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) June 30, December 31, 2024 2023 ASSETS Current Assets: Cash and cash equivalents $ 3,616 $ 2,746 Trade accounts receivable, net of allowance for doubtful accounts of $ 1,110 and $ 823 , respectively 33,001 39,186 Inventory, net of allowance for obsolescence of $ 2,836 20,254 21,639 Federal income tax receivable 11,386 11,538 Prepaid expenses and other 2,139 1,162 Total current assets 70,396 76,271 Long-term inventory, net of allowance for obsolescence of $ 1,168 937 701 Rental equipment, net of accumulated depreciation of $ 204,632 and $ 191,745 , respectively 388,331 373,649 Property and equipment, net of accumulated depreciation of $ 18,273 and $ 17,649 , respectively 19,584 20,550 Intangibles, net of accumulated amortization of $ 2,447 and $ 2,384 , respectively 712 775 Other assets 9,205 6,783 Total assets $ 489,165 $ 478,729 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 23,336 $ 17,628 Accrued liabilities 6,803 15,085 Total current liabilities 30,139 32,713 Long-term debt 163,000 164,000 Deferred income tax liability 44,290 41,636 Other long-term liabilities 6,076 4,486 Total liabilities 243,505 242,835 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 ; 13,727 and 13,688 shares issued, respectively 137 137 Additional paid-in capital 116,898 116,480 Retained earnings 143,629 134,281 Treasury shares, at cost, 1,310 shares ( 15,004 ) ( 15,004 ) Total stockholders' equity 245,660 235,894 Total liabilities and stockholders' equity $ 489,165 $ 478,729 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 Six months ended June 30, June 30, 2024 2023 2024 2023 Revenue: Rental income $ 34,926 $ 24,105 $ 68,660 $ 46,828 Sales 2,270 1,595 4,773 4,587 Aftermarket services 1,295 1,257 1,965 2,162 Total revenue 38,491 26,957 75,398 53,577 Operating costs and expenses: Cost of rentals, exclusive of depreciation stated separately below 14,228 11,343 27,342 22,988 Cost of sales, exclusive of depreciation stated separately below 2,249 1,876 4,429 5,113 Cost of aftermarket services, exclusive of depreciation stated separately below 1,012 969 1,512 1,578 Selling, general and administrative expenses 4,791 4,860 9,493 9,422 Depreciation and amortization 7,705 6,418 14,792 12,583 Impairment expense — 779 — 779 Retirement of rental equipment — — 5 — Total operating costs and expenses 29,985 26,245 57,573 52,463 Operating income 8,506 712 17,825 1,114 Other income (expense): Interest expense ( 2,932 ) ( 185 ) ( 5,867 ) ( 185 ) Other income (expense), net ( 30 ) 226 163 341 Total other income (expense), net ( 2,962 ) 41 ( 5,704 ) 156 Income before provision for income taxes 5,544 753 12,121 1,270 Income tax expense ( 1,294 ) ( 249 ) ( 2,773 ) ( 396 ) Net income $ 4,250 $ 504 $ 9,348 $ 874 Earnings per share: Basic $ 0.34 $ 0.04 $ 0.75 $ 0.07 Diluted $ 0.34 $ 0.04 $ 0.75 $ 0.07 Weighted average shares outstanding: Basic 12,384 12,292 12,392 12,253 Diluted 12,483 12,394 12,484 12,374 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, 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 Issuance of restricted stock — — 140 1 ( 1 ) — — — — Compensation expense on common stock options — — — — 30 — — — 30 Compensation expense on restricted common stock — — — — 1,100 — — — 1,100 Taxes paid related to net shares settlement of equity awards — — — — ( 798 ) — — — ( 798 ) Net loss — — — — — 504 — — 504 BALANCES, June 30, 2023 — $ — 13,688 $ 136 $ 116,045 $ 130,408 1,310 $ ( 15,004 ) $ 231,585 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, 2024 — $ — 13,688 $ 137 $ 116,480 $ 134,281 1,310 $ ( 15,004 ) $ 235,894 Compensation expense on common stock options — — — — 29 — — — 29 Compensation expense on restricted common stock — — — — 245 — — — 245 Taxes paid related to net shares settlement of equity awards — — 6 — — — — — — Net income — — — — — 5,098 — — 5,098 BALANCES, March 31, 2024 — — 13,694 137 116,754 139,379 1,310 $ ( 15,004 ) 241,266 Compensation expense on common stock options — — — — 46 — — — 46 Compensation expense on restricted common stock — — — — 196 — — — 196 Taxes paid related to net shares settlement of equity awards — — 33 — ( 98 ) — — — ( 98 ) Net income — — — — — 4,250 — — 4,250 BALANCES, June 30, 2024 — $ — 13,727 $ 137 $ 116,898 $ 143,629 1,310 $ ( 15,004 ) $ 245,660 