Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Description of Business
Natural Gas Services Group, Inc. (the "Company", “NGS”, "Natural Gas Services Group", "we" or "our") (a Colorado corporation), is a leading provider of natural gas compression equipment and services to the energy industry. The Company manufactures, fabricates, rents, sells and maintains natural gas compressors and flare systems for oil and natural gas production and plant facilities. NGS is headquartered in Midland, Texas, with fabrication facilities located in Tulsa, Oklahoma and Midland, Texas, and service facilities located in major oil and natural gas producing basins in the U.S.
Recent Events
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus known as COVID-19 due to the risks it imposes on the international community as the virus spreads globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The effects of the COVID-19 outbreak, including actions taken by businesses and governments to contain the spread of the virus, resulted in a significant, rapid decline in global and U.S. economic conditions. This significant drop in economic activity has 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, have resulted in the oil markets coming back into balance. After trading below $20 per barrel in the second half of April and averaging $28.53 per barrel in May, WTI crude oil has averaged approximately $40 per barrel since June 1 with greatly reduced price volatility.
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. In addition, unit utilization remained steady in July compared to June, and unit pricing has stabilized.
Nevertheless, risks remain high in this environment. As restrictions have been reduced in many states and countries, the rate of COVID-19 infections, hospitalizations and deaths has increased, particularly in the U.S. This has resulted in a reinstatement of some restrictions in several states, including Texas. If states and countries need to put further restrictions in place to help prevent the spread of the virus, crude oil demand could decline again. In addition, according to IEA’s August report, global oil supply rose by 2.5 MMbpd in July after Saudi Arabia ended its 1 MMbpd additional voluntary production cut and U.S. production increased. Additional shut-in production could be restored, and completion activities by domestic producers are likely to increase somewhat during the second half of 2020 to offset production declines. These risks to both
supply and demand could negatively impact oil prices, which would impact our utilization, rental revenues and overall financial performance during the remainder of 2020 as well as 2021.
Given the current economic and industry backdrop, we still expect compressor sales to be low for the remainder of 2020, as exploration and production companies have significantly reduced their capital expenditures budgets.
In regards to our costs, we implemented various cost cutting measures with respect to operating expenses and capital expenditures during the second quarter. Our operating expense reductions included reductions in our headcount from both layoffs and attrition, wage freezes, centralization of certain processes for better cost control, and the enlistment of our suppliers in our cost cutting efforts. We expect these cost cutting measures to continue to benefit our financial performance through the remainder of 2020. In addition, as we have done during prior downturns, we have reduced our capital expenditures budget. We invested $11.0 million in capital expenditures during the first six months of 2020. After recently securing new rental orders from one of our larger customers, we plan to only incur another $8-$10 million in capital expenditures for the remainder of 2020, bringing our 2020 capital expenditures budget to $19-$21 million, down from $69.9 million in 2019.
Finally, in keeping with current commercial precautions and practices in our industry, we implemented new guidelines to mitigate health risks to our employees and customers during this outbreak. We adopted remote and staggered work processes at our Midland headquarters. After reopening our headquarters in Midland, Texas on June 1, Midland experienced a significant increase in COVID-19 infections, including a verified positive test among the Company’s professional staff. As a result, the Company was forced to close its corporate headquarters for a second time on June 29, 2020. The Company’s corporate headquarters remains closed as of the date of this filing. The office closure - which was dictated by positive testing and subsequent quarantines - and staffing challenges resulted in delays in our collection and assimilation of financial data related to the completion of our interim financial statements required for this filing. With remote and staggered work processes back in place, we do not anticipate such issues going forward.
In addition, we adapted our field and fabrication work processes as well. To date, our field operations have continued largely uninterrupted, as the U.S. Department of Homeland Security designated our industry as part of our country’s critical infrastructure. Remote work and work process adjustments related to COVID-19 have not impacted our ability to maintain of service operations or caused us to incur significant costs. In addition, we have not experienced any supply chain issues in connection with the COVID-19 outbreak.
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company's financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the 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.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, its subsidiary, NGSG Properties, LLC and the rabbi trust associated with the Company's deferred compensation plan (see Note 9). All significant intercompany accounts and transactions for the periods presented have been eliminated in consolidation.
These financial statements include all adjustments, consisting of only normal recurring adjustments, which are necessary to make our financial position at June 30, 2020 and the results of our operations for the three and six months ended June 30, 2020 and 2019 not misleading. As permitted by the rules and regulations of the Securities and Exchange Commission (SEC), the accompanying condensed consolidated financial statements do not include all disclosures normally required by generally accepted accounting principles in the United States of America (GAAP). These financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 on file with the SEC. In our opinion, the condensed consolidated financial statements are a fair presentation of the financial position, results of operations, changes in stockholders' equity and cash flows for the periods presented.
