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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, 2003
------------------
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)
(432) 563-3974
(Issuer's Telephone number)
N/A
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(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 September 30, 2003
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Common Stock, $.001 par value 5,022,181
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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, 2003
FORM 10-QSB
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements............................................Page 1
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
Item 2. Management's Discussion and Analysis or Plan of Operation.......Page 7
Item 3. Controls and Procedures.........................................Page 12
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................Page 13
Item 5. Other Information...............................................Page 14
Item 6. Exhibits and Reports on Form 8-K................................Page 15
Signatures...............................................................Page 16
Natural Gas Services Group, Inc.
Consolidated Balance Sheet
(unaudited)
September 30, 2003
ASSETS
Current Assets:
Cash and cash equivalents $ 258,276
Accounts receivable - trade 1,584,767
Inventory 2,546,683
Prepaid expenses 130,344
-----------
Total current assets 4,520,070
Lease equipment, net 17,537,997
Other property, plant and equipment, net 2,779,335
Goodwill, net of accumulated amortization 2,589,655
Patents, net of accumulated amortization 120,812
Other assets 79,200
-----------
Total assets $27,627,069
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt and capital lease $ 2,342,151
Accounts payable and accrued liabilities 1,411,129
Unearned Income 492,271
-----------
Total current liabilities 4,245,551
Long term debt and capital lease, less current portion 6,273,100
Subordinated notes, net 1,393,104
Deferred income tax payable 1,773,202
-----------
Total liabilities 13,684,957
SHAREHOLDERS' EQUITY
Preferred stock 3,437
Common stock 50,221
Paid in capital 11,183,715
Retained earnings 2,704,739
-----------
Total shareholders' equity 13,942,112
-----------
Total liabilities and shareholders' equity $27,627,069
===========
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 Septenber 30
------------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenue:
Sales $ 1,372,248 $ 1,438,069 $ 2,877,358 $ 3,749,300
Service and maintenance 452,714 439,522 1,346,597 1,191,580
Leasing income 1,874,594 1,203,793 5,040,161 3,260,060
------------- ------------- ------------- -------------
3,699,556 3,081,384 9,264,116 8,200,940
Cost of revenue:
Cost of sales 1,008,771 963,035 2,155,568 2,543,287
Cost of service and maintenance 290,008 373,594 961,237 1,012,843
Cost of leasing 545,309 329,850 1,313,093 916,149
------------- ------------- ------------- -------------
1,844,088 1,666,479 4,429,898 4,472,279
------------- ------------- ------------- -------------
Gross Margin 1,855,468 1,414,905 4,834,218 3,728,661
Operating Cost:
Selling expense 159,870 134,786 484,421 378,456
General and administrative expense 395,918 276,523 1,186,922 877,010
Amortization and depreciation 455,563 301,493 1,235,118 839,093
------------- ------------- ------------- -------------
1,011,351 712,802 2,906,461 2,094,559
------------- ------------- ------------- -------------
Operating income 844,117 702,103 1,927,757 1,634,102
Interest expense (170,971) (273,568) (500,760) (796,408)
Equity in earnings of joint venture -- 132,081 -- 339,684
Other income 1,253 15,316 2,040 17,226
------------- ------------- ------------- -------------
Income before income taxes 674,399 575,932 1,429,037 1,194,604
Income tax expense 289,992 207,000 611,595 486,563
------------- ------------- ------------- -------------
Net income 384,407 368,932 817,442 708,041
Preferred dividends 30,530 31,009 92,550 106,624
------------- ------------- ------------- -------------
Net income available to common shareholders
$ 353,877 $ 337,923 $ 724,892 $ 601,417
============= ============= ============= =============
Earnings per share:
Basic $ 0.07 $ 0.10 $ 0.15 $ 0.18
Diluted $ 0.07 $ 0.08 $ 0.14 $ 0.15
Weighted average shares:
Basic 4,995,713 3,357,632 4,910,062 3,357,632
Diluted 5,389,673 4,091,862 5,208,096 4,136,709
------------- ------------- ------------- -------------
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, September 30,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 817,442 $ 708,041
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 1,235,120 839,093
Deferred taxes 602,202 486,563
Amortization of debt issuance costs 48,717 48,717
Warrants Issued for debt guarantee -- 42,025
Equity in earnings of joint venture -- (339,684)
Gain on disposal of assets 10,547 (15,066)
Changes in operating assets and liabilities:
Trade and other receivables (938,817) 246,047
Inventory and work in progress (1,000,735) (191,713)
Prepaid expenses and other 42,958 (85,097)
Accounts payable and accrued liabilities 708,971 157,906
