UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
or
☐ 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
(State or other jurisdiction of incorporation or organization)
404 Veterans Airpark Lane, Suite 300, Midland, Texas
(Address of principal executive offices)
Registrant’s telephone number, including area code:
75-2811855
(I.R.S. Employer Identification No.)
79705
(Zip Code)
(432) 262-2700
Title of each class
Common Stock, $.01 par value
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
NGS
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File to be submitted and posted pursuant to Rule 405
of Regulation S-T (§40232.405 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 ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes ☐ No ☒
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 definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer ☐
Accelerated filer ☐
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.☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to
previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive
officers during the relevant recovery period pursuant to §240.10D-1(b).
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2023, was approximately $123.1 million based on the closing price of
the common stock on that date on the New York Stock Exchange.
At March 28, 2024, there were 12,437,074 shares of the Registrant's common stock outstanding.
Documents Incorporated by Reference
Certain information called for in Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference to the registrant’s definitive proxy statement for the annual meeting of shareholders expected
to be held on June 15, 2024.
FORM 10-K
NATURAL GAS SERVICES GROUP, INC.
TABLE OF CONTENTS
Item No.
Item 1.
Item 1A.
Item 1B.
Item 1C.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
Index to Financial Statements
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains 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 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. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, but
are not limited to, the following factors and the other factors described in this Annual Report on Form 10-K under the caption “Risk Factors”:
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•
•
•
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conditions in the oil and natural gas industry, including the supply and demand for oil and natural gas and wide fluctuations in the prices of oil and
natural gas;
our reliance on a major customer;
fluctuations in interest rates;
regulation or prohibition of new well completion techniques;
competition among the various providers of compression services and products;
changes in safety, health and environmental regulations;
changes in economic or political conditions in the markets in which we operate;
failure of our customers to continue to rent equipment after expiration of the primary rental term;
the inherent risks associated with our operations, such as equipment defects, malfunctions and natural disasters;
our inability to comply with covenants in our debt agreements and the decreased financial flexibility associated with our debt;
our future capital requirements and availability of financing;
capacity availability, costs and performance of our outsourced compressor fabrication providers and overall inflationary pressures;
significant economic disruptions and adverse consequences resulting from current and possible long-term effects of the COVID-19 global
pandemic and other potential pandemics and other public health crises;
general economic conditions; and
acts of terrorism.
We believe that it is important to communicate our expectations of future performance to our investors. However, events may occur in the future
that we are unable to accurately predict or that we are unable to control. When considering our forward-looking statements, you should keep in mind the
risk factors and other cautionary statements in this Annual Report on Form 10-K.
Glossary of Industry Terms
"CiP" - A branded gas compressor product line designed, manufactured and packaged by the Company. The 'Cylinder in Plane' design results in
a compact and vibration-free compressor unit that particularly lends itself to unconventional wellhead applications, air compression and compressed natural
gas requirements.
"flare" – A tall stack equipped with burners used as a safety device at wellheads, refining facilities, gas processing plants, and chemical plants.
Flares are used for the combustion and disposal of combustible gases. The gases are piped to a
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remote, usually elevated, location and burned in an open flame in the open air using a specially designed burner tip, auxiliary fuel, and steam or air.
Combustible gases are flared most often due to emergency relief, overpressure, process upsets, startups, shutdowns and other operational safety reasons.
Natural gas that is uneconomical for sale is also flared. Often natural gas is flared as a result of the unavailability of a method for transporting such gas to
markets.
"gas lift" – A production technique whereby natural gas is injected into a well to increase/improve the oil production.
"oil shale" – Also referred to as tight oil, is petroleum that consists of light crude oil contained in petroleum-bearing formations of low-
permeability, often shales or tight sandstones.
"reciprocating compressors" – A reciprocating compressor is a positive displacement device which compresses gas and/or vapor by using a
piston in a cylinder and a back-and-forth, or reciprocating, motion.
"screw compressors" – A positive displacement compressor used in low-pressure and vapor compression applications where two rotating rotors
intermesh to create pockets of continuously decreasing volume, in which the gas is compressed and its pressure is increased.
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ITEM 1. BUSINESS
PART I
Unless the context otherwise requires, references in this Annual Report on Form 10-K to “Natural Gas Services Group,” the “Company”, "NGS",
“we,” “us,” “our” or “ours” refer to Natural Gas Services Group, Inc. Certain specialized terms used in describing our natural gas compressor business are
defined in "Glossary of Industry Terms" on page i.
Smaller Reporting Company
We are a “smaller reporting company” as defined by the SEC. As such, we are eligible to follow the scaled disclosure requirements in several
Regulation S-K and Regulation S-X items. Our disclosures in this Annual Report reflect many of these scaled requirements.
The Company
We are a provider of natural gas compression equipment and services to the energy industry. We rent, operate and maintain natural gas
compressors for oil and natural gas production and plant facilities. We also design, fabricate and manufacture compressor units both for sale and rental to
our customers. We are headquartered in Midland, Texas, with a fabrication facility located in Tulsa, Oklahoma, a rebuild shop located in Midland, Texas,
and service facilities located in major oil and natural gas producing basins in the U.S.
Our primary business and source of gross profit is the rental of natural gas compressor units for applications associated with oil and natural gas
production with a focus on large and medium horsepower applications. Our customers, specifically for large and medium horsepower applications, are
exploration and production companies that utilize our compressor units for artificial lift applications, i.e., production enhancement enabled with high-
pressure gas compression equipment, on unconventional oil wells on single and multi-well pads. In addition, our customer base includes oil and natural gas
exploration and production companies that focus primarily on natural gas production (with typically smaller horsepower applications). The Company's
largest rental area is the Permian Basin (approximately 63.6% of rental revenues in 2023), with the majority of our remaining rental revenue generated in
other oil and natural gas producing regions and basins in Texas, New Mexico and Oklahoma, including the San Juan Basin, the Texas Panhandle/western
Oklahoma, the Barnett Shale, and central Oklahoma. Other regions and plays in which we provide services include the Utica and Marcellus Shales in Ohio,
and the Antrim Shale in Michigan.
Our revenue increased 42.8% to $121.2 million for the year ended December 31, 2023, from $84.8 million for the year ended December 31, 2022.
Our rental revenues increased 42.6% to $106.2 million in 2023 from $74.5 million in 2022 as well as sales revenue increasing 4.1% to $8.9 million in 2023
from $8.6 million in 2022. The increase in rental revenue was primarily due to additional rented compressor units and increased rental rates. For the year
ended December 31, 2023, the Company reported net income of $4.7 million as compared to a net loss of $0.6 million for the year ended December 31,
2022. In addition, the Company's adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") increased 57.0% to $45.8 million in
2023 from $29.2 million in 2022. See "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" for a
reconciliation of adjusted EBITDA to its closest GAAP financial measure, net income (loss).
At December 31, 2023, our current assets were $76.3 million, which included $2.7 million of cash and cash equivalents. Current liabilities were
$32.7 million at year end 2023. Our stockholders' equity as of December 31, 2023, was $235.9 million.
Recent Events
We are transitioning from fabricating a majority of our compressor units in-house to contracting with third-party fabricators who assemble the
units to our specifications, utilizing parts and components from original equipment manufacturers. We continue to design and engineer our compressors and
under this arrangement, we procure and pay for the components of our compressor packages which are delivered to one of our third-party fabricators, who
then assemble the components and test the compressor units prior to our receiving them. During the fabrication process, we hold title to the compressors
and related components. Notwithstanding this transition, we will continue to provide maintenance services, compressor make-ready work and rebuilds at
our Midland, Texas facility but we will no longer perform new unit fabrication at this location. We continue to maintain new unit fabrication capability at
our Tulsa, Oklahoma facility.
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The Company is making this transition for a number of reasons, including (i) the Company feels that the cost advantage of fabricating new units at
the Midland facility has been decreasing in recent years; (ii) the Company’s fabrication facilities are not capable of producing large horsepower units as
efficiently as certain third-party providers; (iii) third party providers have improved in quality and cost competitiveness; and (iv) use of third-party
fabricators relives the Company of issues related to efficiency, inventory and labor scarcity.
Please see "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" for further information.
Our Operating Units
We identify our operating units based upon major revenue sources as Rental, Sales and Aftermarket Services.
Rental. Our rental compression units provide large, medium and small horsepower applications for conventional and unconventional oil and
natural gas production. Our rental contracts generally provide for initial terms of six to 60 months and generally extend on a month-to-month basis
afterward. We believe that, by outsourcing their compression needs, our customers are able to increase their revenues by producing higher volumes of oil
and natural gas due to higher equipment run time, decrease their operating and maintenance cost of operating compression, lower their capital investment
needs and more efficiently meet their changing compression needs. We maintain and service all of the compression equipment we rent to our customers.
The size, type and geographic diversity of our rental fleet enables us to provide our customers with a range of compression units that can serve a
wide variety of applications, and to select the correct equipment for the job, rather than the customer trying to fit the job to its own equipment. We base our
gas compressor rental rates on several factors, including the cost and size of the equipment, the type and complexity of service desired by the customer, the
length of contract and the inclusion of any other services desired, such as installation, transportation and daily operation.
As of December 31, 2023, we had 1,876 natural gas compressors in our rental fleet totaling 520,365 horsepower. Of this total, we had 1,247
natural gas compressors totaling 420,432 horsepower rented to 84 customers. The unit utilization rate of our rental fleet as of December 31, 2023, was
66.5%, while our horsepower utilization for the same period was 80.8%. We added 92 units with a total of 98,349 horsepower to our fleet during 2023. 73
of those units were 400 horsepower or larger, representing approximately 96% of the horsepower added.
Sales. This operating unit includes the following components:
•
•
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Compressor fabrication. Fabrication involves the design, fabrication and assembly of compressor components manufactured by us or other
vendors into compressor units that are ready for rental or sale. In addition to fabricating compressors for our rental fleet, we engineer and fabricate
custom-made natural gas compressors for sale to customers to meet their specifications based on well pressure, production characteristics and the
particular applications for which compression is sought. Fabricated compressors comprised 20.2% and 42.0% of our sales revenue during 2023
and 2022, respectively.
Parts sales and compressor rebuilds. To provide customer support for our compressor sales business, 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 small horsepower screw
compressors and maintain an inventory of new and used compressors to facilitate this part of our business. Parts sales and compressor rebuilds
comprised 78.8% and 55.2% of our sales revenue during 2023 and 2022, respectively. As noted elsewhere herein, we have ceased in-house
fabrication of new compressor units at our Midland facility in favor of contracting our fabrication needs with third-party fabricators and continued
new unit fabrication at our Tulsa, Oklahoma facility.
Compressor manufacturing. We design and manufacture our own proprietary line of reciprocating natural gas compressor frames, cylinders and
parts known as our “CiP”, or Cylinder-in-Plane, product line. We use the finished components to fabricate compressor units for our rental fleet or
for sale to customers. We also sell finished components to other fabricators.
Aftermarket Services. We service and maintain compressors owned by our customers on an “as needed” and contract basis, as well as providing
services related to the installation and start-up of new compressor units. Natural gas compressors require routine maintenance and periodic refurbishing to
prolong their useful life. Routine maintenance includes physical and
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visual inspections and other parametric checks that indicate a change in the condition of the compressors. We perform engine and compressor overhauls on
a condition-based interval or a time-based schedule or at the customer's request. Based on our past experience, these maintenance procedures maximize
component life and unit availability and minimize downtime.
Business Strategy
Our long-term intentions to grow our revenue and profitability are based on the following business strategies;
• Optimize existing utilized fleet. We believe there are opportunities to modestly improve the profitability of our existing utilized rental fleet
through targeted price increases, particularly in geographic areas that have experienced high rates of cost inflation, along with operational
efficiencies by using improved data collection and analysis to optimize our costs in labor, parts, and maintenance costs.
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Improve asset utilization. We believe we can improve the overall cash flow of the business by increasing utilization of the existing fleet as well as
creating investable cash from non-cash assets. We have a significant number of unutilized units—we will review these assets to determine where
relatively low-cost capital expenditures can improve the marketability and cash flow potential of the units. We also have a significant amount of
capital tied up in non-cash assets (including working capital and fixed assets) that we believe can be monetized and invested back in the fleet at or
above target levels of return on invested capital.
Expand rental fleet. We intend to prudently increase the size of our rental fleet mainly through pre-contracted agreements with our customers. We
believe our future growth in this part of our strategy will be primarily driven through our placement of larger horsepower, centralized wellhead
natural gas compressors for unconventional oil production, with select increases in medium horsepower units to meet customer demand beyond
our inventory.
Execute accretive mergers and acquisitions. We believe there are opportunities in mergers with or acquisitions of competitive rental compression
companies or related businesses providing similar services. While there is no certainty as to the probability of any particular deal, we will continue
to evaluate potential acquisitions, joint ventures and other opportunities that could enhance value for our shareholders.
All of the above strategies are subject to revisions and adjustments as a result of several factors discussed in Item 1A, Risk Factors.
Competitive Strengths
We believe our competitive strengths include:
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Strong operational performance. We deliver very high levels of mechanical availability to our customers. Mechanical availability is defined as
the percentage of time that our units are capable of operating as designed and is a measure of reliability. The cost of rental compression is an
appreciable operating expense for a producer and the improved productivity delivers material incremental profitability to customers. This creates
significant value for our customers we believe our high levels of mechanical availability, particularly for our large horsepower rental compression
units, is a competitive differentiator for customers selecting our units.
Innovative rental compression units. We have made a series of technical innovations to our rental compression units that have improved
operational performance while also reducing the environmental impact, largely related to the volume of fugitive emissions, from our compressor
units. Environmental considerations have increased in importance for our customers, particularly with recent environmental regulations and
taxation, most notably the Methane Emissions Reduction Program. We believe the superior operating and environmental performance of our
natural gas engine and electric-drive units, particularly our large horsepower units, is a significant competitive differentiator.
Long-standing customer relationships. We have developed long-standing relationships providing compression equipment to many major and
independent oil and natural gas companies. Our customers generally continue to rent our compressors after the expiration of the initial terms of
our rental agreements, which we believe reflects their satisfaction with the reliability and performance of our services and products.
• High level of customer service. Our ability to provide a broad range of compressors has enabled us to effectively meet the evolving needs of our
customers. We believe this ability, coupled with our personalized services and in-depth knowledge of our customers’ operating needs and growth
plans, have allowed us to enhance our relationships with existing customers as well as attract new customers. The size, type and geographic
diversity of our rental fleet enable
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us to provide customers with a range of compression units that can serve a wide variety of applications. We are able to select the correct
equipment for the job, rather than the customer trying to fit its application to our equipment.
•
Availability of new units. The rental compression industry has undergone significant change over the last five years. Capital constraints, in the
form of reduced debt availability, higher interest rates, and shareholder demands for return of capital, have forced capital discipline upon the
industry. These factors, along with supply chain challenges, led to a dearth of available rental compression units at a time of solid customer
demand. Our strong balance sheet allowed us to strategically gain market share with desirable customers renting large horsepower units on pre-
contracted units. We believe our relatively modest leverage remains a strategic advantage for the company to continue to gain market share on
attractive terms for shareholder return.
Overview and Outlook
The market for compression equipment and services is highly dependent on the production levels and pricing of oil and natural gas. The level of
production for oil activity and capital expenditures has generally been dependent upon the prevailing view of future gas and oil prices, which are influenced
by numerous supply and demand factors, including availability and cost of capital, well productivity and development costs, global and domestic economic
conditions, environmental regulations, policies of OPEC countries and Russia, and other factors. We feel that the current oil market production outlook is
favorable, with current oil prices creating strong incentives for our customers to maximize their production levels. We believe that the current natural gas
market outlook is not as strong, as the current level of natural gas prices makes this a more challenging market. While oil prices have historically been
volatile, we expect demand for our existing compressor fleet to remain positive assuming oil prices remain in reasonable bands around current pricing
levels. While the current production outlook for natural gas is not as strong, given the continued level of depressed prices, we do feel that opportunities
exist for increased utilization of our small and medium horsepower units.
The oil and natural gas industries have historically been cyclical and production levels of oil and natural gas are dependent upon numerous factors.
We will continue to evaluate our business and operating strategy and we will continue to remain prudent in both our allocation of capital and our capital
structure. Nevertheless, if any of these circumstances change, our business could be adversely affected. Please read Item 1A, Risk Factors, in this report.
Major Customer
Sales and rental income to Occidental Permian, LTD. ("Oxy") for the years ended December 31, 2023 and 2022 amounted to 50% and 42% of our
revenue, respectively. No other single customer accounted for more than 10% of our revenues in 2023 or 2022.
Oxy amounted to 64% of our accounts receivable as of December 31, 2023, and 55% of our accounts receivable as of December 31, 2022. No
other customers amounted to more than 10% of our accounts receivable as of December 31, 2023 or 2022. The loss of this key customer would have a
material adverse effect on our business, financial condition, results of operations and cash flows, depending upon the demand for our compressors at the
time of such loss and our ability to attract new customers.
Sales and Marketing
Our sales force pursues the rental and sales market for compressors and other services in their respective territories. Additionally, our personnel
coordinate with each other to develop relationships with customers who operate in multiple regions. Our sales and marketing strategy is focused on
communication with current customers and potential customers through frequent direct contact, technical assistance, print literature, direct mail and
referrals. Our sales and marketing personnel coordinate with our operations personnel in order to promptly respond to and address customer needs. Our
overall sales and marketing efforts concentrate on demonstrating our commitment to enhancing the customer’s cash flow through enhanced product design,
fabrication, manufacturing, installation, operations, customer service and support.
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Competition
We have several competitors in the natural gas compression segment, some of which have greater financial resources. We believe that we compete
effectively on the basis of price, compression unit availability, customer service, flexibility in meeting customer needs, and quality and reliability of our
compressors and related services.
Compressor industry participants can achieve significant advantages through increased size and geographic breadth. As the number of rental
compressors in our rental fleet increases, the number of sales, support, and maintenance personnel required and the minimum level of inventory may not
increase proportionately.
Backlog
As of December 31, 2023, we had $0.8 million sales backlog compared to none as of December 31, 2022. Sales backlog consists of firm customer
orders for which a purchase or work order has been received, satisfactory credit or a financing arrangement exists, and delivery is scheduled. In addition,
the major components of our compressors are acquired from suppliers through periodic purchase orders that currently require three to six months or more
of lead time prior to delivery of the order. We do not believe that backlog is a good indicator of the future growth potential of our business.
Employees
As of December 31, 2023, we had 266 total employees, none of which are represented by a labor union. We believe we have good relations with
our employees.
Liability and Other Insurance Coverage
Our equipment and services are provided to customers who are subject to hazards inherent in the oil and natural gas industry, such as explosions,
fires, and oil spills. We maintain liability insurance that we believe is customary in the industry and which includes environmental cleanup but excludes
product warranty insurance because the majority of components on our compressor unit are covered by the manufacturers and our outsourced fabrication
providers. We also maintain insurance with respect to our facilities. Based on our historical experience, we believe that our insurance coverage is
adequate. However, there is a risk that our insurance may not be sufficient to cover any particular loss or that insurance may not cover all losses. In
addition, insurance rates have in the past been subject to wide fluctuation, and changes in coverage could result in less coverage, increases in cost or higher
deductibles and retentions.
Government Regulation
All of our operations and facilities are subject to numerous federal, state, foreign and local laws, rules and regulations related to various aspects of
our business, including containment and disposal of hazardous materials, water quality and wastewater discharges, oilfield waste and other waste materials
and protection of human health.
To date, we have not been required to expend significant resources in order to satisfy applicable environmental laws and regulations. We do not
anticipate any material capital expenditures for environmental control facilities or extraordinary expenditures to comply with environmental rules and
regulations in the foreseeable future. However, compliance costs under existing laws or under any new requirements could become material and we could
incur liabilities for noncompliance. And as noted below, we may be indirectly affected by environmental laws that affect our customers.
Our business is generally affected by political developments and by federal, state, foreign and local laws and regulations, which relate to the oil
and natural gas industry. The adoption of laws and regulations affecting the oil and natural gas industry for economic, environmental and other policy
reasons could increase our costs and could have an adverse effect on the demand for our services and our operations. The state and federal environmental
laws and regulations that currently apply to our operations could become more stringent in the future.
Climate Change
In response to findings that emissions of carbon dioxide, methane and other Greenhouse Gases (“GHGs”) endanger public health and the
environment, federal legislation has been considered from time to time to reduce GHG emissions. Methane, a primary component of natural gas, and
carbon dioxide, a byproduct of the burning of natural gas, are examples of GHGs. At the federal level, the government could seek to pursue legislative,
regulatory or executive initiatives that may impose significant restrictions on fossil-fuel exploration and production and use such as limitations or bans on
hydraulic fracturing of
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oil and gas wells, bans or restrictions on new leases for production of minerals on federal properties, and imposing restrictive requirements on new pipeline
infrastructure or fossil-fuel export facilities.
The Inflation Reduction Act of 2022 (the “IRA 2022”) imposes a methane emissions charge on certain oil and gas facilities, including onshore
petroleum and natural gas production facilities, which emit 25,000 metric tons or more of carbon dioxide equivalent gas per year and exceed certain
emissions thresholds. We do not operate any facilities that are subject to this emissions charge. In July 2023, the EPA proposed to expand the scope of the
Greenhouse Gas Reporting Program for petroleum and natural gas facilities, as required by the Inflation Reduction Act. Among other things, the proposed
rule expands the emissions events that are subject to reporting requirements to include “other large release events” and applies reporting requirements to
certain new sources and sectors. The rule is currently scheduled to be finalized in 2024 and would take effect on January 1, 2025, for reporting year 2025
(due March 2026) in certain circumstances, with the potential to also impact GHG reporting for reporting year 2024 (due March 2025) in certain
circumstances. In January 2024, the EPA proposed a rule implementing the Inflation Reduction Act’s methane emissions charge. The proposed rule
includes potential methodologies for calculating the amount by which a facility’s reported methane emissions are below or exceed the waste emissions
thresholds and contemplates approaches for implementing certain exemptions created by the Inflation Reduction Act. The methane emissions charge
imposed under the Methane Emissions and Waste Reduction Incentive Program for calendar year 2024 would be $900 per ton emitted over annual methane
emissions thresholds, and would increase to $1,200 in 2025, and $1,500 in 2026. The proposed rule for the waste emissions charge has been published in
the Federal Register and EPA is seeking public comment by March 26, 2024.
Although it is not currently possible to predict how any proposed or future GHG legislation, regulation, agreements or initiatives will impact our
business, any such legislation or regulation of GHG emissions could result in increased compliance or operating costs, additional operating restrictions or
reduced demand for our compressor services, and could have a material adverse effect on our business, financial condition and results of operations.
Other energy legislation and initiatives could include a carbon tax, methane fee or cap and trade program. At the state level, many states, including
the states in which we or our customers conduct operations, have adopted legal requirements that have imposed new or more stringent permitting,
disclosure or well construction requirements on oil and gas activities. For instance, various states and groups of states have adopted or are considering
adopting legislation, regulations or other regulatory initiatives that are focused on such areas as GHG cap and trade programs, carbon taxes, reporting and
tracking programs, and restriction of emissions. For example, in 2019, Colorado passed a bill which delegates authority to local governments to regulate oil
and gas activities and requires the Colorado Oil and Gas Conservation Commission to minimize emissions of methane and other air contaminants.
Likewise, the New Mexico Environment Department has adopted regulations to restrict the venting or flaring of methane.
In an executive order issued on January 20, 2021, President Biden established an Interagency Working Group on the Social Cost of Greenhouse
Gases, which is called on to, among other things, capture the full costs of GHG emissions, including the “social cost” of carbon, nitrous oxide and methane,
which are essentially the monetized damages associated with incremental increases in greenhouse gas emissions. The current administration adopted an
interim social cost of carbon of $51 per ton in February 2021, but in recent rulemakings the EPA has referenced a figure as high as $2,400 per ton effective
in 2030. This figure is intended to be used to guide federal decisions on the costs and benefits of various policies and approvals; such efforts have been the
subject of a series of judicial challenges, which have been largely unsuccessful to date. At this time, we cannot determine whether the administration’s
efforts on social cost or other interagency climate efforts will lead to any particular actions that give rise to a material adverse effect on our business,
financial condition, results of operations and cash flows.
At the international level, there is an agreement, the United Nations-sponsored “Paris Agreement,” for nations to limit their GHG emissions
through non-binding, individually determined reduction goals every five years after 2020. President Biden pledged the renewed participation of the United
States on his first day in office. In November 2021, the United States participated in the United Nations Climate Change Conference in Glasgow, Scotland,
United Kingdom that resulted in a pact among approximately 200 countries, including the United States, called the Glasgow Climate Pact. Relatedly, the
United States and European Union jointly announced the launch of the “Global Methane Pledge,” which aims to cut global methane pollution at least 30%
by 2030 relative to 2020 levels, including “all feasible reductions” in the energy sector. In conjunction with these pacts, the United States committed to an
economy-wide target of reducing net greenhouse gas emissions by 50-52 percent below 2005 levels by 2030. Also in November 2021, President Biden
signed a $1 trillion dollar infrastructure bill into law. The new infrastructure law includes several climate-focused investments, including upgrades to power
grids to accommodate increased use of renewable energy and expansion of electric vehicle infrastructure. Although it is not possible at this time to predict
what additional domestic legislation may be adopted in light of the Paris Agreement or the Glasgow Climate Pact, or how legislation or new regulations
that may be adopted based on the Paris Agreement or the Glasgow Climate Pact to address
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GHG emissions would impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from,
our compressors could require us to incur costs to reduce emissions of GHGs associated with our operations and could decrease demand for oil and natural
gas.
