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NATURAL GAS SERVICES GROUP INC - Quarter Report: 2009 June (Form 10-Q)

form10q_6-09.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009

OR

( ) 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)
Identification No.)

508 W. Wall St., Ste 550
Midland, Texas 79701
(Address of principal executive offices)
(432) 262-2700
(Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Date File to be submitted and posted 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   o
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” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer   x
Non-accelerated filer o
 (Do not check if smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o
No x
 
APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Class
 
 Outstanding at August 10, 2009
Common Stock, $.01 par value
 
12,096,833




   
Part I - FINANCIAL INFORMATION
 
   
Item 1.  Financial Statements
 
   
Page 1
   
Page 2
   
Page 3
   
Page 4
   
Page 10
   
Page 16
   
Page 17
   
 
   
Page 18
   
Page 18
   
Page 18
   
Page 19
   
Page 20


PART I – FINANCIAL INFORMATION
Item 1.  Financial Statements

NATURAL GAS SERVICES GROUP, INC.
CONDENSED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
 
   
December 31,
June 30,
 
   
2008
   
2009
 
ASSETS
           
Current Assets:
           
  Cash and cash equivalents
 
$
1,149
   
$
11,687
 
  Short-term investments
   
2,300
     
 
  Trade accounts receivable, net of doubtful accounts of $177 and $293,
    respectively
   
11,321
     
5,799
 
  Inventory, net of allowance for obsolescence of $500 and $254, respectively
   
31,931
     
27,445
 
  Prepaid income taxes
   
244
     
801
 
  Prepaid expenses and other
   
87
     
231
 
     Total current assets
   
47,032
     
45,963
 
                 
 Rental equipment, net of accumulated depreciation of $24,624 and $29,310, respectively
   
111,967
     
113,723
 
Property and equipment, net of accumulated depreciation of $6,065 and $6,400, respectively
   
8,973
     
8,303
 
Goodwill, net of accumulated amortization of $325, both periods
   
10,039
     
10,039
 
Intangibles, net of accumulated amortization of $1,198 and $1,347, respectively
   
3,020
     
2,871
 
Other assets
   
19
     
19
 
     Total assets
 
$
181,050
   
$
180,918
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current Liabilities:
               
  Current portion of long-term debt
 
$
3,378
   
$
3,378
 
  Accounts payable
   
8,410
     
1,189
 
Accrued liabilities
   
3,987
     
1,925
 
  Current income tax liability
   
110
     
99
 
  Deferred income
   
38
     
281
 
     Total current liabilities
   
15,923
     
6,872
 
                 
Long  term debt, less current portion
   
6,194
     
4,505
 
Line of credit
   
7,000
     
7,000
 
Deferred income tax payable
   
21,042
     
24,552
 
Other long term liabilities
   
441
     
562
 
     Total liabilities
   
50,600
     
43,491
 
                 
Commitments & Contingencies (Note 8)
               
Stockholders’ equity:
               
  Preferred stock, 5,000 shares authorized, no shares issued or outstanding
   
     
 
  Common stock, 30,000 shares authorized, par value $0.01;12,094 and 12,097 shares issued and outstanding, respectively
   
121
     
121
 
  Additional paid-in capital
   
83,937
     
84,245
 
  Retained earnings
   
46,392
     
53,061
 
     Total stockholders' equity
   
130,450
     
137,427
 
     Total liabilities and stockholders' equity
 
$
181,050
   
$
180,918
 
                 

See accompanying notes to these unaudited condensed financial statements.


 
- 1 -


 
NATURAL GAS SERVICES GROUP, INC.
(in thousands, except earnings per share)
(unaudited)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2008
 
2009
 
2008
 
2009
Revenue:
             
Sales, net
$
9,159
   
$
4,599
   
$
18,785
   
$
11,528
 
Rental income
 
10,095
     
11,969
     
19,105
     
24,757
 
Service and maintenance income
 
224
     
189
     
521
     
497
 
Total revenue
 
19,478
     
16,757
     
38,411
     
36,782
 
                               
Operating costs and expenses:
                             
Cost of sales, exclusive of depreciation stated separately below
 
6,238
     
3,253
     
12,631
     
7,782
 
Cost of rentals, exclusive of depreciation stated separately below
 
4,094
     
4,152
     
7,498
     
8,841
 
Cost of service and maintenance, exclusive of depreciation stated separately below
 
152
     
132
     
360
     
347
 
Selling, general, and administrative expense
 
1,485
     
1,654
     
2,835
     
3,231
 
Depreciation and amortization
 
2,364
     
2,935
     
4,489
     
5,893
 
 Total operating costs and expenses
 
14,333
     
12,126
     
27,813
     
26,094
 
                               
Operating income
 
5,145
     
4,631
     
10,598
     
10,688
 
                               
Other income (expense):
                             
Interest expense
 
(193)
 
   
(154
)
   
  (434)
 
   
(314
)
Other income (expense)
 
141 
     
(59
)
   
374 
     
(106
)
Total other income (expense)
 
(52)
 
   
(213
)
   
(60)
 
   
(420
)
                               
Income before provision for income taxes
 
5,093
     
4,418
     
10,538
     
10,268
 
                               
Provision for income taxes
 
1,760
     
1,546
     
3,688
     
3,599
 
                               
Net income
$
3,333
     
2,872
   
$
6,850
   
$
6,669
 
                               
                               
Earnings per share:
                             
Basic
$
0.28 
   
$
0.24 
   
$
0.57
   
$
0.55
 
Diluted
$
0.27 
   
$
0.24 
   
$
0.56
   
$
0.55
 
Weighted average shares outstanding:
                             
Basic
 
12,088
     
12,095
     
12,087
     
12,094
 
Diluted
 
 12,152
     
12,099
     
12,150
     
12,102
 
                               
                               
                               

 
See accompanying notes to these unaudited condensed financial statements.
 



