UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~June 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number 1-31398

NATURAL GAS SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)


Colorado						75-2811855
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

404 Veterans Airpark Ln., Ste 300

Midland, Texas 79705

(Address of principal executive offices)

(432) 262-2700

(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, Par Value $0.01	NGS	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes x						No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes x						No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes ☐						No x

As of ~~May 9,~~August 8, 2022, there were ~~12,476,957~~12,331,147 shares of the Registrant's common stock, $0.01 par value, outstanding.


Part I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets	Page	1

Unaudited Condensed Consolidated Statements of Operations	Page	2

Unaudited Condensed Consolidated Statements of Stockholders' Equity	Page	3

Unaudited Condensed Consolidated Statements of Cash Flows	Page	45

Notes to Unaudited Condensed Consolidated Financial Statements	Page	57

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	Page	1416

Item 3. Quantitative and Qualitative Disclosures about Market Risk	Page	1922

Item 4. Controls and Procedures	Page	1923

Part II - OTHER INFORMATION

Item 1. Legal Proceedings	Page	2023

Item 1A. Risk Factors	Page	2023

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	Page	2023

Item 3. Defaults Upon Senior Securities	Page	2024

Item 4. Mine Safety Disclosures	Page	2024

Item 5. Other Information	Page	2024

Item 6. Exhibits	Page	2125

Signatures	Page	2327

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements


NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value) (unaudited)	NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value) (unaudited)					NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value) (unaudited)
		March 31,		December 31,			June 30,		December 31,
		2022		2021			2022		2021
ASSETS	ASSETS					ASSETS
Current Assets:	Current Assets:					Current Assets:
Cash and cash equivalents	Cash and cash equivalents	$	16,426	$	22,942	Cash and cash equivalents	$	9,828	$	22,942
Trade accounts receivable, net of allowance for doubtful accounts of $1,126 and $1,129, respectively		12,882		10,389
Trade accounts receivable, net of allowance for doubtful accounts of $380 and $1,129, respectively						Trade accounts receivable, net of allowance for doubtful accounts of $380 and $1,129, respectively	11,861		10,389
Inventory	Inventory	17,331		19,329		Inventory	18,478		19,329
Federal income tax receivable (Note 4)	Federal income tax receivable (Note 4)	11,538		11,538		Federal income tax receivable (Note 4)	11,538		11,538
Prepaid income taxes	Prepaid income taxes	54		51		Prepaid income taxes	41		51
Prepaid expenses and other	Prepaid expenses and other	613		854		Prepaid expenses and other	1,612		854
Total current assets	Total current assets	58,844		65,103		Total current assets	53,358		65,103
Long-term inventory, net of allowance for obsolescence of $37 and $64, respectively	Long-term inventory, net of allowance for obsolescence of $37 and $64, respectively	1,495		1,582		Long-term inventory, net of allowance for obsolescence of $37 and $64, respectively	1,630		1,582
Rental equipment, net of accumulated depreciation of $178,038 and $172,563, respectively		209,587		206,985
Property and equipment, net of accumulated depreciation of $16,305 and $15,784, respectively		20,407		20,828
Right of use assets - operating leases, net of accumulated amortization of $602 and $555, respectively		329		285
Rental equipment, net of accumulated depreciation of $183,414 and $172,563, respectively						Rental equipment, net of accumulated depreciation of $183,414 and $172,563, respectively	214,702		206,985
Property and equipment, net of accumulated depreciation of $16,667 and $15,784, respectively						Property and equipment, net of accumulated depreciation of $16,667 and $15,784, respectively	20,170		20,828
Right of use assets - operating leases, net of accumulated amortization of $641 and $555, respectively						Right of use assets - operating leases, net of accumulated amortization of $641 and $555, respectively	290		285

Intangibles, net of accumulated amortization of $2,165 and $2,134, respectively		994		1,025
Intangibles, net of accumulated amortization of $2,196 and $2,134, respectively						Intangibles, net of accumulated amortization of $2,196 and $2,134, respectively	963		1,025
Other assets	Other assets	2,610		2,698		Other assets	2,365		2,698
Total assets	Total assets	$	294,266	$	298,506	Total assets	$	293,478	$	298,506
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:	Current Liabilities:					Current Liabilities:
Accounts payable	Accounts payable	$	5,604	$	4,795	Accounts payable	$	5,238	$	4,795
Accrued liabilities	Accrued liabilities	12,945		14,103		Accrued liabilities	15,958		14,103

Current operating leases	Current operating leases	120		68		Current operating leases	88		68
Deferred income	Deferred income	—		1,312		Deferred income	—		1,312
Total current liabilities	Total current liabilities	18,669		20,278		Total current liabilities	21,284		20,278
Line of credit	Line of credit	—		—		Line of credit	—		—
Deferred income tax liability	Deferred income tax liability	39,278		39,288		Deferred income tax liability	39,644		39,288
Long-term operating leases	Long-term operating leases	210		217		Long-term operating leases	202		217

Other long-term liabilities	Other long-term liabilities	2,726		2,813		Other long-term liabilities	2,592		2,813
Total liabilities	Total liabilities	60,883		62,596		Total liabilities	63,722		62,596
Commitments and contingencies (Note 9)	Commitments and contingencies (Note 9)	0		0		Commitments and contingencies (Note 9)	0		0
Stockholders’ Equity:	Stockholders’ Equity:					Stockholders’ Equity:
Preferred stock, 5,000 shares authorized, no shares issued or outstanding	Preferred stock, 5,000 shares authorized, no shares issued or outstanding	—		—		Preferred stock, 5,000 shares authorized, no shares issued or outstanding	—		—
Common stock, 30,000 shares authorized, par value $0.01; 13,473 and 13,394 shares issued, respectively		135		134
Common stock, 30,000 shares authorized, par value $0.01; 13,499 and 13,394 shares issued, respectively						Common stock, 30,000 shares authorized, par value $0.01; 13,499 and 13,394 shares issued, respectively	135		134
Additional paid-in capital	Additional paid-in capital	114,080		114,017		Additional paid-in capital	114,255		114,017
Retained earnings	Retained earnings	130,440		130,103		Retained earnings	130,370		130,103

Treasury Shares, at cost, 1,022 and 775 shares, respectively		(11,272)		(8,344)
Treasury Shares, at cost, 1,310 and 775 shares, respectively						Treasury Shares, at cost, 1,310 and 775 shares, respectively	(15,004)		(8,344)
Total stockholders' equity	Total stockholders' equity	233,383		235,910		Total stockholders' equity	229,756		235,910
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	294,266	$	298,506	Total liabilities and stockholders' equity	$	293,478	$	298,506

See accompanying notes to these unaudited condensed consolidated financial statements.


NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except earnings per share) (unaudited)	NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except earnings per share) (unaudited)					NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except earnings per share) (unaudited)

		Three months ended					Three months ended				Six months ended
		March 31,					June 30,				June 30,
		2022		2021					2022		2021		2022		2021
Revenue:	Revenue:							Revenue:
Rental income	Rental income	$	17,129	$	15,341			Rental income	$	18,144	$	15,613	$	35,274	$	30,954
Sales	Sales	2,893		2,711				Sales	1,292		1,573		4,184		4,284
Service and maintenance income	Service and maintenance income	314		345				Service and maintenance income	490		563		804		908
Total revenue	Total revenue	20,336		18,397				Total revenue	19,926		17,749		40,262		36,146
Operating costs and expenses:	Operating costs and expenses:							Operating costs and expenses:
Cost of rentals, exclusive of depreciation stated separately below	Cost of rentals, exclusive of depreciation stated separately below	9,230		7,156				Cost of rentals, exclusive of depreciation stated separately below	9,242		9,082		18,472		16,239
Cost of sales, exclusive of depreciation stated separately below	Cost of sales, exclusive of depreciation stated separately below	1,988		2,616				Cost of sales, exclusive of depreciation stated separately below	1,440		1,777		3,428		4,392
Cost of service and maintenance, exclusive of depreciation stated separately below	Cost of service and maintenance, exclusive of depreciation stated separately below	173		48				Cost of service and maintenance, exclusive of depreciation stated separately below	234		250		407		298
Selling, general and administrative expenses	Selling, general and administrative expenses	2,502		2,649				Selling, general and administrative expenses	2,310		2,607		4,811		5,255
Depreciation and amortization	Depreciation and amortization	6,061		6,297				Depreciation and amortization	6,042		6,326		12,103		12,623