The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2020.
Revenue Recognition Policy
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606"). Under ASC 606, 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. sales and property taxes). Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive for those goods or services. To recognize revenue, we (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, we satisfy the performance obligation(s). Shipping and handling costs incurred are accounted for as fulfillment costs and are included in cost of revenues in our consolidated statements of operations.
Nature of Goods and Services
The following is a description of principal activities from which the Company generates its revenue:
Rental Revenue. The Company generates revenue from renting compressors and flare systems to our customers. These contracts, which all qualify as operating leases under ASC Topic 842, Leases (ASC 842), may also include a fee for servicing the compressor or flare during the rental contract. Our rental contracts typically range from six to 24 months, with our larger horsepower compressors having contract terms of up to 60 months. Our revenue is recognized over time, with equal monthly payments over the term of the contract. After the terms of the contract have expired, a customer may renew their contract or continue renting on a monthly basis thereafter. In accordance ASC 842 – Leases, we have applied the practical expedient ASC 842-10-15-42A, which allows the Company to combine lease and non-lease components.
Sales Revenue. The Company generates revenue by the sale of custom/fabricated compressors, flare systems and parts, as well as, exchange/rebuilding customer owned compressors and sale of used rental equipment.
Custom/fabricated compressors and flare systems - The Company designs and fabricates compressors and flares based on the customer’s specifications outlined in their contract. Though the equipment being built is customized by the customer, control under these contracts does not pass to the customer until the compressor or flare package is complete and shipped, or in accordance with a bill and hold arrangement, the customer accepts title and assumes the risk and rewards of ownership. We request some of our customers to make progressive payments as the product is being built; these payments are recorded as a contract liability on the Deferred Income line on the condensed consolidated balance sheet until control has been transferred. These contracts also may include an assurance warranty clause to guarantee the product is free from defects in material and workmanship for a set duration of time; this is a standard industry practice and is not considered a performance obligation.
From time to time, upon the customer’s written request, we recognize revenue when manufacturing is complete and the equipment is ready for shipment. At the customer’s request, we will bill the customer upon completing all performance obligations, but before shipment. The customer will formally request that we ship the equipment per their direction from our manufacturing facility at a later specified date and that we segregate the equipment from our finished goods, such that they are not available to fill other orders. Per the customer’s agreement change of control is passed to the customer once the equipment is complete and ready for shipment. We have operated using bill and hold agreements with certain customers for many years, with consistent and satisfactory results for both the customer and us. The credit terms on these agreements are consistent with the credit terms on all other sales. All control is shouldered by the customer and there are no exceptions to the customer’s commitment to accept and pay for the manufactured equipment. Revenues recognized related to bill and hold arrangements for the six months ended June 30, 2020 and 2019 was approximately $852,000 and $6.1 million, respectively.
Parts - Revenue is recognized after the customer obtains control of the parts. Control is passed either by the customer taking physical possession or the parts being shipped. The amount of revenue recognized is not adjusted for expected returns, as our historical part returns have been de minimis.
Exchange or rebuilding customer owned compressors - Based on the contract, the Company will either exchange a new/rebuilt compressor for the customer’s malfunctioning compressor or rebuild the customer’s compressor. Revenue is recognized after control of the replacement compressor has transferred to the customer based on the terms of the contract, i.e., by physical delivery, delivery and installment, or shipment of the compressor.
Used compressors or flares - From time to time, a customer may request to purchase a used compressor or flare out of our rental fleet. Revenue from the sale of rental equipment is recognized when the control has passed to the customer based on the terms of the contract, i.e., when the customer has taken physical possession or the equipment has been shipped.
Service and Maintenance Revenue. The Company provides routine or call-out services on customer owned equipment. Revenue is recognized after services in the contract are rendered.
Payment terms for sales revenue and service and maintenance revenue discussed above are generally 30 to 60 days, although terms for specific customers can vary. Also, transaction prices are not subject to variable consideration constraints.