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) Six months ended June 30, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,348 $ 874 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,792 12,583 Amortization of debt issuance costs 315 184 Deferred income tax expense 2,654 396 Stock-based compensation 516 1,617 Provision from credit losses 287 128 Impairment expense — 779 Gain on sale of assets ( 229 ) ( 206 ) Retirement of rental equipment 5 — Gain on company owned life insurance ( 173 ) ( 80 ) Changes in operating assets and liabilities: Trade accounts receivables 5,898 ( 6,332 ) Inventory 1,149 ( 4,438 ) Prepaid expenses and prepaid income taxes ( 825 ) ( 301 ) Accounts payable and accrued liabilities ( 2,575 ) 16,888 Deferred income ( 418 ) ( 37 ) Other 375 588 NET CASH PROVIDED BY OPERATING ACTIVITIES 31,119 22,643 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of rental equipment, property and other equipment ( 28,262 ) ( 93,479 ) Purchase of company owned life insurance ( 17 ) ( 329 ) Proceeds from sale of property and equipment 355 231 Proceeds from surrender of company owned life insurance 43 — NET CASH USED IN INVESTING ACTIVITIES ( 27,881 ) ( 93,577 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loan 8,000 75,011 Repayment of loan ( 9,000 ) — Payments of other long-term liabilities, net ( 385 ) ( 50 ) Payments of debt issuance costs ( 885 ) ( 2,131 ) Taxes paid related to net share settlement of equity awards ( 98 ) ( 982 ) NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ( 2,368 ) 71,848 NET CHANGE IN CASH AND CASH EQUIVALENTS 870 914 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,746 3,372 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,616 $ 4,286 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 10,458 $ 1,966 NON-CASH TRANSACTIONS Transfer of rental equipment to inventory $ — $ 708 Right of use asset acquired through a finance lease $ 1,751 $ 63 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 and services to the energy industry. We design, rent, sell, service and maintain natural gas compressors for oil and natural gas production and plant facilities, generally using equipment from third-party fabricators and OEM suppliers along with limited in-house assembly. NGS is headquartered in Midland, Texas, with a fabrication facility located in Tulsa, Oklahoma, a rebuild shop in Midland, Texas, and service facilities located in major oil and natural gas producing basins in the U.S. The Company was formed on December 17, 1998. 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, which owns the Company's headquarters office building 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 June 30, 2024 and the results of our operations for the three months and six ended June 30, 2024 and 2023 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, 2023 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 six months ended June 30, 2024 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2024. Revenue Recognition Policy Revenue is measured based on the consideration and terms 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 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 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. Our rental contracts typically range from six to 60 months. Our revenue is recognized over time, with 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 with ASC 842 – Leases, 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. Our sales revenue is recognized in accordance with ASC 606. Custom compressors - The Company designs and assembles 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 is completed and shipped, or in accordance with a bill and hold arrangement, in which the customer accepts title and assumes the risk and rewards of ownership at a specified time. We request some of our customers to make progressive payments as the compressor is being built; these payments are recorded as a contract liability on the Accrued Liability line on the 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. 