Total operating costs and expenses	Total operating costs and expenses	19,954		18,766				Total operating costs and expenses	19,268		20,042		39,221		38,807
Operating income (loss)	Operating income (loss)	382		(369)				Operating income (loss)	658		(2,293)		1,041		(2,661)
Other income (expense):	Other income (expense):							Other income (expense):
Interest expense	Interest expense	(24)		(1)				Interest expense	(24)		(14)		(49)		(16)
Other income (expense), net	Other income (expense), net	(32)		101				Other income (expense), net	(332)		50		(364)		151
Total other income (expense), net	Total other income (expense), net	(56)		100				Total other income (expense), net	(356)		36		(413)		135
Income (loss) before provision for income taxes	Income (loss) before provision for income taxes	326		(269)				Income (loss) before provision for income taxes	302		(2,257)		628		(2,526)
Income tax benefit (expense)	Income tax benefit (expense)	11		(125)				Income tax benefit (expense)	(372)		339		(361)		213
Net income (loss)	Net income (loss)	$	337	$	(394)			Net income (loss)	$	(70)	$	(1,918)	$	267	$	(2,313)
Earnings (loss) per share:	Earnings (loss) per share:							Earnings (loss) per share:
Basic	Basic	$	0.03	$	(0.03)			Basic	$	(0.01)	$	(0.14)	$	0.02	$	(0.17)
Diluted	Diluted	$	0.03	$	(0.03)			Diluted	$	(0.01)	$	(0.14)	$	0.02	$	(0.17)
Weighted average shares outstanding:	Weighted average shares outstanding:							Weighted average shares outstanding:
Basic	Basic	12,537		13,263				Basic	12,305		13,305		12,421		13,284
Diluted	Diluted	12,698		13,263				Diluted	12,305		13,305		12,528		13,284

See accompanying notes to these unaudited condensed consolidated financial statements.


NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) (unaudited)	NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) (unaudited)																								NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) (unaudited)
		Preferred Stock			Common Stock			Additional Paid-In Capital				Retained Earnings				Treasury Stock							Total Stockholders' Equity			Preferred Stock							Common Stock						Additional Paid-In Capital			Retained Earnings		Treasury Stock				Total Stockholders' Equity
		Shares	Amount		Shares	Amount								Shares			Amount					Shares					Amount				Shares			Amount							Shares			Amount
BALANCES, January 1, 2021	BALANCES, January 1, 2021	—	$	—	13,296	$	133			$	112,615			$	139,286		38			$	(490)					$	251,544	BALANCES, January 1, 2021	—			$	—		13,296			$		133		$	112,615	$	139,286	38		$	(490)	$	251,544

Issuance of restricted stock	Issuance of restricted stock	—	—		62	—		—				—				—		—					—		Issuance of restricted stock	—				—			62			—			—			—		—		—		—
Compensation expense on restricted common stock	Compensation expense on restricted common stock	—	—		—	1		473				—				—		—					474		Compensation expense on restricted common stock	—				—			—			1			473			—		—		—		474
Taxes paid related to net shares settlement of equity awards	Taxes paid related to net shares settlement of equity awards	—	—		—	—		(224)				—				—		—					(224)		Taxes paid related to net shares settlement of equity awards	—				—			—			—			(224)			—		—		—		(224)
Net income	Net income	—	—		—	—		—				(394)				—		—					(394)		Net income	—				—			—			—			—			(394)		—		—		(394)
BALANCES, March 31, 2021	BALANCES, March 31, 2021	—	$	—	13,358	$	134	$	112,864			$	138,892			38		$	(490)				$	251,400	BALANCES, March 31, 2021	—				—			13,358			134			112,864			138,892		38		(490)		251,400

Issuance of restricted stock																									Issuance of restricted stock	—				—			36			—			—			—		—		—		—
Compensation expense on restricted common stock																									Compensation expense on restricted common stock	—				—			—			—			421			—		—		—		421
Taxes paid related to net shares settlement of equity awards																									Taxes paid related to net shares settlement of equity awards	—				—			—			—			(110)			—		—		—		(110)
Purchase of treasury shares																									Purchase of treasury shares	—				—			—			—			—			—		175		(1,892)		(1,892)
Net income																									Net income	—				—			—			—			—			(1,918)		—		—		(1,918)
BALANCES, June 30, 2021																									BALANCES, June 30, 2021	—				$	—		13,394			$	134		$	113,175		$	136,974	213		$	(2,382)	$	247,901

BALANCES, January 1, 2022		—	$	—	13,394	$	134	$	114,017			$	130,103			775		$	(8,344)				$	235,910
Compensation expense on common stock options		—	—		—	—		21				—				—		—					21
Issuance of restricted stock		—	—		79	—		—				—				—		—					—
Compensation expense on restricted common stock		—	—		—	1		401				—				—		—					402
Taxes paid related to net shares settlement of equity awards		—	—		—	—		(359)				—				—		—					(359)
Purchase of treasury shares		—	—		—	—		—				—				247		(2,928)					(2,928)
Net loss		—	—		—	—		—				337				—		—					337
BALANCES, March 31, 2022		—	$	—	13,473	$	135	$	114,080			$	130,440			1,022		$	(11,272)				$	233,383


NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) (unaudited)
	Preferred Stock			Common Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock			Total Stockholders' Equity
	Shares	Amount		Shares	Amount						Shares	Amount
BALANCES, January 1, 2022	—	$	—	13,394	$	134	$	114,017	$	130,103	775	$	(8,344)	$	235,910
Compensation expense on common stock options	—	—		—	—		21		—		—	—		21
Issuance of restricted stock	—	—		79	—		—		—		—	—		—
Compensation expense on restricted common stock	—	—		—	1		401		—		—	—		402
Taxes paid related to net shares settlement of equity awards	—	—		—	—		(359)		—		—	—		(359)
Purchase of treasury shares	—	—		—	—		—		—		247	(2,928)		(2,928)
Net loss	—	—		—	—		—		337		—	—		337
BALANCES, March 31, 2022	—	—		13,473	135		114,080		130,440		1,022	(11,272)		233,383
Compensation expense on common stock options	—	—		—	—		147		—		—	—		147
Issuance of restricted stock	—	—		26	—		—		—		—	—		—
Compensation expense on restricted common stock	—	—		—	—		184		—		—	—		184
Taxes paid related to net shares settlement of equity awards	—	—		—	—		(156)		—		—	—		(156)
Purchase of treasury shares	—	—		—	—		—		—		288	(3,732)		(3,732)
Net loss	—	—		—	—		—		(70)		—	—		(70)
BALANCES, June 30, 2022	—	$	—	13,499	$	135	$	114,255	$	130,370	1,310	$	(15,004)	$	229,756

See accompanying notes to these unaudited condensed consolidated financial statements.


NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)	NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)					NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
		Three months ended					Six months ended
		March 31,					June 30,
		2022		2021			2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:	CASH FLOWS FROM OPERATING ACTIVITIES:					CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	Net income (loss)	$	337	$	(394)	Net income (loss)	$	267	$	(2,313)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	Adjustments to reconcile net income (loss) to net cash provided by operating activities:					Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	6,061		6,297		Depreciation and amortization	12,103		12,623
Amortization of debt issuance costs	Amortization of debt issuance costs	12		—		Amortization of debt issuance costs	24		7
Deferred income tax (benefit) expense	Deferred income tax (benefit) expense	(11)		123		Deferred income tax (benefit) expense	356		(224)
Stock-based compensation	Stock-based compensation	423		474		Stock-based compensation	754		895
Bad debt allowance	Bad debt allowance	—		15		Bad debt allowance	—		65

Gain on sale of assets	Gain on sale of assets	(36)		—		Gain on sale of assets	(151)		—

Loss (gain) on company owned life insurance	Loss (gain) on company owned life insurance	130		(98)		Loss (gain) on company owned life insurance	557		(188)
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Trade accounts receivables	Trade accounts receivables	(2,494)		(855)		Trade accounts receivables	(1,472)		(410)
Inventory	Inventory	2,085		(100)		Inventory	803		(1,543)

Prepaid expenses and prepaid income taxes	Prepaid expenses and prepaid income taxes	238		301		Prepaid expenses and prepaid income taxes	(748)		(369)
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	(349)		2,523		Accounts payable and accrued liabilities	2,298		4,281

Deferred income	Deferred income	(1,312)		(1,069)		Deferred income	(1,312)		(410)

