NATURAL GAS SERVICES GROUP INC 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures An evaluation was carried out under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Vice President and Chief Financial Officer, of the effectiveness of the design of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended or, the “Exchange Act”) as of December 31, 2020, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the President and Chief Executive Officer and our Vice President and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2020, are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosures. Due to the inherent limitations of control systems, not all misstatements may be detected. Those inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people. Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met. Management’s Report on Internal Control Over Financial Reporting Our management, including the President and Chief Executive Officer and our Principal Accounting Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system is designed 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. Our internal control over financial reporting includes those policies and procedures that: • pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; • provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipt and expenditures are being made only in accordance with authorizations of management and our Board of Directors; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. All internal control systems, no matter how well designed, have inherent limitations. A system of internal control may become inadequate over time because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, 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. Management, including our President and Chief Executive Officer and our Vice President and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on this assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2020. For the year ended December 31, 2019, management determined that our internal control over financial reporting was not effective due to the material weaknesses noted below. 32 Material Weaknesses in Internal Control over Financial Reporting During the fourth quarter of fiscal year 2018, we identified a material weakness in internal controls over financial reporting related to our accounting and reporting of income tax (expense) benefit and consolidated balance sheet and the consolidated operations statement accounts. We did not design and maintain an effective control environment with formal accounting policies and controls to adequately provide sufficient information for the preparation of our tax provision to our third party tax professionals and did not provide an appropriate level or sufficient review of the tax provision. The material weakness created a reasonable possibility that there could be a material misstatement of our annual or interim financial statements. This material weakness resulted in an immaterial misstatement in the provision for income taxes in our consolidated financial statement as of and for the years ended December 31, 2017, 2016 and 2015. Consolidated financial statements included in our Annual Report on Form 10-K issued as of December 31, 2018 reflect the correction of this misstatement of income tax (expense) benefit, the related consolidated balance sheet and the consolidated operations statement accounts. We have undergone evaluations, enhancements and implementation in our internal controls over financial reporting to address the identified material weakness. We have implemented various changes and enhancements to improve our controls related to the material weakness. After testing, our revised controls were not considered remediated at year end 2019, so further changes were implemented. Changes made include timely submittal of tax input data to our preparer, tie-out of key inputs and review meetings with financial management and our preparer to confirm assumptions and results. We have re-assessed our internal controls at the end of 2020 and have concluded that the changes made sufficiently remediate the material weakness. During the fourth quarter of fiscal year 2019, we identified another material weakness in internal controls over financial reporting related to our accounting and reporting of compressor "make-ready" jobs, as well as various other compressor maintenance jobs, that were inappropriately capitalized, resulting in immaterial increases to the Company’s cost of rentals and, to a much lesser extent, depreciation expense in prior periods. These increases in operating costs and expenses were immaterial to all prior annual and interim periods, but would have been material to the fourth quarter of 2019 if these cumulative operating costs and expenses were taken as an out-of-period adjustment. We did not design and maintain an effective control environment with formal accounting policies and controls to adequately provide sufficient information to report these expenses in a timely manner. The material weakness created a reasonable possibility that there could be a material misstatement of our annual or interim financial statements. Management reviewed its procedures around the activity that led to this material weakness during 2019. We have completed our review and changed the treatment of make-ready jobs to expense the cost at the time the job occurs and have made changes to our capitalization policy and review procedures. We believe these changes have been in place for a sufficient period to conclude that the material weakness has been remediated by the end of 2020. Changes in Internal Control Over Financial Reporting Except for the remediation of control deficiencies discussed above, there were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We will continue to review and document our disclosure controls and procedures, including our internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. ITEM 9B. OTHER INFORMATION None. 33 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 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, 2020 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, 2020 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, 2020 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, 2020 or as such period may be extended by action of the Securities and Exchange Commission. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this item is incorporated herein by reference to the section “Principal Accounting Fees and Services” in our definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2020 or as such period may be extended by action of the Securities and Exchange Commission. 34 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 Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10-QSB filed and dated November 10, 2004). 3.2 Bylaws, as amended (Incorporated by reference to Exhibit 3.11 of the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2016.) 10. 1 2009 Restricted Stock/Unit Plan, as amended (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K dated June 3, 2014 and filed with the Securities and Exchange Commission on June 6, 2014.) 10. 2 Stock Option Plan, as amended and restated (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2016.) 10. 3 Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 10, 2010 (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 November 24, 2014.) 10. 4 Fifth Amendment of Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated August 31, 2017 (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 September 7, 2017.) 10. 5 Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 10, 2010 (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 December 16, 2011.) 10. 6 Fourth Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated August 31, 2017 (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 September 7, 2017.) 10. 7 Promissory Note in the aggregate amount of $30,000,000 issued to JPMorgan Chase Bank, N.A., dated August 31, 2017, in connection with the revolving credit line under the Credit Agreement with JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 7, 2017.) 10. 8 Amended and restated Employment Agreement dated April 27, 2015 between Natural Gas Services Group, Inc. and Stephen C. Taylor (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 29, 2015.) 10. 9 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.) 