NATURAL GAS SERVICES GROUP INC 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, with the participation of our 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 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. 32 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: a. 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. b. 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. c. We have engaged a third-party consultant to conduct a full assessment of our controls and procedures. d. 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 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. ITEM 9B. OTHER INFORMATION None. ITEM 9C. DISCLOSURES REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 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, 2022 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, 2022 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, 2022 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, 2022 or as such period may be extended by action of the Securities and Exchange Commission. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this item is incorporated herein by reference to the section “Principal Accountant Fees and Services” in our definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2022 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 3.1 of the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on February 10, 2021.) 4.1 Description of Securities (Incorporated by reference to the Registrant's Registration Statement on From 8-A, filed with the SEC on October 27, 2008.) 4.2 Form of Senior Indenture (Incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on From S-3 (No. 333-261091) and filed on November 16, 2021) 4.3 Form of Subordinated Indenture (Incorporated by reference to Exhibit 4.4 of the Registrant's Registration Statement on Form S-3 (No. 333-261091) and filed on November 16, 2021 10.1 † 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.) 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 † Retirement Agreement dated May 17, 2022 between Natural Gas Services Group, Inc. and Stephen C. Taylor (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 19, 2022.) 10.4 † Severance Agreement and Release Between Natural Gas Services Group, Inc. and John W. 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.) 10.5 † Letter Agreement between Natural Gas Services Group, Inc. and James D. 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.) 10.6 † 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.) 10.7 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.) 10.8 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.) 35 10.9 † Letter Agreement dated June 9, 2022 between Natural Gas Services Group, Inc. and John W. Chisholm (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on June 13, 2022.) *21.1 Subsidiaries of the registrant *23.1 Consent of Ham, Langston & Brezina L.L.P. *23.2 Consent of Moss Adams LLP *31.1 Certification of Interim Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *31.2 Certification of Interim Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *32.1 Certification of Interim Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *32.2 Certification of Interim 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, 2023 By: /s/ Stephen C. Taylor Stephen C. Taylor Chairman of the Board, Interim President and Chief Executive Officer (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen C. 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: Signature Title Date /s/ Stephen C. Taylor Chairman of the Board of Directors, Interim Chief Executive Officer and President (Principal Executive Officer) March 31, 2023 Stephen C. Taylor /s/ James D. Faircloth Interim Chief Financial Officer (Principal Accounting Officer) March 31, 2023 James D. Faircloth /s/ Leslie A. Beyer Director March 31, 2023 Leslie A. Beyer /s/ Nigel J. Jenvey Director March 31, 2023 Nigel J. Jenvey /s/ David L. Bradshaw Director March 31, 2023 David L. Bradshaw 37 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page 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; PCAOB ID 659) F- 1 Consolidated Balance Sheets as of December 31, 2022 and 2021 F- 3 Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021 F- 4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2022 and 2021 F- 5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 F- 6 Notes to Consolidated Financial Statements F- 7 38 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, 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 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 Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Ham, Langston & Brezina LLP Houston, Texas March 31, 2023 We have served as the Company's auditor since 2022. F - 1 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. 