UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended~~September~~June 30, ~~2019~~2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number 1-31398

NATURAL GAS SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)


Colorado						75-2811855
(State or other jurisdiction of						~~(I.R.S. Employer~~
incorporation or organization)						(I.R.S. Employer Identification No.)

404 Veterans Airpark Ln., Ste 300

Midland, Texas 79705

(Address of principal executive offices)

(432) 262-2700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, Par Value $0.01

NGS

NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes x						No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes x						No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer x

☒

Non-accelerated filer o

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes ☐						No x

~~APPLICABLE ONLY TO CORPORATE ISSUERS~~

As of ~~October 28, 2019,~~August 10, 2020, there were ~~13,470,397~~13,466,564 shares of the Registrant's common stock, $0.01 par value, outstanding.

~~Securities registered pursuant to Section 12(b) of the Act:~~

~~Title of each class~~

~~Trading Symbol(s)~~

~~Name of each exchange on which registered~~

~~Common Stock, $0.01 par value~~

~~NGS~~

~~NYSE~~

Part I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets

Page

Unaudited Condensed Consolidated ~~Income~~ Statements of Operations

Page

Unaudited Condensed Consolidated Statements of Stockholders' Equity

Page

Unaudited Condensed Consolidated Statements of Cash Flows

Page

Notes to Unaudited Condensed Consolidated Financial Statements

Page

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Page

1921

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Page

2429

Item 4. Controls and Procedures

Page

2429

Part II - OTHER INFORMATION

Item 1. Legal Proceedings

Page

2530

Item 1A. Risk Factors

Page

Page

Page

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements


NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited)	NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited)									NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited)

		September 30,		December 31,			June 30,		December 31,
		2019		2018			2020		2019
ASSETS	ASSETS					ASSETS
Current Assets:	Current Assets:					Current Assets:
Cash and cash equivalents	Cash and cash equivalents	$	19,482	$	52,628	Cash and cash equivalents	$	15,451	$	11,592
Trade accounts receivable, net of allowance for doubtful accounts of $325 and $291, respectively		11,224		7,219
Trade accounts receivable, net of allowance for doubtful accounts of $972 and $918, respectively						Trade accounts receivable, net of allowance for doubtful accounts of $972 and $918, respectively	11,674		9,106
Inventory	Inventory	30,289		30,974		Inventory	15,761		21,080
Federal income tax receivable						Federal income tax receivable	14,992		—
Prepaid income taxes	Prepaid income taxes	3,102		3,148		Prepaid income taxes	95		40
Prepaid expenses and other	Prepaid expenses and other	1,320		2,430		Prepaid expenses and other	637		597
Total current assets	Total current assets	65,417		96,399		Total current assets	58,610		42,415
Long-term inventory, net of allowance of $3,371 and $19, respectively		540		3,980
Rental equipment, net of accumulated depreciation of $156,800 and $165,428, respectively		205,741		175,886
Property and equipment, net of accumulated depreciation of $12,317 and $11,556, respectively		22,101		16,587
Right of use assets - operating leases, net of accumulated amortization $130		447		—
Goodwill		—		10,039
Intangibles, net of accumulated amortization of $1,852 and $1,758, respectively		1,307		1,401
Long-term inventory, net of allowance for obsolescence of $37 and $24, respectively						Long-term inventory, net of allowance for obsolescence of $37 and $24, respectively	1,123		1,068
Rental equipment, net of accumulated depreciation of $173,462 and $162,348, respectively						Rental equipment, net of accumulated depreciation of $173,462 and $162,348, respectively	215,853		217,742
Property and equipment, net of accumulated depreciation of $12,771 and $12,847, respectively						Property and equipment, net of accumulated depreciation of $12,771 and $12,847, respectively	22,160		21,869
Right of use assets - operating leases, net of accumulated amortization of $258 and $158, respectively						Right of use assets - operating leases, net of accumulated amortization of $258 and $158, respectively	510		604

Intangibles, net of accumulated amortization of $1,946 and $1,883, respectively						Intangibles, net of accumulated amortization of $1,946 and $1,883, respectively	1,213		1,276
Other assets	Other assets	1,443		1,109		Other assets	1,690		1,603
Total assets	Total assets	$	296,996	$	305,401	Total assets	$	301,159	$	286,577
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:	Current Liabilities:					Current Liabilities:

Accounts payable	Accounts payable	$	4,183	$	2,122	Accounts payable	$	1,188	$	1,975
Accrued liabilities	Accrued liabilities	8,358		8,743		Accrued liabilities	2,538		2,287
Line of credit						Line of credit	417		417

Current operating leases	Current operating leases	107		—		Current operating leases	183		189
Deferred income	Deferred income	81		81		Deferred income	125		640
Total current liabilities	Total current liabilities	12,729		10,946		Total current liabilities	4,451		5,508
Line of credit		417		417

Deferred income tax liability	Deferred income tax liability	31,229		32,158		Deferred income tax liability	41,744		31,243
Long-term operating leases	Long-term operating leases	340		—		Long-term operating leases	327		415

Other long-term liabilities	Other long-term liabilities	1,790		1,699		Other long-term liabilities	1,780		1,718
Total liabilities	Total liabilities	46,505		45,220		Total liabilities	48,302		38,884
Commitments and contingencies (Notes 8 and 11)
Commitments and contingencies (Notes 6 and 13)						Commitments and contingencies (Notes 6 and 13)
Stockholders’ Equity:	Stockholders’ Equity:					Stockholders’ Equity:
Preferred stock, 5,000 shares authorized, 0 shares issued or outstanding	Preferred stock, 5,000 shares authorized, 0 shares issued or outstanding	—		—		Preferred stock, 5,000 shares authorized, 0 shares issued or outstanding	—		—
Common stock, 30,000 shares authorized, par value $0.01; 13,142 and 13,005 shares issued, respectively		131		130
Common stock, 30,000 shares authorized, par value $0.01; 13,286 and 13,178 shares issued, respectively						Common stock, 30,000 shares authorized, par value $0.01; 13,286 and 13,178 shares issued, respectively	133		132
Additional paid-in capital	Additional paid-in capital	109,861		107,760		Additional paid-in capital	111,489		110,573
Retained earnings	Retained earnings	140,989		152,291		Retained earnings	141,725		137,478

Treasury Shares, at cost, 38 shares	Treasury Shares, at cost, 38 shares	(490)		—		Treasury Shares, at cost, 38 shares	(490)		(490)
Total stockholders' equity	Total stockholders' equity	250,491		260,181		Total stockholders' equity	252,857		247,693
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	296,996	$	305,401	Total liabilities and stockholders' equity	$	301,159	$	286,577

See accompanying notes to these unaudited condensed consolidated financial statements.

NATURAL GAS SERVICES GROUP, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(in thousands, except earnings per share)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
Revenue:
Rental income $ 14,434 $ 12,039 $ 41,393 $ 34,937
Sales 5,877 3,947 15,816 13,328
Service and maintenance income 541 410 1,529 1,053
Total revenue 20,852 16,396 58,738 49,318
Operating costs and expenses:
Cost of rentals, exclusive of depreciation stated separately below 6,300 5,363 18,544 15,262
Cost of sales, exclusive of depreciation stated separately below 4,390 3,081 12,508 10,196
Cost of service and maintenance 164 107 470 273
Selling, general and administrative expense 2,791 2,353 7,966 6,683
Depreciation and amortization 5,867 5,536 17,108 16,372
Impairment of goodwill 10,039 — 10,039 —
Inventory allowance and retirement of rental equipment 4,862 — 4,862 —
Total operating costs and expenses 34,413 16,440 71,497 48,786
Operating (loss) income (13,561) (44) (12,759) 532
Other income (expense):
Interest expense (4) (4) (12) (10)
Other income, net 93 184 579 189
Total other income, net 89 180 567 179
(Loss) Income before provision for income taxes (13,472) 136 (12,192) 711
Income tax benefit (expense) 1,240 100 890 (3)
Net (loss) income $ (12,232) $ 236 $ (11,302) $ 708
(Loss) Earnings per share:
Basic $ (0.93) $ 0.02 $ (0.86) $ 0.05
Diluted $ (0.93) $ 0.02 $ (0.86) $ 0.05
Weighted average shares outstanding:
Basic 13,137 12,977 13,112 12,953
Diluted 13,137 13,254 13,112 13,228


NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except earnings per share) (unaudited)

	Three months ended						Six months ended
	June 30,						June 30,
	2020		2019		2020		2019
Revenue:
Rental income	$	15,131	$	13,572	$	31,231	$	26,959
Sales	2,008		5,814		3,458		9,939

Service and maintenance income	266		509		606		988
Total revenue	17,405		19,895		35,295		37,886
Operating costs and expenses:
Cost of rentals, exclusive of depreciation stated separately below	6,629		6,613		14,526		12,833
Cost of sales, exclusive of depreciation stated separately below	1,860		4,419		3,599		8,118

Cost of service and maintenance, exclusive of depreciation stated separately below	100		159		225		306

Selling, general and administrative expenses	2,663		2,682		4,825		5,175
Depreciation and amortization	6,301		5,720		12,541		11,297


Total operating costs and expenses	17,553		19,593		35,716		37,729
Operating (loss) income	(148)		302		(421)		157
Other income (expense):
Interest expense	(8)		(4)		(11)		(8)
Other income, net	378		181		193		486
Total other income, net	370		177		182		478
Income (loss) before provision for income taxes	222		479		(239)		635
Income tax (expense) benefit	(57)		(152)		4,486		(210)
Net income	$	165	$	327	$	4,247	$	425
Earnings per share:
Basic	$	0.01	$	0.02	$	0.32	$	0.03
Diluted	$	0.01	$	0.02	$	0.32	$	0.03
Weighted average shares outstanding:
Basic	13,237		13,134		13,197		13,100
Diluted	13,480		13,462		13,448		13,368

See accompanying notes to these unaudited condensed consolidated financial statements.


NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) (unaudited)	NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) (unaudited)																																													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		Preferred Stock											Common Stock										Additional Paid-In Capital		Retained Earnings	Treasury Stock	Total Stockholders' Equity
		Shares	Amount		Shares	Amount							Shares			Amount				Total Stockholders' Equity				Shares			Amount				Shares				Amount									Additional Paid-In Capital	Shares			Retained Earnings		Amount		Total Stockholders' Equity
BALANCES, January 1, 2018		—	$	—	12,880	$	129	$	105,325	$	151,865	—		$	—	$	257,319
BALANCES, January 1, 2019																		BALANCES, January 1, 2019	—			$	—			13,005			$	130			$	107,760			$	151,342		—		$	—			$	259,232
Exercise of common stock options	Exercise of common stock options	—	—		9	—		157		—		—		—		157		Exercise of common stock options	—		—				57			—				555				—			—		—				555
Compensation expense on common stock options	Compensation expense on common stock options	—	—		—	—		66		—		—		—		66		Compensation expense on common stock options	—		—				—			—				31				—			—		—				31
Issuance of restricted stock	Issuance of restricted stock	—	—		60	—		—		—		—		—		—		Issuance of restricted stock	—		—				71			—				—				—			—		—				—
Compensation expense on restricted common stock	Compensation expense on restricted common stock	—	—		—	—		362		—		—		—		362		Compensation expense on restricted common stock	—		—				—			1				463				—			—		—				464
Taxes paid related to net shares settlement of equity awards	Taxes paid related to net shares settlement of equity awards	—	—		—	—		(495)		—		—		—		(495)		Taxes paid related to net shares settlement of equity awards	—		—				—			—				(192)				—			—		—				(192)
Net income	Net income	—	—		—	—		—		225		—		—		225		Net income	—		—				—			—				—				98			—		—				98
BALANCES, March 31, 2018		—	$	—	12,949	$	129	$	105,415	$	152,090	—		$	—	$	257,634

Compensation expense on common stock options		—	—		—	—		31		—		—		—		31
Issuance of restricted stock		—	—		19	—		—		—						—
Compensation expense on restricted common stock		—	—		—	1		616		—		—		—		617
Taxes paid related to net shares settlement of equity awards		—	—		—	—		(134)		—		—		—		(134)
Net income		—	—		—	—		—		247		—		—		247
BALANCES, June 30, 2018		—	$	—	12,968	$	130	$	105,928	$	152,337	—		$	—	$	258,395

BALANCES, March 31, 2019																		BALANCES, March 31, 2019	—		$	—			13,133			$	131			$	108,617			$	151,440		—		$	—			$	260,188
Exercise of common stock options	Exercise of common stock options	—	—		29	—		522		—		—		—		522		Exercise of common stock options														(50)													(50)
Compensation expense on common stock options	Compensation expense on common stock options	—	—		—	—		30		—		—		—		30		Compensation expense on common stock options	—		—				—			—				30				—			—		—				30
Issuance of restricted stock	Issuance of restricted stock	—	—		4	—		—		—		—		—		—		Issuance of restricted stock	—		—				5			—				—				—			—		—				—
Compensation expense on restricted common stock	Compensation expense on restricted common stock	—	—		—	—		624		—		—		—		624		Compensation expense on restricted common stock	—		—				—			—				612				—			—		—				612
Taxes paid related to net shares settlement of equity awards	Taxes paid related to net shares settlement of equity awards	—	—		—	—		—		—		—		—		—		Taxes paid related to net shares settlement of equity awards	—		—				—			—				9				—			—		—				9
Net income	Net income	—	—		—	—		—		236		—		—		236		Net income	—		—				—			—				—				327			—		—				327
BALANCES, September 30, 2018		—	$	—	13,001	$	130	$	107,104	$	152,573	—		$	—	$	259,807
BALANCES, June 30, 2019																		BALANCES, June 30, 2019	—		$	—			13,138			$	131			$	109,218			$	151,767		—		$	—			$	261,116


NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) (unaudited)	NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) (unaudited)																																													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		Preferred Stock											Common Stock										Additional Paid-In Capital		Retained Earnings	Treasury Stock	Total Stockholders' Equity
		Shares	Amount		Shares	Amount							Shares			Amount				Total Stockholders' Equity				Shares			Amount				Shares				Amount									Additional Paid-In Capital	Shares			Retained Earnings		Amount		Total Stockholders' Equity
BALANCES, January 1, 2019		—	$	—	13,005	$	130	$	107,760	$	152,291	—		$	—	$	260,181
Exercise of common stock options		—	—		57	—		555		—		—		—		555
BALANCES, January 1, 2020																		BALANCES, January 1, 2020	—			$	—			13,178			$	132			$	110,573			$	137,478		38		$	(490)			$	247,693

