NATURAL GAS SERVICES GROUP INC 10-Q

Item 1. Financial Statements NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value) (unaudited) September 30, December 31, 2022 2021 ASSETS Current Assets: Cash and cash equivalents $ 2,586 $ 22,942 Trade accounts receivable, net 12,599 10,389 Inventory 21,761 19,329 Federal income tax receivable (Note 4) 11,538 11,538 Prepaid income taxes 43 51 Prepaid expenses and other 1,279 854 Total current assets 49,806 65,103 Long-term inventory, net 1,726 1,582 Rental equipment, net 224,964 206,985 Property and equipment, net 20,015 20,828 Right of use assets - operating leases, net 277 285 Intangibles, net 931 1,025 Other assets 2,394 2,698 Total assets $ 300,113 $ 298,506 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 9,968 $ 4,795 Accrued liabilities 15,522 14,103 Current operating leases 82 68 Deferred income — 1,312 Total current liabilities 25,572 20,278 Long-term debt 2,000 — Deferred income tax liability 39,573 39,288 Long-term operating leases 194 217 Other long-term liabilities 2,515 2,813 Total liabilities 69,854 62,596 Commitments and contingencies (Note 9) Stockholders’ Equity: Preferred stock, 5,000 shares authorized, no shares issued or outstanding — — Common stock, 30,000 shares authorized, par value $ 0.01 ; 13,499 and 13,394 shares issued, respectively 135 134 Additional paid-in capital 114,838 114,017 Retained earnings 130,290 130,103 Treasury Shares, at cost, 1,310 and 775 shares, respectively ( 15,004 ) ( 8,344 ) Total stockholders' equity 230,259 235,910 Total liabilities and stockholders' equity $ 300,113 $ 298,506 See accompanying notes to these unaudited condensed consolidated financial statements. 1 NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except earnings per share) (unaudited) Three months ended Nine months ended September 30, September 30, 2022 2021 2022 2021 Revenue: Rental income $ 18,631 $ 16,195 $ 53,905 $ 47,149 Sales 1,786 1,472 5,970 5,756 Service and maintenance income 326 578 1,129 1,486 Total revenue 20,743 18,245 61,004 54,391 Operating costs and expenses: Cost of rentals, exclusive of depreciation stated separately below 9,988 8,826 28,460 25,065 Cost of sales, exclusive of depreciation stated separately below 1,987 1,563 5,416 5,955 Cost of service and maintenance, exclusive of depreciation stated separately below 186 327 593 625 Selling, general and administrative expenses 4,064 2,705 8,875 7,960 Depreciation and amortization 6,016 6,387 18,118 19,010 Total operating costs and expenses 22,241 19,808 61,462 58,615 Operating loss ( 1,498 ) ( 1,563 ) ( 458 ) ( 4,224 ) Other income (expense): Interest expense ( 25 ) ( 25 ) ( 74 ) ( 40 ) Other income, net 1,370 119 1,007 270 Total other income, net 1,345 94 933 230 Income (loss) before provision for income taxes ( 153 ) ( 1,469 ) 475 ( 3,994 ) Income tax benefit (expense) 73 212 ( 288 ) 425 Net income (loss) $ ( 80 ) $ ( 1,257 ) $ 187 $ ( 3,569 ) Earnings (loss) per share: Basic $ ( 0.01 ) $ ( 0.10 ) $ 0.02 $ ( 0.27 ) Diluted $ ( 0.01 ) $ ( 0.10 ) $ 0.02 $ ( 0.27 ) Weighted average shares outstanding: Basic 12,192 13,121 12,344 13,225 Diluted 12,192 13,121 12,434 13,225 See accompanying notes to these unaudited condensed consolidated financial statements. 2 NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) (unaudited) Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Total Stockholders' Equity Shares Amount Shares Amount Shares Amount BALANCES, January 1, 2021 — $ — 13,296 $ 133 $ 112,615 $ 139,286 38 $ ( 490 ) $ 251,544 Issuance of restricted stock — — 62 — — — — — — Compensation expense on restricted common stock — — — 1 473 — — — 474 Taxes paid related to net shares settlement of equity awards — — — — ( 224 ) — — — ( 224 ) Net loss — — — — — ( 394 ) — — ( 394 ) BALANCES, March 31, 2021 — — 13,358 134 112,864 138,892 38 ( 490 ) 251,400 Issuance of restricted stock — — 36 — — — — — — Compensation expense on restricted common stock — — — — 421 — — — 421 Taxes paid related to net shares settlement of equity awards — — — — ( 110 ) — — — ( 110 ) Purchase of treasury shares — — — — — — 175 ( 1,892 ) ( 1,892 ) Net loss — — — — — ( 1,918 ) — — ( 1,918 ) BALANCES, June 30, 2021 — — 13,394 134 113,175 136,974 213 ( 2,382 ) 247,901 Compensation expense on restricted stock — — — — 421 — — — 421 Purchase of treasury shares — — — — — — 258 ( 2,540 ) ( 2,540 ) Net loss — — — — — ( 1,257 ) — — ( 1,257 ) BALANCES, September 30, 2021 — $ — 13,394 $ 134 $ 113,596 $ 135,717 471 $ ( 4,922 ) $ 244,525 3 NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands) (unaudited) Preferred Stock Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Total Stockholders' Equity Shares Amount Shares Amount Shares Amount BALANCES, January 1, 2022 — $ — 13,394 $ 134 $ 114,017 $ 130,103 775 $ ( 8,344 ) $ 235,910 Compensation expense on common stock options — — — — 21 — — — 21 Issuance of restricted stock — — 79 — — — — — — Compensation expense on restricted common stock — — — 1 401 — — — 402 Taxes paid related to net shares settlement of equity awards — — — — ( 359 ) — — — ( 359 ) Purchase of treasury shares — — — — — — 247 ( 2,928 ) ( 2,928 ) Net income — — — — — 337 — — 337 BALANCES, March 31, 2022 — — 13,473 135 114,080 130,440 1,022 ( 11,272 ) 233,383 Compensation expense on common stock options — — — — 147 — — — 147 Issuance of restricted stock — — 26 — — — — — — Compensation expense on restricted common stock — — — — 184 — — — 184 Taxes paid related to net shares settlement of equity awards — — — — ( 156 ) — — — ( 156 ) Purchase of treasury shares — — — — — — 288 ( 3,732 ) ( 3,732 ) Net loss — — — — — ( 70 ) — — ( 70 ) BALANCES, June 30, 2022 — $ — 13,499 $ 135 $ 114,255 $ 130,370 1,310 $ ( 15,004 ) $ 229,756 Compensation expense on common stock options — — — — 193 — — — 193 Compensation expense on restricted common stock — — — — 390 — — — 390 Net loss — — — — — ( 80 ) — — ( 80 ) BALANCES, September 30, 2022 — $ — 13,499 $ 135 $ 114,838 $ 130,290 1,310 $ ( 15,004 ) $ 230,259 See accompanying notes to these unaudited condensed consolidated financial statements. 4 NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Nine months ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 187 $ ( 3,569 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 18,118 19,010 Amortization of debt issuance costs 35 18 Deferred income tax (benefit) expense 285 ( 442 ) Stock-based compensation 1,337 1,316 Bad debt allowance — 65 Gain on sale of assets ( 1,449 ) ( 127 ) Loss (gain) on company owned life insurance 551 ( 162 ) Changes in operating assets and liabilities: Trade accounts receivables ( 2,210 ) 225 Inventory ( 2,576 ) ( 1,682 ) Prepaid expenses and prepaid income taxes ( 417 ) ( 256 ) Accounts payable and accrued liabilities 6,592 5,599 Deferred income ( 1,312 ) ( 410 ) Other ( 256 ) 373 NET CASH PROVIDED BY OPERATING ACTIVITIES 18,885 19,958 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of rental equipment, property and other equipment ( 35,338 ) ( 19,080 ) Purchase of company owned life insurance ( 272 ) ( 98 ) Proceeds from sale of property and equipment 1,546 141 NET CASH USED IN INVESTING ACTIVITIES ( 34,064 ) ( 19,037 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loan 2,000 — Payments of other long-term liabilities, net ( 2 ) ( 1 ) Payments of debt issuance costs — ( 237 ) Repayments of line of credit, net — ( 417 ) Purchase of treasury shares ( 6,660 ) ( 4,432 ) Taxes paid related to net share settlement of equity awards ( 515 ) ( 335 ) NET CASH USED IN FINANCING ACTIVITIES ( 5,177 ) ( 5,422 ) NET CHANGE IN CASH AND CASH EQUIVALENTS ( 20,356 ) ( 4,501 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,942 28,925 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,586 $ 24,424 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 38 $ 25 NON-CASH TRANSACTIONS Right of use asset acquired through an operating lease $ 118 $ — See accompanying notes to these unaudited condensed consolidated financial statements. 5 Natural Gas Services Group, Inc. Notes to Condensed Consolidated Financial Statements (unaudited) 1. Description of Business Natural Gas Services Group, Inc. (the "Company", “NGS”, "Natural Gas Services Group", "we" or "our") (a Colorado corporation), is a provider of natural gas compression equipment and services to the energy industry. The Company manufactures, fabricates, rents, sells and maintains natural gas compressors and flare systems for oil and natural gas production and plant facilities. NGS is headquartered in Midland, Texas, with fabrication facilities located in Tulsa, Oklahoma and Midland, Texas, and service facilities located in major oil and natural gas producing basins in the U.S. 2. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, its subsidiary, NGSG Properties, LLC and the rabbi trust associated with the Company's deferred compensation plan. All significant intercompany accounts and transactions for the periods presented have been eliminated in consolidation. These financial statements include all adjustments, consisting of only normal recurring adjustments, which are necessary to make our financial position at September 30, 2022 and the results of our operations for the three and nine months ended September 30, 2022 and 2021 not misleading. As permitted by the rules and regulations of the Securities and Exchange Commission (the "SEC"), the accompanying condensed consolidated financial statements do not include all disclosures normally required by generally accepted accounting principles in the United States of America (GAAP). These financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 on file with the SEC. In our opinion, the condensed consolidated financial statements are a fair presentation of the financial position, results of operations, changes in stockholders' equity and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2022. Revenue Recognition Policy The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606"), except for rental revenue as discussed below. Under ASC 606, revenue is measured based on a consideration specified in a customer’s contract, excluding any sale incentives and taxes collected on behalf of third parties (i.e. sales and property taxes). Revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration that we expect to receive for those goods or services. To recognize revenue, we (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, we satisfy the performance obligation(s). Shipping and handling costs incurred are accounted for as fulfillment costs and are included in cost of revenues in our condensed consolidated statements of operations. Nature of Goods and Services The following is a description of principal activities from which the Company generates its revenue: Rental Revenue. The Company generates revenue from renting compressors and flare systems to our customers. These contracts, which all qualify as operating leases under ASC Topic 842, Leases (ASC 842), may also include a fee for servicing the compressor or flare during the rental contract period. Our rental contracts typically range from six to 24 months, with our larger horsepower compressors having contract terms of up to 60 months. Our revenue is recognized over time, with equal monthly payments over the term of the contract. After the terms of the contract have expired, a customer may renew their contract or continue renting on a monthly basis thereafter. In accordance ASC 842, we have applied the practical expedient ASC 842-10-15-42A, which allows the Company to combine lease and non-lease components. 6 Sales Revenue. The Company generates revenue by the sale of custom/fabricated compressors, flare systems and parts, as well as, exchange/rebuilding customer owned compressors and sale of used rental equipment. Custom/fabricated compressors and flare systems - The Company designs and fabricates compressors and flares based on the customer’s specifications outlined in their contract. Though the equipment being built is customized by the customer, control under these contracts does not pass to the customer until the compressor or flare package is complete and shipped, or in accordance with a bill and hold arrangement, the customer accepts title and assumes the risk and rewards of ownership. We request some of our customers to make progressive payments as the product is being built; these payments are recorded as a contract liability on the Deferred Income line on the condensed consolidated balance sheet until control has been transferred. These contracts also may include an assurance warranty clause to guarantee the product is free from defects in material and workmanship for a set duration of time; this is a standard industry practice and is not considered a performance obligation. From time to time we recognize revenue when manufacturing is complete and the equipment is ready for shipment. At the customer’s request, we will bill the customer upon completing all performance obligations, but before shipment. The customer will formally request that we ship the equipment per their direction from our manufacturing facility at a later specified date and that we segregate the equipment from our finished goods, such that they are