Other	Other	(89)		164		Other	(231)		338

NET CASH PROVIDED BY OPERATING ACTIVITIES	NET CASH PROVIDED BY OPERATING ACTIVITIES	4,995		7,381		NET CASH PROVIDED BY OPERATING ACTIVITIES	13,248		12,752
CASH FLOWS FROM INVESTING ACTIVITIES:	CASH FLOWS FROM INVESTING ACTIVITIES:					CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of rental equipment, property and other equipment	Purchase of rental equipment, property and other equipment	(8,212)		(4,965)		Purchase of rental equipment, property and other equipment	(19,173)		(12,567)
Purchase of company owned life insurance	Purchase of company owned life insurance	(47)		(17)		Purchase of company owned life insurance	(236)		(55)
Proceeds from sale of property and equipment	Proceeds from sale of property and equipment	37		—		Proceeds from sale of property and equipment	224		—

NET CASH USED IN INVESTING ACTIVITIES	NET CASH USED IN INVESTING ACTIVITIES	(8,222)		(4,982)		NET CASH USED IN INVESTING ACTIVITIES	(19,185)		(12,622)
CASH FLOWS FROM FINANCING ACTIVITIES:	CASH FLOWS FROM FINANCING ACTIVITIES:					CASH FLOWS FROM FINANCING ACTIVITIES:

Payments of other long-term liabilities, net	Payments of other long-term liabilities, net	(2)		—		Payments of other long-term liabilities, net	(2)		(1)

Payments of debt issuance costs						Payments of debt issuance costs	—		(237)
Repayments of line of credit, net	Repayments of line of credit, net	—		(417)		Repayments of line of credit, net	—		(417)

Purchase of treasury shares	Purchase of treasury shares	(2,928)		—		Purchase of treasury shares	(6,660)		(1,892)
Taxes paid related to net share settlement of equity awards	Taxes paid related to net share settlement of equity awards	(359)		(224)		Taxes paid related to net share settlement of equity awards	(515)		(335)

NET CASH USED IN FINANCING ACTIVITIES	NET CASH USED IN FINANCING ACTIVITIES	(3,289)		(641)		NET CASH USED IN FINANCING ACTIVITIES	(7,177)		(2,882)
NET CHANGE IN CASH AND CASH EQUIVALENTS	NET CHANGE IN CASH AND CASH EQUIVALENTS	(6,516)		1,758		NET CHANGE IN CASH AND CASH EQUIVALENTS	(13,114)		(2,752)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	22,942		28,925		CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	22,942		28,925
CASH AND CASH EQUIVALENTS AT END OF PERIOD	CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	16,426	$	30,683	CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	9,828	$	26,173
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:	SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:					SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	Interest paid	$	12	$	1	Interest paid	$	25	$	9

NON-CASH TRANSACTIONS	NON-CASH TRANSACTIONS					NON-CASH TRANSACTIONS

Right of use asset acquired through an operating lease	Right of use asset acquired through an operating lease	$	91	$	—	Right of use asset acquired through an operating lease	$	91	$	—

See accompanying notes to these unaudited condensed consolidated financial statements.

Natural Gas Services Group, Inc.

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 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.

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. 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 ~~March 31,~~June 30, 2022 and the results of our operations for the three and six months ended ~~March 31,~~June 30, 2022 and 2021 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, 2021 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 ~~March 31,~~June 30, 2022 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2022.

Revenue Recognition Policy

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606"), except for rental revenue as discussed below. 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 condensed 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 period. 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, 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 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 maintained by the customer and there are no exceptions to the customer’s commitment to accept and pay for the manufactured equipment. There was no revenue recognized for bill and hold arrangements for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021.

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 ~~March 31,~~June 30, 2022 and 2021:


		Three months ended March 31,				Three months ended June 30,				Six months ended June 30,
		2022		2021				2022		2021		2022		2021
		(in thousands)				(in thousands)				(in thousands)
Compressors - sales	Compressors - sales	$	1,968	$	1,891		Compressors - sales	$	286	$	—	$	2,253	$	1,891
Flares - sales	Flares - sales	—		46			Flares - sales	83		29		83		75
Other (parts/rebuilds) - sales	Other (parts/rebuilds) - sales	925		774			Other (parts/rebuilds) - sales	923		1,544		1,848		2,318
Service and maintenance	Service and maintenance	314		345			Service and maintenance	490		563		804		908
Total revenue from contracts with customers	Total revenue from contracts with customers	3,207		3,056			Total revenue from contracts with customers	1,782		2,136		4,988		5,192
Add: ASC 842 rental revenue	Add: ASC 842 rental revenue	17,129		15,341			Add: ASC 842 rental revenue	18,144		15,613		35,274		30,954
Total revenue	Total revenue	$	20,336	$	18,397		Total revenue	$	19,926	$	17,749	$	40,262	$	36,146

Contract Balances

As of ~~March 31,~~June 30, 2022 and December 31, 2021, we had the following receivables and deferred income from contracts with customers:


		March 31, 2022		December 31, 2021			June 30, 2022		December 31, 2021
		(in thousands)					(in thousands)
Accounts Receivable	Accounts Receivable					Accounts Receivable
Accounts receivable - contracts with customers	Accounts receivable - contracts with customers	$	3,375	$	3,354	Accounts receivable - contracts with customers	$	3,817	$	3,354
Accounts receivable - ASC 842	Accounts receivable - ASC 842	10,633		8,164		Accounts receivable - ASC 842	8,424		8,164
Total Accounts Receivable	Total Accounts Receivable	14,008		11,518		Total Accounts Receivable	12,241		11,518
Less: Allowance for doubtful accounts	Less: Allowance for doubtful accounts	(1,126)		(1,129)		Less: Allowance for doubtful accounts	(380)		(1,129)
Total Accounts Receivable, net	Total Accounts Receivable, net	$	12,882	$	10,389	Total Accounts Receivable, net	$	11,861	$	10,389

Deferred income	Deferred income	$	—	$	1,312	Deferred income	$	—	$	1,312

The Company recognized sales revenues of $1.3 million for the ~~three~~six months ended ~~March 31,~~June 30, 2022 that was included in deferred income at the beginning of 2022. For the year ended December 31, 2021, the Company recognized sales revenues of $1.1 million that was included in deferred income at the beginning of 2021.

The increase of accounts receivable and decrease of deferred income were primarily due to normal timing differences between our performance and the customers’ payments.

Remaining Performance Obligations

As of ~~March 31,~~June 30, 2022, the Company did not have deferred 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.

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 ~~March 31,~~June 30, 2022.

Our policy regarding income tax interest and penalties is to expense those items as interest expense and other expense, respectively.

Recently Issued Accounting Pronouncements

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.

3. Inventory

Our inventory, net of allowance for obsolescence of $37,000 at ~~March 31,~~June 30, 2022 and $64,000 at December 31, 2021, consisted of the following amounts:


		March 31, 2022		December 31, 2021			June 30, 2022		December 31, 2021
		(in thousands)					(in thousands)
Raw materials - current	Raw materials - current	$	16,213	$	17,528	Raw materials - current	$	16,880	$	17,528
Work-in-process	Work-in-process	1,118		1,801		Work-in-process	1,598		1,801
Inventory - current	Inventory - current	17,331		19,329		Inventory - current	18,478		19,329
Raw materials - long term (net of allowances of $37 and $64, respectively)	Raw materials - long term (net of allowances of $37 and $64, respectively)	1,495		1,582		Raw materials - long term (net of allowances of $37 and $64, respectively)	1,630		1,582
Inventory - total	Inventory - total	$	18,826	$	20,911	Inventory - total	$	20,108	$	20,911

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.

Inventory Allowance

We routinely review our inventory allowance balance to account for slow moving or obsolete inventory costs that may not be recoverable in the future.

A summary of our inventory allowance is as follows:


		March 31, 2022		December 31, 2021			June 30, 2022		December 31, 2021
		(in thousands)					(in thousands)
Beginning balance	Beginning balance	$	64	$	221	Beginning balance	$	64	$	221
Accruals	Accruals	—		208		Accruals	—		208
Write-offs	Write-offs	(27)		(365)		Write-offs	(27)		(365)
Ending balance	Ending balance	$	37	$	64	Ending balance	$	37	$	64

4. Federal Income Tax Receivable

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 allowed 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 has filed amended returns to carryback these losses for five years. Accordingly, during 2020, the Company recorded a federal income tax receivable of $15.0 million and an increase to its deferred income tax liability of $10.1 million on its condensed consolidated balance sheet. During the third quarter of 2020, the Company received refunds totaling $3.9 million related to its 2018 NOLs, which reduced its federal income tax receivable to $11.5 million on its condensed consolidated balance sheet as of ~~March 31,~~June 30, 2022.