Compensation expense on common stock options	Compensation expense on common stock options	—	—		—	—		31		—		—		—		31		Compensation expense on common stock options	—		—				—			—				17				—			—		—				17
Issuance of restricted stock	Issuance of restricted stock	—	—		71	—		—		—		—		—		—		Issuance of restricted stock	—		—				95			—				—				—			—		—				—
Compensation expense on restricted common stock	Compensation expense on restricted common stock	—	—		—	1		463		—		—		—		464		Compensation expense on restricted common stock	—		—				—			1				485				—			—		—				486
Taxes paid related to net shares settlement of equity awards	Taxes paid related to net shares settlement of equity awards	—	—		—	—		(192)		—		—		—		(192)		Taxes paid related to net shares settlement of equity awards	—		—				—			—				(149)				—			—		—				(149)
Net income	Net income	—	—		—	—		—		357		—		—		357		Net income	—		—				—			—				—				4,082			—		—				4,082
BALANCES, March 31, 2019		—	$	—	13,133	$	131	$	108,617	$	152,648	—		$	—	$	261,396
Exercise of common stock options		—	—		—	—		(50)		—		—		—		(50)
BALANCES, March 31, 2020																		BALANCES, March 31, 2020	—		$	—			13,273			$	133			$	110,926			$	141,560		38		$	(490)			$	252,129

Compensation expense on common stock options	Compensation expense on common stock options	—	—		—	—		30		—		—		—		30		Compensation expense on common stock options	—		—				—			—				1				—			—		—				1
Issuance of restricted stock	Issuance of restricted stock	—	—		5	—		—		—		—		—		—		Issuance of restricted stock	—		—				13			—				—				—			—		—				—
Compensation expense on restricted common stock	Compensation expense on restricted common stock	—	—		—	—		612		—		—		—		612		Compensation expense on restricted common stock	—		—				—			—				562				—			—		—				562
Taxes paid related to net shares settlement of equity awards		—	—		—	—		9		—		—		—		9

Net income	Net income	—	—		—	—		—		573		—		—		573		Net income	—		—				—			—				—				165			—		—				165
BALANCES, June 30, 2019		—	$	—	13,138	$	131	$	109,218	$	153,221	—		$	—	$	262,570
Exercise of common stock options		—	—		—	—		—		—		—		—		—
Compensation expense on common stock options		—	—		—	—		32		—		—		—		32
Issuance of restricted stock		—	—		4	—		—		—		—		—		—
Compensation expense on restricted common stock		—	—		—	—		611		—		—		—		611
Taxes paid related to net shares settlement of equity awards		—	—		—	—		—		—		—		—		—
Purchase of treasury shares		—	—		—	—		—		—		38		(490)		(490)
Net loss		—	—		—	—		—		(12,232)		—		—		(12,232)
BALANCES, September 30, 2019		—	$	—	13,142	$	131	$	109,861	$	140,989	38		$	(490)	$	250,491
BALANCES, June 30, 2020																		BALANCES, June 30, 2020	—		$	—			13,286			$	133			$	111,489			$	141,725		38		$	(490)			$	252,857


NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
	Six months ended
	June 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,247	$	425
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	12,541		11,297
Deferred income taxes	399		219
Stock-based compensation	1,066		1,137
Bad debt allowance	63		55


Gain on sale of assets	(273)		(37)

Loss (gain) on company owned life insurance	92		(131)

Changes in operating assets and liabilities:
Trade accounts receivables	(2,631)		(4,219)
Inventory	5,262		2,311
Federal income tax receivable	(14,992)		—
Prepaid expenses and prepaid income taxes	(95)		(225)
Accounts payable and accrued liabilities	(536)		(4,287)

Deferred income	(515)		32
Deferred tax liability increase due to tax law change	10,103		—
Other	71		192

NET CASH PROVIDED BY OPERATING ACTIVITIES	14,802		6,769
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of rental equipment, property and other equipment	(10,989)		(29,724)
Purchase of company owned life insurance	(196)		(111)
Proceeds from sale of property and equipment	383		26
Proceeds from sale of deferred compensation mutual fund	10		—
Proceeds from insurance claims of property and equipment	—		11
NET CASH USED IN INVESTING ACTIVITIES	(10,792)		(29,798)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loan	4,601		—
Repayment of loan	(4,601)		—
Payments from other long-term liabilities, net	(2)		(10)


Proceeds from exercise of stock options	—		505

Taxes paid related to net share settlement of equity awards	(149)		(183)

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES	(151)		312
NET CHANGE IN CASH AND CASH EQUIVALENTS	3,859		(22,717)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	11,592		52,628
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	15,451	$	29,911
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	11	$	8
Income taxes paid	$	63	$	45
NON-CASH TRANSACTIONS
Transfer of rental equipment components to inventory	$	—	$	347
Transfer of prepaids to rental equipment and inventory	$	—	$	574

Right of use asset acquired through an operating lease	$	5	$	126

See accompanying notes to these unaudited condensed consolidated financial statements.

NATURAL GAS SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended
September 30,
2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) income $ (11,302) $ 708
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization 17,108 16,372
Deferred income taxes (929) 133
Stock-based compensation 1,780 1,729
Bad debt allowance (recovery) 55 (137)
Inventory allowance 3,350 —
Impairment of goodwill 10,039 —
Gain on sale of assets (37) (49)
Retirement of rental equipment 1,512 —
(Gain) loss on company owned life insurance (145) 15
Changes in operating assets and liabilities:
Trade accounts receivables (4,060) 555
Inventory 1,861 6,307
Prepaid expenses and prepaid income taxes 198 (416)
Accounts payable and accrued liabilities 1,054 (2,397)
Deferred income — (51)
Other 125 267
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,609 23,036
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of rental equipment and property and equipment (53,401) (28,815)
Purchase of company owned life insurance (207) (237)
Proceeds from sale of property and equipment 26 49
Proceeds from insurance claims of property and equipment 11 —
NET CASH USED IN INVESTING ACTIVITIES (53,571) (29,003)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments from other long-term liabilities, net (16) (25)
Proceeds from exercise of stock options 505 680
Purchase of treasury shares (490) —
Taxes paid related to net share settlement of equity awards (183) (629)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (184) 26
NET CHANGE IN CASH AND CASH EQUIVALENTS (33,146) (5,941)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 52,628 69,208
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,482 $ 63,267
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 43 $ 10
Income taxes paid $ 254 $ 66
NON-CASH TRANSACTIONS
Transfer of rental equipment components to inventory $ 746 $ 144
Transfer of prepaids to rental equipment and inventory $ 958 $ —
Right of use acquired through an operating lease $ 126 $ —

~~See accompanying notes to these unaudited condensed consolidated financial statements.~~

Natural Gas Services Group, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~(1) Basis~~1. Description of ~~Presentation~~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.

Recent Events

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus known as COVID-19 due to the risks it imposes on the international community as the virus spreads globally. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The effects of the COVID-19 outbreak, including actions taken by businesses and governments to contain the spread of the virus, resulted in a significant, rapid decline in global and U.S. economic conditions. This significant drop in economic activity has caused global demand for crude oil to drastically decline. According to the International Energy Agency’s (“IEA”) Oil Market Report for July 2020, global crude oil demand during the second quarter of 2020 declined 16.4 million barrels per day (“MMbpd”) compared to the second quarter of 2019, a decrease of more than 15%.

In March 2020, discussion between OPEC and Russia (“OPEC+”) resulted in Saudi Arabia significantly discounting the price of its crude oil, as well as Saudi Arabia and Russia significantly increasing their oil supply in April 2020. The dramatic decline in crude oil demand combined with this increase in supply resulted in unprecedented storage issues and a resulting severe lack of takeaway capacity for oil producers. As a result, crude oil prices reached record or multi-year lows in April. West Texas Intermediate (“WTI”) crude oil traded below $20 per barrel and Brent crude oil traded below $30 per barrel during the second half of April, including an anomalous trading day where WTI traded at negative values on low volume close to the end of a contract trading month.

In April 2020, OPEC+ agreed to cut production by 9.7 MMbpd starting in May 2020, while Saudi Arabia voluntarily cut another 1 MMbpd starting in June 2020. Meanwhile, oil production dropped dramatically in non-OPEC countries, including the U.S. Burdened by low prices and takeaway issues, U.S. producers (including several of our customers) shut in production to varying degrees in April and May, and drilling and completion activities dramatically declined. According to IEA’s Oil Market Report for August 2020, U.S. production in May dropped 2 MMbpd from April and 2.9 MMbpd from its all-time high in November 2019. According to IEA’s July report, global oil supply fell to a nine-year low of 86.9 MMbpd in June.

As states throughout the U.S., as well as many other countries around the world, began to lift restrictions and reopened their economies to varying degrees, global demand for crude oil partially recovered. This increased demand, combined with the production cuts mentioned above, have resulted in the oil markets coming back into balance. After trading below $20 per barrel in the second half of April and averaging $28.53 per barrel in May, WTI crude oil has averaged approximately $40 per barrel since June 1 with greatly reduced price volatility.

These issues discussed above resulted in an increasing number of unit returns and shut-in notices from our customers during April and May 2020, which primarily impacted our small (125 HP or less) and medium (126 HP – 399 HP) horsepower units. In late May and throughout June as oil prices partially recovered and stabilized, we received restart notices for several wells that were recently shut in. As a result, our rental revenue, unit utilization, and horsepower utilization declined 6.0%, 5.2% and 4.5%, respectively, in the second quarter when compared to the first quarter of 2020. In addition, unit utilization remained steady in July compared to June, and unit pricing has stabilized.

Nevertheless, risks remain high in this environment. As restrictions have been reduced in many states and countries, the rate of COVID-19 infections, hospitalizations and deaths has increased, particularly in the U.S. This has resulted in a reinstatement of some restrictions in several states, including Texas. If states and countries need to put further restrictions in place to help prevent the spread of the virus, crude oil demand could decline again. In addition, according to IEA’s August report, global oil supply rose by 2.5 MMbpd in July after Saudi Arabia ended its 1 MMbpd additional voluntary production cut and U.S. production increased. Additional shut-in production could be restored, and completion activities by domestic producers are likely to increase somewhat during the second half of 2020 to offset production declines. These risks to both

supply and demand could negatively impact oil prices, which would impact our utilization, rental revenues and overall financial performance during the remainder of 2020 as well as 2021.

Given the current economic and industry backdrop, we still expect compressor sales to be low for the remainder of 2020, as exploration and production companies have significantly reduced their capital expenditures budgets.

In regards to our costs, we implemented various cost cutting measures with respect to operating expenses and capital expenditures during the second quarter. Our operating expense reductions included reductions in our headcount from both layoffs and attrition, wage freezes, centralization of certain processes for better cost control, and the enlistment of our suppliers in our cost cutting efforts. We expect these cost cutting measures to continue to benefit our financial performance through the remainder of 2020. In addition, as we have done during prior downturns, we have reduced our capital expenditures budget. We invested $11.0 million in capital expenditures during the first six months of 2020. After recently securing new rental orders from one of our larger customers, we plan to only incur another $8-$10 million in capital expenditures for the remainder of 2020, bringing our 2020 capital expenditures budget to $19-$21 million, down from $69.9 million in 2019.

Finally, in keeping with current commercial precautions and practices in our industry, we implemented new guidelines to mitigate health risks to our employees and customers during this outbreak. We adopted remote and staggered work processes at our Midland headquarters. After reopening our headquarters in Midland, Texas on June 1, Midland experienced a significant increase in COVID-19 infections, including a verified positive test among the Company’s professional staff. As a result, the Company was forced to close its corporate headquarters for a second time on June 29, 2020. The Company’s corporate headquarters remains closed as of the date of this filing. The office closure - which was dictated by positive testing and subsequent quarantines - and staffing challenges resulted in delays in our collection and assimilation of financial data related to the completion of our interim financial statements required for this filing. With remote and staggered work processes back in place, we do not anticipate such issues going forward.

In addition, we adapted our field and fabrication work processes as well. To date, our field operations have continued largely uninterrupted, as the U.S. Department of Homeland Security designated our industry as part of our country’s critical infrastructure. Remote work and work process adjustments related to COVID-19 have not impacted our ability to maintain of service operations or caused us to incur significant costs. In addition, we have not experienced any supply chain issues in connection with the COVID-19 outbreak.

The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company's financial condition, liquidity, and future results of operations. Management is actively monitoring the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak on its results of operations, financial condition, or liquidity during the remainder of 2020 or 2021.

2. Summary of Significant Accounting Policies

~~These notes apply to the unaudited condensed consolidated financial statements~~Principles of ~~Natural Gas Services Group, Inc. a Colorado corporation (the "Company", “NGSG”, "Natural Gas Services Group", "we" or "our").~~ Consolidation and Basis of Presentation

The accompanying unaudited condensed 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 5)9). All significant intercompany accounts and transactions for the periods presented have been eliminated in consolidation.

These financial statements include all adjustments, consisting of only normal recurring adjustments, which are necessary to make our financial position at ~~September~~June 30, ~~2019~~2020 and the results of our operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 not misleading. As permitted by the rules and regulations of the Securities and Exchange Commission (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, ~~2018~~2019 on file with the SEC. In our opinion, the condensed consolidated financial statements are a fair presentation of the 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~~six months ended ~~September~~June 30, ~~2019~~2020 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, ~~2019.~~2020.

Revenue Recognition Policy

The Company ~~adopted~~recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606") ~~on January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.~~

~~The Company applied~~. Under ASC 606, ~~using the cumulative effect method. We had no significant changes in our recognition of~~ revenue at adoption and our review of all open revenue from contracts with customers on January 1, 2018 indicated we had no adjustment to be made. If an adjustment had been needed, we would have recognized the cumulative effect of initially applying ASC 606 with an adjustment to the opening balance of equity at January 1, 2018.

~~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). WeRevenue 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, ~~once our~~we (i) identify the contract(s) with a customer; (ii) identify the performance ~~obligation has been satisfied and control over a product or service has transferred~~obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the ~~customer.~~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 ~~income statement.~~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 ~~generally~~typically range from six to 6024 months, with our larger horsepower compressors having ~~longer minimum~~ contract ~~terms.~~terms of up to 60 months. Our ~~rental~~ revenue is recognized over time, with equal monthly payments over the term of the contract. After the ~~term~~terms of athe contract ~~has~~have expired, a customer may renew their contract or continue renting on a monthly basis thereafter. In accordance ASC 842 – Leases, we have applied the practical expedient ASC 842-10-15-42A, which allows the Company to combine lease and non-lease components.

Sales Revenue.The Company generates revenue by the sale of custom/fabricated compressors, flare systems and parts, as well as, exchange/rebuilding customer owned compressors and sale of used rental equipment.