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. /s/ Moss Adams LLP Dallas, Texas March 18, 2022 We have served as the Company's auditor from 2020 to 2022. F - 2 NATURAL GAS SERVICES GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands) December 31, 2022 2021 ASSETS Current Assets: Cash and cash equivalents $ 3,372 $ 22,942 Trade accounts receivable, net of allowance for doubtful accounts of $ 338 and $ 1,129 , respectively 14,668 10,389 Inventory 23,414 19,329 Federal income tax receivable 11,538 11,538 Prepaid income taxes 10 51 Prepaid expenses and other 1,145 854 Total current assets 54,147 65,103 Long-Term Inventory, net of allowance for obsolescence of $ 120 and $ 64 , respectively 1,557 1,582 Rental equipment, net of accumulated depreciation of $ 177,729 and $ 172,563 , respectively 246,450 206,985 Property and equipment, net of accumulated depreciation of $ 16,981 and $ 15,784 , respectively 22,176 20,828 Right of use assets - operating leases, net of accumulated amortization $ 721 and $ 555 , respectively 349 285 Intangibles, net of accumulated amortization of $ 2,259 and $ 2,134 , respectively 900 1,025 Other assets 2,667 2,698 Total assets $ 328,246 $ 298,506 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 6,481 $ 4,795 Accrued liabilities 23,726 14,103 Current operating leases 155 68 Deferred income 37 1,312 Total current liabilities 30,399 20,278 Credit facility 25,000 — Deferred income tax liability 39,798 39,288 Long-term operating leases 194 217 Other long-term liabilities 2,779 2,813 Total liabilities 98,170 62,596 Commitments and contingencies (Note 15) Stockholders’ Equity: Preferred stock, 5,000 shares authorized, no shares issued or outstanding — — Common stock, 30,000 shares authorized, par value $ 0.01 ; 13,519 and 13,394 shares issued, respectively 135 134 Additional paid-in capital 115,411 114,017 Retained earnings 129,534 130,103 Treasury shares, at cost, 1,310 shares and 775 , respectively ( 15,004 ) ( 8,344 ) Total stockholders' equity 230,076 235,910 Total liabilities and stockholders' equity $ 328,246 $ 298,506 See accompanying notes to these consolidated financial statements. F - 3 NATURAL GAS SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except earnings per share) Year Ended December 31, 2022 2021 Revenue: Rental income $ 74,465 $ 63,624 Sales 8,568 6,882 Service and maintenance income 1,792 1,914 Total revenue 84,825 72,420 Operating costs and expenses: Cost of rentals, exclusive of depreciation stated separately below 37,750 36,638 Cost of sales, exclusive of depreciation stated separately below 7,650 7,829 Cost of service and maintenance, exclusive of depreciation stated separately below 957 898 Selling, general and administrative expenses 13,642 10,762 Depreciation and amortization 24,116 25,397 Inventory allowance 83 208 Retirement of rental equipment 196 3,096 Total operating costs and expenses 84,394 84,828 Operating income (loss) 431 ( 12,408 ) Other income (expense): Interest expense ( 364 ) ( 65 ) Other income (expense) ( 108 ) 687 Total other income, net ( 472 ) 622 Income (loss) before income taxes: ( 41 ) ( 11,786 ) (Provision for) benefit from income taxes: Current ( 17 ) 1 Deferred ( 511 ) 2,602 Total income tax benefit (expense) ( 528 ) 2,603 Net loss $ ( 569 ) $ ( 9,183 ) Loss per share: Basic $ ( 0.05 ) $ ( 0.70 ) Diluted $ ( 0.05 ) $ ( 0.70 ) Weighted average shares outstanding: Basic 12,305 13,100 Diluted 12,305 13,100 See accompanying notes to these consolidated financial statements. F - 4 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, 2020 — $ — 13,296 $ 133 $ 112,615 $ 139,286 38 $ ( 490 ) $ 251,544 Compensation expense on common stock options — — — — 1 — — — 1 Issuance of restricted stock — — 98 — — — — — — Compensation expense on restricted common stock — — — 1 1,737 — — — 1,738 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 ) BALANCES, December 31, 2021 — — 13,394 134 114,017 130,103 775 ( 8,344 ) 235,910 Compensation expense on common stock options — — — — 255 — — — 255 Issuance of restricted stock — — 125 — — — — — — Compensation expense on restricted common stock — — — 1 1,654 — — — 1,655 Taxes paid related to net shares settlement of equity awards — — — — ( 515 ) — — — ( 515 ) Purchase of treasury shares — — — — — — 535 ( 6,660 ) ( 6,660 ) Net loss — — — — — ( 569 ) — — ( 569 ) BALANCES, December 31, 2022 — $ — 13,519 $ 135 $ 115,411 $ 129,534 1,310 $ ( 15,004 ) $ 230,076 See accompanying notes to these consolidated financial statements. F - 5 NATURAL GAS SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2022 2021 CASH FLOWS FROM 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 Amortization of debt issuance costs 48 31 Deferred taxes 510 ( 2,602 ) Gain on disposal of assets ( 250 ) ( 182 ) Retirement of rental equipment 196 3,096 Bad debt allowance — 65 Inventory allowance 83 208 Stock-based compensation 1,910 1,738 (Gain) loss on company owned life insurance 389 ( 298 ) Changes in operating assets and liabilities: Trade accounts receivables ( 4,279 ) 1,430 Inventory ( 4,143 ) ( 1,277 ) Prepaid income taxes and prepaid expenses ( 250 ) ( 460 ) Accounts payable and accrued liabilities 11,309 9,756 Deferred income ( 1,275 ) 208 Other ( 31 ) 600 NET CASH PROVIDED BY OPERATING ACTIVITIES 27,764 28,527 CASH FLOWS USED IN INVESTING ACTIVITIES: Purchase of rental equipment, property and other equipment ( 