5. Rental Equipment

Our rental equipment and associated accumulated depreciation as of ~~March 31,~~June 30, 2022 and December 31, 2021, respectively, consisted of the following:

810


		March 31, 2022		December 31, 2021			June 30, 2022		December 31, 2021
		(in thousands)					(in thousands)
Compressor units	Compressor units	$	380,797	$	374,336	Compressor units	$	386,284	$	374,336
Work-in-process	Work-in-process	6,828		5,212		Work-in-process	11,832		5,212
Rental equipment	Rental equipment	387,625		379,548		Rental equipment	398,116		379,548
Accumulated depreciation	Accumulated depreciation	(178,038)		(172,563)		Accumulated depreciation	(183,414)		(172,563)
Rental equipment, net of accumulated depreciation	Rental equipment, net of accumulated depreciation	$	209,587	$	206,985	Rental equipment, net of accumulated depreciation	$	214,702	$	206,985

We evaluated our rental equipment for potential impairment as of ~~March 31,~~June 30, 2022, and determined that no such impairment existed as of that date.

6. Credit Facility

Previous Credit Agreement

We had a senior secured revolving credit agreement the ("Previous Credit Agreement") with JP Morgan Chase Bank, N.A (the "Lender") that matured on March 31, 2021. Prior to maturation, the outstanding balance of $417,000 was repaid. The Previous Credit Agreement had an aggregate commitment of $30 million, subject to collateral availability.

New Credit Agreement

On May 11, 2021, we entered into a five year senior secured revolving credit agreement ("New Credit Agreement") with Texas Capital Bank, National Association (the "Lender") with an initial commitment of $20 million and an accordion feature that would increase the maximum commitment to $30 million, subject to collateral availability. We also have a right to request from the Lender, on an uncommitted basis, an increase of up to $30 million on the aggregate commitment; provided, however, the aggregate commitment amount is not permitted to exceed $50 million. The maturity date of the New Credit Agreement is May 11, 2026. The obligations under the New Credit Agreement are secured by a first priority lien on a variety of our assets, including inventory and accounts receivable as well as a variable number of our leased compressor equipment.

Borrowing Base. At any time before the maturity of the New 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) 90% of eligible accounts receivable owed to the Company by investment grade debtors, plus (b) 85% of the eligible accounts receivable owing by non-investment grade debtors, plus (c) 50% of the eligible inventory, valued at the lower of cost or market value at such time, subject to a cap of this component not to exceed $2.0 million, plus (d) the lesser of (i) 95% of the net book value of the compressors that the Lender has determined are eligible for the extension of credit, valued at the lower of cost or market value with depreciation not to exceed 25 years, at such time and (ii) 80% of the net liquidation value percentage of the net book value of the eligible compressors that the Lender has determined are eligible for the extension of credit, valued at the lower of cost or market value with depreciation not to exceed 25 years, at such time, plus (e) 80% of the value at cost (excluding any costs for capitalized interest or other non-cash capitalized costs) of the eligible new compressor fleet, minus (f) any required availability reserves determined by the Lender in its sole discretion. The Lender may adjust the borrowing base components if material deviations in the collateral are discovered in future audits of the collateral. As of ~~March 31,~~June 30, 2022, our allowable borrowing base was $20.0 million.

Interest and Fees. Under the terms of the New Credit Agreement, we have the option of selecting the applicable variable rate for each revolving loan, or portion thereof, of either (a) the Base Rate (as defined below) plus the Applicable Margin, or (b) in the case of a Eurodollar Rate Loan, the Adjusted Eurodollar Rate plus the Applicable Margin. "Base Rate" means, for any day, a rate of interest per annum equal to the highest of (a) the prime rate for such day; (b) the sum of the federal funds rate for such day plus 0.50%; and (c) the Adjusted Eurodollar Rate for such day plus 1.00%. The Applicable Margin is determined based upon the leverage ratio as set forth in the most recent compliance certificate received by the Lender for each fiscal quarter from time to time pursuant to the New Credit Agreement. Depending on the leverage ratio, the Applicable Margin can be 0.25% to 0.75% for Base Rate Loans (as defined in the New Credit Agreement) and 1.25% to 1.75% for Eurodollar Rate Loans and for requested letters of credit. In addition, we are required to pay a monthly commitment fee on the daily average unused amount of the commitment while the New Credit Agreement is in effect at an annual rate equal to 0.25% of the unused commitment amount. Accrued interest is payable monthly on outstanding principal amounts and unused commitment fee, provided that accrued interest on Eurodollar Rate Loans is payable at the end of each interest period, but in no event less frequently than quarterly.

Covenants. The New Credit Agreement contains customary representations and warranties, as well as covenants which, among other things, condition or 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 are applicable during certain trigger periods specified in the

911

Credit Agreement and require us during such trigger periods to maintain a leverage ratio less than or equal to 3.00 to 1.00 as of the last day of each fiscal quarter and a fixed charge coverage ratio greater than or equal to 1.00 to 1.00 as of the last day of each fiscal quarter.

Events of Default and Acceleration. The New 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 Credit Agreement and the other transaction documents; inaccuracies in representations and warranties; certain defaults, termination events or similar events; certain defaults with respect to any other Company indebtedness in excess of $1.0 million; certain bankruptcy or insolvency events; the rendering of certain judgments in excess of $1.0 million; certain ERISA events; certain change in control events and the defectiveness of any liens under the secured revolving credit agreement. Obligations outstanding under the Credit Agreement may be accelerated upon the occurrence of an event of default.

As of ~~March 31,~~June 30, 2022, we were in compliance with all financial covenants in our New Credit Agreement. At ~~March 31,~~June 30, 2022, we had no amounts outstanding under the New Credit Agreement.

7. Stock-Based and Other Long-Term Incentive Compensation

Stock Options

A summary of all option activity as of December 31, 2021, and changes during the ~~three~~six months ended ~~March 31,~~June 30, 2022 is presented below.


		Number of Stock Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)			Number of Stock Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)
Outstanding, December 31, 2021	Outstanding, December 31, 2021	200,834	$	21.17	4.83	$	—	Outstanding, December 31, 2021	200,834	$	21.17	4.83	$	—
Granted	Granted	—	—		—	—		Granted	187,500	16.02		—	—

Cancelled / Forfeited	Cancelled / Forfeited	(2,500)	10.58		—	5		Cancelled / Forfeited	(8,250)	18.05		—	11
Expired	Expired	(8,500)	14.89		—	—		Expired	(8,500)	14.89		—	—
Outstanding, March 31, 2022		189,834	$	21.59	4.73	$	70
Exercisable, March 31, 2022		136,834	$	25.85	2.79	$	—
Outstanding, June 30, 2022								Outstanding, June 30, 2022	371,584	$	18.79	3.45	$	21
Exercisable, June 30, 2022								Exercisable, June 30, 2022	163,584	$	23.65	2.21	$	2

The following table summarizes information about our stock options outstanding at ~~March 31,~~June 30, 2022:


Range of Exercise Prices	Range of Exercise Prices	Options Outstanding				Options Exercisable			Range of Exercise Prices	Options Outstanding				Options Exercisable
		Shares	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price			Shares	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$0.01-18.00	$0.01-18.00	53,000	9.75	$	10.58	—	$	10.58	$0.01-18.00	238,000	3.97	$	14.87	30,000	$	14.26
$18.01-22.00	$18.01-22.00	20,500	0.97	18.75		20,500	18.75		$18.01-22.00	20,500	0.72	18.75		20,500	18.75
$22.01-26.00	$22.01-26.00	42,167	3.04	22.90		42,167	22.90		$22.01-26.00	42,167	2.79	22.90		42,167	22.90
$26.01-30.00	$26.01-30.00	30,000	4.88	28.15		30,000	28.15		$26.01-30.00	28,750	4.63	28.15		28,750	28.15
$30.01-34.00	$30.01-34.00	44,167	1.97	30.41		44,167	30.41		$30.01-34.00	42,167	1.72	30.41		42,167	30.41
		189,834	4.73	$	21.59	136,834	$	25.85		371,584	3.45	$	18.79	163,584	$	23.65

1012

The summary of the status of our unvested stock options as of December 31, 2021 and changes during the ~~three~~six months ended ~~March 31,~~June 30, 2022 is presented below:


Unvested Stock Options:	Unvested Stock Options:	Shares	Weighted Average Grant Date Fair Value Per Share		Unvested Stock Options:	Shares	Weighted Average Grant Date Fair Value Per Share
Unvested at December 31, 2021	Unvested at December 31, 2021	55,500	$	5.15	Unvested at December 31, 2021	55,500	$	5.15

Granted					Granted	187,500	4.37
Vested					Vested	(30,000)	2.85
Exercised					Exercised	—	—
Cancelled/Forfeited	Cancelled/Forfeited	(2,500)	5.15		Cancelled/Forfeited	(5,000)	5.15
Unvested at March 31, 2022		53,000	$	5.15
Unvested at June 30, 2022					Unvested at June 30, 2022	208,000	$	4.78

As of ~~March 31,~~June 30, 2022, there was ~~$218,643~~$875,890 of unrecognized compensation cost related to unvested options. For the ~~three~~six months ended ~~March 31,~~June 30, 2022 there was ~~$21,222~~$168,059 of compensation expense for stock options. For the ~~three~~six months ended ~~March 31,~~June 30, 2021, there was no compensation expense for stock options.

