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, 2023 2022 ASSETS Current Assets: Cash and cash equivalents $ 197 $ 3,372 Trade accounts receivable, net of allowance for doubtful accounts of $ 529 and $ 338 , respectively 28,041 14,668 Inventory 26,115 23,414 Federal income tax receivable (Note 4) 11,538 11,538 Prepaid income taxes — 10 Prepaid expenses and other 1,436 1,145 Total current assets 67,327 54,147 Long-term inventory, net of allowance for obsolescence of $ 40 and $ 120 , respectively 2,172 1,557 Rental equipment, net of accumulated depreciation of $ 193,795 and $ 177,729 , respectively 355,382 246,450 Property and equipment, net of accumulated depreciation of $ 17,737 and $ 16,981 , respectively 21,074 22,176 Right of use assets - operating leases, net of accumulated amortization $ 864 and $ 721 , respectively 261 349 Intangibles, net of accumulated amortization of $ 2,353 and $ 2,259 , respectively 806 900 Other assets 4,791 2,667 Total assets $ 451,813 $ 328,246 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 30,550 $ 6,481 Accrued liabilities 14,608 23,726 Current operating leases 98 155 Deferred income — 37 Total current liabilities 45,256 30,399 Long-term debt 128,000 25,000 Deferred income tax liability 41,206 39,798 Long-term operating leases 163 194 Other long-term liabilities 3,223 2,779 Total liabilities 217,848 98,170 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 ; 13,688 and 13,519 shares issued, respectively 136 135 Additional paid-in capital 116,254 115,411 Retained earnings 132,579 129,534 Treasury shares, at cost, 1,310 shares ( 15,004 ) ( 15,004 ) Total stockholders' equity 233,965 230,076 Total liabilities and stockholders' equity $ 451,813 $ 328,246 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, 2023 2022 2023 2022 Revenue: Rental income $ 27,705 $ 18,631 $ 74,533 $ 53,905 Sales 1,413 3,086 6,000 7,270 Aftermarket services 2,251 326 4,413 1,129 Total revenue 31,369 22,043 84,946 62,304 Operating costs and expenses: Cost of rentals, exclusive of depreciation stated separately below 13,462 9,988 36,450 28,460 Cost of sales, exclusive of depreciation stated separately below 1,505 2,083 6,618 5,512 Cost of aftermarket services, exclusive of depreciation stated separately below 1,846 186 3,424 593 Selling, general and administrative expenses 2,845 4,064 12,267 8,875 Depreciation and amortization 6,807 6,016 19,390 18,118 Impairment expense — — 779 — Total operating costs and expenses 26,465 22,337 78,928 61,558 Operating income (expense) 4,904 ( 294 ) 6,018 746 Other income (expense): Interest expense ( 1,600 ) ( 25 ) ( 1,785 ) ( 74 ) Other income (expense), net ( 87 ) 166 254 ( 197 ) Total other income (expense), net ( 1,687 ) 141 ( 1,531 ) ( 271 ) Income (loss) before provision for income taxes 3,217 ( 153 ) 4,487 475 Income tax (expense) benefit ( 1,046 ) 73 ( 1,442 ) ( 288 ) Net income (loss) $ 2,171 $ ( 80 ) $ 3,045 $ 187 Earnings (loss) per share: Basic $ 0.18 $ ( 0.01 ) $ 0.25 $ 0.02 Diluted $ 0.18 $ ( 0.01 ) $ 0.25 $ 0.02 Weighted average shares outstanding: Basic 12,378 12,192 12,295 12,344 Diluted 12,403 12,192 12,372 12,434 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, 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 Issuance of restricted stock — — 26 — — — — — — Compensation expense on common stock options — — — — 147 — — — 147 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. 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, 2023 — $ — 13,519 $ 135 $ 115,411 $ 129,534 1,310 $ ( 15,004 ) $ 230,076 Compensation expense on common stock options — — — — 22 — — — 22 Issuance of restricted stock — — 29 — — — — — — Compensation expense on restricted common stock — — — — 465 — — — 465 Taxes paid related to net shares settlement of equity awards — — — — ( 184 ) — — — ( 184 ) Net income — — — — — 370 — — 370 BALANCES, March 31, 2023 — — 13,548 135 115,714 129,904 1,310 ( 15,004 ) 230,749 Compensation expense on common stock options — — — — 30 — — — 30 Issuance of restricted stock — — 140 1 ( 1 ) — — — — Compensation expense on restricted common stock — — — — 1,100 — — — 1,100 Taxes paid related to net shares settlement of equity awards — — — — ( 798 ) — — — ( 798 ) Net income — — — — — 504 — — 504 BALANCES, June 30, 2023 — — 13,688 136 116,045 130,408 1,310 ( 15,004 ) 231,585 Compensation expense on common stock options — — — — 22 — — — 22 Compensation expense on restricted common stock — — — — 187 — — — 187 Net income — — — — — 2,171 — — 2,171 BALANCES, September 30, 2023 — $ — 13,688 $ 136 $ 116,254 $ 132,579 1,310 $ ( 15,004 ) $ 233,965 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, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,045 $ 187 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,390 18,118 Amortization of debt issuance costs 287 35 Deferred income tax expense 1,408 285 Stock-based compensation 1,826 1,337 Bad debt allowance 199 — Impairment expense 779 — Gain on sale of assets ( 281 ) ( 106 ) Loss (gain) on company owned life insurance 49 551 Changes in operating assets and liabilities: Trade accounts receivables ( 13,572 ) ( 2,210 ) Inventory ( 2,608 ) ( 2,576 ) Prepaid expenses and prepaid income taxes ( 281 ) ( 417 ) Accounts payable and accrued liabilities 14,951 6,592 Deferred income ( 37 ) ( 1,312 ) Other 543 ( 309 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 25,698 20,175 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of rental equipment, property and other equipment ( 128,563 ) ( 35,250 ) Purchase of company owned life insurance ( 378 ) ( 272 ) Proceeds from sale of property and equipment 231 167 NET CASH USED IN INVESTING ACTIVITIES ( 128,710 ) ( 35,355 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loan 103,000 2,000 Payments of other long-term liabilities, net ( 50 ) ( 2 ) Payments of debt issuance costs ( 2,131 ) — Purchase of treasury shares — ( 6,660 ) Taxes paid related to net share settlement of equity awards ( 982 ) ( 515 ) NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 99,837 ( 5,177 ) NET CHANGE IN CASH AND CASH EQUIVALENTS ( 3,175 ) ( 20,357 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,372 22,942 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 197 $ 2,585 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 4,347 $ 25 NON-CASH TRANSACTIONS Right of use asset acquired through an operating lease $ 63 $ 91 Transfer of rental equipment to inventory $ 708 $ — 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 leading provider of natural gas compression equipment, technology and services to the energy industry. The Company manufactures, fabricates, rents, sells and maintains natural gas compressors 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. The company also has increasingly used third-party fabricators as well. 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, 2023 and the results of our operations for the three and nine months ended September 30, 2023 and 2022 not misleading. Some adjustments may cause the prior year number in these financial statements to differ from the prior year interim financial statements. 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, 2022 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, 2023 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2023. 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 compressor 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 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, generally monthly, in accordance with payment terms under 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 with 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, and parts, as well as, exchange/rebuilding customer owned compressors and sale of used rental equipment. Custom/fabricated compressors - The Company designs and fabricates compressors 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 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 or the third-party fabrication site at a later specified date and that we segregate this equipment from our finished goods, such that this equipment is 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, 2023 or 2022. 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 - From time to time, a customer may request to purchase a used compressor 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. Aftermarket Services . The Company provides routine or call-out services on customer owned equipment. Revenue is recognized after services are rendered. The company also provides freight and commissioning services for new compressor sets. Payment terms for sales revenue and aftermarket services 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, 2023 and 2022: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 (in thousands) (in thousands) Compressors - sales $ 207 $ 1,300 $ 1,214 $ 3,553 Flares - sales — 131 87 214 Other (parts/rebuilds) - sales 1,206 1,655 4,699 3,503 Aftermarket services 2,251 326 4,413 1,129 Total revenue from contracts with customers 3,664 3,412 10,413 8,399 Add: ASC 842 rental revenue 27,705 18,631 74,533 