35 10.1 0 Annual Incentive Bonus Plan (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 December 18, 2012.) *21.1 Subsidiaries of the registrant *23.1 Consent of BDO USA, LLP *23.2 Consent of Moss Adams, LLP *31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *31.2 Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *32.2 Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document * Filed herewith. ITEM 16. FORM 10-K SUMMARY None. 36 SIGNATURES 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. NATURAL GAS SERVICES GROUP, INC. March 31, 2021 By: /s/ Stephen C. Taylor Stephen C. Taylor Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) 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 Title Date /s/ Stephen C. Taylor Chairman of the Board of Directors, Chief Executive Officer and President (Principal Executive Officer) March 31, 2021 Stephen C. Taylor /s/ G. Larry Lawrence Vice President and Chief Financial Officer (Principal Accounting Officer) March 31, 2021 G. Larry Lawrence /s/ Leslie A. Beyer Director March 31, 2021 Leslie A. Beyer /s/ William F. Hughes, Jr. Director March 31, 2021 William F. Hughes, Jr. /s/ David L. Bradshaw Director March 31, 2021 David L. Bradshaw /s/ John W. Chisholm Director March 31, 2021 John W. Chisholm 37 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F- 1 Consolidated Balance Sheets as of December 31, 2020 and 2019 F- 4 Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019 F- 5 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2020 and 2019 F- 6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 F- 7 Notes to Consolidated Financial Statements F- 8 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 sheet of Natural Gas Services Group, Inc. and subsidiary (the “Company”) as of December 31, 2020, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020, and the consolidated results of its operations and its cash flows for the year then ended, 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 audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit 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 audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Estimation of Undiscounted Cash Flows in Assessment of Long-Lived Asset Impairment As described in Notes 1 and 4, the Company assesses long-lived assets, including rental equipment, for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company's evaluation of possible triggering events uses both internal and external data, including the following key indicators and internally developed assumptions: i) significant underperformance relative to historical or projected cash flows; ii) significant adverse changes in the extent or manner an asset group is being used or its condition, including meaningful drop in fleet utilization over the prior period quarters, and iii) significant negative industry or company specific trends or actions. We identified the estimation of undiscounted cash flows in the assessment of long-lived asset impairment as a critical audit matter. The estimation of undiscounted cash flows uses inputs that require significant management judgment, including estimating future anticipated revenues and expenses. Assessing these assumptions require a high degree of subjective auditor F - 1 judgment to perform procedures due to the nature and extent of audit evidence and effort required to appropriately address these matters. The primary procedures we performed to address this critical audit matter included: • Obtaining an understanding of the design of the Company's process and controls over the identification of possible long-lived asset impairment triggering events, including the process to develop the indicators and assumptions listed above. • Evaluating management's identification of events or changes in circumstances that indicate the carrying amounts may not be recoverable. • Evaluating management's estimate of useful lives of rental equipment, and anticipated rental rates of units, net returns or sets, and estimated gross margins utilized in the estimate of discounted cash flows by comparison to historical rates and performing sensitivity analysis. • Evaluating the Company's ability to forecast future rental revenue and related assumptions by comparing to historical results of operations. /s/ Moss Adams LLP Dallas, Texas March 31, 2021 We have served as the Company's auditor since 2020. F - 2 Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Natural Gas Services Group, Inc. Midland, Texas Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of Natural Gas Services Group, Inc. (the “Company”) as of December 31, 2019, the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2029, and the results of its operations and its cash flows for each of the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 31, 2020 expressed an adverse opinion thereon. 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 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. 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. /s/ BDO USA, LLP We have served as the Company's auditor from 2010 to 2020. Austin, Texas March 31, 2020 F - 3 NATURAL GAS SERVICES GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands) December 31, 2020 2019 ASSETS Current Assets: Cash and cash equivalents $ 28,925 $ 11,592 Trade accounts receivable, net of allowance for doubtful accounts of $ 1,161 and $ 918 , respectively 11,884 9,106 Inventory 19,926 21,080 Federal income tax receivable 11,538 — Prepaid income taxes 66 40 Prepaid expenses and other 379 597 Total current assets 72,718 42,415 Long-Term Inventory, net of allowance for obsolescence of $ 221 and $ 24 , respectively 1,065 1,068 Rental equipment, net of accumulated depreciation of $ 175,802 and $ 162,348 , respectively 207,585 217,742 Property and equipment, net of accumulated depreciation of $ 13,916 and $ 12,847 , respectively 21,749 21,869 Right of use assets - operating leases, net of accumulated amortization $ 356 483 604 Intangibles, net of accumulated amortization of $ 2,008 and $ 1,883 , respectively 1,151 1,276 Other assets 2,050 1,603 Total assets $ 306,801 $ 286,577 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 2,373 $ 1,975 Accrued liabilities 6,770 2,287 Line of credit 417 417 Current operating leases 198 189 Deferred income 1,103 640 Total current liabilities 10,861 5,508 Deferred income tax liability 41,890 31,243 Long-term operating leases 285 415 Other long-term liabilities 2,221 1,718 Total liabilities 55,257 38,884 Commitments and contingencies (Notes 6 and 17) Stockholders’ Equity: Preferred stock, 5,000 shares authorized, no shares issued or outstanding — — Common stock, 30,000 shares authorized, par value $ 0.01 ; 13,296 and 13,178 shares issued, respectively 133 132 Additional paid-in capital 112,615 110,573 Retained earnings 139,286 137,478 Treasury shares, at cost, 38 shares ( 490 ) ( 490 ) Total stockholders' equity 251,544 247,693 Total liabilities and stockholders' equity $ 306,801 $ 286,577 See accompanying notes to these consolidated financial statements. F - 4 NATURAL GAS SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except earnings per share) For the Years Ended December 31, 2020 2019 Revenue: Rental income $ 60,826 $ 56,701 Sales 5,657 19,763 Service and maintenance income 1,572 1,980 Total revenue 68,055 78,444 Operating costs and expenses: Cost of rentals, exclusive of depreciation stated separately below 28,506 27,583 Cost of sales, exclusive of depreciation stated separately below 6,211 16,097 Cost of service and maintenance, exclusive of depreciation stated separately below 714 630 Selling, general and administrative expenses 10,550 10,710 Depreciation and amortization 25,198 23,268 Impairment of goodwill — 10,039 Inventory allowance 184 3,758 Retirement of rental equipment 291 1,512 Total operating costs and expenses 71,654 93,597 Operating loss ( 3,599 ) ( 15,153 ) Other income (expense): Interest expense ( 14 ) ( 15 ) Other income 629 611 Total other income, net 615 596 Loss before income taxes: ( 2,984 ) ( 14,557 ) (Provision for) benefit from income taxes: Current 15,438 31 Deferred ( 10,646 ) 662 Total income tax benefit 4,792 693 Net income (loss) $ 1,808 $ ( 13,864 ) Earnings (loss) per share: Basic $ 0.14 $ ( 1.06 ) Diluted $ 0.14 $ ( 1.06 ) Weighted average shares outstanding: Basic 13,224 13,114 Diluted 13,261 13,114 See accompanying notes to these consolidated financial statements. F - 5 NATURAL GAS SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Total Stockholders' Equity Shares Amount Shares Amount Shares Amount BALANCES, December 31, 2018 — $ — 13,005 $ 130 $ 107,760 $ 151,342 — $ — $ 259,232 Exercise of common stock options — — 56 1 505 — — — 506 Compensation expense on common stock options — — — — 124 — — — 124 Issuance of restricted stock — — 117 — — — — — — Compensation expense on restricted common stock — — — 1 