Restricted Shares/Units

On March 18, 2021, the Compensation Committee awarded 129,212 shares of restricted common stock to 2 executive officers that vest ratably over three years, beginning on March 18, 2022. On June 17, 2021, the Compensation Committee awarded 5,000 shares of restricted stock to an executive officer that vests ratably over three years beginning on June 17, 2022. In addition, on March 18, 2021, 5,612 shares of restricted common stock were awarded to each of our 3 independent Board members. Lastly, on April 1, 2021, 5,291 shares of restricted common stock were awarded to a newly appointed Board member. On April 26, 2022, 4,212 shares of restricted common stock were awarded to each of our 4 independent Board members. The restricted stock issued to ~~our~~these directors ~~vests~~vest in one year from the date of grant. ~~There were no grants of restricted common stock as of the three months ended March 31, 2022.~~

Total compensation expense related to these and previously granted restricted stock awards was ~~$0.4 million~~$586,000 and ~~$0.5 million~~$896,000 for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, respectively. As of ~~March 31,~~June 30, 2022, there was a total of $1.0 million of unrecognized compensation expense related to these shares/units which is expected to be recognized over the next ~~1.8~~2.5 years.

A summary of all restricted stock/units outstanding as of December 31, 2021 and activity during the ~~three~~six months ended ~~March 31,~~June 30, 2022 is presented below:


		Number of Shares	Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)			Number of Shares	Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)
Outstanding, December 31, 2021	Outstanding, December 31, 2021	276,319	$	9.67	1.77	$	2,893	Outstanding, December 31, 2021	276,319	$	9.67	1.77	$	2,893
Granted	Granted	—	—			—		Granted	16,848	11.87			200
Vested	Vested	(110,465)	12.75			1,267		Vested	(152,134)	10.99			1,778
Canceled/Forfeited	Canceled/Forfeited	—	—			—		Canceled/Forfeited	—	—			—
Outstanding, March 31, 2022		165,854	$	7.62	1.56	$	1,975
Outstanding, June 30, 2022								Outstanding, June 30, 2022	141,033	$	8.51	2.50	$	1,366

1113

Other Long-Term Incentive Compensation

On March 18, 2021, the Compensation Committee issued a long-term incentive award of $1.0 million to an executive officer that vests in equal, annual tranches over 3 years beginning on the anniversary of the grant date. In addition, on March 18, 2021, we issued a $50,000 award to 3 of our independent members of our Board of Directors as partial payment for their services in 2021. On April 1, 2021, we issued a $50,000 award to a newly appointed independent member of our Board of Directors as partial payment for his services in 2021. On April 26, 2022, we issued a $50,000 award to our 3 independent Board members. These awards vest one year from the date of grant and are payable in cash upon vesting. There were no long-term incentive awards issued to executives ~~of directors~~ during the ~~three~~six months ended ~~March 31,~~June 30, 2022. The Company accounts for these other long-term incentive awards 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 ~~$219,575~~$431,000 and ~~$166,000~~$381,000 for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, respectively. As of ~~March 31,~~June 30, 2022, there was a total of ~~$1.0 million~~$935,550 of unrecognized compensation expense related to these other long-term incentive awards which is expected to be recognized over the next ~~1.7~~1.3 years.

8. (Loss) Earnings per Share

The following table reconciles the numerators and denominators of the basic and diluted earnings (loss) per share computation:


		Three months ended					Three months ended				Six months ended
		March 31,					June 30,				June 30,
		2022		2021					2022		2021		2022		2021
		(in thousands, except per share data)				(in thousands, except per share data)
Numerator:	Numerator:							Numerator:
Net income (loss)	Net income (loss)	$	337	$	(394)			Net income (loss)	$	(70)	$	(1,918)	$	267	$	(2,313)
Denominator for earnings (loss) per basic common share:	Denominator for earnings (loss) per basic common share:							Denominator for earnings (loss) per basic common share:
Weighted average common shares outstanding	Weighted average common shares outstanding	12,537		13,263				Weighted average common shares outstanding	12,305		13,305		12,421		13,284
Denominator for earnings (loss) per diluted common share:	Denominator for earnings (loss) per diluted common share:							Denominator for earnings (loss) per diluted common share:
Weighted average common shares outstanding	Weighted average common shares outstanding	12,537		13,263				Weighted average common shares outstanding	12,305		13,305		12,421		13,284
Dilutive effect of stock options and restricted stock/units	Dilutive effect of stock options and restricted stock/units	161		—				Dilutive effect of stock options and restricted stock/units	—		—		107		—
Diluted weighted average shares	Diluted weighted average shares	12,698		13,263				Diluted weighted average shares	12,305		13,305		12,528		13,284
Earnings (loss) per common share:	Earnings (loss) per common share:							Earnings (loss) per common share:
Basic	Basic	$	0.03	$	(0.03)			Basic	$	(0.01)	$	(0.14)	$	0.02	$	(0.17)
Diluted	Diluted	$	0.03	$	(0.03)			Diluted	$	(0.01)	$	(0.14)	$	0.02	$	(0.17)

For the three and six months ended ~~March 31,~~June 30, 2022, ~~4,852~~141,033 and 33,550 restricted stock/units, respectively, were not included in the computation of diluted earnings per share due to their antidilutive effect. For the three and ~~189,834~~six months ended June 30, 2022 371,584 stock options were not included in the computation of diluted loss per share due to their antidilutive effect.

For the three and six months ended ~~March 31,~~June 30, 2021, ~~315,359~~276,319 restricted stock/units and 145,334 stock options were not included in the computation of diluted ~~earnings~~loss per share due to their antidilutive effect.

9. 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.

1214

10. Subsequent Events

~~None.~~In accordance with ASC 855 - Subsequent Events - the Company has evaluated all events subsequent to the balance sheet date as of June 30, 2022 through the date of this report and believes nothing is required hereunder.

1315

Item 2. 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, 2021 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. We use the words “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “intend,” “plan,” “budget” and other similar words to identify forward-looking statements. You should read statements that contain these words carefully and should not place undue reliance on these statements because they discuss future expectations, contain projections of results of operations or of our financial condition and/or state other “forward-looking” information. We do not undertake any obligation to update or revise publicly any forward-looking statements. 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, 2021, as it contains important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements.

Overview

We fabricate, manufacture, rent, and sell natural gas compressors and related equipment. Our primary focus is on the rental of natural gas compressors. Our rental contracts typically provide for initial terms of six to 24 months, with our larger horsepower units having contract terms of up to 60 months. After the initial term of our rental contracts, many of our customers have continued to rent our compressors on a month-to-month basis. Rental amounts are billed monthly in advance and include maintenance of our rented compressors. As of ~~March 31,~~June 30, 2022, we had ~~1,276~~1,281 natural gas compressors totaling ~~306,834~~311,379 horsepower rented to 79 customers compared to ~~1,265~~1,245 natural gas compressors totaling ~~287,914~~287,365 horsepower rented to 8079 customers at ~~March 31,~~June 30, 2021.

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. Fabrication of compressors involves our purchase of engines, compressors, coolers, and other components, and our assembling of these components on skids for delivery to customer locations. The major components of our compressor packages are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently require lead times between three to six months with delivery dates scheduled to coincide with our estimated production schedules. Although we do not have formal continuing supply contracts with any major supplier, we believe we have adequate alternative sources available. Recent inflationary pressures have created price increases in both major and minor components for our compressors as well as longer than normal lead times for such components. To date, we have been able to increase our rental rates and sales prices proportionally; however, if cost increases continue and we are no longer able to increase our rental rates and sales prices such an event could have a material adverse effect on the results of our operations and financial condition.