 
- 2 -


 
NATURAL GAS SERVICES GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
 
(in thousands)
(unaudited)
 
   
Six months ended
June 30,
 
   
2008
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
   Net income
  $ 6,850     $ 6,669  
       Adjustments to reconcile net income to net cash provided by operating   activities:
               
        Depreciation and amortization
    4,489       5,893  
        Deferred taxes
    3,688       3,599  
        Employee stock options expense
    181       299  
        Gain on disposal of assets
    (14 )     (44 )
Changes in current assets and liabilities:
               
        Trade accounts receivables, net
    798       5,522  
        Inventory, net
    (9,332 )     4,800  
        Prepaid income taxes and prepaid expenses
    558       (701 )
        Accounts payable and accrued liabilities
    4,682       (9,283 )
        Current income tax liability
    (220 )     (100 )
        Deferred income
    1,670       243  
        Other
    18        
NET CASH PROVIDED BY OPERATING ACTIVITIES
    13,368       16,897  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
        Purchase of property and equipment
    (21,897 )     (7,235 )
        Purchase of short-term investments
    (294 )      
        Redemption of short-term investments
    12,528       2,300  
        Proceeds from sale of property and equipment
    35       135  
NET CASH USED IN INVESTING ACTIVITIES
    (9,628 )     (4,800 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
        Proceeds from line of credit
    500        
        Proceeds from other long-term liabilities, net
    150       121  
        Repayments of long-term debt
    (2,689 )     (1,689 )
        Repayments of line of credit
    (1,100 )      
        Proceeds from exercise of stock options
    44       9  
NET CASH USED IN FINANCING ACTIVITIES
    (3,095 )     (1,559 )
                 
NET CHANGE IN CASH
    645       10,538  
                 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    245       1,149  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 890     $ 11,687  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
   Interest paid
  $ 477     $ 322  
   Income taxes paid
  $ 220     $ 658  

See accompanying notes to these unaudited condensed financial statements.

 
- 3 -



(1) Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed financial statements present the condensed results of our company taken from our books and records. In our opinion, such information includes all adjustments, consisting of only normal recurring adjustments, which are necessary to make our financial position at June 30, 2009 and the results of our operations for the three and six month periods ended June 30, 2008 and 2009 not misleading.  As permitted by the rules and regulations of the Securities and Exchange Commission (SEC) the accompanying condensed financial statements do not include all disclosures normally required by accounting principles generally accepted in the United States of America.  These condensed financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 on file with the SEC.  In our opinion, the condensed financial statements are a fair presentation of the financial position, results of operations and cash flows for the periods presented.

The results of operations for the three and six month period’s ending June 30, 2009 is not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2009.

Revenue recognition

Revenue from the sales of custom and fabricated compressors, and flare systems is recognized upon shipment of the equipment to customers or when all conditions have been met title is transferred to the customer. Exchange and rebuild compressor revenue is recognized when both the replacement compressor has been delivered and the rebuild assessment has been completed. Revenue from compressor services is recognized upon providing services to the customer. Maintenance agreement revenue is recognized as services are rendered. Rental revenue is recognized over the terms of the respective rental agreements based upon the classification of the rental agreement. Deferred income represents payments received before a product is shipped.  Revenue from the sale of rental units is included in sales revenue when equipment is shipped or title is transferred to the customer.

Fair Value of Financial Instruments

We adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), and the related effective interpretations for both financial and non-financial assets and liabilities. The adoption of SFAS 157 did not have a material impact on our unaudited condensed consolidated financial statements. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.

Our financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and notes payable. Pursuant to SFAS 157, the fair value of our cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. We believe that the recorded values of all of our other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

Subsequent Events

We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through August 10, 2009, the day the financial statements were issued.

Recently Issued Accounting Pronouncements
 
   On January 1, 2009, we adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51,” (SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This standard defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS 160 requires, among other items, that a noncontrolling interest be included in the consolidated statement of financial position within equity separate from the parent’s equity; consolidated net income to be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated income statement; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. The adoption of SFAS 160 had no impact on our consolidated financial statements.

 
- 4 -


       On January 1, 2009, we adopted SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141, Business Combinations (SFAS 141R), and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This Statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values. Additionally, this Statement requires acquisition related costs to be expensed in the period in which the costs were incurred and the services are received instead of including such costs as part of the acquisition price.  SFAS 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this Statement.  The adoption of SFAS No. 141(R) had no impact on our consolidated financial statements.

In April 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. We adopted SFAS 165 for the quarter ending June 30, 2009.  The adoption of SFAS 165 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167).   SFAS 167 requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (VIE), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. SFAS 167 is effective for annual reporting periods beginning after November 15, 2009. The adoption of SFAS No. 167 is not expected to have a material impact on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168).  SFAS 168 identifies the FASB Accounting Standards Codification as the authoritative source of generally accepted accounting principles in the United States. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect the adoption of SFAS 168 to have a material impact on our consolidated financial statements.

 
- 5 -



(2) Stock-Based Compensation

A summary of option activity under our 1998 Stock Option plan for the six month period ended June 30, 2009 is presented below.

   
Number
 of
Stock Options
   
Weighted Average
Exercise
 Price
   
Weighted
Average
Remaining
Contractual Life (years)
   
Aggregate
Intrinsic
Value
 
                         
Outstanding, December 31, 2008
    264,501     $ 14.61       7.94     $   *
                                 
  Granted
    107,433       8.45              
  Exercised
    (3,000 )     3.25              
  Forfeited or expired
                       
                                 
Outstanding, June 30, 2009
    368,934     $ 12.91       8.13     $ 145  
                                 
Exercisable, June 30, 2009
    176,166     $ 12.72       6.85     $ 102  

*  Market price as of December 31, 2008 exceeded the weighted average exercise price, and as such, resulted in the aggregate intrinsic value being negative or “out-of-the-money”.

