What changed in this filing

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Item 9A. Controls and Procedures

2023-03-31 compared with 2022-03-18 · 188 added, 137 removed, 716 unchanged (31% of the section changed)

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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, 2021, 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, 2021, 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.

We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our management, with the participation of our Interim Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022.

Based upon the evaluation, our Interim Chief Executive Officer and Interim Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective at a reasonable assurance level, due to the material weakness identified during fiscal year 2022,

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;

• 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, 2021.

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, 2021.

Our management, including the Interim Chief Executive Officer and our Interim Chief Accounting Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”), as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act.

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with GAAP.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, based on the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on the results of this evaluation, the Company’s management concluded that internal control over financial reporting was not effective as of December 31, 2022, due to the material weakness listed below.

A material weakness is a deficiency, or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Management identified a material weakness in its internal control over financial reporting at December 31, 2022, over our inventory process.

Specifically, we have identified issues related to:

classification of inventory work in progress;

year-end physical inventory count procedures, and the process to review and approve inventory adjusting journal entries.

After giving full consideration to this material weakness, and the additional analyses and other procedures that we performed to ensure that our consolidated financial statements included in this Annual Report on Form 10-K were prepared in accordance with U.S.

generally accepted accounting principles (“US GAAP”), our management has concluded that our consolidated financial statements present fairly, in all material respects our financial position, results of operations and cash flows for the periods disclosed in conformity with US GAAP.

Remediation Plan for Material Weakness

In response to the material weakness, management, with oversight of the Audit Committee of the Board of Directors, has begun the process of, and is committed to, designing and implementing effective measures to strengthen our internal controls over financial reporting and remediate the material weakness.

Our planned internal control remediation efforts include:

We intend to update and implement accounting policies and procedures related to work in process inventory.

These will include modifying our financial reporting account consolidation procedures.

We intend to improve and enforce our formalized inventory count and inventory adjustment processes which includes taking steps to reinforce the inventory taking procedures, proper training and supervision of warehouse staff and strengthening review and approval requirements for any inventory adjustments.

We have engaged a third-party consultant to conduct a full assessment of our controls and procedures.

We intend to continue efforts to ensure our employees understand the ongoing importance of internal controls and compliance with corporate policies and procedures.

While these actions and planned actions are subject to ongoing management evaluation and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles, we are committed to the continuous improvement of our internal control over financial reporting and will continue to diligently review our internal control over financial reporting.

Attestation Report of the Registered Public Accounting Firm

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm on our ICFR because we are a Smaller Reporting Company and are not subject to auditor attestation requirements under applicable SEC rules.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2021, 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.

During the quarter ended December 31, 2022, there were no changes in our ICFR that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

OTHER INFORMATION

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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, 2022 or as such period may be extended by action of the Securities and Exchange Commission.

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, 2021 or as such period may be extended by action of the Securities and Exchange Commission.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the section “Principal Accountant Fees and Services” in our definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2022 or as such period may be extended by action of the Securities and Exchange Commission.

EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENTS

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

Bylaws, as amended (Incorporated by reference to Exhibit 3.11 of the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2016.)

Bylaws, as amended (Incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 10, 2021.)

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

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333-261091) and filed on November 16, 2021

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

2019 Equity Incentive Plan, as amended (Incorporated by reference to Exhibit 4.3 of the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange Commission on July 12, 2022.)

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

Amended and restated Employment Agreement dated April 27, 2015 between Natural Gas Services Group, Inc.

Retirement Agreement dated May 17, 2022 between Natural Gas Services Group, Inc.

and Stephen C.

Taylor (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 29, 2015.)

Taylor (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 19, 2022.)

Severance Agreement and Release Between Natural Gas Services Group, Inc.

Chisholm dated December 21, 2022 (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 28, 2022.)

Letter Agreement between Natural Gas Services Group, Inc.

Faircloth dated February 8, 2023 (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-k filed with the Securities and Exchange Commission on February 13, 2023.)