not available to fill other orders. Per the customer’s agreement change of control is passed to the customer once the equipment is complete and ready for shipment. We have operated using bill and hold agreements with certain customers for many years, with consistent and satisfactory results for both the customer and us. The credit terms on these agreements are consistent with the credit terms on all other sales. All control is maintained by the customer and there are no exceptions to the customer’s commitment to accept and pay for the manufactured equipment. There was no revenue recognized for bill and hold arrangements for the nine months ended September 30, 2022 or 2021. Parts - Revenue is recognized after the customer obtains control of the parts. Control is passed either by the customer taking physical possession or the parts being shipped. The amount of revenue recognized is not adjusted for expected returns, as our historical part returns have been de minimis. Exchange or rebuilding customer owned compressors - Based on the contract, the Company will either exchange a new/rebuilt compressor for the customer’s malfunctioning compressor or rebuild the customer’s compressor. Revenue is recognized after control of the replacement compressor has transferred to the customer based on the terms of the contract, i.e., by physical delivery, delivery and installment, or shipment of the compressor. Used compressors or flares - From time to time, a customer may request to purchase a used compressor or flare out of our rental fleet. Revenue from the sale of rental equipment is recognized when the control has passed to the customer based on the terms of the contract, i.e., when the customer has taken physical possession or the equipment has been shipped. Service and Maintenance Revenue . The Company provides routine or call-out services on customer owned equipment. Revenue is recognized after services in the contract are rendered. Payment terms for sales revenue and service and maintenance revenue discussed above are generally 30 to 60 days, although terms for specific customers can vary. Also, transaction prices are not subject to variable consideration constraints. 7 Disaggregation of Revenue The following table shows the Company's revenue disaggregated by product or service type for the three and nine months ended September 30, 2022 and 2021: Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 (in thousands) (in thousands) Compressors - sales $ — $ — $ 2,253 $ 1,891 Flares - sales 131 74 214 149 Other (parts/rebuilds) - sales 1,655 1,398 3,503 3,716 Service and maintenance 326 578 1,129 1,486 Total revenue from contracts with customers 2,112 2,050 7,099 7,242 Add: ASC 842 rental revenue 18,631 16,195 53,905 47,149 Total revenue $ 20,743 $ 18,245 $ 61,004 $ 54,391 Contract Balances As of September 30, 2022 and December 31, 2021, we had the following receivables and deferred income from contracts with customers: September 30, 2022 December 31, 2021 (in thousands) Accounts Receivable Accounts receivable - contracts with customers $ 5,188 $ 3,354 Accounts receivable - ASC 842 7,782 8,164 Total Accounts Receivable 12,970 11,518 Less: Allowance for doubtful accounts ( 371 ) ( 1,129 ) Total Accounts Receivable, net $ 12,599 $ 10,389 Deferred income $ — $ 1,312 The Company recognized sales revenues of $ 1.3 million for the nine months ended September 30, 2022 that was included in deferred income at the beginning of 2022. For the year ended December 31, 2021, the Company recognized sales revenues of $ 1.1 million that was included in deferred income at the beginning of 2021. The increase of accounts receivable and decrease of deferred income were primarily due to normal timing differences between our performance and the customers’ payments. Remaining Performance Obligations As of September 30, 2022, the Company did no t have deferred revenue related to unsatisfied performance obligations. Contract Costs The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general and administrative expenses on our condensed consolidated statements of operations. 