Deferred income 174,710 74,129
Other (60,436) (26,209)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,640,679 1,944,752
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,900,453) (3,025,780)
Acquisition of remaining interest in joint venture, net of cash acquired 242,753 --
Proceeds from sale of property and equipment 112,500 40,000
Decrease in lease receivable 210,512 62,543
Distribution from equity method investee 49,090 260,868
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (5,285,598) (2,662,369)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from bank loans and line of credit 2,649,811 1,853,386
Repayments of long term debt (1,583,951) (647,004)
Deferred offering costs -- (250,937)
Proceeds from stock offering, net of offering cost -- 12,724
Dividends paid on preferred stock (92,550) (75,613)
Proceeds from exercise of warrants 216,247 43
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,189,557 892,599
------------- -------------
NET CHANGE IN CASH AND CASH EQUVALENTS (2,455,362) 174,982
CASH AT BEGINNING OF PERIOD 2,713,638 512,669
------------- -------------
CASH AT END OF PERIOD $ 258,276 $ 687,651
============= =============
SUPPLEMENTAL DICLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 500,760 $ 796,408
Income taxes paid $ -- $ --
The accompanying notes are an integral part of the consolidated statements of
cash flows.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited financial statements present the
consolidated results of our company and its wholly owned subsidiaries 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 September 30, 2003 and the results
of our operations for the nine months periods ended September 30, 2003 and 2002
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 accounting principles generally accepted in
the United States of America. These financial statements should be read in
conjunction with the financial statements included in our Annual Report on Form
10-KSB on file with the SEC. Investments in joint ventures in which our 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 our opinion, the consolidated 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 nine months ended September 30, 2003
are not necessarily indicative of the results of operations to be expected for
the full fiscal year ending December 31, 2003
(2) Stock-based Compensation
Statement of Financial Accounting Standards No. 123, ("SFAS 123")
"Accounting for Stock-Based Compensation," encourages, but does not require, the
adoption of a fair value-based method of accounting for employee stock-based
compensation transactions. We have elected to apply the provisions of Accounting
Principles Board Opinion No. 25 ("Opinion 25"), "Accounting for Stock Issued to
Employees," and related interpretations, in accounting for our employee
stock-based compensation plans. Under Opinion 25, compensation cost is measured
as the excess, if any, of the quoted market price of our stock at the date of
the grant above the amount an employee must pay to acquire the stock.
Had compensation costs for options granted to our employees been
determined based on the fair value at the grant dates consistent with the method
prescribed by SFAS No. 123, our pro forma net income and earnings per share
would have been reduced to the pro forma amounts listed below:
Three Months Ended Nine months Ended
September 30 September 30
2003 2002 2003 2002
----------- ----------- ----------- -----------
Pro forma impact of fair value method
Income applicable to common shares, as reported $ 353,877 337,923 724,892 601,417
Pro-forma stock-based compensation costs under
the fair value method, net of related tax (7,683) (14,010) (23,048) (28,020)
----------- ----------- ----------- -----------
Pro-forma income applicable to common shares $ 346,194 $ 323,913 $ 701,844 $ 573,397
under the fair-value method
Earnings per common share
Basic earnings per share reported $ 0.07 $ 0.10 $ 0.15 $ 0.18
Diluted earnings per share reported $ 0.07 $ 0.08 $ 0.14 $ 0.15
4
Pro-forma basic earnings per share under the fair
value method $ 0.07 $ 0.10 $ 0.14 $ 0.17
Pro-forma diluted earnings per share under the
fair value method $ 0.06 $ 0.08 $ 0.13 $ 0.14
Weighted average Black-Scholes fair value
assumptions:
Risk free rate 4.0%-5.2%
Expected life 5-10 yrs
Expected volatility 50.0%
Expected dividend yield 0.0%
(3) Acquisitions
On March 31, 2003 we acquired 28 gas compressor packages from Hy-Bon
Engineering Company, Inc. ("Hy-Bon"). The adjusted purchase price amounted to
approximately $2,140,000. As part of the purchase and sale agreement, Hy-Bon
withdrew as a member of Hy-Bon Rotary Compression, L.L.C. ("Joint Venture")
effective as of January 1, 2003. We, as the other member retained all assets of
the Joint Venture that as of December 31, 2002 had an unaudited aggregate value
of $346,511. We plan to dissolve the Joint Venture and have agreed not to
operate under the name Hy-Bon. We have consolidated the operations of the Joint
Venture beginning January 1, 2003 and then began recording our share of the
profit of the acquired interest beginning April 1, 2003.