65,122 ) ( 25,710 ) Purchase of company owned life insurance ( 329 ) ( 150 ) Proceeds from sale of property and equipment 372 195 NET CASH USED IN INVESTING ACTIVITIES ( 65,079 ) ( 25,665 ) CASH FLOWS USED IN FINANCING ACTIVITIES: Proceeds from line of credit 25,000 — Proceeds of other long-term liabilities ( 3 ) ( 1 ) Repayments of line of credit, net — ( 417 ) Payments of debt issuance costs ( 77 ) ( 237 ) Purchase of treasury shares ( 6,660 ) ( 7,854 ) Taxes paid related to net share settlement of equity awards ( 515 ) ( 336 ) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 17,745 ( 8,845 ) NET CHANGE IN CASH AND CASH EQUIVALENTS ( 19,570 ) ( 5,983 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,942 28,925 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,372 $ 22,942 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 276 $ 30 NON-CASH TRANSACTIONS Right of use asset acquired through an operating lease 229 — See accompanying notes to these consolidated financial statements. F - 6 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 10. All significant intercompany accounts and transactions for the periods presented have been eliminated in consolidation. Use of Estimates The preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires our management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant estimates include fixed asset lives, 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. 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 55 % and 46 % of our accounts receivable as of December 31, 2022 and 2021, respectively. 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 $ 0.3 million and $ 1.1 million at December 31, 2022 and 2021, respectively. Management believes that the allowance is adequate; however, actual write-offs may exceed the recorded allowance. F - 7 A summary of our allowance for doubtful accounts is as follows: Year Ended December 31, ($ in thousands) 2022 2021 Beginning balance $ 1,129 $ 1,161 Accruals — 65 Recoveries — 8 Write-offs ( 791 ) ( 105 ) Ending balance $ 338 $ 1,129 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 with ASC 842 – Leases, we have applied the practical expedient ASC 842-10-15-42A, which allows the Company to combine lease and non-lease components. Sales Revenue. The Company generates revenue by the sale of custom/fabricated compressors, flare systems and parts, as well as, exchange/rebuilding customer owned compressors and sale of used rental equipment. 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, 2022 and 2021 was approximately $ 0 and $ 20,000 , 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 - 8 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, 2022 2021 (in thousands) Compressors - sales $ 3,601 $ 1,891 Flares - sales 239 365 Other (Parts/Rebuilds) - sales 4,728 4,626 Service and maintenance 1,792 1,914 Total revenue from contracts with customers 10,360 8,796 Add: ASC 842 rental revenue 74,465 63,624 Total revenue $ 84,825 $ 72,420 Contract Balances As of December 31, 2022 and 2021, we had the following receivables and deferred income from contracts with customers: December 31, 2022 2021 (in thousands) Accounts Receivable Accounts receivable - contracts with customers $ 4,353 $ 3,354 Accounts receivable - ASC 842 10,653 8,164 Total Accounts Receivable 15,006 11,518 Less: Allowance for doubtful accounts ( 338 ) ( 1,129 ) Total Accounts Receivable, net $ 14,668 $ 10,389 Deferred income $ 37 $ 1,312 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, 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. F - 9 T ransaction Price Allocated to the Remaining Performance Obligations As of December 31, 2022, 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 Accounting Standards Codification ("ASC") 842 requires all leases to be reported on the balance sheet as right-of-use ("ROU") assets and lease obligations. We determine if an arrangement is a lease at inception and determine lease classification and recognize ROU assets and liabilities on the lease commencement date based on the present value of lease payments over the lease term. As the discount rate implicit in the lease is rarely readily determinable, we estimate our incremental borrowing rate using information available at the commencement date in determining the present value of the lease payments. We, as a lessee, apply the practical expedient to not separate non-lease components from lease components, therefore, accounting for each separate lease component and its associated non-lease component, as a single lease component. For each lease that 1) contains the same timing and pattern of transfer for lease and non-lease components and 2) if the lease component, if accounted for separately, would be classified as an operating lease, the Company has elected to not separate non-lease components from lease components. Major Customers and Concentration of Credit Risk Sales and rental income from Occidental Permian, LTD. ("Oxy") in 2022 and 2021 amounted to 42 % and 40 % of revenue, respectively. No other single customer accounted for more than 10% of our revenues in 2022 and 2021. Oxy's accounts receivable balances amounted to 55 % and 46 % of our accounts receivable as of December 31, 2022 and 2021, respectively. No other customers amounted to more than 10% of our accounts receivable as of December 31, 2022 and 2021. Inventory Inventory (current and long-term) is valued at the lower of cost and net realizable value. The cost of inventories is determined by the weighted average method. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on current and anticipated customer demand and production requirements. The Company assesses anticipated customer demand based on current and upcoming capital expenditure budgets of its major customers as well as other significant companies in the industry, along with oil and natural gas price forecasts and other factors affecting the industry. In addition, our long-term inventory consists of raw materials and replacement parts that remain 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. F - 10 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. Intangibles At December 31, 2022 and 2021, NGS had intangible assets, which relate to developed technology and a trade name. Developed technology is amortized on a straight-line basis with a useful life of 20 years, with a weighted average remaining life of approximately four years as of December 31, 2022. NGS has an intangible asset related to the trade name of SCS which was acquired in our acquisition of Screw Compression Systems in January 2005. This asset is not being amortized as it has been deemed to have an indefinite life. Our policy is to review intangibles that are being amortized for impairment when indicators of impairment are present. In addition, it is our policy to review indefinite-lived intangible assets for impairment annually or when indicators of impairment are present. We review intangibles through an assessment of the estimated future cash flows related to such assets. In the event that assets are found to be carried at amounts in excess of estimated undiscounted future cash flows, then the assets will be adjusted for impairment to a level commensurate with a discounted cash flow analysis of the underlying assets. Warranty When warranted, we accrue amounts for estimated warranty claims based upon current and historical product warranty costs and any other related information known. There was no warranty reserve as of December 31, 2022 and 2021. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and net operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the statutory enactment date. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In order to record any financial statement benefit, we are required to determine, based on technical merits of the position, whether it is more likely than not (a likelihood of more than 50 percent) that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes. If that step is satisfied, then we must measure the tax position to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of the benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We have no uncertain tax positions as of December 31, 2022. Our policy regarding income tax interest and penalties is to expense those items as other expense. 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. F - 11 Management believes that the fair value of our cash and cash equivalents, trade receivables, accounts payable and line of credit at December 31, 2022 and 2021 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. 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. 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. The maintenance and service of our products is consistent across the entire Company and is performed via an internal fleet of vehicles. The regulatory environment is similar in every jurisdiction in that the most impacting regulations and practices are the result of federal energy policy. Recently Issued Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments to ASC Topic 326 require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including trade receivables. For companies that qualify as smaller reporting companies, the amendments in this update are effective for interim and annual periods beginning after January 1, 2023. 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 $ 120,000 and $ 64,000 at December 31, 2022 and 2021, respectively, consisted of the following: December 31, 2022 2021 (in thousands) Raw materials - current $ 21,354 $ 17,528 Work-in-process 2,060 1,801 Inventory - current 23,414 19,329 Raw materials - long term (net of allowances of $ 120 and $ 64 , respectively) 1,557 1,582 Inventory - total $ 24,971 $ 20,911 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 We routinely review our inventory allowance balance to account for slow moving or obsolete inventory costs that may not be recoverable in the future. F - 12 A summary of our inventory allowance is as follows: Year Ended December 31, 2022 2021 (in thousands) Beginning balance $ 64 $ 221 Accruals 83 208 Write-offs ( 27 ) ( 365 ) Ending balance $ 120 $ 64 4. Rental Equipment, Property and Equipment Rental Equipment Our rental equipment and associated accumulated depreciation as of December 31, 2022 and 2021, respectively, consisted of the following: December 31, 2022 2021 (in thousands) Compressor units $ 387,145 $ 374,336 Work-in-progress 37,034 5,212 Rental equipment 424,179 379,548 Accumulated depreciation ( 177,729 ) ( 172,563 ) Rental equipment, net of accumulated depreciation $ 246,450 $ 206,985 Our rental equipment has an estimated useful life between 15 and 25 years. 