2,457 — — — 2,458 Taxes paid related to net shares settlement of equity awards — — — — ( 273 ) — — — ( 273 ) Purchase of treasury shares — — — — — — 38 ( 490 ) ( 490 ) Net loss — — — — — ( 13,864 ) — — ( 13,864 ) BALANCES, December 31, 2019 — — 13,178 132 110,573 137,478 38 ( 490 ) 247,693 Compensation expense on common stock options — — — — 19 — — — 19 Issuance of restricted stock — — 118 — — — — — — Compensation expense on restricted common stock — — — 1 2,175 — — — 2,176 Taxes paid related to net shares settlement of equity awards — — — — ( 152 ) — — — ( 152 ) Net loss — — — — — 1,808 — — 1,808 BALANCES, December 31, 2020 — $ — 13,296 $ 133 $ 112,615 $ 139,286 38 $ ( 490 ) $ 251,544 See accompanying notes to these consolidated financial statements. F - 6 NATURAL GAS SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ 1,808 $ ( 13,864 ) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 25,198 23,268 Deferred taxes 10,646 ( 662 ) Gain on disposal of assets ( 284 ) ( 55 ) Retirement of rental equipment 291 1512 Bad debt allowance (recovery) 329 664 Inventory allowance 184 3,758 Impairment of goodwill — 10,039 Stock-based compensation 2,195 2,582 (Gain) loss on company owned life insurance ( 168 ) ( 219 ) Changes in operating assets and liabilities: Trade accounts receivables ( 3,107 ) ( 2,550 ) Inventory 1,033 8,256 Prepaid income taxes and prepaid expenses ( 11,346 ) 3,288 Accounts payable and accrued liabilities 4,880 ( 7,225 ) Deferred income 463 559 Other 527 61 NET CASH PROVIDED BY OPERATING ACTIVITIES 32,649 29,412 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of rental equipment, property and other equipment ( 15,257 ) ( 69,938 ) Purchase of company owned life insurance ( 296 ) ( 302 ) Proceeds from insurance claim — 35 Proceeds from sale of property and equipment 394 30 NET CASH USED IN INVESTING ACTIVITIES ( 15,159 ) ( 70,175 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds of other long-term liabilities ( 5 ) ( 16 ) Proceeds from exercise of stock options — 506 Purchase of treasury shares — ( 490 ) Taxes paid related to net share settlement of equity awards ( 152 ) ( 273 ) NET CASH USED IN FINANCING ACTIVITIES ( 157 ) ( 273 ) NET CHANGE IN CASH AND CASH EQUIVALENTS 17,333 ( 41,036 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,592 52,628 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,925 $ 11,592 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 14 $ 39 Income taxes paid 105 275 NON-CASH TRANSACTIONS Transfer of rental equipment to inventory — 836 Transfer of inventory to rental equipment — 1,184 Transfer of prepaids to rental equipment and inventory — 958 Right of use asset acquired through an operating lease 77 762 See accompanying notes to these consolidated financial statements. F - 7 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. The Company manufactures, fabricates, rents, sells and maintains natural gas compressors and flare systems for oil and natural gas production and plant facilities. NGS is headquartered in Midland, Texas, with fabrication facilities located in Tulsa, Oklahoma and Midland, Texas, and service facilities located in major oil and natural gas producing basins in the U.S. 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 12. 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, bad debt allowance 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. We invest our cash primarily in deposits and money market funds with commercial banks. At times, cash balances at banks and financial institutions may exceed federally insured amounts. We believe that the risk to our cash balance is minimal because we have chosen a large bank with strong long-term ratings of Aa2/A+. 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. One customer accounted for 35 % of our accounts receivable as of December 31, 2020 and 2019. A significant change in the liquidity or financial position of this customer could have a material adverse impact on the collectability of our accounts receivable and our future operating results. The allowance for doubtful accounts was $ 1.2 million and $ 0.9 million at December 31, 2020 and 2019, respectively. Management believes that the allowance is adequate; however, actual write-offs may exceed the recorded allowance. F - 8 A summary of our allowance for doubtful accounts is as follows: Year Ended December 31, ($ in thousands) 2020 2019 Beginning balance $ ( 918 ) $ ( 291 ) Accruals ( 329 ) ( 664 ) Recoveries — — Write-offs 86 37 Ending balance $ ( 1,161 ) $ ( 918 ) Revenue Recognition Policy Revenue is measured based on a consideration specified in a customer’s contract, excluding any sale incentives and taxes collected on behalf of third parties (i.e. sales and property taxes). Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive for those goods or services. To recognize revenue, we (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, we satisfy the performance obligation(s). Shipping and handling costs incurred are accounted for as fulfillment costs and are included in cost of revenues in our Consolidated Statements of Operations. Nature of Goods and Services The following is a description of principal activities from which the Company generates its revenue: Rental Revenue . The Company generates revenue from renting compressors and flare systems to our customers. These contracts, which all qualify as operating leases under ASC Topic 842, Leases (ASC 842), may also include a fee for servicing the compressor or flare during the rental contract. Our rental contracts typically range from six to 24 months, with our larger horsepower compressors having contract terms of up to 60 months. Our revenue is recognized over time, with equal monthly payments over the term of the contract. After the terms of the contract have expired, a customer may renew their contract or continue renting on a monthly basis thereafter. In accordance ASC 842 – Leases, we have applied the practical expedient ASC 842-10-15-42A, which allows the Company to combine lease and non-lease components. Sales Revenue. The Company generates revenue by the sale of custom/fabricated compressors, flare systems and parts, as well as, exchange/rebuilding customer owned compressors and sale of used rental equipment. Custom/fabricated compressors and flare systems - The Company designs and fabricates compressors and flares based on the customer’s specifications outlined in their contract. Though the equipment being built is customized by the customer, control under these contracts does not pass to the customer until the compressor or flare package is 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. From time to time, upon the customer’s written request, we recognize revenue when manufacturing is complete and the equipment is ready for shipment. At the customer’s request, we will bill the customer upon completing all performance obligations, but before shipment. The customer will formally request we ship the equipment per their direction from our manufacturing facility at a later specified date and that we segregate the equipment from our finished goods, such that they are not available to fill other orders. Per the customer’s agreement change of control is passed to the customer once the equipment is complete and ready for shipment. We have operated using bill and hold agreements with certain customers for many years, with consistent satisfactory results for both the customer and us. The credit terms on these agreements are consistent with the credit terms on all other sales. All control is shouldered by the customer and there are no exceptions to the customer’s commitment to accept and pay for the manufactured equipment. Revenues recognized related to bill and hold arrangements for the years ended December 31, 2020 and 2019 was approximately $ 0.9 million and $ 11.6 million, respectively. Parts - Revenue is recognized after the customer obtains control of the parts. Control is passed either by the customer taking physical possession or the parts being shipped. The amount of revenue recognized is not adjusted for expected returns, as our historical part returns have been de minimis. F - 9 Exchange or rebuilding customer owned compressors - Based on the contract, the Company will either exchange a new/rebuilt compressor for the customer’s malfunctioning compressor or rebuild the customer’s compressor. Revenue is recognized after control of the replacement compressor has transferred to the customer based on the terms of the contract, i.e., by physical delivery, delivery and installment, or shipment of the compressor. Used compressors or flares - From time to time, a