We granted 30,000 options to an officer on January 28, 2009 at an exercise price of $9.95 with a three year vesting period.  We granted 62,433 options to employees and officers on March 17, 2009 at an exercise price of $7.84 with a one year vesting period.  We granted 15,000 options to the non executive members of the board of directors on March 18, 2009 at an exercise price of $8.00 vesting through December 2009.
 
The following table summarizes information about the stock options outstanding at June 30, 2009:

Range of Exercise Prices
   
Options Outstanding
   
Options Exercisable
 
   
Shares
   
Weighted
Average
Remaining
Contractual
Life (years)
   
Weighted
Average
Exercise
Price
   
Shares
   
Weighted
Average
Exercise
Price
 
                                 
$
0.00 – 5.58
     
19,000
     
3.56
   
4.24
     
19,000
   
4.24
 
                                             
 
5.59 – 9.43
     
137,433
     
8.08
     
8.41
     
67,500
     
8.99
 
                                             
 
9.44 – 15.60
     
74,501
     
8.36
     
12.57
     
36,333
     
14.19
 
                                             
 
15.61 – 20.48
     
138,000
     
8.68
     
18.76
     
53,333
     
19.47
 
                                             
$
0.00 – 20.48
     
368,934
     
8.13
   
$
12.91
     
176,166
   
$
12.72
 


 
- 6 -



The summary of the status of the our unvested stock options as of June 30, 2009 and changes during the six months ended June 30, 2009 is presented below.
 
 
 
Unvested stock options:
 
Shares
   
Weighted Average
Grant Date Fair Value
 
             
Unvested at December 31, 2008 
   
106,168
   
$
8.19
 
                 
  Granted
   
107,433
     
4.78
 
  Vested
   
(20,833
)
   
8.00
 
  Forfeited
   
     
 
                 
Unvested at June 30, 2009
   
192,768
   
$
6.29
 
 
As of June 30, 2009, there was $908,000 of unrecognized compensation cost related to unvested options.  Such cost is expected to be recognized over a weighted-average period of 1.25 years.  Total compensation expense for stock options was $181,000 and $299,000 for the six months ended June 30, 2008 and 2009, respectively.  An income tax benefit was recognized from the exercise of stock options of approximately $12,000 for the six months ended June 30, 2008 and 2009.

On June 16, 2009, at our annual meeting of shareholders, our shareholders approved a proposed amendment to our 1998 Stock Option Plan (the “Plan”) to add an additional 200,000 shares of common stock to the Plan, thereby authorizing the issuance of up to 750,000 shares of common stock under the Plan.

Also on June 16, 2009, at our annual meeting of shareholders, our shareholders adopted the 2009 Restricted Stock/Unit Plan.  A total of 300,000 shares of Company common stock are reserved for issuance under the restricted stock plan.

(3) Inventory
 
During six months ended June 30, 2009, we disposed of approximately $527,000 of obsolete inventory and added approximately $281,000 to our allowance.  Inventory, net of allowance for obsolescence of $500,000 at December 31, 2008 and $254,000 at June 30, 2009 consisted of the following amounts:
 
December 31,
 
June 30,
 
 
2008
 
2009
 
 
(in thousands)
 
(in thousands)
 
         
Raw materials
  $ 26,124     $ 23,814  
Finished goods
    2,417       1,722  
Work in process
    3,390       1,909  
    $ 31,931     $ 27,445  
(4) Credit Facility

Revolving Line of Credit Facility.  As of June 30, 2009, the amount available for revolving line of credit advances was $33.0 million.  The amount we could borrow is determined by a borrowing base calculation and is based primarily upon our receivables, equipment and inventory.  We had $7.0 million outstanding as of June 30, 2009 on this revolving line of credit facility, and the interest rate was 4.00%.

$16.9 Million Multiple Advance Term Loan Facility.  As of June 30, 2009 this term loan facility had a principal balance of $7.9 million, and the interest rate was 4.00%.

As of June 30, 2009, we were in compliance with all covenants in our Loan Agreement.  A default under our bank credit facility could trigger the acceleration of our bank debt so that it is immediately due and payable.  Such default would have a material adverse effect on our liquidity, financial position and operations.

 
- 7 -



(5) Other Long-term Liabilities

As of June 30, 2009, we had a long-term liability of $275,000 to Midland Development Corporation.  This amount is to be recognized as income contingent upon certain staffing requirements in the future.  In addition, we entered into a purchase agreement with a vendor on July 30, 2008 pursuant to which we agreed to purchase up to $4.8 million of our paint and coating requirements exclusively from the vendor.  In connection with the execution of the agreement, the vendor paid us a $300,000 fee which is considered to be a discount toward future purchases from the vendor.  Based on our historical paint and coating requirements, we estimate meeting the $4.8 million purchase obligation within five years.  The $300,000 payment received by the Company is recorded as a long-term liability and will decrease as the purchase commitment is fulfilled.  The long-term liability remaining as of June 30, 2009 was $287,000.

(6) Earnings per Share
 
The following table reconciles the numerators and denominators of the basic and diluted earnings per share computation.

   
Three months Ended
June 30,
 
(in thousands,
except per share data)
   
Six months Ended
June 30,
 
(in thousands,
except per share data)
 
   
2008
   
2009
   
2008
   
2009
 
Numerator:
                       
Net income
  $ 3,333       2,872       6,850       6,669  
Denominator for basic net income per common share:
                               
Weighted average common shares outstanding
    12,088       12,095       12,087       12,094  
                                 
Denominator for diluted net income per share:
                               
Weighted average common shares outstanding
    12,088       12,095       12,087       12,094  
Dilutive effect of stock options and warrants
    64       4       63       8  
Diluted weighted average shares
    12,152       12,099       12,150       12,102  
                                 
Earnings per common share:
                               
Basic
  $ 0.28     $ 0.24     $ 0.57     $ 0.55  
Diluted
  $ 0.27     $ 0.24     $ 0.56     $ 0.55  

A total of 182,501 stock options were excluded from diluted weighted average shares as their effect would be antidilutive.