53,905 Total revenue $ 31,369 $ 22,043 $ 84,946 $ 62,304 Contract Balances As of September 30, 2023 and December 31, 2022, we had the following receivables and deferred income from contracts with customers: September 30, 2023 December 31, 2022 (in thousands) Accounts Receivable Accounts receivable - contracts with customers $ 5,207 $ 4,353 Accounts receivable - ASC 842 23,363 10,653 Total Accounts Receivable 28,570 15,006 Less: Allowance for doubtful accounts ( 529 ) ( 338 ) Total Accounts Receivable, net $ 28,041 $ 14,668 Deferred income $ — $ 37 The Company recognized sales revenues of $ 37 thousand for the nine months ended September 30, 2023 that was included in deferred income at the beginning of 2023. The increase in accounts receivable and decrease in deferred income were primarily due to normal timing differences between our performance and the customers’ payments. Remaining Performance Obligations As of September 30, 2023, the Company had no 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 ta x positions as of September 30, 2023. Our policy regarding income tax interest and penalties is to expense those items as interest expense and other expense, respectively. Capitalized Interest Effective January 1, 2023, the Company began capitalizing interest from external borrowings on significant expenditures for the fabrication of its natural gas compressor equipment until such projects are ready for their intended use. Capitalized interest is added to the cost of the underlying asset and is amortized over the useful lives of the assets in the same manner as the underlying assets. For the nine months ended September 30, 2023, the Company capitalized interest aggregating approximately $ 4.1 million. 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 adopted ASU 2016-13 on January 1, 2023. The adoption did not result in any material change to our financial statements. There were no other recent accounting pronouncements during the nine months ended September 30, 2023 that are expected to have a material impact on our financial statements. 3. Inventory Our inventory, net of allowance for obsolescence of $ 40,000 at September 30, 2023 and $ 120,000 at December 31, 2022, consisted of the following amounts: September 30, 2023 December 31, 2022 (in thousands) Raw materials - current $ 24,587 $ 21,354 Work-in-process 1,528 2,060 Inventory - current 26,115 23,414 Raw materials - long term (net of allowance of $ 40 and $ 120 , respectively) 2,172 1,557 Inventory - total $ 28,287 $ 24,971 Our long-term inventory consists of raw materials that remain viable but that the Company does not expect to sell or use within one year. 9 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. A summary of our inventory allowance is as follows: September 30, 2023 December 31, 2022 (in thousands) Beginning balance $ 120 $ 64 Accruals — 83 Write-offs ( 80 ) ( 27 ) Ending balance $ 40 $ 120 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, 2023 and December 31, 2022. 5. Rental Equipment Our rental equipment and associated accumulated depreciation as of September 30, 2023 and December 31, 2022, respectively, consisted of the following: September 30, 2023 December 31, 2022 (in thousands) Compressor units $ 494,282 $ 387,145 Work-in-process 54,895 37,034 Rental equipment 549,177 424,179 Accumulated depreciation ( 193,795 ) ( 177,729 ) Rental equipment, net of accumulated depreciation $ 355,382 $ 246,450 We evaluated our rental equipment for potential material impairment as of September 30, 2023, 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, 2023 December 31, 2022 (in thousands) Total long-term debt $ 128,000 $ 25,000 10 Amended and Restated Credit Agreement On May 11, 2021, we entered into a five-year senior secured revolving credit agreement ("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. At December 31, 2022, we had $ 25 million outstanding under the Credit Agreement with a weighted average interest rate of 7.32 % . On February 28, 2023, we replaced our Credit Agreement by entering into a five-year senior secured revolving credit agreement (“Amended and Restated Credit Agreement”) with Texas Capital Bank, as administrative agent (the “Lender”), TCBI Securities, Inc., as joint lead arranger and sole book runner and Bank of America, N.A., as joint lead arranger, with an initial commitment of $ 175 million as of the closing date. Subject to collateral availability, we also have a right to request from the Lender, on an uncommitted basis, an increase of up to $ 125 