Disaggregation of Revenue
The following table shows the Company's revenue disaggregated by product or service type for the three and six months ended June 30, 2020 and 2019:
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Three months ended June 30,
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Six months ended June 30,
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(in thousands)
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(in thousands)
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2020
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2019
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2020
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2019
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Compressors - sales
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$
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1,360
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$
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4,788
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$
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2,212
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$
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7,496
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Flares - sales
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160
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106
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240
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541
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Other (parts/rebuilds) - sales
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488
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920
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|
|
1,006
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|
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1,902
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Service and maintenance
|
266
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|
509
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606
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988
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Total revenue from contracts with customers
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2,274
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6,323
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4,064
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10,927
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Add: ASC 842 rental revenue
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15,131
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13,572
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31,231
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26,959
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Total revenue
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$
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17,405
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$
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19,895
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$
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35,295
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$
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37,886
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Contract Balances
As of June 30, 2020 and December 31, 2019, we had the following receivables and deferred income from contracts with customers:
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(in thousands)
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June 30, 2020
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December 31, 2019
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Accounts Receivable
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Accounts receivable - contracts with customers
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$
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3,176
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$
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3,061
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Accounts receivable - ASC 842
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9,470
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6,963
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Total Accounts Receivable
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$
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12,646
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$
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10,024
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Less: Allowance for doubtful accounts
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(972)
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(918)
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Total Accounts Receivable, net
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$
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11,674
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$
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9,106
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Deferred income
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$
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125
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$
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640
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The Company recognized rental revenue of $73,000 for the six months ended June 30, 2020 that was included in deferred income at the beginning of 2020. For the year ended December 31, 2019, the Company recognized revenue of $48,000 from amounts related to sales that were included in deferred income at the beginning of 2019.
The increases (decreases) of accounts receivable and deferred income were primarily due to normal timing differences between our performance and the customers’ payments.
Transaction Price Allocated to the Remaining Performance Obligations
As of June 30, 2020, the Company did not have revenue related to unsatisfied performance obligations.
Contract Costs
The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general and administrative expenses on our condensed consolidated statements of operations.
Leases
On January 1, 2019, we adopted ASC 842 using the modified retrospective method. We recognized the cumulative effect of initially applying the new lease standard and had no adjustments to retained earnings.
ASC 842 requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations. We elected the practical expedients permitted under the transition guidance of the new standard that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. We did not reassess whether any contracts or land easements entered into prior to adoption are leases or contain leases.
The Company, as a lessor, applies the practical expedient to not separate non-lease components from lease components, therefore, accounting for each separate lease component and its associated non-lease component, as a single lease component. Each lease that 1) contains the same timing and pattern of transfer for lease and non-lease components; and 2) if the lease component, if accounted for separately, would be classified as an operating lease, the Company elects to not separate non-lease components from lease components.
Inventory
Inventory (current and long-term) is valued at the lower of cost and net realizable value. The cost of inventories is determined by the weighted average method. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on current and anticipated customer demand and production requirements. The Company accesses anticipated customer demand based on current and upcoming capital expenditure budgets of its major customers as well as other significant companies in the industry, along with oil and natural gas price forecasts and other factors affecting the industry. In addition, our long-term inventory consists of raw materials that remain viable but which the Company does not expect to sell within the next year.
Rental Equipment and Property and Equipment
Rental equipment and property and equipment are recorded at cost less accumulated depreciation, except for work-in-progress on new rental equipment which is recorded at cost until it’s complete and added to the fleet. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Our rental equipment has an estimated useful life between 15 and 25 years, while our property and equipment has an estimate useful lives which range from 3 to 39 years. The majority of our property and equipment, including rental equipment, is a direct cost to generating revenue.
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. The following factors could trigger an impairment review: significant underperformance relative to historical or projected future cash flows; significant adverse changes in the extent or manner in which asset (or asset group) is being used or its condition, including a meaningful drop in fleet utilization over the prior four quarters; significant negative industry or company-specific trends or actions, including meaningful capital expenditure budget reductions by our major customers or other sizable exploration and production or midstream companies, as well as significant declines in oil and natural gas prices; legislative changes prohibiting us from leasing our units or flares; or poor general economic conditions. 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.
Sales of equipment out of the rental fleet are included with sales revenue and cost of sales, while retirements of units are shown as a separate operating expense. Gains and losses resulting from sales and dispositions of other property and equipment are included within other income (expense). Maintenance and repairs are charged to cost of rentals as incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense in the tax provision in our condensed consolidated statements of operations.
We account for uncertain tax positions in accordance with guidance in ASC 740, which prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the condensed consolidated financial statements. Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. A liability for unrecognized tax benefits is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. We have no liabilities for uncertain tax positions as of June 30, 2020.