Litigation risks are also increasing, as a number of cities and other local governments have sought to bring suits against the largest oil and natural
gas exploration and production companies in state or federal court, alleging, among other things, that such companies created public nuisances by
producing fuels that contributed to global warming effects, such as rising sea levels, and therefore are responsible for roadway and infrastructure damages,
or alleging that the companies have been aware of the adverse effects of climate change for some time but defrauded their investors by failing to adequately
disclose those impacts.
There are also increasing financial risks for fossil fuel producers and oil and gas field service providers (such as the Company) as shareholders
currently invested in fossil-fuel energy and related service companies concerned about the potential effects of climate change may elect in the future to shift
some or all of their investments into non-energy related sectors. Institutional lenders who provide financing to fossil-fuel energy and related companies also
have become more attentive to sustainable lending practices and some of them may elect not to provide funding for fossil fuel energy companies.
Additionally, the lending practices of institutional lenders have been the subject of intensive lobbying efforts in recent years, oftentimes public in nature, by
environmental activists, proponents of the international Paris Agreement, and foreign citizenry concerned about climate change not to provide funding for
fossil fuel producers. Limitation of investments in and financings for fossil fuel energy companies could result in the restriction, delay or cancellation of
drilling programs or development or production activities of our customers, which in turn could have a material adverse effect on our compressor rental and
sale business.
The adoption and implementation of new or more stringent international, federal or state legislation, regulations or other regulatory initiatives that
impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil
and natural gas or generate GHG emissions could result in increased costs of compliance or additional operating restrictions or reduced demand for our
compressor products and services, and could have a material adverse effect on our business, financial condition and results of operations.
We believe that our existing environmental control procedures are adequate and that we are in substantial compliance with environmental laws and
regulations, and the phasing in of emission controls and other known regulatory requirements should not have a material adverse effect on our financial
condition or operational results. However, it is possible that future developments, such as new or increasingly strict requirements and environmental laws
and enforcement policies there under, could lead to material costs of environmental compliance by us. While we may be able to pass on the additional cost
of complying with such laws to our customers, there can be no assurance that attempts to do so will be successful. Some risk of environmental liability and
other costs are inherent in the nature of our business, however, and there can be no assurance that environmental costs will not rise.
To the extent that new laws or other governmental actions restrict the energy industry or impose additional environmental protection requirements
that result in increased costs to the oil and gas industry, we could be adversely affected. We cannot determine to what extent our future operations and
earnings may be affected by new legislation, new regulations or changes in existing regulations.
Site Remediation and Waste Management and Disposal
The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), also known as the Superfund law, and
analogous state laws impose liability on certain classes of persons, known as “potentially responsible parties,” for the disposal or release of a regulated
hazardous substance into the environment. These potentially responsible parties include (1) the current owners and operators of a facility, (2) the past
owners and operators of a facility at the time the disposal or release of a hazardous substance occurred, (3) parties that arranged for the offsite disposal or
treatment of a hazardous substance, and (4) transporters of hazardous substances to off-site disposal or treatment facilities. Potentially responsible parties
under CERCLA may be subject to strict, joint and several liability for the costs of investigating and cleaning up environmental contamination, for damages
to natural resources and for the costs of certain health studies. In addition to statutory liability under CERCLA, common law claims for personal injury or
property damage can also be brought by neighboring landowners and other third parties related to contaminated sites.
The Resource Conservation and Recovery Act (“RCRA”), and comparable state statutes and their implementing regulations, regulate the
generation, transportation, treatment, storage, disposal, and cleanup of hazardous and solid (non-hazardous) wastes. Under a delegation of authority from
the EPA, most states administer some or all of the provisions of RCRA, sometimes in conjunction with their own, more stringent requirements. Federal and
state regulatory agencies can seek
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to impose administrative, civil, and criminal penalties for alleged non-compliance with RCRA and analogous state requirements. In general, hazardous
waste is waste with properties that can potentially endanger human health or the environment.
Under CERCLA, RCRA and analogous state laws, we could be required to remove or remediate environmental impacts on properties we currently
own and lease or formerly owned or leased (including hazardous substances or wastes disposed of or released by prior owners or operators), to clean up
contaminated off-site disposal facilities where our wastes have come to be located or to implement remedial measures to prevent or mitigate future
contamination. Compliance with these laws may constitute a significant cost and effort for us. No specific accounting for environmental compliance has
been maintained or projected by us at this time. We are not presently aware of any material environmental demands, claims, or adverse actions, litigation or
administrative proceedings in which either we or our acquired properties are involved in or subject to or arising out of any predecessor operations.
We currently own or lease, and in the past have owned or leased, a number of properties that have been used in support of our operations for a
number of years. We have utilized operating and disposal practices that were or are currently standard in the industry. However, materials such as solvents,
thinner, waste paint, waste oil, wash down water and sandblast material may have been disposed of or released in or under properties currently or formerly
owned or operated by us or our predecessors. Although we have utilized operating and disposal practices that were standard in the industry at the time,
hydrocarbons, hazardous substances, or other regulated wastes may have been disposed of or released on or under the properties owned or leased by us or
on or under other locations where such materials have been taken for disposal by companies sub-contracted by us. In addition, some of these properties
may have been previously owned or operated by third parties whose treatment and disposal or release of hydrocarbons, hazardous substances or other
regulated wastes was not under our control. These properties and the materials released or disposed thereon may be subject to CERCLA, RCRA and
analogous state laws. Under such laws, we could be required to remove or remediate historical property contamination, or to perform certain operations to
prevent future contamination. We are not currently under any order requiring that we undertake or pay for any cleanup activities. However, we cannot
provide any assurance that we will not receive any such order in the future.
Under CERCLA and analogous state laws, we could be required to remove or remediate environmental impacts on properties we currently own
and lease or formerly owned or leased (including hazardous substances or wastes disposed of or released by prior owners or operators), to clean up
contaminated off-site disposal facilities where our wastes have come to be located or to implement remedial measures to prevent or mitigate future
contamination. Compliance with these laws may constitute a significant cost and effort for us. No specific accounting for environmental compliance has
been maintained or projected by us at this time. We are not presently aware of any material environmental demands, claims, or adverse actions, litigation or
administrative proceedings in which either we or our acquired properties are involved in or subject to or arising out of any predecessor.
Furthermore, the modification of existing laws or regulations or the adoption of new laws or regulations that result in the curtailment of
exploratory or developmental drilling for oil and gas could materially and adversely affect our operations by discouraging our customers from drilling for
hydrocarbons, disrupting revenue through permitting or similar delays. Demand for our compression products and services could be diminished in
connection with these initiatives. Further, to the extent that the review results in the development of additional restrictions on exploration and drilling,
limitations on the availability of leases, or restrictions on the ability to obtain required permits, it could have a material adverse impact on our operations by
reducing our customers’ compression needs and the demand for our services.
Air Emissions
Our operations are also subject to federal, state, and local regulations. The Clean Air Act and implementing regulations and comparable state laws
and regulations regulate emissions of air pollutants from various industrial sources and also impose various monitoring and reporting requirements,
including requirements related to emissions from certain stationary engines, such as those on our compressor units. These laws and regulations impose
limits on the levels of various substances that may be emitted into the atmosphere from our compressor units and required us to meet more stringent air
emission standards and install new emission control equipment on all of our engines built after July 1, 2008.
In recent years, the EPA has lowered the National Ambient Air Quality Standard (“NAAQs”) for several air pollutants. For example, in 2013, the
EPA lowered the annual standard for fine particulate matter from 15 to 12 micrograms per cubic meter. In 2015, the EPA published the final rule
strengthening the standards for ground level ozone, and the states are expected to establish revised attainment/non-attainment regions. State implementation
of the revised NAAQS could result in stricter permitting requirements, delay or prohibit our customers’ ability to obtain such permits, and result in
increased expenditures for
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pollution control equipment, which could negatively impact our customers’ operations by increasing the cost of additions to equipment, and negatively
impact our business.
In 2012, the EPA finalized rules that establish new air emission controls for oil and natural gas production and natural gas processing operations.
Specifically, the EPA’s rule package included New Source Performance Standards to address emissions of sulfur dioxide and volatile organic compounds
(“VOCs”) and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production and
processing activities. The rules established specific new requirements regarding emissions from compressors and controls at natural gas processing plants,
dehydrators, storage tanks and other production equipment as well as the first federal air standards for natural gas wells that are hydraulically fractured. The
EPA has taken a number of steps to amend or expand on these regulations since 2012. For example, in June 2016, the EPA published New Source
Performance Standards that require certain new, modified or reconstructed facilities in the oil and natural gas sector to reduce methane gas and VOC
emissions. These standards expanded the 2012 standards by using certain equipment-specific emissions control practices, requiring additional controls for
pneumatic controllers and pumps as well as compressors, and imposing leak detection and repair requirements for natural gas compressor and booster
stations. In addition, in December 2023, the EPA proposed a rule to further reduce methane and VOC emissions from new and existing sources in the oil
and gas sector. These standards, as well as any future laws and their implementing regulations, may impose stringent air permit requirements, or mandate
the use of specific equipment or technologies to control emissions. We cannot predict the final regulatory requirements or the future costs to comply with
such requirements with any certainty.
We are also subject to air regulation at the state level. For example, sources of air emissions within Texas are controlled by the Texas Commission
on Environmental Quality (“TCEQ”). Air emission sources that emit at greater than de minimis levels must obtain a permit prior to operation through the
TCEQ. In addition, TCEQ has implemented revisions to certain air permit programs that significantly increase the air permitting requirements for new and
certain existing oil and gas production and gathering sites for a number of counties in the Barnett Shale production area that established new emissions
standards for engines, which impact the operation of specific categories of engines by requiring the use of alternative engines, compressor packages or the
installation of aftermarket emissions control equipment. Expansion by the TCEQ of this type of program and the adoption of similar regulations in other
states may increase our compliance costs.
Water Discharge
Clean Water Act. The Clean Water Act ("CWA") and the Oil Pollution Act of 1990 and implementing regulations govern:
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the prevention of discharges, including oil and produced water spills, and
liability for drainage into waters.
The CWA and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of
oil and other substances, into waters of the United States. The discharge of pollutants into regulated waters and wetlands is prohibited, except in accordance
with the terms of a permit issued by the EPA or an analogous state agency. The CWA also requires the development and implementation of spill prevention,
control and countermeasures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon spill or leak at hydrocarbon
facilities. In addition, the CWA and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff
from certain types of facilities. Federal and state regulatory agencies can impose administrative, civil and criminal penalties as well as other enforcement
mechanisms for non-compliance with discharge permits or other requirements of the CWA and analogous state laws and regulations. Our compression
operations do not generate process wastewaters that are discharged to waters of the U.S. However, the operations of our customers may generate such
wastewaters subject to the CWA. While it is the responsibility of our customers to follow CWA regulations and obtain proper permits, violations of the
CWA may indirectly impact our operations in a negative manner.
Safe Drinking Water Act. Some of our customers’ natural gas production is developed from unconventional sources that require hydraulic
fracturing as part of the completion process. Legislation to amend the Safe Drinking Water Act (“SDWA”) to repeal the exemption for hydraulic fracturing
from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well as legislative proposals
to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed from time to time and the federal
government continues to consider legislation to amend the SDWA. Some states have also proposed or adopted legislative or regulatory restrictions on
hydraulic fracturing, including prohibitions on the practice. We cannot predict the future of such legislation and what additional, if any, provisions would be
included. Additional levels of regulation or interpretation are adopted at the federal or state level could lead to increased operating costs and prohibitions or
curtailment of current hydraulic practices could reduce demand for our compression services, which could materially adversely affect our results of
operations and financial position.
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Occupational Safety and Health
We are subject to the requirements of Occupational Safety and Health Administration ("OSHA") and comparable state statutes. These laws and the
implementing regulations strictly govern the protection of the health and safety of employees. The OSHA hazard communication standard, the EPA
community right-to-know regulations under Title III of CERCLA, and similar state statutes require that we maintain and/or disclose information about
hazardous materials used or produced in our operations. We believe that we are in compliance with these applicable requirements and with other
comparable laws.
Patents, Trademarks and Other Intellectual Property
We believe that the success of our business depends more on the technical competence, creativity and marketing abilities of our employees than on
any individual patent, trademark, or copyright. Nevertheless, as part of our ongoing research, development and manufacturing activities, we may seek
patents when appropriate on inventions concerning new products, process and product improvements.
Suppliers and Raw Materials
Fabrication of our rental compressors involves the purchase by us of engines, compressors, coolers and other components, and the assembly of
these components on skids for delivery to customer locations. These major components of our compressors are acquired through periodic purchase orders
placed with third-party suppliers on an "as needed" basis, which typically requires a three to twelve month lead time 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. In the past, we have not experienced any sudden and dramatic increases in the prices of the major components
for our compressors. However, the occurrence of such an event could have a material adverse effect on the results of our operations and financial condition,
particularly if we are unable to increase our rental rates and sale prices proportionate to any such component price increases.
Available Information
We use our website as a channel of distribution for Company information. We make available free of charge on the Investor Relations section of
our website (www.ngsgi.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K. We also make
available through our website other reports filed with or furnished to the SEC under the Securities Exchange Act of 1934 ("Exchange Act"), as amended,
including our proxy statements and reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Business Ethics
and the charters to our various Committees of our Board of Directors. Paper copies of our filings are also available, without charge upon written request.
Please mail requests to Natural Gas Services Group, Inc., 404 Veterans Airpark Lane, Suite 300, Midland, TX 79705. The information contained on our
website is not part of this Report.
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ITEM 1A. RISK FACTORS
You should carefully consider the following risks associated with owning our common stock. Although the risks described below are the risks that
we believe are material, they are not the only risks relating to our industry, our business and our common stock. Additional risks and uncertainties,
including those that we have not yet identified or that we currently believe are immaterial, may also adversely affect our business, financial condition or
results of operations.
Risks Associated With Our Industry
Decreased oil and natural gas prices and oil and gas industry expenditure levels adversely affect our revenue.
Our revenue is derived primarily from expenditures in the oil and natural gas industry, which, in turn, are based on budgets to explore for, develop
and produce oil and natural gas. When these expenditures decline, as they have at various times during the past several years, our revenue will suffer. The
industry’s willingness to explore for, develop and produce oil and natural gas depends largely upon the prevailing view of future oil and natural gas
prices. Prices for oil and natural gas historically have been, and are likely to continue to be, highly volatile. Many factors affect the supply and demand for
oil and natural gas and, therefore, influence oil and natural gas prices, including:
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the level of oil and natural gas production;
the level of oil and natural gas inventories;
domestic and worldwide demand for oil and natural gas;
the expected cost of developing new reserves;
the cost of producing oil and natural gas;
the level of drilling and completions activity;
inclement weather;
domestic and worldwide economic activity;
regulatory and other federal and state requirements in the United States;
the ability of the Organization of Petroleum Exporting Countries, national oil companies and other large producers to set and maintain production
levels and prices for oil;
political conditions in or affecting oil and natural gas producing countries;
terrorist activities affecting traditional supply routes and other possible terrorist activities in the United States and elsewhere;
the cost of developing alternative energy sources;
environmental regulation; and
tax policies.
The rental contracts of many of our operating compressor units have a short-term duration, and oil and natural gas companies tend to respond
quickly to upward or downward changes in prices. Any prolonged reduction in drilling and production activities historically has reduced our compressor
sales and materially eroded both rental pricing and utilization rates for our equipment and services and adversely affected our financial results. As a result
of any such prolonged reductions, we may suffer losses, be unable to make necessary capital expenditures or be unable to meet our financial obligations.
The intense competition in our industry could result in reduced profitability and loss of market share for us.
We compete with the oil and natural gas industry’s largest equipment and service providers who have greater name recognition than we do. These
companies also have substantially greater financial resources, larger operations and greater budgets for marketing, research and development than we
do. They may be better able to compete because of their broader geographic dispersion and ability to take advantage of international opportunities, the
greater number of compressors in their fleet, their product and service diversity or a lower cost of capital. As a result, we could lose customers and market
share to those competitors. These companies may also be better positioned than us to successfully endure downturns in the oil and natural gas industry.
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Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better prices,
features, performance or other competitive characteristics than our products and services. Competitive pressures or other factors also may result in
significant price competition that could harm our revenue and our business. Additionally, we may face competition in our efforts to acquire other
businesses.
Adverse macroeconomic and business conditions may significantly and negatively affect our results of operations.
As a result of the COVID-19 outbreak and other economic conditions in the United States and abroad, our revenue and profitability were
adversely affected in the ensuing years. The condition of domestic and global financial markets and the potential for disruption and illiquidity in the credit
markets could have an adverse effect on our operating results and financial condition, and if sustained for an extended period, such adverse effects could
also become significant. Uncertainty and turmoil in the credit markets may negatively impact the ability of our customers to finance utilization of our
products and services and could result in a decrease in, or cancellation of, orders or adversely affect the collectability of our receivables. If the availability
of credit to our customers is reduced, they may reduce their drilling and production expenditures, thereby decreasing demand for our products and services,
which could have a negative impact on our financial condition. A prolonged period of depressed prices for oil and natural gas would likely result in delays
or cancellation of projects by our customers, reducing the demand for our products and services.
Continued elevated levels of inflation could have an adverse impact on our operating results.
The U.S. economy has experienced elevated levels of inflation since early 2022. While such levels of inflation have moderated in recent months,
uncertainty remains on expectations of inflation during 2024. Should inflationary pressures return or increase, the result will be an increase in our cost
structure, including labor costs, parts costs, lubricants and other items used in our operations. If such cost increases occur, we may be unable to pass along
such increases to our customers in the form of higher rental rates for our compressor units. Increases in inflation could also increase the costs of new
compressor units, making them less attractive and decreasing the demand from our customers for such assets. Should any of these items occur, they could
negatively impact the results of our operations.
A reduction in demand for oil could adversely affect our business.
Our results of operations depend upon the level of activity in the energy market, including oil development, production, and transportation. Oil
and natural gas prices and the level of drilling and exploration activity can be volatile. As a result, the demand for our natural gas compression services can
be adversely affected. A reduction in demand has, and could in the future continue to, force us to reduce our pricing substantially. Additionally, our
customers’ production from oil-weighted reserves constitutes the majority percentage of our business. These are considered unconventional sources and are
generally less economically feasible to be developed in low oil price environments. A decline in demand for oil and natural gas generally has an adverse
effect on our business, financial condition and results of operations.
Our industry is highly cyclical, and our results of operations may be volatile.
Our industry is highly cyclical, with periods of high demand and high pricing followed by periods of low demand and low pricing. Periods of low
demand intensify the competition in the industry and often result in rental equipment being idle for long periods of time. We have been required to enter
into lower rate rental contracts in response to market conditions and our rentals and sales revenue have decreased as a result of such conditions. Due to the
short-term nature of most of our rental contracts, changes in market conditions can quickly affect our business. As a result of the cyclicality of our industry,
we anticipate our results of operations will be volatile in the future.
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Increased regulation or ban of current fracturing techniques could reduce demand for our compressors.
From time to time, for example, legislation has been proposed in Congress to amend the federal Safe Drinking Water Act (“SDWA”) to require
federal permitting of hydraulic fracturing and the disclosure of chemicals used in the hydraulic fracturing process. Further, the EPA completed a study
finding that hydraulic fracturing could potentially harm drinking water resources under adverse circumstances such as injection directly into groundwater
or into production wells lacking mechanical integrity. Further, legislation to amend the SDWA to repeal the exemption for hydraulic fracturing (except
when diesel fuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as
well as legislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in recent
sessions of Congress. Several states and local jurisdictions also have adopted or are considering adopting regulations that could restrict or prohibit
hydraulic fracturing in certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic
fracturing fluids. While we do not perform hydraulic fracturing, many of our customers do and their activity level drives demand for our products.
More recently, federal and state governments have begun investigating whether the disposal of produced water into underground injection wells
has caused increased seismic activity in certain areas. The results of these studies could lead federal and state governments and agencies to develop and
implement additional regulations.
A ban of hydraulic fracturing would likely halt some projects, including unconventional projects, at least temporarily. Expanded regulations are
likely to introduce a period of uncertainty as companies determine ways to proceed. Any curtailment could result in a reduction in demand for our
compressors, potentially affecting both sales and rentals of our units.
We are subject to extensive environmental laws and regulations that could require us to take costly compliance actions that could harm our financial
condition.
Our fabrication and maintenance operations are significantly affected by stringent and complex federal, state and local laws and regulations
governing the discharge of substances into the environment or otherwise relating to environmental protection. In these operations, we generate and manage
hazardous wastes such as solvents, thinner, waste paint, waste oil, wash down wastes, and sandblast material. We attempt to use generally accepted
operating and disposal practices and, with respect to acquisitions, will attempt to identify and assess whether there is any environmental risk before
completing an acquisition. Based on the nature of the industry, however, hydrocarbons or other wastes may have been disposed of or released on or under
properties owned or leased by us or on or under other locations where such wastes have been taken for disposal. The waste on these properties may be
subject to federal or state environmental laws that could require us to remove the waste or remediate sites where they have been released. We could be
exposed to liability for cleanup costs, natural resource and other damages as a result of our conduct or the conduct of, or conditions caused by, prior
owners, lessees or other third parties. Environmental laws and regulations have changed in the past, and they are likely to change in the future. If current
existing regulatory requirements or enforcement policies change, we may be required to make significant unanticipated capital and operating expenditures.
Any failure by us to comply with applicable environmental laws and regulations may result in governmental authorities taking actions against our
business that could harm our operations and financial condition, including the:
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issuance of administrative, civil and criminal penalties;
denial or revocation of permits or other authorizations;
reduction or cessation in operations; and
performance of site investigatory, remedial or other corrective actions.
Increasing attention to environmental, social and governance matters and future related reporting requirements may impact our business, financial
results and stock price.
In recent years, increasing attention has been given to corporate activities related to environmental, social and governance (“ESG”) matters in
public discourse and the investment community. A number of advocacy groups, both domestically and internationally, have campaigned for governmental
and private action to promote change at public companies related to ESG matters, including through the investment and voting practices of investment
advisers, public pension funds, universities and other members of the investing community. These activities include increasing attention and demands for
action related to climate change and energy transition matters, such as promoting the use of substitutes to fossil fuel products
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and encouraging the divestment of fossil fuel equities, as well as pressuring lenders and other financial services companies to limit or curtail activities with
fossil fuel companies.
Members of the investment community have begun to screen companies for sustainability performance, including practices related to climate
change. In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings systems for
evaluating companies on their approach to ESG matters. These ratings are used by some investors to inform their investment and voting decisions.
Unfavorable ESG ratings may lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other
industries, which could have a negative impact on our stock price and our access to and costs of capital.
Regulatory requirements related to ESG or sustainability reporting have been issued in the European Union that apply to financial market
participants. In the United States, such regulations have been issued related to pension investments in California, and for the responsible investment of
public funds in Illinois. Additional regulation is pending in other states. We expect regulatory requirements related to ESG matters to continue to expand
globally. If we are not able to meet future sustainability reporting requirements of regulators or current and future expectations of investors, customers or
other stakeholders, our business and ability to raise capital may be adversely affected.
Increasing attention to climate change, increasing societal expectations on companies to address climate change, and potential consumer use of
substitutes to energy commodities may result in increased costs, reduced demand for our customers’ hydrocarbon products which will likely translate to
reduced demand for compression services, reduced profits, increased investigations and litigation, increased governmental regulations and negative impacts
on our stock price and access to capital markets.
International, national and state governments and agencies continue to evaluate and promulgate legislation and regulations that are focused on
restricting greenhouse gas (GHG) emissions. Compliance with climate action regulations applicable to our customers' operations may have significant
implications that could adversely affect our business and operating results in the fossil fuel sectors, and boosting demand for technologies contributing
to the climate action agenda.
In the United States, the U.S. Environmental Protection Agency (EPA) has taken steps to regulate GHG emissions as air pollutants under the U.S.
Clean Air Act of 1970, as amended. The EPA's Greenhouse Gas Reporting Rule requires monitoring and reporting of GHG emissions from, among others,
certain mobile and stationary GHG emission sources in the oil and natural gas industry. In addition, the U.S. government has proposed rules in the past
setting GHG emissions standards for, or otherwise aimed at reducing GHG emissions from, the oil and natural gas industry. Caps or fees on carbon
emissions, including in the U.S., have been and may continue to be established and the cost of such caps or fees could disproportionately affect the fossil
fuel sectors. We are unable to predict whether and when the proposed changes in laws or regulations ultimately will occur or what they ultimately will
require, and accordingly, we are unable to assess the potential financial or operational impact they may have on our customers and therefore our business.
Risks Associated With Our Company
A significant majority of our compressor unit rental agreements are either month-to-month or short-term in duration. which, if terminated or not
renewed, would adversely impact our revenue and our ability to recover our initial equipment costs.
The length of our compressor rental agreements with our customers varies based on customer needs, equipment configurations and geographic
area. In most cases, under currently prevailing rental rates, the initial rental periods are not long enough to enable us to fully recoup the average cost of
acquiring or fabricating the equipment. On a unit basis, of the 1,247 compressors rented at December 31, 2023, 773 were rented on a month-to-month
basis. On a horsepower basis, of the 420,432 total rented horsepower, we had 141,194 of that total rented on a month-to-month basis, with the remainder on
contracts expiring between 2024 and 2028. Given the volatility of the oil and gas market, we cannot be sure that a substantial number of our customers will
continue their rental agreements or that, if such agreements were terminated we will be able to re-rent the equipment to new customers or that any re-rentals
would be at comparable rental rates. The inability to timely renegotiate or re-rent a substantial portion of our compressor rental fleet could have a material
adverse effect upon our business, financial condition, results of operations and cash flows.
14
We could be subject to substantial liability claims that could harm our financial condition.
Our products are used in production applications where an accident or a failure of a product can cause personal injury, loss of life, damage to
property, equipment or the environment, or suspension of operations. While we maintain insurance coverage, we face the following risks under our
insurance coverage:
• we may not be able to continue to obtain insurance on commercially reasonable terms;
• we may be faced with types of liabilities that will not be covered by our insurance, such as damages from significant product liabilities and from
environmental contamination;
•
the dollar amount of any liabilities may exceed our policy limits; and
• we do not maintain coverage against the risk of interruption of our business.
