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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
( ) TRANSITION REPORT UNDER 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 small business issuer as specified in its charter)
Colorado 75-2811855
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2911 SCR 1260
Midland, Texas 79706
(Address of principal executive offices)
(915) 563-3974
(Issuer's Telephone number)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Outstanding at
Class October 31, 2002
- ----------------------------- -----------------------------
Common Stock, $.001 par value 4,857,632
Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
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NATURAL GAS SERVICES GROUP, INC.
Commission File Number: 1-31398
Quarter Ended September 30, 2002
FORM 10-QSB
Part I - FINANCIAL INFORMATION
Unaudited Consolidated Balance Sheet......................................Page 1
Unaudited Consolidated Income Statements..................................Page 2
Unaudited Consolidated Statements of Cash Flows...........................Page 3
Notes to Unaudited Consolidated Financial Statements......................Page 4
Management's Discussion and Analysis or Plan of Operation.................Page 7
Part II - OTHER INFORMATION..............................................Page 14
Item 6. Exhibits and Reports on Form 8-K................................Page 14
Signatures...............................................................Page 14
Natural Gas Services Group, Inc.
Consolidated Balance Sheet
(unaudited)
September 30, 2002
ASSETS
Current Assets:
Cash and cash equivalents $ 687,651
Accounts receivable - trade 739,664
Lease receivable - net of unearned interest of $27,120 92,989
Inventory 1,807,121
Prepaid expenses 52,042
-----------
Total Current Assets 3,379,467
-----------
Property plant and equipment, net: 14,624,814
Goodwill, net of accumulated amortization of $325,192 2,589,655
Patents, net of accumulated amortization of $103,067 148,296
Lease receivable net of unearned interest of $13,487 139,888
Investments in joint venture 197,486
Deferred offering cost 360,747
Other assets 30,380
-----------
Total Assets $21,470,733
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt and capital lease $ 9,509,466
Accounts payable 1,138,226
Unearned Income 257,503
-----------
Total Current Liabilities 10,905,195
-----------
Long term portion, less current portion and capital lease 1,706,042
Subordinated notes, net of discount of $216,526 1,322,735
Deferred income tax payable 1,100,000
SHAREHOLDERS' EQUITY
Preferred Stock, 5,000,000 shares authorized, par value $0.01:
10% convertible series A: 1,177,000 shares authorized: 381,654 shares
Outstanding; 10% cumulative liquidation preference of $1,240,376 3,817
Common Stock, 30,000,000 shares authorized, par value $0.01:
3,357,632 shares issued and outstanding 33,576
Paid in Capital 4,497,563
Retained Earnings 1,901,805
-----------
Shareholders' Equity 6,436,761
-----------
Total Liabilities and Shareholders' Equity $21,470,733
===========
The accompanying notes are an integral part of the consolidated balance sheet.
1
Natural Gas Services Group, Inc.
Consolidated Income Statements
(unaudited)
Three months ended September 30 Nine months ended September 30
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenue:
Sales $ 1,877,591 $ 1,325,297 $ 4,940,880 $ 3,946,875
Leasing income 1,203,793 1,006,009 3,260,060 2,282,413
------------- ------------- ------------- -------------
3,081,384 2,331,306 8,200,940 6,229,288
------------- ------------- ------------- -------------
Cost of revenue:
Cost of sales 1,336,629 983,483 3,556,130 2,737,803
Cost of leasing 329,850 290,563 916,149 651,230
------------- ------------- ------------- -------------
Total cost of revenue 1,666,479 1,274,046 4,472,279 3,389,033
------------- ------------- ------------- -------------
Gross Margin 1,414,905 1,057,260 3,728,661 2,840,255
------------- ------------- ------------- -------------
Selling expense 134,786 135,674 378,456 441,513
General and Administrative expense 276,523 320,891 877,010 844,395
Amortization & depreciation 301,493 268,407 839,093 624,164
------------- ------------- ------------- -------------
Operating income 702,103 332,288 1,634,102 930,183
------------- ------------- ------------- -------------
Interest expense (273,568) (280,670) (796,408) (652,481)
Earnings from minority interest 132,081 70,703 339,684 138,055
Other income 15,316 1,439 17,226 82,571
------------- ------------- ------------- -------------
Income before income taxes 575,932 123,760 1,194,604 498,328
------------- ------------- ------------- -------------
Income tax expense 207,000 76,885 486,563 278,363
------------- ------------- ------------- -------------
Net income $ 368,932 $ 46,875 $ 708,041 $ 219,965
------------- ------------- ------------- -------------
Preferred dividends 31,009 3,186 106,624 3,186
------------- ------------- ------------- -------------
Net income available to common shareholders $ 337,923 $ 43,689 $ 601,417 $ 216,779
============= ============= ============= =============
Earnings per share:
Basic $ 0.10 $ 0.01 $ 0.18 $ 0.06
Diluted $ 0.08 $ 0.01 $ 0.15 $ 0.06
Weighted average Shares:
Basic 3,357,632 3,357,632 3,357,632 3,357,632
Diluted 4,091,862 3,455,600 4,136,709 3,455,600
The accompanying notes are an integral part of the consolidated income
statements.