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 Company management routinely reviews its inventory of rental equipment for retirement or obsolescence. During 2022, 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 124 units should be retired from our rental fleet. Accordingly, we recorded a $ 0.2 million loss on retirement of rental equipment during the year ended December 31, 2022. During our review of our rental compressor units in 2021, we determined 263 units should be retired from our rental fleet. We recorded a $ 3.1 million loss on retirement of rental equipment. F - 13 Property and Equipment Property and equipment consists of the following at December 31, 2022 and 2021: December 31, Useful Lives (Years) 2022 2021 ($ in thousands) Land — $ 1,680 $ 1,680 Building 39 19,166 18,977 Leasehold improvements 39 1,218 1,197 Office equipment and furniture 5 2,016 2,016 Software 5 573 573 Machinery and equipment 7 4,052 3,874 Vehicles 3 9,858 8,295 Work-in-progress 594 — Total 39,157 36,612 Less accumulated depreciation ( 16,981 ) ( 15,784 ) Total $ 22,176 $ 20,828 Depreciation expense for property and equipment was $ 2.1 million and $ 2.4 million for the year ended December 31, 2022 and 2021, 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, 2022 and 2021: December 31, 2022 2021 (in thousands) Rentals $ 23,243 $ 24,423 Sales 275 281 Service & Maintenance 33 49 Corporate 440 476 Total $ 23,991 $ 25,229 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 - 14 Future minimum rent payments for arrangements not on a month-to-month basis at December 31, 2022 are as follows: Years Ending December 31, (in thousands) 2023 $ 32,494 2024 19,098 2025 16,682 2026 7,835 2027 3,303 Thereafter — Total $ 79,412 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 eight years . Renewal and termination options are included in the lease term when it is reasonably certain that the Company will exercise the option. The Company's lease agreements do not contain any contingent rental payments, material residual guarantees or material restrictive covenants. Right of use assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As substantially all of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate, which is based on a fully collateralized loan over the lease term, to determine the present value of lease payments. The Company has no finance leases. The following table reflects the amounts related to leases that are recorded on our consolidated balance sheets as of December 31, 2022 and 2021 : Classification on Consolidated December 31, Balance Sheets 2022 2021 ($ in thousands) Operating lease assets Right of use assets-operating leases $ 349 $ 285 Current lease liabilities Current operating leases $ 155 $ 68 Noncurrent lease liabilities Long-term operating leases 194 217 Total lease liabilities $ 349 $ 285 Weighted average remaining lease term in years 4.5 6.6 Implicit Rate 5.2 % 3.4 % Operating lease costs are recognized on a straight-line basis over the lease term. Total operating lease costs for the year ended December 31, 2022 was approximately $ 384,000 . December 31, 2022 2021 (in thousands) Cash paid for amounts included in the measurement of lease liabilities Operating lease cost (1) (2) $ 384 $ 556 (1) Lease costs are classified on the Consolidated Statements of Operations in cost of sales, cost of compressors and selling, general and administrative expenses. F - 15 (2) Includes costs of $ 207,000 for leases with terms of 12 months or less and $ 177,000 for leases with terms greater than 12 months for the year ended December 31, 2022. Includes costs of $ 346,000 for leases with terms of 12 months or less and $ 210,000 for leases with terms greater than 12 months for the year ended December 31, 2021. The following table shows the future maturities of lease liabilities: Years Ending December 31, Lease Liabilities (in thousands) 2023 $ 167 2024 41 2025 41 2026 40 2027 39 Thereafter 54 Total lease payments 382 Less: Imputed interest ( 33 ) Total $ 349 Rent expense under such leases was $ 177,000 and $ 210,000 for the years ended December 31, 2022 and 2021, respectively. 