(7) Segment Information
 
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishes standards for public companies relating to the reporting of financial and descriptive 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 the allocation of resources and the assessment of performance.  Our management identifies segments based upon major revenue sources as shown in the tables below.  However, management does not track assets by segment.

For the three months ended June 30, 2009 (in thousands):
 
   
Sales
   
Rental
   
Service & Maintenance
   
Corporate
   
Total
 
Revenue
 
$
4,599
   
$
11,969
   
$
189
   
$
   
$
16,757
 
Operating costs and expenses
   
3,253
     
4,152
     
132
     
4,589
     
12,126
 
Other income/(expense)
   
     
     
     
(213
)
   
(213
)
Income before provision for  income taxes
 
$
1,346
   
$
7,817
   
$
57
   
$
(4,802
)
 
$
4,418
 


 
- 8 -




For the three months ended June 30, 2008 (in thousands):
 
   
Sales
   
Rental
   
Service & Maintenance
   
Corporate
   
Total
 
Revenue
 
$
9,159
   
$
10,095
   
$
224
   
$
   
$
19,478
 
Operating costs and expenses
   
6,238
     
4,094
     
152
     
3,849
     
14,333
 
Other income/(expense)
   
     
     
     
(52
)
   
(52
)
Income before provision for  income taxes
 
$
2,921
   
$
6,001
   
$
72
   
$
(3,901
)
 
$
5,093
 

For the six months ended June 30, 2009 (in thousands):
 
   
Sales
   
Rental
   
Service & Maintenance
   
Corporate
   
Total
 
Revenue
 
$
11,528
   
$
24,757
   
$
497
   
$
   
$
36,782
 
Operating costs and expenses
   
7,782
     
8,841
     
347
     
9,124
     
26,094
 
Other income/(expense)
   
     
     
     
(420)
 
   
(420
)
Income before provision for  income taxes
 
$
3,746
   
$
15,916
   
$
150
   
$
(9,544)
 
 
$
10,268
 
*Segment Assets
 
$
   
$
   
$
   
$
180,918
   
$
180,918
 

For the six months ended June 30, 2008 (in thousands):
 
   
Sales
   
Rental
   
Service & Maintenance
   
Corporate
   
Total
 
Revenue
 
$
18,785
   
$
19,105
   
$
521
   
$
   
$
38,411
 
Operating costs and expenses
   
12,631
     
7,498
     
360
     
7,324
     
27,813
 
Other income/(expense)
   
     
     
     
(60
)
   
(60)
 
Income before provision for  income taxes
 
$
6,154
   
$
11,607
   
$
161
   
$
(7,384
)
 
$
10,538
 
*Segment Assets
 
$
   
$
   
$
   
$
163,687
   
$
163,687
 
* Management does not track assets by segment

(8)  Legal Proceedings
 
From time to time, we are a party to various other 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 consolidated 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 other threatened litigation.



 
- 9 -



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, 2008 filed with the SEC.

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 provide for initial terms of six to 24 months. After the initial term of our rental contracts, most of our customers have continued to rent our compressors on a month-to-month basis. Rental amounts are paid monthly in advance and include maintenance of the rented compressors. As of June 30, 2009, we had 1,345 natural gas compressors totaling 168,381 horsepower rented to 99 third parties compared to 1,388 natural gas compressors totaling 168,355 horsepower rented to 108 third parties at June 30, 2008.

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 the purchase by us of engines, compressors, coolers and other components, and then assembling these components on skids for delivery to customer locations. The major components of our compressors are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently requires a two to three month lead time 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, 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. Maintenance agreements typically have terms of six months to one year and require payment of a monthly fee.

The oil and 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 natural gas and the corresponding changes in commodity prices. As demand and prices increase, oil and gas producers increase their capital expenditures for drilling, development and production activities. Generally, the increased capital expenditures ultimately result in greater revenues and profits for services and equipment companies.

In general, we expect our overall business activity and revenues to track the level of activity in the natural gas industry, with changes in domestic natural gas production and consumption levels and prices more significantly affecting our business than changes in crude oil and condensate production and consumption levels and prices. We also believe that demand for compression services and products is driven by declining reservoir pressure in maturing natural gas producing fields and, more recently, by increased focus by producers on non-conventional natural gas production, such as coalbed methane, gas shales and tight gas, which typically requires more compression than production from conventional natural gas reservoirs.

Demand for our products and services was strong throughout previous years but began to decline in the first quarter of 2009 and will most likely continue to decline for the remainder of the year due to lower oil and natural gas prices and decreased demand for natural gas.  However, we believe the long-term trend in our markets is favorable.

 
- 10 -



For fiscal year 2009, our forecasted capital expenditures will be directly dependent upon our customers’ compression requirements and are not anticipated to exceed our internally generated cash flows.  Any required capital will be for additions to our compressor rental fleet and/or addition or replacement of service vehicles.  We believe that cash flows from operations will be sufficient to satisfy our capital and liquidity requirements through 2009.  We may require additional capital to fund any unanticipated expenditures, including any acquisitions of other businesses, although that capital may not be available to us when we need it or on acceptable terms.

Results of Operations

Three months ended June 30, 2008, compared to the three months ended June 30, 2009.

The table below shows our revenues and percentage of total revenues of each of our segments for the three months ended June 30, 2008 and June 30, 2009.

   
Revenue
   
(in thousands)
   
Three months ended June 30,
   
2008
 
2009
Sales
 
$
9,159
 
47
%
 
$
4,599
 
27
%
Rental
   
10,095
 
52
%
   
11,969
 
72
%
Service and Maintenance
   
224
 
1
%
   
189
 
1
%
Total
 
$
19,478
       
$
16,757
     

Total revenue decreased from $19.5 million to $16.8 million, or 14.0%, for the three months ended June 30, 2009, compared to the same period ended June 30, 2008. This was mainly the result of increased rental revenue offset by decreased sales revenue.  Sales revenue decreased 49.8%, rental revenue increased 18.6%, and service and maintenance revenue decreased 15.6%.