2
Natural Gas Services Group, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Nine Months
Ended Ended
September 30, 2002 September 30, 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 708,041 $ 219,965
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 839,093 624,164
Deferred taxes 486,563 278,363
Amortization of debt issuance costs 48,717 37,891
Gain on disposal of assets (15,066) (71,964)
Warrants issued for debt guarantee 42,025 23,137
Earning from minority interest (339,684) (138,055)
Changes in current assets and liabilities:
Trade and other receivables 246,047 (383,889)
Inventory (191,713) (437,981)
Prepaid expenses and other (85,097) (199,945)
Accounts payable and accrued liabilities 157,906 708,597
Deferred income 74,129 (10,108)
Other (26,209) (2,554)
------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,944,752 647,621
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,025,780) (1,887,171)
Proceeds from sale of property and equipment 40,000 179,923
Acquisition of compression related assets of Great Lakes -- (1,295,180)
Compression
Decrease in lease receivable 62,543 54,296
Minority interest investment 260,868 77,592
------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (2,662,369) (2,870,540)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from bank loans 1,853,386 926,759
Repayments of long term debt (647,004) (506,892)
Dividends paid on preferred stock (75,613) (3,186)
Proceeds from note offering, net of offering cost -- 1,372,196
Deferred offering cost (250,937) --
Proceeds from warrants 43 --
Proceeds from sale of preferred stock 12,724 407,485
------------------ ------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 892,599 2,196,362
------------------ ------------------
NET INCREASE (DECREASE) IN CASH 174,982 (26,557)
CASH AT BEGINNING OF PERIOD 512,669 142,906
------------------ ------------------
CASH AT END OF PERIOD $ 687,651 $ 116,349
================== ==================
The accompanying notes are an integral part of the consolidated statements of
cash flow.
3
NATURAL GAS SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization
Natural Gas Services Group, Inc. (the "Company" or "NGSG") (a Colorado
corporation) was formed on December 18, 1998 for the purposes of combining the
operations of certain manufacturing, service and leasing entities providing
services to a customer base of oil and gas exploration and production companies
operating primarily in California, Colorado, Kansas, Louisiana, Michigan, New
Mexico, Oklahoma, Texas and Wyoming.
(2) Basis of Presentation
The accompanying unaudited financial statements present the consolidated
results of the Company and its wholly-owned subsidiaries taken from the Company
books and records. However, in the opinion of management, such information
includes all adjustments, consisting of only normal recurring adjustments, which
are necessary to make the Company's financial position at September 30, 2002 and
the results of its operations for the three and nine month periods ended
September 30, 2002 and 2001 not misleading. As permitted by the rules and
regulations of the Securities and Exchange Commission (SEC) the accompanying
financial statements do not include all disclosures normally required by
generally accepted accounting principals. These financial statements should be
read in conjunction with the financial statements included with the Company's
Registration Statement on Form SB-2 on file with the SEC. Investments in joint
ventures in which the Company does not have majority voting control are
accounted for by the equity method. All intercompany balances and transactions
have been eliminated in consolidation. In the opinion of management, the
consolidated financial statements are a fair presentation of the financial
position, results of operations and cash flows for the period presented.