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 rebuild 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 or rebuilt 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 Service Revenue . The Company provides routine or call-out services on customer owned equipment as well as commissioning of new units for customers. Revenue is recognized after services in the contract are rendered. Payment terms for sales revenue and aftermarket services revenue discussed above are generally 30 to 60 days although terms for specific customers can vary. Also, the transaction prices are not subject to variable consideration constraints. Disaggregation of Revenue The following table shows the Company's revenue disaggregated by product or service type for the three months and six months ended June 30, 2024 and 2023: Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 (in thousands) (in thousands) Compressors - sales $ 58 $ 38 $ 1,341 $ 1,007 Other (parts/rebuilds) - sales 2,212 1,557 3,432 3,580 Aftermarket services 1,295 1,257 1,965 2,162 Total revenue from contracts with customers 3,565 2,852 6,738 6,749 Add: ASC 842 rental revenue 34,926 24,105 68,660 46,828 Total revenue $ 38,491 $ 26,957 $ 75,398 $ 53,577 7 Contract Balances As of June 30, 2024 and December 31, 2023, we had the following receivables and deferred income from contracts with customers: June 30, 2024 December 31, 2023 (in thousands) Accounts Receivable Accounts receivable - contracts with customers $ 5,593 $ 7,138 Accounts receivable - ASC 842 28,518 32,871 Total Accounts Receivable 34,111 40,009 Less: Allowance for doubtful accounts ( 1,110 ) ( 823 ) Total Accounts Receivable, net $ 33,001 $ 39,186 Deferred income $ — $ 418 The Company recognized sales revenues of $ 0.4 million for the six months ended June 30, 2024 that was included in accrued liabilities at the beginning of 2024. The decrease in accounts receivable and deferred income were primarily due to normal timing differences between our performance and the customers’ payments. Remaining Performance Obligations As of June 30, 2024, 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. 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 June 30, 2024. Our policy regarding income tax interest and penalties is to expense those items as interest expense and other expense, respectively. 8 Capitalized Interest The Company capitalizes 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 three months ended June 30, 2024 and 2023, the Company capitalized interested aggregating approximately $ 1.2 million and $ 1.8 million. For the six months ended June 30, 2024 and 2023, th e Company capitalized interest aggregating approximately $ 2.4 million a nd $ 2.7 million , respe ctively. Recently Issued Accounting Pronouncements In December 2023, the Financial Standards Accounting Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09 “Income Taxes (Topics 740): Improvements to Income Tax Disclosures” to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the potential effect that the updated standard will have on the financial statement disclosures. In November 2023, the FASB issued ASU 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted. The adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements or disclosures. 3. Inventory Our inventory, net of allowance for obsolescence of $ 4.0 million at June 30, 2024 and December 31, 2023, consisted of the following amounts: June 30, 2024 December 31, 2023 (in thousands) Inventory, net of allowance for obsolescence of $ 2,836 $ 19,450 $ 20,227 Work-in-process 804 1,412 Inventory - current 20,254 21,639 Raw materials - long term net of allowance of $ 1,168 937 701 Inventory - total $ 21,191 $ 22,340 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. 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: June 30, 2024 December 31, 2023 (in thousands) Beginning balance $ 4,004 $ 120 Accruals — 3,965 Write-offs — ( 81 ) Ending balance $ 4,004 $ 4,004 9 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 $ 11.4 million and $ 11.5 million on its condensed consolidated balance sheet as of June 30, 2024 and December 31, 2023, respectively. 