8 Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense in the tax provision in our condensed consolidated statements of operations. We account for uncertain tax positions in accordance with guidance in ASC 740, which prescribes the minimum recognition threshold a tax position taken or expected to be taken in a tax return is required to meet before being recognized in the condensed consolidated financial statements. Tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. A liability for unrecognized tax benefits is recorded for any tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. We have no liabilities for uncertain tax positions as of September 30, 2022. Our policy regarding income tax interest and penalties is to expense those items as interest expense and other expense, respectively. Recently Issued Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments to ASC Topic 326 require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including trade receivables. For companies that qualify as smaller reporting companies, the amendments in this update are effective for interim and annual periods beginning after January 1, 2023. We are currently evaluating the impact of ASU 2016-13 on our consolidated financial statements and note disclosures. 3. Inventory Our inventory, net of allowance for obsolescence of $ 37,000 at September 30, 2022 and $ 64,000 at December 31, 2021, consisted of the following amounts: September 30, 2022 December 31, 2021 (in thousands) Raw materials - current $ 18,608 $ 17,528 Work-in-process 3,153 1,801 Inventory - current 21,761 19,329 Raw materials - long term (net of allowances of $ 37 and $ 64 , respectively) 1,726 1,582 Inventory - total $ 23,487 $ 20,911 Our long-term inventory consists of raw materials that remain viable but that the Company does not expect to sell or use within the year. Inventory Allowance We routinely review our inventory allowance balance to account for slow moving or obsolete inventory costs that may not be recoverable in the future. 9 A summary of our inventory allowance is as follows: September 30, 2022 December 31, 2021 (in thousands) Beginning balance $ 64 $ 221 Accruals — 208 Write-offs ( 27 ) ( 365 ) Ending balance $ 37 $ 64 4. Federal Income Tax Receivable On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the economic impact caused by the COVID-19 pandemic. The CARES Act allowed NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid federal income taxes. The Company generated significant NOLs during 2018 and 2019, and has filed amended returns to carryback these losses for five years. Accordingly, during 2020, the Company recorded a federal income tax receivable of $ 15.0 million and an increase to its deferred income tax liability of $ 10.1 million on its condensed consolidated balance sheet. During the third quarter of 2020, the Company received refunds totaling $ 3.9 million related to its 2018 NOLs, which reduced its federal income tax receivable to $ 11.5 million on its condensed consolidated balance sheet as of September 30, 2022. 5. Rental Equipment Our rental equipment and associated accumulated depreciation as of September 30, 2022 and December 31, 2021, respectively, consisted of the following: September 30, 2022 December 31, 2021 (in thousands) Compressor units $ 387,476 $ 374,336 Work-in-process 22,018 5,212 Rental equipment 409,494 379,548 Accumulated depreciation ( 184,530 ) ( 172,563 ) Rental equipment, net of accumulated depreciation $ 224,964 $ 206,985 We evaluated our rental equipment for potential impairment as of September 30, 2022, and determined that no such impairment existed as of that date. 6. Long-term Debt Our long-term debt consists of the following: September 30, 2022 December 31, 2021 (in thousands) Revolving credit facility $ 2,000 $ — Previous Credit Agreement We had a senior secured revolving credit agreement the ("Previous Credit Agreement") with JP Morgan Chase Bank, N.A (the "Lender") that matured on March 31, 2021. Prior to maturation, the outstanding balance of $ 0.4 million was repaid. The Previous Credit Agreement had an aggregate commitment of $ 30 million, subject to collateral availability. 