Our policy regarding income tax interest and penalties is to expense those items as interest expense and other expense, respectively.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the economic impact caused by the COVID-19 pandemic. The CARES Act, among other things, permits federal income tax net operating loss ("NOL") carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs 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. Please read Note 4, Federal Income Tax Receivable for a discussion about the impact on our condensed consolidated financial statements.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC Topic 820 established a fair value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. These inputs are categorized as follows:
Level 1- quoted prices in an active market for identical assets or liabilities;
Level 2- quoted prices in an active market for similar assets or liabilities, inputs other than quoted prices that are observable for similar assets or liabilities, inputs derived principally from or corroborated by observable market data by correlation or other means; and
Level 3- valuation methodology with unobservable inputs that are significant to the fair value measurement.
Management believes that the fair value of our cash and cash equivalents, trade receivables, accounts payable and line of credit at June 30, 2020 and December 31, 2019 approximate their carrying values due to the short-term nature of the instruments or the use of prevailing market interest rates.
Segments and Related Information
ASC 280-10-50, “Operating Segments”, define the characteristics of an operating segment as a) being engaged in business activity from which it may earn revenue and incur expenses, b) being reviewed by the company's chief operating decision maker (CODM) for decisions about resources to be allocated and assess its performance and c) having discrete financial information. Although we look at our products to analyze the nature of our revenue, other financial information, such as certain costs and expenses, net income and EBITDA are not captured or analyzed by these categories. Our CODM does not make resource allocation decisions or access the performance of the business based on these categories, but rather in the aggregate. Based on this, management believes that it operates in one business segment.
In their analysis of product lines as potential operating segments, management also considered ASC 280-10-50-11, “Aggregation Criteria”, which allows for the aggregation of operating segments if the segments have similar economic characteristics and if the segments are similar in each of the following areas:
•The nature of the products and services;
•The nature of the production processes;
•The type or class of customer for their products and services;
•The methods used to distribute their products or provide their services; and
•The nature of the regulatory environment, if applicable.
We are engaged in the business of designing and manufacturing compressors and flares. Our compressors and flares are sold and rented to our customers. In addition, we provide service and maintenance on compressors in our fleet and to third parties. These business activities are similar in all geographic areas. Our manufacturing process is essentially the same for the entire Company and is performed at our facilities in Midland, Texas and Tulsa, Oklahoma. Our customers primarily consist of entities in the business of producing oil and natural gas. The maintenance and service of our products is consistent across the entire Company and is performed via an internal fleet of vehicles. The regulatory environment is similar in every jurisdiction in that the most impacting regulations and practices are the result of federal energy policy. In addition, the economic characteristics of each customer arrangement are similar in that we maintain policies at the corporate level.
Recently Issued Accounting Pronouncements
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.
Revisions of Prior Period Financial Statements
As stated in our Annual Report on Form 10-K for the year ended December 31, 2019, we revised our consolidated financial statements for the years ended December 31, 2018 and 2017, as well as for interim periods in 2019 and 2018, for immaterial operating costs and expenses that were inappropriately capitalized. The following is a summary of the revisions to our unaudited, condensed consolidated financial statements for the three and six months ended June 30, 2019:
Revised Condensed Consolidated Statements of Operations
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For the three months ended June 30, 2019
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($ in thousands)
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As Reported
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Revisions
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As Revised
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Total revenue
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$
|
19,895
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|
$
|
—
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$
|
19,895
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Operating costs and expenses:
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|
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Cost of rentals, exclusive of depreciation stated separately below
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|
6,359
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|
|
254
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|
|
6,613
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Depreciation and amortization
|
|
5,683
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|
|
37
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|
|
5,720
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|
|
Total operating costs and expenses
|
|
19,302
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|
|
291
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|
|
19,593
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Operating income (loss)
|
|
593
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|
|
(291)
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|
|
302
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Income before provision for income taxes
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|
770
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(291)
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|
|
479
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Income tax (expense) benefit
|