5. Rental Equipment Our rental equipment and associated accumulated depreciation as of June 30, 2024 and December 31, 2023, respectively, consisted of the following: June 30, 2024 December 31, 2023 (in thousands) Compressor units $ 544,397 $ 514,527 Work-in-process 48,566 50,867 Rental equipment 592,963 565,394 Accumulated depreciation ( 204,632 ) ( 191,745 ) Rental equipment, net of accumulated depreciation $ 388,331 $ 373,649 We evaluated our rental equipment for potential material impairment as of June 30, 2024, and determined that an immaterial impairm ent of less than $ 0.1 million existed as of that date. 6. Long-term Debt Our long-term debt consists of the following: June 30, 2024 December 31, 2023 (in thousands) Total long-term debt $ 163,000 $ 164,000 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. On December 12, 2022, we entered into a First Amendment to the Credit Agreement (the "First Amendment") to increase the maximum commitment to $ 30 million. 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 Credit Agreement was May 11, 2026. The obligations under the Credit Agreement were 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. On February 28, 2023, we replaced our prior credit agreement by entering into a five-year senior secured revolving credit agreement (“Amended and Restated Credit Agreement”) with the Lender, as administrative agent, 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 10 compressor equipment. In connection with the amendment we agreed to pay fees of $ 2.0 million (representing fees equal to 1.39 % of the $ 145 million increase in the commitment) and reimburse the lenders for their expenses. On November 14, 2023, the Company entered into a First Amendment to the Amended and Restated Credit Agreement (the "Amendment") with the Lender, as administrative agent and certain other lenders to (i) increase the lender commitment from $ 175 million to $ 225 million, and (ii) to add First-Citizens Bank & Trust Company as a new lender to the facility. In connection with the Amendment, we agreed to pay fees of $ 0.6 million (representing fees equal to 1.125 % of the $ 50 million increase in the commitment) and reimburse the lenders for their expenses. On June 6, 2024, the Company entered into a Second Amendment to the Amended and Restated Credit Agreement (the "Second Amendment") with the Lender and certain other lenders primarily to (i) increase the aggregate lender commitment from $ 225 million to $ 300 million, (ii) revise the leverage ratio covenant (as more fully describe below) and (iii) to add Zions Bancorporation, N.A. (dba Amegy Bank) as a new lender to under the facility. The Company also agreed to fees of $ 0.9 million (representing 1.125 % of the $ 75 million increase in the commitment) and reimburse the lenders for their expenses. On June 25, 2024, the Company entered into a Third Amendment to the Amended and Restated Credit Agreement (the "Third Amendment") with the Lender, as administrative agent and the lenders thereto to increase the potential aggregate commitment of the existing credit facility from $ 300 million to $ 350 million. Under the Third Amendment, the Company has a right to request from the Lender, on an uncommitted basis, an increase of up to $ 50 million on the aggregate commitment; provided, however, the aggregate commitment amount is not permitted to exceed $ 350 million. We also agreed to reimburse the lenders for their expenses. As of June 30, 2024, we were in compliance with all financial covenants in our Amended and Restated Credit Agreement. As of June 30, 2024, we had approximately $ 163 million outstanding under our Amended and Restated Credit Agreement with a weighted average interest rate of 8.93 %. At June 30, 2024, we had approximately $ 119.7 million available for borrowing under the Amended and Restated Credit Agreement, subject to borrowing base determination. 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 this 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 of cost (excluding any costs for capitalized interest or other noncash 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 material deviations in the collateral are discovered in future audits of the collateral. 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 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 the 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 in the Amended and Restated Credit Agreement that require us to maintain (i) a leverage ratio, as defined, lesser than or equal to (a) 3.50 to 1.00 as of the last day of each fiscal quarter ending on or prior to December 31, 2024, (b) 3.75 to 1.00 for the fiscal quarters ending on March 31, 2025 and June 30, 11 2025, (c) 3.50 to 1.00 for the fiscal quarters ending September 30, 2025, December 31, 2025 and March 31, 2026 and (d) 3.25 to 1.00 for the fiscal quarter ending June 30, 2026 and for 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. As of June 30, 2024, the Company is in compliance with these covenants. 