Any claims made under our policies will likely cause our premiums to increase. Any future damages caused by our products or services that are
not covered by insurance, are in excess of policy limits or are subject to substantial deductibles, would reduce our earnings and our cash available for
operations.
A significant amount of our revenues and accounts receivable are related to one customer and a loss of this customer or other current customers could
adversely affect our results of operations.
Our business is dependent not only on securing new customers but also on maintaining current customers. We had one customer that accounted for
an aggregate of approximately 50% of our revenue for the year ended December 31, 2023, and the same customer accounted for an aggregate of
approximately 42% of our revenue for the year ended December 31, 2022. At December 31, 2023, this same customer accounted for an aggregate of 64%
of our accounts receivable. Unless we are able to retain our existing customers, or secure new customers if we lose one or more of our significant
customers, our revenue and results of operations would be adversely affected. In addition, the default on payments by our significant customer or other
important customers would negatively impact our cash flow and current assets.
Loss of key members of our management could adversely affect our business.
In keeping with our streamlined approach to our business, our executive management team consists of four officers: our (i) Chief Executive
Officer, (ii) Chief Financial Officer (iii) Chief Technical Officer and (iv) President and Chief Operating Officer. On February 1, 2024, Justin Jacobs, a
member of our board of directors, was named as Chief Executive Officer and assumed these duties beginning on February 12, 2024. We have had two
Interim Chief Financial Officers since the resignation of our prior Chief Financial Officer on February 28, 2023. While there is an ongoing search for a
permanent Chief Financial Officer, if this position is not adequately or timely replaced, our business operations could be materially adversely affected. In
addition, we rely on James Hazlett, our long-time Chief Technical Officer, in connection with the design and engineering of our compressor lines. While
we have recently hired Brian Tucker as our Chief Operating Officer, we expect that Mr. Hazlett’s services will also continue to be available to us in the
foreseeable future. However, the complete loss of either Messrs. Tucker’s or Hazlett’s services could have an adverse impact on our business. We do not
carry any key-man insurance on any of our officers or directors.
The erosion of the financial condition of our customers could adversely affect our business.
Many of our customers finance their exploration and development activities through cash flow from operations, the incurrence of debt or the
issuance of equity. During times when the oil or natural gas markets are weak, our customers are more likely to experience a deterioration in their financial
condition. Many of our customers’ equity values and liquidity substantially decline during declines in oil and natural gas prices, and in some cases access
to capital markets may be an unreliable source of financing for some customers. The combination of a reduction in cash flow resulting from declines in
commodity prices, an increase in the interest rates charged for debt financing, a reduction in borrowing bases under reserve-based credit facilities and the
lack of availability of debt or equity financing may result in a reduction in our customers’ spending for our products and services. For example, our
customers could seek to preserve capital by canceling month-to-month contracts, canceling or delaying scheduled maintenance of their existing natural gas
compression equipment or determining not to enter into any new natural gas compression service contracts or purchase new compression equipment.
15
We might be unable to employ qualified technical personnel, which could hamper our present operations or increase our costs.
Many of the compressors that we sell or rent are mechanically complex and often must perform in harsh conditions. We believe that our success
depends upon our ability to employ and retain a sufficient number of technical personnel who have the ability to design, utilize, enhance and maintain these
compressors. Our ability to maintain and expand our operations depends in part on our ability to utilize and increase our skilled labor force. The demand
for skilled workers is high, and supply is limited. A significant increase in the wages paid by competing employers could result in a reduction of our skilled
labor force or cause an increase in the wage rates that we must pay or both. If either of these events were to occur, our cost structure could increase and our
operations and growth potential could be impaired.
We may require a substantial amount of capital to expand our compressor rental fleet and grow our business.
In late 2022 and for 2023, we significantly expanded and borrowed under our bank credit facility in order to finance the growth of our large
horsepower compressor fleet, increasing the outstanding balance on our facility from $25 million at December 31, 2022, to $164 million at December 31,
2023. The current commitment on our credit facility is $225 million, subject to borrowing base limitations. At December 31, 2023, our borrowing base
under the credit facility was approximately $219.7 million, leaving approximately $55.7 million available for future borrowing.
During 2024, the amount we will spend on capital expenditures related to compression equipment will be determined primarily by the activity of
our customers, our financial resources and access to capital. The amount and timing of any capital expenditures may vary depending on a variety of factors,
including the level of activity in the oil and natural gas exploration and production industry and the presence of alternative uses for our capital, including
any acquisitions that we may pursue. In addition, although a significant portion of the value of a new compressor increases our borrowing base under our
credit facility once it has been fully constructed and put into service, we generally have an approximate lag of 9 to 12 months between borrowing money
under the credit facility to fund progress payments to build a compressor and the time it becomes eligible for inclusion in our borrowing base. This lag can
reduce the amount of future borrowings available for working capital purposes and new compressor unit acquisition until the unit is placed into service.
During the past year, we funded our capital expenditures through cash flows from operations and borrowings from our revolving credit facility.
Although we believe that cash on hand, cash flows from our operations and bank borrowing from our revolving credit facility will provide us with
sufficient cash to fund our planned capital expenditures for 2024, we cannot provide assurance that these sources will be sufficient considering the factors
and limitations noted above.
In addition to expanding our existing business through organic growth opportunities, we may require additional capital to fund any significant
unanticipated capital expenditures, such as a material acquisition. To the extent we would require any necessary capital, due to the existing constraints
noted above and any issues or limitations in the equity and debt capital markets, such capital, may not be available to us when we need it or on acceptable
terms. Our ability to raise additional capital will depend on the results of our operations and the status of various capital and industry markets at the time
we seek such capital. Failure to generate sufficient cash flow, together with the absence of alternative sources of capital, could stagnate our growth and
have a material adverse effect on our business, financial condition, results of operations or cash flow.
Our debt levels may negatively impact our current and future financial stability.
In November 2023, we increased the borrowing commitment of our revolving credit facility from $175 million to $225 million (subject to
borrowing base limitation and customary covenants) and at December 31, 2023, we had $164 million outstanding on the revolving credit facility and
anticipate additional borrowing on the facility through 2024. Should we utilize our full debt capacity growth beyond that point could be impacted. As a
result of our indebtedness at any given point in time, we might not have the ability to incur any substantial additional indebtedness. The level of our
indebtedness could have several important effects on our future operations, including:
•
•
•
our ability to obtain additional financing for working capital, acquisitions, capital expenditures and other purposes may be limited;
a significant portion of our cash flow from operations may be dedicated to the payment of principal and interest (which is variable on our
revolving credit facility) on our debt, thereby reducing funds available for other purposes; and
our leverage if increased to an unacceptable level, could make us more vulnerable to economic downturns.
16
If we borrow under our credit line and are unable to service our debt, we will likely be forced to take remedial steps that are contrary to our business
plan.
If we were to materially borrow further under our line of credit or other borrowing arrangements, it is possible that our business will not generate
sufficient cash flow from operations to meet any debt service requirements and the payment of principal when due depending on the amount of borrowings
at any given time. If this were to occur, we may be forced to:
•
•
•
sell assets at disadvantageous prices;
obtain additional financing on less favorable terms; or
refinance all or a portion of our indebtedness on terms that may be less favorable to us.
Our current credit agreement contains covenants that limit our operating and financial flexibility and, if breached, could expose us to severe remedial
provisions.
Under the terms of our current credit agreement, we must:
comply with various leverage, commitment coverage and other customary financial ratios;
not exceed specified levels of debt;
comply with limits on asset sales;
comply with limits on cash dividends; and
other customary financial and operational limitations.
•
•
•
•
•
Our ability to meet the financial ratios and tests under our credit agreement can be affected by events beyond our control, and we may not be able
to satisfy those ratios and tests. A breach of any one of these covenants or requirements could permit the lending organization to accelerate outstanding
amounts so that it is immediately due and payable. If a breach occurs, no further borrowings would be available under our credit arrangement. If we are
unable to repay any outstanding amounts, the lending organization could proceed against and foreclose on the assets we pledged as collateral to secure
payment of our indebtedness.
Our current credit agreement contains a variable interest rate and increases to such rate may increase our borrowing cost.
The interest expense charged on our outstanding borrowings under our current credit agreement is based upon a variable rate which fluctuates as
interest rates change. Changes in macroeconomic conditions outside of our control could result in a higher interest rate being charged on our outstanding
borrowings and an increase in the overall interest costs charged. This could have an adverse impact on our operations, our free cash flow and our ability to
invest in future growth.
If we fail to acquire or successfully integrate additional businesses, our growth may be limited and our results of operations may suffer.
As part of our business strategy, we evaluate potential acquisitions of other businesses or assets. However, there can be no assurance that we will
be successful in consummating any such acquisitions. The successful acquisition of businesses or assets will depend on various factors, including, but not
limited to, our ability to obtain financing and the competitive environment for acquisitions. In addition, we may not be able to successfully integrate any
businesses or assets that we acquire in the future. The integration of acquired businesses is likely to be complex and time-consuming, place a significant
strain on management and may disrupt our business. We also may be adversely impacted by any unknown liabilities of acquired businesses, including
environmental liabilities. We may encounter substantial difficulties, costs and delays involved in integrating common accounting, information and
communication systems, operating procedures, internal controls and human resources practices, including incompatibility of business cultures and the loss
of key employees and customers. These difficulties may reduce our ability to gain customers or retain existing customers, and may increase operating
expenses, resulting in reduced revenues and income and a failure to realize the anticipated benefits of acquisitions.
Failure to effectively manage our business and growth could adversely affect our operating results and our internal controls.
In 2023, we had significant growth in our revenue and operations. Our strategy envisions the continued expansion and growth of our business,
subject to the demand for oil and gas and the impact of the other risks set forth in this risk factor section and elsewhere in this Report. Continued rapid
growth will likely challenge and place a strain on our management systems and
17
resources if we are unable to timely adapt and expand such systems and resources. Many of our ongoing reporting functions rely on data capture and
recording using manual entry of transaction data. In order to efficiently and effectively manage our planned growth, we will need to continue to analyze
and upgrade our use of technology, including our ERP and other operating systems and this will likely require future capital investment. We must continue
to refine and expand our business capabilities, our workforce, our systems and processes, and our access to financing sources. As we continue to grow, we
must continue to hire, train, supervise and manage new employees. We cannot assure that we will be able to:
• meet our capital needs;
•
•
•
upgrade and expand our office and field management infrastructure so that it is appropriate for our level of activity;
continue to improve our systems effectively or efficiently and in a timely manner, including financial and management controls, reporting systems
and procedures; and
attract, hire, train and retain additional highly skilled and motivated officers, sales staff, district managers and employees and allocate our human
resources optimally.
If we are unable to manage our growth, our financial conditions and results of operations may be adversely affected.
Liability to customers under warranties and indemnification provisions may materially and adversely affect our results of operations.
We provide warranties as to the proper operation and conformance to specifications of the equipment we manufacture. Our equipment is complex
and often deployed in harsh environments. Failure of this equipment to operate properly or to meet specifications may increase our costs by requiring
additional engineering resources and services, replacement of parts and equipment or monetary reimbursement to a customer. We have in the past received
warranty claims and we expect to continue to receive them in the future. To the extent that we incur substantial warranty claims in any period, our
reputation, our ability to obtain future business and our results of operations could be materially and adversely affected.
Our rental and sales contracts provide for varying forms of indemnification from our customers and in most cases may require us to indemnify our
customers. Under some of our rental and sales contracts, liability with respect to personnel and property is customarily assigned on a “knock-for-knock”
basis, which means that we and our customers assume liability for our respective personnel and property. However, in certain rental and sales contracts we
assume liability for damage to our customer’s property as well as the property of certain other third parties on the site resulting from our negligence. Since
our products are used in production applications in the energy industry, expenses and liabilities in connection with accidents involving our products and
services could be extensive and may exceed our insurance coverage.
Our income taxes may change.
We are subject to income tax on a jurisdictional or legal entity basis and significant judgment is required in certain instances to allocate our taxable
income to a jurisdiction and to determine the related income tax expense and benefits. Losses in one jurisdiction generally may not be used to offset profits
in other jurisdictions. As a result, changes in the mix of our earnings (or losses) between jurisdictions, among other factors, could alter our overall effective
income tax rate, possibly resulting in significant tax rate increases.
We are regularly audited by various tax authorities. Income tax audit assessments or changes in tax laws, regulations, or other interpretations may
result in increased tax provisions which could materially affect our operating results in the period or periods in which such determinations are made or
changes occur.
Failure to maintain effective internal controls could have a material adverse effect on our operations.
Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial
reporting. If we fail to remediate our material weakness or maintain effective internal controls, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover,
effective internal controls are necessary for us to produce reliable financial reports and to help prevent financial fraud. If, as a result of deficiencies in our
internal controls, we cannot provide reliable financial reports or prevent fraud, our business decision process may be adversely affected, our business and
operating results could be harmed, investors could lose confidence in our reported financial information, and the price of our stock could decrease as a
result.
18
We rely on computer and telecommunications systems, and failures in our systems or cyber security attacks or breaches could result in information
theft, data corruption, disruption in operations and/or financial loss.
In the conduct of our business, we rely heavily on information technology systems(“digital technology”), including internet-based systems, to
process, transmit and store electronic information. In particular, we depend upon our digital technology for supply chain management, inventory
management, payment processing and data storage. Like many companies, we have become increasingly dependent upon digital technology to conduct
daily operations. Our business partners, including vendors, service providers and financial institutions, are also dependent upon digital technology.
We are continually exposed to various cybersecurity risks, including but not limited to, unauthorized access to our systems or data, malware and
ransomware attacks, denial-of-service attacks, phishing, theft or loss of intellectual property, and data breaches. These risks could result from malicious
actors, employee error, malfeasance, or other operational vulnerabilities. A cybersecurity attack could have a significant adverse impact on our business
operations, financial condition and reputation. Potential consequences include loss of sensitive or proprietary information, disruption of business
operations, financial losses from remedial actions, litigation and potential legal liabilities and damage to customer and investor confidence.
We have taken steps to protect against cyber-attacks to minimize the risk of our systems being penetrated and compromised by implementing a
comprehensive cybersecurity program, such as regular risk assessments and penetration testing, deployment of firewalls and intrusion detection systems,
deployment of encryption technologies, implementation of access controls and the development of incident response and recovery plans. Additionally, we
have employed data backup and storage measures that could allow for recovery of our data. However, we cannot assure that our efforts to prevent such an
attack or, that if an attack were to occur, that we would be able to access our data in a timely fashion.
Risks Associated With Our Common Stock
The price of our common stock may fluctuate.
The trading price of our common stock and the price at which we may sell securities in the future are subject to substantial fluctuations in response
to various factors, including our ability to successfully accomplish our business strategy, the trading volume of our stock, changes in governmental
regulations, actual or anticipated variations in our quarterly or annual financial results, our involvement in litigation, general market conditions, the prices
of oil and natural gas, announcements by us and our competitors, our liquidity, our ability to raise additional funds, and other events such as those discussed
in the factors above.
Future sales of our common stock could adversely affect our stock price.
Substantial sales of our common stock in the public market, or the perception by the market that those sales could occur, may lower our stock
price or make it difficult for us to raise additional equity capital in the future. According to filings made with the Securities and Exchange Commission as
of March 28, 2024, an aggregate of approximately 37.1% of the outstanding shares of our common stock are owned by five institutional investors, each of
which owns more than 5% of our outstanding shares as of the date of their respective filings. Potential sales of large amounts of these shares in a short
period of time by one or more of these significant investors could have a negative impact on our stock price. In addition, potential sales of our common
stock by our directors and officers, who beneficially own approximately 7.3% of the outstanding shares of our common stock as of March 28, 2024, and
because of the negative perception of sales by insiders, could also have a negative impact on our stock price.
We have a comparatively low number of shares of common stock outstanding and, therefore, our common stock may suffer from limited liquidity and
its price will likely be volatile and its value may be adversely affected.
Because of our relatively low number of outstanding shares of common stock, the trading price of our common stock will likely be subject to
significant price fluctuations and limited liquidity. This may adversely affect the value of your investment. In addition, our common stock price is subject to
fluctuations in response to variations in quarterly operating results, changes in management, future announcements concerning us, general trends in the
industry and other events or factors such as those described above.
19
If we issue debt or equity securities, you may lose certain rights and be diluted.
If we raise funds in the future through the issuance of debt or equity securities, the securities issued may have rights and preferences and privileges
senior to those of holders of our common stock, and the terms of the securities may impose restrictions on our operations or dilute your ownership in our
Company.
We currently have on file with the SEC an effective "universal" shelf registration statement on Form S-3, which enables us to sell, from time to
time, our common stock and other securities, including debt securities, covered by the registration statement in one or more public offerings. The shelf
registration statement allows us to enter the public markets and consummate sales of the registered securities in rapid fashion and with little or no notice.
Issuances of securities under our shelf registration statement may dilute our existing shareholders.
If securities analysts downgrade our stock or cease coverage of us, the price of our stock could decline.
The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our
business. We do not control these analysts. Furthermore, there are many large, well-established, publicly traded companies active in our industry and
market, which may mean that it is less likely that we will receive widespread analyst coverage. If one or more of the analysts who do cover us downgrade
our stock, our stock price would likely decline rapidly. If one or more of these analysts cease coverage, we could lose visibility in the market, which in turn
could cause our stock price to decline.
Provisions contained in our governing documents could hinder a change in control.
Our articles of incorporation and bylaws contain provisions that may discourage acquisition bids and may limit the price investors are willing to
pay for our common stock. Our articles of incorporation and bylaws provide that:
•
•
•
•
•
directors are elected for three-year terms, with approximately one-third of the board of directors standing for election each year;
cumulative voting is not allowed, which limits the ability of minority shareholders to elect any directors;
advance notice for nominations of directors by shareholders and for shareholders to include matters to be considered at our annual meeting;
the unanimous vote of the board of directors or the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by the
holders of all shares entitled to vote in the election of directors is required to change the size of the board of directors; and
directors may be removed only for cause or by the holders of not less than 80% of the votes entitled to be cast on the matter.
Our Board of Directors has the authority to issue up to five million shares of preferred stock. The Board of Directors can fix the terms of the
preferred stock without any action on the part of our shareholders. The issuance of shares of preferred stock may delay or prevent a change in control
transaction. In addition, preferred stock could be used in connection with the Board of Directors’ adoption of a shareholders’ rights plan (also known as a
poison pill), which would make it much more difficult to effect a change in control of our Company through acquiring or controlling blocks of stock. Also,
our directors and officers as a group will continue to beneficially own stock and although this is not a majority of our stock, it confers substantial voting
power in the election of directors and management of our Company. This would make it difficult for other minority shareholders to effect a change in
control or otherwise extend any significant control over our management. This may adversely affect the market price and interfere with the voting and other
rights of our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
20
ITEM 1C. - CYBERSECURITY
Information Technology and Cybersecurity Risks.
Our information technology, software and application systems (“digital technology’) has been an important part of our operations and our ability
to compete successfully. We continue to invest in technology solutions to improve more inefficient systems, to streamline and automate workflows and to
provide digital and mobile applications for our field service personnel. We are committed to maintaining robust cybersecurity measures, continuously
evaluating and updating our cybersecurity practices, and being prepared to respond to and recover from cybersecurity incidents. We face ongoing risk from
cybersecurity threats. There can be no assurance that our efforts will prevent or mitigate all cybersecurity events, which, if realized, could have a material
impact on our operations and financial results. See Part I, Item 1A “Risk Factors” of this Report.
Cybersecurity Incidents
We have not experienced any material cybersecurity incidents nor have we identified risks from known threats that could likely materially
impacted our operations or financial results.
Management of Cybersecurity Risk
During 2023, we adopted a Cybersecurity Event Plan (“Cybersecurity Plan”) which outlines how we identify and manage our cybersecurity risk.
The Cybersecurity Plan contains the following elements:
•
•
•
•
•
Incident Identification and Reporting – outlines the steps used to promptly identify cybersecurity risks and report those through appropriate
means;
Incident Assessment –after collecting information about a potential risk or threat, a protocol has been developed and outlined that will allow a
cross-functional team to assess the threat;
Incident Containment–provides for action to be taken to isolate and attempt to contain and minimize any potential threat;
Resolution and Recovery– outlines the steps to be taken, based upon the incident and the systems potentially impacted, to mitigate the potential
impact of the threat and restore system access and functionality in the minimum amount of time;
Training and Awareness–development of training and awareness programs to allow employees to understand how to promptly respond in the event
of a perceived threat.
Governance
Our Board of Directors has an active role in oversight of our risks and is assisted by management in the exercise of these responsibilities. Our
Manager of Information Technology prepares and gives a presentation to the Board at each of its quarterly meetings, which includes updates on
cybersecurity. Our IT Manager is responsible for assessing and managing risks from cybersecurity threats and carrying out our formal cybersecurity event
plan. Our IT Manager is responsible for reporting material incidents to our Chief Executive Officer, who in turn will report to the Lead Independent
Director. Our IT Manager has over 20 years of information technology experience in the energy industry.
21
ITEM 2. PROPERTIES
The table below describes the material facilities owned or leased by Natural Gas Services Group as of December 31, 2023:
Location
Status
Square Feet
Uses
Tulsa, Oklahoma
Midland, Texas
Lewiston, Michigan
Midland, Texas
Bloomfield, New Mexico
Godley, Texas
Bridgeport, Texas
Midland, Texas
Carrollton, Ohio
Wheeler, Texas
Owned and Leased
Owned
Owned
Owned
Owned
Leased
Leased
Owned
Leased
Leased
91,780 Compressor fabrication, rental and services
70,000 Compressor repair and overhaul, services
15,360 Compressor fabrication, rental and services
45,000 Corporate office
7,000 Office and parts and services
5,000 Parts and services
4,500 Office and parts and services
4,100 Parts and services
2,600 Parts and services
2,160 Parts and services
We believe that our properties are generally well maintained and in good condition and adequate for our purposes.
ITEM 3. 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 effect on our financial position,
results of operations or cash flow. We are not currently a party to any bankruptcy, receivership, reorganization, adjustment or similar proceeding, and we
are not aware of any material threatened litigation.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
PART II
Our common stock currently trades on the New York Stock Exchange under the symbol “NGS”. As of December 31, 2023, as reflected by our
transfer agent records, we had 7 record holders of our common stock. This number does not include any beneficial owners for whom shares of common
stock may be held in “nominee” or “street” name. On March 28, 2024, the last reported sale price of our common stock as reported by the New York Stock
Exchange was $19.43 per share.
Dividends
To date, we have not declared or paid any dividends on our common stock. We currently do not anticipate paying a cash dividend on our common
stock. Although we intend to retain our earnings, if any, to finance the growth of our business, our Board of Directors will have the discretion to declare and
pay dividends in the future. Payment of dividends in the future
22
will depend upon our earnings, capital requirements, and other factors which our Board of Directors may deem relevant. Our credit agreement also contains
restrictions on our paying dividends under certain circumstances.
Equity Compensation Plans
The following table summarizes certain information regarding our equity compensation plans as of December 31, 2023:
Equity compensation plans approved by security holders:
Plan Category
Stock Option Plan
2019 Equity Incentive Plan
Total
(a)
Number of securities to
vest or be issued upon
exercise of outstanding
options
(b)
Weighted-average
issuance or exercise
price of
outstanding options
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans
(excluding securities
reflected in column
(a))
(1)
129,751
133,898
263,649
$
$
20.59
10.66
415,085
405,833
820,918
(1)
Total number of shares issuable upon exercise of options granted to employees, officers, and directors under our 1998 Stock Option Plan.
Sale of Unregistered Securities and Issuer Repurchases
We made no sales of unregistered securities during the year ended December 31, 2023, nor any repurchases during 2023.
23
ITEM 6. RESERVED
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist you in understanding our financial position and results of operations for each of the years ended
December 31, 2023 and 2022. You should read the following discussion and analysis in conjunction with our audited financial statements and the related
notes.
The following discussion contains forward-looking statements. For a description of limitations inherent in forward-looking statements, see
“Special Note Regarding Forward-Looking Statements” on page ii.
Overview
We rent, operate and maintain, as well as sell natural gas compressors and related equipment. We also design, fabricate and manufacture
compressor units both for sale and rental to our customers. Some fabrication work is done in-house with an increasing amount done by third-party
contractors. Our primary focus is on the rental of natural gas compressors. Our rental contracts generally provide for initial terms of six to 60 months, with
our larger horsepower units having longer initial terms than our small and medium horsepower units. After the initial term of our rental contracts, most 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 the rented compressors. As of December 31, 2023, we had 1,247 natural gas compressors totaling 420,432 horsepower rented to 84 customers, compared
to 1,221 natural gas compressors totaling 318,350 horsepower rented to 81 customers at December 31, 2022. Of the 420,432 horsepower rented as of
December 31, 2023, we had 279,238 of the total horsepower operating under contracts expiring between 2024 and 2028 and we had 141,194 of that
horsepower rented on a month-to-month basis. Of the 1,247 compressors rented at December 31, 2023, 773 were rented on a month-to-month basis.
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. These major
components of our compressors are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently
requires a minimum three to twelve month lead time 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. Finally due to supply
chain disruptions as a result of the COVID-19 pandemic, the Russian invasion of the Ukraine and the increased rate of inflation, we continue to experience
cost increases and sporadic unavailability of many of our parts needed to fabricate and maintain our rental fleet. While we have a robust supplier network,
pricing pressure from our customers and competitors presents challenges in increasing our rental rates to offset these increased costs which could have a
material adverse effect on the results of our operations and financial condition, particularly if we were unable to increase our rental rates and sales prices
proportionate to any such component price increases. We also use third-party contractors for fabrication and these companies may experience the same
risks.