|
(197)
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|
|
45
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|
|
(152)
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Net income (loss)
|
|
573
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|
|
(246)
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|
|
327
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|
|
Earnings (loss) per share, basic
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|
0.04
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|
|
(0.02)
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|
|
0.02
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Earnings (loss) per share, diluted
|
|
0.04
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|
(0.02)
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|
|
0.02
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For the six months ended June 30, 2019
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($ in thousands)
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As Reported
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Revisions
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As Revised
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Total revenue
|
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$
|
37,886
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$
|
—
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|
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$
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37,886
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Operating costs and expenses:
|
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|
|
|
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Cost of rentals, exclusive of depreciation stated separately below
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12,244
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|
|
589
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|
|
12,833
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Depreciation and amortization
|
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11,241
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|
|
56
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|
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11,297
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Total operating costs and expenses
|
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37,084
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|
|
645
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|
|
37,729
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Operating income (loss)
|
|
802
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|
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(645)
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|
|
157
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Income before provision for income taxes
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|
1,280
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|
|
(645)
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|
|
635
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Income tax (expense) benefit
|
|
(350)
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|
|
140
|
|
|
(210)
|
|
|
Net income (loss)
|
|
930
|
|
|
(505)
|
|
|
425
|
|
|
Earnings (loss) per share, basic
|
|
0.07
|
|
|
(0.04)
|
|
|
0.03
|
|
|
Earnings (loss) per share, diluted
|
|
0.07
|
|
|
(0.04)
|
|
|
0.03
|
|
Revised Condensed Consolidated Statement of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2019
|
|
|
|
|
|
($ in thousands)
|
|
As Reported
|
|
Revisions
|
|
As Revised
|
|
Retained earnings balance at January 1, 2019
|
|
$
|
152,291
|
|
|
$
|
(949)
|
|
|
$
|
151,342
|
|
|
Total stockholders' equity at January 1, 2019
|
|
260,181
|
|
|
(949)
|
|
|
259,232
|
|
|
Net income (loss) for the three months ended March 31, 2019
|
|
357
|
|
|
(259)
|
|
|
98
|
|
|
Retained earnings balance at March 31, 2019
|
|
152,648
|
|
|
(1,208)
|
|
|
151,440
|
|
|
Total stockholders' equity at March 31, 2019
|
|
261,396
|
|
|
(1,208)
|
|
|
260,188
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) for the three months ended June 30, 2019
|
|
573
|
|
|
(246)
|
|
|
327
|
|
|
Retained earnings balance at June 30, 2019
|
|
153,221
|
|
|
(1,454)
|
|
|
151,767
|
|
|
Total stockholders' equity at June 30, 2019
|
|
262,570
|
|
|
(1,454)
|
|
|
261,116
|
|
Revised Condensed Consolidated Statement of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2019
|
|
|
|
|
|
($ in thousands)
|
|
As Reported
|
|
Revisions
|
|
As Revised
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
930
|
|
|
$
|
(505)
|
|
|
$
|
425
|
|
|
Depreciation and amortization
|
|
11,241
|
|
|
56
|
|
|
11,297
|
|
|
Deferred taxes
|
|
356
|
|
|
(137)
|
|
|
219
|
|
|
Inventory decrease
|
|
1,200
|
|
|
1,111
|
|
|
2,311
|
|
|
Prepaid expenses and prepaid income taxes increase
|
|
(22)
|
|
|
(203)
|
|
|
(225)
|
|
|
Net cash provided by operating activities
|
|
6,447
|
|
|
322
|
|
|
6,769
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Purchase of rental equipment, property and other equipment
|
|
(29,402)
|
|
|
(322)
|
|
|
(29,724)
|
|
|
Net cash used in investing activities
|
|
(29,476)
|
|
|
(322)
|
|
|
(29,798)
|
|
|
Net change in cash and cash equivalents
|
|
(22,717)
|
|
|
—
|
|
|
(22,717)
|
|
3. Inventory
Our inventory, net of allowance for obsolescence of $37,000 at June 30, 2020 and $24,000 at December 31, 2019, consisted of the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Raw materials - current
|
$
|
14,800
|
|
|
$
|
19,388
|
|
|
Work-in-process
|
961
|
|
|
1,692
|
|
|
|
|
|
|
|
Inventory - current
|
15,761
|
|
|
21,080
|
|
|
Raw materials - long term (net of allowances of $37 and $24, respectively)
|
1,123
|
|
|
1,068
|
|
|
Inventory - total
|
$
|
16,884
|
|
|
$
|
22,148
|
|
Our long-term inventory consists of raw materials that remain viable but that the Company does not expect to sell or use within the year. During the six months ended June 30, 2020 and 2019, there were no write-offs of obsolete inventory against the allowance for obsolescence.
4. Federal Income Tax Receivable
As discussed in Note 2, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid federal income taxes. The Company generated significant NOLs during 2018 and 2019, and plans to carryback these losses for five years. Accordingly, as of June 30, 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. In addition, the Company recorded a current income tax benefit of $4.9 million on its condensed consolidated statement of operations for the six months ended June 30, 2020.