10 New Credit Agreement On May 11, 2021, we entered into a five year senior secured revolving credit agreement ("New Credit Agreement") with Texas Capital Bank, National Association (the "Lender") with an initial commitment of $ 20 million and an accordion feature that would increase the maximum commitment to $ 30 million, subject to collateral availability. We also have a right to request from the Lender, on an uncommitted basis, an increase of up to $ 30 million on the aggregate commitment; provided, however, the aggregate commitment amount is not permitted to exceed $ 50 million. The maturity date of the New Credit Agreement is May 11, 2026. The obligations under the New Credit Agreement are secured by a first priority lien on a variety of our assets, including inventory and accounts receivable as well as a variable number of our leased compressor equipment. Borrowing Base. At any time before the maturity of the New Credit Agreement, we may draw, repay and re-borrow amounts available under the borrowing base up to the maximum aggregate availability discussed above. Generally, the borrowing base equals the sum of (a) 90 % of eligible accounts receivable owed to the Company by investment grade debtors, plus (b) 85 % of the eligible accounts receivable owing by non-investment grade debtors, plus (c) 50 % of the eligible inventory, valued at the lower of cost or market value at such time, subject to a cap of this component not to exceed $ 2.0 million, plus (d) the lesser of (i) 95 % of the net book value of the compressors that the Lender has determined are eligible for the extension of credit, valued at the lower of cost or market value with depreciation not to exceed 25 years, at such time and (ii) 80 % of the net liquidation value percentage of the net book value of the eligible compressors that the Lender has determined are eligible for the extension of credit, valued at the lower of cost or market value with depreciation not to exceed 25 years, at such time, plus (e) 80 % of the value at cost (excluding any costs for capitalized interest or other non-cash capitalized costs) of the eligible new compressor fleet, minus (f) any required availability reserves determined by the Lender in its sole discretion. The Lender may adjust the borrowing base components if material deviations in the collateral are discovered in future audits of the collateral. As of September 30, 2022, our allowable borrowing base was $ 18.0 million. Interest and Fees. Under the terms of the New Credit Agreement, we have the option of selecting the applicable variable rate for each revolving loan, or portion thereof, of either (a) the Base Rate (as defined below) plus the Applicable Margin, or (b) in the case of a Eurodollar Rate Loan, the Adjusted Eurodollar Rate plus the Applicable Margin. "Base Rate" means, for any day, a rate of interest per annum equal to the highest of (a) the prime rate for such day; (b) the sum of the federal funds rate for such day plus 0.50 %; and (c) the Adjusted Eurodollar Rate for such day plus 1.00 %. The Applicable Margin is determined based upon the leverage ratio as set forth in the most recent compliance certificate received by the Lender for each fiscal quarter from time to time pursuant to the New Credit Agreement. Depending on the leverage ratio, the Applicable Margin can be 0.25 % to 0.75 % for Base Rate Loans (as defined in the New Credit Agreement) and 1.25 % to 1.75 % for Eurodollar Rate Loans and for requested letters of credit. In addition, we are required to pay a monthly commitment fee on the daily average unused amount of the commitment while the New Credit Agreement is in effect at an annual rate equal to 0.25 % of the unused commitment amount. Accrued interest is payable monthly on outstanding principal amounts and unused commitment fee, provided that accrued interest on Eurodollar Rate Loans is payable at the end of each interest period, but in no event less frequently than quarterly. Covenants. The New Credit Agreement contains customary representations and warranties, as well as covenants which, among other things, condition or limit our ability to incur additional indebtedness and liens; enter into transactions with affiliates; make acquisitions in excess of certain amounts; pay dividends; redeem or repurchase capital stock or senior notes; make investments or loans; make negative pledges; consolidate, merge or effect asset sales; or change the nature of our business. In addition, we also have certain financial covenants that are applicable during certain trigger periods specified in the Credit Agreement and require us during such trigger periods to maintain a leverage ratio less than or equal to 3.00 to 1.00 as of the last day of each fiscal quarter and a fixed charge coverage ratio greater than or equal to 1.00 to 1.00 as of the last day of each fiscal quarter. Events of Default and Acceleration. The New Credit Agreement contains