The results of operations for the three and nine months ended September 30,
2002 are not necessarily indicative of the results of operations to be expected
for the full fiscal year ending December 31, 2002
(3) Subsequent Events
Public Stock Offering - In October 2002, the Company completed an initial
public stock offering of 1,500,000 shares of common stock and warrants to
purchase 1,500,000 shares of common stock which provided gross proceeds to the
Company of approximately $7,875,000.
Each warrant allows the holder to purchase one share of common stock at an
exercise price of $6.25 for a period of 4 years after the date of the offering.
The warrants are redeemable by the Company at $0.25 per warrant upon 30 days
notice if the market price of the common stock for 20 consecutive trading days
preceding the date the notice is given equals or exceeds 175% of the exercise
price of the warrant or $10.94. The underwriters have a 60 day option
(over-allotment option) to purchase up to 225,000 shares of common stock and
225,000 warrants at the respective offering prices.
The Company also issued the representative of the underwriters' options to
purchase 150,000 shares of common stock and 150,000 warrants, that are
exercisable beginning one year from the public offering date for a period of 5
years, at 125% of the Company's public offering price. The representative of the
underwriters' options are exercisable at prices of $6.25 and $0.3125 per share
and per warrant, respectively. Each warrant is exercisable at $7.8125.
4
NATURAL GAS SERVICES GROUP, INC.
Long Term Debt - In connection with completion of its initial public
offering, the Company signed an amended credit agreement with its bank whereby
it borrowed an additional $3,500,000, in the form of a term loan with monthly
principal payments of $58,333 with interest at 1% over prime for 60 months. The
proceeds from this loan as well as $3,452,464 of the proceeds from the public
offering were used to retire the remaining $6,952,464 of debt due to Dominion
Michigan Production Services, Inc (Dominion Michigan) for the purchase of its
compression related assets that are operated by our subsidiary, Great Lakes
Compression, Inc. (Great Lakes Compression).
(4) Goodwill- Adoption of Statement 142 (Unaudited)
The Company adopted FAS 142 on January 1, 2002, at which time it ceased the
amortization of goodwill. At September 30, 2002, the Company's goodwill had a
carrying value of $2,589,655. Pursuant to FAS 142, the Company completed its
initial test for goodwill impairment and no impairment was indicated. The
following table sets forth the effect of the adoption of FAS 142 for each
period:
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income $ 601,417 $ 216,779 $ 337,923 $ 43,689
Add back: Goodwill
amortization, net
of tax effect -- 75,303 -- 25,101
Adjusted net income $ 601,417 $ 292,082 $ 337,923 $ 68,790
Basic earnings per
share:
Reported net
income $ .18 $ .06 $ .10 $ .01
Goodwill
amortization -- .02 -- .01
Adjusted net
income $ .18 $ .08 $ .10 $ .02
Diluted earnings per
share:
Reported net
income $ .15 $ .06 $ .08 $ .01
Goodwill
amortization -- .02 -- .01
Adjusted net
income $ .15 $ .08 $ .08 $ .02
5
NATURAL GAS SERVICES GROUP, INC.
(5) Segment information
FAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for public companies relating to the
reporting of information about their operating segments in financial statements.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by chief
operating decision-makers in deciding how to allocate resources and in assessing
performance.
The Company identifies its segments based on its subsidiary entities.
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
Nine Months Ended
September 30, 2002
Revenue $ 2,856 $ 1,684 $ 3,661 $ -- $ 8,201
Inter-segment revenue 4,064 (4,064) --
Net Income 504 850 252 (898) 708
Segment Assets 4,064 7,360 9,165 882 21,471
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
Three Months Ended
September 30, 2002
Revenue $ 1,285 $ 625 $ 1,171 $ -- $ 3,081
Inter-segment revenue 980 (980) --
Net Income 274 335 97 (338) 368
Segment Assets 4,064 7,360 9,165 882 21,471
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
Nine Months Ended
September 30, 2001
Revenue $ 3,039 $ 1,086 $ 2,104 $ -- $ 6,229
Inter-segment revenue 1,869 (1,869) --
Net Income 198 390 239 (607) 220
Segment Assets 2,259 4,618 9,007 2,529 18,413
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
Three Months Ended
September 30, 2001
Revenue $ 869 $ 391 $ 1,071 $ -- $ 2,331
Inter-segment revenue 733 (733) --
Net Income (52) 140 156 (197) 47
Segment Assets 2,259 4,618 9,007 2,529 18,413
6
NATURAL GAS SERVICES GROUP, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operation
Overview
We include the operations of Rotary Gas Systems, NGE Leasing and Great
Lakes Compression. These entities provide products and services to the oil and
gas industry and are engaged in (1) the manufacture, service, sale, and rental
of natural gas compressors to enhance the productivity of oil and gas wells, and
(2) the manufacture, sale and rental of flares and flare ignition systems for
plant and production facilities. We are the parent company and provide
administrative and management support and, therefore, have expenses associated
with that activity.