(4) Long Term Debt
We entered into a new loan agreement with our bank, as of March 26,
2003 that included new borrowing of $2,150,000 in the form of a term loan with
monthly principal payments of $35,833 with interest at 1% over prime but not
less than 5.25% for 60 months. The proceeds from this new borrowing were used to
purchase the 28 gas compressors from Hy-Bon. The new loan agreement also
included the renewal of our line of credit for $750,000 with interest at 1% over
prime but not less than 5.25% for one year.
(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.
Our segment information is set forth in the following table:
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
Nine Months Ended ----------- ----------- ----------- ----------- -----------
September 30, 2003
Revenue $ 2,192 $ 3,340 $ 3,732 $ -- $ 9,264
Inter-segment revenue 4,179 62 11 (4,252) --
Net Income (loss) 229 1,272 625 (1,309) 817
Segment Assets 4,654 13,330 9,157 486 27,627
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 (loss) 504 850 252 (898) 708
Segment Assets 4,064 7,360 9,165 882 21,471
5
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
Three Months Ended ----------- ----------- ----------- ----------- -----------
September 30, 2003
Revenue $ 992 $ 1,270 $ 1,437 $ -- $ 3,699
Inter-segment revenue 1,435 27 3 (1,465) --
Net Income (loss) 283 398 231 (528) 384
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 (loss) 274 335 97 (338) 368
(6) Earnings per common share
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computation.
Three Months Ended Nine months Ended
September 30, September 30,
2003 2002 2003 2002
-------------------------- --------------------------
Basic earnings per share Numerator:
Net income $ 384,407 $ 368,932 817,442 708,041
Less: dividends on preferred shares (30,530) (31,009) (92,550) (106,624)
-------------------------- --------------------------
Net income available to common shareholders $ 353,877 $ 337,923 $ 724,892 $ 601,417
========================== ==========================
Denominator -
Weighted average common shares outstanding 4,995,713 3,357,632 4,910,062 3,357,632
========================== ==========================
Basic earnings per share $ 0.07 $ 0.10 $ 0.15 $ 0.18
========================== ==========================
Diluted earnings per share Numerator:
Net income $ 384,407 $ 368,932 817,442 708,041
Less: dividends on preferred shares (1) (30,530) (31,009) (92,550) (106,624)
-------------------------- --------------------------
Net income available to common shareholders $ 353,877 $ 337,923 $ 724,892 $ 601,417
========================== ==========================
Denominator :
Weighted average common shares outstanding 4,995,713 3,357,632 4,910,062 3,357,632
Common stock options and warrants 393,690 734,230 298,034 779,077
Conversion of preferred shares (1) -- -- -- --
-------------------------- --------------------------
5,389,673 4,091,862 5,208,096 4,136,709
========================== ==========================
Diluted earnings per share $ 0.07 $ 0.08 $ 0.14 $ 0.15
========================== ==========================
(1) Preferred shares were anti-dilutive for the nine and three months ended
September 30, 2003 and 2002.
6
Item 2. Management's Discussion and Analysis or Plan of Operation
Overview
We include the operations of Rotary Gas Systems, NGE Leasing and Great
Lakes Compression, which are wholly owned subsidiaries. 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.