customer may request to purchase a used compressor or flare out of our rental fleet. Revenue from the sale of rental equipment is recognized when the control has passed to the customer based on the terms of the contract, i.e. when the customer has taken physical possession or the equipment has been shipped. Service and Maintenance Revenue. The Company provides routine or call-out services on customer owned equipment. Revenue is recognized after services in the contract are rendered. Payment terms for sales revenue and service and maintenance revenue discussed above are generally 30 to 60 days although terms for specific customers can vary. Also, 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: Year Ended December 31, 2020 2019 (in thousands) Compressors - sales $ 2,211 $ 15,185 Flares - sales 489 959 Other (Parts/Rebuilds) - sales 2,957 3,619 Service and maintenance 1,572 1,980 Total revenue from contracts with customers 7,229 21,743 Add: ASC 842 rental revenue 60,826 56,701 Total revenue $ 68,055 $ 78,444 Contract Balances As of December 31, 2020 and 2019, we had the following receivables and deferred income from contracts with customers: December 31, 2020 2019 (in thousands) Accounts Receivable Accounts receivable - contracts with customers $ 3,243 $ 3,061 Accounts receivable - ASC 842 9,802 6,963 Total Accounts Receivable 13,045 10,024 Less: Allowance for doubtful accounts ( 1,161 ) ( 918 ) Total Accounts Receivable, net 11,884 9,106 Deferred income $ 1,103 $ 640 The Company recognized $ 73,000 in revenue for the year ended December 31, 2020 that was included in deferred income at the beginning of 2020. For the period ended December 31, 2019, the Company recognized revenue of $ 48,000 from amounts related to sales that were included in deferred income at the beginning of 2019. F - 10 The increases (decreases) of accounts receivable and deferred income were primarily due to normal timing differences between our performance and the customers’ payments. T ransaction Price Allocated to the Remaining Performance Obligations As of December 31, 2020, the Company did not have revenue related to unsatisfied performance obligations. Contract Costs The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general and administrative expense on our Consolidated Statements of Operations. Leases On January 1, 2019, we adopted ASC 842 using the modified retrospective method. We recognized the cumulative effect of initially applying the new lease standard and had no adjustments to retained earnings. The comparative information has not been restated and continues to be reported under the lease accounting standard in effect for those periods. The new lease standard requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations. We elected the practical expedients permitted under the transition guidance of the new standard that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. We did not reassess whether any contracts or land easements entered into prior to adoption are leases or contain leases. The cumulative effect of the changes made to our consolidated balance sheet at January 1, 2019, for the adoption of ASC 842 was as follows: Balance at December 31, 2018 Adjustments due to ASC 842 Balance at January 1, 2019 (in thousands) Balance Sheet Assets Right of use assets $ — $ 451 $ 451 Liabilities Current portion of operating leases $ — $ 126 $ 126 Long term portion of operating leases — 325 325 Total lease liabilities $ — $ 451 $ 451 The Company, as a lessee, applies the practical expedient to not separate non-lease components from lease components, therefore, accounting for each separate lease component and its associated non-lease component, as a single lease component. Each lease that 1) contains the same timing and pattern of transfer for lease and non-lease components; and 2) if the lease component, if accounted for separately, would be classified as an operating lease, the Company elects to not separate non-lease components from lease components. Major Customers and Concentration of Credit Risk Sales and rental income from Occidental Permian, LTD. ("Oxy") in 2020 and 2019 amounted to 30 % and 36 % of revenue, respectively. No other single customer accounted for more than 10% of our revenues in 2020 and 2019. Oxy's accounts receivable balances amounted to 35 % and 35 % of our accounts receivable as of December 31, 2020 and 2019, respectively. No other customers amounted to more than 10% of our accounts receivable as of December 31, 2020 and 2019. F - 11 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 that remain viable but which the Company does not expect to sell within the next year. Rental Equipment and Property and Equipment Rental equipment and property and equipment are recorded at cost less accumulated depreciation, except for work-in-progress on new rental equipment which is recorded at cost until it’s complete and added to the fleet. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Our rental equipment has an estimated useful life between 15 and 25 years, while our property and equipment has an estimate useful lives which range from 3 to 39 years. The majority of our property and equipment, including rental equipment, is a direct cost to generating revenue. We assess the impairment of rental equipment and property and equipment whenever events or changes in circumstances indicate that the net recorded amount may not be recoverable. The following factors could trigger an impairment review: significant underperformance relative to historical or projected future cash flows; significant adverse changes in the extent or manner in which asset (or asset group) is being used or its condition, including a meaningful drop in fleet utilization over the prior four quarters; significant negative industry or company-specific trends or actions, including meaningful capital expenditure budget reductions by our major customers or other sizable exploration and production or midstream companies, as well as significant declines in oil and natural gas prices; legislative changes prohibiting us from leasing our units or flares; or poor general economic conditions. An impairment loss is recognized if the future undiscounted cash flows associated with the asset (or asset group) and the estimated fair value of the asset are less than the asset's carrying value. Sales of equipment out of the rental fleet are included with sales revenue and cost of sales, while retirements of units are shown a separate operating expense. Gains and losses resulting from sales and dispositions of other property and equipment are included with other income. Maintenance and repairs are charged to cost of rentals as incurred. Goodwill Goodwill represents the cost in excess of fair value of the identifiable net assets acquired. Goodwill is tested annually for impairment or as needed upon the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely than not impaired. As further described in Note 7 of these financial statements, we fully impaired the Company's goodwill during the third quarter of 2019, resulting in a goodwill impairment charge of $ 10.0 million for the year ended December 31, 2019. Intangibles At December 31, 2020 and 2019, 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 five years as of December 31, 2020. 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. F - 12 Warranty 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, 2020. The warranty reserve was $ 74,000 for December 31, 2019, and is included in accrued liabilities on the consolidated balance sheet. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and operating losses and tax credit 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. We 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 establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense in the tax provision in the statement of income. 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. Our policy regarding income tax interest and penalties is to expense those items as other expense. 