Sales revenue decreased from $9.2 million to $4.6 million, or 49.8%, for the three months ended June 30, 2009, compared to the same period ended June 30, 2008.  This decrease is the result of lower demand for our products due to industry declines in capital expenditures which resulted in fewer compressor unit sales to third parties from our Tulsa and Michigan operations.  Sales from outside sources included: (1) compressor unit sales, (2) flare sales, (3) parts, and (4) compressor rebuilds.

Rental revenue increased from $10.1 million to $12.0 million, or 18.6%, for the three months ended June 30, 2009, compared to the same period ended June 30, 2008.  This increase was the result of additional units added to our rental fleet and rented to third parties.  The company ended the period with 1,771 compressor packages in its rental fleet, up from 1,546 units at June 30, 2008.  The rental fleet had a utilization of 75.9% as of June 30, 2009 compared to 89.8% utilization as of June 30, 2008. This utilization decrease partially resulted from units being returned by a major customer that performed a routine yearly evaluation of compressor needs.  Additionally, the demand for smaller horsepower units has slowed due to the decline of natural gas commodity prices.

The overall operating margin percentage increased to 27.6% for the three months ended June 30, 2009, from 26.4% for the same period ended June 30, 2008. This is mainly the result of higher margins received in our rental segment.  The overall margin is affected by the product mix between rental and sales, and since our rental margin is higher and rentals increased during the period, the overall margin moved higher.

Selling, general, and administrative expense increased from $1.5 million to $1.7 million or 11.4% for the three months ended June 30, 2009 as compared to the same period ended June 30, 2008.  This increase is mainly due to an increase in:  (1) stock option expenses, (2) sales salaries expenses, related to additional salespeople in the Houston since several Oil and Gas Companies are Headquartered there, and (3) additional commission on rentals.

Depreciation and amortization expense increased from $2.4 million to $2.9 million or 24.2% for the three months ended June 30, 2009, compared to the same period ended June 30, 2008.  This increase was the result of new gas compressor rental units being added to the rental fleet from June 30, 2008 to June 30, 2009, thus increasing the depreciable base.

 
- 11 -



Other income, net of other expense, decreased $200,000 for the three months ended June 30, 2009, compared to the same period ended June 30, 2008. This decrease is mainly the result of decreased balances in our short-term investments generating less interest income.

Interest expense decreased 20.2% for the three months ended June 30, 2009, compared to the same period ended June 30, 2008, mainly due to decreased principal balances owed under our bank loan facility and a reduction in our interest rate on our term loan and bank line of credit.

Provision for income tax decreased from $1.8 million to $1.5 million, or 12.2%, and is the result of the decrease in taxable income.

Six months ended June 30, 2008, compared to the six months ended June 30, 2009.

The table below shows our revenues and percentage of total revenues of each of our segments for the six months ended June 30, 2008 and June 30, 2009.
   
Revenue
   
(in thousands)
   
Six months ended June 30,
   
2008
 
2009
Sales
 
$
18,785
 
49
%
 
$
11,528
 
32
%
Rental
   
19,105
 
50
%
   
24,757
 
67
%
Service and Maintenance
   
521
 
1
%
   
497
 
1
%
Total
 
$
38,411
       
$
36,782
     

Total revenue decreased from $38.4 million to $36.8 million, or 4.2%, for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This was mainly the result of a 38.6% decrease in sales revenue, offset by an increase in rental revenue of 29.6%, and service and maintenance revenue decreased 4.6%.

Sales revenue decreased from $18.8 million to $11.5 million, or 38.6%, for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This decrease is the result of lower demand for our products due to an industry slowdown which resulted in fewer compressor unit sales to third parties from our Tulsa and Michigan operations.  Sales from outside sources included: (1) compressor unit sales, (2) flare sales, (3) parts sales, (4) compressor rebuilds and (5) rental unit sales.

Rental revenue increased from $19.1 million to $24.8 million, or 29.6%, for the six months ended June 30, 2009, compared to the same period ended June 30, 2008.  This increase was the result of additional units added to our rental fleet and rented to customers.  The company ended the period with 1,771 compressor packages in its rental fleet, up from 1,546 units at June 30, 2008.  The rental fleet has a utilization of 75.9% as of June 30, 2009.

The overall operating margin percentage increased to 29.1% for the six months ended June 30, 2009, from 27.6% for the same period ended June 30, 2008. This is mainly the result of increased margins of our rental fleet activity. The overall margin is also affected by the product mix between rental and sales, since our rental margin is higher and rentals increased, as a percentage of revenue, during the period the overall margin moved higher. Because of the larger margins that we obtain from rentals it is generally our focus to increase our rentals business.

Selling, general, and administrative expense increased from $2.8 million, to $3.2 million, or 14.0%, for the six months ended June 30, 2009, as compared to the same period ended June 30, 2008.  This increase is mainly due to an increase in stock option expenses, and sales salaries expenses and commissions on rental equipment.

Depreciation and amortization expense increased from $4.5 million, to $5.9 million, or 31.3%, for the six months ended June 30, 2009, compared to the same period ended June 30, 2008.  This increase was the result of 225 new gas compressor rental units being added to the rental fleet from June 30, 2008 to June 30, 2009, thus increasing the depreciable base.

Other income net of other expense decreased $480,000 for the six months ended June 30, 2009, compared to the same period ended June 30, 2008. This decrease is mainly the result of decreased balances in our short-term investments.

Interest expense decreased 27.7% for the six months ended June 30, 2009, compared to the same period ended June 30, 2008, mainly due to decreased principal balances owed under our bank loan facility.