Liquidity and Capital Resources
We have funded our operations through public and private offerings of
our common and preferred stock, subordinated debt and bank debt. Proceeds were
primarily used to pay debt and to fund the manufacture and fabrication of
additional units for our rental fleet of gas compressors.
At September 30, 2003, we had cash and cash equivalents of $258,276,
working capital of $274,519 and non-subordinated debt of $8,615,251, of which
$2,342,151 was classified as current. We had net cash flow from operating
activities of $1,640,679 during the first nine months of 2003. This was
primarily from net income of $817,442 plus depreciation and amortization of
$1,235,120, an increase in accounts payable and accrued liabilities of $708,971,
an increase in deferred taxes of $602,202 and offset by an increase in inventory
of $1,000,735 and accounts receivable of $938,817.
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 rate plus 1%.
We entered into a new loan agreement with our bank, dated as of March
26, 2003. This included new borrowing of $2,150,000 in the form of a term loan
with monthly principal payments of $35,833 with interest at 1% over prime rate
but not less than 5.25% for 60 months. The proceeds from this new borrowing were
used to purchase the 28 gas compressors from Hy-Bon. The new loan agreement also
included the renewal of our line of credit for $750,000 with interest at 1% over
prime rate for one year. We have not drawn from the line of credit as of
September 30, 2003.
Funds from the initial public offering, which closed on October 24,
2002, have permitted us to actively pursue adding gas compressors to our rental
fleet. We expect to fund additional rental units through additional bank debt
and cash flow from operations.
A summary of the use of the proceeds from our initial public offering
as of September 30, 2003 is as follows:
o $3,458,464 to reduce indebtedness; and
o $3,070,706 for the manufacture of gas compressors placed in
our rental fleet
7
Results of Operations
Nine Months Ended September 30, 2003,
Compared to the Nine months Ended September
30, 2002.
Natural Gas
(in thousands) Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
Nine Months Ended ----------- ----------- ----------- ----------- -----------
September 30, 2003
Revenue $ 2,192 $ 3,340 $ 3,732 $ -- $ 9,264
Inter-segment revenue 4,179 62 11 (4,252) --
Gross margin 1,018 2,358 1,458 -- 4,834
Selling, general and
administrative expense 676 128 206 661 1,671
Depreciation and amortization
expense 107 620 490 18 1,235
Operating income (loss) 235 1,610 762 (679) 1,928
Interest expense 6 348 129 18 501
Other income or (expense) -- 10 (8) -- 2
Provision for income tax -- -- -- 612 612
----------- ------------ ----------- ----------- -----------
Net income 229 1,272 625 (1,309) 817
=========== ============ =========== =========== ===========
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
Operating income (loss) 508 786 722 (381) 1,635
Interest expense 6 291 470 30 797
Equity in earnings from joint
venture -- 340 -- -- 340
Other income or (expense) 2 15 -- -- 17
Provision for income tax -- -- -- 487 487
----------- ------------ ----------- ----------- -----------
Net income (loss) $ 504 $ 850 $ 252 $ (898) $ 708
=========== ============ =========== =========== ===========
--------------------------------------------------------------------------------
Rotary Gas Systems Operations
Revenue from outside sources decreased 23% or $664,000 for the nine
months ended September 30, 2003, as compared to the same period ended September
30, 2002. Because our products are custom-built, fluctuations in revenue from
outside sources are expected. This decrease was mainly the result of a reduction
in the sale of compressor units to third parties.
The gross margin percentage increased from 42% for the nine months
ended September 30, 2002, to 46% for the same period ended September 30, 2003.
The cost of revenue is comprised of expenses associated with service, parts and
manufacturing expenses. This increase resulted mainly from a change in the
product mix.
Selling, general and administrative expense increased $76,000 or 13%
for the nine months ended September 30, 2003, as compared to the same period
ended September 30, 2002. This was mainly the result of the addition of new
salesmen in the Farmington, New Mexico and West Texas areas.