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. We have no uncertain tax positions as of December 31, 2020. Fair Value Measurement Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC Topic 820 established a fair value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. These inputs are categorized as follows: Level 1- quoted prices in an active market for identical assets or liabilities; Level 2- quoted prices in an active market for similar assets or liabilities, inputs other than quoted prices that are observable for similar assets or liabilities, inputs derived principally from or corroborated by observable market data by correlation or other means; and Level 3- valuation methodology with unobservable inputs that are significant to the fair value measurement. Management believes that the fair value of our cash and cash equivalents, trade receivables, accounts payable and line of credit at December 31, 2020 and 2019 approximate their carrying values due to the short-term nature of the instruments or the use of prevailing market interest rates. Segments and Related Information ASC 280-10-50, “Operating Segments”, define the characteristics of an operating segment as a) being engaged in business activity from which it may earn revenue and incur expenses, b) being reviewed by the company's chief operating decision maker (CODM) for decisions about resources to be allocated and assess its performance and c) having discrete financial information. Although we indeed look at our products to analyze the nature of our revenue, other financial information, such as certain costs and expenses, net income and EBITDA are not captured or analyzed by these categories. Our CODM does not make resource allocation decisions or access the performance of the business based on these categories, but rather in the aggregate. Based on this, management believes that it operates in one business segment. F - 13 In their analysis of product lines as potential operating segments, management also considered ASC 280-10-50-11, “Aggregation Criteria”, which allows for the aggregation of operating segments if the segments have similar economic characteristics and if the segments are similar in each of the following areas: • The nature of the products and services; • The nature of the production processes; • The type or class of customer for their products and services; • The methods used to distribute their products or provide their services; and • The nature of the regulatory environment, if applicable. We are engaged in the business of designing and manufacturing compressors and flares. Our compressors and flares are sold and rented to our customers. In addition, we provide service and maintenance on compressors in our fleet and to third parties. These business activities are similar in all geographic areas. Our manufacturing process is essentially the same for the entire Company and is performed in house at our facilities in Midland, Texas and Tulsa, Oklahoma. Our customers primarily consist of entities in the business of producing natural gas. The maintenance and service of our products is consistent across the entire Company and is performed via an internal fleet of vehicles. The regulatory environment is similar in every jurisdiction in that the most impacting regulations and practices are the result of federal energy policy. In addition, the economic characteristics of each customer arrangement are similar in that we maintain policies at the corporate level. Recently Issued Accounting Pronouncements In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform, which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate ("LIBOR"). The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships and other transactions that reference LIBOR as a benchmark rate are modified. This guidance is effective upon issuance and expires on December 31, 2022. We are currently evaluating the impact of the LIBOR transition and this ASU 2020-04 on our consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (ASC Topic 740), which simplifies accounting for income taxes by removing certain exceptions to various tax accounting principles and clarifies other existing guidance in order to improve consistency of application. These amendments are effective for public entities for interim and annual periods beginning after December 15, 2020. We are currently evaluating the impact of ASU 2019-12 on our consolidated financial statements and note disclosures. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments to ASC Topic 326 require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including trade receivables. For companies that qualify as smaller reporting companies, the amendments in this update are effective for interim and annual periods beginning after January 1, 2023. We are currently evaluating the impact of ASU 2016-13 on our consolidated financial statements and note disclosures . 3. Inventory Our inventory, net of allowance for obsolescence of $ 221,000 and $ 24,000 at December 31, 2020 and 2019, respectively, consisted of the following: F - 14 December 31, 2020 2019 (in thousands) Raw materials - current $ 18,026 $ 19,388 Work-in-process 1,900 1,692 Finished goods — — Inventory - current 19,926 21,080 Raw materials - long term (net of allowances of $ 221 and $ 24 , respectively) 1,065 1,068 Inventory - total $ 20,991 $ 22,148 Our long-term inventory consists of raw materials that remain viable but which the Company does not expect to sell within the next year. Inventory Allowance Given its concerns about the industry backdrop, Company management determined during 2019 that an increase of its inventory allowance was necessary. Due to the slow moving nature or obsolescence of a portion of its long-term inventory and inventory related to the retirement of rental equipment, management recorded a charge of $ 3.8 million to write off inventory that will not be recoverable in the future. For the year ended December 31, 2020, inventory allowance totaled $ 0.3 million. We ended 2020 with an inventory allowance balance of $ 221,000 . A summary of our inventory allowance is as follows: Year Ended December 31, 2020 2019 (in thousands) Beginning balance $ ( 24 ) $ ( 19 ) Accruals ( 251 ) ( 3,758 ) Write-offs 54 3,753 Ending balance ( 221 ) ( 24 ) 4. Rental Equipment, Property and Equipment Rental Equipment Our rental equipment and associated accumulated depreciation as of December 31, 2020 and 2019, respectively, consisted of the following: December 31, 2020 2019 (in thousands) Compressor units $ 379,623 $ 370,961 Work-in-progress 3,764 9,129 Rental equipment 383,387 380,090 Accumulated depreciation ( 175,802 ) ( 162,348 ) Rental equipment, net of accumulated depreciation $ 207,585 $ 217,742 Our rental equipment has an estimated useful life between 15 and 25 years. Depreciation expense for rental equipment was $ 22.7 million and $ 21.4 million for the year ended December 31, 2020 and 2019, respectively. F - 15 Retirement of Rental Equipment Company management routinely reviews its inventory of rental equipment for retirement or obsolescence. During 2020, 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 determined 216 units should be retired from our rental fleet. Accordingly, we recorded a $ 0.3 million loss on retirement of rental equipment during the year ended December 31, 2020. During our review of our rental compressor units in 2019, we determined 327 units should be retired from our rental fleet. We recorded a $ 1.5 million loss on retirement of rental equipment. Property and Equipment Property and equipment consists of the following at December 31, 2020 and 2019: December 31, Useful Lives (Years) 2020 2019 ($ in thousands) Land — $ 1,680 $ 1,290 Building 39 18,977 18,632 Building and leasehold improvements 39 1,168 1,168 Office equipment and furniture 5 2,016 2,001 Software 5 573 573 Machinery and equipment 7 3,653 3,492 Vehicles 3 7,598 7,560 Total 35,665 34,716 Less accumulated depreciation ( 13,916 ) ( 12,847 ) Total $ 21,749 $ 21,869 Depreciation expense for property and equipment was $ 2.3 million and $ 1.7 million for the year ended December 31, 2020 and 2019, 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, 2020 and 2019: December 31, 2020 2019 (in thousands) Rentals $ 24,255 $ 22,596 Sales 281 275 Service & Maintenance 42 37 Corporate 495 235 Total $ 25,073 $ 23,143 5. Rental Activity 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 - 16 Future minimum rent payments for arrangements not on a month-to-month basis at December 31, 2020 are as follows: Years Ending December 31, (in thousands) 2021 $ 21,565 2022 15,084 2023 13,763 2024 8,590 2025 5,845 Thereafter 13,880 Total $ 78,727 6. Leases The Company determines if an arrangement is a lease at inception by assessing whether it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company’s leases are primarily related to property leases for its field offices. The Company's leases have remaining lease terms of one to nine years . Renewal and termination options are included in the lease term when it is reasonably certain that the Company will exercise the option. The Company's lease agreements do not contain any contingent rental payments, material residual guarantees or material restrictive covenants. 