We also manufacture a proprietary line of compressor frames, cylinders and parts, known as our CiP (Cylinder-in-Plane) product line. We use finished CiP component products in the fabrication of compressor units for sale or rental by us or sell the finished component products to other compressor fabricators. We also design, fabricate, sell, install, and service flare stacks and related ignition and control devices for onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. To provide customer support for our compressor and flare sales businesses, we stock varying levels of replacement parts at our Midland, Texas facility and at field service locations. We also provide an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this business.

We provide service and maintenance to our customers under written maintenance contracts or on an as-required basis in the absence of a service contract. Maintenance agreements typically have terms of six months to one year and require payment of a monthly fee.

1416

The oil and natural gas equipment rental and services industry is cyclical in nature. The most critical factor in assessing the outlook for the industry is the worldwide supply and demand for oil and natural gas and the corresponding changes in commodity prices. As demand and prices increase, oil and natural gas producers typically increase their capital expenditures for drilling, development and production activities, although recent equity capital constraints and demands from institutional investors to keep spending within operating cash flow have meaningfully restrained capital expenditure budgets of domestic exploration and production companies. Generally, increased capital expenditures ultimately result in greater revenues and profits for service and equipment companies.

In general, we expect our overall business activity and revenues to track the level of activity in the oil and natural gas industry, with changes in crude oil and condensate production and consumption levels and prices affecting our business more than changes in domestic natural gas production and consumption levels and prices. In recent years we have increased our rentals and sales in unconventional oil shale plays, which are more dependent on crude oil prices. With this shift towards oil production, the demand for overall compression services and products is driven by two general factors: an increased focus by producers on artificial lift applications, e.g., production enhancement with compression assisted gas lift; 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. We recognized this need in recent years and have been shifting our cash and fabrication resources towards designing, fabricating and renting gas compressor packages that range from 400 horsepower up to 1,500 horsepower. While this is a response to market conditions and trends, it also provides us with the opportunity to compete as a full-line compression provider. In addition, recent heightened focus on the emissions profile of our customers has created a shift in demand from natural gas powered compression to electric motor compression in areas where the electric infrastructure can accommodate the energy demands of these units. In response to this shift, we have announced plans to convert up to 100 compressor packages from internal combustion engines to electric motors. The initial conversions will focus on packages in the 200-250 horsepower range.

Industry Update

We typically experience a decline in demand during periods of low crude oil and natural gas prices. 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 through the first ~~three~~six months of 2022. 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. 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. As such, we still expect compressor sales to be low for the remainder of 2022, as exploration and production companies have elected to rent compression units rather than allocating capital dollars to purchase new compression.

Results of Operations

Three months ended ~~March 31,~~June 30, 2022, compared to the three months ended ~~March 31,~~June 30, 2021.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended ~~March 31,~~June 30, 2022 and 2021.


		Three months ended March 31,							Three months ended June 30,
		2022				2021				2022						2021
		(in thousands)							(in thousands)
Rental	Rental	$	17,129	84.2	%		$	15,341			83.4	%	Rental	$	18,144	91.0	%	$	15,613	88.0	%
Sales	Sales	2,893		14.2	%		2,711				14.7	%	Sales	1,292		6.5	%	1,573		8.9	%
Service and Maintenance	Service and Maintenance	314		1.5	%		345				1.9	%	Service and Maintenance	490		2.5	%	563		3.1	%
Total	Total	$	20,336				$	18,397					Total	$	19,926			$	17,749

Total revenue increased ~~10.5%~~12.3% to ~~$20.3~~$19.9 million for the three months ended ~~March 31,~~June 30, 2022 compared to ~~$18.4~~$17.7 million for the three months ended ~~March 31,~~June 30, 2021. This increase was primarily a result of higher rental revenue ~~(11.7%~~(16.2% increase) during 2022 ~~as well as higher~~partially offset by lower sales revenue ~~(7% increase)~~(18% decrease).

Rental revenue increased to ~~$17.1~~$18.1 million for the three months ended ~~March 31,~~June 30, 2022 compared to ~~$15.3~~$15.6 million for the same period in 2021. This increase during the ~~first~~second quarter of 2022 was attributable to (i) an increase in high horsepower compression rentals as these units carry a higher revenue rate than our lower horsepower ~~units.~~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,~~June 30, 2022, we had ~~2,033~~2,043 compressor packages in our fleet, down from ~~2,238~~2,257 units at ~~March 31,~~June 30, 2021 due to the retirement of units during the fourth quarter of 2021. The Company's total unit horsepower decreased to ~~421,422~~426,811 horsepower at ~~March 31,~~June 30, 2022 compared to ~~441,911~~446,803 horsepower at ~~March 31,~~June 30, 2021, due to the aforementioned unit retirements in the fourth quarter of 2021 partially offset by the addition to the Company's fleet of 27 high horsepower compressors with ~~10,900~~13,160 horsepower over the past 12 months. As of ~~March 31,~~June 30, 2022, we had ~~1,276~~1,281 natural gas compressors with a total of ~~306,834~~311,379 horsepower rented to 79 customers, compared to ~~1,265~~1,245 natural gas compressors with a total of ~~287,914~~287,365 horsepower rented to 8079 customers as of ~~March 31,~~June 30, 2021. As a result, our total rented horsepower as of ~~March 31,~~June 30, 2022 increased by ~~6.6%~~8.4% over the last twelve months. Our rental fleet had unit utilization as of ~~March 31,~~June 30, 2022, and 2021, respectively, of ~~62.8%~~62.7% and ~~56.5%~~55.2%, and our horsepower utilization for the same ~~period ends~~dates increased to ~~72.8%~~73.0% from ~~65.2%~~64.3%. Our total rented horsepower increased by ~~6.6%~~8.4% contrasted against a ~~0.9%~~2.9% increase 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~~decreased to ~~$2.9~~$1.3 million for the three months ended ~~March 31,~~June 30, 2022 compared to ~~$2.7~~$1.6 million for the three months ended ~~March 31,~~June 30, 2021. This ~~increase~~decrease is mostly attributable to decreased parts and rebuild sales partially offset by increased compressor sales during the ~~first~~second quarter of 2022 compared to the same period in 2021. 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 to $9.2 million during the three months ended ~~March 31,~~June 30, 2022 compared to ~~$7.2~~$9.1 million during the three months ended ~~March 31,~~June 30, 2021. While rental revenues increased ~~11.7%~~16.2%, this ~~29.0%~~1.8% increase in costs of rentals is primarily due to inflationary pressures on labor and ~~parts as well as a significant increase in repair and maintenance work on our rental fleet.~~parts. 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 decreased ~~24.0%~~19.0% to ~~$2.0~~$1.4 million during the three months ended ~~March 31,~~June 30, 2022 compared to ~~$2.6~~$1.8 million during the three months ended ~~March 31,~~June 30, 2021. This decrease was primarily due to a reduction in unabsorbed costs related to our fabrication operations during the period.

Selling, general, and administrative ("SG&A") expenses decreased ~~5.5%~~11.4% to ~~$2.5~~$2.3 million for the three months ended ~~March 31,~~June 30, 2022 compared $2.6 million during the same period in 2021. This decrease in SG&A expenses was primarily attributable to (i) a $392,000 decrease in ~~stock compensation expense and a decrease in non-cash charges related to~~ our deferred compensation ~~program.~~liability and (ii) a $188,000 decrease in restricted stock compensation expense. These decreases were partially offset by (i) a $160,000 increase in accrued bonus expense and (ii) a $147,000 increase in stock option expense.

Depreciation and amortization expense decreased to ~~$6.1~~$6.0 million for the three months ended ~~March 31,~~June 30, 2022 compared to $6.3 million for the three months ended ~~March 31,~~June 30, 2021. This was the result of a reduction in our rental fleet due to unit retirements in the fourth quarter of 2021.

We recorded an income tax ~~benefit~~expense of approximately ~~$11,000~~$372,000 for the three months ended ~~March 31,~~June 30, 2022 compared to an income tax ~~expense~~benefit of ~~$(125,000)~~$339,000 for the three months ended ~~March 31,~~June 30, 2021. For interim periods, our income tax benefit (expense) is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods. Our estimated annual effective tax rate differs from the U.S. federal statutory rate of 21% primarily as a result of expenses not deductible for income tax purposes.

Six months ended June 30, 2022, compared to the six months ended June 30, 2021.

The table below shows our revenues and percentage of total revenues of each of our product lines for the six months ended June 30, 2022 and 2021.