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.)

Credit Agreement dated as of May 11, 2021, among the Natural Gas Services Group, Inc.

and NGSG Properties, LLC, a Colorado limited liability company, the banks and other financial institutions identified therein as Lenders from time to time party thereto and Texas Capital Bank, National Association, as Administrative Agent, Swing Line Lender and L/C Issuer.

Pledge and Security Agreement dated as of May 11, 2021, among Natural Gas Services Group, Inc., the Loan Parties (as defined therein) and Texas Capital Bank, National Association, as Administrative Agent.

Note dated as of May 11, 2021, by Natural Gas Services Group, Inc.

in favor of Texas Capital Bank, National Association, as Lender.

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.)

Amended and Restated Credit Agreement dated February 28, 2023, among Natural Gas Services Group, Inc., the other Loan Parties thereto, Texas Capital Bank, in its capacity as Administrative Agent and the Lenders party thereto (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 6, 2023.)

Amended and Restated Pledge and Security Agreement dated February 28, 2023, among Natural Gas Services Group, Inc., the Grantors thereto, Texas Capital Bank, in its capacity as Administrative Agent, for the Lenders and other Secured Parties (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 6, 2023.)

Letter Agreement dated June 9, 2022 between Natural Gas Services Group, Inc.

Chisholm (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2022.)

Subsidiaries of the registrant

Consent of Ham, Langston & Brezina L.L.P.

Consent of Moss Adams LLP

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

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

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

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

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

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

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

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

101.INS XBRL Instance Document

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/s/ Stephen C.

Chairman of the Board, President and Chief Executive Officer

Chairman of the Board, Interim President and Chief Executive Officer

(Principal Executive Officer)

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KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen C.

Taylor and Micah C.

Foster, jointly and severally, as his/her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Taylor and James D.

Faircloth, jointly and severally, as his/her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him/her and in his/her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises hereby ratifying and confirming all that said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

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/s/ Stephen C.

Taylor Chairman of the Board of Directors, Chief Executive Officer and President (Principal Executive Officer) March 18, 2022

Foster Vice President and Chief Financial Officer (Principal Accounting Officer)

Taylor Chairman of the Board of Directors, Interim Chief Executive Officer and President (Principal Executive Officer) March 31, 2023

Faircloth Interim Chief Financial Officer (Principal Accounting Officer)

March 31, 2023

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Bradshaw Director March 31, 2023

Chisholm Director March 18, 2022

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm ( Moss Adams, LLP ;

Reports of Independent Registered Public Accounting Firm ( Ham, Langston & Brezina, LLP ;

Houston, Texas ;

PCAOB ID 298 and Report of Independent Registered Public Accounting Firm (Moss Adams, LLP;

Dallas, Texas;

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Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Natural Gas Services Group, Inc.

and subsidiary (the “Company”) as of December 31, 2021 and 2020, and 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, 2021 and 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.

We have audited the accompanying consolidated balance sheet of Natural Gas Services Group, Inc.

and subsidiary (the “Company”) as of December 31, 2022, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year 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, 2022, 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 audits.

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.

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Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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 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.

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.

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We determined that there are no critical audit matters.

/s/ Ham, Langston & Brezina LLP

Houston, Texas

March 31, 2023

We have served as the Company's auditor since 2022.

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, 2021, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year 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, 2021, 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.

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.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Moss Adams LLP

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March 18, 2022

We have served as the Company's auditor since 2020.

We have served as the Company's auditor from 2020 to 2022.

NATURAL GAS SERVICES GROUP, INC.