7. Intangibles At December 31, 2022 and 2021, the Company had intangible assets, which relate to developed technology and a trade name. Amortization expense recognized in each of the years ending December 31, 2022 and 2021 was $ 125,000 . Estimated amortization expense for the years 2023-2025 is approximately $ 125,000 per year. The Company has an intangible asset with a gross carrying value of $ 654,000 at December 31, 2022 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, 2022 December 31, 2021 Useful Life (years) Gross Carrying Value Accumulated Amortization Net Book Value Gross Carrying Value Accumulated Amortization Net Book Value Developed Technology 20 $ 2,505 $ 2,259 $ 246 $ 2,505 $ 2,134 $ 371 Trade Name Indefinite 654 — 654 654 — 654 Total $ 3,159 $ 2,259 $ 900 $ 3,159 $ 2,134 $ 1,025 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 during the years ended December 31, 2022 or 2021. F - 16 8. Credit Facility Previous Credit Agreement We had a senior secured revolving credit agreement (the "Previous Credit Agreement") with JP Morgan Chase Bank, N.A (the "Lender") that matured on March 31, 2021. The Previous Credit Agreement had an aggregate commitment of $ 30 million, subject to collateral availability. New Credit Agreement On May 11, 2021, we entered into a five year senior secured revolving credit agreement ("New Credit Agreement") with Texas Capital Bank, National Association (the "Lender") with an initial commitment of $ 20 million and an accordion feature that would increase the maximum commitment to $ 30 million, subject to collateral availability. 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; provided, however, the aggregate commitment amount is not permitted to exceed $ 50 million. The maturity date of the New Credit Agreement is May 11, 2026. The obligations under the New Credit Agreement are secured by a first priority lien on a variety of our assets, including inventory and accounts receivable as well as a variable number of our leased compressor equipment. 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 Amended and Restated Credit Agreement, we may draw, repay and re-borrow amounts available under the borrowing base up to the maximum aggregate availability discussed above. Generally, the borrowing base equals the sum of (a) 85 % of eligible accounts receivable owed to the Company, plus (b) 50 % of the eligible inventory, valued at the lower of cost or market value at such time, subject to a cap of this component not to exceed $ 2.5 million, plus (c) the lesser of (i) 95 % of the net book value of the compressors that the Lender has determined are eligible for the extension of credit, valued at the lower of cost or market value with depreciation not to exceed 25 years, at such time and (ii) 80 % of the net liquidation value percentage of the net book value of the eligible compressors that the Lender has determined are eligible for the extension of credit, valued at the lower of cost or market value with depreciation not to exceed 25 years, at such time, plus (d) 80 % of the net book value, valued at the lower of cost (excluding any costs for capitalized interest or other noncash capitalized costs) or market of the eligible new compressor fleet, minus (e) any required availability reserves determined by the Lender in its sole discretion. The Lender may adjust the borrowing base components if material deviations in the collateral are discovered in future audits of the collateral. Interest and Fees. Under the terms of the Amended and Restated Credit Agreement, we have the option of selecting the applicable variable rate for each revolving loan, or portion thereof, of either (a) the Base Rate (as defined below) plus the Applicable Margin, or (b) in the case of a Term SOFR (“Secured Overnight Financing Rate”) Loan, the Adjusted Term SOFR rate plus the Applicable Margin. "Base Rate" means, for any day, a rate of interest per annum equal to the highest of (a) the prime rate for such day; (b) the sum of the federal funds rate for such day plu s 0.50 %; and (c) the Adjusted Term SOFR for such day plu s 1.00 %. The Applicable Margin is determined based upon the leverage ratio as set forth in the most recent compliance certificate received by the Lender for each fiscal quarter from time to time pursuant to the Amended and Restated Credit Agreement. Depending on the leverage ratio, the Applicable Margin can 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. F - 17 Covenants. The Amended and Restated Credit Agreement contains customary representations and warranties, as well as covenants which, among other things, condition or limit our ability to incur additional indebtedness and liens; enter into transactions with affiliates; make acquisitions in excess of certain amounts; pay dividends; redeem or repurchase capital stock or senior notes; make investments or loans; make negative pledges; consolidate, merge or effect asset sales; or change the nature of our business. In addition, we are subject to certain financial covenants in the Amended and Restated Credit Agreement that require us to maintain (i) a leverage ratio, as defined, lesser than or equal to 3.50 to 1.00 as of the last day of each fiscal quarter ending on or prior to December 31, 2024 and 3.25 to 1.00 for the fiscal quarter ending March 31, 2025 and for each fiscal quarter thereafter and (ii) a fixed charge coverage ratio greater than or equal to 1.25 to 1.00 as of the last day of each fiscal quarter . Events of Default and Acceleration . The Amended and Restated Credit Agreement contains customary events of default for