In December 2023, we decided to cease fabrication of new compressor units for sale or rental to customers at our Midland, Texas facility. We
continue to maintain new unit compressor fabrication capability at our Tulsa, Oklahoma facility as well as having relationships with multiple outsourced
compressor fabrication providers.
We also manufacture a 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. Although we have significantly de-emphasized our flare product line, we continue to hold a limited inventory of 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 aftermarket services to our non-rental customers under written maintenance contracts or on an as-required basis in the absence of a
service contract.
24
The following table sets forth our revenues from each of our three product lines categories for the periods presented:
Rental
Sales
Aftermarket Services
Total
Year Ended December 31,
2022
2023
(in thousands)
$
$
106,159 $
8,921
6,087
121,167 $
74,465
8,568
1,792
84,825
Our strategy for growth is focused on our compressor rental business. Margins, exclusive of depreciation and amortization, for our rental business
have historically run in the mid-40% to low-60% range, while margins for the compressor sales business tend to be in the mid-20% range.
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 result in greater revenues and profits for service and
equipment companies.
Generally, higher commodity prices lead to higher capital expenditures by oil and natural gas producers and higher levels of production. In
general, we expect our overall business activity and revenues to track the level of activity in the oil and natural gas industry, specifically production levels,
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 rental 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 non-conventional production. These latter 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 single and multiple larger horsepower compressor packages. We recognized this need in
recent years and have shifted our cash and fabrication resources towards designing, fabricating and renting gas compressor packages that range from 400
horsepower up to 2,500 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.
We typically experience a decline in demand during periods of low crude oil and natural gas prices. In recent years, our level of activity has
become more largely driven by the price of crude oil as opposed to natural gas. During the first quarter of 2020, due to COVID, we saw a substantial
decline in the prices for oil and natural gas. While prices largely recovered in 2021 and then stabilized in 2022 and 2023, activity levels of exploration and
production companies have been and will continue to be dependent not only on commodity prices, but also on their ability to generate sufficient operational
cash flow to fund their activities. Generally, we feel that the level of demand for our compressor services is more closely tied to production activities, which
are likely to fare better than drilling activity in periods of declining commodity prices.
For fiscal year 2024, our forecasted capital expenditures will be directly dependent upon our customers’ compression requirements and our capital
availability, assuming prudent use of leverage. We believe that cash on hand, cash flows from operations and borrowings under our revolving credit facility
will be sufficient to satisfy our capital and liquidity requirements through 2024. If we require additional capital to fund any significant unanticipated
expenditures, including any material acquisitions of other businesses, joint ventures or other opportunities, this additional capital could exceed our current
resources, might not be available to us when we need it, or might not be on acceptable terms.
Critical Accounting Policies and Practices
We have identified the policies below as critical to our business operations and the understanding of our results of operations. 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
25
principles generally accepted in the United States. Actual results could differ significantly from those estimates under different assumptions and
conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the
portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain. We describe our significant accounting policies more fully in Note 2 ("Summary
of Significant Accounting Policies") to our consolidated financial statements.
Our critical accounting policies are as follows:
•
•
•
•
•
revenue recognition;
provision for credit losses;
accounting for income taxes;
accounting for long-lived assets; and
accounting for inventory.
Revenue Recognition Policy
Our 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). We recognize revenue once a performance obligation has been satisfied and control over a product or service
has transferred to the customer. Shipping and handling costs incurred are accounted for as fulfillment costs and are included in cost of revenues in our
Consolidated Statements of Operations.
Nature of Goods and Services
Rental Revenue. The Company generates revenue from renting compressors and flare systems to our customers. These contracts may also include
a fee for servicing the compressor or flare during the rental contract. Our rental contracts typically range from six to 60 months, with our larger horsepower
compressors having longer minimum contract terms. Our rental 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. Our rental
business follows ASC 842 for revenue recognition. In accordance with ASC 842 – Leases, we have applied the practical expedient ASC 842-10-15-42A,
which allows the Company to combine lease and non-lease components.
Sales Revenue. The Company generates revenue by the sale of custom/fabricated compressors, and parts, as well as, exchange/rebuilding customer
owned compressors and sale of used rental equipment. 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 is completed and shipped, or, in accordance with a bill and hold arrangements, 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 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. Our sales and aftermarket services follow ASC 606 for revenue recognition.
Provision for Credit Losses
We perform ongoing credit evaluations of our customers and adjust credit limits based on management's assessment of the customer's financial
condition, third-party credit reports and payment history, as well as industry conditions and general economic conditions. We continuously monitor
collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established,
we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Management believes that its provision for
credit losses is adequate; however, actual write-offs may exceed the recorded provision.
Accounting for Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our federal income taxes as well as income taxes in each
of the states in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting
26
purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not probable, we must
establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense in the
tax provision in the statement of income.
Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. We currently have no valuation allowance and fully expect to utilize all of our deferred tax
assets.
ASC 740 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. In order to record any financial statement benefit, we are required to determine, based on technical
merits of the position, whether it is more likely than not (a likelihood of more than 50 percent) that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation processes. If that step is satisfied, then we must measure the tax position to determine the amount of
benefit to recognize in the financial statements. The tax position is measured at the largest amount of the benefit that is greater than 50 percent likely of
being realized upon ultimate settlement. Our policy regarding income tax interest and penalties is to expense those items as other expense.
Long-Lived Assets
Rental Equipment, Property and Equipment (Including Retirement of Rental Equipment)
Rental equipment and property and equipment are recorded at cost less accumulated depreciation, except for work-in-progress on new rental
equipment which is recorded at cost until it’s complete and added to the fleet. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Our rental equipment has estimated useful lives between 15 to 25 years, while our property and equipment has estimated useful
lives which range from 3 to 39 years. The majority of our property and equipment, including rental equipment, is a direct cost to generating revenue.
We assess the impairment of rental equipment and property and equipment whenever events or changes in circumstances indicate that the net
recorded amount may not be recoverable. The following factors could trigger an impairment review: significant underperformance relative to historical or
projected future cash flows; significant adverse changes in the extent or manner in which asset (or asset group) is being used or its condition, including a
meaningful drop in fleet utilization over the prior four quarters; significant negative industry or company-specific trends or actions, including meaningful
capital expenditure budget reductions by our major customers or other sizable exploration and production or midstream companies, as well as significant
declines in oil and natural gas prices; legislative changes prohibiting us from leasing our units; or poor general economic conditions. An impairment loss is
recognized if the future undiscounted cash flows associated with the asset (or asset group) and the estimated fair value of the asset are less than the asset's
carrying value.
Inventories
We value our total inventory (current and long-term) at the lower of the actual cost and net realizable value of the inventory. We regularly review
inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on current and anticipated customer demand and
production requirements. The Company accesses anticipated customer demand based on current and upcoming capital expenditure budgets of its major
customers as well as other significant companies in the industry, along with oil and natural gas price forecasts and other factors affecting the industry. For
the year ended December 31, 2023, our provision for excess and obsolete inventory totaled $4.0 million. The majority of this amount was due to a 2023
charge related to the company's decision to cease future compressor fabrication at our Midland facility, which reduced the expected future demand of
certain inventory items held at this facility.
Our Performance Trends and Outlook
The market for compression equipment and services is highly dependent on the production levels of oil and natural gas. The level of production
for oil activity and capital expenditures has generally been dependent upon the prevailing view of future gas and oil prices, which are influenced by
numerous supply and demand factors, including availability and cost of capital, well productivity and development costs, global and domestic economic
conditions, environmental regulations, policies of OPEC countries and Russia, and other factors. We feel that the current oil market production outlook is
favorable, with current oil prices creating strong incentives for our customers to maximize their production levels. We believe that the current natural gas
market outlook is not as strong, as the current level of natural gas prices makes this a more challenging market. While oil prices have historically been
volatile, we expect demand for our existing compressor fleet to remain positive assuming oil prices remain in reasonable bands around current pricing
levels. While the current production outlook for natural gas is not as strong, given the continued level of depressed prices, we do feel that opportunities
exist for specialized compression applications, including for our small and medium horsepower units.
27
The oil and natural gas industries have historically been cyclical and production levels of oil and natural gas are dependent upon numerous factors.
We will continue to evaluate our business and operating strategy and we will continue to remain prudent in both our allocation of capital and our capital
structure. Nevertheless, if any of these circumstances change, our business could be adversely affected.
Results of Operations
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
The table below shows our revenues and percentage of total revenues for each of our product lines for the years ended December 31, 2023 and
2022.
Rental
Sales
Service & Maintenance
Total
Revenue
Year Ended December 31,
2023
2022
$
$
106,159
8,921
6,087
121,167
(dollars in thousands)
87.6 % $
7.4 %
5.0 %
$
74,465
8,568
1,792
84,825
87.8 %
10.1 %
2.1 %
Total revenue increased to $121.2 million from $84.8 million, or 42.8%, for the year ended December 31, 2023, compared to 2022. This increase
was mainly a result of increased rental revenue (42.6% increase) primarily due to a greater number of large horsepower units being rented and rental unit
price increases as well as higher aftermarket service revenue (239.7% increase) primarily due to increased compressor sets and related freight charges.
Rental revenue increased to $106.2 million (42.6%) from $74.5 million for the year ended December 31, 2023, compared to 2022. Rental revenues
comprised 87.6% of our total revenues for the years ended December 31, 2023, compared to 87.8% for 2022. As of December 31, 2023, we had 1,876
natural gas compressors in our rental fleet, up from 1,869 units at year end 2022. In addition, the Company's total unit horsepower increased by 22.3% to
520,365 at December 31, 2023, compared to 425,340 horsepower at year end 2022. As of December 31, 2023, we had 1,247 natural gas compressors
totaling 420,432 horsepower rented to 84 customers, compared to 1,221 natural gas compressors totaling 318,350 horsepower rented to 81 customers as of
December 31, 2022. This increase in rented horsepower reflects the addition of 73 high horsepower compressors with 94,340 horsepower to the Company's
fleet during 2023. The rental fleet had unit utilization as of December 31, 2023 and 2022 of 66.5% and 65.3%, respectively, while our horsepower
utilization for the same periods was 80.8% and 74.8%, respectively. The increase in both utilization metrics was mainly the result of the addition and
increased demand for our higher horsepower units. During the year ended December 31, 2023, we placed into service 92 newly set units, 73 of which were
400 horsepower or larger.
Sales revenue increased to $8.9 million from $8.6 million for the year ended December 31, 2023, compared to 2022. This increase is largely
attributable to an increase in parts sales during 2023. Sales are subject to fluctuations in the timing of industry activity related to capital projects and, as
such, can vary substantially between periods.
Company management routinely reviews its inventory for obsolescence. Due to the slow-moving nature, obsolescence of a portion of the
Company's long-term inventory, inventory related to the retirement of certain rental equipment and management's decision to cease further fabrication at
our Midland fabrication facility, we recorded an increase of $4.0 million in the inventory allowance reserve to reduce the carrying amount of inventory
items where we feel there is reduced future demand for certain items. We ended 2023 with an inventory allowance balance of $4.0 million.
Company management also routinely reviews its rental fleet to determine which units are no longer of the type, configuration, make or model that
our customers are demanding or that are not cost efficient to refurbish, maintain and/or operate. As a result of this review, we determined 95 units should be
retired from our rental fleet. Accordingly, we recorded a $0.5 million loss on retirement of rental equipment during the year ended December 31, 2023.
Operating income increased to $10.5 million for the year ended December 31, 2023, compared to $0.4 million for the year ended December 31,
2022. The increase in operating income was mainly due to a $36.3 million increase in revenues partially offset by a $2.8 million increase in selling, general
and administrative expenses and a $11.1 million increase in costs of rentals primarily related to growth of our rental fleet and inflationary pressures on parts
and labor expenses.
28
Selling, general, and administrative expenses increased by $2.8 million to $16.5 million for the year ended December 31, 2023, as compared to
$13.6 million for 2022. This 20.6% increase was primarily the result of increased consulting and recruiting charges related to interim executive roles and
search firms partially offset by a decrease in officer bonus accruals.
Depreciation and amortization expense increased to $26.6 million from $24.1 million, or 10.1%, for the year ended December 31, 2023, compared
to 2022. The increase is the result of new units added to our rental fleet in 2023. We added 92 units (approximately 98,349 horsepower) to our fleet during
the twelve-month period ended December 31, 2023. Seventy-three of those units were 400 horsepower or larger, representing approximately 96% of the
horsepower added.
Income tax expense increased to $1.9 million from $0.5 million for the year ended December 31, 2023, compared to 2022. Our effective tax rate
for both years differs from the U.S. federal statutory rate of 21%. The Company recorded a current income tax expense of $0.5 million on its consolidated
statement of operations for the year ended December 31, 2022. Our income tax expense in 2023 was largely due to certain executive severance
compensation expenses incurred during 2023 that are non-deductible for income tax purposes. As such, we recognized income tax expense of $1.9 million
while incurring net income before income taxes of $6.6 million for the year ended December 31, 2023.
Adjusted Gross Margin Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022
The table below shows our adjusted gross margin and related percentages for each of our product lines for the years ended December 31, 2023 and
December 31, 2022. Adjusted gross margin is the difference between revenue and cost of revenues, exclusive of depreciation and amortization expense.
Rental
Sales
Service & Maintenance
Total
Adjusted Gross Margin
Year Ended December 31,
(1)
2023
2022
$
$
57,282
2
1,429
58,713
(dollars in thousands)
54.0 %
— %
23.5 %
48.5 %
$
$
36,715
918
835
38,468
49.3 %
10.7 %
46.6 %
45.3 %
(1)
For a reconciliation of adjusted gross margin to its most directly comparable financial measure calculated and presented in accordance with GAAP,
please read "Non-GAAP Financial Measures" below.
Our overall adjusted gross margin percentage increased to 48.5% for the year ended December 31, 2023, compared to 45.3% for the year ended
December 31, 2022. Our increase in gross margin is mainly due to an increase in rental revenues. Rental revenues increased 42.6% over 2022, while our
costs of rentals increased 29.5% driven by additional units sets and inflationary pressures primarily in labor and parts costs. Our sales margin decreased to
0.0% in 2023 from 10.7% in 2022. Sales revenues increased 4.1% attributable to increased parts sales. While many sales costs are variable, certain costs
such as labor or fixed overhead are less variable as a certain staff level is retained to meet demand when market forces shift. Third party aftermarket
services margin decreased to 23.5% from 46.6% for the year ended December 31, 2023, compared to 2022. This decrease is primarily attributable to a large
increase in lower margin pass through costs related to new compressor sets during 2023. Aftermarket services only represents 5.0% of our revenue in 2023,
providing minimal impact on our overall adjusted gross margin.
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 income or (loss)) before interest, taxes, depreciation and
amortization, as well as an increase in inventory allowance and inventory impairment expense, retirement of rental equipment, non-recurring severance
expenses and non-cash equity compensation expenses. 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:
29
•
•
•
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, as
a basis for strategic planning and forecasting, and as a component for setting incentive compensation.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as
reported under generally accepted accounting principles. Some of these limitations are:
• Adjusted EBITDA does not reflect all 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 income, the most directly comparable GAAP financial
measure.
Reconciliation
The following table reconciles our net income (loss), the most directly comparable GAAP financial measure, to Adjusted EBITDA:
Net income (loss)
Interest expense
Income tax expense
Depreciation and amortization
Impairment expense
Inventory allowance
Retirement of rental equipment
Severance expenses
Stock compensation expense
Adjusted EBITDA
Our definition and use of Adjusted Gross Margin
Year Ended December 31,
2023
2022
(in thousands)
4,747 $
4,082
1,873
26,550
779
3,965
505
1,224
2,054
45,779 $
(569)
364
528
24,116
—
83
196
2,537
1,910
29,165
$
$
We define “Adjusted Gross Margin” as total revenue less costs of revenues (excluding depreciation and amortization expense). Adjusted gross
margin is included as a supplemental disclosure because it is a primary measure used by our management as it represents the results of revenue and costs
(excluding depreciation and amortization expense), which are key components of our operations. Adjusted gross margin differs from gross margin, in that
gross margin includes depreciation expense. We believe adjusted gross margin is important because it focuses on the current operating performance of our
operations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in those
30
operations. Depreciation expense does not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore
may not portray the costs from current operating activity. Rather, depreciation expense reflects the systematic allocation of historical property and
equipment values over the estimated useful lives.
Adjusted gross margin has certain material limitations associated with its use as compared to gross margin. These limitations are primarily due to
the exclusion of depreciation expense, which is material to our results of operations. Because we use capital assets, depreciation expense is a necessary
element of our costs and our ability to generate revenue. In order to compensate for these limitations, management uses this non-GAAP measure as a
supplemental measure to other GAAP results to provide a more complete understanding of our performance.
As an indicator of our operating performance, adjusted gross margin should not be considered an alternative to, or more meaningful than, gross
margin as determined in accordance with GAAP. Our adjusted gross margin may not be comparable to a similarly titled measure of another company
because other entities may not calculate adjusted gross margin in the same manner.
Reconciliation
The following table calculates gross margin, the most directly comparable GAAP financial measure, and reconciles it to adjusted gross margin:
Total revenue
Costs of revenue, exclusive of depreciation and amortization
Depreciation allocable to costs of revenue
Gross margin
Depreciation allocable to costs of revenue
Adjusted gross margin
Liquidity and Capital Resources
Our working capital positions as of December 31, 2023 and 2022 were as follows:
Current Assets:
Cash and cash equivalents
Trade accounts receivable, net
Inventory, net
Federal income tax receivable
Prepaid expenses and other
Total current assets
Current Liabilities:
Accounts payable
Accrued liabilities
Total current liabilities
Net working capital
Year Ended December 31,
2023
2022
(in thousands)
$
$
121,167 $
(62,454)
(25,856)
32,857
25,856
58,713 $
84,825
(46,357)
(23,551)
14,917
23,551
38,468
As of December 31,
2023
2022
(in thousands)
$
2,746 $
39,186
21,639
11,538
1,162
76,271
17,628
15,085
32,713
43,558 $
$
3,372
14,668
23,414
11,538
1,155
54,147
6,481
23,918
30,399
23,748
For the year ended December 31, 2023, we invested approximately $153.9 million in rental equipment, property and other equipment. During the
year, we added $152.5 million in new equipment to our rental fleet and $1.4 million in other property and equipment. Our investment in rental equipment
includes any changes to work-in-progress related to our rental fleet jobs at the beginning of the year compared to the end of the year. Our rental work-in-
progress increased by $13.8 million during
31
2023. We financed our investment in rental equipment, property and other equipment with cash flows from operations during 2023 and borrowings under
our revolving credit facility. We anticipate that our cash flows from operations as well as our borrowing capacity under our Amended and Restated Credit
Agreement (defined below) will provide ample liquidity for our planned capital expenditures during 2024 and beyond.
Cash flows
At December 31, 2023, we had cash and cash equivalents of $2.7 million compared to $3.4 million at year end 2022. Our cash flow from
operations of $18.0 million was offset by capital expenditures of $153.9 million during 2023. We had net proceeds of $139.0 million from borrowings
under our revolving credit facility. We also had working capital of $43.6 million at December 31, 2023, compared to $23.7 million at December 31, 2022.
We had net cash flow from operating activities of $18.0 million during 2023 compared to $27.8 million during 2022. Our cash flow from operating
activities of $18.0 million was negatively impacted by changes in working capital. Certain such changes were caused by a significant increase in rental
activity, which led to delays in billing and collecting amounts due from certain customers. We anticipate a reversal of this trend during 2024 and a return to
more historical levels of working capital.
Senior Bank Borrowings
On May 11, 2021, we entered into a five-year senior secured revolving credit agreement ("Credit Agreement") with Texas Capital Bank, National
Association (the "Lender") with an initial commitment of $20 million and an accordion feature that would increase the maximum commitment to $30
million, subject to collateral availability. We also have a right to request from the Lender, on an uncommitted basis, an increase of up to $30 million on the
aggregate commitment; provided, however, the aggregate commitment amount is not permitted to exceed $50 million. The maturity date of the Credit
Agreement is May 11, 2026. The obligations under the 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.
On February 28, 2023, we replaced our Credit Agreement by entered into a five-year senior secured revolving credit agreement (“Amended and
Restated Credit Agreement”) with Texas Capital Bank, as administrative agent (the “Lender”), TCBI Securities, Inc., as joint lead arranger and sole book
runner and Bank of America, N.A., as joint lead arranger, with an initial commitment of $175 million as of the closing date. Subject to collateral
availability, we also have a right to request from the Lender, on an uncommitted basis, an increase of up to $125 million on the aggregate commitment;
provided, however, the aggregate commitment amount is not permitted to exceed $300 million. The maturity date of the Amended and Restated Credit
Agreement is February 28, 2028. The obligations under the Amended and Restated 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. In connection with the amendment,
we agreed to pay fees of $2.0 million (representing fees equal to 1.39% of the $145 million increase in the commitment) and reimburse the lenders for their
expenses. The obligations under the Amended and Restated 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.
On November 14, 2023, the Company entered into a First Amendment to the Amended and Restated Credit Agreement (the 'Amendment") with
the Lender and certain other lenders to (i) increase the lender commitment from $175 million to $225 million, and (ii) to add First-Citizens Bank & Trust
Company as a new lender to the facility. In connection with the Amendment, we agreed to pay fees of $0.6 million (representing fees equal to 1.125% of
the $50 million increase in the commitment) and reimburse the lenders for their expenses.
Borrowing Base. At any time before the maturity of the Amended and Restated 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) 85% of
eligible accounts receivable owed to the Company, plus (b) 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 $2.5 million, plus (c) 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 (d) 80% of the net book value, valued at the lower of
cost (excluding any costs for capitalized interest or other noncash capitalized costs) or market of the eligible new compressor fleet, minus (e) 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.
Interest and Fees. Under the terms of the Amended and Restated 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 Term SOFR
("Secured Overnight Financing Rate") Loan, the Adjusted Term SOFR rate plus the Applicable Margin. "Base Rate" means, for any day, a rate of interest
per annum equal to the highest of (a) the
32
prime rate for such day; (b) the sum of the federal funds rate for such day plus 0.50%; and (c) the Adjusted Term SOFR 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 Amended and Restated Credit Agreement. Depending on the leverage ratio, the Applicable Margin can be 2.00%
to 2.75% for Base Rate Loans (as defined in the Amended and Restated Credit Agreement) and 3% to 3.75% for Term SOFR 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 Amended
and Restated Credit Agreement is in effect at an annual rate equal to 0.50% of the unused commitment amount. Accrued interest is payable monthly on
outstanding principal amounts and unused commitment fee, provided that accrued interest on Term SOFR Loans is payable at the end of each interest
period, but in no event less frequently than quarterly.
Covenants. The Amended and Restated 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 are subject to certain financial covenants in the Amended and Restated Credit
Agreement that require us to maintain (i) a leverage ratio, as defined, lesser than or equal to 3.50 to 1.00 as of the last day of each fiscal quarter ending on
or prior to December 31, 2024 and 3.25 to 1.00 for the fiscal quarter ending March 31, 2025 and for each fiscal quarter thereafter and (ii) a fixed charge
coverage ratio greater than or equal to1.25 to 1.00 as of the last day of each fiscal quarter.
Events of Default and Acceleration. The Amended and Restated 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 Amended and
Restated 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 million; certain bankruptcy or insolvency events; the
rendering of certain judgments in excess of $1 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 Amended and Restated Credit Agreement may be accelerated upon the occurrence
of an event of default.
As of December 31, 2023, we had $164 million outstanding under our Amended and Restated Credit Agreement with a weighted average interest
rate of 9.40%, and we were in compliance with all financial covenants in our Amended and Restated Credit Agreement.
Components of Our Principal Capital Expenditures
Capital expenditures for the years ended December 31:
Expenditure Category
Rental equipment and property and equipment
2023
2022
(in thousands)
$
153,943 $
65,122
The level of our capital expenditures will vary in future periods depending on energy market conditions and other related economic factors. Based
upon existing economic and market conditions, we believe that our cash on hand, operating cash flow and available line of credit are adequate to fully fund
our net capital expenditures requirements for 2024. We also believe we have flexibility with respect to our financing alternatives and adjustments to our
capital expenditure plans if circumstances warrant. We do not have any material continuing commitments related to our current operations that cannot be
met with our cash on hand and our line of credit. However, our financing capacity could be negatively impacted by other economic factors. Please see Item
1A, Risk Factors, of 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
December 31, 2023, we did not have any material off-balance sheet arrangements.
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
33
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. January 1, 2023, we adopted ASU
2016-13 on our consolidated financial statements and note disclosures. The adoption did not have a material impact on our financial statements.
Environmental Regulations
Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to protection of
human safety and health and the environment, affect our operations and costs. Compliance with these laws and regulations could cause us to incur
remediation or other corrective action costs or result in the assessment of administrative, civil and criminal penalties and the issuance of injunctions
delaying or prohibiting operations. In addition, we have acquired certain properties and plant facilities from third parties whose actions with respect to the
management and disposal or release of hydrocarbons or other wastes were not under our control. Under environmental laws and regulations, we could be
required to remove or remediate wastes disposed of or released by prior owners. In addition, we could be responsible under environmental laws and
regulations for properties and plant facilities we lease, but do not own. Compliance with such laws and regulations increases our overall cost of business,
but has not had a material adverse effect on our operations or financial condition. It is not anticipated, based on current laws and regulations, that we will be
required in the near future to expend amounts that are material in relation to our total expenditure budget in order to comply with environmental laws and
regulations but such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. We also could incur costs
related to the cleanup of sites to which we send equipment and for damages to natural resources or other claims related to releases of regulated substances
at such sites.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to Smaller Reporting Companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary financial data are included in this Annual Report on Form 10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the reports that we file or submit under the
Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and
communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of December 31, 2023. Based upon the evaluation, our Chief Executive Officer and Interim Chief Financial Officer
concluded that, as of such date, our disclosure controls and procedures were not effective at a reasonable assurance level, due to the material weakness that
was previously disclosed effective December 31, 2022 and discussed below.