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Accrued liabilities 23,726 14,103

Line of credit — 417

Current operating leases 155 68

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Total current liabilities 30,399 20,278

Credit facility 25,000 —

Deferred income tax liability 39,798 39,288

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(in thousands, except earnings per share)

For the Years Ended December 31,

Year Ended December 31,

Rental income $ 74,465 $ 63,624

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Total operating costs and expenses 84,394 84,828

Operating loss ( 12,408 ) ( 3,599 )

Operating income (loss) 431 ( 12,408 )

Other income (expense):

Interest expense ( 364 ) ( 65 )

Other income 687 629

Other income (expense) ( 108 ) 687

Total other income, net ( 472 ) 622

Loss before income taxes:

Income (loss) before income taxes:

( 41 ) ( 11,786 )

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Deferred ( 511 ) 2,602

Total income tax benefit 2,603 4,792

Net income (loss) $ ( 9,183 ) $ 1,808

Earnings (loss) per share:

Total income tax benefit (expense) ( 528 ) 2,603

Net loss $ ( 569 ) $ ( 9,183 )

Loss per share:

Basic $ ( 0.05 ) $ ( 0.70 )

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Taxes paid related to net shares settlement of equity awards — — — — ( 336 ) — — — ( 336 )

Purchase of treasury shares — — — — — — 737 ( 7854 ) ( 7,854 )

Net loss — — — — — ( 9,183 ) — — ( 9,183 )

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(in thousands)

For the Years Ended December 31,

Year Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income $ ( 9,183 ) $ 1,808

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Net loss $ ( 569 ) $ ( 9,183 )

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization 24,116 25,397

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Stock-based compensation 1,910 1,738

Gain on company owned life insurance ( 298 ) ( 168 )

(Gain) loss on company owned life insurance 389 ( 298 )

Changes in operating assets and liabilities:

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NET CASH PROVIDED BY OPERATING ACTIVITIES 27,764 28,527

CASH FLOWS FROM INVESTING ACTIVITIES:

CASH FLOWS USED IN INVESTING ACTIVITIES:

Purchase of rental equipment, property and other equipment ( 65,122 ) ( 25,710 )

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NET CASH USED IN INVESTING ACTIVITIES ( 65,079 ) ( 25,665 )

CASH FLOWS FROM FINANCING ACTIVITIES:

CASH FLOWS USED IN FINANCING ACTIVITIES:

Proceeds from line of credit 25,000 —

Proceeds of other long-term liabilities ( 3 ) ( 1 )

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Taxes paid related to net share settlement of equity awards ( 515 ) ( 336 )

NET CASH USED IN FINANCING ACTIVITIES ( 8,845 ) ( 157 )

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 17,745 ( 8,845 )

NET CHANGE IN CASH AND CASH EQUIVALENTS ( 19,570 ) ( 5,983 )

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Interest paid $ 276 $ 30

Income taxes paid — 105

NON-CASH TRANSACTIONS

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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 regional bank with strong long-term ratings of Baa3/BBB-.

Accounts Receivable

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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.

In accordance with ASC 842 – Leases, we have applied the practical expedient ASC 842-10-15-42A, which allows the Company to combine lease and non-lease components.

Sales Revenue.

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The Company recognized $ 1.3 million in revenue for the year ended December 31, 2022 that was included in deferred income at the beginning of 2022.

For the period ended December 31, 2020, the Company recognized revenue of $ 73,000 from amounts related to sales that were included in deferred income at the beginning of 2020.

For the period ended December 31, 2021, the Company recognized revenue of $ 1.1 million from amounts related to sales that were included in deferred income at the beginning of 2021.

The increases (decreases) of accounts receivable and deferred income were primarily due to normal timing differences between our performance and the customers’ payments.

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There was no warranty reserve as of December 31, 2022 and 2021.

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.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the statutory enactment date.

Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

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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, 2022.

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

Fair Value Measurement

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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.

Historically, our manufacturing process has been essentially the same for the entire Company and has been performed in house at our facilities in Midland, Texas and Tulsa, Oklahoma.

Recently, however, we have contracted with third party fabricators to assemble our larger horsepower natural gas compressors.

Our customers primarily consist of entities in the business of producing natural gas.

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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 June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (ASC Topic 326):

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Our rental equipment has an estimated useful life between 15 and 25 years.