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. Based on the present value of lease payments for the Company's existing leases, the Company recorded net lease assets and lease liabilities of approximately $ 451,000 , respectively, upon adoption. The Company had no finance leases. The new lease standard did not materially impact the Company's consolidated statements of income and had no impact on the Company's consolidated statements of cash flows. The impact of the new lease standard on the December 31, 2020 and 2019 consolidated balance sheet was as follows: Classification on Consolidated December 31, Balance Sheet 2020 2019 ($ in thousands) Operating lease assets Right of use assets-operating leases $ 483 $ 604 Current lease liabilities Current operating leases $ 198 $ 189 Noncurrent lease liabilities Long-term operating leases 285 415 Total lease liabilities $ 483 $ 604 Weighted average remaining lease term in years 1.5 2.6 Implicit Rate 3.2 % 3.1 % Operating lease costs are recognized on a straight-line basis over the lease term. Total operating lease costs for the year ended December 31, 2020 was approximately $ 550,000 . December 31, 2020 2019 (in thousands) Cash paid for amounts included in the measurement of lease liabilities Operating lease cost (1) (2) $ 550 $ 548 F - 17 (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 $ 333,000 for leases with terms of 12 months or less and $ 217,000 for leases with terms greater than 12 months for the year ended December 31, 2020. Includes costs of $ 350,000 for leases with terms of 12 months or less and $ 198,000 for leases with terms greater than 12 months for the year ended December 31, 2019. The following table shows the future maturities of lease liabilities: Years Ending December 31, Lease Liabilities (in thousands) 2021 $ 211 2022 76 2023 38 2024 38 2025 38 Thereafter 130 Total lease payments 531 Less: Imputed interest ( 48 ) Total $ 483 Rent expense under such leases was $ 217,000 and $ 198,000 for the years ended December 31, 2020 and 2019, respectively. 7. Goodwill Goodwill represents the cost in excess of fair value of the identifiable net assets acquired. Goodwill is tested annually for impairment or as needed upon the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely than not impaired. During the third quarter of 2019, the Company examined various qualitative factors to determine if a quantitative goodwill impairment test was needed. For several months prior to the end of the third quarter of 2019, the Company experienced a significant decline in stock price, which was reflective of the significant deterioration of stock prices of companies throughout the oilfield services sector. In addition, the Company noted its largest customer as well as several other exploration and production companies had announced significant reductions to their 2020 capital expenditures budgets compared to those in 2019. These reductions clearly indicated lower demand for oilfield services, including compression services, in 2020 compared to 2019. In addition, the reductions reflected the deteriorated equity markets for energy companies and demands from institutional investors that energy companies keep capital spending within operating cash flow. After considering these factors and various other industry, economic and company-specific factors, we calculated our market capitalization (based on our closing stock price) as of September 30, 2019, and compared it to the carrying value of our net assets. Since the carrying value of our net assets exceeded our market capitalization and after considering all of the aforementioned qualitative factors, Company management determined that it was more likely than not that the fair value of the Company’s net assets was less than its carrying amount. As a result of our qualitative assessment, we proceeded to perform our quantitative goodwill impairment analysis, where we used an independent valuation specialist to assist us in determining the fair value of our net assets. In this impairment analysis, the estimated fair value of our net assets was determined utilizing market and income-based approaches. Determining fair value in this analysis required significant judgment, including judgments about appropriate comparable companies, appropriate discount rates and our estimated future cash flows, which are subject to change. As a result of our quantitative evaluation, we recorded a goodwill impairment charge of $ 10.0 million in 2019 eliminating our goodwill balance at that date. F - 18 8. Intangibles At December 31, 2020 and 2019, the Company had intangible assets, which relate to developed technology and a trade name. The carrying amount net of accumulated amortization at December 31, 2020 and 2019 was $ 1.2 million and $ 1.3 million, respectively. Amortization expense recognized in each of the years ending December 31, 2020 and 2019 was $ 125,000 . Estimated amortization expense for the years 2021-2024 is $ 125,000 per year. The Company has an intangible asset with a gross carrying value of $ 654,000 at December 31, 2020 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, 2020 December 31, 2019 Useful Life (years) Gross Carrying Value Accumulated Amortization Net Book Value Gross Carrying Value Accumulated Amortization Net Book Value Developed Technology 20 $ 2,505 $ 2,008 $ 497 $ 2,505 $ 1,883 $ 622 Trade Name Indefinite 654 — 654 654 — 654 Total $ 3,159 $ 2,008 $ 1,151 $ 3,159 $ 1,883 $ 1,276 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. Based upon our analysis, we experienced no impairment of intangible assets (excluding goodwill) during the years ended December 31, 2020 or 2019. In addition, in conjunction with our quantitative assessment of goodwill, we used the services of an independent valuation specialist to assist us in determining the fair value of our trade name during the third quarter of 2019. In this impairment analysis, the estimated fair value of our trade name was determined utilizing an income-based approach that required significant judgment, including those about an appropriate royalty rate and discount rate. This analysis indicated no impairment of our trade name. 9. Credit Facility We had a senior secured revolving credit agreement with JP Morgan Chase Bank, N.A (the "Amended Credit Agreement") that matured on March 31, 2021. Please see Note 18 - Subsequent Events for further discussion of the maturity event. The Amended Credit Agreement had an aggregate commitment of $ 30 million, subject to collateral availability. We also had a right to request from the Lender, on an uncommitted basis, an increase of up to $ 20 million on the aggregate commitment (which could have potentially increased the commitment amount to $ 50 million). Borrowing Base . At any time before the maturity of the Amended Credit Agreement, we could draw, repay and re-borrow amounts available under the borrowing base up to the maximum aggregate availability discussed above. Generally, the borrowing base equaled the sum of (a) 80 % of our eligible accounts receivable plus (b) 50 % of the book value of our eligible general inventory (not to exceed 50 % of the commitment amount at the time) plus (c) 75 % of the book value of our eligible equipment inventory. JPMorgan Chase Bank (the “Lender”) could adjust the borrowing base components if material deviations in the collateral were discovered in audits of the collateral. We had $ 29.5 million borrowing base availability at December 31, 2020 under the terms of our Amended Credit Agreement. Interest and Fees . Under the terms of the Amended Credit Agreement, we had the option of selecting the applicable variable rate for each revolving loan, or portion thereof, of either (a) LIBOR multiplied by the Statutory Reserve Rate (as defined in the Amended Credit Agreement), with respect to this rate, for Eurocurrency funding, plus the Applicable Margin (“LIBOR-based”), or (b) CB Floating Rate, which is the Lender's Prime Rate less the Applicable Margin; provided, however, that no more than three LIBOR-based borrowings under the agreement could be outstanding at any one time. For purposes of the LIBOR-based interest rate, the Applicable Margin is 1.50 %. For purposes of the CB Floating Rate, the Applicable Margin is 1.25 %. F - 19 Accrued interest was payable monthly on outstanding principal amounts, provided that accrued interest on LIBOR-based loans was payable at the end of each interest period, but in no event less frequently than quarterly. In addition, fees and expenses were payable in connection with our requests for letters of credit (generally equal to the Applicable Margin for