 2023 compared to $12.1 million for the six months ended June 30, 2022.

This increase was the result of unit retirements in the fourth quarter of 2021.

We recorded an income tax expense of $0.4 million for the six months ended June 30, 2023 and the six months ended June 30, 2022.

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

We recorded an impairment expense of $0.8 million related to capitalized software costs for the 6 months ended June 30, 2023.

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, severance expenses, impairment of goodwill, an increase in inventory allowance and inventory write-offs, and retirement of rental equipment.

“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, severance expenses, impairment expenses, 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.

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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, for the three months ended March 31, 2023 and 2022, the most directly comparable GAAP financial measure.

Please read the table below under “Reconciliation” to see how Adjusted EBITDA reconciles to our net (loss) income, for the three months ended June 30, 2023 and 2022, the most directly comparable GAAP financial measure.

Reconciliation

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

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2023 2022 2023 2022

(in thousands)

Net income $ 370 $ 337

Net income (loss) $ 504 $ (70) $ 874 $ 267

Interest expense 185 24 185 49

Income tax expense (benefit) 150 (11)

Income tax expense 249 372 396 361

Depreciation and amortization 6,418 6,042 12,583 12,103

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Severance expenses 612 — 1,224 —

Impairment expense 779 — 779 —

Adjusted EBITDA $ 9,877 $ 6,699 $ 17,658 $ 13,534

For the three months ended March 31, 2023, Adjusted EBITDA increased $1.0 million (13.9%) due primarily to a $6.3 million increase in total revenues partially offset by a $2.4 million increase in costs of rentals.

For the three months ended June 30, 2023, Adjusted EBITDA increased $3.2 million (47.4%) due primarily to a $7.0 million increase in total revenues partially offset by a $2.1 million increase in costs of rentals.

For the six months ended June 30, 2023, Adjusted EBITDA increased 4.1 million (30.5%) due primarily to an $11.6 million increase in rental revenue partially offset by an increase of $4.5 million for cost of rentals.

Liquidity and Capital Resources

Our working capital positions as of March 31, 2023 and December 31, 2022 are set forth below:

March 31, December 31,

Our working capital positions as of June 30, 2023 and December 31, 2022 are set forth below:

June 30, December 31,

(in thousands)

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Total working capital $ 18,884 $ 23,748

For the three months ended March 31, 2023, we invested $47.8 million in rental and property and other equipment by adding $47.0 million in new equipment to our rental fleet and $0.8 million primarily in vehicles as well as various other machinery and equipment.

For the six months ended June 30, 2023, we invested $93.5 million in rental and property and other equipment by adding $92.3 million in new equipment to our rental fleet and $1.2 million primarily 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 increased by $28.6 million during the three months ended March 31, 2023.

We financed our investment in rental equipment, property and other equipment with cash flow from operations, and borrowings under our Amended and Restated Credit Facility.

Our rental work-in-process increased by $19.9 million during the six months ended June 30, 2023.

We financed our investment in rental

equipment, property and other equipment with cash flow from operations, and borrowings under our Amended and Restated Credit Facility.

We anticipate that our cash flows from operations as well as our borrowing capacity under our Amended and Restated Credit Agreement will provide adequate liquidity for our planned capital expenditures during the remainder of 2023.

For any new capital expenditures in 2023 and beyond that exceeds our cash flow from operations and our

borrowing base under our Amended and Restated Credit Agreement, we anticipate that we would need to negotiate an expansion of our borrowing capacity under our Amended and Restated Credit Agreement or raise money in the capital markets through equity.

For any new capital expenditures in 2023 and beyond that exceeds our cash flow from operations and our borrowing base under our Amended and Restated Credit Agreement, we anticipate that we would need to negotiate an expansion of our borrowing capacity under our Amended and Restated Credit Agreement or raise money in the capital markets through sales of equity or debt securities.

While we control the timing and extent of our capital expenditures, there is no assurance that any such borrowing expansion would be granted.

At March 31, 2023 we had approximately $77 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination.

At March 31, 2023, we had cash and cash equivalents of $7.4 million compared to $3.4 million at December 31, 2022.

Our cash flows from operating activities of $18.2 million were offset by capital expenditures of $47.8 million during the three months ended March 31, 2023.

We had working capital of $17.6 million at March 31, 2023 compared to $23.7 million at December 31, 2022.

We generated cash flows from operating activities of $18.2 million during the first three months of 2023 compared to cash flows provided by operating activities of $5.0 million for the first three months of 2022.

At June 30, 2023 we had approximately $75 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination.

At June 30, 2023, we had cash and cash equivalents of $4.3 million compared to $3.4 million at December 31, 2022.

Our cash flows from operating activities of $22.6 million were offset by capital expenditures of $93.5 million during the six months ended June 30, 2023.

We had working capital of $18.9 million at June 30, 2023 compared to $23.7 million at December 31, 2022.

We generated cash flows from operating activities of $22.6 million during the first six months of 2023 compared to cash flows provided by operating activities of $13.2 million for the first six months of 2022.

For the remainder of 2023, our overall plan is to continue monitoring and holding expenses in line with the anticipated level of activity, fabricate rental fleet equipment only in direct response to market requirements, emphasize marketing of our idle gas compressor units and utilizing bank borrowing in line with market conditions.

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We believe market conditions indicate significant demand growth for large horsepower compression in 2023 and beyond.

While we believe that cash flows from operations, our current cash position and borrowing capacity under our Amended and Restated Credit Agreement will be sufficient to satisfy a portion of our capital activity, we may need to negotiate an expansion of our borrowing capacity under our Amended and Restated Credit Agreement to meet the capital expenditure requirements needed to meet anticipated additional demand.

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 March 31, 2023, the off-balance sheet arrangements and transactions that we have entered into include purchase agreements.

As of June 30, 2023, the off-balance sheet arrangements and transactions that we have entered into include 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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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