8
Depreciation expense increased 19% or $17,000 for the nine months ended
September 30, 2003, as compared to the same period ended September 30, 2002.
This increase was mainly due to the purchase of additional sales vehicles, shop
and office equipment.
NGE Leasing Operations
Revenue from our rental of natural gas compressors increased $1,656,000
or 98% for the nine months ended September 30, 2003, as compared to the same
period in 2002. This increase is the result of units added to our rental fleet.
From September 30, 2002, to September 30, 2003, we added 83 gas compressor units
to our rental fleet, which included the 28 units we purchased from Hy-Bon on
March 31, 2003. The revenue from the Joint Venture, which was previously
accounted for using the equity method, has been consolidated beginning January
1, 2003. The profit earned on the units purchased from Hy-Bon is included in our
consolidated earnings beginning April 1, 2003.
The gross margin percentage decreased from 72% for the nine months
ended September 30, 2002 to 71% for the same period ending 2003. This decrease
mainly resulted from a slight increase in maintenance expenses associated with
rental compressor units.
Selling, general and administrative expense increased $8,000 or 7% for
the nine months ended September 30, 2003, as compared to the same period in
2002. This was mainly the result of an increase in sales commissions from
increased rental revenue.
Depreciation expense increased 105% or $317,000 for the nine months
ended September 30, 2003, as 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 an increase in interest expense of 20% from $291,000 for the
nine months ended September 30, 2002, to $348,000 for the same period ended
September 30, 2003. This is mainly as a result of an increase in bank debt used
to purchase equipment for the rental fleet.
Great Lakes Compression
Revenue increased 2% for the nine months ended September 30, 2003,
compared to the same period in 2002. This increase resulted from a decrease in
the sales of compressor units to third parties offset by increases in parts and
labor sales. Because our compressor units are custom-built, fluctuations in
revenue from outside sources are expected.
The gross margin percentage increased from 36% for the nine months
ended September 30, 2002 to 39% for the same period in 2003. The cost of revenue
is comprised of expenses associated with the maintenance of the gas compressor
rental activity, service, parts and manufacturing expenses. This increase
resulted mainly from a change in the sales product mix.
Selling, general and administrative expense increased by 10% or $18,000
for the nine months ended September 30, 2003, as compared to the same period in
2002. This is mainly the result of an increase in advertising and promotional
expenses.
Depreciation expense increased from $412,000 for the nine months ended
September 30, 2002, to $490,000 for the same period ended September 30, 2003.
The increase is the result of equipment that was added to the rental fleet and
the replacement of several service vehicles.
There was a decrease in interest expense of 73% from $470,000 for the
nine months ended September 30, 2002 to $129,000 for the nine months ended
9
September 30, 2003. This decrease resulted from a reduction of the debt owed to
Dominion Michigan. Part of the proceeds from our initial public offering was
used to reduce debt in the amount of $3,452,464 and our bank financed the
remaining balance of $3,500,000 at a more favorable interest rate.
Natural Gas Services Group
Selling, general and administrative expense increased 90% from $347,000
for the nine months ended September 30, 2002, as compared to $661,000 for the
same period ended September 30, 2003. This was mainly the result of the added
expense associated with being a publicly held company such as legal fees,
auditor fees, underwriters and public relations fees.
Amortization and depreciation expense decreased 47% from $34,000 for
the nine months ended September 30, 2002, to $18,000 for the same period ended
September 30, 2003. This mainly resulted from vehicles that were moved to our
subsidiary, Great Lakes Compression.
Interest expense decreased 40% from $30,000 for the nine months ended
September 30, 2002, to $18,000 for the same period ended September 30, 2003.
This decrease resulted from a reduction in the interest rate and from bank notes
for vehicles moved to our subsidiary.
Provision for income tax is accounted for on a consolidated basis.
Therefore, the tax for all companies is included in the provision for income tax
for Natural Gas Services Group. Income tax expense increased $125,000 or 26%,
which is consistent with and pursuant to changes in state and federal tax
statutes and the increase in net taxable income.