customary events of default for credit facilities of this size and type, and includes, without limitation, payment defaults; defaults in performance of covenants or other agreements contained in the Credit Agreement and the other transaction documents; inaccuracies in representations and warranties; certain defaults, termination events or similar events; certain defaults with respect to any other Company indebtedness in excess of $ 1.0 million; certain bankruptcy or insolvency events; the rendering of certain judgments in excess of $ 1.0 million; certain ERISA events; certain change in control events and the defectiveness of any liens under the secured revolving credit agreement. Obligations outstanding under the Credit Agreement may be accelerated upon the occurrence of an event of default. As of September 30, 2022, we were in compliance with all financial covenants in our New Credit Agreement. At September 30, 2022, we had $ 2.0 million outstanding under the New Credit Agreement with an interest rate of 6.50 % as of September 30, 2022. 11 7. Stock-Based and Other Long-Term Incentive Compensation Stock Options A summary of all option activity as of December 31, 2021, and changes during the nine months ended September 30, 2022 is presented below. Number of Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Outstanding, December 31, 2021 200,834 $ 21.17 4.83 $ — Granted 190,000 $ 15.95 — $ — Cancelled / Forfeited ( 50,750 ) $ 22.78 — $ 11 Expired ( 13,500 ) $ 13.29 — $ — Outstanding, September 30, 2022 326,584 $ 18.21 3.33 $ — Exercisable, September 30, 2022 120,584 $ 23.72 1.96 $ — The following table summarizes information about our stock options outstanding at September 30, 2022: Range of Exercise Prices Options Outstanding Options Exercisable Shares Weighted Average Remaining Contractual Life (years) Weighted Average Exercise Price Shares Weighted Average Exercise Price $ 0.01 - 18.00 231,000 3.76 $ 14.98 25,000 $ 15.00 $ 18.01 - 22.00 13,000 0.47 $ 18.75 13,000 $ 18.75 $ 22.01 - 26.00 29,667 2.54 $ 22.90 29,667 $ 22.90 $ 26.01 - 30.00 20,750 4.38 $ 28.15 20,750 $ 28.15 $ 30.01 - 34.00 32,167 1.47 $ 30.41 32,167 $ 30.41 326,584 3.33 $ 18.21 120,584 $ 23.72 The summary of the status of our unvested stock options as of December 31, 2021 and changes during the nine months ended September 30, 2022 is presented below: Unvested Stock Options: Shares Weighted Average Grant Date Fair Value Per Share Unvested at December 31, 2021 55,500 $ 5.15 Granted 190,000 $ 4.38 Vested ( 30,000 ) $ 2.85 Exercised — $ — Cancelled/Forfeited ( 9,500 ) $ 5.42 Unvested at September 30, 2022 206,000 $ 4.76 As of September 30, 2022, there was $ 0.7 million of unrecognized compensation cost related to unvested options. For the nine months ended September 30, 2022 there was $ 0.4 million of compensation expense for stock options. For the nine months ended September 30, 2021, there was no compensation expense for stock options. 12 Restricted Shares/Units On March 18, 2021, the Compensation Committee awarded 129,212 shares of restricted common stock to two executive officers that vest ratably over three years , beginning on March 18, 2022. On June 17, 2021, the Compensation Committee awarded 5,000 shares of restricted stock to an executive officer that vests ratably over three years beginning on June 17, 2022. In addition, on March 18, 2021, 5,612 shares of restricted common stock were awarded to each of our three independent Board members. Lastly, on April 1, 2021, 5,291 shares of restricted common stock were awarded to a newly appointed Board member. On April 26, 2022, 4,212 shares of restricted common stock were awarded to each of our four independent Board members. The restricted stock issued to these directors vest in one year from the date of grant. On August 15, 2022, the Compensation Committee awarded 32,040 shares of restricted common stock to two executive officers that vest ratably over 3 years, beginning on April 25, 2023. In addition, on August 15, 2022, the Compensation Committee awarded 60,839 shares of restricted stock to Mr. Stephen Taylor, our former Chief Executive Officer. The restricted shares granted to Mr. Taylor will vest in full on June 30, 2023. Total compensation expense related to these and previously granted restricted stock awards was $ 1.0 million and $ 1.3 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, there was a total of $ 1.5 