Depreciation expense for rental equipment was $ 22.9 million and $ 22.7 million for the year ended December 31, 2021 and 2020, respectively.

During the year ended December 31, 2021 we added 65 units to our rental fleet, 35 of which were repurchased from a significant customer who had previously purchased these units from us under a bill and hold arrangement in prior years, but had not yet placed the units in service.

Depreciation expense for rental equipment was $ 21.9 million and $ 22.9 million for the years ended December 31, 2022 and 2021, respectively.

During the year ended December 31, 2022 we added 45 units to our rental fleet.

Retirement of Rental Equipment

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Vehicles 3 9,858 8,295

Work-in-progress 594 —

Total 39,157 36,612

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2023 $ 32,494

Thereafter 462

Total $ 79,412

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We had a senior secured revolving credit agreement (the "Previous Credit Agreement") with JP Morgan Chase Bank, N.A (the "Lender") that matured on March 31, 2021.

Prior to maturation, the outstanding balance of $ 417,000 was repaid.

The Previous Credit Agreement had an aggregate commitment of $ 30 million, subject to collateral availability.

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On May 11, 2021, we entered into a five year senior secured revolving credit agreement ("New Credit Agreement") with Texas Capital Bank, National Association (the "Lender") with an initial commitment of $ 20 million and an accordion feature that would increase the maximum commitment to $ 30 million, subject to collateral availability.

On December 12, 2022, we entered into a First Amendment to the New Credit Agreement (the "First Amendment") to increase the maximum commitment to $ 30 million.

We also have a right to request from the Lender, on an uncommitted basis, an increase of up to $ 30 million on the aggregate commitment;

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The obligations under the New Credit Agreement are secured by a first priority lien on a variety of our assets, including inventory and accounts receivable as well as a variable number of our leased compressor equipment.

As of December 31, 2022, we were in compliance with all financial covenants in our New Credit Agreement.

At December 31, 2022, we had $ 25.0 million outstanding under the New Credit Agreement with a weighted average interest rate of 7.32 %.

At December 31, 2022, we had $ 5 million of availability under the New Credit Agreement.

Amended and Restated Credit Agreement

On February 28, 2023, we entered into a five-year senior secured revolving credit agreement (“Amended and Restated Credit Agreement”) with Texas Capital Bank, as administrative agent (the “Lender”), TCBI Securities, Inc., as joint lead arranger and sole book runner and Bank of America, N.A., as joint lead arranger, with an initial commitment of $ 175 million as of the closing date.

Subject to collateral availability, we also have a right to request from the Lender, on an uncommitted basis, an increase of up to $ 125 million on the aggregate commitment;

provided, however, the aggregate commitment amount is not permitted to exceed $ 300 million.

The maturity date of the Amended and Restated Credit Agreement is February 28, 2028.

The obligations under the Amended and Restated Credit Agreement are secured by a first priority lien on a variety of our assets, including inventory and accounts receivable as well as a variable number of our leased compressor equip.

Borrowing Base .

At any time before the maturity of the New Credit Agreement, we may draw, repay and re-borrow amounts available under the borrowing base up to the maximum aggregate availability discussed above.

Generally, the borrowing base equals the sum of (a) 90 % of eligible accounts receivable owed to the Company by investment grade debtors, plus (b) 85 % of the eligible accounts receivable owing by non-investment grade debtors, plus (c) 50 % of the eligible inventory, valued at the lower of cost or market value at such time, subject to a cap of this component not to exceed $ 2 million, plus (d) the lesser of (i) 95 % of the net book value of the compressors that the Lender has determined are eligible for the extension of credit, valued at the lower of cost or market value with depreciation not to exceed 25 years, at such time and (ii) 80 % of the net liquidation value percentage of the net book value of the eligible compressors that the Lender has determined are eligible for the extension of credit, valued at the lower of cost or market value with depreciation not to exceed 25 years, at such time, plus (e) 80 % of the value at cost (excluding any costs for capitalized interest or other non-cash capitalized costs) of the eligible new compressor fleet, minus (f) any required availability reserves determined by the Lender in its sole discretion.