Custom/fabricated compressors and flare systems - The Company designs and fabricates compressors and flares based on the customer’s specifications outlined in their contract. Though the equipment being built is customized by the customer, control under these contracts does not pass to the customer until the compressor or flare package is complete and shipped, or in accordance with a bill and hold ~~arrangements~~arrangement, 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 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.

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 that 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 and 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 ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 was approximately ~~$9.4 million.~~$852,000 and $6.1 million, respectively.

Parts - Revenue is recognized after the customer obtains control of the parts. Control is passed either by the customer taking physical possession or the parts being shipped. The amount of revenue recognized is not adjusted for expected returns, as our historical part returns have been de minimis.

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, 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 three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~2019:


		Three months ended September 30,						Nine months ended September 30,							Three months ended June 30,				Six months ended June 30,
		(in thousands)						(in thousands)							(in thousands)				(in thousands)
		2019		2018		2019		2018			2020		2019		2020		2019
Compressors - sales	Compressors - sales	$	4,703	$	2,891	$	12,199	$	9,454	Compressors - sales	$	1,360	$	4,788	$	2,212	$	7,496
Flares - sales	Flares - sales	243		336		783		1,827		Flares - sales	160		106		240		541
Other (Parts/Rebuilds) - sales		931		720		2,834		2,047
Other (parts/rebuilds) - sales										Other (parts/rebuilds) - sales	488		920		1,006		1,902
Service and maintenance	Service and maintenance	541		410		1,529		1,053		Service and maintenance	266		509		606		988
Total revenue from contracts with customers	Total revenue from contracts with customers	6,418		4,357		17,345		14,381		Total revenue from contracts with customers	2,274		6,323		4,064		10,927
Add: non-ASC 606 rental revenue		14,434		12,039		41,393		34,937
Add: ASC 842 rental revenue										Add: ASC 842 rental revenue	15,131		13,572		31,231		26,959
Total revenue	Total revenue	$	20,852	$	16,396	$	58,738	$	49,318	Total revenue	$	17,405	$	19,895	$	35,295	$	37,886

Contract Balances

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we had the following receivables and deferred income from contracts with customers:


		September 30, 2019		December 31, 2018			(in thousands)
		(in thousands)							June 30, 2020		December 31, 2019
Accounts Receivable	Accounts Receivable					Accounts Receivable
Accounts receivable - contracts with customers	Accounts receivable - contracts with customers	$	4,038	$	2,250	Accounts receivable - contracts with customers	$	3,176	$	3,061
Accounts receivable - non-ASC 606		7,511		5,260
Accounts receivable - ASC 842						Accounts receivable - ASC 842	9,470		6,963
Total Accounts Receivable	Total Accounts Receivable	$	11,549	$	7,510	Total Accounts Receivable	$	12,646	$	10,024
Less: Allowance for doubtful accounts	Less: Allowance for doubtful accounts	(325)		(291)		Less: Allowance for doubtful accounts	(972)		(918)
Total Accounts Receivable, net	Total Accounts Receivable, net	$	11,224	$	7,219	Total Accounts Receivable, net	$	11,674	$	9,106

Deferred income	Deferred income	$	81	$	81	Deferred income	$	125	$	640

The Company recognized ~~$47,000 in~~rental revenue of $73,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 that was included in deferred income at the beginning of ~~2019.~~2020. For the year ended December 31, ~~2018,~~2019, the Company recognized revenue of ~~$176,000~~$48,000 from amounts related to sales that were included in deferred income at the beginning of ~~2018.~~2019.

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

Transaction Price Allocated to the Remaining Performance Obligations

As of ~~September~~June 30, ~~2019,~~2020, the Company did not have revenue related to unsatisfied performance ~~obligations under ASC 606-10-50-13.~~obligations.

Contract Costs

The Company ~~applies the practical expedient in ASC 340-40-25-4 and~~ 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~~expenses on our condensed consolidated ~~income statement.~~statements of operations.

Leases

On January 1, 2019, we adopted ASC 842 ~~Leases ("ASC 842") and all the related amendments~~ using the modified retrospective method. We recognized the cumulative effect of initially applying the new lease standard and had no adjustments to retained earnings. The comparative information has not been restated and continues to be reported under the lease accounting standard in effect for those periods. We do not expect the adoption of the new lease standard to have a material impact to our net income on an ongoing basis.

~~The new lease standard~~ASC 842 requires all leases to be reported on the balance sheet as right-of-use assets and lease obligations. We elected the practical expedients permitted under the transition guidance of the new standard that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. We did not reassess whether any contracts or land easements entered into prior to adoption are leases or contain leases.

~~The cumulative effect of the changes made to our consolidated balance sheet at January 1, 2019, for the adoption of ASU 2016-02, Leases, was as follows (in thousands):~~

Balance at December 31, 2018 Adjustments due to ASU 2016-02 Balance at January 1, 2019
Balance Sheet
Assets
Right of use assets $ — $ 451 $ 451
Liabilities
Current portion of operating leases $ — $ 126 $ 126
Long term portion of operating leases — 325 325
Total lease liabilities $ — $ 451 $ 451

The Company, as a ~~lessee,~~lessor, applies the practical expedient ~~in ASC 842-10-15-37, and does~~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.

~~The Company, as a lessor, applies the practical expedient in ASC 842-10-15-42A, in leases~~ Each lease that ~~contain~~1) contains the same timing and pattern of transfer for lease and non-lease ~~components~~components; and ~~are deemed~~2) if the lease component, if accounted for separately, would be classified as an operating ~~leases,~~lease, the ~~lessor is~~Company elects to not ~~required to~~ separate non-lease components from lease components. ~~Therefore, on any lease that meets these qualifications we have chosen to account for each separate lease component and its associated non-lease component, as a single lease component.~~

The Company applies the practical expedient in ASC 842-20-25-2, to recognize the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred for leases with terms of 12 months or less.Inventory

~~Fair Value~~Inventory (current and long-term) is valued at the lower of ~~Financial Instruments~~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 accesses anticipated customer demand based on current and upcoming capital expenditure budgets of its major customers as well as other significant companies in the industry, along with oil and natural gas price forecasts and other factors affecting the industry. In addition, our long-term inventory consists of raw materials that remain viable but which the Company does not expect to sell within the next year.

Rental Equipment and Property and Equipment

Rental equipment and property and equipment are recorded at cost less accumulated depreciation, except for work-in-progress on new rental equipment which is recorded at cost until it’s complete and added to the fleet. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Our ~~financial instruments consist principally~~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 ~~equivalents, accounts receivable, accounts payable, deferred compensation plan (cash portion)~~flows associated with the asset (or asset group) and ~~our line of credit. Pursuant to ASC 820 (Accounting Standards Codification),~~ the estimated fair value of ~~our cash equivalents is determined based on “Level 1” inputs, which consist~~the asset are less than the asset's carrying value.

Sales of ~~quoted prices in active markets for identical assets. We believe that~~equipment out of the ~~recorded values~~rental fleet are included with sales revenue and cost of ~~all~~sales, while retirements of ~~our~~units are shown as a separate operating expense. Gains and losses resulting from sales and dispositions of other ~~financial instruments approximate their fair values because~~property and equipment are included within other income (expense). Maintenance and repairs are charged to cost of ~~their nature (variable rate debt) and relatively short maturity dates or durations.~~rentals as incurred.

Income Taxes

As part of the process of preparing our financial statements, we are required to estimate our federal income taxes as well as income taxes in each of the states in which we operate. We use an estimated annual effective tax rate for purposes of determining the income tax provision during interim reporting periods. In calculating our estimated annual effective tax rate, we consider forecasted annual pre-tax income and estimated permanent book versus tax differences, as well as tax credits. Adjustments to the effective tax rate and estimate will occur as information and assumptions change.This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and operating losses and tax credit 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 ~~included in our consolidated balance sheet. We must then assess~~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 ~~likelihood that our~~ deferred tax assets will not be ~~recovered from future taxable income and, to the extent we believe that recovery is not probable, we must establish a valuation allowance.~~realized. To the extent we establish a valuation allowance or increase this allowance in a period, we ~~must~~ include an expense in the tax provision in ~~the statement~~our condensed consolidated statements of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We currently have no valuation allowance and fully expect to utilize all of our deferred tax assets.

ASC 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 has a greater than 50 percent likelihood of being realized upon ultimate settlement.

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

During the fourth quarter of 2018, the Company discovered a potential uncertain tax position attributable to the deductibility of certain executive compensation expense for federal income tax purposes aggregating approximately $168,000, $149,000 and $230,000 for the years ended December 31, 2017, 2016 and 2015, respectively. As a result, in accordance with ASC Topic 740, during the fourth quarter of 2018, the Company recorded a tax adjustment of $547,000 and accrued penalty and interest expense of $55,000 attributable to the uncertain tax position. The Company's management determined the effect of the potential uncertain tax position on previously reported results of operations for the years ended December 31, 2017 and 2016 was not material.

As of September 30, 2019, the Company has filed an amended tax return for the year ended 2015 and has recognized certain offsetting deductions thus reducing our uncertain tax position reserve for 2015, 2016 and 2017. Accrued interest and penalties at September 30, 2019 related to 2016 and 2017 uncertain tax position was approximately $23,000. The Company plans on amending it's 2016 and 2017 filed federal income tax returns and is still in the process of analyzing certain offsetting deductions to reduce the uncertain tax position reserve.

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 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 ~~reconciliation of~~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 have no liabilities for uncertain tax positions as of ~~the beginning and ending amount of uncertain tax positions is as follows (in thousands):~~June 30, 2020.


~~Balance at January 1, 2019~~	$	~~578~~
~~Additions based on tax positions related to current year~~	—
~~Reductions for tax positions of prior years~~	~~(319)~~
~~Balance at September 30, 2019~~	$	~~259~~

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

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. Please read Note 4, Federal Income Tax Receivable for a discussion about the impact on our condensed consolidated financial statements.

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC Topic 820 established a fair value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. These inputs are categorized as follows:

Level 1- quoted prices in an active market for identical assets or liabilities;

Level 2- quoted prices in an active market for similar assets or liabilities, inputs other than quoted prices that are observable for similar assets or liabilities, inputs derived principally from or corroborated by observable market data by correlation or other means; and

Level 3- valuation methodology with unobservable inputs that are significant to the fair value measurement.

Management believes that the fair value of our cash and cash equivalents, trade receivables, accounts payable and line of credit at June 30, 2020 and December 31, 2019 approximate their carrying values due to the short-term nature of the instruments or the use of prevailing market interest rates.

Segments and Related Information

ASC 280-10-50, “Operating Segments”, define the characteristics of an operating segment as a) being engaged in business activity from which it may earn revenue and incur expenses, b) being reviewed by the company's chief operating decision maker (CODM) for decisions about resources to be allocated and assess its performance and c) having discrete financial information. Although we 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 1 business segment.

~~Reclassification of Prior Period Balances~~

Certain reclassifications have been made to prior period amounts, due to our adoption of ASC 842, to conform to the current-year presentation. These reclassifications had no effect on the financial statements.

~~(2) Stock-Based Compensation~~

~~Stock Options:~~

~~A summary of option activity under our 1998 Stock Option Plan as of December 31, 2018, and changes during the nine months ended September 30, 2019 is presented below.~~

Number
of
Stock Options
Weighted Average
Exercise
Price
Weighted
Average
Remaining
Contractual Life (years)
Aggregate
Intrinsic
Value
(in thousands)
Outstanding, December 31, 2018 283,686 $ 20.46 3.58 $ 434
Exercised (56,352) 8.97 — 474
Canceled/Forfeited (3,000) 27.91 — —
Outstanding, September 30, 2019 224,334 $ 23.25 3.67 $ —
Exercisable, September 30, 2019 213,901 $ 23.01 3.49 $ —

1011

~~The~~In their analysis of product lines as potential operating segments, management also considered ASC 280-10-50-11, “Aggregation Criteria”, which allows for the aggregation of operating segments if the segments have similar economic characteristics and if the segments are similar in each of the following ~~table summarizes information about our stock options outstanding at September 30, 2019:~~areas:

Range of Exercise Prices
Options Outstanding Options Exercisable
Shares
Weighted
Average
Remaining
Contractual
Life (years)
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
$0.01-15.70 8,500 2.32 $ 14.89 8,500 $ 14.89
$15.71-17.81 42,000 0.82 17.54 42,000 17.54
$17.82-20.48 50,500 1.59 19.43 50,500 19.43
$20.49-33.36 123,334 5.59 27.33 112,901 27.26
224,334 3.67 $ 23.25 213,901 $ 23.01
•The nature of the products and services;

•The ~~summary~~nature of the ~~status of our unvested stock options as of December 31, 2018 and changes during the nine months ended September 30, 2019 is presented below.~~production processes;

Unvested stock options:
Shares
Weighted Average
Grant Date Fair Value Per Share
Unvested at December 31, 2018 20,865 $ 11.93
Vested (10,432) 11.93
Unvested at September 30, 2019 10,433 $ 11.93
•The type or class of customer for their products and services;

~~As of September 30, 2019, there was $46,105 of unrecognized compensation cost related~~•The methods used to ~~unvested options. Such cost is expected to be recognized over a weighted-average period of one year. Total compensation expense for stock options was $91,984~~distribute their products or provide their services; and ~~$127,055 for the nine months ended September 30, 2019 and 2018, respectively.~~

~~Restricted Shares/Units:~~•The nature of the regulatory environment, if applicable.

We are engaged in the business of designing and manufacturing compressors and flares. Our compressors and flares are sold and rented to our customers. In addition, we provide service and maintenance on compressors in our fleet and to third parties. These business activities are similar in all geographic areas. Our manufacturing process is essentially the same for the entire Company and is performed at our facilities in Midland, Texas and Tulsa, Oklahoma. Our customers primarily consist of entities in the business of producing oil and natural gas. The maintenance and service of our products is consistent across the entire Company and is performed via an internal fleet of vehicles. The regulatory environment is similar in every jurisdiction in that the most impacting regulations and practices are the result of federal energy policy. In addition, the economic characteristics of each customer arrangement are similar in that we maintain policies at the corporate level.