	Six months ended June 30,
	2022				2021
	(in thousands)
Rental	$	35,274	87.6	%	$	30,954	85.6	%
Sales	4,184		10.4	%	4,284		11.9	%
Service and Maintenance	804		2.0	%	908		2.5	%
Total	$	40,262			$	36,146

Total revenue increased 11.4% to $40.3 million for the six months ended June 30, 2022 compared to $36.1 million during the nine months ended June 30, 2021. This increase was primarily a result of higher rental revenue (14.0% increase) during the first six months of 2022 partially offset by decreased sales revenue (2.3% decrease).

Rental revenue increased to $35.3 million for the six months ended June 30, 2022 compared to $31.0 million during the six months ended June 30, 2021. This increase during the first six months of 2022 was attributable to an increase in high horsepower compression rentals as these units carry a higher 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 decreased to $4.2 million for the six months ended June 30, 2022 compared to $4.3 million for the same period in 2021. This decrease is mostly attributable to a decrease in parts sales partially offset by an increase in compressor 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 13.8% to $18.5 million during the six months ended June 30, 2022 compared to $16.2 million during the six months ended June 30, 2021. 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 decreased 21.9% to $3.4 million during the six months ended June 30, 2022 compared to $4.4 million during the six months ended June 30, 2021. This decrease during the first six months of 2022 was primarily due to a decrease in parts sales.

Selling, general, and administrative expenses decreased (8.4)% to $4.8 million for the six months ended June 30, 2022 compared to $5.3 million for the same period in 2021. SG&A expenses during the first six months of 2022 were impacted by a $597,000 reduction in deferred compensation and a $201,000 reduction in restricted stock compensation expenses, partially offset by a $340,000 increase in expected executive bonus compensation expense and officer salaries related to the recent appointment of our interim President and Chief Executive Officer.

Depreciation and amortization expense decreased 4.1% to $12.1 million for the six months ended June 30, 2022 compared to $12.6 million for the six months ended June 30, 2021. This decrease was the result of unit retirements in the fourth quarter of 2021.

We recorded an income tax expense of $361,000 for the six months ended June 30, 2022 compared to an income tax benefit of $213,000 for the six months ended June 30, 2021. 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.

Non-GAAP Financial Measures

Our definition and use of Adjusted EBITDA

“Adjusted EBITDA” is a non-GAAP financial measure that we define as earnings (net (loss) income) before interest, taxes, depreciation and amortization, as well as non-cash stock compensation, impairment of goodwill, an increase in inventory allowance and inventory write-offs, and retirement of rental equipment. This term, as used and defined by us, may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in

accordance with GAAP. Adjusted EBITDA should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. However, management believes Adjusted EBITDA is useful to an investor in evaluating our operating performance because:

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

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

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

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

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

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

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

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

There are other material limitations to using Adjusted EBITDA as a measure of performance, including the inability to analyze the impact of certain recurring items that materially affect our net income or loss, and the lack of comparability of results of operations of different companies. Please read the table below under “Reconciliation” to see how Adjusted EBITDA reconciles to our net (loss) income, the most directly comparable GAAP financial measure.

Reconciliation

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


		Three months ended March 31,					Three months ended June 30,				Six months ended June 30,
		2022		2021					2022		2021		2022		2021
		(in thousands)				(in thousands)
Net income (loss)	Net income (loss)	$	337	$	(394)			Net income (loss)	$	(70)	$	(1,918)	$	267	$	(2,313)
Interest expense	Interest expense	24		1				Interest expense	24		14		49		16
Income tax expense (benefit)	Income tax expense (benefit)	(11)		125				Income tax expense (benefit)	372		(339)		361		(213)
Depreciation and amortization	Depreciation and amortization	6,061		6,297				Depreciation and amortization	6,042		6,326		12,103		12,623
Non-cash stock compensation expense	Non-cash stock compensation expense	423		474				Non-cash stock compensation expense	331		421		754		895

Adjusted EBITDA	Adjusted EBITDA	$	6,834	$	6,503			Adjusted EBITDA	$	6,699	$	4,504	$	13,534	$	11,008

For the three months ended ~~March 31,~~June 30, 2022, Adjusted EBITDA increased ~~$0.3~~$2.2 million ~~(5.1%~~(48.7%) due primarily to a ~~$1.9~~$2.2 million increase in total revenues and a ~~$0.6~~$0.3 million reduction in costs of sales partially offset by a ~~$2.1~~$0.2 million increase in costs of rentals. For the six months ended June 30, 2022, Adjusted EBITDA increased $2.5 million (22.9%) due primarily to a $4.1 million increase in total revenues and a $1.0 million reduction in costs of sales partially offset by a $2.2 million increase in costs of rentals.

1720

Liquidity and Capital Resources

Our working capital positions as of ~~March 31,~~June 30, 2022 and December 31, 2021 are set forth below:


		March 31,		December 31,			June 30,		December 31,
		2022		2021			2022		2021
		(in thousands)					(in thousands)
Current Assets:	Current Assets:					Current Assets:
Cash and cash equivalents	Cash and cash equivalents	$	16,426	$	22,942	Cash and cash equivalents	$	9,828	$	22,942
Trade accounts receivable, net	Trade accounts receivable, net	12,882		10,389		Trade accounts receivable, net	11,861		10,389
Inventory	Inventory	17,331		19,329		Inventory	18,478		19,329
Federal income tax receivable	Federal income tax receivable	11,538		11,538		Federal income tax receivable	11,538		11,538
Prepaid income taxes	Prepaid income taxes	54		51		Prepaid income taxes	41		51
Prepaid expenses and other	Prepaid expenses and other	613		854		Prepaid expenses and other	1,612		854
Total current assets	Total current assets	58,844		65,103		Total current assets	53,358		65,103
Current Liabilities:	Current Liabilities:					Current Liabilities:
Accounts payable	Accounts payable	5,604		4,795		Accounts payable	5,238		4,795
Accrued liabilities	Accrued liabilities	12,945		14,103		Accrued liabilities	15,958		14,103
Line of credit	Line of credit	—		—		Line of credit	—		—

Current operating leases	Current operating leases	120		68		Current operating leases	88		68
Deferred income	Deferred income	—		1,312		Deferred income	—		1,312
Total current liabilities	Total current liabilities	18,669		20,278		Total current liabilities	21,284		20,278
Total working capital	Total working capital	$	40,175	$	44,825	Total working capital	$	32,074	$	44,825

For the ~~three~~six months ended ~~March 31,~~June 30, 2022, we invested ~~$8.2~~$19.2 million in rental and property and other ~~equipment. During the three months ended March 31, 2022, we added $8.1~~equipment by adding $18.8 million in new equipment to our rental fleet and ~~$0.1 million~~$410,000 mostly in vehicles as well as various other machinery and equipment. Our investment in rental equipment, property and other equipment also includes any changes to work-in-process related to our rental fleet jobs at the beginning of the period compared to the end of the period. Our rental work-in-process increased by ~~$1.6~~$6.6 million during the ~~three~~six months ended ~~March 31,~~June 30, 2022. We financed our investment in rental equipment, property and other equipment with cash flow from operations and cash on hand. We anticipate that our cash flows from operations as well as our borrowing capacity under our New Credit Agreement will provide ample liquidity for our planned capital expenditures during the remainder of 2022 and beyond.

Cash flows

At ~~March 31,~~June 30, 2022, we had cash and cash equivalents of ~~$16.4~~$9.8 million compared to $22.9 million at December 31, 2021. Our cash flows from operating activities of ~~$5.0~~$13.2 million were offset by capital expenditures of ~~$8.2~~$19.2 million during the ~~three~~six months ended ~~March 31,~~June 30, 2022. We had working capital of ~~$40.2~~$32.1 million at ~~March 31,~~June 30, 2022 compared to $44.8 million at December 31, 2021. We generated cash flows from operating activities of ~~$5.0~~$13.2 million during the first ~~three~~six months of 2022 compared to cash flows provided by operating activities of ~~$7.4~~$12.8 million for the first ~~three~~six months of 2021. The ~~decline~~increase in cash flows from operating activities was primarily driven by higher sales margins partially offset by higher costs of rentals during the first ~~three~~six months of 2022. ~~These increases were partially offset by slightly higher sales margins.~~

Strategy

For the remainder of 2022, 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 limit bank borrowing in line with market conditions. For the remainder of 2022, our forecasted capital expenditures are not anticipated to exceed our internally generated cash flows, ~~and our~~ cash on ~~hand. Any~~hand and borrowing availability under our New Credit Agreement. The majority of required capital will be for contracted, premium-priced additions to our compressor rental fleet and/or required service vehicles. We believe that cash flows from operations, ~~and~~ our current cash position and borrowing capacity under our New Credit Agreement will be sufficient to satisfy our capital and liquidity requirements for the foreseeable future.