Management’s Report on Internal Control Over Financial Reporting
Our management, including the Chief Executive Officer and our Interim Chief Accounting Officer, is responsible for establishing and maintaining
adequate internal control over financial reporting (“ICFR”), as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over
financial reporting is designed to provide reasonable assurance
34
regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31,
2023, based on the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Based on the results of this evaluation, the Company’s management concluded that internal control over financial reporting was not effective as of
December 31, 2023, due to the unremedied material weakness listed below.
A material weakness is a deficiency, or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We have concluded that the following material weakness in our ICFR that was previously disclosed in our Annual Report on Form 10-K for the
year ended December 31,2022 has not been fully remediated as of December 31, 2023.
Management identified a material weakness in its ICFR at December 31, 2023, over our inventory process. Specifically, we have identified issues
related to year-end physical inventory count procedures, and the process to review and approve inventory adjusting journal entries.
After giving full consideration to this material weakness, and the additional analyses and other procedures that we performed to ensure that our
consolidated financial statements included in this Annual Report on Form 10-K were prepared in accordance with U.S. generally accepted accounting
principles (“US GAAP”), our management has concluded that our consolidated financial statements present fairly, in all material respects our financial
position, results of operations and cash flows for the periods disclosed in conformity with US GAAP.
Remediation Plan for Previously Identified Material Weakness
Management, with the oversight of the Audit Committee and the Board of Directors, has been actively engaged in remediation efforts to address
the material weakness throughout 2023, and these efforts will continue into 2024.
We made progress towards addressing our material weakness in inventory through the specific actions listed below:
• We have made and continue to make enhancements to our control environment by improving guidance, communication of expectations and
importance of internal controls. Specifically, in the second quarter of 2023, we engaged a third-party consulting firm, who specializes in internal
controls over financial reporting, to assist with the design, implementation, and assessment of our controls and procedures.
• We have hired additional qualified operational and executive personnel during 2023, which has helped to provide additional capacity and expertise
to enhance inventory procedures. Specifically, in the third quarter of 2023, the Company hired a new Inventory Control Manager who assumed
direct responsibility for inventory procedures and controls. Additionally. in the fourth quarter of 2023, the Company hired a new President and
Chief Operating Officer, who is also deeply involved in the inventory process. The Company is also currently assessing if additional accounting
and financial personnel should be hired in the organization in order to perform control activities in support of preparation of the financial
statements in accordance with U.S. GAAP. We expect that this assessment will be completed during the second quarter of 2024, with appropriate
action taken during 2024, to ensure that the Company has a sufficient complement of qualified personnel at the right levels, based on any
identified gaps in personnel requirements.
• We have evaluated and improved the inventory process and procedures. Specifically, we have retrained all involved personnel in the inventory
process, with emphasis on periodic count procedures and inventory adjustments.
• We have updated our inventory accounting policies and procedures to ensure completeness and accuracy of inventory accounts through proper
cutoff, accruals, and analytic review procedures at period end.
35
While these actions and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and
operating effectiveness of internal controls over a sustained period of financial reporting cycles, we are committed to the continuous improvement of our
ICFR and will continue to diligently review our ICFR.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm on our ICFR because we are a
Smaller Reporting Company and are not subject to auditor attestation requirements under applicable SEC rules.
Changes in Internal Control Over Financial Reporting
Other than the changes noted above there were no changes in our ICFR during the year ended December 31, 2023, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
36
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this item is incorporated herein by reference to the sections “Election of Directors,” “Executive Officers,”
“Corporate Governance” and “The Board of Directors and its Committees” in our definitive proxy statement which will be filed with the Securities and
Exchange Commission within 120 days after December 31, 2023 or as such period may be extended by action of the Securities and Exchange Commission.
We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees. The Code of Business Conduct
and Ethics is posted in the "Investor Relations" section of our website at www.ngsgi.com. The Code of Business Conduct and Ethics maybe obtained free
of charge by writing before to Natural Gas Services Group, Inc., Attn: Investor Relations, 404 Veterans Airpark Lane, Ste 300 Midland, TX 79705.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the section “Executive Compensation” in our definitive proxy
statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2023 or as such period may be extended
by action of the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated herein by reference to the section “Principal Shareholders and Security Ownership of
Management” in our definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31,
2023 or as such period may be extended by action of the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the sections “Related Person Transactions” and “Corporate
Governance” in our definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2023
or as such period may be extended by action of the Securities and Exchange Commission.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the section “Principal Accountant Fees and Services” in our
definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2023 or as such period
may be extended by action of the Securities and Exchange Commission.
37
PART IV
ITEM 15. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENTS
The following documents are filed as part of this Annual Report on Form 10-K:
(a)(1) and (a)(2) Consolidated Financial Statements
For a list of Consolidated Financial Statements, see “Index to Consolidated Financial Statements” incorporated herein by reference.
(a)(3) Exhibits
A list of exhibits to this Annual Report on Form 10-K is set forth below:
Exhibit No. Description
3.1
3.2
4.1
4.2
4.3
10.1†
10.2†
10.3†
10.4†
10.5
10.6
10.7†
Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10-QSB filed and dated November 10, 2004).
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.)
Description of Securities (Incorporated by reference to the Registrant's Registration Statement on From 8-A, filed with the SEC on October
27, 2008.)
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)
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
2019 Equity Incentive Plan, as amended (Incorporated by reference to Exhibit 4.3 of the Registrant’s Registration Statement on Form S-8
filed with the Securities and Exchange Commission on July 12, 2022.)
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.)
Retirement Agreement dated 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 May 19, 2022.)
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 on Form 10-Q filed with the Securities and Exchange Commission on May 6,
2016.)
Amended and Restated Credit Agreement dated February 28, 2023, among Natural Gas Services Group, Inc., the other Loan Parties thereto,
Texas Capital Bank, in its capacity as Administrative Agent and the Lenders party thereto (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 March 6, 2023.)
Amended and Restated Pledge and Security Agreement dated February 28, 2023, among Natural Gas Services Group, Inc., the Grantors
thereto, Texas Capital Bank, in its capacity as Administrative Agent, for the Lenders and other Secured Parties (Incorporated by reference to
Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 6, 2023.)
Retention Agreement dated September19, 2023 between Natural Gas Services Group, Inc. and James Hazlett (Incorporated by reference to
Exhibit 10.11 of the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14,
2023.)
38
10.8†
10.9†
10.10†
10.11 †
10.12*†
10.13*†
*21.1
*23.1
*31.1
*31.2
*32.1
*32.2
97.1*
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Employment Agreement between Brian L. Tucker and Natural Gas Services Group, Inc. dated October 9, 2023 (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 October 10, 2023.)
Employment Agreement between Justin C. Jacobs and Natural Gas Services Group, Inc. dated January 29, 2024 (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 February 1, 2024.)
Employee Non-Compete Agreement between Justin C. Jacobs and Natural Gas Services Group, Inc. dated January 29, 2024 (Incorporated by
reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 1,
2024.)
Employee Proprietary Rights Agreement between Justin C. Jacobs and Natural Gas Services Group, Inc. dated January 29, 2024
(Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 1, 2024.)
Form of Restricted Stock Unit Award under the Natural Gas Services Group, Inc. 2019 Equity Incentive Plan, as amended.
Form of Performance Stock Unit Award under the Natural Gas Services Group, Inc. 2019 Equity Incentive Plan, as amended.
Subsidiaries of the registrant
Consent of Ham, Langston & Brezina L.L.P.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Interim Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Interim Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Natural Gas Services Group, Inc. Clawback Policy
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith.
ITEM 16. FORM 10-K SUMMARY
None.
39
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
April 1, 2024
NATURAL GAS SERVICES GROUP, INC.
By:
/s/ Justin C. Jacobs
Justin C. Jacobs
Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Justin Jacobs and John
Bittner, jointly and severally, as his/her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him/her and in
his/her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises hereby ratifying
and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated:
Signature
/s/ Stephen C. Taylor
Stephen C. Taylor
/s/ John Bittner
John Bittner
/s/ Don Tringali
Don Tringali
/s/ Nigel J. Jenvey
Nigel J. Jenvey
/s/ David L. Bradshaw
David L. Bradshaw
/s/ Georganne Hodges
Georganne Hodges
Title
Date
Chairman of the Board of Directors
April 1, 2024
Interim Chief Financial Officer (Principal Accounting Officer)
April 1, 2024
Director
Director
Director
Director
40
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (Ham, Langston & Brezina, LLP; Houston, Texas; PCAOB ID 298
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2023 and 2022
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-4
F-5
F-6
41
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Natural Gas Services Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Natural Gas Services Group, Inc. (the “Company”) as of December 31, 2023 and 2022,
and related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2023,
and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of
America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be
communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Ham, Langston & Brezina LLP
Houston, Texas
April 1, 2024
We have served as the Company's auditor since 2022.
F - 1
NATURAL GAS SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
2023
2022
ASSETS
Current Assets:
Cash and cash equivalents
Trade accounts receivable, net of allowance for doubtful accounts of $823 and $338, respectively
Inventory, net of allowance for obsolescence of $2,836 and $0, respectively
Federal income tax receivable
Prepaid expenses and other
Total current assets
Long-term inventory, net of allowance for obsolescence of $1,168 and $120, respectively
Rental equipment, net of accumulated depreciation of $191,745 and $177,729, respectively
Property and equipment, net of accumulated depreciation of $17,649 and $16,981, respectively
Intangibles, net of accumulated amortization of $2,384 and $2,259, respectively
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
Accrued liabilities
Total current liabilities
Credit facility
Deferred income tax liability
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 15)
Stockholders’ Equity:
Preferred stock, 5,000 shares authorized, no shares issued or outstanding
Common stock, 30,000 shares authorized, par value $0.01; 13,688 and 13,519 shares issued, respectively
Additional paid-in capital
Retained earnings
Treasury shares, at cost, 1,310 shares
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
$
2,746 $
39,186
21,639
11,538
1,162
76,271
701
373,649
20,550
775
6,783
478,729 $
17,628 $
15,085
32,713
164,000
41,636
4,486
242,835
—
137
116,480
134,281
(15,004)
235,894
478,729 $
3,372
14,668
23,414
11,538
1,155
54,147
1,557
246,450
22,176
900
3,016
328,246
6,481
23,918
30,399
25,000
39,798
2,973
98,170
—
135
115,411
129,534
(15,004)
230,076
328,246
See accompanying notes to these consolidated financial statements.
F - 2
NATURAL GAS SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share)
Revenue:
Rental income
Sales
Aftermarket services
Total revenue
Operating costs and expenses:
Cost of rentals, exclusive of depreciation stated separately below
Cost of sales, exclusive of depreciation stated separately below
Cost of aftermarket services, exclusive of depreciation stated separately below
Selling, general and administrative expenses
Depreciation and amortization
Impairment expense
Inventory allowance
Retirement of rental equipment
Total operating costs and expenses
Operating income
Other income (expense):
Interest expense
Other income (expense)
Total other expense, net
Income (loss) before income taxes:
Provision for income taxes:
Current
Deferred
Total income tax expense
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
See accompanying notes to these consolidated financial statements.
F - 3
Year Ended December 31,
2022
2023
$
$
$
$
106,159 $
8,921
6,087
121,167
48,877
8,919
4,658
16,457
26,550
779
3,965
505
110,710
10,457
(4,082)
245
(3,837)
6,620
(35)
(1,838)
(1,873)
4,747 $
0.39 $
0.38 $
12,316
12,383
74,465
8,568
1,792
84,825
37,750
7,650
957
13,642
24,116
—
83
196
84,394
431
(364)
(108)
(472)
(41)
(17)
(511)
(528)
(569)
(0.05)
(0.05)
12,305
12,305
NATURAL GAS SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Preferred Stock
Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury Stock
Shares
Amount
Total
Stockholders'
Equity
Amount
134 $
114,017 $
130,103
775 $
(8,344) $
235,910
BALANCES, December 31, 2021
Compensation expense on common
stock options
Issuance of restricted stock
Compensation expense on restricted
common stock
Taxes paid related to net shares
settlement of equity awards
Purchase of treasury shares
Net loss
BALANCES, December 31, 2022
Compensation expense on common
stock options
Issuance of restricted stock
Compensation expense on restricted
common stock
Taxes paid related to net shares
settlement of equity awards
Net income
BALANCES, December 31, 2023
Shares
Amount
— $
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Shares
13,394 $
—
125
—
—
—
—
13,519
—
169
—
—
—
1
—
—
—
135
—
—
2
255
—
1,654
(515)
—
—
115,411
97
—
1,955
—
—
—
—
—
(569)
129,534
—
—
—
—
—
—
—
535
—
1,310
—
—
—
—
—
—
—
(6,660)
—
(15,004)
—
—
—
—
—
13,688 $
—
—
137 $
(983)
—
116,480 $
—
4,747
134,281
—
—
1,310 $
—
—
(15,004) $
255
—
1,655
(515)
(6,660)
(569)
230,076
97
—
1,957
(983)
4,747
235,894
See accompanying notes to these consolidated financial statements.
F - 4
NATURAL GAS SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Year Ended December 31,
2022
2023
$
4,747 $
Depreciation and amortization
Amortization of debt issuance costs
Deferred taxes
Gain on disposal of assets
Impairment expense
Retirement of rental equipment
Provision for credit losses
Inventory allowance
Stock-based compensation
Loss on company owned life insurance
Changes in operating assets and liabilities:
Trade accounts receivables
Inventory
Prepaid income taxes and prepaid expenses
Accounts payable and accrued liabilities
Other
NET CASH PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of rental equipment, property and other equipment
Purchase of company owned life insurance
Proceeds from sale of property and equipment
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from line of credit
Payments of other long term liabilities
Payments of debt issuance costs
Purchase of treasury shares
Taxes paid related to net share settlement of equity awards
NET CASH PROVIDED BY FINANCING ACTIVITIES
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid
NON-CASH TRANSACTIONS
Transfer of rental equipment to inventory
Right of use asset acquired through a finance lease
Right of use asset acquired through an operating lease
26,550
425
1,838
(481)
779
505
492
3,965
2,054
235
(25,010)
(669)
(7)
2,436
174
18,033
(153,943)
(422)
477
(153,888)
139,000
(95)
(2,693)
—
(983)
135,229
(626)
3,372
2,746 $
7,053 $
665 $
1,146 $
63 $
$
$
$
$
$
See accompanying notes to these consolidated financial statements.
F - 5
(569)
24,116
48
511
(250)
—
196
—
83
1,910
389
(4,279)
(4,143)
(250)
10,033
(31)
27,764
(65,122)
(329)
372
(65,079)
25,000
(3)
(77)
(6,660)
(515)
17,745
(19,570)
22,942
3,372
276
—
—
229
NATURAL GAS SERVICES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Natural Gas Services Group, Inc. (the "Company", “NGS”, "Natural Gas Services Group", "we" or "our") (a Colorado corporation), is a leading
provider of natural gas compression equipment and services to the energy industry. We rent, operate and maintain natural gas compressors and related
equipment. We also design, fabricate and manufacture compressor units both for sale and rental to our customers. NGS is headquartered in Midland, Texas,
with a fabrication facility located in Tulsa, Oklahoma, a rebuild shop in Midland, Texas, and service facilities located in major oil and natural gas
producing basins in the U.S. The Company was formed on December 17, 1998.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company, its subsidiary, NGSG Properties, LLC and the rabbi
trust associated with the Company’s deferred compensation plan, see Note 10. All significant intercompany accounts and transactions for the periods
presented have been eliminated in consolidation.
Use of Estimates
The preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the United States of
America requires our management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and
accompanying notes. Actual results could differ from those estimates. Significant estimates include fixed asset lives, provision for credit losses and the
allowance for inventory obsolescence. Additionally, NGS conducts a yearly review of impairment of long-lived assets. Throughout the review, determining
factors are based on estimates that can significantly impact the carrying value of these assets. It is at least reasonably possible these estimates could be
revised in the near term and the revisions could be material.
Cash Equivalents and Financial Instruments
For purposes of reporting cash flows, we consider all short-term investments with an original maturity of three months or less to be cash
equivalents. At times, cash balances at banks and financial institutions may exceed federally insured amounts.
Accounts Receivable
Our trade receivables consist of customer obligations for the sale of compressors and flare systems due under normal trade terms, and operating
leases for the use of our natural gas compressors. The receivables are not collateralized except as provided for under lease agreements. However, we
typically require deposits of as much as 50% or use of progress payments for large custom sales contracts. We perform ongoing credit evaluations of our
customers and adjust credit limits based on management's assessment of the customer's financial condition and payment history, as well as industry
conditions and general economic conditions. We continuously monitor collections and payments from our customers, and maintain a provision for
estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses
have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss
rates that we have in the past. The provision for credit losses was $0.8 million and $0.3 million at December 31, 2023 and 2022, respectively. Management
believes that the allowance is adequate; however, actual write-offs may exceed the recorded allowance.
F - 6
A summary of our allowance for credit losses is as follows:
Beginning balance
Accruals
Write-offs
Ending balance
Revenue Recognition Policy
Year Ended December 31,
2023
2022
(in thousands)
$
$
338
492
(7)
823
$
$
1,129
—
(791)
338
Revenue is measured based on a consideration specified in a customer’s contract, excluding any sale incentives and taxes collected on behalf of
third parties (i.e. sales and property taxes). Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects
the consideration that we expect to receive for those goods or services. To recognize revenue, we (i) identify the contract(s) with a customer; (ii) identify
the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the
contract; and (v) recognize revenue when, or as, we satisfy the performance obligation(s). Shipping and handling costs incurred are accounted for as
fulfillment costs and are included in cost of revenues in our Consolidated Statements of Operations.
Nature of Goods and Services
The following is a description of principal activities from which the Company generates its revenue:
Rental Revenue. The Company generates revenue from renting compressors and flare systems to our customers. These contracts, which all qualify
as operating leases under ASC Topic 842, Leases (ASC 842), may also include a fee for servicing the compressor or flare during the rental contract. Our
rental contracts typically range from six to 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 with
ASC 842 – Leases, we have applied the practical expedient ASC 842-10-15-42A, which allows the Company to combine lease and non-lease components.
Sales Revenue. The Company generates revenue by the sale of custom/fabricated compressors, flare systems and parts, as well as
exchange/rebuilding customer owned compressors and sale of used rental equipment. Our sales revenue is recognized in accordance with ASC 606.
Custom/fabricated compressors - The Company designs and fabricates compressors 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
is completed and shipped, or in accordance with a bill and hold arrangements 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 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.
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 rebuild 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.
F - 7
Used compressors or flares - From time to time, a customer may request to purchase a used compressor 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.
Aftermarket Service 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 aftermarket services revenue discussed above are generally 30 to 60 days although terms for specific
customers can vary. Also, the 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 years ended:
Compressors - sales
Flares - sales
Other (Parts/Rebuilds) - sales
Aftermarket services
Total revenue from contracts with customers
Add: ASC 842 rental revenue
Total revenue
Contract Balances
Year Ended December 31,
2023
2022
$
$
(in thousands)
1,800 $
87
7,034
6,087
15,008
106,159
121,167 $
As of December 31, 2023 and 2022, we had the following receivables and deferred income from contracts with customers:
December 31,
Accounts Receivable
Accounts receivable - contracts with customers
Accounts receivable - ASC 842
Total Accounts Receivable
Less: Allowance for doubtful accounts
Total Accounts Receivable, net
Deferred income
2023
2022
(in thousands)
$
$
$
7,138 $
32,871
40,009
(823)
39,186 $
418 $
3,601
239
4,728
1,792
10,360
74,465
84,825
4,353
10,653
15,006
(338)
14,668
37
The Company recognized less than $0.1 million in revenue for the year ended December 31, 2023, that was included in accrued liabilities at the
beginning of 2023. For the period ended December 31, 2022, the Company recognized revenue of $1.3 million from amounts related to sales that were
included in deferred income at the beginning of 2022.
The increases (decreases) in accounts receivable and deferred income were primarily due to normal timing differences between our performance
and the customers’ payments.
Transaction Price Allocated to the Remaining Performance Obligations
As of December 31, 2023, the Company had $0.4 million of revenue related to unsatisfied performance obligations.
F - 8
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 expense on our Consolidated
Statements of Operations.
Leases
Accounting Standards Codification ("ASC") 842 requires all leases to be reported on the balance sheet as right-of-use ("ROU") assets and lease
obligations. We determine if an arrangement is a lease at inception and determine lease classification and recognize ROU assets and liabilities on the lease
commencement date based on the present value of lease payments over the lease term. As the discount rate implicit in the lease is rarely readily
determinable, we estimate our incremental borrowing rate using information available at the commencement date in determining the present value of the
lease payments. We, as a lessee, apply the practical expedient to not separate non-lease components from lease components, therefore, accounting for each
separate lease component and its associated non-lease component, as a single lease component. For each lease that 1) contains the same timing and pattern
of transfer for lease and non-lease components and 2) if the lease component, if accounted for separately, would be classified as an operating lease, the
Company has elected to not separate non-lease components from lease components.
Major Customers and Concentration of Credit Risk
Sales and rental income from Occidental Permian, LTD. ("Oxy") in 2023 and 2022 amounted to 50% and 42% of revenue, respectively. No other
single customer accounted for more than 10% of our revenues in 2023 and 2022. Oxy's accounts receivable balances amounted to 64% and 55% of our
accounts receivable as of December 31, 2023 and 2022, respectively. No other customers amounted to more than 10% of our accounts receivable as of
December 31, 2023 and 2022.
Inventory
Inventory (current and long-term) is valued at the lower of cost and net realizable value. The cost of inventories is determined by the weighted
average method. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on current and
anticipated customer demand and production requirements. The Company assesses anticipated customer demand based on current and upcoming capital
expenditure budgets of its major customers as well as other significant companies in the industry, along with oil and natural gas price forecasts and other
factors affecting the industry. In addition, our long-term inventory consists of raw materials and replacement parts that remain useable but which the
Company does not expect to sell or use within the next year.
Rental Equipment and Property and Equipment
Rental equipment and property and equipment are recorded at cost less accumulated depreciation, except for work-in-progress on new rental
equipment which is recorded at cost until it’s complete and added to the fleet. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Our rental equipment has estimated useful lives between 15 and 25 years, while our property and equipment has estimated useful
lives which ranges from 3 to 39 years. The majority of our property and equipment, including rental equipment, is a direct cost to generating revenue.
We assess the impairment of rental equipment and property and equipment whenever events or changes in circumstances indicate that the net
recorded amount may not be recoverable. The following factors could trigger an impairment review: significant underperformance relative to historical or
projected future cash flows; significant adverse changes in the extent or manner in which asset (or asset group) is being used or its condition, including a
meaningful drop in fleet utilization over the prior four quarters; significant negative industry or company-specific trends or actions, including meaningful
capital expenditure budget reductions by our major customers or other sizable exploration and production or midstream companies, as well as significant
declines in oil and natural gas prices; legislative changes prohibiting us from leasing our units or flares; or poor general economic conditions. An
impairment loss is recognized if the future undiscounted cash flows associated with the asset (or asset group) and the estimated fair value of the asset are
less than the asset's carrying value.
Sales of equipment out of the rental fleet are included with sales revenue and cost of sales, while retirements of units are shown a separate
operating expense. Gains and losses resulting from sales and dispositions of other property and equipment are included within selling, general, and
administrative expenses. Maintenance and repairs are charged to cost of rentals as incurred.
F - 9
Intangibles
At December 31, 2023 and 2022, NGS had intangible assets, which relate to developed technology and a trade name. Developed technology is
amortized on a straight-line basis with a useful life of 20 years, with a weighted average remaining life of approximately four years as of December 31,
2023. NGS has an intangible asset related to the trade name of SCS which was acquired in our acquisition of Screw Compression Systems in January
2005. This asset is not being amortized as it has been deemed to have an indefinite life.
Our policy is to review intangibles that are being amortized for impairment when indicators of impairment are present. In addition, it is our policy
to review indefinite-lived intangible assets for impairment annually or when indicators of impairment are present. We review intangibles through an
assessment of the estimated future cash flows related to such assets. In the event that assets are found to be carried at amounts in excess of estimated
undiscounted future cash flows, then the assets will be adjusted for impairment to a level commensurate with a discounted cash flow analysis of the
underlying assets.
Warranty
When warranted, we accrue amounts for estimated warranty claims based upon current and historical product warranty costs and any other related
information known. There was no warranty reserve as of December 31, 2023 and 2022.
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 net operating losses and tax credit carry-forwards. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the statutory
enactment date. 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.
ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. In order to record any financial statement benefit, we are required to determine, based on technical
merits of the position, whether it is more likely than not (a likelihood of more than 50 percent) that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation processes. If that step is satisfied, then we must measure the tax position to determine the amount of
benefit to recognize in the financial statements. The tax position is measured at the largest amount of the benefit that is greater than 50 percent likely of
being realized upon ultimate settlement. We have no uncertain tax positions as of December 31, 2023.
Our policy regarding income tax interest and penalties is to expense those items as other expense.
Capitalized Interest
Effective January 1, 2023, the Company began capitalizing interest from external borrowings on significant expenditures for the fabrication of its
natural gas compressor equipment until such projects are ready for their intended use. Capitalized interest is added to the cost of the underlying asset and is
amortized over the useful lives of the assets in the same manner as the underlying assets. For the year ended December 31, 2023, the Company capitalized
interest totaling approximately $5.5 million.