LIBOR-related borrowings multiplied by the face amount of the requested letter of credit) and administrative and legal costs. Maturity . The maturity date of the Amended Credit Agreement, originally scheduled for December 31, 2020, was extended to March 31, 2021 on December 29, 2020, at which time all amounts borrowed under the agreement will be due and outstanding letters of credit must be cash collateralized. The agreement could be terminated early upon our request or the occurrence of an event of default. Security . The obligations under the Amended Credit Agreement were secured by a first priority lien on all of our inventory and accounts and lease receivables, along with a first priority lien on a variable number of our leased compressor equipment the book value of must be maintained at a minimum of 2.00 to 1.00 commitment coverage ratio (such ratio being equal to (i) the amount of the borrowing base as of such date to (ii) the amount of the commitment as of such date.) Covenants. The Amended Credit Agreement contained customary representations and warranties, as well as covenants which, among other things, limited our ability to incur additional indebtedness and liens; enter into transactions with affiliates; make acquisitions in excess of certain amounts; pay dividends; redeem or repurchase capital stock or senior notes; make investments or loans; make negative pledges; consolidate, merge or effect asset sales; or change the nature of our business. In addition, we also had certain financial covenants that required us to maintain a leverage ratio less than or equal to 2.50 to 1.00 as of the last day of each fiscal quarter. Events of Default and Acceleration. The Amended Credit Agreement contained customary events of default for credit facilities of this size and type, and included, without limitation, payment defaults; defaults in performance of covenants or other agreements contained in the loan documents; inaccuracies in representations and warranties; certain defaults, termination events or similar events; certain defaults with respect to any other Company indebtedness in excess of $ 50,000 ; certain bankruptcy or insolvency events; the rendering of certain judgments in excess of $ 150,000 ; certain ERISA events; certain change in control events and the defectiveness of any liens under the secured revolving credit facility. Obligations under the Amended Credit Agreement could be accelerated upon the occurrence of an event of default. As of December 31, 2020, we were in compliance with all covenants in our Amended Credit Agreement. A default under our Credit Agreement would trigger the acceleration of our bank debt so that it is immediately due and payable. Such default would likely limit our ability to access other credit. At December 31, 2020 our balance on the line of credit was $ 417,000 . Our weighted average interest rate for the year ended December 31, 2020 was 2.75 %. 10. CARES Act Loan On April 10, 2020, the Company entered into a promissory note (the "Loan") for an unsecured loan in the amount of $ 4.6 million through the Paycheck Protection Program ("PPP") established by the CARES Act and administered by the U.S. Small Business Administration ("SBA"). The Loan was made for the purpose of securing funding for salaries and wages of employees that may have otherwise been displaced by the outbreak of COVID-19 and the resulting detrimental impact on the Company's business. JPMorgan Chase Bank, N.A. (the "Lender") processed and funded the Loan. On April 23, 2020, the SBA advised that companies that applied for and received PPP loans that had other sufficient sources of liquidity that would not be "significantly detrimental" to their businesses may be subject to increased scrutiny and potential liability unless these companies repaid their loans in full by May 7, 2020. While the Company believes it was justified in seeking the Loan and the funds received were earmarked for the purposes set forth in the original PPP regulations, the Company voluntarily repaid the Loan, with accrued interest, to the Lender on May 4, 2020. 11. Income Taxes The (provision for) benefit from income taxes for the years ended December 31, 2020 and 2019, consists of the following (in thousands): F - 20 2020 2019 Current benefit (provision): Federal benefit (expense) $ 15,587 $ 86 State (expense) benefit ( 149 ) ( 55 ) Total current benefit (provision) 15,438 31 Deferred benefit (provision): Federal benefit (expense) ( 10,234 ) 662 State ( 412 ) — Total deferred benefit (expense) ( 10,646 ) 662 Total benefit (provision) $ 4,792 $ 693 The effective tax rate for the years ended December 31, 2020 and 2019, differs from the statutory rate as follows: 2020 2019 Statutory rate 21.0 % 21.0 % State and local taxes ( 17.0 ) % ( 3.7 ) % Uncertain tax position — % — % Goodwill impairment — % ( 13.7 ) % Research and development credit — % 1.4 % Stock based compensation ( 13.1 ) % ( 0.8 ) % Nondeductible compensation ( 11.6 ) % ( 0.3 ) % Effect of CARES Act 180.3 % — % Other 0.5 % 0.9 % Effective rate 160.1 % 4.8 % Deferred re-measurement for rate change — % — % Effective rate 160.1 % 4.8 % 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 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 condensed 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, 2020. F - 21 The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and (liabilities) as of December 31, 2020 and 2019, are as follows (in thousands): 2020 2019 Deferred income tax assets: Net operating loss $ 3,361 $ 1,519 Research and development credits 1,363 161 Stock compensation 175 580 Deferred compensation 705 389 Other 398 160 Total deferred income tax assets 6,002 2,809 Deferred income tax liabilities: Property and equipment ( 47,626 ) ( 33,761 ) Goodwill and other intangible assets ( 266 ) ( 291 ) Total deferred income tax liabilities ( 47,892 ) ( 34,052 ) Net deferred income tax liabilities $ ( 41,890 ) $ ( 31,243 ) As of December 31, 2020, the Company had NOL carryforwards for federal income tax purposes of $ 11.6 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, 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, 2020 and 2019. Our policy regarding income tax interest and penalties is to expense those items as incurred. During the years ended December 31, 2020 and 2019, there were no significant income tax interest or penalty items in the statement of income. 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. 12. 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 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 $ 2.0 million and $ 1.5 million as of December 31, 2020 and 2019, respectively, with a gain related to the policy of $ 168,000 and $ 218,800 reported in other income in our consolidated income statement for the year ended December 31, 2020 and 2019, respectively. For deferrals of base salary, bonus, commissions and director fees, settlement payments are made to participants in cash, either in a lump sum or in periodic installments. The 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 $ 2.2 million and $ 1.7 million as of December 31, 2020 and 2019, respectively. The deferred obligation is included in other long-term liabilities in the consolidated balance sheet. F - 22 For deferrals of restricted stock units, the plan does not allow for diversification, therefore, distributions are paid in shares of common stock and the obligation is carried at grant value. As of December 31, 2020 and 2019, respectively, we have 45,998 and 85,565 unvested restricted stock units being deferred. As of December 31, 2020 and 2019, respectively we have released and issued 145,702 and 89,187 shares to the deferred compensation plan with a value of $ 2.2 million and $ 1.7 million, respectively. 13. Stockholders' Equity Preferred Stock We have a total of 5.0 million authorized preferred shares with rights and preferences as designated by the Board of Directors. As of December 31, 2020 and 2019, there were no issued or outstanding preferred shares. 