Recently Issued Accounting Pronouncements

In accordance with the Company's employment agreement with Stephen Taylor, the Company's Chief Executive Officer, the Compensation Committee reviewed his performance in determining the issuance of restricted common stock. Based on this review which included consideration of the Company's 2018 performance, Mr. Taylor, was awarded 131,674 restricted shares/units on March 29, 2019, which vest over three years, in equal annual installments, beginning March 29, 2020. On March 29,December 2019, the ~~Compensation Committee awarded 20,000 restricted shares/units~~FASB issued ASU 2019-12, Income Taxes (ASC Topic 740), which simplifies accounting for income taxes by removing certain exceptions to ~~each~~various tax accounting principles and clarifies other existing guidance in order to improve consistency of ~~G. Larry Lawrence, our CFO,~~application. These amendments are effective for public entities for interim and ~~James Hazlett, our Vice President of Technical Services. The restricted shares to Messrs. Lawrence and Hazlett vest over three years, in equal~~ annual ~~installments,~~periods beginning ~~March 29,~~after December 15, 2020. We ~~also awarded~~are currently evaluating the impact of ASU 2019-12 on our consolidated financial statements and issued 23,136 shares of restricted common stock to the independent members of our Board of Directors as partial payment for 2019 services as directors. The restricted stock issued to our directors vests over one year, in quarterly installments, beginning March 31, 2020. Total compensation expense related to restricted awards was $1.7 million and $1.6 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was a total of $4.3 million of unrecognized compensation expense related to these shares/units which is expected to be recognized over the next three years.note disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments to ASC Topic 326 require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including trade receivables. For companies that qualify as smaller reporting companies, the amendments in this update are effective for interim and annual periods beginning after January 1, 2023. We are currently evaluating the impact of ASU 2016-13 on our consolidated financial statements and note disclosures.

1112

~~(3)~~Revisions of Prior Period Financial Statements

As stated in our Annual Report on Form 10-K for the year ended December 31, 2019, we revised our consolidated financial statements for the years ended December 31, 2018 and 2017, as well as for interim periods in 2019 and 2018, for immaterial operating costs and expenses that were inappropriately capitalized. The following is a summary of the revisions to our unaudited, condensed consolidated financial statements for the three and six months ended June 30, 2019:

Revised Condensed Consolidated Statements of Operations


	For the three months ended June 30, 2019
($ in thousands)	As Reported		Revisions		As Revised
Total revenue	$	19,895	$	—	$	19,895
Operating costs and expenses:
Cost of rentals, exclusive of depreciation stated separately below	6,359		254		6,613
Depreciation and amortization	5,683		37		5,720
Total operating costs and expenses	19,302		291		19,593
Operating income (loss)	593		(291)		302
Income before provision for income taxes	770		(291)		479



Income tax (expense) benefit	(197)		45		(152)
Net income (loss)	573		(246)		327
Earnings (loss) per share, basic	0.04		(0.02)		0.02
Earnings (loss) per share, diluted	0.04		(0.02)		0.02


	For the six months ended June 30, 2019
($ in thousands)	As Reported		Revisions		As Revised
Total revenue	$	37,886	$	—	$	37,886
Operating costs and expenses:
Cost of rentals, exclusive of depreciation stated separately below	12,244		589		12,833
Depreciation and amortization	11,241		56		11,297
Total operating costs and expenses	37,084		645		37,729
Operating income (loss)	802		(645)		157
Income before provision for income taxes	1,280		(645)		635
Income tax (expense) benefit	(350)		140		(210)
Net income (loss)	930		(505)		425
Earnings (loss) per share, basic	0.07		(0.04)		0.03
Earnings (loss) per share, diluted	0.07		(0.04)		0.03

Revised Condensed Consolidated Statement of Stockholders' Equity


	For the six months ended June 30, 2019
($ in thousands)	As Reported		Revisions		As Revised
Retained earnings balance at January 1, 2019	$	152,291	$	(949)	$	151,342
Total stockholders' equity at January 1, 2019	260,181		(949)		259,232
Net income (loss) for the three months ended March 31, 2019	357		(259)		98
Retained earnings balance at March 31, 2019	152,648		(1,208)		151,440
Total stockholders' equity at March 31, 2019	261,396		(1,208)		260,188

Net income (loss) for the three months ended June 30, 2019	573		(246)		327
Retained earnings balance at June 30, 2019	153,221		(1,454)		151,767
Total stockholders' equity at June 30, 2019	262,570		(1,454)		261,116

Revised Condensed Consolidated Statement of Cash Flows


	For the six months ended June 30, 2019
($ in thousands)	As Reported		Revisions		As Revised
Cash flows from operating activities:
Net income	$	930	$	(505)	$	425
Depreciation and amortization	11,241		56		11,297
Deferred taxes	356		(137)		219
Inventory decrease	1,200		1,111		2,311
Prepaid expenses and prepaid income taxes increase	(22)		(203)		(225)
Net cash provided by operating activities	6,447		322		6,769
Cash flows from operating activities:
Purchase of rental equipment, property and other equipment	(29,402)		(322)		(29,724)
Net cash used in investing activities	(29,476)		(322)		(29,798)
Net change in cash and cash equivalents	(22,717)		—		(22,717)

3. Inventory

Our inventory, net of allowance for obsolescence of ~~$3.4 million~~$37,000 at ~~September~~June 30, ~~2019~~2020 and ~~$19,000~~$24,000 at December 31, ~~2018~~2019, consisted of the following amounts:

September 30, 2019 December 31, 2018
(in thousands)
Raw materials - current $ 23,893 $ 26,152
Raw materials - long term, net 540 3,980
Finished Goods 1,022 1,022
Work in process 5,374 3,800
$ 30,829 $ 34,954


	(in thousands)
	June 30, 2020		December 31, 2019
Raw materials - current	$	14,800	$	19,388
Work-in-process	961		1,692

Inventory - current	15,761		21,080
Raw materials - long term (net of allowances of $37 and $24, respectively)	1,123		1,068
Inventory - total	$	16,884	$	22,148

Our long-term inventory consists of raw materials that remain viable but that the Company does not expect to sell or use within the year.

~~(4) Inventory Allowance and Retirement of Long-Lived Assets~~

Given its concerns about the current industry and broader economic backdrop, Company management conducted a detailed review of our rental compressor units and initiated a thorough inventory analysis during the third quarter of 2019. Due to the slow moving nature or obsolescence of long-term inventory and inventory related to the retirement of rental equipment, management recorded an increase of $3.4 million in the inventory allowance reserve for costs that may not be recoverable in the future.

During the ~~review~~six months ended June 30, 2020 and 2019, there were no write-offs of ~~our rental compressor units, management looked~~obsolete inventory against the allowance for any units that 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 327 units should be retired from our rental fleet. We performed an optimization review and recorded a $1.5 million loss on retirement of rental equipment to reduce the book value of each unit to zero.

~~(5) Deferred Compensation Plan~~

The Company has a non-qualified deferred compensation plan for executive officers, directors and certain eligible employees. The assets of the deferred compensation plan are held in a rabbi trust and are subject to additional risk of loss in the event of bankruptcy or insolvency of the Company. The plan allows for deferral of up to 90% of a participant’s base salary, bonus, commissions, director fees and restricted stock unit 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 $1.4 million and $1.1 million as of September 30, 2019 and 2018, respectively. For the nine months ending September 30, 2019, we reported in other income (expense) in the consolidated income statement a gain related to the policy of approximately $145,000 and for the same period in 2018, a loss of approximately $15,000.

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 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 $1.5 million and $1.2 million as of September 30, 2019 and 2018, respectively. The deferred obligation is included in other long-term liabilities in the condensed consolidated balance sheet.

For deferrals of restricted stock units, the plan does not allow for diversification, therefore, distributions are paid in shares of common stock and the obligation is carried at grant value. As of September 30, 2019 and 2018, respectively, we have 94,148 and 102,793 unvested restricted stock units being deferred. As of September 30, 2019 and 2018, respectively we have released and issued 80,604 and 33,834 shares to the deferred compensation plan with a value of $1.7 million and $857,000, respectively.

obsolescence.

4. Federal Income Tax Receivable

As discussed in Note 2, 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 plans to carryback these losses for five years. Accordingly, as of June 30, 2020, the Company recorded a federal income tax receivable of $15.0 million and an increase to its deferred income tax liability of $10.1 million on its condensed consolidated balance sheet. In addition, the Company recorded a current income tax benefit of $4.9 million on its condensed consolidated statement of operations for the six months ended June 30, 2020.

5. Rental Equipment

Our rental equipment and associated accumulated depreciation as of June 30, 2020 and December 31, 2019, respectively, consisted of the following:


	(in thousands)
	June 30, 2020		December 31, 2019
Compressor units	$	381,113	$	370,961
Work-in-progress	8,202		9,129
Rental equipment	389,315		380,090
Accumulated depreciation	(173,462)		(162,348)
Rental equipment, net of accumulated depreciation	$	215,853	$	217,742

We evaluated our rental equipment for potential impairment as of June 30, 2020, and determined that no such impairment existed as of that date.

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 two months to 9 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.

ROU 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 to determine the present value of lease payments. Based on the present value of lease payments for the Company's existing leases, the Company recorded net lease assets and lease liabilities of approximately $451,000, respectively, upon adoption. The Company had no finance leases. The new lease standard did not materially impact the Company's condensed consolidated statements of operations and had no impact on the Company's condensed consolidated statements of cash flows.

The impact of the new lease standard on the June 30, 2020 condensed consolidated balance sheet was as follows:


	Classification on the Condensed Consolidated Balance Sheet	June 30, 2020
		(in thousands, except years)
Operating lease assets	Right of use assets-operating leases	$	510

Current lease liabilities	Current operating leases	$	183
Noncurrent lease liabilities	Long-term operating leases	327
Total lease liabilities		$	510

Weighted average remaining lease term in years		2.1
Implicit Rate		3.1		%

~~(6) Goodwill~~

~~Goodwill is tested annually~~Operating lease costs are recognized on a straight-line basis over the lease term. Total operating lease costs for ~~impairment or as needed upon~~ the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely than not impaired. In the last several months, the Company experienced a significant decline in stock price, which is reflective of the significant deterioration of stock prices of companies throughout the oilfield services sector. Accordingly, we calculated our market capitalization (based on our closing stock price) as of September 30, 2019, and compared it to the carrying value of our net assets. Since the carrying value of our net assets exceeded our market capitalization and after considering various economic, industry, and company-specific factors, Company management determined that it was more likely than not that the fair value of the Company’s net assets was less than its carrying amount.

As a result of our qualitative assessment, we proceeded to perform our quantitative goodwill impairment analysis, where we used an independent valuation specialist to assist us in determining the fair value of our net assets. In this impairment analysis, the estimated fair value of our net assets was determined utilizing market and income-based approaches. Determining fair value in this analysis required significant judgment, including judgments about appropriate comparable companies, appropriate discount rates and our estimated future cash flows, which are subject to change. As a result of our quantitative evaluation, we recorded a goodwill impairment charge of $10.0 million during the third quarter of 2019.

~~A summary of changes in the Company’s goodwill during the nine~~six months ended ~~September~~June 30, ~~2019 is as follows (in millions):~~2020 was approximately $275,000.


	~~Goodwill, net~~June 30, 2020
	(in thousands)
~~December 31, 2018~~Cash paid for amounts included in the measurement of lease liabilities
Operating lease cost ^{(1) (2)}	$	~~10,039~~
~~Impairments~~	~~(10,039)~~
~~September 30, 2019~~	$	—275

(1) Lease costs are classified on the condensed consolidated statements of operations in cost of sales, cost of compressors and selling, general and administrative expenses.

~~(7)~~(2) Includes costs of $179,000 for leases with terms of 12 months or less and $96,000 for leases with terms greater than 12 months.

The following table shows the future maturities of lease liabilities as of June 30, 2020:


Years Ending December 31,	Lease Liabilities
	(in thousands)
2020 (excluding the six months ended June 30, 2020)	$	101
2021	174
2022	47
2023	38
2024	38
Thereafter	168
Total lease payments	566
Less: Imputed interest	(56)
Total	$	510

7. Credit Facility

We have a senior secured revolving credit agreement the ("Amended Credit Agreement") with JP Morgan Chase Bank, N.A (the "Lender") with an aggregate commitment of $30 million, subject to collateral availability. We also have a right to request from the Lender, on an uncommitted basis, an increase of up to $20 million on the aggregate commitment (which could potentially increase the commitment amount to $50 million). ~~On August 31, 2017, we amended and renewed the Amended Credit Agreement, extending the maturity date to December 31, 2020. No other material revisions were made to the credit facility.~~

Borrowing Base. At any time before the maturity of the Amended 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) 80% of our eligible accounts receivable plus (b) 50% of the book value of our eligible general inventory (not to exceed 50% of the commitment amount at the time) plus (c) 75% of the book value of our eligible equipment inventory. The Lender may adjust the borrowing base components if material deviations in the collateral are discovered in future audits of the collateral. We had $29.5 million borrowing base availability at ~~September~~June 30, ~~2019~~2020 under the terms of our Amended Credit Agreement.

Interest and Fees. Under the terms of the Amended Credit Agreement, we have the option of selecting the applicable variable rate for each revolving loan, or portion thereof, of either (a) LIBOR multiplied by the Statutory Reserve Rate (as defined in the Amended Credit Agreement), with respect to this rate, for Eurocurrency funding, plus the Applicable Margin (“LIBOR-based”), or (b) CB Floating Rate, which is the Lender's Prime Rate less the Applicable Margin; provided, however, that no more than 3 LIBOR-based borrowings under the agreement may be outstanding at any one time. For purposes of the LIBOR-based interest rate, the Applicable Margin is ~~1.50%~~1.25%. For purposes of the CB Floating Rate, the Applicable Margin is 1.50%. For the ~~nine~~six month period ended ~~September~~June 30, ~~2019,~~2020, our weighted average interest rate was ~~3.38%~~2.45%.

Accrued interest is payable monthly on outstanding principal amounts, provided that accrued interest on LIBOR-based loans is payable at the end of each interest period, but in no event less frequently than quarterly. In addition, fees and expenses

are payable in connection with our requests for letters of credit (generally equal to the Applicable Margin for LIBOR-related borrowings multiplied by the face amount of the requested letter of credit) and administrative and legal costs.

Maturity. The maturity date of the Amended Credit Agreement is December 31, 2020, at which time all amounts borrowed under the agreement will be due and outstanding letters of credit must be cash collateralized. The agreement may be terminated early upon our request or the occurrence of an event of default.

Security. The obligations under the Amended Credit Agreement are secured by a first priority lien on all of our inventory and accounts and leases receivables, along with a first priority lien on a variable number of our leased ~~compressor equipment~~compressors, the book value of which must be maintained at a minimum of 2.00 to 1.00 commitment coverage ratio (such ratio being equal to (i) the amount of the borrowing base as of such date to (ii) the amount of the commitment as of such date).

Covenants. The Amended Credit Agreement contains customary representations and warranties, as well as covenants which, among other things, 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 also have certain financial covenants that require us to maintain ~~on a consolidated basis~~ a leverage ratio less than or equal to 2.50 to 1.00 as of the last day of each fiscal quarter.