credit facilities of this size and type, and includes, without limitation, payment defaults; defaults in performance of covenants or other agreements contained in the Amended and Restated Credit Agreement and the other transaction documents; inaccuracies in representations and warranties; certain defaults, termination events or similar events; certain defaults with respect to any other Company indebtedness in excess of $ 1.0 million; certain bankruptcy or insolvency events; the rendering of certain judgments in excess of $ 1 million; certain ERISA events; certain change in control events and the defectiveness of any liens under the secured revolving credit agreement. Obligations outstanding under the Amended and Restated Credit Agreement may be accelerated upon the occurrence of an event of default. 9. Income Taxes The (provision for) benefit from income taxes for the years ended December 31, 2022 and 2021, consists of the following (in thousands): 2022 2021 Current (expense) benefit Federal benefit $ — $ — State (expense) benefit ( 17 ) 1 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: 2022 2021 Statutory rate 21.0 % 21.0 % State and local taxes 812.2 % 5.2 % Stock based compensation ( 58.5 ) % ( 0.7 ) % Nondeductible compensation ( 1846.3 ) % ( 3.6 ) % Other ( 217.1 ) % 0.2 % Effective rate ( 1288.7 ) % 22.1 % 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. 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, 2022. F - 18 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): 2022 2021 Deferred income tax assets: Net operating loss $ 6,391 $ 5,355 Research and development credits 1,338 1,363 Stock compensation 121 114 Deferred compensation 617 632 Other 354 515 Total deferred income tax assets 8,821 7,979 Deferred income tax liabilities: Property and equipment ( 48,427 ) ( 47,044 ) Goodwill and other intangible assets ( 192 ) ( 223 ) Total deferred income tax liabilities ( 48,619 ) ( 47,267 ) Net deferred income tax liabilities $ ( 39,798 ) $ ( 39,288 ) 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 ("IRC"), could limit the amount of NOL carryforwards used in any one year. In general, under Section 382 and 383 of the IRC, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs and certain tax credits, to offset future taxable income and tax. In general, an ownership change occurs if the aggregate stock ownership of certain stockholders changes by more than 50 percentage points over such stockholders’ lowest percentage of ownership during the testing period (generally three years). We account for uncertain tax positions in accordance with guidance in FASB ASC 740, which prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. The Company assessed whether it had any uncertain tax positions related to open tax years and concluded there were none. Accordingly, no reserve for uncertain tax positions has been recorded as of December 31, 2022 and 2021. Our policy regarding income tax interest and penalties is to expense those items as incurred. During the years ended December 31, 2022 and 2021, there were no significant income tax interest or penalty items in the statement of operations. We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal or state income tax examination by tax authorities for years before 2015. 10. Deferred Compensation Plans Effective January 1, 2016, the Company established a non-qualified deferred compensation plan for executive officers, directors and certain eligible employees. The assets of the deferred compensation plan are held in a rabbi trust and are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The plan allows for deferral 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 $ 2.4 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. 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 $ 2.8 million and $ 2.8 million as of December 31, 2022 and 2021, respectively. The deferred obligation is included in other long-term liabilities in the consolidated balance sheets. F - 19 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, 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. 11. Stockholders' Equity Preferred Stock We have a total of 5.0 million authorized preferred shares which may be issued in series with rights and preferences as designated by the Board of Directors. As of December 31, 2022 and 2021, there were no issued or outstanding preferred shares. 12. Stock-Based and Other Long-Term Incentive Compensation Restricted Stock On June 20, 2019, at our annual meeting of shareholders, our shareholders approved an Equity Incentive Plan for restricted shares/units, stock options and other equity awards. 