Natural Gas Services (NGS) - 2020 Q2 - Quarterly Report

Part I - FINANCIAL INFORMATION This section covers the company's unaudited financial statements, management's discussion and analysis, market risk, and internal controls Item 1. Consolidated Financial Statements The unaudited condensed consolidated financial statements detail the company's financial position, operations, cash flows, and prior period revisions Unaudited Condensed Consolidated Balance Sheets Total assets and stockholders' equity increased due to a federal income tax receivable and higher cash, while total liabilities also rose Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $58,610 | $42,415 | | Federal income tax receivable | $14,992 | $— | | Total assets | $301,159 | $286,577 | | Total current liabilities | $4,451 | $5,508 | | Deferred income tax liability | $41,744 | $31,243 | | Total liabilities | $48,302 | $38,884 | | Total stockholders' equity | $252,857 | $247,693 | Unaudited Condensed Consolidated Statements of Operations The company reported an operating loss in Q2 2020 and for the six-month period, with net income boosted by a significant CARES Act tax benefit Statement of Operations Summary (in thousands, except EPS) | Metric | Q2 2020 | Q2 2019 | 6 Months 2020 | 6 Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $17,405 | $19,895 | $35,295 | $37,886 | | Rental income | $15,131 | $13,572 | $31,231 | $26,959 | | Sales | $2,008 | $5,814 | $3,458 | $9,939 | | Operating (loss) income | ($148) | $302 | ($421) | $157 | | Income tax (expense) benefit | ($57) | ($152) | $4,486 | ($210) | | Net income | $165 | $327 | $4,247 | $425 | | Diluted EPS | $0.01 | $0.02 | $0.32 | $0.03 | Unaudited Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased in the first half of 2020, driven by net income and stock-based compensation - Total stockholders' equity grew by $5.2 million in the first six months of 2020, reaching $252.9 million at June 30, 2020[17] Unaudited Condensed Consolidated Statements of Cash Flows Operating cash flow significantly increased, with reduced investing activities leading to an overall rise in cash and cash equivalents Cash Flow Summary (in thousands) | Cash Flow Activity | Six months ended June 30, 2020 | Six months ended June 30, 2019 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $14,802 | $6,769 | | Net Cash Used in Investing Activities | ($10,792) | ($29,798) | | Net Cash (Used in) Provided by Financing Activities | ($151) | $312 | | Net Change in Cash | $3,859 | ($22,717) | | Cash at End of Period | $15,451 | $29,911 | Notes to Unaudited Condensed Consolidated Financial Statements These notes detail the impact of COVID-19, CARES Act tax benefits, PPP loan repayment, and prior period financial statement revisions - The COVID-19 pandemic and related economic decline caused a drop in demand, leading to unit returns and shut-ins. In response, the company implemented cost-cutting measures and reduced its 2020 capital expenditures budget to $19-$21 million, down from $69.9 million in 2019[24][28][31] - Under the CARES Act, the company plans to carry back net operating losses from 2018 and 2019, resulting in a recorded federal income tax receivable of $15.0 million and a current income tax benefit of $4.9 million for the first six months of 2020[66][82] - The company obtained a $4.6 million PPP loan in April 2020 but voluntarily repaid it in full in May 2020 following updated SBA guidance[101][102] - Prior period financial statements for 2019 and 2018 were revised to correct for immaterial operating costs and expenses that were inappropriately capitalized[76] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the impact of COVID-19 and oil price collapse on revenue, operations, and liquidity, highlighting cost-cutting and tax benefits Results of Operations Total revenue declined in the first half of 2020 due to lower sales, resulting in an operating loss, offset by a significant tax benefit Revenue by Product Line - Six Months Ended June 30 (in thousands) | Product Line | 2020 | % of Total | 2019 | % of Total | | :--- | :--- | :--- | :--- | :--- | | Rental | $31,231 | 88.5% | $26,959 | 71.2% | | Sales | $3,458 | 9.8% | $9,939 | 26.2% | | Service and Maintenance | $606 | 1.7% | $988 | 2.6% | | Total | $35,295 | | $37,886 | | - Rental fleet horsepower utilization increased to 63.6% at June 30, 2020, from 59.9% a year prior, reflecting strong demand for higher horsepower units and the retirement of older, smaller units[160][161] - The company recorded a $4.5 million income tax benefit for the six months ended June 30, 2020, primarily due to the CARES Act allowing the carryback of net operating losses[169] Liquidity and Capital Resources The company maintains strong liquidity with increased working capital and reduced capital expenditures, believing current resources are sufficient Working Capital (in thousands) | Component | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $58,610 | $42,415 | | Total current liabilities | $4,451 | $5,508 | | Total working capital | $54,159 | $36,907 | - Capital expenditures for the first six months of 2020 were $11.0 million. The company plans to spend only an additional $8-$10 million for the remainder of 2020[139][171] - As of June 30, 2020, the company had $29.5 million available for borrowing under its $30 million senior secured revolving credit facility[175] Item 3. Quantitative and Qualitative Disclosures about Market Risk No material changes occurred in the market risks previously disclosed in the company's Annual Report on Form 10-K - There have been no changes in the market risks disclosed in the Company's Form 10-K for the year ended December 31, 2019[183] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in income tax accounting and improper capitalization of maintenance costs - Management concluded that disclosure controls and procedures were not effective as of the end of the reporting period[184] - A material weakness related to income tax accounting, first identified in 2018, has not yet been fully remediated[185][187] - A second material weakness was identified in Q4 2019 concerning the improper capitalization of 'make-ready' and other maintenance jobs, which resulted in the revision of prior period financial statements[188] Part II - OTHER INFORMATION This section covers legal proceedings, risk factors, and a list of exhibits filed with the report Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings or aware of any threatened litigation - The company is not currently a party to any material legal proceedings[189] Item 1A. Risk Factors This section directs readers to risk factors detailed in the company's prior Form 10-K and Form 10-Q filings - Readers are directed to the risk factors detailed in the 2019 Form 10-K and the Q1 2020 Form 10-Q[190] Item 6. Exhibits This section lists all exhibits filed with the report, including corporate governance, financial agreements, and regulatory certifications - The report includes exhibits such as the Articles of Incorporation, credit agreements, stock plans, and Sarbanes-Oxley certifications[191][193] Signatures This section contains the required signatures for the filing