At any time before the maturity of the Amended and Restated Credit Agreement, we may draw, repay and re-borrow amounts available under the borrowing base up to the maximum aggregate availability discussed above.

Generally, the borrowing base equals the sum of (a) 85 % of eligible accounts receivable owed to the Company, plus (b) 50 % of the eligible inventory, valued at the lower of cost or market value at such time, subject to a cap of this component not to exceed $ 2.5 million, plus (c) the lesser of (i) 95 % of the net book value of the compressors that the Lender has determined are eligible for the extension of credit, valued at the lower of cost or market value with depreciation not to exceed 25 years, at such time and (ii) 80 % of the net liquidation value percentage of the net book value of the eligible compressors that the Lender has determined are eligible for the extension of credit, valued at the lower of cost or market value with depreciation not to exceed 25 years, at such time, plus (d) 80 % of the net book value, valued at the lower of cost (excluding any costs for capitalized interest or other noncash capitalized costs) or market of the eligible new compressor fleet, minus (e) any required availability reserves determined by the Lender in its sole discretion.

The Lender may adjust the borrowing base components if material deviations in the collateral are discovered in future audits of the collateral.

As of December 31, 2021, our allowable borrowing base was $ 20.0 million.

Interest and Fees.

Under the terms of the New Credit Agreement, we have the option of selecting the applicable variable rate for each revolving loan, or portion thereof, of either (a) the Base Rate (as defined below) plus the Applicable Margin, or (b) in the case of a Eurodollar Rate Loan, the Adjusted Eurodollar Rate plus the Applicable Margin.

Under the terms of the Amended and Restated Credit Agreement, we have the option of selecting the applicable variable rate for each revolving loan, or portion thereof, of either (a) the Base Rate (as defined below) plus the Applicable Margin, or (b) in the case of a Term SOFR (“Secured Overnight Financing Rate”) Loan, the Adjusted Term SOFR rate plus the Applicable Margin.

"Base Rate" means, for any day, a rate of interest per annum equal to the highest of (a) the prime rate for such day;

(b) the sum of the federal funds rate for such day plus 0.50 %;

and (c) the Adjusted Eurodollar Rate for such day plus 1.00 %.

The Applicable Margin is determined based upon the leverage ratio as set forth in the most recent compliance certificate received by the Lender for each fiscal quarter from time to time pursuant to the New Credit Agreement.

Depending on the leverage ratio, the Applicable Margin can be 0.25 % to 0.75 % for Base Rate Loans (as defined in the New Credit Agreement) and 1.25 % to 1.75 % for Eurodollar Rate Loans and for requested letters of credit.

In addition, we are required to pay a monthly commitment fee on the daily average unused amount of the commitment while the New Credit Agreement is in effect at an annual rate equal to 0.25 % of the unused commitment amount.

Accrued interest is payable monthly on outstanding principal amounts and unused commitment fee, provided that accrued interest on Eurodollar Rate Loans is payable at the end of each interest period, but in no event less frequently than quarterly.

The New Credit Agreement contains customary representations and warranties, as well as covenants which, among other things, condition or limit our ability to incur additional indebtedness and liens;

(b) the sum of the federal funds rate for such day plu s 0.50 %;

and (c) the Adjusted Term SOFR for such day plu s 1.00 %.

Depending on the leverage ratio, the Applicable Margin can b e 2.00 % to 2.75 % fo r Base Rate Loans (as defined in the Amended and Restated Credit Agreement) and 3 % to 3.75 % for Term SOFR Loans and for requested letters of credit.

In addition, we are required to pay a monthly commitment fee on the daily average unused amount of the commitment while the Amended and Restated Credit Agreement is in effect at an annual rate equal to 0.50 % of the unused commitment amount.