Events of Default and Acceleration. The Amended Credit Agreement 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 loan documents; inaccuracies in representations and warranties; certain defaults, termination events or similar events; certain defaults with respect to any other Company indebtedness in excess of $50,000; certain bankruptcy or insolvency events; the rendering of certain judgments in excess of $150,000; certain ERISA events; certain change in control events and the defectiveness of any liens under the secured revolving credit facility. Obligations under the Amended Credit Agreement may be accelerated upon the occurrence of an event of default.

As of ~~September~~June 30, ~~2019,~~2020, we were in compliance with all financial covenants in our Amended Credit Agreement. A default under our Credit Agreement could trigger the acceleration of our bank debt so that it is immediately due and payable. Such default would likely limit our ability to access other credit. At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, our outstanding balance on the line of credit was $417,000.

8. CARES Act Loan

~~(8) Leases~~On April 10, 2020, the Company entered into a promissory note (the “Loan”) for an unsecured loan in the amount of $4.6 million through the Paycheck Protection Program (“PPP”) established by the CARES Act and administered by the U.S. Small Business Administration ("SBA"). The Loan was made for the purpose of securing funding for salaries and wages of employees that may have otherwise been displaced by the outbreak of COVID-19 and the resulting detrimental impact on the Company’s business. JPMorgan Chase Bank, N.A. (the “Lender”) processed and funded the Loan.

On April 23, 2020, the SBA advised that companies that applied for and received PPP loans that had other sufficient sources of liquidity that would not be "significantly detrimental" to their businesses may be subject to increased scrutiny and potential liability unless these companies repaid their loans in full by May 7, 2020. While the Company believes it was justified in seeking the Loan and the funds received were earmarked for the purposes set forth in the original PPP regulations, the Company voluntarily repaid the Loan, with accrued interest, to the Lender on May 4, 2020.

9. Deferred Compensation Plan

The Company ~~adopted~~has a non-qualified deferred compensation plan for executive officers, directors and certain eligible employees. The assets of the ~~new lease standard on January 1, 2019 using the modified retrospective transition method. Prior periods were not retrospectively adjusted~~deferred compensation plan are held in a rabbi trust and ~~continue~~are subject to ~~be reported under the accounting standards in effect for those periods. The Company elected the package~~additional risk of practical expedients permitted under the transition guidance within the new lease standard, which among other things, allowed the company to continue to account for existing leases based on the historical lease classification. The Company also elected the practical expedients to exclude right-of-use ("ROU") assets and lease liabilities for leases with an initial term of 12 months or less from the balance sheet, and to combine lease and non-lease components for property leases, which primarily relate to ancillary expenses such as common area maintenance charges and management fees.

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 10 years. Renewal and termination options are included~~loss in the ~~lease term when it~~event of bankruptcy or insolvency of the Company. The plan allows for deferral of up to 90% of a participant’s base salary, bonus, commissions, director fees and restricted stock unit awards. A Company owned life insurance policy held in a rabbi trust is ~~reasonably certain that~~utilized as a source of funding for the ~~Company will exercise the option.~~

plan. The ~~Company's lease agreements do not contain any contingent rental payments, material residual guarantees or material restrictive covenants.~~

~~ROU assets and lease liabilities are recognized at the lease commencement date based on the present~~cash surrender value of ~~lease payments over~~ the ~~lease term. As substantially all~~life insurance policy is $1.6 million and $1.5 million as of June 30, 2020 and December 31, 2019, respectively. We reported in other (expense) income in the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate to determine the present value of lease payments. Based on the present value of lease payments for the Company's existing leases, the Company recorded net lease assets and lease liabilities of approximately $451,000, respectively, upon adoption. The Company had no finance leases. The new lease standard did not materially impact the Company'scondensed consolidated statements of operations a loss related to the policy of approximately $92,000 and ~~had no impact on~~a gain of approximately $131,000 for the ~~Company's consolidated statements of cash flows.~~six months ended June 30, 2020 and 2019, respectively.

1417

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 ~~impact~~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. The deferred compensation liability, which is included in other long-term liabilities in the ~~new lease standard on the September 30, 2019~~condensed consolidated balance sheet, was $1.7 million as ~~follows:~~of June 30, 2020 and December 31, 2019.


	~~Classification on the Condensed Consolidated Balance Sheet~~	~~September 30, 2019~~
		~~(in thousands, except years)~~
~~Operating lease assets~~	~~Right of use assets-operating leases~~	$	~~447~~

~~Current lease liabilities~~	~~Current operating leases~~	$	~~107~~
~~Noncurrent lease liabilities~~	~~Long-term operating leases~~	~~340~~
~~Total lease liabilities~~		$	~~447~~

~~Weighted average remaining lease term in years~~		~~2.9~~
~~Implicit Rate~~		~~3.8~~		%

For deferrals of restricted stock units, the plan does not allow for diversification, therefore, distributions are paid in shares of common stock and the obligation is carried at grant value. As of June 30, 2020 and 2019, respectively, we had 48,601 and 62,145 unvested restricted stock units being deferred. As of June 30, 2020, we had released and issued 143,099 shares with a value of $2.2 million to the deferred compensation plan. As of June 30, 2019, we had released and issued 79,688 shares with a value of $1.7 million to the deferred compensation plan.

Operating lease costs are recognized on a straight-line basis over the lease term. Total operating lease costs for the nine months ended September 30, 2019 was approximately $426,000, which included approximately $277,000 related to short-term lease costs.

10. Stock-Based and Other Long-Term Incentive Compensation


	~~September 30, 2019~~
	~~(in thousands)~~
~~Cash paid for amounts included in the measurement of lease liabilities~~
~~Operating lease cost~~⁽¹⁾	$	~~149~~

Stock Options

~~(1) Lease costs are classified on~~A summary of all option activity as of December 31, 2019, and changes during the ~~condensed consolidated statements of income in cost of sales, cost of compressors and selling, general and administrative expenses.~~six months ended June 30, 2020 is presented below.


	Number of Stock Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)
Outstanding, December 31, 2019	208,334	$	23.67	3.66	$	—
Granted	5,000	4.91


Expired	(40,000)	19.11
Outstanding, June 30, 2020	173,334	$	24.18	4.18	$	7
Exercisable, June 30, 2020	168,334	$	24.75	4.01	$	—

The following table ~~shows the future maturities of lease liabilities:~~summarizes information about our stock options outstanding at June 30, 2020:

Years Ending December 31, Lease Liabilities
(in thousands)
2019 (excluding the nine months ended September 30, 2019) $ 31
2020 116
2021 95
2022 43
2023 35
Thereafter 190
Total lease payments 510
Less: Imputed interest 63
Total $ 447


Range of Exercise Prices	Options Outstanding												Options Exercisable
		Shares		Weighted Average Remaining Contractual Life (years)			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
$0.01-15.70	13,500		4.62		$	11.19		8,500		$	14.89
$15.71-17.81	16,000		0.57		17.81			16,000		17.81
$17.82-20.48	20,500		2.72		18.75			20,500		18.75
$20.49-33.36	123,334		4.84		27.33			123,334		27.33
	173,334		4.18		$	24.18		168,334		$	24.75

1518

~~As previously disclosed on Form 10-K and under~~The summary of the ~~previous lease standard (Topic 840), future minimum obligations under lease commitments in effect at~~status of our unvested stock options as of December 31, ~~2018 as follows:~~2019 and changes during the six months ended June 30, 2020 is presented below.

Operating Leases
(in thousands)
2019 $ 298
2020 118
2021 97
2022 44
2023 35
Thereafter 15
Total $ 607


Unvested stock options:	Shares	Weighted Average Grant Date Fair Value Per Share
Unvested at December 31, 2019	10,433	$	11.93
Granted	5,000	2.07
Vested	(10,433)	11.93
Canceled/Forfeited	—	—
Unvested at June 30, 2020	5,000	$	2.07

As of June 30, 2020, there was $8,000 of unrecognized compensation cost related to unvested options. Total compensation expense for stock options was $18,000 and $61,000 for the six months ended June 30, 2020 and 2019, respectively.

Restricted Shares/Units

In accordance with the Company's employment agreement with Stephen Taylor, the Company's Chief Executive Officer, the Compensation Committee of the Company's Board of Directors reviewed his performance in determining the issuance of restricted common stock. Based on this review, which included consideration of the Company's 2019 performance, Mr. Taylor was awarded 94,133 restricted shares/units on April 28, 2020, which vest over three years, in equal annual installments, beginning April 28, 2021. On April 28, 2020, the Compensation Committee awarded 10,000 restricted shares/units to our Vice President of Technical Services, James Hazlett. The restricted shares to Mr. Hazlett vest over three years, in equal annual installments, beginning April 28, 2021. We also awarded and issued 4,432 shares of restricted common stock to each of our four independent members of our Board of Directors as partial payment for their services in 2020. These awards of restricted stock vest one year from the date of grant. Total compensation expense related to these and previously granted restricted stock awards was $1.0 million and $1.1 million for the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, there was a total of $2.9 million of unrecognized compensation expense related to these shares/units which is expected to be recognized over the next 2.75 years.

Other Long-Term Incentive Compensation

On April 28, 2020, based on its review of Mr. Taylor's 2019 performance, the Compensation Committee also issued a long-term incentive award of $1,061,820 to Mr. Taylor that vests in equal, annual tranches over three years. At the time of vesting, each tranche will be payable in cash or common stock at the discretion of the Compensation Committee. In addition, on April 28, 2020, we issued a $50,000 award to each of our four independent members of our Board of Directors as partial payment for their services in 2020. These awards vest one year from the date of grant and are payable in cash upon vesting. The Company accounts for these other long-term incentive awards to Mr. Taylor and our independent Board members as liabilities under accrued liabilities on our condensed consolidated balance sheet. The vesting of these awards 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 $126,000 for the six months ended June 30, 2020. As of June 30, 2020, there was a total of $1.1 million of unrecognized compensation expense related to these other long-term incentive awards which is expected to be recognized over the next 2.75 years.

~~(9) (Loss)~~

11. Earnings per Share

The following table reconciles the numerators and denominators of the basic and diluted ~~(loss)~~ earnings per share computation (in thousands, except per share data):


		Three months ended						Nine months ended							Three months ended				Six months ended
		September 30,						September 30,							June 30,				June 30,
		2019		2018		2019		2018			2020		2019		2020		2019
Numerator:	Numerator:									Numerator:
Net (loss) income		$	(12,232)	$	236	$	(11,302)	$	708
Denominator for basic (loss) income per common share:
Net income										Net income	$	165	$	327	$	4,247	$	425
Denominator for earnings per basic common share:										Denominator for earnings per basic common share:
Weighted average common shares outstanding	Weighted average common shares outstanding	13,137		12,977		13,112		12,953		Weighted average common shares outstanding	13,237		13,134		13,197		13,100
Denominator for diluted (loss) earnings per share:
Denominator for earnings per diluted common share:										Denominator for earnings per diluted common share:
Weighted average common shares outstanding	Weighted average common shares outstanding	13,137		12,977		13,112		12,953		Weighted average common shares outstanding	13,237		13,134		13,197		13,100
Dilutive effect of stock options and restricted stock		—		277		—		275
Dilutive effect of stock options and restricted shares										Dilutive effect of stock options and restricted shares	243		328		251		268
Diluted weighted average shares	Diluted weighted average shares	13,137		13,254		13,112		13,228		Diluted weighted average shares	13,480		13,462		13,448		13,368
(Loss) Earnings per common share:
Earnings per common share:										Earnings per common share:
Basic	Basic	$	(0.93)	$	0.02	$	(0.86)	$	0.05	Basic	$	0.01	$	0.02	$	0.32	$	0.03
Diluted	Diluted	$	(0.93)	$	0.02	$	(0.86)	$	0.05	Diluted	$	0.01	$	0.02	$	0.32	$	0.03

~~In the three and nine months ended September 30, 2019, restricted stock and stock options were 0t included in the computation of diluted loss per share due to their antidilutive effect.~~

InFor the three months ended ~~September~~June 30, ~~2018,~~2020, options to purchase ~~126,334~~168,334 weighted average shares of common stock with exercise prices ranging from ~~$22.90~~$14.89 to $33.36 were not included in the computation of diluted earnings per share due to their antidilutive effect.

InFor the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2020, options to purchase ~~82,167~~175,587 weighted average shares of common stock with exercise prices ranging from ~~$28.15~~$14.89 to $33.36 were not included in the computation of diluted earnings per share due to their antidilutive effect.

For the three months ended June 30, 2019, options to purchase 216,669 weighted average shares of common stock with exercise prices ranging from $16.74 to $33.36 were not included in the computation of diluted earnings per share due to their antidilutive effect.

For the six months ended June 30, 2019, options to purchase 207,591 weighted average shares of common stock with exercise prices ranging from $17.74 to $33.36 were not included in the computation of diluted earnings per share due to their antidilutive effect.

~~(10) Segment Information~~

ASC 280-10-50, “Operating Segments", defines the characteristics of an operating segment as: a) being engaged in business activity from which it may earn revenue and incur expenses, b) being reviewed by the Company's chief operating decision maker (CODM) for decisions about resources to be allocated and assess its performance and c) having discrete financial information. Although we look at our products to analyze the nature of our revenue, other financial information, such as certain costs and expenses, net income and EBITDA are not captured or analyzed by these categories. Our CODM does not make resource allocation decisions or access the performance of the business based on these categories, but rather in the aggregate. Based on this, management believes that it operates in 1 business segment.

In their analysis of product lines as potential operating segments, management also considered ASC 280-10-50-11, “Aggregation Criteria”, which allows for the aggregation of operating segments if the segments have similar economic characteristics and if the segments are similar in each of the following areas:

•~~The nature of the products and services;~~12. Related Party

•In 2016, we entered into a joint venture partnership, N-G, LLC (‘N-G”), with Genis Holdings, LLC (“Genis”) to explore new technologies for wellhead compression. NGS and Genis both share 50% ownership of N-G. We account for this investment under the equity method. In 2018, we ordered some compressor packages from Genis, totaling $1.0 million. The ~~nature of the production processes;~~

•~~The type or class of customer for their products~~compressors were completed and ~~services;~~

•~~The methods used to distribute their products or provide their services; and~~

•~~The nature of the regulatory environment, if applicable.~~

~~We are engaged~~paid in the business of designing and manufacturing compressors and flares. Our compressors and flares are sold and rented to our customers. In addition, we provide service and maintenance on compressors in our fleet and to third parties. These business activities are similar in all geographic areas. Our manufacturing process is essentially the same for the entire Company and is performed in-housefull at our facilities in Midland, Texas and Tulsa, Oklahoma. Our customers primarily consist of entities in the business of producing natural gas and crude oil. The maintenance and service of our products is consistent across the entire Company and is performed via an internal fleet of vehicles. The regulatory environment is similar in every jurisdiction in that the most impacting regulations and practices are the result of federal energy policy. In addition, the economic characteristics of each customer arrangement are similar in that we maintain policies at the corporate level.