5. Rental Equipment
Our rental equipment and associated accumulated depreciation as of June 30, 2020 and December 31, 2019, respectively, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
June 30, 2020
|
|
December 31, 2019
|
|
Compressor units
|
$
|
381,113
|
|
|
$
|
370,961
|
|
|
Work-in-progress
|
8,202
|
|
|
9,129
|
|
|
Rental equipment
|
389,315
|
|
|
380,090
|
|
|
Accumulated depreciation
|
(173,462)
|
|
|
(162,348)
|
|
|
Rental equipment, net of accumulated depreciation
|
$
|
215,853
|
|
|
$
|
217,742
|
|
We evaluated our rental equipment for potential impairment as of June 30, 2020, and determined that no such impairment existed as of that date.
6. Leases
The Company determines if an arrangement is a lease at inception by assessing whether it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company’s leases are primarily related to property leases for its field offices. The Company's leases have remaining lease terms of two months to 9 years. Renewal and termination options are included in the lease term when it is reasonably certain that the Company will exercise the option. The Company's lease agreements do not contain any contingent rental payments, material residual guarantees or material restrictive covenants.
ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As substantially all of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate to determine the present value of lease payments. Based on the present value of lease payments for the Company's existing leases, the Company recorded net lease assets and lease liabilities of approximately $451,000, respectively, upon adoption. The Company had no finance leases. The new lease standard did not materially impact the Company's condensed consolidated statements of operations and had no impact on the Company's condensed consolidated statements of cash flows.
The impact of the new lease standard on the June 30, 2020 condensed consolidated balance sheet was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Classification on the Condensed Consolidated Balance Sheet
|
June 30, 2020
|
|
|
|
(in thousands, except years)
|
|
Operating lease assets
|
Right of use assets-operating leases
|
$
|
510
|
|
|
|
|
|
|
Current lease liabilities
|
Current operating leases
|
$
|
183
|
|
|
Noncurrent lease liabilities
|
Long-term operating leases
|
327
|
|
|
Total lease liabilities
|
|
$
|
510
|
|
|
|
|
|
|
Weighted average remaining lease term in years
|
|
2.1
|
|
Implicit Rate
|
|
3.1
|
%
|
Operating lease costs are recognized on a straight-line basis over the lease term. Total operating lease costs for the six months ended June 30, 2020 was approximately $275,000.
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
(in thousands)
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating lease cost (1) (2)
|
$
|
275
|
|
(1) Lease costs are classified on the condensed consolidated statements of operations in cost of sales, cost of compressors and selling, general and administrative expenses.
(2) Includes costs of $179,000 for leases with terms of 12 months or less and $96,000 for leases with terms greater than 12 months.
The following table shows the future maturities of lease liabilities as of June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
Years Ending December 31,
|
|
Lease Liabilities
|
|
|
|
(in thousands)
|
|
2020 (excluding the six months ended June 30, 2020)
|
|
$
|
101
|
|
|
2021
|
|
174
|
|
|
2022
|
|
47
|
|
|
2023
|
|
38
|
|
|
2024
|
|
38
|
|
|
Thereafter
|
|
168
|
|
|
Total lease payments
|
|
566
|
|
|
Less: Imputed interest
|
|
(56)
|
|
|
Total
|
|
$
|
510
|
|
7. Credit Facility
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. The Lender may adjust the borrowing base components if material deviations in the collateral are discovered in future audits of the collateral. We had $29.5 million borrowing base availability at June 30, 2020 under the terms of our Amended Credit Agreement.
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 1.25%. For purposes of the CB Floating Rate, the Applicable Margin is 1.50%. For the six month period ended June 30, 2020, our weighted average interest rate was 2.45%.
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.
Maturity. 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.
Security. 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 compressors, the book value of which 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).
Covenants. 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 loan 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 facility. Obligations under the Amended Credit Agreement may be accelerated upon the occurrence of an event of default.
As of June 30, 2020, we were in compliance with all financial covenants in our Amended Credit Agreement. A default under our Credit Agreement could trigger the acceleration of our bank debt so that it is immediately due and payable. Such default would likely limit our ability to access other credit. At June 30, 2020 and December 31, 2019, our outstanding balance on the line of credit was $417,000.
8. CARES Act Loan
On April 10, 2020, the Company entered into a promissory note (the “Loan”) for an unsecured loan in the amount of $4.6 million through the Paycheck Protection Program (“PPP”) established by the CARES Act and administered by the U.S. Small Business Administration ("SBA"). The Loan was made for the purpose of securing funding for salaries and wages of employees that may have otherwise been displaced by the outbreak of COVID-19 and the resulting detrimental impact on the Company’s business. JPMorgan Chase Bank, N.A. (the “Lender”) processed and funded the Loan.