million on the aggregate commitment; provided, however, the aggregate commitment amount is not permitted to exceed $ 300 million. The maturity date of the Amended and Restated Credit Agreement is February 28, 2028. The obligations under the Amended and Restated Credit Agreement are secured by a first priority lien on most 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 Amended and Restated 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) 85 % of eligible accounts receivable owed to the Company, plus (b) 50 % of the eligible inventory, valued at the lower of cost or market value at such time, subject to a cap of the component not to exceed $ 2.5 million, plus (c) 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 (d) 80 % of the net book value, valued at the lower cost (excluding any costs for capitalized interest or other non-cash capitalized costs) or market of the eligible new compressor fleet, minus (e) any required availability reserves determined by the Lender in its sole discretion. The Lender may adjust the borrowing base components if the material deviations in the collateral are discovered in the future audits of the collateral. At September 30, 2023, our borrowing base was approximately $ 175 million. Interest and Fees . Under the terms of the Amended and Restated 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 Term SOFR ("Secured Overnight Financing Rate") Loan, the Adjusted Term SOFR 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 a day; (b) the sum of the federal funds rate for such day plus 0.50 %; and (c) the Adjusted Term SOFR 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 Amended and Restated Credit Agreement. Depending on the leverage ratio, the Applicable Margin can be 2.00 % to 2.75 % for Base Rate Loans (as defined in Amended and Restated Credit Agreement) and 3.00 % to 3.75 % for Term SOFR 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 Amended and Restated Credit Agreement is in effect at an annual rate equal to 0.50 % of the unused commitment amount. Accrued interest is payable monthly on outstanding principal amounts and unused commitment fee, provided that accrued interest on Term SOFR Loans is payable at the end of each interest period, but in no event less frequently than quarterly. Covenants . The Amended and Restated 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 are subject to certain financial covenants during certain trigger periods in the Amended and Restated Credit Agreement that require us to maintain (i) a leverage ratio, as defined, lesser than or equal to 3.50 to 1.00 as of the last day of each fiscal quarter thereafter and (ii) a fixed charge coverage ratio greater than or equal to 1.25 to 1.00 as of the last day of each fiscal quarter. Events of Default and Acceleration . The Amended and Restated 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 Amended and Restated 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 11 liens under the secured revolving credit agreement. Obligations outstanding under the Amended and Restated Credit Agreement may be accelerated upon the occurrence of an event of default. As of September 30, 2023, we were in compliance with all financial covenants in our Amended and Restated Credit Agreement. As of September 30, 2023, we had approximately $ 128 million outstanding under our Amended and Restated Credit Agreement with a weighted average interest rate of 8.98 %. At September 30, 2023, we had approximately $ 47 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination. 7. Stock-Based and Other Long-Term Incentive Compensation Stock Options A summary of all option activity as of December 31, 2022, and changes during the nine months ended September 30, 2023 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, 2022 201,584 $ 19.32 3.90 $ 41 Granted 1,000 $ 10.12 9.76 $ — Cancelled / Forfeited ( 12,500 ) $ 15.60 — 4 Expired ( 38,000 ) $ 16.28 — — Outstanding, September 30, 2023 152,084 $ 20.33 3.81 — Exercisable, September 30, 2023 119,750 $ 22.89 2.58 $ — The following table summarizes information about our stock options outstanding at September 30, 2023: 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 73,000 6.22 $ 12.97 40,666 $ 14.65 $ 22.01 - 26.00 28,667 1.54 $ 22.90 28,667 $ 22.90 $ 26.01 - 30.00 19,750 3.38 $ 28.15 19,750 $ 28.15 $ 30.01 - 34.00 30,667 0.47 $ 30.41 30,667 $ 30.41 152,084 3.81 $ 20.33 119,750 $ 22.89 The summary of the status of our unvested stock options as of December 31, 2022 and changes during the nine months