For the three months ended September 30, 2019 (in thousands):
Rental Sales Service & Maintenance Corporate Total
Revenue $ 14,434 $ 5,877 $ 541 $ — $ 20,852
Operating costs and corporate expenses 6,300 4,390 164 18,697 29,551
Inventory Allowance 987 2,363 — — 3,350
Retirement of Rental Equipment 1,512 — — — 1,512
Total other income, net — — — 89 89
Income before provision for income taxes $ 5,635 $ (876) $ 377 $ (18,608) $ (13,472)

For the three months ended September 30, 2018 (in thousands):
Rental Sales Service & Maintenance Corporate Total
Revenue $ 12,039 $ 3,947 $ 410 $ — $ 16,396
Operating costs and corporate expenses 5,363 3,081 107 7,889 16,440
Total other income, net — — — 180 180
Income before provision for income taxes $ 6,676 $ 866 $ 303 $ (7,709) $ 136

For the nine months ended September 30, 2019 (in thousands):
Rental Sales Service & Maintenance Corporate Total
Revenue $ 41,393 $ 15,816 $ 1,529 $ — $ 58,738
Operating costs and expenses 18,544 12,508 470 35,113 66,635
Inventory Allowance 987 2,363 — — 3,350
Retirement of Rental Equipment 1,512 — — — 1,512
Total other income, net — — — 567 567
Income before provision for income taxes $ 20,350 $ 945 $ 1,059 $ (34,546) $ (12,192)

For the nine months ended September 30, 2018 (in thousands:
Rental Sales Service & Maintenance Corporate Total
Revenue $ 34,937 $ 13,328 $ 1,053 $ — $ 49,318
Operating costs and expenses 15,262 10,196 273 23,055 48,786
Total other income, net — — — 179 179
Income before provision for income taxes $ 19,675 $ 3,132 $ 780 $ (22,876) $ 711
December 31, 2019.

~~(11)~~13. Commitments and Contingencies

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 adverse effect on our financial position, results of operations or cash flow. We are not currently a party to any material legal proceedings, and we are not aware of any threatened material litigation.

As of September 30, 2019, the Company has a remaining contractual obligation related to the construction of a new corporate office of approximately $375,000, to be financed by cash on hand. Construction of a new office began in late 2017 and is expected to be completed in 2019.

~~Stock Repurchase Program~~

On August 12, 2019, the Company announced the Board of Directors had authorized the repurchase of up to $10.0 million of its outstanding shares of common stock in the open market, block trades or privately negotiated transactions. The timing and extent of any repurchase is subject to the discretion of management and is dependent upon market pricing and conditions, business, legal, accounting and other considerations. The repurchase program does not obligate the Company to purchase any shares and will expire on September 30, 2020, subject to earlier termination of the program by the Board of Directors. The repurchase program may be modified, suspended or terminated at any time without notice, in the Company’s discretion, based upon a number of factors, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, the need for capital in the Company’s operations and other factors deemed appropriate. The Company intends to finance the repurchases with existing liquidity and free cash flow. As of September 30, 2019, the Company repurchased 37,936 of its outstanding shares of common stock with a value of $490,000, at an average price of $12.91. As of September 30, 2019, the Company had approximately $9.5 million remaining under the repurchase authorization.

~~(12) Related Party~~

In 2016, we entered into a joint venture partnership, N-G, LLC (‘N-G”), with Genis Holdings, LLC (“Genis”) to explore new technologies for wellhead compression. NGS and Genis both share 50% ownership of N-G. In 2018, we ordered some compressor packages from Genis, totaling $1.0 million. The compressors were completed and delivered during the first quarter of 2019. As of September 30, 2019, the units were paid in full and reclassified from prepaids and are included in rental equipment on the consolidated balance sheet.

1820

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis of our financial condition and results of operations are based on, and should be read in conjunction with, our condensed, consolidated financial statements and the related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 filed with the SEC.

This report and our Annual Report on Form 10-K 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 on Form 10-K, including statements regarding our future financial position, growth strategy, budgets, projected costs, plans and objectives of management for future operations, are forward-looking statements. We use the words “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “intend,” “plan,” “budget” and other similar words to identify forward-looking statements. You should read statements that contain these words carefully and should not place undue reliance on these statements because they discuss future expectations, contain projections of results of operations or of our financial condition and/or state other “forward-looking” information. We do not undertake any obligation to update or revise publicly any forward-looking statements. Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations or assumptions will prove to have been correct.

Please read Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2019, as it contains important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements.

Overview

We fabricate, manufacture, rent, and sell natural gas compressors and related equipment. Our primary focus is on the rental of natural gas compressors. Our rental contracts ~~generally~~typically provide for initial terms of six to 24 months, with our larger horsepower units having contract terms of up to 60 months. After the initial term of our rental contracts, many of our customers have continued to rent our compressors on a month-to-month basis. Rental amounts are billed monthly in advance and include maintenance of ~~the~~our rented compressors. As of ~~September~~June 30, ~~2019,~~2020, we had ~~1,401~~1,273 natural gas compressors totaling ~~270,222~~284,373 horsepower rented to 9384 customers compared to ~~1,324~~1,374 natural gas compressors totaling ~~217,315~~247,879 horsepower rented to 8797 customers at ~~September~~June 30, ~~2018.~~2019.

We also fabricate natural gas compressors for sale to our customers, designing compressors to meet unique specifications dictated by well pressures, production characteristics, and particular applications for which compression is sought. Fabrication of compressors involves our purchase of engines, compressors, coolers, and other components, and our assembling of these components on skids for delivery to customer locations. The major components of our compressors packages are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently require lead times between ~~three~~two to ~~six~~three months with delivery dates scheduled to coincide with our estimated production schedules. Although we do not have formal continuing supply contracts with any major supplier, we believe we have adequate alternative sources available. In the past, we have not experienced any sudden and dramatic increases in the prices of the major components for our ~~compressors. However,~~compressors; however, the occurrence of such an event could have a material adverse effect on the results of our operations and financial condition, particularly if we were unable to increase our rental rates and sales prices proportionate to any such component price increases.

We also manufacture a proprietary line of compressor frames, cylinders and parts, known as our CiP (Cylinder-in-Plane) product line. We use finished CiP component products in the fabrication of compressor units for sale or rental by us or sell the finished component products to other compressor fabricators. We also design, fabricate, sell, install, and service flare stacks and related ignition and control devices for onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. To provide customer support for our compressor and flare sales businesses, we stock varying levels of replacement parts at our Midland, Texas facility and at field service locations. We also provide an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this business.

We provide service and maintenance to our customers under written maintenance contracts or on an as-required basis in the absence of a service contract. ~~Formal maintenance~~Maintenance agreements typically have terms of six months to one year and require payment of a monthly fee.

The oil and natural gas equipment rental and services industry is cyclical in nature. The most critical factor in assessing the outlook for the industry is the worldwide supply and demand for oil and natural gas ~~and crude oil~~ and the corresponding changes in commodity prices. As demand and prices increase, oil and natural gas producers typically increase their capital expenditures for drilling, development and production ~~activities.~~activities, although recent equity capital constraints and demands from institutional investors to keep spending within operating cash flow have meaningfully restrained capital expenditure budgets of domestic exploration and production companies. Generally, ~~the~~ increased capital expenditures ultimately result in greater revenues and profits for ~~services~~service and equipment companies.

In general, we expect our overall business activity and revenues to track the level of activity in the oil and natural gas industry, with changes in crude oil and condensate production and consumption levels and prices affecting our business more than changes in domestic natural gas production and consumption levels and prices. In recent years we have increased our ~~rental~~rentals and sales in ~~the non-conventional~~unconventional oil shale plays, which are more dependent on crude oil prices. With this shift towards oil production, the demand for overall compression services and products is driven by two general factors; an increased focus by producers on artificial lift applications, e.g., production enhancement with compression assisted gas lift; and declining reservoir pressure in maturing natural gas producing fields, especially ~~non-conventional~~unconventional production. These types of applications have historically been serviced by wellhead size compressors, and continue to be, but there has also been an economic move by our customers towards centralized drilling and production facilities, which have increased the market need for larger horsepower compressor packages. We recognized this need over the past two to three years and have been shifting our cash and fabrication resources towards designing, fabricating and renting gas compressor packages that range from 400 horsepower up to 1,380 horsepower. While this is a response to market conditions and trends, it also provides us with the opportunity to compete as a full-line compression provider.

We typically experience a decline in demand during periods of low crude oil and natural gas prices. ~~Low crude oil and natural gas prices experienced throughout 2016 continued into mid-2017. In the latter half of 2017,~~Compared to 2018, we ~~saw an increase in oil prices and activity that continued during most of 2018. During 2019, we have~~ witnessed a moderation of crude oil prices as well as drilling and completion activity ~~levels.~~levels during 2019. During the first quarter of 2020, we saw a substantial decline in the prices for oil and natural gas. During the second quarter of 2020, oil prices partially recovered and stabilized somewhat. Activity levels of ~~E&P~~exploration and production companies have been and will be dependent not only on commodity prices, but also on their ability to generate sufficient operational cash flow to fund their activities. Generally, though, we feel that production activities ~~(of~~(in which we are involved) will fare better than drilling activity. ~~While the continuation of this level of activity is uncertain and variable period to period, we believe the long-term trend in our market is favorable.~~

Recent Events

in the second half of April and averaging $28.53 per barrel in May, WTI crude oil has averaged approximately $40 per barrel since June 1 with greatly reduced price volatility.

Results of Operations

Three months ended ~~September~~June 30, ~~2019,~~2020, compared to the three months ended ~~September~~June 30, ~~2018.~~2019.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.


		Revenue Three months ended September 30,														Three months ended June 30,
		(in thousands)														(in thousands)
		2019						2018						2020							2019
Rental	Rental	$	14,434	69	%	$	12,039		73	%	Rental	$	15,131	87.0	%		$	13,572	68.2	%
Sales	Sales	5,877		28	%	3,947			24	%	Sales	2,008		11.5	%		5,814		29.2	%

Service and Maintenance	Service and Maintenance	541		3	%	410			3	%	Service and Maintenance	266		1.5	%		509		2.6	%
Total	Total	$	20,852			$	16,396				Total	$	17,405				$	19,895

Total revenue ~~increased~~decreased 12.5% to ~~$20.9~~$17.4 million ~~from $16.4 million, or 27.2%,~~ for the three months ended ~~September~~June 30, ~~2019,~~2020 compared to $19.9 million for the three months ended June 30, 2019. This decline was primarily a result of lower sales revenue (65.5% decrease) during the second quarter of 2020 mainly due to lower compressor sales offset by higher rental revenue (11.5% increase).

Rental revenue increased to $15.1 million for the three months ended June 30, 2020 compared to $13.6 million for the same period ended ~~September~~June 30, ~~2018.~~2019. This increase during the second quarter of 2020 was ~~mainly a result of higher rental revenue primarily due~~attributable to a greater number of large horsepower units being rented offset by shut-ins, rate reductions and ~~an increase~~returns due to a significant drop in ~~compressor sales compared to~~oil prices resulting from the ~~same period~~COVID-19 pandemic and crude oil demand destruction. Toward the end of the second quarter of 2020, a partial recovery and greater stability in ~~2018.~~oil prices resulted in restarts of many previously shut-in wells.

~~Rental revenue increased to $14.4 million from $12.0 million for the three months ended September~~As of June 30, ~~2019, compared to the same period ended September 30, 2018. We ended the quarter with 2,277~~2020, we had 2,335 compressor packages in our fleet, down from ~~2,567~~2,572 units at ~~September~~June 30, ~~2018,~~2019, due to the retirement of 327 units (with 39,758 horsepower) during the third quarter of 2019. Despite this decrease due to unit retirement, the Company's total unit horsepower increased by 8.0% to 446,805 horsepower at June 30, 2020 compared to 413,785 horsepower at June 30, 2019, which reflects the addition to the Company's fleet of 58 high horsepower compressors with 68,500 horsepower over the past 12 months. As of June 30, 2020, we had 1,273 natural gas compressors totaling 284,373 horsepower rented to 84 customers, compared to 1,374 natural gas compressors totaling 247,897 horsepower rented to 97 customers as of June 30, 2019. The rental fleet had a unit utilization as of ~~September~~June 30, ~~2019~~2020, and ~~2018,~~2019, respectively, of ~~61.5%~~54.5% and ~~51.6%~~53.4%, while our horsepower utilization for the same periods, respectively, was ~~66.4%~~63.6% and ~~55.2%~~59.9%. The rise in both utilizations was mainly the result of the rise in demand for our higher horsepower units as well as unit retirements during the third quarter of 2019.

Sales revenue ~~increased~~decreased to ~~$5.9 million from $3.9~~$2.0 million for the three months ended ~~September~~June 30, ~~2019~~2020 compared to $5.8 million for the same period ended ~~September~~June 30, ~~2018.~~2019. This ~~increase was~~decrease in mostly attributable to a large decrease in compressor sales and, to a lesser extent, parts sales.These reduced sales reflect significantly reduced industry activity levels due to the ~~result of~~COVID-19 pandemic, lower commodity prices and severe capital constraints on exploration and production companies. Sales are subject to fluctuations in timing of industry activity related to capital ~~projects. We believe this timing is reflective of the typical sales cycle, resulting in fluctuating compressor unit sales to third parties from our Tulsa~~projects and, ~~Midland operations.~~as such, can vary substantially between periods.

InDespite an 11.5% increase in rental revenue during the ~~last several months,~~second quarter of 2020 compared to the ~~Company experienced a significant decline~~same period in ~~stock price, which is reflective~~2019, cost of the significant deterioration of stock prices of companies throughout the oilfield services sector. As a result, the Company performed a goodwill impairment analysis as of September 30, 2019. The analysis showed our carrying value of net assets exceeded its fair value, indicating that goodwill was fully impaired. Accordingly, the Company recorded a goodwill impairment charge of $10.0rentals remained flat at $6.6 million during the ~~third~~three months ended June 30, 2020 compared to the three months ended June 30, 2019. When compared to the second quarter of ~~2019.~~2019, an increase in maintenance and repairs expense ($0.5 million) during the second quarter of 2020 that corresponded with our increase in rental revenue was mostly offset by lower payroll and benefits expenses as well as lower vehicle expenses.

~~Due~~Cost of sales decreased 57.9% to ~~the slow moving nature or obsolescence of long-term inventory and inventory related to the retirement of rental equipment, management started a thorough inventory analysis~~$1.9 million during the ~~third~~three months ended June 30, 2020 compared to $4.4 million during the three months ended June 30, 2019. This decrease during the second quarter of ~~2019. Accordingly, management has recorded an increase~~2020 was primarily due to a large decrease in compressor sales and, to a lesser degree, parts sales. This decrease during the second quarter of ~~$3.4 million in the inventory allowance reserve for costs~~2020 also reflects lower labor efficiency due to much lower activity levels at our fabrication facilities that ~~may not be recoverable in the future.~~was partially offset by lower payroll and benefits expenses.