On April 23, 2020, the SBA advised that companies that applied for and received PPP loans that had other sufficient sources of liquidity that would not be "significantly detrimental" to their businesses may be subject to increased scrutiny and potential liability unless these companies repaid their loans in full by May 7, 2020. While the Company believes it was justified in seeking the Loan and the funds received were earmarked for the purposes set forth in the original PPP regulations, the Company voluntarily repaid the Loan, with accrued interest, to the Lender on May 4, 2020.
9. Deferred Compensation Plan
The Company has a non-qualified deferred compensation plan for executive officers, directors and certain eligible employees. The assets of the deferred compensation plan are held in a rabbi trust and are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The plan allows for deferral of up to 90% of a participant’s base salary, bonus, commissions, director fees and restricted stock unit awards. A Company owned life insurance policy held in a rabbi trust is utilized as a source of funding for the plan. The cash surrender value of the life insurance policy is $1.6 million and $1.5 million as of June 30, 2020 and December 31, 2019, respectively. We reported in other (expense) income in the condensed consolidated statements of operations a loss related to the policy of approximately $92,000 and a gain of approximately $131,000 for the six months ended June 30, 2020 and 2019, respectively.
For deferrals of base salary, bonus, commissions and director fees, settlement payments are made to participants in cash, either in a lump sum or in periodic installments. The obligation to pay the deferred compensation and the deferred director fees is adjusted to reflect the positive or negative performance of investment measurement options selected by each participant. The deferred compensation liability, which is included in other long-term liabilities in the condensed consolidated balance sheet, was $1.7 million as of June 30, 2020 and December 31, 2019.
For deferrals of restricted stock units, the plan does not allow for diversification, therefore, distributions are paid in shares of common stock and the obligation is carried at grant value. As of June 30, 2020 and 2019, respectively, we had 48,601 and 62,145 unvested restricted stock units being deferred. As of June 30, 2020, we had released and issued 143,099 shares with a value of $2.2 million to the deferred compensation plan. As of June 30, 2019, we had released and issued 79,688 shares with a value of $1.7 million to the deferred compensation plan.
10. Stock-Based and Other Long-Term Incentive Compensation
Stock Options
A summary of all option activity as of December 31, 2019, and changes during the six months ended June 30, 2020 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Stock Options
|
|
Weighted Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Life (years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding, December 31, 2019
|
208,334
|
|
|
$
|
23.67
|
|
|
3.66
|
|
$
|
—
|
|
|
Granted
|
5,000
|
|
|
4.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
(40,000)
|
|
|
19.11
|
|
|
|
|
|
|
Outstanding, June 30, 2020
|
173,334
|
|
|
$
|
24.18
|
|
|
4.18
|
|
$
|
7
|
|
|
Exercisable, June 30, 2020
|
168,334
|
|
|
$
|
24.75
|
|
|
4.01
|
|
$
|
—
|
|
The following table summarizes information about our stock options outstanding at June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
Options Outstanding
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
Shares
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
$0.01-15.70
|
13,500
|
|
|
4.62
|
|
$
|
11.19
|
|
|
8,500
|
|
|
$
|
14.89
|
|
|
$15.71-17.81
|
16,000
|
|
|
0.57
|
|
17.81
|
|
|
16,000
|
|
|
17.81
|
|
|
$17.82-20.48
|
20,500
|
|
|
2.72
|
|
18.75
|
|
|
20,500
|
|
|
18.75
|
|
|
$20.49-33.36
|
123,334
|
|
|
4.84
|
|
27.33
|
|
|
123,334
|
|
|
27.33
|
|
|
|
173,334
|
|
|
4.18
|
|
$
|
24.18
|
|
|
168,334
|
|
|
$
|
24.75
|
|
The summary of the status of our unvested stock options as of December 31, 2019 and changes during the six months ended June 30, 2020 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested stock options:
|
Shares
|
|
Weighted Average
Grant Date Fair Value Per Share
|
|
Unvested at December 31, 2019
|
10,433
|
|
|
$
|
11.93
|
|
|
Granted
|
5,000
|
|
|
2.07
|
|
|
Vested
|
(10,433)
|
|
|
11.93
|
|
|
Canceled/Forfeited
|
—
|
|
|
—
|
|
|
Unvested at June 30, 2020
|
5,000
|
|
|
$
|
2.07
|
|
As of June 30, 2020, there was $8,000 of unrecognized compensation cost related to unvested options. Total compensation expense for stock options was $18,000 and $61,000 for the six months ended June 30, 2020 and 2019, respectively.