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 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. As of December 31, 2022, there was a total of approximately $ 1.0 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 . A summary of all restricted stock activity as of December 31, 2021 and 2022 and changes during the years then ended are presented below. Number of Shares Grant Date Fair Value Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Outstanding, December 31, 2020 258,101 $ 12.87 8.61 $ 2,447 Granted 156,339 $ 8.99 — $ 1,406 Vested ( 134,788 ) $ 14.94 — $ 1,258 Canceled/Forfeited ( 3,333 ) 12.26 — 31 Outstanding, December 31, 2021 276,319 $ 9.67 1.77 $ 2,893 Granted 126,662 $ 10.21 — $ 1,294 Vested ( 152,134 ) $ 10.99 — $ 1,778 Canceled/Forfeited — $ — — $ — Outstanding, December 31, 2022 250,847 $ 9.14 1.42 $ 2,681 Other Long-Term Incentive Compensation F - 20 On April 28, 2020, the Compensation Committee issued a long-term incentive award of $ 1.1 million to an executive officer that vests in equal, annual tranches over three years . At the time of vesting, each tranche will be payable in cash or common stock at the discretion of the Compensation Committee. On March 18, 2021, the Compensation Committee issued a long-term incentive award of $ 1.0 million to an executive officer that vests in equal, annual tranches over three years . On March 18, 2021, we issued a $ 50,000 award to each of our three independent Board members. On April 1, 2021, we issued a $ 50,000 award to a newly appointed independent Board member. These awards vest one year from the date of grant and 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. 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 $ 1.0 million for the year ended December 31, 2022. 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 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. We believe that such awards align the interests of our employees with our stockholders. Option awards are generally granted with an exercise price equal to the market price of our stock at the date of grant; those option awards generally vest in equal increments over three years of continuous service and have ten-year contractual terms. Certain option and share awards provide for accelerated vesting if there is a change in control of the Company (as defined in the Stock Option Plan). The last date that grants can be made under the Stock Option Plan is February 28, 2026. As of December 31, 2022, 344,253 shares were still available to be granted under the Stock Option Plan. The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of options granted is based on the vesting period and historical exercise and post-vesting employment termination behavior for similar grants. We use historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Weighted average Black -Scholes fair value assumption during the year ended December 31, are as follows: 2022 Risk free rate 2.99 % Expected life 2.67 Expected volatility 54.5 % Expected dividend yield — % During the year ended December 31, 2022, 215,000 stock option grants were made. F - 21 A summary of all option activity as of December 31, 2021 and 2022 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, 2020 161,334 $ 24.48 3.48 $ — Granted 55,500 $ 10.58 — — Exercised — — — — Canceled/Forfeited — $ — — $ — Expired ( 16,000 ) $ 17.81 — — Outstanding, December 31, 2021 200,834 $ 21.17 4.83 — Granted 215,000 $ 16.07 — — Exercised — — — — Canceled/Forfeited ( 200,750 ) $ ( 18.09 ) — — Expired ( 13,500 ) $ 13.29 — — Outstanding, December 31, 2022 201,584 $ 19.32 3.90 $ — Exercisable, December 31, 2022 160,084 $ 21.48 2.55 $ — The weighted average grant date fair value of options granted during 2022 was $ 4.24 per option. 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. The following table summarizes information about our stock options outstanding at December 31, 2022: 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 -$ 18.00 106,000 5.58 $ 13.30 64,500 $ 14.78 $ 18.01 -$ 22.00 13,000 0.22 18.75 13,000 $ 18.75 $ 22.01 -$ 26.00 29,667 2.28 22.90 29,667 $ 22.90 $ 26.01 -$ 30.00 20,750 4.13 28.15 20,750 $ 28.15 $ 30.01 -$ 34.00 32,167 1.22 30.41 32,167 $ 30.41 201,584 3.90 $ 19.32 160,084 $ 21.48 The summary of the status of our unvested stock options as of December 31, 2022 and changes during the year then ended is presented below. Unvested stock options: Shares Weighted Average Grant Date Fair Value Unvested at December 31, 2021 55,500 $ 10.58 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 F - 22 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. 13. 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, 2022 2021 Numerator: 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 per share: Weighted average common shares outstanding 12,305 13,100 Dilutive effect of stock options and restricted shares — — Diluted weighted average shares 12,305 13,100 Loss per common share: Basic $ ( 0.05 ) $ ( 0.70 ) Diluted $ ( 0.05 ) $ ( 0.70 ) 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. 14. Accrued Liabilities Accrued liabilities consists of the following as of December 31, 2022 and 2021 (in thousands): 2022 2021 Accrued purchases $ 17,763 $ 9,667 Accrued compensation 4,472 2,369 Accrued other 1,491 2,067 Total $ 23,726 $ 14,103 15. Commitments and Contingencies 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. F - 23 16. 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. 17. Subsequent Events On February 28, 2023, we entered into an Amended and Restated Credit Agreement. See Note 8. F - 24