1821

Bank Borrowings

~~We have a senior secured revolving credit agreement the ("~~The New Credit ~~Agreement")~~Agreement with Texas Capital Bank, National Association (the "Lender") ~~with~~has an initial commitment of $20 million, and an accordion feature that would increase the maximum commitment to $30 million, subject to collateral availability. We also have a right to request from the Lender, on an uncommitted basis, an increase of up to $30 million on the aggregate commitment; provided however, the aggregate commitment amount is not permitted to exceed $50 million. The maturity date of the New Credit Agreement is May 11, 2026. As of ~~March 31,~~June 30, 2022, we did not have any borrowings outstanding under the New Credit Agreement.

Critical Accounting Policies and Practices

Our condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ significantly from those estimates under different assumptions and conditions. Management has determined that our critical accounting policies are those that relate to revenue recognition, estimating the allowance for doubtful accounts, accounting for income taxes, accounting for long-lived assets and accounting for inventory.

There have been no changes in the critical accounting policies disclosed in the Company's Form 10-K for the year ended December 31, 2021.

Recently Issued Accounting Pronouncements

Please read Note 2, Summary of Significant Accounting Policies, Recently Issued Accounting Pronouncements in our condensed consolidated financial statements in this report.

Off-Balance Sheet Arrangements

From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of ~~March 31,~~June 30, 2022, 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.

Special Note Regarding Forward-Looking Statements

Except for historical information contained herein, the statements in this report are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise; the introduction of competing technologies by other companies; a prolonged, substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our products and services; and new governmental safety, health and environmental regulations, which could require us to make significant capital expenditures. The forward-looking statements included in this Form 10-Q are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. A discussion of these and other risk factors is included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no changes in the market risks disclosed in the Company's Form 10-K for the year ended December 31, 2021.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

An evaluation was carried out under the supervision and with the participation of our management, including our Interim President and Chief Executive Officer and our Vice President and Chief Financial Officer, of the effectiveness of the design of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended or, the “Exchange Act”) as of December 31, 2021, pursuant to Exchange Act Rule 13a-15. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily applies its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Interim President and Chief Executive Officer and our Vice President and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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 flows. We are not currently a party to any material legal proceedings and we are not aware of any threatened litigation.

Item 1A. Risk Factors

Please refer to and read Item 1A, Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for a discussion of the risks associated with our Company and industry.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended ~~March 31,~~June 30, 2022, we did not sell any securities which were not registered under the Securities Act of 1933. The following table summarizes our purchases of shares of common stock during this period.

ISSUER PURCHASES OF EQUITY SECURITIES1,2
(a) (b) (c) (d)
For the Three Months Ended March 31, 2022 Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that may yet be Purchased Under Plans or Programs3
(in thousands)
January 1, 2022 to January 31, 2022 49,074 $10.93 49,074 $6,123
February 1, 2022 to February 28, 2022 48,598 $11.51 48,598 $5,564
March 1, 2022 to March 31, 2022 148,816 $12.31 148,816 $3,732


ISSUER PURCHASES OF EQUITY SECURITIES1,2
	(a)	(b)	(c)	(d)
For the Three Months Ended June 30, 2022	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that may yet be Purchased Under Plans or Programs3
				(in thousands)
April 1, 2022 to April 30, 2022	119,532	$12.55	119,532	$2,094
May 1, 2022 to May 31, 2022	110,257	$12.57	110,257	$655
June 1, 2022 to June 30, 2022	58,228	$14.52	58,228	$0

1 The table summarizes repurchases of (and remaining authority to repurchase) shares of our Common Stock.

2 The figures in the table reflect transactions according to the settlement dates. For purposes of our unaudited consolidated financial statements included in this Form 10-Q, the impact of these repurchases is recorded according to the settlement dates.

3 On September 30, 2021, our Board of Directors authorized the repurchase of up to $10.0 million of our outstanding Common Stock in the open market (pursuant to Rule 10b5-1 plans or otherwise), block trades or privately negotiated transactions. ~~This repurchase program is set to expire on September 30, 2022. The amounts~~As noted in this column, ~~indicate~~ the ~~remaining amounts that may yet be~~repurchase authorization has been expended ~~to repurchase shares under these authorizations.~~and thus the program has expired.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

2024

Item 6. Exhibits

The following exhibits are filed herewith or incorporated herein by reference, as indicated:


Exhibit No.			Description

3.1			Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10-QSB filed and dated November 10, ~~2004)~~2004.)

3.2			Bylaws as amended (Incorporated by reference to Exhibit 3.1 of the Registrant's current report on form 8-K filed with the Securities and Exchange Commission on February 10, 2021.

4.1			Description of Securities (Incorporated by reference to the Registrant's Registration Statement on From 8-A, filed with the SEC on October 27, 2008.)

4.2			Form of Senior Indenture (Incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on From S-3 (No. 333-261091) and filed on November 16, ~~2021)~~2021.)

4.3			Form of Subordinated Indenture (Incorporated by reference to Exhibit 4.4 of the Registrant's Registration Statement on Form S-3 (No. 333-261091) and filed on November 16, ~~2021~~2021.)


10.1			2019 Equity Incentive Plan (Incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K dated June 20, 2019 and filed with the Securities and Exchange Commission on June 21, 2019.)

10.2			Stock Option Plan, as amended and restated (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2016.)



10.3			~~Amended and restated Employment~~Retirement Agreement dated ~~April 27, 2015~~May 17, 2022 between Natural Gas Services Group, Inc. and Stephen C. Taylor (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on ~~April 29, 2015.~~May 19, 2022.)

10.4			The Executive Nonqualified Excess Plan Adoption Agreement, referred to as the Nonqualified Deferred Compensation Plan (Incorporated by reference to Exhibit 10.11 of the Registrant's Quarterly ~~report~~Report on Form 10-Q filed with the Securities and Exchange Commission on May 6, 2016.)


~~10.~~510.5			Credit Agreement dated as of May 11, 2021, among the Natural Gas Services Group, Inc. and NGSG Properties, LLC, a Colorado limited liability company, the banks and other financial institutions identified therein as Lenders from time to time party thereto and Texas Capital Bank, National Association, as Administrative Agent, Swing Line Lender and L/C Issuer. (Incorporated by reference to Exhibit 10.6 of the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 14, 2021.)

~~10.~~610.6			Pledge and Security Agreement dated as of May 11, 2021, among Natural Gas Services Group, Inc., the Loan Parties (as defined therein) and Texas Capital Bank, National Association, as Administrative Agent. (Incorporated by reference to Exhibit 10.7 of the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 14, 2021.)

~~10.~~710.7			Note dated as of May 11, 2021, by Natural Gas Services Group, Inc. in favor of Texas Capital Bank, National Association, as Lender. (Incorporated by reference to Exhibit 10.8 of the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 14, 2021.)

*31.110.8			Letter Agreement dated June 9, 2022 between Natural Gas Services Group, Inc. and John W. Chisholm (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2022.)

31.1*			Certification of Interim Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.231.2			Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.132.1			Certification of Interim Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.232.2			Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


101.INS			XBRL Instance Document

101.SCH			XBRL Taxonomy Extension Schema Document

101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF			XBRL Taxonomy Extension Definition Linkbase Document

101.LAB			XBRL Taxonomy Extension Label Linkbase Document

101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

			* Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NATURAL GAS SERVICES GROUP, INC.


/s/ ~~Stephen C. Taylor~~John W. Chisholm						/s/ Micah C. Foster
~~Stephen C. Taylor~~John W. Chisholm						Micah C. Foster
Interim President and Chief Executive Officer						Vice President and Chief Financial Officer
(Principal Executive Officer)						(Principal Accounting Officer)

~~May 16,~~August 15, 2022						~~May 16,~~August 15, 2022


ISSUER PURCHASES OF EQUITY SECURITIES1,2
	(a)	(b)	(c)	(d)
For the Three Months Ended March 31, 2022	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that may yet be Purchased Under Plans or Programs3
				(in thousands)
January 1, 2022 to January 31, 2022	49,074	$10.93	49,074	$6,123
February 1, 2022 to February 28, 2022	48,598	$11.51	48,598	$5,564
March 1, 2022 to March 31, 2022	148,816	$12.31	148,816	$3,732