million of unrecognized compensation expense related to these shares/units which is expected to be recognized over the next 1.7 years. A summary of all restricted stock/units outstanding as of December 31, 2021 and activity during the nine months ended September 30, 2022 is presented below: Number of Shares Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Outstanding, December 31, 2021 276,319 $ 9.67 1.77 $ 2,893 Granted 109,727 $ 10.09 $ 1,107 Vested ( 152,134 ) $ 10.99 $ 1,778 Canceled/Forfeited — $ — $ — Outstanding, September 30, 2022 233,912 $ 9.01 1.71 $ 2,179 Other Long-Term Incentive Compensation On March 18, 2021, the Compensation Committee issued a long-term incentive award of $ 1.0 million to an executive officer that vests in equal, annual tranches over 3 years beginning on the anniversary of the grant date. In addition, on March 18, 2021, we issued a $ 50,000 award to three of our independent members of our Board of Directors as partial payment for their services in 2021. On April 1, 2021, we issued a $ 50,000 award to a newly appointed independent member of our Board of Directors as partial payment for his services in 2021. On April 26, 2022, we issued a $ 50,000 award to each of our three independent Board members. These awards vest one year from the date of grant and are payable in cash upon vesting. There were no long-term incentive awards issued to executives during the nine months ended September 30, 2022. The Company accounts for these other long-term incentive awards as liabilities under accrued liabilities on our condensed consolidated balance sheet. The vesting of these awards is subject to acceleration upon certain events, such as (i) death or disability of the recipient, (ii) certain circumstances in connection with a change of control of the Company, (iii) for executive officers, termination without cause (as defined in the agreement), and (iv) for executive officers, resignation for good reason (as defined). Total compensation expense related to these other long-term incentive awards was approximately $ 0.7 million and $ 0.6 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, there was a total of $ 0.8 million of unrecognized compensation expense related to these other long-term incentive awards which is expected to be recognized over the next 0.6 years. 13 8. Earnings (Loss) per Share The following table reconciles the numerators and denominators of the basic and diluted earnings (loss) per share computation: Three months ended Nine months ended September 30, September 30, 2022 2021 2022 2021 (in thousands, except per share data) Numerator: Net income (loss) $ ( 80 ) $ ( 1,257 ) $ 187 $ ( 3,569 ) Denominator for earnings (loss) per basic common share: Weighted average common shares outstanding 12,192 13,121 12,344 13,225 Denominator for earnings (loss) per diluted common share: Weighted average common shares outstanding 12,192 13,121 12,344 13,225 Dilutive effect of stock options and restricted stock/units — — 90 — Diluted weighted average shares 12,192 13,121 12,434 13,225 Earnings (loss) per common share: Basic $ ( 0.01 ) $ ( 0.10 ) $ 0.02 $ ( 0.27 ) Diluted $ ( 0.01 ) $ ( 0.10 ) $ 0.02 $ ( 0.27 ) For the three and nine months ended September 30, 2022, 233,912 and 143,891 restricted stock/units, respectively, were not included in the computation of diluted earnings per share due to their antidilutive effect. For the three and nine months ended September 30, 2022 326,584 stock options were not included in the computation of diluted loss per share due to their antidilutive effect. For the three and nine months ended September 30, 2021, 276,319 restricted stock/units and 145,334 stock options were not included in the computation of diluted loss per share due to their antidilutive effect. 9. Commitments and Contingencies From time to time, we are a party to various legal proceedings in the ordinary course of our business. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on our financial position, results of operations or cash flow. We are not currently a party to any material legal proceedings, and we are not aware of any threatened material litigation. 10. Subsequent Events In accordance with ASC 855 - Subsequent Events - the Company has evaluated all events subsequent to the balance sheet date as of September 30, 2022 through the date of this report and believes nothing is required thereunder. 14