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 liens. Obligations outstanding under the Amended and Restated Credit Agreement may be accelerated upon the occurrence of an event of default. . 7. Stock-Based and Other Long-Term Incentive Compensation Stock Options A summary of all option activity as of December 31, 2023, and changes during the six months ended June 30, 2024 is presented below: Number of Shares Underlying Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Aggregate Intrinsic Value (in thousands) Outstanding, December 31, 2023 129,751 $ 20.59 4.10 $ 274 Granted 44,000 $ 23.10 12.46 $ — Cancelled / Forfeited ( 667 ) $ 10.58 — $ 3 Expired ( 29,667 ) $ 30.41 — $ — Outstanding, June 30, 2024 143,417 19.37 6.30 $ 476 Exercisable, June 30, 2024 77,584 $ 19.73 3.81 $ 268 The following table summarizes information about our stock options outstanding at June 30, 2024: 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 51,000 7.76 $ 10.77 29,167 $ 10.93 $ 18.01 - 26.00 72,667 6.27 $ 23.02 28,667 $ 22.90 $ 26.01 - 30.00 19,750 2.63 $ 28.15 19,750 $ 28.15 143,417 6.30 $ 19.37 77,584 $ 19.73 12 The following table summarizes changes in our unvested stock options for the six months ended June 30, 2024: Unvested Stock Options: Shares Weighted Average Grant Date Fair Value Per Share Unvested at December 31, 2023 24,335 $ 5.45 Granted 44,000 $ 12.46 Vested, outstanding shares ( 2,502 ) $ 6.57 Cancelled/Forfeited — $ — Unvested at June 30, 2024 65,833 $ 10.09 As of June 30, 2024, there was $ 0.4 million of unrecognized compensation cost related to unvested options. For the six months and three months ended June 30, 2024, there was less than $ 0.1 million of compensation expense for stock options, respectively. For the six months and three months ended June 30, 2023, there was less than $ 0.1 million of compensation expense for stock options. Restricted Shares/Units and Performance Share Units The following summarizes grants made of equity awards under our 2019 Equity Incentive Plan, as amended, on the dates indicated: • On April 25, 2023, the Compensation Committee awarded 27,840 shares of restricted stock units to James R. Hazlett, 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 Stephen. Taylor, 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 ("RSU"). These RSUs vest one year from the date of grant. With respect to the 9,470 share RSU award received by Justin Jacobs, at the time of grant, he was an employee of Mill Road Capital Management, LLC (“Mill Road”), and was serving on our Board pursuant to a right of appointment held by Mill Road in connection with a Cooperation Agreement between Mill Road and us. Pursuant to a pre-existing contractual obligation, Mill Road has the right to receive the economic benefit of the shares upon vesting of this RSU. On January 29, 2024, Mr. Jacobs terminated his employment with Mill Road and on February 12, 2024, he began employment as our permanent Chief Executive Officer. As a result, since he no longer qualified as an independent member of our Board, Mr. Jacobs relinquished the vesting of 2,252 shares representing the pro-rata number of shares allocable under the award since the beginning his employment in February. Thus, these shares have not been issued and remain in our 2019 Plan for future award grants. In connection with the contractual obligation noted above, 6,856 of the vested shares are in the process of being transferred by Mr. Jacobs to Mill Road for no consideration, and Mr. Jacobs continues to own 362 of the vested shares relating the period between his termination of employment with Mill Road and employment as our CEO. • On June 30, 2023, Mr. Taylor, in connection with his agreement to continue as our Interim Chief Executive Officer while we finalized our permanent CEO search, was granted RSUs for 10,101 shares of common stock that vested on June 30, 2024. In addition, Mr. Taylor was also issued 10,101 shares of common stock pursuant to his Retirement