Fair Value Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date under current market conditions. ASC Topic 820 established a fair value hierarchy, which requires an entity to
maximize the use of observable inputs when measuring fair value. These inputs are categorized as follows:
Level 1- quoted prices in an active market for identical assets or liabilities;
Level 2- quoted prices in an active market for similar assets or liabilities, inputs other than quoted prices that are observable for similar assets or liabilities,
inputs derived principally from or corroborated by observable market data by correlation or other means; and
F - 10
Level 3- valuation methodology with unobservable inputs that are significant to the fair value measurement.
Management believes that the fair value of our cash and cash equivalents, trade receivables, and accounts payable at December 31, 2023 and 2022
approximate their carrying values due to the short-term nature of the instruments or the use of prevailing market interest rates. The company considered the
borrowings under the credit facility to approximate fair value based upon borrowing rates currently available to us for loans with similar terms (level 2).
Segments and Related Information
ASC 280-10-50, “Operating Segments”, define the characteristics of an operating segment as a) being engaged in business activity from which it
may earn revenue and incur expenses, b) being reviewed by the company's chief operating decision maker (CODM) for decisions about resources to be
allocated and assess its performance and c) having discrete financial information. Although we look at our products to analyze the nature of our revenue,
other financial information, such as certain costs and expenses, net income and EBITDA are not captured or analyzed by these categories. Our CODM does
not make resource allocation decisions or assess the performance of the business based on these categories, but rather in the aggregate. Based on this,
management believes that it operates in one business segment.
We are engaged in the business of designing and fabricating compressors. Our compressors are sold and rented to our customers. In addition, we
provide aftermarket services on compressors in our fleet and to third parties. These business activities are similar in all geographic areas. Historically, our
manufacturing process has been essentially the same for the entire Company and has been performed in-house at our facilities in Midland, Texas and Tulsa,
Oklahoma. Increasingly, however, we have contracted with third party fabricators to assemble our larger horsepower natural gas compressors. Our
customers primarily consist of entities in the business of producing oil and natural gas. The maintenance and service of our products is consistent across the
entire Company and is performed via an internal fleet of vehicles. The regulatory environment is similar in every jurisdiction in that the most impacting
regulations and practices are the result of federal energy policy.
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. As of January 1, 2023 we adopted ASU 2016-13. The standard did not materially affect our
consolidated financial statements and note disclosures.
In December 2023, the Financial Standards Accounting Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023- 09 “Income Taxes
(Topics 740): Improvements to Income Tax Disclosures” to expand the disclosure requirements for income taxes, specifically related to the rate
reconciliation and income taxes paid. ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted. The
Company is currently evaluating the potential effect that the updated standard will have on the financial statement disclosures.
In November 2023, the FASB issued ASU 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” which
expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses.
ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption
permitted. The adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements or disclosures.
3. Inventory
Our inventory, net of allowance for obsolescence of $4.0 million and $0.1 million at December 31, 2023 and 2022, respectively, consisted of the
following:
F - 11
Inventory, net of allowance for obsolescence of $2,836 and $0, respectively
Work-in-process
Inventory current
Raw materials - long term (net of allowances of $1,168 and $120, respectively)
Inventory total
December 31,
2023
2022
(in thousands)
$
$
20,227 $
1,412
21,639
701
22,340 $
21,354
2,060
23,414
1,557
24,971
Our long-term inventory consists of raw materials that remain viable but which the Company does not expect to sell or use within the next 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. For the year ended December 31, 2023, our provision for excess and obsolete inventory totaled $4.0 million. The majority of this amount was due to
a 2023 charge related to the company's decision to cease future compressor fabrication at our Midland facility, which reduced the expected future demand
of certain inventory items held at this facility.
A summary of our inventory allowance is as follows:
Beginning balance
Additions
Write-offs
Ending balance
4. Rental Equipment, Property and Equipment
Rental Equipment
Year Ended December 31,
2023
2022
(in thousands)
120
3,965
(81)
4,004
$
$
64
83
(27)
120
$
$
Our rental equipment and associated accumulated depreciation as of December 31, 2023 and 2022, respectively, consisted of the following:
Compressor units
Work-in-progress
Rental equipment
Accumulated depreciation
Rental equipment, net of accumulated depreciation
2023
December 31,
(in thousands)
2022
$
$
514,527 $
50,867
565,394
(191,745)
373,649 $
387,145
37,034
424,179
(177,729)
246,450
Our rental equipment has an estimated useful life between 15 and 25 years. Depreciation expense for rental equipment was $24.0 million and
$21.9 million for the years ended December 31, 2023 and 2022, respectively.
F - 12
Retirement of Rental Equipment
Management routinely reviews the Company's inventory of rental equipment for retirement or obsolescence. During 2023, management reviewed
the rental fleet to determine which units were not of the type, configuration, make or model that our customers are demanding or that were not cost efficient
to refurbish, maintain and/or operate. As a result of this review, we recorded a $0.5 million loss on retirement of rental equipment during the year ended
December 31, 2023.
During our review of our rental compressor units in 2022, we recorded a $0.2 million loss on retirement of rental equipment.
Property and Equipment
Property and equipment consists of the following at December 31, 2023 and 2022:
Land
Building
Leasehold improvements
Office equipment and furniture
Software
Machinery and equipment
Vehicles
Work-in-progress
Total
Less accumulated depreciation
Total
Useful Lives
(Years)
December 31,
2023
2022
—
39
39
5
5
7
3
$
$
(in thousands)
1,680 $
19,140
1,295
2,039
573
4,113
8,770
589
38,199
(17,649)
20,550 $
1,680
19,166
1,218
2,016
573
4,052
9,858
594
39,157
(16,981)
22,176
Depreciation expense for property and equipment was $2.4 million and $2.1 million for the year ended December 31, 2023 and 2022, respectively.
Depreciation Expense by Product Line
The following table depicts annual depreciation expense associated with each product line as well as our corporate activities at December 31, 2023
and 2022:
Rentals
Sales
Service & Maintenance
Corporate
Total
5. Rental Activity
2023
December 31,
(in thousands)
2022
$
$
25,507 $
260
89
569
26,425 $
23,243
275
33
440
23,991
We rent natural gas compressor packages to entities in the petroleum industry. These rental arrangements are classified as operating leases and
generally have original terms of six months to sixty months and continue on a month-to-month basis thereafter.
F - 13
Future minimum rent payments for arrangements not on a month-to-month basis at December 31, 2023, are as follows:
Years Ending December 31,
2024
2025
2026
2027
2028
Thereafter
Total
(in thousands)
$71,965
54,402
41,127
32,650
18,463
—
$218,607
6. Leases
The Company determines if an arrangement is a lease at inception by assessing whether it conveys the right to control the use of an identified asset
for a period of time in exchange for consideration. The Company’s operating leases are primarily related to property leases for its field offices. The
Company's operating leases have remaining lease terms of one to eight years. Renewal and termination options are included in the lease term when it is
reasonably certain that the Company will exercise the option. The company's finance leases are primarily related to vehicles used in our rental business.
The company's finance leases have lease terms of 3 years.
The Company's lease agreements do not contain any contingent rental payments, material residual guarantees or material restrictive covenants.
Right of use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease
term. As substantially all of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which is based on a
fully collateralized loan over the lease term, to determine the present value of lease payments. The following table reflects the amounts related to leases that
are recorded on our consolidated balance sheets as of December 31, 2023 and 2022:
Classification on Consolidated
Balance Sheets
December 31,
2023
2022
Operating lease assets
Finance lease assets
Current lease liabilities
Current lease liabilities
Non-current lease liabilities
Non-current lease liabilities
Total lease liabilities
Weighted average remaining lease term in years
Implicit Rate
Other assets
Other assets
Accrued liabilities
Accrued liabilities
Other long-term liabilities
Other long-term liabilities
$
$
$
$
($ in thousands)
210
1,045
$
$
58
307
173
723
1,261
$
$
3.1
9.1 %
349
—
155
—
194
—
349
4.5
5.2 %
Operating lease costs are recognized on a straight-line basis over the lease term. Total operating lease costs for the years ended December 31, 2023
and December 31, 2022 were approximately $0.5 million and $0.4 million respectively.
F - 14
Cash paid for amounts included in the measurement of lease liabilities
Operating lease cost
Finance lease cost
(1) (2)
December 31,
2023
2022
(in thousands)
$
$
485 $
95 $
384
—
(1) Lease costs are classified on the Consolidated Statements of Operations in cost of sales, cost of compressors and selling, general and administrative
expenses.
(2) Includes costs of $0.3 million for leases with terms of 12 months or less and $0.2 million for leases with terms greater than 12 months for the year
ended December 31, 2023. Includes costs of $0.2 million for leases with terms of 12 months or less and $0.2 million for leases with terms greater than 12
months for the year ended December 31, 2022.
The following table shows the future maturities of lease liabilities:
Year Ending December 31,
2024
2025
2026
2027
2028
Thereafter
Total lease payments
Less: Imputed interest
Total
Lease Liabilities
(in thousands)
437
419
328
38
38
16
1,276
(15)
1,261
$
$
Rent expense under such leases was $0.2 million and $0.2 million for the years ended December 31, 2023 and 2022, respectively.
7. Intangibles
At December 31, 2023 and 2022, the Company had intangible assets, which relate to developed technology and a trade name. Amortization
expense recognized in each of the years ending December 31, 2023 and 2022 was $0.1 million. Estimated amortization expense for 2024 is approximately
$0.1 million. The Company has an intangible asset with a gross carrying value of $0.7 million at December 31, 2023, related to the trade name of SCS
which was acquired in our acquisition of Screw Compression Systems in January 2005. This asset is not being amortized as it has been deemed to have an
indefinite life.
The following table represents the identified intangible assets by major asset class (in thousands):
December 31, 2023
December 31, 2022
Useful Life
(years)
20
Indefinite
Gross
Carrying
Value
$
$
2,505 $
654
3,159 $
Accumulated
Amortization
Net Book
Value
Gross
Carrying
Value
Accumulated
Amortization
Net Book
Value
2,384 $
—
2,384 $
121
654
775
$
$
2,505 $
654
3,159 $
2,259 $
—
2,259 $
246
654
900
Developed Technology
Trade Name
Total
Our policy is to review intangibles that are being amortized for impairment when indicators of impairment are present. In addition, it is our
policy to review indefinite-lived intangible assets for impairment annually or when indicators of
F - 15
impairment are present. We review intangibles through an assessment of the estimated future cash flows related to such assets. In the event that assets are
found to be carried at amounts in excess of estimated undiscounted future cash flows, then the assets will be adjusted for impairment to a level
commensurate with a discounted cash flow analysis of the underlying assets. Based upon our analysis, we experienced no impairment of intangible assets
during the years ended December 31, 2023 or 2022.
8. Credit Facility
On May 11, 2021, we entered into a five-year senior secured revolving credit agreement ("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. On December 12, 2022, we entered into a First Amendment to the Credit Agreement (the "First Amendment")
to increase the maximum commitment to $30 million. We also have a right to request from the Lender, on an uncommitted basis, an increase of up to $30
million on the aggregate commitment; provided, however, the aggregate commitment amount is not permitted to exceed $50 million. The maturity date of
the Credit Agreement was May 11, 2026. The obligations under the Credit Agreement were 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. At December 31, 2022, we had
$25.0 million outstanding under the Credit Agreement with a weighted average interest rate of 7.32%.
On February 28, 2023, we replaced our Credit Agreement by entering into a five-year senior secured revolving credit agreement (“Amended and
Restated Credit Agreement”) with Texas Capital Bank, as administrative agent (the “Lender”), TCBI Securities, Inc., as joint lead arranger and sole book
runner and Bank of America, N.A., as joint lead arranger, with an initial commitment of $175 million as of the closing date. Subject to collateral
availability, we also have a right to request from the Lender, on an uncommitted basis, an increase of up to $125 million on the aggregate commitment;
provided, however, the aggregate commitment amount is not permitted to exceed $300 million. The maturity date of the Amended and Restated Credit
Agreement is February 28, 2028. In connection with the amendment we agreed to pay fees of $2.0 million (representing fees equal to 1.39% of the
$145 million increase in the commitment) and reimburse the lenders for their expenses. The obligations under the Amended and Restated 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.
On November 14, 2023, the Company entered into a First Amendment to the Amended and Restated Credit Agreement (the "Amendment") with
the Lender and certain other lenders to (i) increase the lender commitment from $175 million to $225 million, and (ii) to add First-Citizens Bank & Trust
Company as a new lender to the facility. In connection with the Amendment, we agreed to pay fees of $0.6 million (representing fees equal to 1.125% of
the $50 million increase in the commitment) and reimburse the lenders for their expenses. As of December 31, 2023, we were in compliance with all
financial covenants in our credit agreement. At December 31, 2023, we had $164.0 million outstanding under our Amended and Restated Credit Agreement
at a weighted average interest rate of 9.40%. At December 31, 2023, we had approximately $56.0 million of availability under the Amended and Restated
Credit Agreement.
Borrowing Base. At any time before the maturity of the Amended and Restated 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) 85% of
eligible accounts receivable owed to the Company, plus (b) 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 $2.5 million, plus (c) 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 (d) 80% of the net book value, valued at the lower of
cost (excluding any costs for capitalized interest or other noncash capitalized costs) or market of the eligible new compressor fleet, minus (e) 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.
Interest and Fees. Under the terms of the Amended and Restated 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 Term SOFR
(“Secured Overnight Financing Rate”) Loan, the Adjusted Term SOFR 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 Term
SOFR 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 Amended and Restated Credit Agreement. Depending on the leverage ratio,
the Applicable Margin can be 2.00% to 2.75% for Base Rate Loans (as
F - 16
defined in the Amended and Restated Credit Agreement) and 3% to 3.75% for Term SOFR 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 Amended and Restated Credit Agreement is
in effect at an annual rate equal to 0.50% of the unused commitment amount. Accrued interest is payable monthly on outstanding principal amounts and
unused commitment fee, provided that accrued interest on Term SOFR Loans is payable at the end of each interest period, but in no event less frequently
than quarterly.
Covenants. The Amended and Restated 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 are subject to certain financial covenants in the Amended and Restated Credit
Agreement that require us to maintain (i) a leverage ratio, as defined, lesser than or equal to 3.50 to 1.00 as of the last day of each fiscal quarter ending on
or prior to December 31, 2024 and 3.25 to 1.00 for the fiscal quarter ending March 31, 2025 and for each fiscal quarter thereafter and (ii) a fixed charge
coverage ratio greater than or equal to 1.25 to 1.00 as of the last day of each fiscal quarter.
Events of Default and Acceleration. The Amended and Restated 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 Amended and
Restated 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.
Obligations outstanding under the Amended and Restated Credit Agreement may be accelerated upon the occurrence of an event of default.
9. Income Taxes
The provision for income taxes for the years ended December 31, 2023 and 2022, consists of the following (in thousands):
Current expense
State expense
Total current expense
Deferred (expense) benefit:
Federal expense
State benefit
Total deferred expense
Total expense
2023
2022
$
$
(35) $
(35)
(1,940)
102
(1,838)
(1,873) $
(17)
(17)
(857)
346
(511)
(528)
The effective tax rate for the years ended December 31, 2023 and 2022, differs from the statutory rate as follows:
Statutory rate
State and local taxes
Stock based compensation
Nondeductible compensation
Other
Effective rate
2023
2022
21.0 %
(1.3)%
0.7 %
8.2 %
(0.3)%
28.3 %
21.0 %
812.2 %
(58.5)%
(1,846.3)%
(217.1)%
(1,288.7)%
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the economic impact
caused by the COVID-19 pandemic. The CARES Act, among other things, permits federal income tax net operating loss ("NOL") carryovers and
carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019,
and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid federal income taxes. The Company
generated significant NOLs
F - 17
during 2018 and 2019 and filed carryback claims for these losses to the preceding five years. Accordingly, as of March 31, 2020, the Company recorded a
federal income tax receivable of $15.0 million and an increase to its deferred tax liability of $10.1 million on its balance sheet. During the third quarter of
2020, the Company received refunds corresponding to the 2018 NOL carryback, leaving a balance in the federal income tax receivable of $11.5 million at
December 31, 2023.
In conjunction with the $11.5 million income tax refund claim, on March 8, 2023, the Company received a notice from the Internal Revenue
Service that its 2015, 2016, 2017 and 2019 income tax returns were selected for examination.
The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and (liabilities) as of December
31, 2023 and 2022, are as follows (in thousands):
Deferred income tax assets:
Net operating loss
Research and development credits
Stock compensation
Interest expense
Inventory reserves
Deferred compensation
Other
Total deferred income tax assets
Deferred income tax liabilities:
Property and equipment
Goodwill and other intangible assets
Total deferred income tax liabilities
Net deferred income tax liabilities
2023
2022
$
$
22,190 $
1,313
153
991
893
792
285
26,617
(68,110)
(143)
(68,253)
(41,636) $
6,391
1,338
121
—
—
617
354
8,821
(48,427)
(192)
(48,619)
(39,798)
As of December 31, 2023, the Company had NOL carryforwards for federal income tax purposes of $96.0 million, which may be carried forward
indefinitely and can offset up to 80% of future taxable income in any given year. Future changes in ownership, as defined by Section 382 of the Internal
Revenue Code ("IRC"), could limit the amount of NOL carryforwards used in any one year. In general, under Section 382 and 383 of the IRC, a
corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs and certain tax credits, to offset
future taxable income and tax. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders changes by more than 50
percentage points over such stockholders’ lowest percentage of ownership during the testing period (generally three years).
We account for uncertain tax positions in accordance with guidance in FASB 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 financial statements. The Company assessed
whether it had any uncertain tax positions related to open tax years and concluded there were none. Accordingly, no reserve for uncertain tax positions has
been recorded as of December 31, 2023 and 2022.
Our policy regarding income tax interest and penalties is to expense those items as incurred. During the years ended December 31, 2023 and 2022,
there were no significant income tax interest or penalty items in the statement of operations.
We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, we are no longer subject to U.S.
federal or state income tax examination by tax authorities for years before 2015.
10. Deferred Compensation Plans
Effective January 1, 2016, the Company established a non-qualified deferred compensation plan for executive officers, directors and certain
eligible employees. The assets of the deferred compensation plan are held in a rabbi trust and are subject to additional risk of loss in the event of
bankruptcy or insolvency of the Company. The plan allows for deferral of up to 90% of a participant’s base salary, bonus, commissions, director fees and
restricted stock awards. A Company owned life insurance policy held in a rabbi trust is utilized as a source of funding for the plan. The cash surrender
value of the life insurance policy is $3.0 million and $2.4 million as of December 31, 2023 and 2022, respectively, with a loss related to the policy of $(0.2)
million
F - 18
and $(0.4) million reported in other income in our consolidated statement of operations for the year ended December 31, 2023 and 2022, respectively.
For deferrals of base salary, bonus, commissions and director fees, settlement payments are made to participants in cash, either in a lump sum or in
periodic installments. The deferred obligation to pay the deferred compensation and the deferred director fees is adjusted to reflect the positive or negative
performance of investment measurement options selected by each participant and was $3.6 million and $2.8 million as of December 31, 2023 and 2022,
respectively. The deferred obligation is included in other long-term liabilities in the consolidated balance sheets.
For deferrals of restricted stock units, the plan does not allow for diversification, therefore, distributions are paid in shares of our common stock
and the obligation is carried at grant value. As of December 31, 2023 and 2022, respectively, we have none and 3,138 unvested restricted stock units being
deferred. As of December 31, 2023 and 2022, respectively we have released and issued 191,700 and 188,562 shares to the deferred compensation plan with
a value of $2.7 million and $2.6 million, respectively.
11. Stockholders' Equity
Preferred Stock
We have a total of 5.0 million authorized preferred shares which may be issued in series with rights and preferences as designated by the Board
of Directors. As of December 31, 2023 and 2022, there were no issued or outstanding preferred shares.
12. Stock-Based and Other Long-Term Incentive Compensation
Restricted Stock
On June 20, 2019, at our annual meeting of shareholders, our shareholders approved the 2019 Equity Incentive Plan for restricted shares/units,
stock options and other equity awards which reserved for issuance up to 500,000 shares of common stock in connection with awards. On June 16, 2022, at
our annual meeting of shareholders, our shareholders approved an amendment to the Equity Incentive Plan to increase the number of shares available for
issuance under the plan by 650,000 shares of common stock. As of December 31, 2023, we had outstanding awards of 133,898 shares under the Equity
Incentive Plan that may vest over the next three years. As of December 31, 2023, 405,833 shares were still available for issuance under the Equity
Incentive Plan.
On April 26, 2022, 4,212 shares of restricted common stock were awarded to each of our four independent Board members. The restricted stock
issued to our directors vests in one year from the date of grant. On August 15, 2022, the Compensation Committee awarded 32,040 shares of restricted
common stock to two executive officers that vest ratably over three years, beginning on April 25, 2023. In addition, on August 15, 2022, the Compensation
Committee awarded 60,839 shares of restricted common stock to Mr. Stephen Taylor, our Interim Chief Executive Officer. The restricted shares granted to
Mr. Taylor vested in full on June 30, 2023. On April 25, 2023, the Compensation Committee awarded 27,840 shares of restricted stock to our Chief
Technical Officer that vest ratably over three years, beginning on April 25, 2024. Pursuant to the Retirement Agreement dated May 17, 2022, between the
Company and Mr. Taylor, our Interim Chief Executive Officer, on April 25, 2023, the Compensation Committee awarded 58,790 fully vested shares of
common stock to Mr. Taylor. On May 9, 2023, the Compensation Committee awarded each of our four independent Board members 9,470 restricted stock
units. These restricted stock units vest one year from the date of grant. On June 30, 2023, Stephen C. Taylor was granted restricted stock units for 10,101
and 10,101 shares of common stock that will vest immediately and one year from the date of grant, respectively. On October 8, 2023, the Compensation
Committee awarded 6,361 restricted stock units to Brian Tucker, our Chief Operating Officer. These units will vest ratably over three years beginning on
October 9, 2024. On October 26, 2023, the compensation committee awarded 4,623 restricted stock units to an independent director. These units vest one
year from the date of the grant.
Compensation expense related to the restricted shares was approximately $2.0 million and $1.7 million for the years ended December 31, 2023
and 2022, respectively. As of December 31, 2023, there was a total of approximately $0.7 million of unrecognized compensation expense related to the
unvested portion of these restricted shares/units. This expense is expected to be recognized over the next three years.
F - 19
A summary of all restricted stock/unit activity as of December 31, 2022 and 2023 and changes during the years then ended are presented below.
Outstanding, December 31, 2021
Granted
Vested
Outstanding, December 31, 2022
Granted
Vested
Canceled/Forfeited
Outstanding, December 31, 2023
Other Long-Term Incentive Compensation
Number
of
Shares
Grant Date Fair
Value
Weighted
Average
Remaining
Contractual Life
(years)
Aggregate
Intrinsic
Value
(in thousands)
276,319 $
126,662 $
(152,134) $
250,847 $
164,640 $
(267,232) $
(14,357) $
133,898 $
9.67
10.21
10.99
9.14
10.65
9.22
10.04
10.66
1.77 $
— $
— $
1.42 $
— $
— $
— $
1.57 $
2,893
1,294
1,778
2,681
1,754
2,683
158
1,813
On April 28, 2020, the Compensation Committee issued a long-term incentive award of $1.1 million to an executive officer that vests in equal,
annual tranches over three years. At the time of vesting, each tranche was paid in cash. 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 three years. On March 18, 2021, we issued a $50,000
award to each of our three independent Board members. On April 1, 2021, we issued a $50,000 award to a newly appointed independent Board member.
These awards vest one year from the date of grant and were paid in cash upon vesting. On April 26, 2022, we issued a $50,000 award to each of our four
independent Board members. These awards vest one year from the date of grant and were paid in cash upon vesting. The Company accounts for these other
long-term incentive awards as liabilities under accrued liabilities on our consolidated balance sheet. The vesting of these 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 $0.4 million and $1.0 million respectively for the years
ended December 31, 2023 and 2022. As of December 31, 2023 and 2022 respectively there was a total of $0.0 million and $0.7 million of unrecognized
compensation expense related to these other long-term incentive awards which is expected to be recognized over the next year.
1998 Stock Option Plan
Our 1998 Stock Option Plan as amended, which is stockholder approved, permits the granting of stock options to its employees for up to 1.0
million shares of common stock. We believe that such awards align the interests of our employees with our stockholders. Option awards are generally
granted with an exercise price equal to the market price of our stock at the date of grant; those option awards generally vest in equal increments over three
years of continuous service and have ten-year contractual terms. Certain option and share awards provide for accelerated vesting if there is a change in
control of the Company (as defined in the Stock Option Plan). The last date that grants can be made under the Stock Option Plan is February 28, 2026. As
of December 31, 2023, 415,085 shares were still available to be granted under the Stock Option Plan.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions
noted in the following table. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant. The expected life of options granted is based on the vesting period and historical exercise and post-vesting employment termination behavior
for similar grants. We use historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees
that have similar historical exercise behavior are considered separately for valuation purposes.
F - 20
Weighted average Black -Scholes fair value assumption during the year ended December 31, are as follows:
Risk free rate
Expected life
Expected volatility
Expected dividend yield
2023
2022
3.99 %
6.5
47 %
— %
2.99 %
2.67
54.5 %
— %
During the year ended December 31, 2023, and 2022, we made 6,000 and 215,000 stock option grants, respectively.
A summary of all option activity as of December 31, 2022 and 2023 and changes during the years then ended are presented below:
Outstanding December 31, 2021
Granted
Canceled/Forfeited
Expired
Outstanding, December 31, 2022
Granted
Canceled/Forfeited
Expired
Outstanding, December 31, 2023
Exercisable, December 31, 2023
Number
of
Shares
Weighted
Average
Exercise Price
200,834 $
215,000 $
(200,750) $
(13,500) $
201,584 $
6,000 $
(39,833) $
(38,000) $
129,751 $
105,416 $
21.17
16.07
(18.09)
13.29
19.32
9.80
16.33
16.28
20.59
22.85
Weighted
Average
Remaining
Contractual Life
(years)
Aggregate
Intrinsic
Value
(in thousands)
4.83 $
— $
— $
— $
3.90 $
— $
— $
— $
4.10 $
3.08 $
—
—
—
—
—
1
11
—
274
146
The weighted average grant date fair value of options granted during 2023 and 2022 was $5.11 and $4.24 per option respectively. There were no
option exercises in either 2023 or 2022.