Three months Ended September 30, 2003. Compared to the Three Months Ended
September 30, 2002
(in thousands) Natural Gas
Rotary NGE Great Lakes Services
Gas Leasing Compression Group Total
Three months Ended ----------- ------------ ----------- ----------- -----------
September 30, 2003
Revenue $ 992 $ 1,270 $ 1,437 $ -- $ 3,699
Inter-segment revenue 1,435 27 3 (1,465) --
Gross margin 539 804 512 -- 1,855
Selling, general and administrative
expense 216 42 71 227 556
Depreciation and amortization
Expense 37 241 171 6 455
Operating income (loss) 286 521 270 (233) 844
Interest expense 3 124 40 5 172
Other income or (expense) -- 1 1 -- 2
Provision for income tax -- -- -- 290 290
----------- ------------ ----------- ----------- -----------
Net income (loss) $ 283 $ 398 $ 231 $ (528) $ 384
=========== ============ =========== =========== ===========
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
Operating income (loss) 275 294 253 (120) 702
Equity in earning of joint venture 132 132
Interest expense 2 105 156 11 274
Other income or (expense) 1 14 -- -- 15
Provision for income tax -- -- -- 207 207
----------- ------------ ----------- ----------- -----------
Net Income (loss) $ 274 $ 335 $ 97 $ (338) $ 368
=========== ============ =========== =========== ===========
10
Rotary Gas Systems Operations
Revenue from outside sources decreased $293,000 or 23% for the three
months ended September 30, 2003, as compared to the same period ended September
30, 2002. Because our products are custom-built, fluctuations in revenue from
outside sources are expected. This decrease was mainly the result of a reduction
in the sale of compressor units to third parties. The quarter ending September
30, 2002 included 10 compressor units sold to a major customer while the same
period for 2003 had no compressor sales but this was offset by an increase in
flare unit sales, rebuild service and parts.
The gross margin percentage increased to 54% for the three months ended
September 30, 2003, as compared to 40% for the same period ended September 30,
2002. The cost of revenue is comprised of expenses associated with service,
parts and manufacturing expenses. This increase resulted mainly from a change in
the product-mix.
Selling, general and administrative expense increased 6% or $13,000 for
the three months ended September 30, 2003, as compared to the same period ended
September 30, 2002. This was mainly the result of the addition of new salesmen
in the Farmington, New Mexico and West Texas areas. Depreciation expense
increased 19% from $31,000 for the three months ended September 30, 2002, to
$37,000 for the same period ended September 30, 2003. This increase was mainly
due to the purchase of additional service vehicles, shop and office equipment.
There was a slight decrease in interest expense for the three months
ended September 30, 2003, as compared to the same period ended September 30,
2002, mainly due to the reduction in loan balances on vehicles.
NGE Leasing Operations
Revenue from the rental of natural gas compressors increased 103% for
the three months ended September 30, 2003, as compared to the same period in
2002. This increase is the result of the revenue from units added to our rental
fleet, both from the units we manufactured and the units we acquired from the
Hy-Bon transaction.
The gross margin percentage decreased from 72% for the three months
ended September 30, 2002, to 63% the same period in 2003. This decrease mainly
resulted from an increase in the maintenance expenses associated with the
compressor units. This does not represent a trend since repairs cost often
fluctuate from period to period on our rental equipment.
Selling, general and administrative expense increased from $40,000 for
the three months ended September 30, 2002, to $42,000 for the same period in
2003. This was mainly the result of an increase in sales commissions due to
increased rental revenue.
Depreciation expense increased 111% from $143,000, for the three months
ended September 30, 2002 to $241,000 for the three months ended September 30,
2003. This increase was the result of new gas compressor rental units being
added to the rental fleet during the period.
There was an increase in interest expense from $105,000 for the three
months ended September 30, 2002, to $124,000 for the same period ended September
30, 2003. This is mainly a result of an increase in bank debt used to purchase
equipment for the rental fleet.
11
Great Lakes Compression
Revenue increased 23% for the three months ended September 30, 2003, as
compared to the same period in 2002. This increase was the result of a
significant increase in maintenance and labor sales to third parties.
The gross margin percentage decreased from 39% for the three months
ended September 30, 2002, to 36% for the same period in 2003. 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 resulted mainly from a change in the sales product mix.