We acquired the compression related assets of Great Lakes Compression from
Dominion Michigan on March 29, 2001. This acquisition significantly increased
the number of compressor units that we own and service and thereby increased our
revenue and operating income beginning April 1, 2001.
Results of Operations
Nine Months Ended September 30, 2002 Compared to the Nine Months Ended September
30, 2001
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression (1) Group Total
----------- ----------- --------------- ----------- -----------
Nine Months Ended
September 30, 2002
Revenue $ 2,856 $ 1,684 $ 3,661 $ -- $ 8,201
Inter-segment revenue 4,064 (4,064) --
Gross margin 1,198 1,209 1,322 -- 3,729
Selling, general and administrative
expense 600 120 188 347 1,255
Depreciation and amortization
expense 90 303 412 34 839
Interest expense 6 291 470 30 797
Other income 2 15 17
Equity in earnings from joint venture 340 340
Income tax 487 487
----------- ----------- --------------- ----------- -----------
Net Income $ 504 $ 850 $ 252 $ (898) $ 708
=========== =========== =============== =========== ===========
Nine Months Ended
September 30, 2001
Revenue $ 3,039 $ 1,086 $ 2,104 $ -- $ 6,229
Inter-segment revenue 1,869 (1,869) --
Gross margin 1,051 763 1,026 -- 2,840
Selling, general and administrative
expense 774 108 185 219 1,286
Depreciation and amortization
expense 78 180 280 86 624
Interest expense 3 303 322 24 652
Other income 2 80 82
Equity in earnings from joint venture 138 138
Income tax 278 278
----------- ----------- --------------- ----------- -----------
Net income $ 198 $ 390 $ 239 $ (607) $ 220
=========== =========== =============== =========== ===========
_______
(1) We purchased the compression related assets of Great Lakes Compression from
Dominion Michigan on March 29, 2001. Therefore, the information of Great Lakes
Compression for the period ending March 31, 2001, is not included.
7
NATURAL GAS SERVICES GROUP, INC.
Rotary Gas Systems Operations
Revenue from outside sources decreased approximately $183,000 or
approximately 6% for the nine months ended September 30, 2002 compared to the
same period ended September 30, 2001. Because our products are custom-built,
fluctuations in revenue from outside sources are expected. Our main focus is to
build our rental fleet and associated lease revenue in NGE Leasing, which in the
long term is more profitable and has a more stable cash flow. For the nine
months ended September 30, 2001, approximately 58% of our plant output was used
to build gas compressors for NGE Leasing as opposed to approximately 80% for the
same period in 2002.
The gross margin percentage increased from 35% for the nine months ended
September 30, 2001, to 42% for the same period ended September 30, 2002. The
slight increase resulted mainly from some change in the sales product mix.
Selling, general and administrative expense decreased from $774,000, to
$600,000 or 22% for the nine months ended September 30, 2001, as compared to the
same period ended September 30, 2002. This was mainly the result of the
reduction of selling expenses related to the decision to discontinue the air
compressor line. We discontinued this line of product in the development stage
so that we could concentrate on our main product, gas compression.
Depreciation expense increased 15% from $78,000 to $90,000 for the nine
months ended September 30, 2001, compared to the same period ended September 30,
2002. This increase was mainly due to the purchase of additional vehicles, shop
and office equipment.
There was a $3,000 increase in interest expense for the nine months ended
September 30, 2002 compared to the same period ended September 30, 2001, mainly
due to financing the purchase of additional service vehicles.