ended September 30, 2023 is presented below: Unvested Stock Options: Shares Weighted Average Grant Date Fair Value Per Share Unvested at December 31, 2022 39,000 $ 5.44 Granted 1,000 $ 5.30 Vested, outstanding shares ( 3,332 ) $ 6.26 Cancelled/Forfeited ( 4,334 ) $ 5.15 Unvested at September 30, 2023 32,334 $ 5.38 12 As of September 30, 2023, there was $ 108,000 of unrecognized compensation cost related to unvested options. For the nine months ended September 30, 2023, there was $ 74,000 of compensation expense for stock options. For the nine months ended September 30, 2022, there was 361,000 of compensation expense for stock options. Restricted Shares/Units On April 26, 2022, 4,212 shares of restricted common stock were awarded to each of our three independent Board members. The restricted stock issued to these directors vests 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 three years , beginning on April 25, 2023 of these 32,040 shares, 11,024 shares were forfeited in connection with the executive officer's resignation. In addition, on August 15, 2022, the Compensation Committee awarded 60,839 shares of restricted stock to Stephen C. Taylor, our Interim Chief Executive Officer, that vested in full on June 30, 2023. On April 25, 2023, the Compensation Committee awarded 27,840 shares of restricted stock to our Chief Technical Officer that vest ratably over three years , beginning on April 25, 2024. Pursuant to the Retirement Agreement dated May 17, 2022, between the Company and Mr. Taylor, our Interim Chief Executive Officer, on April 25, 2023, the Compensation Committee awarded 58,790 fully vested shares of common stock to Mr. Taylor. On May 9, 2023, the Compensation Committee awarded each of our four independent Board members 9,470 restricted stock units. These restricted stock units vest one year from the date of grant. On June 30, 2023 Stephen C. Taylor was granted restricted stock units for 10,101 shares of common stock that will vest one year from the date of grant. Total compensation expense related to these and previously granted restricted stock awards was $ 1.7 million and $ 1.0 million for the nine months ended September 30, 2023, and 2022, respectively. A summary of all restricted stock/units outstanding as of December 31, 2022 and activity during the nine months ended September 30, 2023 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, 2022 250,847 $ 8.40 1.42 $ 2,681 Granted 153,656 $ 10.41 $ 1,599 Vested ( 267,232 ) $ 9.22 $ 2,683 Canceled/Forfeited ( 14,357 ) $ 10.04 $ 158 Outstanding, September 30, 2023 122,914 $ 10.29 4.84 $ 1,482 Other Long-Term Incentive Compensation On April 26, 2022, subject to vesting we granted a $ 50,000 cash award to each of our three independent Board members. These awards vested on April 26, 2023 and have been paid. The Company accounts for these other long-term incentive awards as liabilities under accrued liabilities on our condensed consolidated balance sheet. In general the vesting of long term 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 in the agreement). Total compensation expense related to these and other long-term incentive awards was approximately $ 426,000 and $ 672,000 for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, all compensation expense related to these other long-term incentive awards had been recognized. 13 8. Earnings (loss) per 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, 2023 2022 2023 2022 (in thousands, except per share data) Numerator: Net income (loss) $ 2,171 $ ( 80 ) $ 3,045 $ 187 Denominator for earnings per basic common share: Weighted average common shares outstanding 12,378 12,192 12,295 12,344 Denominator for earnings per diluted common share: Weighted average common shares outstanding 12,378 12,192 12,295 12,344 Dilutive effect of stock options and restricted stock/units 25 — 77 90 Diluted weighted average shares 12,403 12,192 12,372 12,434 Earnings (loss) per common share: Basic $ 0.18 $ ( 0.01 ) $ 0.25 $ 0.02 Diluted $ 0.18 $ ( 0.01 ) $ 0.25 $ 0.02 9. Commitments and Contingencies From time to time, we are a party to various legal proceedings in the ordinary course of our business. We are not currently a party to any material legal proceedings, and we are not aware of any threatened material litigation. The Company believes it maintains adequate insurance coverage against any potential litigation loss. 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, 2023 through the date this report was issued and believes nothing is required thereunder. 14