Accrued interest is payable monthly on outstanding principal amounts and unused commitment fee, provided that accrued interest on Term SOFR Loans is payable at the end of each interest period, but in no event less frequently than quarterly.

The Amended and Restated Credit Agreement contains customary representations and warranties, as well as covenants which, among other things, condition or limit our ability to incur additional indebtedness and liens;

enter into transactions with affiliates;

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or change the nature of our business.

In addition, we also have certain financial covenants that are applicable during certain trigger periods specified in the Credit Agreement and require us during such trigger periods to maintain a leverage ratio less than or equal to 3.00 to 1.00 as of the last day of each fiscal quarter and a fixed charge coverage ratio greater than or equal to 1.00 to 1.00 as of the last day of each fiscal quarter.

In addition, we are subject to certain financial covenants in the Amended and Restated Credit Agreement that require us to maintain (i) a leverage ratio, as defined, lesser than or equal to 3.50 to 1.00 as of the last day of each fiscal quarter ending on or prior to December 31, 2024 and 3.25 to 1.00 for the fiscal quarter ending March 31, 2025 and for each fiscal quarter thereafter and (ii) a fixed charge coverage ratio greater than or equal to 1.25 to 1.00 as of the last day of each fiscal quarter .

Events of Default and Acceleration .

The New Credit Agreement contains customary events of default for credit facilities of this size and type, and includes, without limitation, payment defaults;

defaults in performance of covenants or other agreements contained in the Credit Agreement and the other transaction documents;

The Amended and Restated Credit Agreement contains customary events of default for credit facilities of this size and type, and includes, without limitation, payment defaults;

defaults in performance of covenants or other agreements contained in the Amended and Restated Credit Agreement and the other transaction documents;

inaccuracies in representations and warranties;

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certain change in control events and the defectiveness of any liens under the secured revolving credit agreement.

Obligations outstanding under the Credit Agreement may be accelerated upon the occurrence of an event of default.

As of December 31, 2021, we were in compliance with all financial covenants in our New Credit Agreement.

At December 31, 2021, we had no amounts outstanding under the New Credit Agreement .

Obligations outstanding under the Amended and Restated Credit Agreement may be accelerated upon the occurrence of an event of default.

The (provision for) benefit from income taxes for the years ended December 31, 2022 and 2021, consists of the following (in thousands):

Current benefit:

Current (expense) benefit

Federal benefit $ — $ —

State (expense) benefit ( 17 ) 1

Total current benefit 1 15,438

Deferred benefit:

Federal benefit (expense) 1,991 ( 10,234 )

State benefit (expense) 611 ( 412 )

Total deferred benefit (expense) 2,602 ( 10,646 )

Total benefit $ 2,603 $ 4,792

Total current (expense) benefit ( 17 ) 1

Deferred (expense) benefit:

Federal (expense) benefit ( 857 ) 1,991

State (expense) benefit 346 611

Total deferred (expense) benefit ( 511 ) 2,602

Total (expense) benefit $ ( 528 ) $ 2,603

The effective tax rate for the years ended December 31, 2022 and 2021, differs from the statutory rate as follows:

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Nondeductible compensation ( 1846.3 ) % ( 3.6 ) %

Effect of CARES Act — % 180.3 %

Other ( 217.1 ) % 0.2 %

Effective rate ( 1288.7 ) % 22.1 %

Effective rate 22.1 % 160.1 %

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.

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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, 2022.

In conjunction with the $ 11.5 million income tax refund claim, on March 8, 2023, the Company received a notice from the Internal Revenue Service that its 2015, 2016, 2017 and 2019 income tax returns were selected for examination.

The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and (liabilities) as of December 31, 2022 and 2021, are as follows (in thousands):

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As of December 31, 2022, the Company had NOL carryforwards for federal income tax purposes of $ 25.4 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 ("IR"), could limit the amount of NOL carryforwards used in any one year.