NGE Leasing Operations
Revenue from rental of natural gas compressors increased 55% for the nine
months ended September 30, 2002, compared to the same period in 2001. This
increase is the result of the increase in our rental fleet of which 66 new
compressors were added during the nine months ended September 30, 2002, as
compared to the addition of 30 during the 2001 period. These compressors were
manufactured by Rotary Gas Systems.
The gross margin percentage increased 2% from 70% for the period ending
September 30, 2001 to 72% for the same period in 2002. The cost of revenue is
comprised mainly of expenses associated with the maintenance of the gas
compressor rental activity. This increase resulted from the fact that of the 66
new compressors added to our rental fleet in the nine months ended September 30,
2002, 48 were the new GS 10 model which have a lower percentage maintenance cost
than other models in our fleet. Normally the cost of equipment maintenance will
naturally increase over time as the equipment ages, thereby reducing the gross
margin. The expected life of a gas compressor unit will exceed 15 years with
routine maintenance and a major overhaul every three to four years.
Selling, general and administrative expense increased from $108,000 to
$120,000 or 11% for the nine months ended September 30, 2002, as compared to the
same period in 2001. This was mainly the result of an increase in commission
expense.
8
NATURAL GAS SERVICES GROUP, INC.
Depreciation expense increased 68% from $180,000 to $303,000 for the nine
months ended September 30, 2001, compared to the same period ended September 30,
2002. This increase was the result of new gas compressor rental units being
added to the rental fleet during the period.
There was a decrease in interest expense from $303,000 to $291,000 for the
nine months ended September 30, 2001 as compared to the same period ended
September 30, 2002. .This is mainly a result of a reduction in bank debt.
Equity in earnings from a joint venture increased 146% from $138,000 to
$340,000 during the nine months ended September 30, 2001, compared to the same
period ended September 30, 2002. This is a joint venture, called Hy-Bon Rotary
Compression, LLC that serves a mutual area of interest in which we contribute
gas compressor units for rental. The increase is due to net profits associated
with the additional units leased in 2002 as compared to those in 2001.
Great Lakes Compression
We acquired the compression related assets of Great Lakes Compression from
Dominion Michigan as of March 29, 2001. Therefore, there is no historical
comparative data for the nine months ended September 30, 2001.
Natural Gas Services Group
Selling, general and administrative expense increased from $219,000 to
$347,000 or 58% for the nine months ended September 30, 2001, as compared to the
same period ended September 30, 2002. This was mainly the result of an added
expense for warrants valued at $42,000 granted to certain officers and directors
as consideration for their guarantee of restructured corporate bank debt and an
increase in accrual for officer bonuses normally paid at year end.
Amortization and depreciation expense decreased from $86,000 to $34,000 or
60% for the nine months ended September 30, 2001 compared to the same period
ended September 30, 2002. This decrease was mainly the result of changes in the
accounting method for amortizing goodwill.
Interest expense increased from $24,000 to $30,000 or 25% for the nine
months ended September 30, 2001 compared to the same period ended September 30,
2002. This increase was the result of financing the purchase on three new
service vehicles.
Income tax expense is accounted for on a consolidated basis. Therefore, the
tax for all companies is included in the tax expense for Natural Gas Services
Group. Income tax expense increased 75% from $278,000 to $487,000 for the nine
months ended September 30, 2001 compared to same period ended September 30,
2002. This increase is mainly due to an increase in income before taxes.
9
NATURAL GAS SERVICES GROUP, INC.
Three Months Ended September 30, 2002 Compared to the Three Months Ended September 30, 2001
(in thousands) Natural Gas
Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
----------- ----------- ----------- ----------- -----------
Three Months Ended
September 30, 2002
Revenue $ 1,285 $ 625 $ 1,171 $ $ 3,081
Inter-segment revenue 980 (980) --
Gross margin 509 448 458 1,415
Selling, general and administrative
expense 203 40 62 107 412
Depreciation and amortization
expense 31 114 143 13 301
Interest expense 2 105 156 11 274
Other income 1 14 15
Equity in earnings from joint venture 132 132
Income tax 207 207
----------- ----------- ----------- ----------- -----------
Net Income $ 274 $ 335 $ 97 $ (338) $ 368
=========== =========== =========== =========== ===========
Three Months Ended
September 30, 2001
Revenue $ 869 $ 391 $ 1,071 $ $ 2,331
Inter-segment revenue 733 (733) --
Gross margin 243 267 547 1,057
Selling, general and administrative
expense 269 22 86 80 457
Depreciation and amortization
expense 27 68 142 31 268
Interest expense 1 108 163 9 281
Other income 2 2
Equity in earnings from joint venture 71 71
Income tax 77 77
----------- ----------- ----------- ----------- -----------
$ (52) $ 140 $ 156 $ (197) $ 47
=========== =========== =========== =========== ===========
_______
Rotary Gas Systems Operations
Revenue from outside sources increased $416,000 or 48% for the three months
ended September 30, 2002 compared to the same period ended September 30, 2001.