Restricted Shares/Units
In accordance with the Company's employment agreement with Stephen Taylor, the Company's Chief Executive Officer, the Compensation Committee of the Company's Board of Directors reviewed his performance in determining the issuance of restricted common stock. Based on this review, which included consideration of the Company's 2019 performance, Mr. Taylor was awarded 94,133 restricted shares/units on April 28, 2020, which vest over three years, in equal annual installments, beginning April 28, 2021. On April 28, 2020, the Compensation Committee awarded 10,000 restricted shares/units to our Vice President of Technical Services, James Hazlett. The restricted shares to Mr. Hazlett vest over three years, in equal annual installments, beginning April 28, 2021. We also awarded and issued 4,432 shares of restricted common stock to each of our four independent members of our Board of Directors as partial payment for their services in 2020. These awards of restricted stock vest one year from the date of grant. Total compensation expense related to these and previously granted restricted stock awards was $1.0 million and $1.1 million for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, there was a total of $2.9 million of unrecognized compensation expense related to these shares/units which is expected to be recognized over the next 2.75 years.
Other Long-Term Incentive Compensation
On April 28, 2020, based on its review of Mr. Taylor's 2019 performance, the Compensation Committee also issued a long-term incentive award of $1,061,820 to Mr. Taylor that vests in equal, annual tranches over three years. At the time of vesting, each tranche will be payable in cash or common stock at the discretion of the Compensation Committee. In addition, on April 28, 2020, we issued a $50,000 award to each of our four independent members of our Board of Directors as partial payment for their services in 2020. These awards vest one year from the date of grant and are payable in cash upon vesting. The Company accounts for these other long-term incentive awards to Mr. Taylor and our independent Board members as liabilities under accrued liabilities on our condensed consolidated balance sheet. The vesting of these awards awards is subject to acceleration upon certain events, such as (i) death or disability of the recipient, (ii) certain circumstances in connection with a change of control of the Company, (iii) for executive officers, termination without cause (as defined in the agreement), and (iv) for executive officers, resignation for good reason (as defined). Total compensation expense related to these other long-term incentive awards was approximately $126,000 for the six months ended June 30, 2020. As of June 30, 2020, there was a total of $1.1 million of unrecognized compensation expense related to these other long-term incentive awards which is expected to be recognized over the next 2.75 years.
11. Earnings per Share
The following table reconciles the numerators and denominators of the basic and diluted earnings per share computation (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
Six months ended
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
165
|
|
|
$
|
327
|
|
|
$
|
4,247
|
|
|
$
|
425
|
|
|
Denominator for earnings per basic common share:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
13,237
|
|
|
13,134
|
|
|
13,197
|
|
|
13,100
|
|
|
Denominator for earnings per diluted common share:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
13,237
|
|
|
13,134
|
|
|
13,197
|
|
|
13,100
|
|
|
Dilutive effect of stock options and restricted shares
|
243
|
|
|
328
|
|
|
251
|
|
|
268
|
|
|
Diluted weighted average shares
|
13,480
|
|
|
13,462
|
|
|
13,448
|
|
|
13,368
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.32
|
|
|
$
|
0.03
|
|
|
Diluted
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
$
|
0.32
|
|
|
$
|
0.03
|
|
For the three months ended June 30, 2020, options to purchase 168,334 weighted average shares of common stock with exercise prices ranging from $14.89 to $33.36 were not included in the computation of diluted earnings per share due to their antidilutive effect.
For the six months ended June 30, 2020, options to purchase 175,587 weighted average shares of common stock with exercise prices ranging from $14.89 to $33.36 were not included in the computation of diluted earnings per share due to their antidilutive effect.
For the three months ended June 30, 2019, options to purchase 216,669 weighted average shares of common stock with exercise prices ranging from $16.74 to $33.36 were not included in the computation of diluted earnings per share due to their antidilutive effect.
For the six months ended June 30, 2019, options to purchase 207,591 weighted average shares of common stock with exercise prices ranging from $17.74 to $33.36 were not included in the computation of diluted earnings per share due to their antidilutive effect.
12. Related Party
In 2016, we entered into a joint venture partnership, N-G, LLC (‘N-G”), with Genis Holdings, LLC (“Genis”) to explore new technologies for wellhead compression. NGS and Genis both share 50% ownership of N-G. We account for this investment under the equity method. In 2018, we ordered some compressor packages from Genis, totaling $1.0 million. The compressors were completed and paid in full at December 31, 2019.
13. Commitments and Contingencies
From time to time, we are a party to various legal proceedings in the ordinary course of our business. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on our financial position, results of operations or cash flow. We are not currently a party to any material legal proceedings, and we are not aware of any threatened material litigation.