Future changes in ownership, as defined by Section 382 of the Internal Revenue Code ("IRC"), could limit the amount of NOL carryforwards used in any one year.

In general, under Section 382 and 383 of the IRC, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs and certain tax credits, to offset future taxable income and tax.

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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 $ 2.5 million and $ 2.0 million as of December 31, 2021 and 2020, respectively, with a gain related to the policy of $ 298,000 and $ 168,000 reported in other income in our consolidated statement of operations for the year ended December 31, 2021 and 2020, respectively.

The cash surrender value of the life insurance policy is $ 2.4 million and $ 2.5 million as of December 31, 2022 and 2021, respectively, with a gain/(loss) related to the policy of $( 389,000 ) and $ 298,000 reported in other income in our consolidated statement of operations for the year ended December 31, 2022 and 2021, 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.

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For deferrals of restricted stock units, the plan does not allow for diversification, therefore, distributions are paid in shares of our common stock and the obligation is carried at grant value.

As of December 31, 2021 and 2020, respectively, we

have 17,248 and 45,998 unvested restricted stock units being deferred.

As of December 31, 2022 and 2021, respectively, we have 3,138 and 17,248 unvested restricted stock units being deferred.

As of December 31, 2022 and 2021, respectively we have released and issued 188,562 and 174,452 shares to the deferred compensation plan with a value of $ 2.6 million and $ 2.5 million, respectively.

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On June 20, 2019, at our annual meeting of shareholders, our shareholders approved an Equity Incentive Plan for restricted shares/units, stock options and other equity awards.

The Equity Incentive Plan allows issuance up to 500,000 share of common stock.

The Equity Incentive Plan allows issuance up to 500,000 shares of common stock.

On June 16, 2022, at our annual meeting of shareholders, our shareholders approved an amendment to the Equity Incentive Plan to increase the number of shares available for issuance under the plan by 650,000 shares of common stock.

As of December 31, 2022, we had 250,847 shares outstanding under the Equity Incentive Plan that will vest over the next three years .

As of December 31, 2022, 570,473 shares were still available for issuance under the Equity Incentive Plan.

On March 18, 2021, the Compensation Committee awarded 129,212 shares of restricted common stock to two executive officers that vest ratably over three years , beginning on March 18, 2022.

On June 17, 2021, the Compensation Committee awarded 5,000 shares of restricted common stock to an executive officer that vest ratably over three years beginning on June 17, 2022.

In addition, on March 18, 2021, 5,612 shares of restricted common stock were awarded to each of our three independent Board members.

Lastly, on April 1, 2021, 5,291 shares of restricted common stock were awarded to a newly appointed independent Board member.

On April 26, 2022, 4,212 shares of restricted common stock were awarded to each of our four independent Board members.

The restricted stock issued to our directors vests in one year from the date of grant.

On August 15, 2022, the Compensation Committee awarded 32,040 shares of restricted common stock to two executive officers that vest ratably over three years , beginning on April 25, 2023.

In addition, on August 15, 2022, the Compensation Committee awarded 60,839 shares of restricted common stock to Mr.

Stephen Taylor, our Interim Chief Executive Officer.

The restricted shares granted to Mr.

Taylor will vest in full on June 30, 2023.

Compensation expense related to the restricted shares was approximately $ 1.7 million and $ 1.7 million for the years ended December 31, 2022 and 2021, respectively.

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Canceled/Forfeited

( 3,333 ) 12.26 — 31

Outstanding, December 31, 2021 276,319 $ 9.67 1.77 $ 2,893

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Canceled/Forfeited

( 3333 ) $ 12.26 — $ 31

Outstanding, December 31, 2022 250,847 $ 9.14 1.42 $ 2,681

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On March 18, 2021, the Compensation Committee issued a long-term incentive award of $ 1.0 million to an executive officer that vests in equal, annual tranches over three years .

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.

On March 18, 2021, we issued a $ 50,000 award to each of our three independent Board members.