F - 21
The following table summarizes information about our stock options outstanding at December 31, 2023:
Range of Exercise Prices
$0.01-$18.00
$22.01-$26.00
$26.01-$30.00
$30.01-$30.41
Options Outstanding
Weighted
Average
Remaining
Contractual
Life (years)
Weighted
Average
Exercise
Price
8.25
1.28
3.13
0.22
4.10
$
$
$
$
$
10.77
22.90
28.15
30.41
20.59
Shares
51,667
28,667
19,750
29,667
129,751
Options Exercisable
Weighted
Average
Exercise
Price
10.76
22.90
28.15
30.41
22.85
Shares
27,332
28,667
19,750
29,667
105,416
$
$
$
$
$
The summary of the status of our unvested stock options as of December 31, 2023, and changes during the year then ended is presented below.
Unvested stock options:
Unvested at December 31, 2022
Granted
Vested
Canceled/Forfeited
Unvested at December 31, 2023
Weighted
Average
Grant Date Fair
Value
Shares
39,000 $
6,000 $
(14,998) $
(5,667) $
24,335 $
10.95
9.80
10.90
10.58
10.79
We recognized stock compensation expense from stock options of $0.1 million and $0.3 million for the years ended December 31, 2023 and 2022,
respectively. As of December 31, 2023, there was $0.1 million of unamortized compensation cost related to unvested stock options.
13. Earnings (loss) per Share
Basic earnings (loss) per common share is computed using the weighted average number of common shares outstanding during the period. Diluted
earnings (loss) per common share is computed using the weighted average number of common stock and common stock equivalent shares outstanding
during the period.
F - 22
The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share amounts):
Numerator:
Net income (loss)
Denominator for basic net earnings (loss) per common share:
Weighted average common shares outstanding
Denominator for diluted net income (loss) per share:
Weighted average common shares outstanding
Dilutive effect of stock options and restricted shares
Diluted weighted average shares
Earnings (loss) per common share:
Basic
Diluted
Year Ended December 31,
2023
2022
$
4,747 $
(569)
12,316
12,305
12,316
67
12,383
$
$
0.39 $
0.38 $
12,305
—
12,305
(0.05)
(0.05)
In the year ended December 31, 2022, 250,847 restricted stock/units and 201,584 stock options were not included in the computation of diluted
loss per share due to their antidilutive effect. In the year ended December 31, 2023, 10,984 restricted stock/units and 129,751 stock options were not
included in the computation of diluted earnings per share due to their antidilutive effect.
14. Accrued Liabilities
Accrued liabilities consisted of the following as of December 31, 2023 and 2022 (in thousands):
Accrued purchases
Accrued compensation
Accrued other
Total
15. Commitments and Contingencies
Legal Proceedings
2023
2022
$
$
$
8,629
2,137
4,319
15,085
$
17,763
4,472
1,683
23,918
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 effect on our financial position,
results of operations or cash flow. We are not currently a party to any bankruptcy, receivership, reorganization, adjustment or similar proceeding, and we
are not aware of any other threatened litigation.
16. Related Party
During the year ended December 31, 2023, we sold $0.9 million of compressor components to N-G Joint Venture, LLC our 14% joint venture. As
of December 31, 2023, we had accounts receivable of $0.2 million with N-G.
During the year ended December 31, 2023, we paid $0.3 million to Mill Road Capital, a large shareholder, for expense reimbursements related to
our cooperation agreement.
17. Subsequent Events
On February 1, 2024, the Company announced that it had appointed Justin Jacobs as Chief Executive Officer, effective February 12, 2024. Mr.
Jacobs is a member of our board of directors.
F - 23
Exhibit 10.12
NATURAL GAS SERVICES GROUP, INC.
Restricted Stock Unit Award Agreement [Employees]
[Form approved by Comp Comm March 4, 2024]
This Restricted Stock Unit Award Agreement (this “Agreement”) is made and entered into as of [ ● ], by and between
Natural Gas Services Group, Inc., a Colorado corporation (the “Company”) and [●], an individual who is an employee of the
Company (the “Employee”) relating to an award made on [ ● ] (the “Grant Date”) by the Compensation Committee of the
Company (the “Committee”).
WHEREAS, the Company has adopted the 2019 Equity Incentive Plan, as may be amended from time to time (the
“Plan”) pursuant to which awards of Restricted Stock Units may be granted;
WHEREAS, capitalized terms that are used but not defined herein shall have the meaning ascribed to them in the Plan;
and
WHEREAS, the Committee has determined that it is in the best interests of the Company and its shareholders to grant the
award of Restricted Stock Units provided for herein.
NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows:
1. Grant of Restricted Stock Units. Pursuant to Section 7.2 of the Plan, the Company hereby issues to the
Employee on the Grant Date an Award consisting of, in the aggregate, ______________ [INSERT NUMBER] Restricted Stock
Units (the “Restricted Stock Units” or “RSUs”). Each RSU represents a contractual right to receive one share of Common Stock
of the Company subject to the terms and conditions set forth in this Agreement and the Plan. Employee has been furnished a copy
of the Plan.
2. Consideration. The grant of the RSUs is made in consideration of the services to be rendered by the Employee to the
Company.
3. Restricted Period; Vesting and Forfeiture.
3.1 Except as otherwise provided herein, provided that the Employee remains in Continuous Service through the
applicable vesting date, the Restricted Stock Units will vest in accordance with the following schedule (the period during which
restrictions apply, the “Restricted Period”):
Vesting Date
[VESTING DATE]
[VESTING DATE]
Number of Restricted Stock Units That Vest
[NUMBER OR PERCENTAGE OF UNITS THAT VEST ON THE
VESTING DATE]
[NUMBER OR PERCENTAGE OF UNITS THAT VEST ON THE
VESTING DATE]
1
3.2 The foregoing vesting schedule notwithstanding and notwithstanding Section 3.2, if the Employee’s
Continuous Service terminates as a result of the Employee’s death, Disability, a termination by the Company or an Affiliate
without Cause or a termination by the Employee for Good Reason, 100% of the unvested Restricted Stock Units shall
automatically accelerate and become fully vest as of the date of such termination.
3.3 The foregoing vesting schedule notwithstanding, if a Change in Control occurs and the Employee’s
Continuous Service is terminated by the Company or an Affiliate without Cause or by the Employee for Good Reason, and the
Employee’s date of termination occurs (or in the case of the Employee’s termination of Continuous Service for Good Reason, the
event giving rise to Good Reason occurs) in each case, during the period beginning on the date that is 90 days before the Change
in Control and ending on the date that is eighteen (12) months following the Change in Control, all unvested Restricted Stock
shall automatically become 100% vested on the Employee’s date of termination (or, if later, the date of the Change in Control).
3.4 The foregoing vesting schedule notwithstanding, the Committee may decide, in its sole discretion, to vest in
whole or in part the RSUs awarded to the Employee.
3.5 Notwithstanding anything to the contrary in this Agreement, to the extent the Employee is subject to a written
employment agreement and the terms of such employment agreement differ from the terms set forth in this Agreement, the terms
of the written employment agreement shall control.
4. Restrictions. Subject to any exceptions set forth in this Agreement or the Plan, during the Restricted Period and until
such time as the RSUs are settled in accordance with Section 6, the RSUs or the rights relating thereto may not be assigned,
alienated, pledged, attached, sold or otherwise transferred or encumbered by the Employee. Any attempt to assign, alienate,
pledge, attach, sell or otherwise transfer or encumber the RSUs or the rights relating thereto shall be wholly ineffective and, if
any such attempt is made, the RSUs will be forfeited by the Employee and all of the Employee’s rights to such units shall
immediately terminate without any payment or consideration by the Company.
5. Rights as Shareholder; Dividend Equivalents.
5.1 Except as otherwise provided herein, the Employee shall not have any rights of a shareholder with respect to
the shares of Common Stock underlying the RSUs unless and until the RSUs vest and are settled by the issuance of such shares
of Common Stock or cash at the sole election of the Committee as set forth in Section 6.1(a) and (b).
5.2 Upon and following the settlement of the RSUs, Employee shall be the record owner of the shares of
Common Stock issued upon settlement, unless and until such shares are sold or
2
otherwise disposed of, and as record owner shall be entitled to all rights of a shareholder of the Company (including voting rights
and dividends).
5.3 If, prior to the settlement date, the Company declares and pays (or sets a record date) with respect to an
ordinary cash dividend on the shares of Common Stock, then, on the payment date of the dividend, the Employee's account shall
be credited with Dividend Equivalents in an amount equal to the dividends that would have been paid to the Employee if one
share of Common Stock had been issued on the Grant Date for each Restricted Stock Unit granted to the Employee as set forth in
this Agreement.
5.4 Dividend Equivalents shall be credited by the Company to the Employee's account and interest may, if the
Committee authorizes, be credited on such Dividend Equivalents withheld at a rate and subject to such terms as determined by
the Committee. Dividend Equivalents shall be subject to the same vesting and forfeiture restrictions as the Restricted Stock Units
to which they are attributable in accordance with this Agreement and shall be paid on the same date that the Restricted Stock
Units to which they are attributable are settled in accordance with Section 6 hereof. Dividend Equivalents credited to the
Employee's account shall be settled in cash or, at the discretion of the Committee, in shares of Common Stock having a Fair
Market Value equal to the amount of the Dividend Equivalents and interest, if any.
6. Settlement of RSUs.
6.1 Subject to Sections 6.2, 6.3 and 10 hereof:
(a)
Promptly following each applicable vesting date, and in any event no later than March 15 of the calendar
year following the calendar year in which such vesting occurs (for the avoidance of doubt, such deadline is intended to comply
with the “short-term deferral” exemption from Code Section 409A), the Company shall either (1) issue and deliver to the
Employee the number of shares of Common Stock equal to the number of vested RSUs and enter the Employee’s name on the
books of the Company as the shareholder of record with respect to the shares of Common Stock delivered to the Employee, or (2)
if an election is made by the Committee under subsection (b) below, pay to the Employee a combination of cash and shares of
Common Stock in proportion to the election made by the Committee, as the case may be, with the value of the cash based on the
Fair Market Value of a share of Common Stock on the vesting date.
(b)
Any time prior to vesting or settlement, the Committee, if it determines that there is not a sufficient number
of shares of Common Stock available for issuance under the Plan to settle the full amount of vesting RSUs in shares or for other
reasons in its reasonable discretion, may by notice to the Employee, elect to settle up to 100% of the value of the vesting RSUs in
cash.
6.2 Notwithstanding Section 6.1, in accordance with Section 14.4 of the Plan, the Committee may, but is not
required to, prescribe rules pursuant to which the Employee may elect to defer settlement of some or all of the RSUs. Any
deferral election must be made in compliance with such rules and procedures as the Committee deems advisable. Any such
deferred awards shall also be
3
subject to the terms and conditions of the Company Executive Nonqualified Excess Plan, as may be amended from time to time,
and Section 409A of the Code.
6.3 If the Employee is deemed a “specified employee” within the meaning of Section 409A of the Code, as
determined by the Committee, at a time when Employee becomes eligible for settlement of the RSUs upon his or her “separation
from service” within the meaning of Section 409A of the Code, then to the extent necessary to prevent any accelerated or
additional tax under Section 409A of the Code, such settlement will be delayed until the earlier of: (a) the date that is six months
following the Employee’s separation from service and (b) the Employee’s death.
7. No Right to Continued Service. Neither the Plan nor this Agreement shall confer upon the Employee any right to be
retained in any position, as an Employee, Consultant or Director of the Company. Further, nothing in the Plan or this Agreement
shall be construed to limit the discretion of the Company to terminate the Employee’s Continuous Service at any time, with or
without Cause.
8. Adjustments. If any change is made to the outstanding Common Stock or the capital structure of the Company, if
required, the shares of Common Stock shall be adjusted or terminated in any manner as contemplated by Section 11 of the Plan.
9. Tax Liability and Withholding.
9.1 The Employee shall be required to pay to the Company, and the Company shall have the right to deduct and/or
withhold from any compensation paid to the Employee pursuant to the Plan, an applicable employment agreement or any other
employment arrangement with the Employee, the amount of any required withholding taxes in respect of the Restricted Stock
Units upon the occurrence of an event triggering the requirement, whether upon its grant, vesting, settlement, and/or otherwise,
and to take all such other action as the Committee deems necessary to satisfy all obligations for the payment of such withholding
taxes. The Committee may, in its sole discretion and subject to compliance with all applicable laws, permit the Employee to
satisfy any federal, state or local tax withholding obligation by any of the following means, or by a combination of such means:
(a) tendering a cash payment or withholding cash otherwise payable hereunder.
(b) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable
or deliverable to the Employee as a result of the vesting of the Restricted Stock Units; provided, however, that no shares of
Common Stock shall be withheld with a value exceeding the maximum amount of tax required to be withheld by law.
(c) delivering to the Company previously owned and unencumbered shares of Common Stock.
9.2 Notwithstanding any action the Company takes with respect to any or all income tax, social insurance, payroll tax, or
other tax-related withholding (”Tax-Related Items”), the ultimate liability for all Tax-Related Items is and remains the
Employee’s responsibility and the Company (a) makes no representation or undertakings regarding the treatment of any Tax-
Related Items in connection with the
4
grant, vesting or settlement of the Restricted Stock Units or the subsequent sale of any shares; and (b) does not commit to
structure the Restricted Stock Units to reduce or eliminate the Employee’s liability for Tax-Related Items.
10. Compliance with Law. The issuance and transfer of shares of Common Stock shall be subject to compliance by the
Company and Employee with all applicable requirements of federal and state securities laws and with all applicable requirements
of any stock exchange on which the Company’s shares of Common Stock may be listed. No shares of Common Stock shall be
issued or transferred unless and until any then applicable requirements of state and federal laws and regulatory agencies have
been fully complied with to the satisfaction of the Company and its counsel.
11. Section 409A. It is the intention of the Company and the Employee that the payments, benefits and rights to which
the Employee could be entitled pursuant to this Agreement comply with or be exempt from Section 409A of the Code and the
treasury regulations promulgated thereunder (together “Section 409A”) (to the extent that the requirements of Section 409A are
applicable thereto), after application of all available exemptions (including without limitation the short-term deferral rule). The
provisions of this Agreement shall be construed in a manner consistent with that intention. If any provision of this Agreement
contravenes Section 409A, or would cause the Employee to incur any additional tax, interest or penalty under Section 409A, the
Company and the Employee agree in good faith to reform this Agreement to comply with Section 409A, or to take such other
actions as the Company and the Employee deem necessary or appropriate, to maintain, to the maximum extent practicable,
without violating the provisions of Section 409A, the original intent and economic benefit to the Employee and the Company of
the applicable provision; provided that the Company shall have no obligation to make any changes that could create any
additional economic cost or loss of benefit to the Company. Any provision required for compliance with Section 409A that is
omitted from this Agreement shall be incorporated herein by reference and shall apply retroactively, if necessary, and be deemed
a part of this Agreement to the same extent as though expressly set forth herein. Notwithstanding anything to the contrary, the
Company makes no representation with respect to the tax treatment of the payments and/or benefits provided under this
Agreement, and in no event will Company be liable for, pay or reimburse any additional tax, interest or penalties that may be
imposed on the Employee under Section 409A.
12. Notices. Any notice required to be delivered to the Company under this Agreement shall be in writing and addressed
to the Chief Financial Officer of the Company at the Company’s principal corporate offices. Any notice required to be delivered
to the Employee under this Agreement shall be in writing and addressed to the Employee at the Employee’s address as shown in
the records of the Company. Either party may designate another address in writing (or by such other method approved by the
Company) from time to time.
13. Governing Law. This Agreement will be construed and interpreted in accordance with the laws of the State of
Colorado without regard to conflict of law principles.
14. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by the Employee or the
Board of Employees of the Company for review. The resolution of such dispute
5
by the Board of Employees shall be final and binding on the Employee and the Company and will be given the maximum
deference permitted by law. No member of the Board of Employees will be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or this Agreement.
15. Restricted Stock Units Subject to Plan. This Agreement is subject to the Plan as approved by the Company’s
shareholders. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by
reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the
applicable terms and provisions of the Plan will govern and prevail.
16. Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement will be
binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set
forth herein, this Agreement will be binding upon the Employee and the Employee’s beneficiaries, executors, administrators and
the person(s) to whom the RSUs may be transferred by will or the laws of descent or distribution.
17. Severability. The invalidity or unenforceability of any provision of the Plan or this Agreement shall not affect the
validity or enforceability of any other provision of the Plan or this Agreement, and each provision of the Plan and this Agreement
shall be severable and enforceable to the extent permitted by law.
18. Discretionary Nature of Plan. The Plan is discretionary and may be amended, cancelled or terminated by the
Company at any time, in its discretion. The grant of the RSUs in this Agreement does not create any contractual right or other
right to receive any RSUs or other Awards in the future. Future Awards, if any, will be at the sole discretion of the Company.
19. Amendment. The Committee has the right to amend, alter, suspend, discontinue or cancel the RSUs, prospectively or
retroactively; provided, that, no such amendment shall adversely affect the Employee’s material rights under this Agreement
without the Employee’s consent.
20. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument. Counterpart signature pages to this Agreement transmitted by
facsimile transmission, by electronic mail in portable document format (.pdf), or by any other electronic means intended to
preserve the original graphic and pictorial appearance of a document, will have the same effect as physical delivery of the paper
document bearing an original signature.
21. Acceptance. The Employee hereby acknowledges receipt of a copy of the Plan and this Agreement. The Employee
has read and understands the terms and provisions thereof and accepts the RSUs subject to all of the terms and conditions of the
Plan and this Agreement. The Employee acknowledges that there may be adverse tax consequences upon the grant or vesting of
the RSUs or disposition of the underlying shares and that the Employee has been advised and has had the opportunity to consult a
tax advisor prior to such grant, vesting or disposition.
6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
Natural Gas Services Group, Inc.
By: __________________________
Name:
Title:
Employee:
_____________________
[●]
7
Exhibit 10.13
NATURAL GAS SERVICES GROUP, INC.
Form of
Performance Share Unit Agreement
This Performance Share Unit Agreement (this “Agreement”) is made and entered into as of [●], by and between Natural
Gas Services Group, Inc., a Colorado corporation (the “Company”) and [●], an individual who is an employee of the Company
(the “Participant”) relating to an award made on [●] (the “Grant Date”) by the Compensation Committee of the Company (the
“Committee”).
WHEREAS, the Company has adopted the 2019 Equity Incentive Plan (the “Plan”) pursuant to which Performance
Share Units may be granted;
WHEREAS, capitalized terms that are used but not defined herein shall have the meaning ascribed to them in the Plan;
and
WHEREAS, the Committee has determined that it is in the best interests of the Company and its shareholders to grant the
award of Performance Share Units provided for herein.
NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows:
1. Grant of Performance Share Units. Pursuant to Section 7.3 of the Plan, the Company hereby grants the Participant an
Award to receive such number of Performance Share Units identified on Exhibit 1 as the “Target Award” (the “Target Award”).
Each Performance Share Unit (”PSU”) represents the right to receive one share of Common Stock (the “Share”), subject to the
terms and conditions set forth in this Agreement and the Plan. The number of PSUs that the Participant actually earns for the
Performance Period (up the amount of the “Maximum Award” set forth on Exhibit 1) will be determined by the level of
achievement of the Performance Goals in accordance with Exhibit 1 attached hereto.
2. Performance Period. For purposes of this Agreement, the term “Performance Period” shall be the period set forth on
Exhibit 1.
3. Performance Goals. The number of PSUs earned by the Participant for the Performance Period will be determined at
the end of the Performance Period based on the level of achievement of the performance goals in accordance with Exhibit 1 (the
“Performance Goals”). All determinations of whether Performance Goals have been achieved, the number of PSUs earned by
the Participant, and all other matters related to this Agreement shall be made by the Committee in its sole discretion.
{JK01583961.1 }
EXHIBIT 1 - d1.docx
4. Vesting of PSUs. The PSUs are subject to forfeiture until they vest. The PSUs shall vest only if and to the extent (a) the
Committee determines that the Performance Goals have been met for the Performance Period set forth above and (b) subject to
the exceptions set forth in Sections 5 and 6, the Participant has remained in Continuous Service from the Grant Date through the
last day of the Performance Period. As soon as commercially practicable following completion of the Performance Period (and
no later than 60 days following the end of the Performance Period) (the “Determination Date”), the Committee will review and
certify in writing (a) whether, and to what extent, the Performance Goals for the Performance Period have been achieved, and (b)
the number of PSUs that the Participant shall earn, if any, subject to compliance with the requirements of Section 4. Such
certification shall be final, conclusive and binding on the Participant, and on all other persons, to the maximum extent permitted
by law. Any fractional vested PSU shall be rounded to the nearest whole PSU.
5. Termination of Continuous Service.
5.1 If the Participant’s Continuous Service terminates as a result of a termination by the Company or an Affiliate for
Cause or a termination by the Participant without Good Reason at any time before all of his or her PSUs have vested, then 100%
of the Participant’s unvested PSUs shall be automatically forfeited upon such termination of Continuous Service and neither the
Company nor any Affiliate shall have any further obligations to the Participant under this Agreement.
5.2 Notwithstanding the Performance Goals and Section 4, if the Participant’s Continuous Service terminates as a
result of the Participant’s death or Disability prior to the vesting of the PSUs in accordance with Section 4, then the Participant
(or his or her Estate, as applicable) will be entitled to receive on the Settlement Date (as defined below) 100% of the Target
PSUs.
5.3 Notwithstanding the Performance Goals and Section 4, if the Participant’s Continuous Service terminates as a
result of a termination by the Company or an Affiliate without Cause or a termination by the Participant for Good Reason prior
to the vesting of the PSUs in accordance with Section 4, then the Participant will be entitled to receive a pro rata number of
PSUs based on the Target Award that would otherwise have vested at the end of the Performance Period. For the purposes of this
Section 5.3, the pro rata number of PSUs that vest equals the product obtained by multiplying the total number of PSUs
awarded pursuant to this Agreement by a fraction, the numerator of which equals the number of days that the Participant was
employed during the Performance Period and the denominator of which equals the total number of days in the Performance
Period. Notwithstanding Section 7, the Participant shall be entitled to receive such pro rata number of PSUs as soon as
commercially practicable following the effective date of such termination, except in no event later than March 15th of the
calendar year following the calendar year in which the PSUs vest in accordance with this Section 5.3.
2
5.4 Notwithstanding anything to the contrary in this Agreement, to the extent the Participant is subject to a written
employment agreement and the terms of such employment agreement differ from the terms set forth in this Agreement, the terms
of the written employment agreement shall control.
6. Effect of a Change in Control. The foregoing vesting terms notwithstanding, all PSUs shall vest upon the occurrence of
a Change in Control to the extent that PSUs would otherwise have vested in accordance with Section 3 under the assumption that
the end of the Performance Period is the date of the closing of such Change in Control; provided, however that the minimum
number of PSUs that shall vest will be not less than the Target Award.
7. Settlement of PSUs. Subject to the terms and conditions of this Agreement, as soon as commercially practicable
following the Determination Date, except in no event later than March 15th of the calendar year following the calendar year in
which the PSUs vest in accordance with Section 4 (which payment schedule is intended to comply with the “short-term deferral”
exemption from the application of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”)), the
Participant shall be entitled to receive a number of Shares equal to the number of earned PSUs, subject to all applicable taxes and
withholdings (the “Settlement Date”); provided, however, that at any time prior to the Settlement Date, the Committee, if it
determines that there is not a sufficient number of shares of Common Stock available for issuance under the Plan to settle the full
amount of earned PSUs in shares or for other reasons in its reasonable discretion, may by notice to the Employee, elect to settle
up to 100% of the value of the earned PSUs in cash. On the Settlement Date, the Company shall deliver to the Participant either
(i) one Share for each earned PSU determined in accordance with Section 3 above and subject to applicable taxes and
withholdings in accordance with Section 12 and enter the Participant’s name as a shareholder of record with respect to such
Shares on the books of the Company or the Company’s designated representative, or (ii) if an election is made by the Committee
as set forth above, pay to the Employee a combination of cash and shares of Common Stock in proportion to the election made by
the Committee, as the case may be, with the value of the cash based on the Fair Market Value of a share of Common Stock on the
Settlement Date. Any fractional Shares shall be rounded up to the nearest share on the Settlement Date. Any Shares issued
pursuant to this Section 7 will be issued in a book-entry account in the name of the Participant with the Company’s transfer agent.
Upon such settlement, the PSUs subject to the Award under this Agreement shall cease to exist or be credited to any account of
Participant.
8. Transferability. Subject to any exceptions set forth in this Agreement or the Plan, the PSUs or the rights relating
thereto may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant, except
by will or the laws of descent and distribution, and upon any such transfer by will or the laws of descent and distribution, the
transferee shall hold such PSUs subject to all of the terms and conditions that were applicable to the Participant immediately prior
to such transfer.
9. Rights as Shareholder; Dividend Equivalents.
3
9.1 Except as otherwise provided herein, the Participant shall not have any rights of a shareholder with respect to the
shares of Common Stock underlying the PSUs (including without limitation voting rights) unless and until the PSUs vest and are
settled by the issuance of such shares of Common Stock.