~~During the third quarter of 2019, management performed a review of our rental compressor units~~Selling, general, and ~~determined that 327 units should be retired, representing total horsepower of 39,758. Based on this review,~~administrative ("SG&A") expenses remained flat at ~~September 30, 2019, we recorded a $1.5~~$2.7 million ~~non-cash loss on the retirement of rental equipment to reduce the book value of these units to zero.~~

~~Our operating (loss) income decreased to a loss of $13.6 million compared to a loss of $44,000~~ for the three months ended ~~September~~June 30, ~~2019 and September 30, 2018, respectively. This decrease was mainly due~~2020 compared to ~~an increased inventory allowance, loss on~~ the ~~retirement of rental units, and a goodwill impairment charge recorded~~same period in ~~third~~2019. SG&A expenses during the second quarter of ~~2019 that totaled $14.9 million, partially offset by higher rental revenues and compressor sales.~~

2020 included an unrealized loss

2024

Selling, general, and administrative expense increased to $2.8 million from $2.4 million for the three months ended September 30, 2019, and September 30, 2018, respectively. The increase in selling, general and administrative expenses was largelyon deferred compensation ($0.2 million) due to an increase in ~~officer~~our deferred compensation liability that reflected an improvement in the broader equity markets during the quarter. This loss along with an increase to other long-term incentive ~~bonuses.~~compensation ($0.1 million) was offset by lower bonus ($0.2 million) and stock compensation ($0.1 million) expenses.

Depreciation and amortization expense increased 10.2% to ~~$5.9~~$6.3 million for the three months ended ~~September~~June 30, ~~2019, from $5.5~~2020 compared to $5.7 million for the ~~period~~three months ended ~~September~~June 30, ~~2018.~~2019. This increase was the result of larger horsepower units being added to the fleet. We added 6099 units (approximately ~~56,000~~74,400 horsepower) to our fleet over the past 12 months. ~~Forty-two~~Fifty-eight of ~~these~~those units were 400 horsepower or larger (including 45 at 1,380 horsepower), representing ~~95%~~92% of the horsepower added.

We ~~recorded income tax benefit~~had an operating loss of ~~$1.2 million~~$148,000 for the three months ended ~~September~~June 30, ~~2019~~2020 compared to operating income ~~tax benefit~~ of ~~$100,000~~$302,000 for the three months ended ~~September~~June 30, ~~2018.~~2019. This decrease was mainly due to lower sales revenue and higher depreciation expense partially offset by higher rental revenues during the second quarter of 2020.

Our other income increased $193,000 to $370,000 for the three months ended June 30, 2020 compared to $177,000 for the same period in 2019. This increase was attributable to a gain on sale or disposal of assets ($206,000) as well as an unrealized loss on company-owned life insurance ($170,000) during the second quarter of 2020. Other income during the second quarter of 2019 included approximately $150,000 in interest income.

We recorded an income tax expense of approximately $57,000 for the three months ended June 30, 2020 compared to income tax expense of $152,000 for the three months ended June 30, 2019. For interim periods, our income tax benefit (expense) is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods. Our estimated annual effective tax rate differs from the U.S. federal statutory ~~rates~~rate of 21%. The change in tax benefit was primarily a result of a loss before provision for income taxes of $13.5 million during the third quarter of 2019, which was largely due to goodwill impairment, an increased inventory allowance, and retirement of rental equipment that totaled $14.9 million.

~~Nine~~Six months ended ~~September~~June 30, ~~2019,~~2020, compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

The table below shows our revenues and percentage of total revenues of each of our product lines for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.


		Revenue Nine months ended September 30,															Six months ended June 30,
		(in thousands)															(in thousands)
		2019						2018							2020				2019
Rental	Rental	$	41,393	70	%	$	34,937	71	%	Rental	$	31,231	88.5	%	$	26,959	71.2	%
Sales	Sales	15,816		27	%	13,328		27	%	Sales	3,458		9.8	%	9,939		26.2	%
Service and Maintenance	Service and Maintenance	1,529		3	%	1,053		2	%	Service and Maintenance	606		1.7	%	988		2.6	%
Total	Total	$	58,738			$	49,318			Total	$	35,295			$	37,886

Total revenue decreased 6.8% to $35.3 million for the six months ended June 30, 2020 compared to $37.9 million during the six months ended June 30, 2019. This decline was primarily a result of lower sales revenue (65.2% decrease) during the first six months of 2020 mainly due to lower compressor sales offset by higher rental revenue (15.8% increase).

Rental revenue increased to ~~$58.7~~$31.2 million ~~from $49.3 million, or 19.1%,~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020 compared to $27.0 million during the ~~same period ended September 30, 2018. Comparing the nine~~six months ended ~~September~~June 30, ~~2019 to~~2019. This increase during the ~~same period in 2018, rental revenue increased 18.5% primarily due~~first six months of 2020 was attributable to a greater number of large horsepower units being ~~rented. We also saw an increase in sales revenue of 18.7%~~rented offset by shut-ins, rate reductions and returns due to ~~increased compressor sales.~~a significant drop in oil prices resulting from the COVID-19 pandemic and crude oil demand destruction during the second quarter of 2020. Toward the end of the second quarter of 2020, a partial recovery and greater stability in oil prices resulted in restarts of many previously shut-in wells.

~~Rental revenue increased to $41.4 million from $34.9 million for the nine months ended September~~As of June 30, ~~2019, compared to the same period ended September 30, 2018. We ended the quarter with 2,277~~2020, we had 2,335 compressor packages in our ~~rental~~ fleet, down from ~~2,567~~2,572 units at ~~September~~June 30, ~~2018~~2019, due to the retirement of 327 units (with 39,758 horsepower) during the third quarter of 2019. Despite this decrease due to unit retirement, the Company's total unit horsepower increased by 8.0% to 446,805 horsepower at June 30, 2020 compared to 413,785 horsepower at June 30, 2019, which reflects the addition to the Company's fleet of 58 high horsepower compressors with 68,500 horsepower over the past 12 months. As of June 30, 2020, we had 1,273 natural gas compressors totaling 284,373 horsepower rented to 84 customers, compared to 1,374 natural gas compressors totaling 247,897 horsepower rented to 97 customers as of June 30, 2019. The rental fleet had a unit utilization as of ~~September~~June 30, ~~2019~~2020, and ~~2018,~~2019, respectively, of ~~61.5%~~54.5% and ~~51.6%~~53.4%, while our horsepower utilization for the same periods, respectively, was ~~66.4%~~63.6% and ~~55.2%~~59.9%. The rise in ~~utilization~~ both utilizations

was mainly the result of the rise in demand for our higher horsepower units as well as unit retirements during the third quarter of 2019.

Sales revenue ~~increased~~decreased to ~~$15.8 million from $13.3~~$3.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020 compared to $9.9 million for the same period ~~ended September 30, 2018.~~in 2019. This ~~increase was~~decrease in mostly attributable to a large decrease in compressor sales and, to a lesser extent, parts and flares sales.These reduced sales reflect significantly reduced industry activity levels due to the ~~result of the~~COVID-19 pandemic, lower commodity prices and severe capital constraints on exploration and production companies. Sales are subject to fluctuations in timing of industry activity related to capital ~~projects. We believe this timing is reflective of the typical sales cycle, resulting in fluctuating compressor unit sales to third parties from our Tulsa~~projects and, ~~Midland operations.~~as such, can vary substantially between periods.

~~In the last several months, the Company experienced a significant decline in stock price, which is reflective~~Cost of the significant deterioration of stock prices of companies throughout the oilfield services sector. As a result, the Company performed a goodwill impairment analysis as of September 30, 2019. The analysis showed our carrying value of net assets exceeded its fair value, indicating that goodwill was fully impaired. Accordingly, the Company recorded a goodwill impairment charge of $10.0rentals increased 13.2% to $14.5 million during the ~~third~~six months ended June 30, 2020 compared to $12.8 million during the six months ended June 30, 2019. This increase was a result of higher maintenance and repairs expense during the first six months of 2020 due to higher rental revenue (15.8% increase) as well as a large order from a new customer that required a significant number of make-ready jobs during the first quarter of ~~2019.~~2020.

~~Due~~Cost of sales decreased 55.7% to ~~the slow moving nature or obsolescence of long-term inventory and inventory related to the retirement of rental equipment, management started a thorough inventory analysis~~$3.6 million during the ~~third quarter~~six months ended June 30, 2020 compared to $8.1 million during the six months ended June 30, 2019. This decrease during the first six months of ~~2019. Accordingly, management recorded an increase of $3.4 million in the inventory allowance reserve for costs that may not be recoverable in the future.~~

During the third quarter of 2019 management performed a review of our rental compressor units and determined that 327 units should be retired, representing total horsepower of 39,758. Based on this review, at September 30, 2019, we recorded a $1.5 million non-cash loss on the retirement of rental equipment to reduce the book value of these units to zero.

~~Our operating (loss) income decreased~~2020 was primarily due to a ~~loss of $12.8 million from income of $532,000 for the nine months ended September 30, 2019 compared~~large decrease in compressor sales and, to ~~the same period ended 2018.~~a lesser degree, parts and flares sales. This decrease ~~was~~during the first six months of 2020 also reflects lower labor efficiency due to ~~an increased inventory allowance, loss on the retirement of rental units, and a goodwill impairment charge recorded in third quarter of 2019~~much lower activity levels at our fabrication facilities that ~~totaled $14.9 million,~~was partially offset by ~~higher rental revenues~~lower payroll and ~~compressor sales.~~benefits expenses.

Selling, general, and administrative ~~expense increased~~expenses decreased 6.8% to ~~$8.0 million from $6.7~~$4.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019, as~~2020 compared to $5.2 million for the same period ~~ended September 30, 2018, largely due~~in 2019. SG&A expenses during the first six months of 2020 were impacted by a net unrealized gain ($0.1 million) on deferred compensation, while these expenses were impacted by an unrealized loss ($0.2 million) on deferred compensation during the first six months of 2019. SG&A expenses during first six months of 2020 also included increases to ~~an increase in officer~~other long-term incentive ~~bonuses~~compensation ($0.1 million) and professional services ($0.1 million) expenses that were offset by lower bonus ($0.2 million) and stock ~~compensation.~~compensation ($0.1 million) expenses.

Depreciation and amortization expense increased 11.0% to ~~$17.1~~$12.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020 compared to ~~$16.4~~$11.3 million for the ~~period~~six months ended ~~September~~June 30, ~~2018.~~2019. This increase was the result of ~~large~~larger horsepower units being added to the fleet. We added 6099 units (approximately ~~56,000~~74,400 horsepower) to our fleet over the past 12 months. ~~Forty-two~~Fifty-eight of ~~these~~those units were 400 horsepower or larger (including 45 at 1,380 horsepower), representing ~~95%~~92% of the horsepower added.

We had an operating loss of $421,000 for the six months ended June 30, 2020 compared to operating income of $157,000 for the six months ended June 30, 2019. This decrease was mainly due to lower sales revenue and higher depreciation expense partially offset by higher rental revenues and lower SG&A expenses during the first six months of 2020.

Our other income decreased $296,000 to $182,000 for the six months ended June 30, 2020 compared to $478,000 for the same period in 2019. Other income for the first six months of 2020 included was a gain on sale or disposal of assets ($273,000) and an unrealized loss on company-owned life insurance ($92,000), while other income for the first six months of 2019 included an unrealized gain on company-owned life insurance ($131,000) and interest income ($352,000).

We recorded an income tax benefit of ~~$890,000~~$4.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 compared to income tax expense of ~~$3,000~~$210,000 for the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. For interim periods, our income tax benefit (expense) is computed based upon our estimated annual effective tax rate and any discrete items that impact the interim periods. Our estimated annual effective tax rate differs from the U.S. federal statutory ~~rates~~rate of 21%. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the economic impact caused the COVID-19 pandemic. The ~~change~~CARES Act allows federal net operating losses ("NOL") 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 plans to carryback these losses for five years. Accordingly, the Company recorded a current income tax benefit of $4.9 million for the six months ended June 30, 2020, in addition to an increase to its prepaid income taxes of $15.0 million and an increase to its deferred income tax liability of $10.1 million as of June 30, 2020. This current income tax benefit was ~~primarily~~partially offset by a ~~result~~write-off of a ~~loss before provision for income taxes~~deferred tax asset of ~~$12.2~~approximately $0.4 million related to vesting of restricted stock during the ~~nine months ended September 30, 2019, which was largely due to goodwill impairment, an increased inventory allowance, and retirement~~first quarter of ~~rental equipment that totaled $14.9 million.~~2020.

Liquidity and Capital Resources

Our working capital positions as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 are set forth below:


		September 30,		December 31,			June 30,		December 31,
		2019		2018			2020		2019
		(in thousands)							(in thousands)
Current Assets:	Current Assets:					Current Assets:
Cash and cash equivalents	Cash and cash equivalents	$	19,482	$	52,628	Cash and cash equivalents	$	15,451	$	11,592
Trade accounts receivable, net	Trade accounts receivable, net	11,224		7,219		Trade accounts receivable, net	11,674		9,106
Inventory	Inventory	30,289		30,974		Inventory	15,761		21,080
Federal income tax receivable						Federal income tax receivable	14,992		—
Prepaid income taxes	Prepaid income taxes	3,102		3,148		Prepaid income taxes	95		40
Prepaid expenses and other	Prepaid expenses and other	1,320		2,430		Prepaid expenses and other	637		597
Total current assets	Total current assets	65,417		96,399		Total current assets	58,610		42,415
Current Liabilities:	Current Liabilities:					Current Liabilities:

Accounts payable	Accounts payable	4,183		2,122		Accounts payable	1,188		1,975
Accrued liabilities	Accrued liabilities	8,358		8,743		Accrued liabilities	2,538		2,287
Line of credit						Line of credit	417		417

Current operating leases	Current operating leases	107		—		Current operating leases	183		189
Deferred income	Deferred income	81		81		Deferred income	125		640
Total current liabilities	Total current liabilities	12,729		10,946		Total current liabilities	4,451		5,508
Total working capital	Total working capital	$	52,688	$	85,453	Total working capital	$	54,159	$	36,907

For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, we invested ~~$53.4~~$11.0 million in rental equipment, property and other equipment. During ~~these nine~~the first six months of 2020, we added ~~$48.4~~$10.5 million in new equipment to our rental fleet, ~~$3.8 million in payments~~$335,000 related to the construction of our new corporate office, ~~$430,000~~and $1.1 million mostly in ~~office furniture~~vehicles as well as various other machinery and ~~equipment, and $1.5 million in vehicles.~~equipment. Our investment in property and equipment also includes any changes ~~between work in progress~~to work-in-progress related to our rental fleet jobs ~~started and those completed~~at the beginning of the period compared to the end of the period. Our rental work-in-progress decreased by $927,000 during the ~~period. These changes result~~six months ended June 30, 2020. We financed our investment in ~~a decrease to~~rental equipment, property and other equipment of $845,000. Even though we have idle rental equipment, at times we do not have the specific type of equipment that our customers require, therefore we have to build new equipment to satisfy their needs. We financed this activity with cash flow from operations and cash on hand.