 
- 12 -



Provision for income tax decreased from $3.7 million to $3.6 million, or 2.4%, and is the result of the decrease in taxable income.

Critical Accounting Policies and Practices

A discussion of our critical accounting policies is included in the Company's Form 10-K for the year ended December 31, 2008.

Recently Issued Accounting Pronouncements

 
On January 1, 2009, we adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” (SFAS 157) as it relates to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. SFAS 157 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions. The adoption of SFAS 157, as it relates to nonfinancial assets and nonfinancial liabilities had no impact on our consolidated financial statements. The provisions of SFAS 157 will be applied at such time a fair value measurement of a nonfinancial asset or nonfinancial liability is required, which may result in a fair value that is materially different than would have been calculated prior to the adoption of SFAS 157.
 
   On January 1, 2009, we adopted SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51,” (SFAS 160). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This standard defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS 160 requires, among other items, that a noncontrolling interest be included in the consolidated statement of financial position within equity separate from the parent’s equity; consolidated net income to be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated income statement; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be measured at fair value and a gain or loss be recognized in net income based on such fair value. The adoption of SFAS 160 had no impact on our consolidated financial statements.

       On January 1, 2009, we adopted SFAS No. 141(R), Business Combinations, which replaces SFAS No. 141, Business Combination (SFAS 141R), and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This Statement also requires the acquirer in a business combination achieved in stages to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values. Additionally, this statement requires acquisition related costs to be expensed in the period in which the costs were incurred and the services are received instead of including such costs as part of the acquisition price.  SFAS 141(R) makes various other amendments to authoritative literature intended to provide additional guidance or to confirm the guidance in that literature to that provided in this Statement.  The adoption of SFAS No. 141(R) had no impact on our consolidated financial statements.

In April 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. We adopted SFAS 165 for the quarter ending June 30, 2009.  The adoption of SFAS 165 did not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167).   SFAS 167 requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (VIE), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. SFAS 167 is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the impact of the pending adoption of SFAS No. 167 on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168).  SFAS 168 identifies the FASB Accounting Standards Codification as the authoritative source of generally accepted accounting principles in the United States. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect the adoption of SFAS 168 to have a material impact on our consolidated financial statements.

 
- 13 -


Liquidity and Capital Resources

Our working capital positions as of December 31, 2008 and June 30, 2009 are set forth below.

   
December 31,
 
June 30,
   
2008
 
2009
   
(in thousands)
 
(in thousands)
         
Current Assets:
       
Cash and cash equivalents
 
$
1,149
 
$
11,687
Short-term investments
   
2,300
   
Trade accounts receivable, net
   
11,321
   
5,799
Inventory, net
   
31,931
   
27,445
Prepaid income taxes
   
244
   
801
Prepaid expenses and other
   
87
   
231
Total current assets
   
47,032
   
45,963
             
Current Liabilities:
           
Current portion of long-term debt
   
3,378
   
3,378
Accounts payable
   
8,410
   
1,189
Accrued liabilities
   
3,987
   
1,925
Current portion of tax liability
   
110
   
99
Deferred income
   
38
   
281
Total current liabilities
   
15,923
   
6,872
             
Total working capital
 
$
31,109
 
$
39,091
             
Historically, we have funded our operations through public and private offerings of our equity securities, subordinated debt, bank borrowings and cash flow from operations. Proceeds from financing were primarily used to pay debt and to fund the manufacture and fabrication of additional units for our rental fleet of natural gas compressors.

For the six months ended June 30, 2009, we invested $7.2 million in equipment for our rental fleet, upgrades in emission control, and service vehicles.  We financed this activity with cash flow from operations and cash on hand. In addition, we have repaid $1.7 million of our existing debt.

Cash flows

At June 30, 2009, we had cash and cash equivalents of $11.7 million compared to $1.1 million at December 31, 2008. We had working capital of $39.1 million at June 30, 2009 compared to $31.1 million at December 31, 2008. At June 30, 2009, our total debt was $14.9 million of which $3.4 million was classified as current compared to $16.6 million and $3.4 million, respectively at December 31, 2008. We had positive net cash flow from operating activities of $16.9 million during the first six months of 2009 compared to $13.4 million for the first six months of 2008.  The cash flow from operations of $16.9 million was primarily the result of the net income of $6.7 million and the non cash items of depreciation and taxes of $9.5 million.
 
Accounts receivable decreased $5.5 million to $5.8 million at June 30, 2009 as compared to $11.3 million at December 31, 2008.  This decrease largely reflects the timing of collections and a slowdown in compressor unit sales during the first six months of 2009.

Inventory decreased $4.5 million to $27.4 million as of June 30, 2009 as compared to $31.9 million as of the year ended December 31, 2008. This decrease is mainly the result of our decreased manufacturing activity.

Long-term debt decreased $1.7 million to $14.9 million at June 30, 2009, compared to $17.0 million at December 2008. This decrease is mainly the result of the normal debt amortization.  The current portion of long-term debt remained flat at $3.4 million at June 30, 2009 compared to December 31, 2008.

 
- 14 -


Recession strategy
    
               For the quarter ended June 30, 2009, our overall plan during the downturn in the economy is to reduce expenses in line with the lower anticipated activity, fabricate rental fleet equipment only in direct response to market requirements, emphasize marketing of our idle gas compressor units and reduce bank borrowing.  Capital expenditures for the remainder of the year are not to exceed our internal cash generating capacity.  We believe that cash flows from operations will be sufficient to satisfy our capital and liquidity requirements through 2009.  We may require additional capital to fund any unanticipated expenditures, including any acquisitions of other businesses.  We currently have a $40 million dollar bank line of credit with an available balance of $33 million.

Senior Bank Borrowings

Revolving Line of Credit Facility.  As of June 30, 2009, the amount available for revolving line of credit advances was $33.0 million.  The amount we could borrow is determined by a borrowing base calculation and is based primarily upon our receivables, equipment and inventory.  We had $7.0 million outstanding as of June 30, 2009 on this revolving line of credit facility, and the interest rate on that date was 4.00%.