Because our products are custom-built, fluctuations in revenue from outside
sources are expected. This increase was mainly the result of the additional
number of gas compressor units sold during the period. We sold 10 compressor
units in the three months ended September 30, 2002 as compared to only 6 units
in the same period ended September 30, 2001.
The gross margin percentage increased from 28% for the three months ended
September 30, 2001, to 40% for the same period ended September 30, 2002. This
increase resulted mainly from a change in the sales product mix.
Selling, general and administrative expense decreased from $269,000 to
$203,000 or 25% for the three months ended September 30, 2001, as compared to
the same period ended September 30, 2002. This was mainly the result of the
reduction of selling expenses related to the decision to discontinue the air
compressor line. We discontinued this line of product in the development stage
so that we could concentrate on our main product, gas compression.
10
NATURAL GAS SERVICES GROUP, INC.
Depreciation expense increased 15% from $27,000 to $31,000 for the three
months ended September 30, 2001, compared to the same period ended September 30,
2002. This increase was mainly due to the purchase of additional service
vehicles, shop and office equipment.
There was a $1,000 increase in interest expense for the three months ended
September 30, 2002 compared to the same period ended September 30, 2001, mainly
due to financing the purchase of additional service vehicles.
NGE Leasing Operations
Revenue from rental of natural gas compressors increased 60% for the three
months ended September 30, 2002, compared to the same period in 2001. This
increase is the result of the increase in the number of units added to our
rental fleet.
The gross margin percentage increased 4% from 68% for the three months
ending September 30, 2001 to 72% for the same period in 2002. The cost of
revenue is comprised mainly of expenses associated with the maintenance of the
gas compressor rental activity. This increase mainly resulted from change in the
rental fleet makeup to include the GS-10 model compressor, which has a lower
percentage of maintenance cost.
Selling, general and administrative expense increased from $22,000 to
$40,000 for the three months ended September 30, 2002, as compared to the same
period in 2001. This was mainly the result of an increase in sales commissions
from increased rental revenue.
Depreciation expense increased 68% from $68,000 to $114,000 for the three
months ended September 30, 2001, compared to the same period ended September 30,
2002. This increase was the result of new gas compressor rental units being
added to the rental fleet during the period.
There was a decrease in interest expense from $108,000 to $105,000 for the
three months ended September 30, 2002 as compared to the same period ended
September 30, 2001. This is mainly as a result of a reduction in bank debt.
Equity in earnings from a joint venture increased 86% from $71,000 to
$132,000 during the three months ended September 30, 2001, compared to the same
period ended September 30, 2002. This is a joint venture, called Hy-Bon Rotary
Compression, LLC that serves a mutual area of interest in which we contribute
gas compressor units for rental. The increase is due to net profits associated
with the additional units leased in 2002 as compared to those in 2001.
Great Lakes Compression
Revenue from rental of natural gas compressors increased 9% for the three
months ended September 30, 2002, compared to the same period in 2001. This
increase is the result of the increase in the number of units added to our
rental fleet offset by an increase in idle units.
The gross margin percentage decreased 12% from 51% for the three months
ending September 30, 2001 to 39% for the same period in 2002. The cost of
revenue is comprised of expenses associated with the maintenance of the gas
compressor rental activity, service, parts and manufacturing expenses. This
decrease mainly resulted from a reduced margin on parts sold during the period.
11
NATURAL GAS SERVICES GROUP, INC.