Cash flows

At ~~September~~June 30, ~~2019,~~2020, we had cash and cash equivalents of ~~$19.5~~$15.5 million compared to ~~$52.6~~$11.6 million at December 31, ~~2018.~~2019. Our cash ~~flow~~flows from ~~operations~~operating activities of ~~$20.6~~$14.8 million ~~was~~were partially offset by capital expenditures of ~~$53.4~~$11.0 million during the ~~nine~~six months ended ~~September~~June 30, ~~2019.~~2020. We had working capital of ~~$52.7~~$54.2 million at ~~September~~June 30, ~~2019~~2020 compared to ~~$85.5~~$36.9 million at December 31, ~~2018.~~2019. On ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, we had outstanding debt of $417,000, which is all related to our line of credit. We ~~had positive net~~generated cash ~~flow~~flows from operating activities of ~~$20.6~~$14.8 million during the first ~~nine~~six months of ~~2019~~2020 compared to ~~$23.0~~cash flows provided by operating activities of $6.8 million for the first ~~nine~~six months of ~~2018. The~~2019. Our cash ~~flow~~flows from ~~operations~~operating activities of ~~$20.6~~$14.8 million ~~was~~were primarily the result of net income of $4.2 million, adding back non-cash items of depreciation and amortization of ~~$17.1~~$12.5 million, ~~a loss on retirement of rental equipment of $1.5 million, an increased inventory allowance of $3.4 million, a goodwill impairment charge of $10.0 million, and~~ stock-based compensation of ~~$1.8~~$1.1 million, deferred income tax expense of $0.4 million, utilization of deferred tax assets through NOL carrybacks of $10.1 million, and a net positive change in various working capital and other items of $2.3 million against ~~a net loss~~the negative impact of ~~$11.3~~an increase in federal income tax receivable of $15.0 million, gain of sale of assets of $0.3 million, and ~~decreases~~a reduction in ~~cash flows related to~~ deferred income ~~taxes~~liability of ~~$0.9 million and changes in working capital of $0.9~~$0.5 million.

Strategy

For the remainder of 2020, given the ~~fiscal year 2019,~~state of the economy and our ~~overall~~industry during the COVID-19 pandemic, our plan is to continue ~~monitoring~~to keep our expenses and ~~holding expenses in line with~~capital expenditures low. The cost cutting measures that were implemented during the ~~anticipated level~~second quarter of ~~activity, fabricate rental fleet equipment only in direct response to market requirements, emphasize marketing~~2020 will provide a continuing positive impact over the second half of ~~our idle gas compressor units and limit bank borrowing in line with market conditions.~~the year. For the remainder of ~~2019,~~2020, our forecasted capital expenditures ~~with respect to compression equipment will be directly dependent upon our customers’ compression requirements and~~ are not anticipated to exceed our internally generated cash flows and our cash on hand. Any required capital will be for contracted, premium-priced additions to our compressor rental fleet and/or ~~addition or replacement of~~required service

vehicles. We believe that cash flows from operations and our current cash position ~~and our line of credit~~ will be sufficient to satisfy our capital and liquidity requirements for the foreseeable future. We may require additional capital to fund any unanticipated expenditures, including any acquisitions of other businesses, although that capital, beyond our line of credit, as discussed below may not be available to us when we need it or on acceptable terms.

Bank Borrowings

We have a senior secured revolving credit agreement the ("Amended Credit Agreement") with JP Morgan Chase Bank, N.A. (the "Lender") with an aggregate commitment of $30 million, subject to collateral availability. We also have a right to request from the lender, on an uncommitted basis, an increase of up to $20 million on the aggregate commitment (which could potentially increase the commitment amount to $50 million). ~~On August 31, 2017, we amended and renewed the Amended Credit Agreement, extending the maturity date to December 31, 2020. No other material revisions were made to the credit facility.~~ We had $29.5 million borrowing base availability at ~~September~~June 30, ~~2019~~2020 under the terms of our Amended Credit Agreement, and our balance on the line of credit was $417,000. For further information, see Note ~~7, "Credit Facility".~~6, Credit Facility.

Contractual Obligations and Commitments

We have contractual obligations and commitments that affect the results of operations, financial condition and liquidity. The following table is a summary of our significant cash contractual obligations as of ~~September~~June 30, ~~2019:~~2020:


		Obligations Due in Period (in thousands)																							Obligations Due in Period (in thousands)
Cash Contractual Obligations	Cash Contractual Obligations	2019 ⁽¹⁾		2020		2021		2022		2023		Total		Cash Contractual Obligations	2020 ⁽¹⁾		2021		2022		2023		2024		Thereafter		Total
Line of credit (secured)	Line of credit (secured)	$	—	$	417	$	—	$	—	$	—	$	417	Line of credit (secured)	$	417	$	—	$	—	$	—	$	—	$	—	$	417
Interest on line of credit⁽²⁾	Interest on line of credit⁽²⁾	4		17		—		—		—		21		Interest on line of credit ⁽²⁾	3		—		—		—		—		—		3
Purchase obligations⁽³⁾	Purchase obligations⁽³⁾	196		400		111		—		—		707		Purchase obligations ⁽³⁾	212		250		160		—		—		—		622
Other long-term liabilities	Other long-term liabilities	—		—		41		—		—		41		Other long-term liabilities	—		—		39		—		—		—		39
Lease liabilities (including interest)														Lease liabilities (including interest)	101		174		47		38		38		168		566

Total	Total	$	200	$	834	$	152	$	—	$	—	$	1,186	Total	$	733	$	424	$	246	$	38	$	38	$	168	$	1,647

(1) For the ~~three~~six months remaining in ~~2019.~~2020.

(2) Assumes an interest rate of ~~4.0%~~1.44% and no additional borrowings.

(3) Vendor exclusive purchase agreement related to paint and coatings.

The Company also has a remaining contractual obligation related to the construction of a new corporate office of approximately $375,000, which we intend to finance by cash on hand. Construction of a new office began in late 2017 and is expected to be completed in 2019.

Critical Accounting Policies and Practices

There have been no changes in the critical accounting policies disclosed in the Company's Form 10-K for the year ended December 31, ~~2018.~~2019.

Recently Issued Accounting Pronouncements

~~For further information, see~~Please read Note ~~1 "Basis of Presentation and~~2, Summary of Significant Accounting ~~Polices" on page 6.~~Policies, Recently Issued Accounting Pronouncements in our condensed consolidated financial statements in this report.

Off-Balance Sheet Arrangements

From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of ~~September~~June 30, ~~2019,~~2020, the off-balance sheet arrangements and transactions that we have entered into include operating lease agreements and purchase agreements. We do not believe that these arrangements are reasonably likely to materially affect our liquidity or availability of ~~or requirements for,~~ capital resources.

Special Note Regarding Forward-Looking Statements

Except for historical information contained herein, the statements in this report are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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. Those risks include, among other things, the loss of market share through competition or otherwise; the

introduction of competing technologies by other companies; a prolonged, substantial reduction in oil and natural gas prices, which could cause a decline in the demand for our products and services; and new governmental safety, health and environmental regulations, which could require us to make significant capital expenditures. 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 on Form 10-K for the year ended December 31, ~~2018~~2019 filed with the SEC.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no changes in the market risks disclosed in the Company's Form 10-K for the year ended December 31, ~~2018.~~2019.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

An evaluation was carried out under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Vice President and ~~Principal Accounting~~Chief Financial Officer, of the effectiveness of the design ~~and~~ of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) ofunder the Securities Exchange Act of 1934, as amended or, the “Exchange Act”) as of ~~the end of the period covered by this report~~December 31, 2019, pursuant to Exchange Act Rule 13a-15. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily applies its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the President and Chief Executive Officer and our Vice President and ~~Principal Accounting~~Chief Financial Officer ~~have~~ concluded that, as of the end of the period covered by this report, ~~adjustments must be made~~our disclosure controls and procedures were not effective due to the design of our controls in order to maintain an effective control environment with formal accounting policies and controls. The evaluation is a continuation of a review process that started in the fourth quarter of 2018 when we determined that there was a material ~~weakness in our internal controls over financial reporting related to our review of the tax provision. A material weakness is a deficiency, or a combination of control deficiencies,~~weaknesses in internal control over financial reporting ~~such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected~~discussed below in Management’s Annual Report on ~~a timely basis.~~Internal Control Over Financial Reporting.

Material Weaknesses in Internal Control over Financial Reporting.

During the fourth quarter of fiscal year 2018, we identified a material weakness in internal controls over financial reporting related to our accounting and reporting of income tax (expense) benefit ~~the related~~and consolidated balance sheet ~~accounts~~ and ~~other comprehensive income. In detail, we~~the consolidated statement of operations accounts. We did not design and maintain an effective control environment with formal accounting policies and controls to adequately provide sufficient information for the preparation of our tax provision to our third party tax

professionals, and did not provide an appropriate level or sufficient review of the tax provision. The material weakness created a reasonable possibility that there could be a material misstatement of our annual or interim financial statements.

This material weakness resulted in ~~a material~~an immaterial misstatement in the provision for income taxes in our consolidated financial statement as of and for the years ended December 31, 2017, 2016 and 2015. ~~The misstatements were not material to any individual year.~~ Consolidated financial statements included in our Annual Report on Form 10-K issued as of December 31, 2018 reflect the correction of ~~the material~~this misstatement of income tax (expense) benefit, the related consolidated balance sheet and the consolidated ~~income~~operations statement accounts.

We have undergone evaluations, enhancements and implementation in our internal controls over financial reporting ~~regarding and~~ to address the identified material ~~weakness and significant deficiency.~~weakness. We have implemented various changes and enhancements to improve our controls related to the material ~~weakness and significant deficiency over financial reporting. Management believes that the implementation of these~~weakness. Nevertheless, after testing, our improved controls were not considered remediated at year end 2019, so further changes will ~~remediate the~~need to be implemented. Management expects this material weakness ~~described above. Nevertheless, these changes remain subject~~ to ~~further testing at~~be remediated by the end of ~~the year.~~2020.

~~There have been no other changes~~During the fourth quarter of fiscal year 2019, we identified another material weakness in ~~our~~ internal ~~control~~controls over financial reporting related to our accounting and reporting of compressor "make-ready" jobs, as well as various other compressor maintenance jobs, that ~~occurred during our fiscal~~were inappropriately capitalized, resulting in immaterial increases to the Company’s cost of rentals and, to a much lesser extent, depreciation expense in prior periods. These increases in operating costs and expenses were immaterial to all prior annual and interim periods, but would have been material to the fourth quarter of 2019 if these cumulative operating costs and expenses were taken as an out-of-period adjustment. As detailed in the Company’s consolidated financial statements in its Annual Report on Form 10-K for the year ended ~~September 30,~~December 31, 2019, ~~that have materially affected, or are reasonably likely~~the Company revised its prior period financial statements to ~~materially affect, our internal control over financial reporting.~~reflect these additional operating costs and expenses.

PART II – OTHER INFORMATION

Item 1. 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 adverse effect on our financial position, results of operations or cash ~~flow.~~flows. We are not currently a party to any material legal proceedings and we are not aware of any threatened litigation.

Item 1A. Risk Factors

Please refer to and read ~~“Risk Factors”~~Item 1A, Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018~~2019, as well as an additional Risk Factor in our Form 10-Q for the quarterly period ended March 31, 2020, for a discussion of the risks associated with our Company and industry.

2530

Item 6. Exhibits

The following exhibits are filed herewith or incorporated herein by reference, as indicated:


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 June 21, 2016.


~~10.1~~			Lease Agreement, dated January 9, 2018, between WNB Tower, LTD and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 10.15 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2017 and filed with the Securities and Exchange Commission on March 9, 2018.)

10.2			2009 Restricted Stock/Unit Plan, as amended (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K dated June 3, 2014 and filed with the Securities and Exchange Commission on June 6, 2014.)

10.3			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.)

10.4			Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 10, 2010 (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24, 2014.)

10.5			Fifth Amendment of Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated August 31, 2017 (Incorporated by reference to Exhibit 10.2 of the Registrant's Current report on Form 8-K filed with the Securities and Exchange Commission on September 7, 2017.)

10.6			Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 10, 2010 (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 16, 2011.)

10.7			Fourth Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated August 31, 2017 (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 7, 2017.)

10.8			Promissory Note in the aggregate amount of $30,000,000 issued to JPMorgan Chase Bank, N.A., dated August 31, 2017, in connection with the revolving credit line under the Credit Agreement with JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.3 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 7, 2017.)



~~10.9~~10.10			Amended and restated Employment Agreement dated April 27, 2015 between Natural Gas Services Group, Inc. and Stephen C. Taylor (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 29, 2015.)

~~10.10~~10.11			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.)

2631


~~10.11~~10.12			Annual Incentive Bonus Plan (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission December 18, 2012.)

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

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

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

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

101.INS			XBRL Instance Document

101.SCH			XBRL Taxonomy Extension Schema Document

101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF			XBRL Taxonomy Extension Definition Linkbase Document

101.LAB			XBRL Taxonomy Extension Label Linkbase Document

101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

			* Filed herewith.

SIGNATURES

Pursuant to the requirements 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.


/s/ Stephen C. Taylor						/s/ ~~G. Larry~~James R. Lawrence
Stephen C. Taylor						~~G. Larry~~James R. Lawrence
President and Chief Executive Officer						Vice President and Chief Financial Officer
(Principal Executive Officer)						(Principal Accounting Officer)
~~November 8, 2019~~August 17, 2020

2833


	Balance at December 31, 2018		Adjustments due to ASU 2016-02		Balance at January 1, 2019
Balance Sheet
Assets
Right of use assets	$	—	$	451	$	451
Liabilities
Current portion of operating leases	$	—	$	126	$	126
Long term portion of operating leases	—		325		325
Total lease liabilities	$	—	$	451	$	451


	Operating Leases
	(in thousands)
2019	$	298
2020	118
2021	97
2022	44
2023	35
Thereafter	15
Total	$	607