$16.9 Million Multiple Advance Term Loan Facility. As of June 30, 2009 this term loan facility had a principal balance of $7.8 million, and the interest rate on that date was 4.00%.

As of June 30, 2009, we were in compliance with all covenants in our Loan Agreement.  A default under our bank credit facility could trigger the acceleration of our bank debt so that it is immediately due and payable.  Such default would have a material adverse effect on our liquidity, financial position and operations.

As of June 30, 2009, we had a long-term liability of $275,000 to Midland Development Corporation.  This amount is to be recognized as income contingent upon certain staffing requirements in the future.  In addition, we entered into a purchase agreement with a vendor on July 30, 2008 pursuant to which we agreed to purchase up to $4.8 million of our paint and coating requirements exclusively from the vendor.  In connection with the execution of the agreement, the vendor paid us a $300,000 fee which is considered to be a discount toward future purchases from the vendor.  Based on our historical paint and coating requirements, we estimate meeting the $4.8 million purchase obligation within five years.  The $300,000 payment we received is recorded as a long-term liability and will decrease as the purchase commitment is fulfilled.  The long-term liability remaining as of June 30, 2009 was $287,000.

On June 16, 2009, at our annual meeting of shareholders, our shareholders approved a proposed amendment to our 1998 Stock Option Plan (the “Plan”) to add an additional 200,000 shares of common stock to the Plan, thereby authorizing the issuance of up to 750,000 shares of common stock under the Plan.

Also on June 16, 2009, at our annual meeting of shareholders, our shareholders adopted the 2009 Restricted Stock/Unit Plan.  A total of 300,000 shares of Company common stock are reserved for issuance under the restricted stock plan.

Contractual Obligations and Commitments

We have contractual obligations and commitments that affect our consolidated results of operations, financial condition and liquidity.  The following table is a summary of our significant cash contractual obligations:
   
Obligation Due in Period
(in thousands of dollars)
Cash Contractual Obligations
 
2009(1)
     
2010
     
2011
     
2012
     
2013
     
Thereafter
     
Total
Term loan facility (secured)
$
1,689
   
$
3,378
   
$
2,816
   
$
   
$
   
 $
   
$
7,883
Interest on term loan facility(2)
 
144
     
186
     
52
     
     
     
     
382
Line of credit (secured)
         
7,000
     
     
     
     
     
7,000
Interest on line of credit(3)
 
140
     
93
     
     
     
     
     
233
Purchase obligations
 
880
     
956
     
956
     
956
     
814
     
     
4,562
Other long term debt
 
     
     
     
     
     
562
     
562
Facilities and office leases
 
231
     
356
     
257
     
233
     
166
     
17
     
1,260
  Total
$
3,084
   
$
11,969
   
$
4,081
   
$
1,189
   
$
980
   
$
579
   
$
21,882
______________________________________
 
 (1)
 
For the six months remaining in 2009.
(2)
 
Assumes an interest rate of 4.00%.
(3)
 
Assumes an interest rate of 4.00%.
 

 
 
- 15 -

 
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 June 30, 2009, 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, availability of, or requirements for, capital resources.

We entered into a purchase agreement with a vendor on July 30, 2008 pursuant to which we agreed to purchase up to $4.8 million of our paint and coating requirements exclusively from the vendor.  In connection with the execution of the agreement, the vendor paid us a $300,000 fee which is considered to be a discount toward future purchases from the vendor.  Based on our historical paint and coating requirements, we estimate meeting the $4.8 million purchase obligation within five years.  The $300,000 payment received by the Company is recorded as a long-term liability and will decrease as the purchase commitment is fulfilled.  The long-term liability remaining as of June 30, 2009 was $287,000.
 
Special Note Regarding Forward-Looking Statements

Except for historical information contained herein, the statements in this release 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 NGS’s 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 gas prices which could cause a decline in the demand for NGS’s products and services; and new governmental safety, health and environmental regulations which could require NGS to make significant capital expenditures. The forward-looking statements included in this press release are only made as of the date of this press release, and NGS undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. A discussion of these factors is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

Commodity Risk

Our commodity risk exposure is the pricing applicable to oil and natural gas production. Realized commodity prices received for such production are primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to natural gas. Depending on the market prices of oil and natural gas, companies exploring for oil and natural gas may cancel or curtail their drilling programs, thereby reducing demand for our equipment and services.

Financial Instruments and Debt Maturities
 
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, bank borrowings, and notes. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the highly liquid nature of these short-term instruments. The fair value of the bank borrowings approximate the carrying amounts as of June 30, 2009 and were determined based upon interest rates currently available to us.

Customer Credit Risk

We are exposed to the risk of financial non-performance by customers. Our ability to collect on sales to our customers is dependent on the liquidity of our customer base. To manage customer credit risk, we monitor credit ratings of customers.  Unless we are able to retain our existing customers, or secure new customers if we lose one or more of our significant customers, our revenue and results of operations would be adversely affected.
 
Interest Rate Risk

Our Loan Agreement provides for Prime Rate less 1/2 % (but never lower than 4% or higher than 8.75%) for our term loan facility and Prime Rate less 1/4 % (but never lower than 4% or higher than 8.75%) for our revolving line of credit facility.  Consequently, our exposure to interest rates relate primarily to interest earned on short-term investments and paying above market rates, if such rates are below the fixed rate, on our bank borrowings.  As of June 30, 2009, we were not using any derivatives to manage interest rate risk.
 
 
 
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Item 4.  Controls and Procedures

(a)            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 Principal Accounting Officer and Treasurer, 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) of the Securities Exchange Act of 1934, as amended or, the “Exchange Act”) as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the President and Chief Executive Officer and our Principal Accounting Officer and Treasurer have concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.  These include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosures.  Due the inherent limitations of control systems, not all misstatements may be detected.  Those inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes.  Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people.  Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

(b)            Changes in Internal Controls.

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 
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PART II – OTHER INFORMATION

Item 1.  Legal Proceedings
 
From time to time, we are a party to various other 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 consolidated financial position, results of operations or cash flow.  Except as discussed herein, we are not currently a party to any legal proceedings and we are not aware of any other threatened litigation.

Item 1A.  Risk Factors

Please refer to and read “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 for a discussion of the risk associated with our company and industry.
 
Item 4.     Submission of Matters to a Vote of Security Holders.

Our Annual Meeting of Stockholders was held on June 16, 2009.  At the meeting, our stockholders voted on four matters: (1) election of two Directors to serve until 2012, (2) approval of the Company’s 2009 Restricted Stock/Unit Plan;(3) amendment to the Company’s 1998 Stock Option Plan to increase the number of shares authorized for issuance thereunder from 550,000 to 750,000 shares of common stock, and (4) ratification of the Audit Committee’s appointment of Hein & Associates LLP, registered independent accountants, as our independent auditors for the fiscal year ended December 31, 2009.  Of the 12,093,833 shares of common stock outstanding at the date of the meeting, 10,813,532 shares were represented at the meeting in person or by proxy.
 
The individuals named below were re-elected to a three-year term ending in 2012:
 

Nominee
 
Votes For
 
Votes Withheld
Alan A. Baker
 
10,040,492
 
773,040
William F. Hughes, Jr.
 
10,043,015
 
770,517
 
 
The Company’s 2009 Restricted Stock/Unit Plan was approved as follows:
 

Votes For
 
Votes Against
 
Abstentions
8,171,190
 
456,909
 
14,467
         

The amendment to the Company’s 1998 Stock Option Plan to increase the number of shares authorized for issuance thereunder from 550,000 to 750,000 shares of common stock was approved as follows:

Votes For
 
Votes Against
 
Abstentions
7,638,468
 
994,457
 
9,641
         

The appointment of Hein & Associates LLP, registered independent accountants, as our independent auditors for the fiscal year ended December 31, 2009, was ratified with voting on the proposal as follows:
 

Votes For
 
Votes Against
 
Abstentions
10,438,092
 
361,158
 
14,281
         
 


 
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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 (Incorporated by reference to Exhibit 3.4 of the Registrant's Registration Statement on Form SB-2, No.  333-88314)

4.1
Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on August 30, 2005) 

10.1
1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated September 20, 2006 on file with the SEC September 26, 2006)

10.2
Lease Agreement, dated March 1, 2004, between the Registrant and the City of Midland, Texas (Incorporated by reference to Exhibit 10.19 of the Registrant's Form 10-QSB for the fiscal quarter ended March 31, 2004)

10.3
Seventh Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K dated October 26, 2006 and filed with the Securities and Exchange Commission on November 1, 2006

10.4
Eighth Amended and Restated Loan Agreement between Natural Gas Services Group, Inc. and Western National Bank.

10.5
Revolving Line of Credit Promissory Note issued to Western National Bank.

10.6
Employment Agreement between Natural Gas Services Group, Inc. and Stephen C. Taylor dated October 25, 2008 (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 October 30, 2008)

10.7
Lease Agreement, dated March 26, 2008, 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, 2008 and filed with the Securities and Exchange Commission on March 9, 2009)
 
10.8
2009 Restricted Stock/Unit Plan (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated June 18, 2009 and filed with the Securities and Exchange Commission on June 18, 2009.)
 
10.9
1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K dated June, 18 2009 and filed with the Securities and Exchange Commission on June 18, 2009.)

14.0
Code of Ethics (Incorporated by reference to Exhibit 14.0 of the Registrant's Form 10-KSB for the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission on March 30, 2005)
 
*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

 
* Filed herewith.

 

 



 
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SIGNATURES

Pursuant to the requirements of the Securities and 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/ Earl R. Wait
 
Stephen C. Taylor
   
Earl R. Wait
 
President and Chief Executive Officer
   
Principal Accounting Officer and Treasurer
 

August 10, 2009


 
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INDEX TO EXHIBITS

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 (Incorporated by reference to Exhibit 3.4 of the Registrant's Registration Statement on Form SB-2, No.  333-88314)

4.1
Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on August 30, 2005) 

10.1
1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K Report dated September 20, 2006 on file with the SEC September 26, 2006)

10.2
Lease Agreement, dated March 1, 2004, between the Registrant and the City of Midland, Texas (Incorporated by reference to Exhibit 10.19 of the Registrant's Form 10-QSB for the fiscal quarter ended March 31, 2004)

10.3
Seventh Amended and Restated Loan Agreement (Incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K dated October 26, 2006 and filed with the Securities and Exchange Commission on November 1, 2006

10.4
Eighth Amended and Restated Loan Agreement between Natural Gas Services Group, Inc. and Western National Bank.

10.5
Revolving Line of Credit Promissory Note issued to Western National Bank.

10.6
Employment Agreement between Natural Gas Services Group, Inc. and Stephen C. Taylor dated October 25, 2008 (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 October 30, 2008)

10.7
Lease Agreement, dated March 26, 2008, 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, 2008 and filed with the Securities and Exchange Commission on March 9, 2009)
 
10.8
2009 Restricted Stock/Unit Plan (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated June 18, 2009 and filed with the Securities and Exchange Commission on June 18, 2009.)
 
10.9
1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.2 of the Registrant's Current Report on Form 8-K dated June, 18 2009 and filed with the Securities and Exchange Commission on June 18, 2009.)

14.0
Code of Ethics (Incorporated by reference to Exhibit 14.0 of the Registrant's Form 10-KSB for the fiscal year ended December 31, 2004, and filed with the Securities and Exchange Commission on March 30, 2005)

*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

 
* Filed herewith.

 
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