Agreement. • On October 8, 2023, the Compensation Committee awarded 6,361 restricted stock units to Brian Tucker, our Chief Operating Officer. These units will vest ratably over three years beginning on October 9, 2024. • On October 26, 2023, the compensation committee awarded 4,623 restricted stock units to Georganne Hodges upon her appointment as an independent director. These units vest one year from the date of the grant. • On January 29, 2024, the compensation committee awarded Mr. Jacobs, our Chief Executive Officer, 31,382 restricted stock units and two performance share unit ("PSU") awards, one for 6,494 shares representing a signing bonus and another for 31,382 shares representing an award for 2024 (pro-rated). The restricted stock units vest over three years in equal tranches beginning on the one-year anniversary of the grant date. 13 • On March 4, 2024, the compensation committee awarded Mr. Tucker our Chief Operating Officer 11,293 restricted stock units and 11,293 performance share units. These restricted stock units vest over three years in equal tranches beginning on the one-year anniversary of the grant date. • In addition on March 14, 2024, the compensation committee awarded Mr. Hazlett, our Chief Technical Officer, 21,984 restricted stock units. These restricted stock units vest over three years in equal tranches beginning on the one-year anniversary of the grant date. In connection with Mr. Hazlett's recent retirement on August 1, 2024, we adjusted the vesting terms of the RSUs to correspond with the term of his post-retirement consulting agreement. • On June 13, 2024, the Compensation Committee awarded each of our four independent Board members 5,620 RSUs. These RSUs vest 1 year from the date of grant. In connection with the performance share unit awards granted to Messrs. Jacobs and Tucker set forth above, potential payout for the PSU award is based upon performance for a three-year period ending December 31, 2026 measured against relative total shareholder return (“TSR”) compared to a peer group as established by the Compensation Committee. The PSU award payout ranges from zero (if the Company ranks below the 30th percentile) and up to 200 % for Mr. Jacobs and Mr. Tucker, the CEO and the Chief Operating Officer, respectively, (if the Company ranks first) based upon the Company’s relative TSR performance ranking (subject to certain caps based on absolute TSR). Total compensation expense related to these and previously granted restricted stock awards was $ 0.4 million and $ 1.6 million for the six months ended June 30, 2024, and 2023, respectively. Total compensation expense related to these and previously granted restricted stock awards was $ 0.2 million and $ 1.1 million for the three months ended June 30, 2024 and 2023, respectively. A summary of all restricted stock/units outstanding as of December 31, 2023 and activity during the six months ended June 30, 2024 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, 2023 133,898 $ 10.66 1.57 $ 1,813 Granted 83,294 $ 17.58 $ 1,464 Vested ( 52,505 ) $ 10.26 $ 1,149 Canceled/Forfeited ( 21,147 ) $ 11.12 $ 235 Outstanding, June 30, 2024 143,540 $ 14.82 5.13 $ 2,888 14 8. Earnings per Share The following table reconciles the numerators and denominators of the basic and diluted earnings per share computation : Three months ended Six months ended June 30, June 30, 2024 2023 2024 2023 (in thousands, except per share data) Numerator: Net income $ 4,250 $ 504 $ 9,348 $ 874 Denominator for earnings per basic common share: Weighted average common shares outstanding 12,384 12,292 12,392 12,253 Denominator for earnings per diluted common share: Weighted average common shares outstanding 12,384 12,292 12,392 12,253 Dilutive effect of stock options and restricted stock/units 99 102 92 121 Diluted weighted average shares 12,483 12,394 12,484 12,374 Earnings per common share: Basic $ 0.34 $ 0.04 $ 0.75 $ 0.07 Diluted $ 0.34 $ 0.04 $ 0.75 $ 0.07 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 relating to insurable risks. 10. Subsequent Events In accordance with ASC 855 - Subsequent Events - the Company has evaluated all events subsequent to the balance sheet date as of June 30, 2024 through the date this report was issued and believes nothing is required to be reported thereunder. 15