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These awards vest one year from the date of grant and are payable in cash upon vesting.

On April 26, 2022, we issued a $ 50,000 award to each of our four independent Board members.

These awards vest one year from the date of grant and are payable in cash upon vesting.

The Company accounts for these other long-term incentive awards as liabilities under accrued liabilities on our condensed consolidated balance sheet.

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Total compensation expense related to these other long-term incentive awards was approximately $ 1.0 million for the year ended December 31, 2022.

As of December 31, 2021 there was a total of $ 1.2 million of unrecognized compensation expense related to these other long-term incentive awards which is expected to be recognized over the next three years .

As of December 31, 2022 there was a total of $ 0.7 million of unrecognized compensation expense related to these other long-term incentive awards which is expected to be recognized over the next year.

Stock Option Plan

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( 16,000 ) $ 17.81 — —

( 40,000 ) $ 19.11 — —

Outstanding, December 31, 2021 200,834 $ 21.17 4.83 —

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( 200,750 ) $ ( 18.09 ) — —

( 13,500 ) $ 13.29 — —

Outstanding, December 31, 2022 201,584 $ 19.32 3.90 $ —

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The weighted average grant date fair value of options granted during 2022 was $ 4.24 per option.

We had no grants in 2020.

We had 55,500 grants of stock options in 2021 with a weighted average grant date fair value of $ 5.15 .

There were no option exercises in either 2022 or 2021.

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Granted 215,000 $ 16.07

Vested ( 69,500 ) 14.48

Canceled/Forfeited ( 159,500 ) 16.17

Unvested at December 31, 2022 41,500 $ 11.01

We recognized stock compensation expense from stock options vesting of $ 728 and $ 19,366 for the years ended

December 31, 2021 and 2020, respectively.

We recognized stock compensation expense from stock options of $ 255,000 and $ 728 for the years ended December 31, 2022 and 2021, respectively.

As of December 31, 2022, there was $ 188,000 of unamortized compensation cost related to unvested stock options.

(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):

Loss per Share

Basic loss per common share is computed using the weighted average number of common shares outstanding during the period.

Diluted loss 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 per share (in thousands, except per share amounts):

Year Ended December 31,

Net (loss) income $ ( 9,183 ) $ 1,808

Denominator for basic net (loss) income per common share:

Net loss $ ( 569 ) $ ( 9,183 )

Denominator for basic net loss per common share:

Weighted average common shares outstanding 12,305 13,100

Denominator for diluted net (loss) income per share:

Denominator for diluted net loss per share:

Weighted average common shares outstanding 12,305 13,100

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Diluted weighted average shares 12,305 13,100

(Loss) earnings per common share:

Loss per common share:

Basic $ ( 0.05 ) $ ( 0.70 )

Diluted $ ( 0.05 ) $ ( 0.70 )

In the year ended ended December 31, 2021, 276,319 restricted stock/units and 200,834 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, 2020, 221,061 restricted stock/units and 161,334 stock options were not included in the computation of diluted loss per share due to their antidilutive effect.

In the year ended December 31, 2022, 250,847 restricted stock/units and 201,584 stock options were not included in the computation of dilutive income per share, due to their anti-dilutive effect.

In the year ended December 31, 2021, 276,319 restricted stock/units and 200,834 stock options were not included in the computation of diluted loss per share due to their antidilutive effect.

Accrued Liabilities

Accrued liabilities consists of the following as of December 31, 2022 and 2021 (in thousands):

Accrued purchases

$ 17,763 $ 9,667

Accrued compensation

Accrued other

$ 23,726 $ 14,103

Commitments and Contingencies

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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.

Related Party

During the year ended December 31, 2022, we sold $ 0.6 million of compressor components to N-G Joint Venture, LLC our 50 % joint venture.

As of December 31, 2022, we had accounts receivable of $ 6,000 with N-G.

Subsequent Events

On February 28, 2023, we entered into an Amended and Restated Credit Agreement.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures