NATURAL GAS SERVICES GROUP INC 10-Q

Item 1. Financial Statements NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value) (unaudited) September 30, December 31, 2024 2023 ASSETS Current Assets: Cash and cash equivalents $ 410 $ 2,746 Trade accounts receivable, net of allowance for credit losses of $ 1,248 and $ 823 , respectively 24,809 39,186 Inventory, net of allowance for obsolescence of $ 2,836 for each of the dates presented, respectively 20,175 21,639 Federal income tax receivable 11,382 11,538 Prepaid expenses and other 2,207 1,162 Total current assets 58,983 76,271 Long-term inventory, net of allowance for obsolescence of $ 1,168 for each of the dates presented, respectively 1,043 701 Rental equipment, net of accumulated depreciation of $ 211,841 and $ 191,745 , respectively 407,761 373,649 Property and equipment, net of accumulated depreciation of $ 18,609 and $ 17,649 , respectively 21,538 20,550 Intangibles, net of accumulated amortization of $ 2,478 and $ 2,384 , respectively 681 775 Other assets 8,063 6,783 Total assets $ 498,069 $ 478,729 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 26,473 $ 17,628 Accrued liabilities 7,041 15,085 Total current liabilities 33,514 32,713 Long-term debt 163,000 164,000 Deferred income tax liability 45,691 41,636 Other long-term liabilities 4,678 4,486 Total liabilities 246,883 242,835 Commitments and contingencies (Note 9) Stockholders’ Equity: Preferred stock, 5,000 shares authorized, no shares issued or outstanding — — Common stock, 30,000 shares authorized, par value $ 0.01 ; 13,741 and 13,688 shares issued, respectively 137 137 Additional paid-in capital 117,410 116,480 Retained earnings 148,643 134,281 Treasury shares, at cost, 1,310 shares for each of the dates presented, respectively ( 15,004 ) ( 15,004 ) Total stockholders’ equity 251,186 235,894 Total liabilities and stockholders’ equity $ 498,069 $ 478,729 See accompanying notes to these unaudited condensed consolidated financial statements. 1 NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except earnings per share) (unaudited) Three months ended Nine months ended September 30, September 30, 2024 2023 2024 2023 Revenue: Rental $ 37,350 $ 27,705 $ 106,010 $ 74,533 Sales 1,843 1,413 6,616 6,000 Aftermarket services 1,493 2,251 3,458 4,413 Total revenue 40,686 31,369 116,084 84,946 Operating costs and expenses: Cost of rentals, exclusive of depreciation stated separately below 14,442 13,462 41,784 36,450 Cost of sales, exclusive of depreciation stated separately below 2,028 1,505 6,457 6,618 Cost of aftermarket services, exclusive of depreciation stated separately below 1,324 1,846 2,836 3,424 Selling, general and administrative expenses 5,213 2,845 14,706 12,267 Depreciation and amortization 8,086 6,807 22,878 19,390 Impairments 136 — 136 779 Retirement of rental equipment — — 5 — Total operating costs and expenses 31,229 26,465 88,802 78,928 Operating income 9,457 4,904 27,282 6,018 Other income (expense): Interest expense ( 3,045 ) ( 1,600 ) ( 8,912 ) ( 1,785 ) Other income (expense), net ( 15 ) ( 87 ) 148 254 Total other expense ( 3,060 ) ( 1,687 ) ( 8,764 ) ( 1,531 ) Income before provision for income taxes 6,397 3,217 18,518 4,487 Income tax expense ( 1,383 ) ( 1,046 ) ( 4,156 ) ( 1,442 ) Net income $ 5,014 $ 2,171 $ 14,362 $ 3,045 Earnings per share: Basic $ 0.40 $ 0.18 $ 1.16 $ 0.25 Diluted $ 0.40 $ 0.18 $ 1.15 $ 0.25 Weighted average shares outstanding: Basic 12,427 12,378 12,404 12,295 Diluted 12,526 12,403 12,511 12,372 See accompanying notes to these unaudited condensed consolidated financial statements. 2 NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY (in thousands) (unaudited) Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Shares Amount January 1, 2023 — $ — 13,519 $ 135 $ 115,411 $ 129,534 1,310 $ ( 15,004 ) $ 230,076 Compensation expense on common stock options — — — — 22 — — — 22 Issuance of restricted stock — — 29 — — — — — — Compensation expense on restricted stock units — — — — 465 — — — 465 Taxes paid related to net shares settlement of equity awards — — — — ( 184 ) — — — ( 184 ) Net income — — — — — 370 — — 370 March 31, 2023 — $ — 13,548 $ 135 115,714 $ 129,904 1,310 $ ( 15,004 ) $ 230,749 Issuance of restricted stock — — 140 1 ( 1 ) — — — — Compensation expense on common stock options — — — — 30 — — — 30 Compensation expense on restricted stock units — — — — 1,100 — — — 1,100 Taxes paid related to net shares settlement of equity awards — — — — ( 798 ) — — — ( 798 ) Net income — — — — — 504 — — 504 June 30, 2023 — $ — 13,688 $ 136 116,045 $ 130,408 1,310 $ ( 15,004 ) $ 231,585 Compensation expense on common stock options — — — — 22 — — — 22 Compensation expense on restricted common stock — — — — 187 — — — 187 Net income — — — — — 2,171 — — 2,171 September 30, 2023 — $ — 13,688 $ 136 $ 116,254 $ 132,579 1,310 $ ( 15,004 ) $ 233,965 See accompanying notes to these unaudited condensed consolidated financial statements. 3 NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY (in thousands) (unaudited) Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Total Stockholders’ Equity Shares Amount Shares Amount Shares Amount January 1, 2024 — $ — 13,688 $ 137 $ 116,480 $ 134,281 1,310 $ ( 15,004 ) $ 235,894 Compensation expense on common stock options — — — — 29 — — — 29 Compensation expense on restricted stock units — — — — 245 — — — 245 Taxes paid related to net shares settlement of equity awards — — 6 — — — — — — Net income — — — — — 5,098 — — 5,098 March 31, 2024 — — 13,694 137 116,754 139,379 1,310 $ ( 15,004 ) 241,266 Compensation expense on common stock options — — — — 46 — — — 46 Issuance of restricted stock — — 33 — — — — — Compensation expense on restricted stock units — — — — 196 — — — 196 Taxes paid related to net shares settlement of equity awards — — — — ( 98 ) — — — ( 98 ) Net income — — — — — 4,250 — — 4,250 June 30, 2024 — — 13,727 137 116,898 143,629 1,310 $ ( 15,004 ) 245,660 Exercise of common stock options — — 7 — 70 — — — 70 Issuance of restricted stock — — 7 — — — — — — Compensation expense on common stock options — — — — 66 — — — 66 Compensation expense on restricted stock and performance share units — — — — 456 — — — 456 Taxes paid related to net shares settlement of equity awards — — — — ( 80 ) — — — ( 80 ) Net income — — — — — 5,014 — — 5,014 September 30, 2024 — $ — 13,741 $ 137 $ 117,410 $ 148,643 1,310 $ ( 15,004 ) $ 251,186 See accompanying notes to these unaudited condensed consolidated financial statements. 4 NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine months ended September 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 14,362 $ 3,045 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,878 19,390 Amortization of debt issuance costs 530 287 Deferred income tax expense 4,055 1,408 Stock-based compensation 1,038 1,826 Provision for credit losses 433 199 Impairments 136 779 Gain on sale of assets ( 475 ) ( 281 ) Retirement of rental equipment 5 — Gain on company owned life insurance ( 152 ) 49 Changes in operating assets and liabilities: Trade accounts receivables 13,944 ( 13,572 ) Inventory 1,122 ( 2,608 ) Prepaid expenses and prepaid income taxes ( 1,025 ) ( 281 ) Accounts payable and accrued liabilities 1,271 14,951 Deferred revenue ( 418 ) ( 37 ) Other ( 667 ) 543 NET CASH PROVIDED BY OPERATING ACTIVITIES 57,037 25,698 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of rental equipment, property and other equipment ( 57,350 ) ( 128,563 ) Purchase of company owned life insurance ( 13 ) ( 378 ) Proceeds from sale of property and equipment 504 231 Proceeds from surrender of company owned life insurance 178 — NET CASH USED IN INVESTING ACTIVITIES ( 56,681 ) ( 128,710 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from credit facility borrowings 8,000 103,000 Repayment of credit facility borrowings ( 9,000 ) — Payments of other long-term liabilities, net ( 622 ) ( 50 ) Payments of debt issuance costs ( 962 ) ( 2,131 ) Proceeds from exercise of stock options 70 — Taxes paid related to net share settlement of equity awards ( 178 ) ( 982 ) NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ( 2,692 ) 99,837 NET CHANGE IN CASH AND CASH EQUIVALENTS ( 2,336 ) ( 3,175 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,746 3,372 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 410 $ 197 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 14,445 $ 4,347 NON-CASH TRANSACTIONS Transfer of rental equipment to inventory $ — $ 708 Right of use assets acquired through a finance lease $ 2,174 $ 63 Right of use asset acquired through an operating lease $ 520 $ — See accompanying notes to these unaudited condensed consolidated financial statements. 5 Natural Gas Services Group, Inc. Notes to Condensed Consolidated Financial Statements (unaudited) 1. Description of Business Natural Gas Services Group, Inc. (the “Company,” “NGS,” “Natural Gas Services Group,” “we,” “us” or “our”) (a Colorado corporation), is a leading provider of natural gas compression equipment, technology and services to the energy industry. We rent, design, sell, install, service and maintain natural gas compressors for oil and natural gas production and processing facilities, generally using equipment from third-party fabricators and OEM suppliers along with limited in-house assembly. NGS is headquartered in Midland, Texas, with an assembly facility located in Tulsa, Oklahoma, a rebuild shop in Midland, Texas, and service facilities located in major oil and natural gas producing basins in the U.S. We operate in one reportable segment. The Company was formed on December 17, 1998. 2. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company, its subsidiary, NGSG Properties, LLC, which owns the Company’s headquarters office building and the rabbi trust associated with our deferred compensation plan. All significant intercompany accounts and transactions for the periods presented have been eliminated in consolidation. These financial statements include all adjustments, consisting of normal recurring adjustments, considered necessary for the fair presentation of our financial position at September 30, 2024 and the results of our operations for the three months and nine months ended September 30, 2024 and 2023. As permitted by the rules and regulations of the Securities and Exchange Commission (the “SEC”), the accompanying Condensed Consolidated Financial Statements do not include all disclosures normally required by generally accepted accounting principles in the United States of America (“GAAP”). These financial statements should be read in conjunction with the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 on file with the SEC. In our opinion, the Condensed Consolidated Financial Statements represent a fair representation of our financial position, results of operations, changes in stockholders’ equity and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2024. Revenue Recognition Policy Revenue is measured based on the consideration and terms specified in a customer’s contract, excluding any sale incentives and taxes collected on behalf of third parties (i.e. sales and property taxes). Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive for those goods or services. To recognize revenue, we (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, we satisfy the performance obligation(s). Shipping and handling costs incurred are accounted for as fulfillment costs and are included in cost of revenues in our Condensed Consolidated Statements of Operations. Nature of Goods and Services The following is a description of principal activities from which we generate our revenue: Rental Revenue. We generate revenue from renting compressors 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 during the rental contract. Our rental contracts typically range from six to 60 months. Our revenue is recognized over time, with monthly payments over the term of the contract. After the term of the contract has expired, a customer may renew its contract or continue renting on a monthly basis thereafter. In accordance with ASC 842, we have applied the practical expedient which allows us to combine lease and non-lease components. 6 Sales Revenue . We generate revenue by the sale of custom/fabricated compressors and parts, as well as exchange/rebuilding customer owned compressors and sale of used rental equipment. Our sales revenue is recognized in accordance with ASC Topic 606, Revenues from Customers. Custom compressors - We design and coordinate the assembly of compressors based on our customer’s specifications outlined in their contract. Though the equipment being built is customized by the customer, control under these contracts does not pass to the customer until the compressor is completed and shipped, or in accordance with a bill and hold arrangement, in which the customer accepts title and assumes the risk and rewards of ownership at a specified time. We request certain of our customers to make progressive payments as the compressor is being built; these payments are presented as deferred revenue within Accrued liabilities on the Condensed Consolidated Balance Sheet until control has been transferred. These contracts also may include an assurance warranty clause to guarantee the product is free from defects in material and workmanship for a set duration of time; this is a standard industry practice and is not considered a performance obligation. Parts - Revenue is recognized after the customer obtains control of the parts. Control is passed either by the customer taking physical possession or the parts being shipped. The amount of revenue recognized is not adjusted for expected returns, as our historical part returns have been de minimis. Exchange or rebuild customer-owned compressors - Based on the contract, we 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 or rebuilt 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 - From time to time, a customer may request to purchase a used compressor out of our rental fleet. Revenue from the sale of rental equipment is recognized when the control has passed to the customer based on the terms of the contract, i.e. when the customer has taken physical possession or the equipment has been shipped. Aftermarket Service Revenue . We provide routine or call-out services on customer owned equipment as well as commissioning of new units for customers. Revenue is recognized after services in the contract are rendered. Payment terms for sales revenue and aftermarket services revenue discussed above are generally 30 to 60 days although terms for specific customers can vary. Also, the transaction prices are not subject to variable consideration constraints. Disaggregation of Revenue The following table summarizes our revenue disaggregated by product or service type for the periods presented: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 (in thousands) (in thousands) Compressors - sales $ 383 $ 207 $ 1,724 $ 1,214 Other (parts/rebuilds) - sales 1,460 1,206 4,892 4,786 Aftermarket services 1,493 2,251 3,458 4,413 Total revenue from contracts with customers 3,336 3,664 10,074 10,413 ASC 842 rental revenue 37,350 27,705 106,010 74,533 Total revenue $ 40,686 $ 31,369 $ 116,084 $ 84,946 7 Contract Balances We had the following receivables and deferred revenue from contracts with customers as of the dates presented: September 30, 2024 December 31, 2023 (in thousands) Accounts Receivable Sales and aftermarket services $ 4,394 $ 7,138 Rentals 21,663 32,871 Total Accounts Receivable 26,057 40,009 Less: Allowance for credit losses ( 1,248 ) ( 823 ) Total Accounts Receivable, net $ 24,809 $ 39,186 Deferred revenue $ — $ 418 We recognized sales revenues of $ 0.4 million for the nine months ended September 30, 2024 that was included in accrued liabilities at the beginning of 2024. Remaining Performance Obligations As of September 30, 2024, we had no deferred revenue related to unsatisfied performance obligations. Contract Costs We recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. These costs are included within Selling, general and administrative expenses in our Condensed Consolidated Statements of Operations. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and net operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense in the tax provision in our Condensed Consolidated Statements of Operations. With respect to uncertain tax positions, GAAP prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the Condensed Consolidated Financial Statements. Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. A liability for unrecognized tax benefits is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. We had no liabilities for uncertain ta x positions as of September 30, 2024 and December 31, 2023. Our policy regarding income tax interest and penalties is to charge those items as components of interest expense and other expense, respectively. Capitalized Interest We capitalize interest from external borrowings on significant expenditures for the assembly of our natural gas compressor equipment until such projects are ready for their intended use. Capitalized interest is added to the cost of the underlying asset and is amortized over the useful lives of the assets in the same manner as the underlying assets. For the three months ended September 30, 2024 and 2023, we capitalized interest aggregating approximately $ 1.2 million and $ 1.4 million, respectively. For the nine months ended September 30, 2024 and 2023, we capitalized interest aggregating approximately $ 3.6 million a nd $ 4.1 million , respe ctively. 8 Recently Issued Accounting Pronouncements In December 2023, the Financial Standards Accounting Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09 “Income Taxes (Topics 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”) to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted. We are currently evaluating the potential effect that ASU 2023-09 will have on our Consolidated Financial Statement disclosures. In November 2023, the FASB issued ASU 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (“ASU 2023-07”) which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. The adoption of ASU 2023-07 is not expected to have a material impact on our Consolidated Financial Statements or disclosures. In November 2024, the FASB issued ASU 2024-03 “Income Statement-Reporting Comprehensive Income-Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expense ” (“ASU 2024-03”) which expands annual and interim disclosures expenses for certain types of expenses (including purchases of inventory, employee compensation, depreciation, amortization, and depletion) in commonly presented expense captions (such as cost of sales, selling, general & administrative expenses, and research and development). ASU 2024-03 is effective for our annual periods beginning January 1, 2027, and for interim periods beginning January 1, 2028, with early adoption permitted. The adoption of ASU 2024-03 is not expected to have a material impact on our Consolidated Financial Statements or disclosures. 3. Inventory The following table summarizes the components of our inventory, net of allowance for obsolescence, as of the dates presented: September 30, 2024 December 31, 2023 (in thousands) Inventory, net of allowance for obsolescence of $ 2,836 $ 19,563 $ 20,227 Work-in-process 612 1,412 Inventory - current 20,175 21,639 Raw materials - long term net of allowance of $ 1,168 1,043 701 Inventory - total $ 21,218 $ 22,340 Our long-term inventory consists of raw materials that remain viable but that we do not expect to sell or use within one year. Inventory Allowance We routinely review our inventory allowance balance to account for slow moving or obsolete inventory costs that may not be recoverable in the future. A summary of activity in our inventory allowance is as follows, for the periods presented: Nine months ended Year ended September 30, 2024 December 31, 2023 (in thousands) Beginning balance $ 4,004 $ 120 Accruals — 3,965 Write-offs — ( 81 ) Ending balance $ 4,004 $ 4,004 9 4. Federal Income Tax Receivable On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act ” ) was enacted in response to the economic impact caused by the COVID-19 pandemic. The CARES Act allowed net operating losses (“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. We generated significant NOLs during 2018 and 2019, and have filed amended returns to carryback these losses for five years. Accordingly, during 2020, we recorded a federal income tax receivable of $ 15.0 million and an increase to our deferred income tax liability of $ 10.1 million on our Condensed Consolidated Balance Sheet. During the third quarter of 2020, we received refunds totaling $ 3.9 million related to our 2018 NOLs, which reduced our federal income tax receivable to $ 11.4 million and $ 11.5 million on our Condensed Consolidated Balance Sheet as of September 30, 2024 and December 31, 2023, respectively. 5. Rental Equipment Our rental equipment and associated accumulated depreciation consisted of the following, as of the dates presented: September 30, 2024 December 31, 2023 (in thousands) Compressor units $ 564,594 $ 514,527 Work-in-process 55,008 50,867 619,602 565,394 Accumulated depreciation ( 211,841 ) ( 191,745 ) $ 407,761 $ 373,649 We evaluated our rental equipment for potential impairments as of September 30, 2024, and December 31, 2023 and determined that none were present. 6. Long-term Debt Our outstanding long-term debt consists of the following, as of the dates presented: September 30, 2024 December 31, 2023 (in thousands) Credit facility borrowings $ 163,000 $ 164,000 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 the Texas Capital Bank, National Association (the “Lender ” ), as administrative agent, 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 $ 175.0 million as of the closing date. 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 most of our assets, including inventory and accounts receivable as well as a variable number of our leased compressor equipment. In connection with the closing of the Amended and Restated Credit Agreement, we incurred fees of $ 2.0 million (representing fees equal to 1.39 % of the $ 145.0 million increase in the commitment from the previous credit agreement) and reimbursed the lenders for their expenses. On November 14, 2023, we entered into a First Amendment to the Amended and Restated Credit Agreement (the “Amendment”) with the Lender, as administrative agent and certain other lenders to (i) increase the lender commitment from $ 175.0 million to $ 225.0 million, and (ii) to add First-Citizens Bank & Trust Company as a new lender to the facility. In connection with the Amendment, we incurred fees of $ 0.6 million (representing fees equal to 1.125 % of the $ 50.0 million increase in the commitment) and reimbursed the lenders for their expenses. 10 On June 6, 2024, we entered into a Second Amendment to the Amended and Restated Credit Agreement (the “Second Amendment”) with the Lender and certain other lenders primarily to (i) increase the aggregate lender commitment from $ 225.0 million to $ 300.0 million, (ii) revise the leverage ratio covenant (as more fully describe below) and (iii) to add Zions Bancorporation, N.A. (dba Amegy Bank) as a new lender to the facility. In connection with the Second Amendment, we incurred fees of $ 0.9 million (representing 1.125 % of the $ 75.0 million increase in the commitment) and reimbursed the lenders for their expenses. On June 25, 2024, we entered into a Third Amendment to the Amended and Restated Credit Agreement (the “Third Amendment”) with the Lender, as administrative agent and the lenders thereto to increase the potential aggregate commitment of the existing credit facility from $ 300.0 million to $ 350.0 million. Under the Third Amendment, the Company has a right to request from the Lender, on an uncommitted basis, an increase of up to $ 50.0 million on the aggregate commitment; provided, however, the aggregate commitment amount is not permitted to exceed $ 350.0 million. In connection with the Third Amendment, we reimbursed the lenders for their expenses. As of September 30, 2024, we had $ 163.0 million outstanding under our Amended and Restated Credit Agreement with a weighted average interest rate of 8.82 %. At September 30, 2024, we had approximately $ 131.1 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination. As of September 30, 2024, we were in compliance with all financial covenants in our Amended and Restated Credit Agreement. Borrowing Base . At any time before the maturity of the Amended and Restated Credit Agreement, we may draw, repay and re-borrow amounts available under the borrowing base up to the maximum aggregate availability discussed above. Generally, the borrowing base equals the sum of (a) 85 % of eligible accounts receivable owed to us, 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 Secured Overnight Financing Rate (“SOFR”) Loan, the Adjusted Term SOFR rate plus the Applicable Margin. “Base Rate” means, for any day, a rate of interest per annum equal to the highest of (a) the prime rate for such day; (b) the sum of the federal funds rate for such day plus 0.50 %; and (c) the Adjusted Term SOFR for such day plus 1.00 %. The Applicable Margin is determined based upon the leverage ratio as set forth in the most recent compliance certificate received by the Lender for each fiscal quarter from time to time pursuant to the Amended and Restated Credit Agreement. Depending on the leverage ratio, the Applicable Margin can be 2.00 % to 2.75 % for Base Rate Loans (as defined in the Amended and Restated Credit Agreement) and 3.00 % to 3.75 % for Term SOFR Loans and for requested letters of credit. In addition, we are required to pay a monthly commitment fee on the daily average unused amount of the commitment while the Amended and Restated Credit Agreement is in effect at an annual rate equal to 0.50 % of the unused commitment amount. Accrued interest is payable monthly on outstanding principal amounts and unused commitment fee, provided that accrued interest on Term SOFR Loans is payable at the end of each interest period, but in no event less frequently than quarterly. Covenants. The Amended and Restated Credit Agreement contains customary representations and warranties, as well as covenants which, among other things, condition or limit our ability to incur additional indebtedness and liens; enter into transactions with affiliates; make acquisitions in excess of certain amounts; pay dividends; redeem or repurchase capital stock or senior notes; make investments or loans; make negative pledges; consolidate, merge or effect asset sales; or change the nature of our business. In addition, we are subject to certain financial covenants in the Amended and Restated Credit Agreement that require us to maintain (i) a leverage ratio, as defined, lesser than or equal to (a) 3.50 to 1.00 as of the last day of each fiscal quarter ending on or prior to December 31, 2024, (b) 3.75 to 1.00 for the fiscal quarters ending on March 31, 2025 and June 30, 2025, (c) 3.50 to 1.00 for the fiscal quarters ending September 30, 2025, December 31, 2025 and March 31, 2026 and (d) 3.25 to 1.00 for the fiscal quarter ending June 30, 2026 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. 11 Events of Default and Acceleration . The Amended and Restated Credit Agreement contains customary events of default for credit facilities of this size and type, and includes, without limitation, payment defaults; defaults in performance of covenants or other agreements contained in the Amended and Restated Credit Agreement and the other transaction documents; inaccuracies in representations and warranties; certain defaults, termination events or similar events; certain defaults with respect to any other Company indebtedness in excess of $ 1.0 million; certain bankruptcy or insolvency events; the rendering of certain judgments in excess of $ 1.0 million; certain ERISA events; certain change in control events and the defectiveness of any liens. Obligations outstanding under the Amended and Restated Credit Agreement may be accelerated upon the occurrence of an event of default. 7. Stock-Based and Other Long-Term Incentive Compensation 1998 Stock Option Plan After consideration of the activity described in the table below, a total of 405,919 shares remained available for grant under the 1998 Stock Option Plan (the “Stock Option Plan” ) as of September 30, 2024. The last date that grants can be made under the Stock Option Plan is February 28, 2026. A summary of all option activity during the nine months ended September 30, 2024 is presented below: Number of Shares Underlying Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Outstanding, December 31, 2023 129,751 $ 20.59 4.10 $ 274 Granted 46,000 $ 22.95 $ — Exercised ( 6,667 ) $ 10.58 $ 80 Canceled / Forfeited ( 7,167 ) $ 23.27 $ 3 Expired ( 29,667 ) $ 30.41 $ — Outstanding, September 30, 2024 132,250 $ 19.56 6.15 $ 368 Exercisable, September 30, 2024 69,417 $ 19.86 3.56 $ 208 The following table summarizes information about our stock options outstanding as of September 30, 2024: 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 44,333 7.55 $ 10.80 25,333 $ 10.90 $ 18.01 -$ 26.00 70,167 6.23 $ 22.93 26,334 $ 22.88 $ 26.01 -$ 30.00 17,750 2.38 $ 28.15 17,750 $ 28.15 132,250 6.15 $ 19.56 69,417 $ 19.86 12 The following table summarizes changes in our unvested stock options during the nine months ended September 30, 2024: Unvested Stock Options: Shares Weighted Average Grant Date Fair Value Per Share Unvested, December 31, 2023 24,335 $ 5.45 Granted 46,000 $ 12.37 Vested ( 5,502 ) $ 5.97 Canceled/Forfeited ( 2,000 ) $ 12.46 Unvested, September 30, 2024 62,833 $ 10.25 As of September 30, 2024, there was $ 0.4 million of unrecognized compensation cost related to unvested options. For each of the three and nine months ended September 30, 2024 and 2023, there was approximately $ 0.1 million of compensation expense for stock options, respectively. 