Selling, general and administrative expense increased from $62,000 for
the three months ended September 30, 2002, to $71,000 for the same period in
2003. This is mainly the result of an increase in advertising and promotional
expenses.
Depreciation expense increased from $143,000 for the three months ended
September 30, 2002, to $171,000 for the same period ended September 30, 2003.
The increase is the result of equipment that was added to the rental fleet and
the replacement of service vehicles.
There was a decrease in interest expense from $156,000 for the three
months ended September 30, 2002, to $40,000 for the same period ended September
30, 2003. This decrease resulted from a reduction of the debt owed to Dominion
Michigan. Part of the proceeds from our initial public offering was used to
reduce debt in the amount of $3,452,464 and our bank financed the remaining
balance of $3,500,000 at a more favorable interest rate.
Natural Gas Services Group
Selling, general and administrative expense increased 112% from
$107,000 for the three months ended September 30, 2002, to $227,000 for the same
period ended September 30, 2003. This was mainly the result of an added expense
associated with being a publicly held company such as legal fees, auditor fees,
underwriters and public relations fees.
Amortization and depreciation expense decreased 54% from $13,000 for
the three months ended September 30, 2002, to $6,000 for the same period ended
September 30, 2003. This mainly resulted from vehicles that were moved to our
subsidiary, Great Lakes Compression.
Interest expense decreased 55% from $11,000 for the three months ended
September 30, 2002, to $5,000 for the same period ended September 30, 2003. This
decrease resulted from a reduction in the interest rate and for bank notes for
vehicles moved to our subsidiary.
Provision for income tax is accounted for on a consolidated basis.
Therefore, the tax for all companies is included in the provision for income tax
for Natural Gas Services Group. Income tax expense increased $83,000 or 40%,
which is consistent with and pursuant to changes in state and federal tax
statutes. This increase is mainly due to an increase in income before taxes.
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
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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 September 30, 2003. 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.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) During the three months ended September 30, 2003, holders of 14,000
shares of our outstanding 10% Convertible Series A Preferred Stock converted the
shares into 14,000 shares of our common stock. There was no underwriter involved
in the transactions. The shares of our common stock were all issued in reliance
upon the exemption contained in Section 4(2) of the Securities Act of 1933, as
amended, because all of the persons were accredited investors and appropriate
restrictive legends were placed on the certificates unless the shares were sold
pursuant to the provisions of Rule 144.
(d) On October 21, 2002, our Registration Statement (File No.
333-88314) was declared effective.
Since October 21, 2002, we have incurred an aggregate of approximately
$1,345,830 of expenses in connection with the offering, including underwriting
discounts ($708,750), expenses paid to or for the underwriter ($157,500), and
other expenses of the offering ($479,680). Such amounts were not paid directly
or indirectly to the directors, the officers or to persons owning 10% or more of
any class of our equity securities or to our affiliates. Rather, such payments
were to non-associated third parties. After deducting the total expenses, we
received net offering proceeds of approximately $6,529,170. Through September
30, 2003, the net offering proceeds have been used for:
o $3,458,464 to reduce indebtedness; and
o $3,070,706 for the manufacture of gas compressors placed in
our rental fleet.
The above reflects that we have used all of the net proceeds that we received
from our offering of common stock and warrants. None of the warrants have been
exercised so we have realized no proceeds from the exercise thereof.
Item 5. Other Information
Changes in Board of Directors:
Effective September 10, 2003 Scott W. Sparkman resigned as a member of
the Board of Directors and was replaced by Wallace C. Sparkman.
Effective October 23, 2003 James T. Grigsby resigned as a member of the
Board of Directors to pursue his personal interests.
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NATURAL GAS SERVICES GROUP, INC.
Commission File Number: 1-31398
Quarter Ended September 30, 2003
Form 10-QSB
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
(b) On August 6, 2003, we filed a Current Report on Form 8-K dated August
6, 2003, filing a news release as an Exhibit under Item 7 and describing the
news release under Items 9 and 12.
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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, 2003
EXHIBIT INDEX
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350
15