Selling, general and administrative expense decreased from $86,000 to
$62,000 for the three months ended September 30, 2002, as compared to the same
period in 2001. This was mainly the result of a decrease in insurance, legal and
telephone expense.
Depreciation expense increased only slightly from $142,000 to $143,000 for
the three months ended September 30, 2001, compared to the same period ended
September 30, 2002.
There was a slight decrease in interest expense from $163,000 to $156,000
for the three months ended September 30, 2002 as compared to the same period
ended September 30, 2001.
Natural Gas Services Group
Selling, general and administrative expense increased from $80,000 to
$107,000 or 34% for the three months ended September 30, 2001, as compared to
the same period ended September 30, 2002. This was mainly the result of an added
expense for accrual of officer bonuses.
Amortization and depreciation expense decreased from $31,000 to $13,000 or
58% for the three months ended September 30, 2001 compared to the same period
ended September 30, 2002. This decrease was mainly the result of changes in the
accounting method for amortizing goodwill.
Interest expense increased from $9,000 to $11,000 or 22% for the three
months ended September 30, 2001 compared to the same period ended September 30,
2002. This increase was the result of financing the purchase on three new
service vehicles.
Income tax expense is accounted for on a consolidated basis. Therefore, the
tax for all companies is included in the tax expense for Natural Gas Services
Group. Income tax expense increased 169% from $77,000 to $207,000 for the three
months ended September 30, 2001 compared to same period ended September 30,
2002. This increase is mainly due to an increase in income before taxes.
Liquidity and Capital Resources
We have funded our operations through private offerings of our common and
preferred stock, subordinated debt and bank debt. Proceeds were primarily used
to fund the manufacture and fabrication of additional units for our rental fleet
of gas compressors.
At September 30, 2002, we had cash and cash equivalents of $688,000, a
working capital deficit of $7,526,000 and non-subordinated debt of $11,216,000
of which approximately $9,509,000 was classified as current. We had $1,945,000
of net cash flow from operating activities during the first nine months of 2002.
This was primarily from net income of $708,000 plus depreciation and
amortization of $839,000, an increase in deferred taxes of $487,000 and an
increase in deferred income of $74,000 offset by an increase in inventory and
prepaid expense.
On October 24, 2002 we paid off the note of $6,952,464 payable to Dominion
Michigan , used for the acquisition of the compression related assets of Great
Lakes Compression. $3,452,464 of the funds to pay the note came from the
proceeds of our initial public offering, and $3,500,000 came from additional
bank financing to be amortized over 60 months at prime plus 1%.
Funds from the initial public offering, which closed on October 24, 2002,
will permit us to actively pursue adding gas compressors to our rental fleet. We
expect to fund additional rental units though the use of the offering proceeds
and cash flow from operations. We believe that the revenue generated by our
operations and the proceeds from our offering will be adequate to meet our
anticipated cash, capital and debt service requirements.
12
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934) as of a date (the "Evaluation Date") within 90 days prior to the filing
date of this report. Based upon that evaluation, our chief executive officer and
chief financial officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective in timely alerting them to the
material information relating to us and our consolidated subsidiaries required
to be included in our periodic filings with the SEC.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
13
NATURAL GAS SERVICES GROUP, INC.
Commission File Number: 1-31398
Quarter Ended September 30, 2002
Form 10-QSB
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NATURAL GAS SERVICES GROUP, INC.
By: /s/ Wayne L. Vinson
-----------------------------
Wayne L. Vinson
President and Chief Executive
Officer
By: /s/ Earl R. Wait
-----------------------------
Earl R. Wait
Chief Financial Officer
and Treasurer
November 12, 2002
14
NATURAL GAS SERVICES GROUP, INC.
CERTIFICATION
I, Wayne L. Vinson, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Natural Gas
Services Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
15
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Wayne L. Vinson
Date: November 12, 2002 --------------------------------
Wayne L. Vinson
Title: Chief Executive Officer
16
NATURAL GAS SERVICES GROUP, INC.
CERTIFICATION
I, Earl R. Wait, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Natural Gas
Services Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
17
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Earl R. Wait
Date: November 12, 2002 --------------------------------
Earl R. Wait
Title: Chief Financial Officer
18
EXHIBIT INDEX
Exhibit 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
Exhibit 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
19