9.2 If the Company declares and pays (or sets a record date) with respect to an ordinary cash dividend on shares of
Common Stock prior to the Determination Date, the outstanding PSUs shall be credited with additional PSUs (determined by
dividing the aggregate dividend amount that would have been paid with respect to the Target Award of outstanding PSUs if they
had been actual shares of Common Stock by the Fair Market Value of a share of Common Stock on the dividend payment date),
which additional PSUs shall vest and be settled concurrently with the underlying PSUs and be treated as PSUs for all purposes of
this Agreement. For the avoidance of doubt, if the number of PSUs under this Agreement is prorated, the right to receive
additional PSUs in respect of dividends shall also be correspondingly prorated.
9.3 Upon and following the settlement of the PSUs, Participant shall be the record owner of the shares of Common
Stock issued upon settlement, unless and until such shares are sold or otherwise disposed of, and as record owner shall be entitled
to all rights of a shareholder of the Company (including voting rights and dividends).
10. No Right to Continued Service. Neither the Plan nor this Agreement shall confer upon the Participant any right to be
retained in any position, as a Participant, Consultant or Director of the Company. Further, nothing in the Plan or this Agreement
shall be construed to limit the discretion of the Company to terminate the Participant’s Continuous Service at any time, with or
without Cause.
11. Adjustments. If any change is made to the outstanding Common Stock or the capital structure of the Company, if
required, the PSUs shall be adjusted or terminated in any manner as contemplated by Section 11 of the Plan.
12. Tax Liability and Withholding.
12.1 The Participant shall be required to pay to the Company, and the Company shall have the right to deduct
and/or withhold from any compensation paid to the Participant pursuant to the Plan, an applicable employment agreement or any
other employment arrangement with the Participant, the amount of any required withholding taxes in respect of the PSUs upon
the occurrence of an event triggering the requirement, whether upon its grant, vesting, settlement, and/or otherwise, and to take
all such other action as the Committee deems necessary to satisfy all obligations for the payment of such withholding taxes. The
Committee may, in its sole discretion and subject to compliance with all applicable laws, permit the Participant to satisfy
4
any federal, state or local tax withholding obligation by any of the following means, or by a combination of such means:
(a) tendering a cash payment to the Company;
(b) authorizing the Company to withhold shares of Common Stock from the Shares of Common Stock
otherwise issuable or deliverable to the Participant as a result of the vesting of the PSUs; provided, however, that no
Shares shall be withheld with a value exceeding the maximum amount of tax required to be withheld by law; or
(c) delivering to the Company previously owned and unencumbered Shares of Common Stock.
12.2 Notwithstanding any action the Company takes with respect to any or all income tax, social insurance, payroll
tax, or other tax-related withholding (”Tax-Related Items”), the ultimate liability for all Tax-Related Items is and remains the
Participant’s responsibility and the Company (a) makes no representation or undertakings regarding the treatment of any Tax-
Related Items in connection with the grant, vesting or settlement of the PSUs or the subsequent sale of any shares, (b) does not
commit to structure the PSUs to reduce or eliminate the Participant’s liability for Tax-Related Items, and (c) the Participant
agrees to indemnify and hold the Company harmless from any losses, costs, damages or expenses related to inadequate
withholding.
13. Compliance with Law. The issuance and transfer of shares of Common Stock in connection with the PSUs shall be
subject to compliance by the Company and the Participant with all applicable requirements of federal and state securities laws
and with all applicable requirements of any stock exchange on which the Company’s shares of Common Stock may be listed,
including the Company’s Clawback Policy. No shares of Common Stock shall be issued or transferred unless and until any then
applicable requirements of state and federal laws and regulatory agencies have been fully complied with to the satisfaction of the
Company and its counsel.
14. Notices. Any notice required to be delivered to the Company under this Agreement shall be in writing and addressed
to the Chief Financial Officer of the Company at the Company’s principal corporate offices. Any notice required to be delivered
to the Participant under this Agreement shall be in writing and addressed to the Participant at the Participant’s address as shown
in the records of the Company. Either party may designate another address in writing (or by such other method approved by the
Company) from time to time.
15. Governing Law. This Agreement will be construed and interpreted in accordance with the laws of the State of
Colorado without regard to conflict of law principles.
5
16. Interpretation. Any dispute regarding the interpretation of this Agreement shall be submitted by the Participant or the
Company to the Committee for review. The resolution of such dispute by the Committee shall be final and binding on the
Participant and the Company.
17. PSUs Subject to Plan. This Agreement is subject to the Plan as approved by the Company’s shareholders. The terms
and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a
conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions
of the Plan will govern and prevail.
18. Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement will be
binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set
forth herein, this Agreement will be binding upon the Participant and the Participant’s beneficiaries, executors, administrators and
the person(s) to whom the PSUs may be transferred by will or the laws of descent or distribution.
19. Severability. The invalidity or unenforceability of any provision of the Plan or this Agreement shall not affect the
validity or enforceability of any other provision of the Plan or this Agreement, and each provision of the Plan and this Agreement
shall be severable and enforceable to the extent permitted by law.
20. Discretionary Nature of Plan. The Plan is discretionary and may be amended, cancelled or terminated by the
Company at any time, in its discretion. The grant of the PSUs in this Agreement does not create any contractual right or other
right to receive any PSUs or other Awards in the future. Future Awards, if any, will be at the sole discretion of the Company. Any
amendment, modification, or termination of the Plan shall not constitute a change or impairment of the terms and conditions of
the Participant’s employment with the Company.
21. Amendment. The Committee has the right to amend, alter, suspend, discontinue or cancel the PSUs, prospectively or
retroactively; provided, that, no such amendment shall adversely affect the Participant’s material rights under this Agreement
without the Participant’s consent.
22. Section 409A. It is the intention of the Company and the Participant that the payments, benefits and rights to which
the Participant could be entitled pursuant to this Agreement comply with or be exempt from Section 409A of the Code and the
treasury regulations promulgated thereunder (together “Section 409A”) (to the extent that the requirements of Section 409A are
applicable thereto), after application of all available exemptions (including without limitation the short-term deferral rule or
specified payment date rule of Section 409A). The provisions of this Agreement shall be construed in a manner consistent with
that intention. If any provision of this Agreement contravenes Section 409A, or would cause the Participant to incur any
additional tax, interest or penalty under Section 409A,
6
the Company and the Participant agree in good faith to reform this Agreement to comply with Section 409A, or to take such other
actions as the Company and the Participant deem necessary or appropriate, to maintain, to the maximum extent practicable,
without violating the provisions of Section 409A, the original intent and economic benefit to the Participant and the Company of
the applicable provision; provided that the Company shall have no obligation to make any changes that could create any
additional economic cost or loss of benefit to the Company. Any provision required for compliance with Section 409A that is
omitted from this Agreement shall be incorporated herein by reference and shall apply retroactively, if necessary, and be deemed
a part of this Agreement to the same extent as though expressly set forth herein. Notwithstanding anything to the contrary, the
Company makes no representation with respect to the tax treatment of the payments and/or benefits provided under this
Agreement, and in no event will Company be liable for, pay or reimburse any additional tax, interest or penalties that may be
imposed on the Participant under Section 409A. In the event that the Participant is deemed to be a “specified employee” within
the meaning of that term under Section 409A, the Company is authorized to delay any payments otherwise required hereunder
following termination of employment until the first business day after the end of the six (6) month period following termination
of employment, to the extent that such delay is necessary in order to comply with the requirements of Section 409A. If required
to comply with Section 409A (but only to the extent so required), a termination of employment shall not be deemed to have
occurred for purposes of this Agreement providing for the payment of any amounts or benefits upon or following a termination of
employment unless such termination is also a “separation from service” within the meaning of Section 409A (excluding death)
and, for purposes of any provision of this Agreement, references to “termination of employment,” “separation from
employment,” “termination,” or like terms shall mean such “separation from service” (excluding death).
23. No Impact on Other Benefits. The value of the Participant’s PSUs is not part of his or her normal or expected
compensation for purposes of calculating any severance, retirement, welfare, insurance or similar Participant benefit.
24. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of
which together will constitute one and the same instrument. Counterpart signature pages to this Agreement transmitted by
facsimile transmission, by electronic mail in portable document format (.pdf), or by any other electronic means intended to
preserve the original graphic and pictorial appearance of a document, will have the same effect as physical delivery of the paper
document bearing an original signature.
25. Acceptance. The Participant hereby acknowledges receipt of a copy of the Plan and this Agreement. The Participant
has read and understands the terms and provisions thereof, and accepts the PSUs subject to all of the terms and conditions of the
Plan and this Agreement. The Participant acknowledges that there may be adverse tax consequences upon the vesting or
settlement of the PSUs or disposition of the underlying shares and that the Participant has been advised to consult a tax advisor
prior to such vesting, settlement or disposition.
7
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
Natural Gas Services Group, Inc.
By: _____________________
Name:
Title:
[EXECUTIVE NAME]
By: _____________________
8
TEMPLATE
EXHIBIT 1
PERFORMANCE GOALS
Executive: _________
Target Award. The Target Award is [ENTER #] Performance Share Units.
Maximum Award. The Maximum Award is [ENTER #] Performance Share Units.
Performance Period. The Performance Period is the period commencing _____________ (the “Commencement Date”) and
ending _______________ (the “Evaluation Date”) [Generally 3 years].
In calculating TSR, the share values will be the average (mean) closing price for all trading days during the 30 calendar days
preceding the Commencement Date and the Evaluation Date, respectively.
Vesting of Performance Share Units. The number of PSUs earned shall be determined by the Company’s Relative Total
Shareholder Return or “RTSR” (defined below) as determined in accordance with this Exhibit. The Company’s RTSR is
determined by calculating the Company’s Total Shareholder Return or “TSR” (defined below) as of the end of the Performance
Period and ranking this TSR relative to that of all members of the peer group set forth below (each a “Peer Company” and as a
group, the “Peer Group”), at the end of the Performance Period. Based on such ranking, and subject to any other conditions set
forth in the Agreement, the Plan, this Exhibit or any other exhibits or schedules, the number of PSUs vesting at the end of the
Performance Period shall be determined by the Company’s percentile rank and multiplier in accordance with the Vesting Table
set forth below.
Definitions. Capitalized terms not defined in the Agreement or the Plan are as defined in this Exhibit, including any schedule
attached hereto.
•
•
“Total Shareholder Return” or “TSR” for the Company or a Peer Company is (1) the sum of (a) the cumulative amount
of the dividends of the Company or the Peer Company, as applicable, for the applicable period assuming same-day
reinvestment into the corporation’s common stock on the ex-dividend date and (b) the share price of such corporation at
the end of the applicable period minus the share price at the beginning of the applicable period, by (2) the share price at
the beginning of the applicable period.
“Relative Total Shareholder Return” or “RTSR” is the relative ranking of the Company’s TSR when compared to
members of the Peer Group.
9
10
VESTING TABLE
Below for Illustration only
[Number of companies in Performance Peer Group and
payout levels to be determined by Compensation Committee]
Rela ve TSR Performance Rank
Percen le Ranking
1
2
3
4
5
6
7
8
9
10
11
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Award Payout
Maximum
Stretch
Target
Threshold
Payout vs Target
200%
180%
160%
140%
120%
100%
75%
50%
0%
0%
0%
Absolute TSR Qualifier: Notwithstanding the forgoing, if the Company’s TSR at the end of the Performance Period is less than
zero, the maximum participant may earn is Target.
11
PEER COMPANIES AND PEER GROUP
12
Exhibit 10.13
Peer Company
1.
2. Peer Company
3. Peer Company
4. Peer Company
5. Peer Company
6. Peer Company
7. Peer Company
8. Peer Company
9. Peer Company
10. Peer Company
11. Peer Company
For purposes of determining RTSR ranking, (i) the performance of a Peer Company will not be included in the Peer Group if the
company is not publicly traded (i.e., has no ticker symbol) at the end of the Performance Period; (ii) the performance of any
company in the Peer Group that becomes bankrupt during the Performance Period will be included as a bottom performer in the
calculation of Peer Group performance even if it has no ticker symbol at the end of the measurement period; and (iii) the
performance of the surviving entities will be used in the event there is a combination of any of the Peer Group companies during
the measurement period.
{JK01583961.1 }
EXHIBIT 1 - d1.docx
Exhibit 21.1
Subsidiaries of the Registrant
Listed below are subsidiaries of Natural Gas Services Group, Inc. with their jurisdiction of organization shown in parenthesis:
NGSG Properties, LLC (Colorado)
Rabbi Trust associated with the Company's Non-qualified Deferred Compensation Plan (Texas)
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
Natural Gas Services Group, Inc.
Midland, Texas
We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-261091 and Form S-8 Nos. 333-232269, 333-
212411, 333-160063, 333-147311, 333-110954 and 333-4266100) of our report dated April 1, 2024, relating to the consolidated financial
statements of Natural Gas Services Group, Inc. which report expresses an unqualified opinion, appearing in this Annual Report (Form 10-K)
for the years ended December 31, 2023 and 2022
/s/ Ham, Langston & Brezina L.L.P
Houston, Texas
April 1, 2024
Exhibit 31.1
I, Justin C Jacobs, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Natural Gas Services Group, Inc;
Certifications
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
1. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: April 1, 2024
Natural Gas Services Group, Inc.
By: /s/ Justin C. Jacobs
Justin C. Jacobs,
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, John Bittner, certify that:
1. I have reviewed this Annual Report on Form 10-K of Natural Gas Services Group, Inc;
Certifications
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Dated: April 1, 2024
Natural Gas Services Group, Inc.
By: /s/ John Bittner
John Bittner
Interim Chief Financial Officer
(Principal Accounting Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Natural Gas Services Group, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2023 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Justin C. Jacobs Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 1, 2024
Natural Gas Services Group, Inc.
By: /s/ Justin C. Jacobs
Justin C. Jacobs
Chief Executive Officer
(Principal Executive Officer)
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section
18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or
after the date hereof, regardless of any general incorporation language in such filing.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Natural Gas Services Group, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2023 as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Bittner, Interim Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: April 1, 2024
Natural Gas Services Group, Inc.
By: /s/ John Bittner
John Bittner
Interim Chief Financial Officer
(Principal Accounting Officer)
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section
18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or
after the date hereof, regardless of any general incorporation language in such filing.
Exhibit 97.1
NATURAL GAS SERVICES GROUP, INC.
CLAWBACK POLICY
The Board of Directors (the “Board”) of Natural Gas Services Group, Inc., a Colorado corporation (the “Company”),
believes that it is in the best interests of the Company and its stockholders to adopt this Clawback Policy (this “Policy”), which
provides for the recovery of certain incentive compensation in the event of an Accounting Restatement (as defined below). This
Policy is designed to comply with, and shall be interpreted to be consistent with, Section 10D of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), Rule 10D-1 promulgated under the Exchange Act and Section 303A.14 of the NYSE
Listed Company Manual (the “Listing Standards”).
1. Administration
Except as specifically set forth herein, this Policy shall be administered by the Compensation Committee of the Board
(the “Administrator”). The Administrator is authorized to interpret and construe this Policy and to make all determinations
necessary, appropriate or advisable for the administration of this Policy. Any determinations made by the Administrator shall be
final and binding on all affected individuals and need not be uniform with respect to each individual covered by the Policy. In the
administration of this Policy, the Administrator is authorized and directed to consult with the full Board or such other committees
of the Board, as may be necessary or appropriate as to matters within the scope of such other committee’s responsibility and
authority. Subject to any limitation at applicable law, the Administrator may authorize and empower any officer or employee of
the Company to take any and all actions necessary or appropriate to carry out the purpose and intent of this Policy (other than
with respect to any recovery under this Policy involving such officer or employee).
2. Definitions
As used in this Policy, the following definitions shall apply:
“Accounting Restatement” means an accounting restatement due to the material noncompliance of the Company
with any financial reporting requirement under the securities laws, including any required accounting restatement
to correct an error in previously issued financial statements that is material to the previously issued financial
statements (a “Big R” restatement), or that would result in a material misstatement if the error were corrected in
the current period or left uncorrected in the current period (a “little r” restatement).
“Administrator” has the meaning set forth in Section 1 hereof.
“Board” has the meaning set forth in Preamble.
A.
B.
C.
{JK01579446.2 }
D.
E.
F.
G.
H.
I.
J.
“Clawback Eligible Incentive Compensation” means all Incentive-based Compensation Received by an
Covered Executive (i) after beginning service as an Covered Officer, (ii) who served as a Covered Officer at any
time during the applicable performance period relating to any Incentive-based Compensation (whether or not such
Covered Officer is serving at the time the Erroneously Awarded Compensation is required to be repaid to the
Company), (iii) while the Company has a class of securities listed on a national securities exchange or a national
securities association, and (iv) during the applicable Clawback Period (as defined below).
“Clawback Period” means the three completed fiscal years immediately preceding the Restatement Date (as
defined below), as well as any transition period (that results from a change in the Company’s fiscal year) within or
immediately following those three completed fiscal years (except that a transition period that comprises a period
of at least nine months shall count as a completed fiscal year).
“Company” has the meaning set forth in Preamble.
“Covered Executives” means each individual who is currently or was previously designated as an “officer” of the
Company as defined in Rule 16a-1(f) under the Exchange Act. For the avoidance of doubt, the identification of an
executive officer for purposes of this Policy shall include each executive officer who is or was identified pursuant
to Item 401(b) of Regulation S-K, as well as the principal financial officer and principal accounting officer (or, if
there is no principal accounting officer, the controller).
“Erroneously Awarded Compensation” means, with respect to each Covered Executive in connection with an
Accounting Restatement, the amount of Clawback Eligible Incentive Compensation that exceeds the amount of
Incentive-based Compensation that otherwise would have been Received had it been determined based on the
restated amounts, computed without regard to any taxes paid by the Covered Executive in respect of the
Erroneously Awarded Compensation.
“Exchange Act” has the meaning set forth in Preamble.
“Financial Reporting Measures” means measures that are determined and presented in accordance with the
accounting principles used in preparing the Company’s financial statements, and all other measures that are
derived wholly or in part from such measures. Stock price and total shareholder return (and any measures that are
derived wholly or in part from stock price or total shareholder return) shall, for purposes of this Policy, be
considered Financial Reporting
2
Measures. For the avoidance of doubt, a Financial Reporting Measure need not be presented in the Company’s
financial statements or included in a filing with the SEC.
K.
“Incentive-based Compensation” means any compensation that is granted, earned or vested based wholly or in
part upon the attainment of a Financial Reporting Measure.
L.
“Listing Standards” has the meaning set forth in Preamble.
M.
“NYSE” means the New York Stock Exchange LLC.
N.
O.
P.
“Policy” has the meaning set forth in Preamble.
“Received” means, with respect to any Incentive-based Compensation, actual or deemed receipt, and Incentive-
based Compensation shall be deemed received in the Company’s fiscal period during which the Financial
Reporting Measure specified in the Incentive-based Compensation award is attained, even if the payment or grant
of the Incentive-based Compensation to the Covered Executive occurs after the end of that period.
“Restatement Date” means the earlier to occur of (i) the date the Board or a committee of the Board, concludes,
or reasonably should have concluded, that the Company is required to prepare an Accounting Restatement or (ii)
the date a court, regulator or other legally authorized body directs the Company to prepare an Accounting
Restatement, in each case regardless of if or when the restated financial statements are filed.
Q.
“SEC” means the U.S. Securities and Exchange Commission.
3. Recovery of Erroneously Awarded Compensation in the Event of an Accounting Restatement
In the event the Company is required to prepare an Accounting Restatement, the Company shall reasonably promptly
recover the amount of any Erroneously Awarded Compensation received by any Covered Executive, as calculated pursuant to
Section 4 hereof, during the Clawback Period.
4. Erroneously Awarded Compensation: Amount Subject to Recovery
After an Accounting Restatement, the Administrator shall determine the amount of any Erroneously Awarded
Compensation Received by each Covered Executive and shall promptly notify each Covered Executive with a written notice
containing the amount of any Erroneously Awarded Compensation and a demand for repayment or return of such compensation,
as applicable.
3
For Incentive-Based Compensation based on stock price or TSR: (a) the Administrator shall determine the amount of
Erroneously Awarded Compensation based on a reasonable estimate of the effect of the Accounting Restatement on the stock
price or TSR upon which the Incentive-Based Compensation was received; and (b) the Company shall maintain documentation of
the determination of that reasonable estimate and provide such documentation to the NYSE.
5. Method of Recovery
The Administrator shall determine, in its sole discretion, the timing and method for reasonably promptly recovering
Erroneously Awarded Compensation hereunder, which may include without limitation (a) seeking reimbursement of all or part of
any cash or equity-based award, (b) cancelling prior cash or equity-based awards, whether vested or unvested or paid or unpaid,
(c) cancelling or offsetting against any planned future cash or equity-based awards, (d) forfeiture of deferred compensation,
subject to compliance with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations
promulgated thereunder, and (e) any other method authorized by applicable law or contract. Subject to compliance with any
applicable law, the Administrator may affect recovery under this Policy from any amount otherwise payable to the Covered
Executive, including amounts payable to such individual under any otherwise applicable Company plan or program, including
base salary, bonuses or commissions and compensation previously deferred by the Covered Executive.
To the extent that the Covered Executive has already reimbursed the Company for any Erroneously Awarded
Compensation Received under any duplicative recovery obligations established by the Company or applicable law, it shall be
appropriate for any such reimbursed amount to be credited to the amount of Erroneously Awarded Compensation that is subject
to recovery under this Policy.
To the extent that a Covered Executive fails to repay all Erroneously Awarded Compensation to the Company when due,
the Company shall take all actions reasonable and appropriate to recover such Erroneously Awarded Compensation from the
applicable Covered Executive. The applicable Covered Executive shall be required to reimburse the Company for any and all
expenses reasonably incurred (including legal fees) by the Company in recovering such Erroneously Awarded Compensation in
accordance with the immediately preceding sentence.
The Company is authorized and directed pursuant to this Policy to recover Erroneously Awarded Compensation in
compliance with this Policy unless the Administrator has determined that recovery would be impracticable solely for the
following limited reasons, and subject to the following procedural and disclosure requirements:
•
The direct expense paid to a third party to assist in enforcing the Policy would exceed the amount to be recovered.
Before concluding that it would be impracticable to recover any amount of Erroneously Awarded Compensation
based on expense of enforcement, the Administrator must make a reasonable
4
attempt to recover such erroneously awarded compensation, document such reasonable attempt(s) to recover and
provide that documentation to the NYSE; or
•
Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly
available to employees of the Company, to fail to meet the requirements of Section 401(a)(13) or Section 411(a) of
the Code and regulations thereunder.
6. Disclosure Requirements
The Company shall file all disclosures with respect to this Policy required by applicable SEC filings and rules.
7. No Indemnification of Covered Executive
Notwithstanding the terms of any indemnification or insurance policy or any contractual arrangement with any Covered
Executive, or any provision of the Company’s articles of incorporation, bylaws or applicable law, that may be interpreted to the
contrary, the Company shall not indemnify any Covered Executives against the loss of any Erroneously Awarded Compensation,
including any payment or reimbursement for the cost of third-party insurance purchased by any Covered Executives to fund
potential clawback obligations under this Policy.
8. Administrator Indemnification
Any members of the Administrator, and any other members of the Board who assist in the administration of this Policy,
shall not be personally liable for any action, determination or interpretation made with respect to this Policy and shall be fully
indemnified by the Company to the fullest extent under applicable law and Company policy with respect to any such action,
determination or interpretation. The foregoing sentence shall not limit any other rights to indemnification of the members of the
Board under applicable law or Company policy.
9. Effective Date; Retroactive Application
This Policy shall be effective as of October 2, 2023 (the “Effective Date”). The terms of this Policy shall apply to any
Incentive-Based Compensation that is Received by Covered Executives on or after the Effective Date, even if such Incentive-
Based Compensation was approved, awarded, granted or paid to Covered Executives prior to the Effective Date. Without limiting
the generality of Section 5 hereof, and subject to applicable law, the Administrator may effect recovery under this Policy from
any amount of compensation approved, awarded, granted, payable or paid to the Covered Executive prior to, on or after the
Effective Date.
10. Amendment; Termination
The Board may amend, modify, supplement, rescind or replace all or any portion of this Policy at any time and from time
to time in its discretion, and shall amend this Policy as it deems necessary to comply with applicable law or any rules or standards
adopted by a national securities exchange on which the Company’s securities are listed.
11. Other Recovery Rights; Company Claims
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The Committee intends that this Policy will be applied to the fullest extent required by applicable law. Any employment
agreement, equity award agreement, compensatory plan or any other agreement or arrangement with a Covered Executive shall
be deemed to include, as a condition to the grant of any benefit thereunder, an agreement by the Covered Executive to abide by
the terms of this Policy. Any right of recovery under this Policy is in addition to, and not in lieu of, any other remedies or rights
of recovery that may be available to the Company under applicable law, regulation or rule or pursuant to the terms of any policy
of the Company or any provision in any employment agreement, equity award agreement, compensatory plan, agreement or other
arrangement.
12. Successors
This Policy shall be binding and enforceable against all Covered Executive and, to the extent required by applicable law
or guidance from the SEC or NYSE, their beneficiaries, heirs, executors, administrators or other legal representatives.
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Clawback Policy Acknowledgment
I, the undersigned, agree and acknowledge that I am fully bound by, and subject to, all of the terms and conditions of the
Natural Gas Services Group, Inc. Clawback Policy (as may be amended, restated, supplemented or otherwise modified from time
to time, the “Policy”). In the event of any inconsistency between the Policy and the terms of any employment agreement to which
I am a party, or the terms of any compensation plan, program or agreement under which any compensation has been granted,
awarded, earned or paid, the terms of the Policy shall govern. In the event it is determined by the Administrator that any amounts
granted, awarded, earned or paid to me must be forfeited or reimbursed to the Company, I will promptly take any action
necessary to effectuate such forfeiture and/or reimbursement. Any capitalized terms used in this Acknowledgment without
definition shall have the meaning set forth in the Policy.
Signature: ________________________
Printed Name: _____________________
Date: ________________
{JK01579446.2 }