14. Stock-Based and Other Long-Term Incentive Compensation Restricted Stock/Units On June 18, 2014, at our annual meeting of shareholders, our shareholders approved a proposed amendment to the 2009 Restricted Stock/Unit Plan (the "2009 Plan") to add additional 500,000 shares of common stock to the Plan, thereby authorizing the issuance of up to 800,000 shares of common stock under the Plan. The 2009 Plan expired on June 16, 2019. At December 31, 2020 we had 34,899 shares outstanding under the 2009 Plan that will vest over the next one year . On June 20, 2019, at our annual meeting of shareholders, our shareholders approved a new proposed Equity Incentive Plan for restricted shares/units and stock options. The Equity Incentive Plan allows issuance up to 500,000 share of common stock. As of December 31, 2020, we had 223,202 shares outstanding under the Equity Incentive Plan that will vest over the next three years . In accordance with the Company's employment agreement with Stephen Taylor, the Company's Chief Executive Officer, the Compensation Committee reviewed his performance in determining the issuance of restricted common stock. Based on this review which included consideration of the Company's 2019 performance, Mr. Taylor, was awarded 94,133 restricted shares/units on April 28, 2020, which vest over three years , in equal installments beginning April 28, 2021. On April 28, 2020, the Compensation Committee awarded 10,000 restricted shares/units to James Hazlett, our Vice President of Technical Services. The restricted shares/units to Mr. Hazlett vest over three years , in equal installments, beginning April 28, 2021. We also awarded and issued 4,432 shares of restricted common stock/units to each of our four independent Board members as partial payment for 2020 directors' fees. The restricted stock/units issued to our directors vests in one year from the date of grant. Compensation expense related to the restricted shares/units was approximately $ 2.2 million and $ 2.5 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, there was a total of approximately $ 1.8 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 . As of December 31, 2020, 200,141 shares were still available for issuance under the Equity Incentive Plan. F - 23 A summary of all restricted stock/units activity as of December 31, 2019 and 2020 and changes during the years then ended are presented below. Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Outstanding, December 31, 2018 214,630 $ 25.51 8.85 $ 3,529 Granted 199,810 17.16 — 3,433 Vested ( 134,674 ) 24.26 — 2,807 Canceled/Forfeited — — — — Outstanding, December 31, 2019 279,766 $ 20.15 8.77 $ 3,430 Granted 123,185 5.68 — 700 Vested ( 144,850 ) 20.82 — 946 Canceled/Forfeited — — — — Outstanding, December 31, 2020 258,101 $ 12.87 8.61 $ 2,447 Other Long-Term Incentive Compensation On April 28, 2020, based on its review of Mr. Taylor's 2019 performance, the Compensation Committee also issued a long-term incentive award of $ 1.1 million to Mr. Taylor that vests in equal, annual tranches over three years . At the time of vesting, each tranche will be payable in cash or common stock at the discretion of the Compensation Committee. In addition, on April 28, 2020, we issued a $ 50,000 award to each of our four independent members of our Board of Directors as partial payment for their services in 2020. These awards vest one year from the date of grant and are payable in cash upon vesting. The Company accounts for these other long-term incentive awards to Mr. Taylor and our independent Board members as liabilities under accrued liabilities on our condensed consolidated balance sheet. The vesting of these awards 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 for the year ended December 31, 2020. As of December 31, 2020 there was a total of $ 0.8 million of unrecognized compensation expense related to these other long-term incentive awards which is expected to be recognized over the next 2.25 years. Stock Option Plan Our Stock Option Plan which is stockholder approved, permits the granting of stock options to its employees for up to 1.0 million shares of common stock under the Stock Option Plan. 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 based on 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, 2020, 384,503 shares were still available for issue 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. Weighted average Black -Scholes fair value assumption during the year ended December 31, are as follows: 2020 Risk free rate 0.48 % Expected life 6.59 Expected volatility 42.33 % Expected dividend yield — % F - 24 There were no stock option grants made in 2019. A summary of all option activity as of December 31, 2019 and 2020 and changes during the years then ended are presented below: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Outstanding, December 31, 2018 283,686 $ 20.46 3.58 $ 434 Granted — — — — Exercised ( 56,352 ) 8.97 — 474 Canceled/Forfeited ( 8,000 ) 21.60 — — Expired ( 11,000 ) 17.74 — — Outstanding, December 31, 2019 208,334 $ 23.67 3.66 $ — Granted 5,000 4.91 — — Exercised — — — — Canceled/Forfeited ( 12,000 ) 20.20 — 23,750 Expired ( 40,000 ) 19.11 — — Outstanding, December 31, 2020 161,334 $ 24.48 3.48 $ — Exercisable, December 31, 2020 161,334 $ 24.48 3.48 $ — The weighted average grant date fair value of options granted during 2020 was $ 2.07 . We had no grants in 2019. The total intrinsic value, or the difference between the exercise price and the market price on the date of exercise, of options exercised during the years ended December 31, 2019 was approximately $ 474,000 . There were no option exercises in 2020. Cash received from stock options exercised during the years ended December 31, 2019 was approximately $ 506,000 . The following table summarizes information about our stock options outstanding at December 31, 2020: Range of Exercise Prices Options Outstanding Options Exercisable Shares Weighted Average Remaining Contractual Life (years) Weighted Average Exercise Price Shares Weighted Average Exercise Price $ 0.01 - 18.00 24,500 0.41 $ 16.80 24,500 $ 16.80 $ 18.01 - 22.00 20,500 2.22 18.75 20,500 18.75 $ 22.01 - 26.00 42,167 4.28 22.90 42,167 22.90 $ 26.01 - 30.00 30,000 6.13 28.15 30,000 28.15 $ 30.01 - 34.00 44,167 3.22 30.41 44,167 30.41 161,334 3.48 $ 24.48 161,334 $ 24.48 The summary of the status of our unvested stock options as of December 31, 2020 and changes during the year then ended is presented below. F - 25 Unvested stock options: Shares Weighted Average Grant Date Fair Value Unvested at December 31, 2019 10,433 $ 11.93 Granted 5,000 2.07 Vested ( 10,433 ) 11.93 Canceled/Forfeited ( 5,000 ) 2.07 Unvested at December 31, 2020 — $ — We recognized stock compensation expense from stock options vesting of $ 19,366 and $ 124,000 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, there was no unamortized compensation cost related to unvested stock options. 15. (Loss) Earnings per Share Basic (loss) earnings per common share is computed using the weighted average number of common shares outstanding during the period. Diluted (loss) earnings per common share is computed using the weighted average number of common stock and common stock equivalent shares outstanding during the period. The following table sets forth the computation of basic and diluted (loss) earnings per share (in thousands, except per share amounts): Year Ended December 31, 2020 2019 Numerator: Net (loss) income $ 1,808 $ ( 13,864 ) Denominator for basic net (loss) income per common share: Weighted average common shares outstanding 13,224 13,114 Denominator for diluted net (loss) income per share: Weighted average common shares outstanding 13,224 13,114 Dilutive effect of stock options and restricted shares 37 — Diluted weighted average shares 13,261 13,114 (Loss) earnings per common share: Basic $ 0.14 $ ( 1.06 ) Diluted $ 0.14 $ ( 1.06 ) In the year ended ended December 31, 2020, 221,061 restricted stock/units and 161,334 stock options were not included in the computation of dilutive income per share, due to their anti-dilutive effect. In the year ended ended December 31, 2019, 279,766 restricted stock/units and 208,334 stock options were not included in the computation of diluted loss per share due to their antidilutive effect. 16. Related Party In 2016, we entered into a joint venture partnership, N-G, LLC (‘N-G”), with Genis Holdings, LLC (“Genis”) to explore new technologies for wellhead compression. NGS and Genis both share 50 % ownership of N-G. We account for this investment under the equity method. In 2018, we ordered some compressor packages from Genis, totaling $ 1.0 million. The compressors were completed and paid in full at December 31, 2019. 17. Commitments and Contingencies F - 26 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 other threatened litigation. 18. Subsequent Events On March 31, 2021 our Amended Credit Agreement expired and we have decided not to renew the Amended Credit Agreement. On March 17, 2021 all outstanding indebtedness was repaid. We are in the process of negotiating a new credit facility which we expect to complete by the end of April 2021, although no guarantee can be made that we will be successful in finalizing and securing a new credit facility. F - 27