2019 Equity Incentive Plan The 2019 Equity Incentive Plan, as amended (the “Equity Incentive Plan” ), as approved by our shareholders, provides for up to 1,150,000 shares of common stock for issuance in the form of awards. After consideration of the activity described in detail below, a total of 278,113 shares remained available for grant under the Equity Incentive Plan as of September 30, 2024. The following summarizes grants of certain awards made under our Equity Incentive Plan during 2024: • On January 29, 2024, the Compensation Committee awarded Justin Jacobs, our Chief Executive Officer (“CEO”) , 31,382 time-vested restricted stock units (“RSUs ”) and two performance share unit (“PSUs ” ) awards, one for 6,494 shares representing a signing bonus and another for 31,382 shares representing an award for 2024 (pro-rated). The RSU awards vest over three years in equal tranches beginning on the one-year anniversary of the grant date. • On March 4, 2024, the Compensation Committee awarded Brian Tucker, our Chief Operating Officer (“COO”) , 11,293 time-vested RSUs and 11,293 PSUs. The RSU awards vest over three years in equal tranches beginning on the one-year anniversary of the grant date. • On March 14, 2024, the Compensation Committee awarded Mr. Hazlett, our Chief Technical Officer, 21,984 time-vested RSUs. These RSUs were to vest over three years in equal tranches beginning on the one-year anniversary of the grant date. In connection with Mr. Hazlett ’ s recent retirement on August 1, 2024, we adjusted the vesting terms of the RSUs to correspond with the term of his post-retirement consulting agreement. • On May 7, 2024 and July 9, 2024 the Compensation Committee awarded certain non-executive employees a combined total of 10,616 time-vested RSUs. These RSUs vest over three years in equal tranches beginning on the one-year anniversary of the grant date. • On June 13, 2024, the Compensation Committee awarded each of our four independent Board members a total 5,620 RSUs, or a total of 22,480 RSUs. One half of these awards, or 11,240 in total, will vest one year from the date of grant and will be settled in shares of common stock. The other 11,240 awards will vest one year from the date of grant and can be settled, at the discretion of the recipients, in cash or shares of common stock. • On September 13, 2024, the Compensation Committee awarded Stephen Taylor, our current Chairman of the Board, a total of 4,195 RSUs for his current Board service, of which 2,098 will vest one year from the date of grant and will be settled in shares of common stock and 2,097 awards will vest one year from the date of grant and can be settled, at the discretion of Mr. Taylor, in cash or shares of common stock. 13 Performance Share Units In connection with the PSUs granted to our CEO and COO as set forth above, potential payout for the PSU award is based upon performance for a three-year period ending December 31, 2026 measured against relative total shareholder return (“TSR”) compared to a peer group of 16 companies as established by the Compensation Committee. The PSU award payout ranges from zero (if the Company ranks below the 31.25 percentile) and up to 200 % (if the Company ranks first) based upon our relative TSR performance ranking (subject to certain caps based on absolute TSR). With respect to vesting, the PSUs have both a service condition and a market condition. Due to the presence of the TSR measurement for the common equity of 17 companies, including NGS common stock, which is deemed a “market condition”, the grant-date fair value of the PSUs must be determined using a binomial pricing model. The grant date fair values of $ 19.59 per unit and $ 22.48 per unit for the PSUs awarded to the CEO and COO, respectively, were derived by using a Monte Carlo simulation model. The ranges for the assumptions used in the model for the PSUs are presented as follows: (i) expected volatility - 43.4 % to 43.8 %, (ii) dividend yield - 0 % and (iii) risk-free interest rates - 4.09 % to 4.39 %. The compensation expense associated with the PSUs, similar to stock options, will be recognized over the vesting term of three years whether or not the settlement results in the payout of shares. Cash Settled RSUs The 2024 grant of RSUs to the independent Board members and Mr. Taylor that can be settled in cash represent liability-classified awards. Compensation expense associated with these awards is based upon the fair value of NGS common stock at each reporting period relative to that portion of the service period that has passed. Accordingly, the compensation expense is variable in nature. Time-Vested RSUs A summary of all time-vested RSU activity during the nine months ended September 30, 2024 is presented below: Number of Shares Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Outstanding, December 31, 2023 133,898 $ 10.66 1.57 $ 1,813 Granted 88,613 $ 17.67 $ 1,565 Vested ( 69,824 ) $ 10.24 $ 1,522 Canceled/Forfeited ( 23,399 ) $ 11.07 $ 217 Outstanding, September 30, 2024 129,288 $ 15.68 4.96 $ 2,471 Total compensation expense related to these and previously granted awards under the Equity Incentive Plan was $ 0.5 million and $ 0.2 million for the three months ended September 30, 2024, and 2023, respectively, and $ 0.9 million and $ 1.8 million for the nine months ended September 30, 2024 and 2023, respectively. 14 8. Earnings per Share The following table reconciles the numerators and denominators of the basic and diluted earnings per share computation for the periods presented : Three months ended Nine months ended September 30, September 30, 2024 2023 2024 2023 (in thousands, except per share data) Numerator: Net income $ 5,014 $ 2,171 $ 14,362 $ 3,045 Denominator for earnings per basic common share: Weighted average common shares outstanding 12,427 12,378 12,404 12,295 Denominator for earnings per diluted common share: Weighted average common shares outstanding 12,427 12,378 12,404 12,295 Dilutive effect of stock options, RSUs and PSUs 99 25 107 77 Diluted weighted average shares 12,526 12,403 12,511 12,372 Earnings per common share: Basic $ 0.40 $ 0.18 $ 1.16 $ 0.25 Diluted $ 0.40 $ 0.18 $ 1.15 $ 0.25 9. Commitments and Contingencies From time to time, we are a party to various claims and legal proceedings arising from our operations in the ordinary course of business. We are not currently a party to any material legal proceedings, and we are not aware of any threatened material litigation. While the outcome of any claims and legal proceedings against us cannot be predicted with certainty, we have concluded that it is not considered reasonably possible that a loss resulting from such claims or proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse effect on our financial condition, results of operations or cash flows. Furthermore, we believe that we maintain adequate insurance coverage against any potential litigation loss relating to insurable risks. 10. Subsequent Events We have evaluated all events subsequent to the balance sheet date as of September 30, 2024 and through the date this report was issued and determined that there have been no events that would require adjustments or additional disclosures to our Condensed Consolidated Financial Statements. 15 Special Note Regarding Forward-Looking Statements This report and our Annual Report on Form 10-K for the year ended December 31, 2023 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) contain certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, and information pertaining to us, our industry and the oil and natural gas industry that is based on the beliefs of our management, as well as assumptions made by and information currently available to our management. All statements, other than statements of historical facts contained in this report as well as our Annual Report, including statements regarding our future financial position, growth strategy, budgets, projected costs, plans and objectives of management for future operations, are forward-looking statements. We use the words “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “intend,” “plan,” “budget” and other similar words to identify forward-looking statements. You should read statements that contain these words carefully and should not place undue reliance on these statements because they discuss future expectations, contain projections of results of operations or of our financial condition and/or state other “forward-looking” information. We do not undertake any obligation to update or revise publicly any forward-looking statements. Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations or assumptions will prove to have been correct. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Those risks include, but are not limited to, (i) achieving increased utilization of assets, including rental fleet utilization and monetizing other non-cash balance sheet assets; (ii) failure of projected organic growth due to adverse changes in the oil and gas industry, including depressed oil and gas prices, oppressive environmental regulations and competition; (iii) inability to finance capital expenditures; (iv) adverse changes in customer, employee or supplier relationships; (v) adverse regional and national economic and financial market conditions, including in our key operating areas; (vi) impacts of world events, including pandemics; the financial condition of the Company’s customers and failure of significant customers to perform their contractual obligations; (vii) our ability to economically develop and deploy new technologies and services, including technology to comply with health and environmental laws and regulations; (viii) failure to achieve accretive financial results in connection with any acquisitions we may make (ix) the loss of market share through competition or otherwise, including the introduction of competing technologies by other companies; and (x) prolonged, substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our products and services. The forward-looking statements included in this Form 10-Q are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. A discussion of these and other risk factors is included in our Annual Report filed with the SEC. Please read Item 1A, Risk Factors, in our Annual Report, as it contains important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements.