Natural Gas Services Group
Annual Report 2016

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2016or[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________________________to__________________________Commission file number: 1-31398NATURAL GAS SERVICES GROUP, INC.(Exact Name of Registrant as Specified in its Charter)Colorado 75-2811855(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)508 W. Wall St. Suite 550, Midland, Texas 79701(Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (432) 262-2700 Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, $.01 par value New York Stock ExchangeSecurities registered pursuant to section 12(g) of the Act: None.Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No þIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o No þIndicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.Yes þ No o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K.Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):Large Accelerated Filer ¨ Accelerated Filer þ Non-Accelerated Filer ¨ Smaller Reporting Company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No þThe aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2016 was approximately$292,624,650 based on the closing price of the common stock on that date on the New York Stock Exchange.At March 3, 2017, there were 12,907,777 shares of the Registrant's common stock outstanding.Documents Incorporated by ReferenceCertain information called for in Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference to the registrant’s definitive proxy statement for theannual meeting of shareholders to be held on June 15, 2017.FORM 10-KNATURAL GAS SERVICES GROUP, INC.TABLE OF CONTENTS Item No. Page PART IItem 1.Business1 Item 1A.Risk Factors9 Item 1B.Unresolved Staff Comments16 Item 2.Properties17 Item 3.Legal Proceedings17 Item 4.Mine Safety Disclosures17 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities18 Item 6.Selected Financial Data19 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations23 Item 7A.Quantitative and Qualitative Disclosures About Market Risk34 Item 8.Financial Statements and Supplementary Data34 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure34 Item 9A.Controls and Procedures34 Item 9B.Other Information36 PART III Item 10.Directors, Executive Officers and Corporate Governance37 Item 11.Executive Compensation37 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters37 Item 13.Certain Relationships, and Related Transactions, and Director Independence37 Item 14.Principal Accounting Fees and Services37 PART IV Item 15.Exhibits and Financial Statements38 Item 16.Form 10-K Summary39iSPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934, as amended, and information pertaining to us, our industry and the oil and natural gas industry thatis based on the beliefs of our management, as well as assumptions made by and information currently available to our management. All statements, otherthan statements of historical facts contained in this Annual Report on Form 10-K, including statements regarding our future financial position, growthstrategy, budgets, projected costs, plans and objectives of management for future operations, are forward-looking statements. We use the words “may,”“will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “intend,” “plan,” “budget” and other similar words to identify forward-lookingstatements. You should read statements that contain these words carefully and should not place undue reliance on these statements because they discussfuture expectations, contain projections of results of operations or of our financial condition and/or state other “forward-looking” information. We do notundertake any obligation to update or revise publicly any forward-looking statements. Although we believe our expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations or assumptions will prove to have beencorrect. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, but arenot limited to, the following factors and the other factors described in this Annual Report on Form 10-K under the caption “Risk Factors”:•conditions in the oil and natural gas industry, including the supply and demand for natural gas and wide fluctuations and possible prolongeddepression in the prices of oil and natural gas;•economic challenges presently faced by our customers in the oil and natural gas business that, in turn, could adversely affect our sales, rentals andcollectability of our accounts receivable;•regulation or prohibition of new well completion techniques;•competition among the various providers of compression services and products;•changes in safety, health and environmental regulations;•changes in economic or political conditions in the markets in which we operate;•failure of our customers to continue to rent equipment after expiration of the primary rental term;•the inherent risks associated with our operations, such as equipment defects, malfunctions and natural disasters;•our inability to comply with covenants in our debt agreements and the decreased financial flexibility associated with our debt;•future capital requirements and availability of financing;•fabrication and manufacturing costs;•general economic conditions;•acts of terrorism; and•fluctuations in interest rates.We believe that it is important to communicate our expectations of future performance to our investors. However, events may occur in the futurethat we are unable to accurately predict or that we are unable to control. When considering our forward-looking statements, you should keep in mind the riskfactors and other cautionary statements in this Annual Report on Form 10-K. iiPART IITEM 1. BUSINESSUnless the context otherwise requires, references in this Annual Report on Form 10-K to “Natural Gas Services Group,” the “Company”, “we,”“us,” “our” or “ours” refer to Natural Gas Services Group, Inc. Certain specialized terms used in describing our natural gas compressor business are defined in"Glossary of Industry Terms" on page 8.The CompanyWe are a leading provider of small to medium horsepower compression equipment to the natural gas industry. We focus primarily on the non-conventional natural gas and oil production business in the United States (such as coal bed methane, gas shale, tight gas and oil shales), which, according todata from the Energy Information Administration ("EIA"), is the single largest and fastest growing segment of U.S. hydrocarbon production. We manufacture,fabricate and rent natural gas compressors that enhance the production of natural gas wells and provide maintenance services for those compressors. Inaddition, we sell custom fabricated natural gas compressors to meet customer specifications dictated by well pressures, production characteristics andparticular applications. We also manufacture and sell flare systems for oil and gas plant and production facilities.The vast majority of our rental operations are in non-conventional natural gas and oil regions, which typically have lower initial reservoirpressures, lower productions pressures and/or faster well decline rates. These areas usually require compression to be installed sooner and with greaterfrequency.Natural gas compressors are used in a number of applications for the production and enhancement of gas wells and in gas transportation lines andprocessing plants. Compression equipment is often required to boost a well’s production to economically viable levels and enable gas to continue to flow inthe pipeline to its destination.Our revenue decreased to $71.7 million from $95.9 million for the year ended December 31, 2016 compared to the year ended December 31, 2015.Net income for the year ended December 31, 2016 decreased to $6.5 million ($0.50 per diluted share), as compared to $10.1 million ($0.79 per diluted share)for the year ended December 31, 2015.At December 31, 2016, current assets were $99.8 million, which included $64.1 million of cash and cash equivalents. Current liabilities were $6.5million, and the amount outstanding on our line of credit at December 31, 2016 was $417,000. Our stockholders' equity as of December 31, 2016 was $233.0million.See "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations" for further financial information.We were incorporated in Colorado on December 17, 1998 and maintain our principal offices at 508 W. Wall St., Suite 550, Midland, Texas79701 and our telephone number is (432) 262-2700. Overview and OutlookThe market for compression equipment and services is substantially dependent on the condition of the natural gas and oil industry. In particular,the willingness of natural gas and oil companies to make capital expenditures on exploration, drilling and production of natural gas and oil in the U.S. Thelevel of activity and capital expenditures has generally been dependent upon the prevailing view of future gas and oil prices, which are influenced bynumerous factors, including the level of supply or demand for natural gas and oil and the impact on price of natural gas and oil, worldwide economic activity,interest rates and the cost of capital, environmental regulation, seasonal fluctuations and weather patterns. Natural gas and oil prices and the level ofproduction activity have historically been characterized by significant volatility. The reduction in capital expenditures and production in the natural gas and oil industry, combined with problems in the global economy, led to adownturn in the demand for our products and services in 2009 and 2010. In 2011, a slow recovery began which produced an improvement in the utilizationrate on our rental fleet and stability in our sales backlog. In 2012, we saw growth in demand for our products and that growth continued in 2013 and 2014.Towards the end of 2014 oil prices began a steep decline which resulted in capital budget cuts for many energy companies in 2015 and most of 2016. Thesebudget reductions translated to fewer well completions and a softening of near-term demand for compression. In the latter half of 2016, we began to seeincreased activity and we anticipate a continuation of increased activity in E&P companies in 2017. See “Item 1 -- Business – Our Operating Units” and“Business – Backlog” for more information. 1According to the U.S. Energy Information Administration (“EIA”), total consumption of oil and natural gas in the United States increased 0.3% and0.6%, respectively for the twelve months ended November 2016 compared to the same period 2015. This follows a 1.6% and 1.0% increase in oilcompensation and a 3.2% and 2.8% increase in natural gas compensation in the periods from 2014 to 2015 and 2013 to 2014, respectively. EIA expects totaloil consumption in the U.S. to slightly increase with a slight decrease in natural gas consumption in the U.S in 2017. While we anticipate long-term increaseddemand for oil and natural gas, we expect our business to experience pressure on revenues for 2017 due to the overall uncertainty in the combined oil and gasmarket and the delayed impact of an upturn on the compression business.Long-Term Industry TrendsNatural gas prices historically have been volatile, and this volatility is expected to continue. Oil and natural gas are linked commodities withmany drilling projects producing both products. The sustained oil price collapse that began towards the end of 2014 has made some of those drilling projectsuneconomic. Uncertainty continues to exist as to the direction of future natural gas and near-term crude oil price and oil trends are down in the United Statesand worldwide. Over the last several years gas prices have not shown the resiliency that crude oil prices have and now crude prices are also down sharply. We believe that natural gas is a more environmentally friendly source of energy which is likely to result in increases in demand over time. Being primarily aprovider of services and equipment to natural gas producers, we are impacted by changes in natural gas, crude oil and condensate prices. Longer term naturalgas prices will be determined by the supply and demand for natural gas as well as the prices of competing fuels, such as oil and coal. Prices for oil and naturalgas will also be determined by the energy strategies of the world's top producing companies.We believe part of the growth of the rental compression capacity in the U.S. market has been driven by the trend toward outsourcing by energyproducers and processors. Renting does not require the purchaser to make large capital expenditures for new equipment or to obtain financing through alending institution. This allows the customer’s capital to be used for additional exploration and production of natural gas and oil. Balance sheet pressureassociated with low energy prices could make renting an even more likely option, although overall producing activity could slow down.Notwithstanding the downturn in natural gas prices, we believe that there will continue to be a growing demand for natural gas, in the long-term. We expect long-term demand for our products and services will increase as prices recover as a result of: •the increasing demand for energy, both domestically and abroad;•continued non-conventional gas exploration and production;•environmental considerations which provide strong incentives to use natural gas in place of other carbon fuels;•the cost savings of using natural gas rather than electricity for heat generation;•implementation of international environmental and conservation laws;•the aging of producing natural gas reserves worldwide;•the extensive supply of undeveloped non-conventional natural gas reserves;•the increased drilling for shale oil and its associated gas production; and•the use of our equipment for gas lift on oil wells.Our Operating UnitsWe identify our operating units based upon major revenue sources as Gas Compressor Rental, Engineered Equipment Sales, Service andMaintenance and Corporate. Gas Compressor Rental. Our rental business is primarily focused on non-conventional natural gas and oil production. We provide rental of smallto medium horsepower compression equipment to customers under contracts typically having minimum initial terms of six to twenty fourmonths. Historically, in our experience, most customers retain the equipment beyond the expiration of the initial term. At December 31, 2016, 22% of ourrented compressors were under a lease term while the remainder were leased on a month-to-month basis. By outsourcing their compression needs, we believeour customers are able to increase their revenues by producing a higher volume of natural gas due to greater equipment run-time. Outsourcing also allows2our customers to reduce their compressor downtime, operating and maintenance costs and capital investments and more efficiently meet their changingcompression needs. We maintain and service compressor equipment rented to our customers. The size, type and geographic diversity of our rental fleet enables us to provide our customers with a range of compression units that can serve awide variety of applications, and to select the correct equipment for the job, rather than the customer trying to fit the job to its own equipment. We base ourgas compressor rental rates on several factors, including the cost and size of the equipment, the type and complexity of service desired by the customer, thelength of contract and the inclusion of any other services desired, such as installation, transportation and daily operation.As of December 31, 2016, we had 2,530 natural gas compressors in our rental fleet totaling 362,408 horsepower, as compared to 2,622 natural gascompressors totaling 372,482 horsepower at December 31, 2015. As of December 31, 2016, we had 1,298 natural gas compressors totaling 186,328horsepower rented to 79 customers, compared to 1,818 natural gas compressors totaling 256,204 horsepower rented to 84 customers at December 31, 2015. Asof December 31, 2016, the utilization rate of our rental fleet was 51.3% compared to 69.3% as of December 31, 2015.Engineered Equipment Sales. This operating unit includes the following components:•Compressor fabrication. Fabrication involves the assembly of compressor components manufactured by us or other vendors into compressor unitsthat are ready for rental or sale. In addition to fabricating compressors for our rental fleet, we engineer and fabricate natural gas compressors for saleto customers to meet their specifications based on well pressure, production characteristics and the particular applications for which compression issought.•Compressor manufacturing. We design and manufacture our own proprietary line of reciprocating compressor frames, cylinders and parts known asour “CiP”, or Cylinder-in-Plane, product line. We use the finished components to fabricate compressor units for our rental fleet or for sale tocustomers. We also sell finished components to other fabricators.•Flare fabrication. We design, fabricate, sell, install and service flare stacks and related ignition and control devices for the onshore and offshoreincineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. Applications for thisequipment are often environmentally and regulatory driven, and we believe we are a leading supplier to this market.•Parts sales and compressor rebuilds. To provide customer support for our compressor and flare sales businesses, we stock varying levels ofreplacement parts at our Midland, Texas facility and at field service locations. We also provide an exchange and rebuild program for screwcompressors and maintain an inventory of new and used compressors to facilitate this part of our business.Service and Maintenance. We service and maintain compressors owned by our customers on an “as needed” basis. Natural gas compressors requireroutine maintenance and periodic refurbishing to prolong their useful life. Routine maintenance includes physical and visual inspections and otherparametric checks that indicate a change in the condition of the compressors. We perform wear-particle analysis on all packages and perform overhauls on acondition-based interval or a time-based schedule. Based on our past experience, these maintenance procedures maximize component life and unitavailability and minimize downtime.Business StrategyDuring the downturn in the economy beginning in late 2014, our strategy has been to reduce expenses in line with the lower anticipated businessactivity, and fabricate compressor equipment only in direct response to market requirements. See “Item 7 – Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Our Performance Trends and Outlook" for more information. Our long-term intentions to grow our revenueand profitability are based on the following business strategies:•Expand rental fleet. We intend to prudently increase the size of our rental fleet by fabricating compressor units in numbers that correspond to thegrowth of the market and in relation to market share gains we may experience. We believe our growth will continue to be primarily driven throughour placement of small to medium horsepower wellhead natural gas compressors for non-conventional natural gas and oil production.•Geographic expansion. We will continue to consolidate our operations in existing areas, as well as pursue focused expansion into new geographicregions as opportunities are identified. We presently provide our products and services3to a customer base of oil and natural gas exploration and production companies operating in Colorado, Kansas, Michigan, New Mexico, NorthDakota, Ohio, Oklahoma, Pennsylvania, Texas, Utah, West Virginia and Wyoming. •Expand our ‘secondary’ product lines. In addition to our primary rental and engineered product business lines, we will emphasize the growth ofour other products, e.g., flares, CiP compressor products and general compressor maintenance and repair services.•Selectively pursue acquisitions. We will continue to evaluate potential acquisitions, joint ventures and other opportunities that could provide uswith access to new markets or enhance our current market position.Competitive StrengthsWe believe our competitive strengths include:•Superior customer service. Our emphasis on the small to medium horsepower markets has enabled us to effectively meet the evolving needs of ourcustomers. We believe these markets have been under-serviced by our larger competitors which, coupled with our personalized services and in-depth knowledge of our customers’ operating needs and growth plans, have allowed us to enhance our relationships with existing customers as wellas attract new customers. The size, type and geographic diversity of our rental fleet enable us to provide customers with a range of compression unitsthat can serve a wide variety of applications. We are able to select the correct equipment for the job, rather than the customer trying to fit itsapplication to our equipment.•Diversified product line. Our compressors are available as high and low pressure rotary screw and reciprocating packages. They are designed tomeet a number of applications, including wellhead production, natural gas gathering, natural gas transmission, vapor recovery and gas and plungerlift. In addition, our compressors can be built to handle a variety of gas mixtures, including air, nitrogen, carbon dioxide, hydrogen sulfide andhydrocarbon gases. A diversified compression product line helps us compete by being able to satisfy widely varying pressure, volume andproduction conditions that customers encounter. Our "Flare King" product line provides flares and gas incineration devices to the industry forproduction maintenance and environmental compliance.•Purpose-built rental compressors. Our rental compressor packages have been designed and built to address the primary requirements of ourcustomers in the producing regions in which we operate. Our units are compact in design and are easy, quick and inexpensive to move, install andstart-up. Our control systems are technically advanced and allow the operator to start and stop our units remotely and/or in accordance with wellconditions. We believe our rental fleet is also one of the newest.•Experienced management team. On average, each of our executive and operating team members has over 30 years of oilfield services industryexperience. We believe our management team has successfully demonstrated its ability to grow our business during times of expansion and tomanage through downturns.•Broad geographic presence. We presently provide our products and services to a customer base of oil and natural gas exploration and productioncompanies operating in Colorado, Kansas, Michigan, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, Texas, Utah, West Virginia andWyoming. Our footprint allows us to service many of the natural gas producing regions in the United States. We believe that operating in diversegeographic regions allows us better utilization of our compressors, minimal incremental expenses, operating synergies, volume-based purchasing,leveraged inventories and cross-trained personnel. We also sell engineered compression products to international customers.•Long-standing customer relationships. We have developed long-standing relationships providing compression equipment to many major andindependent oil and natural gas companies. Our customers generally continue to rent our compressors after the expiration of the initial terms of ourrental agreements, which we believe reflects their satisfaction with the reliability and performance of our services and products.Major Customers Sales and rental income to Devon Energy Production, Inc. ("Devon") and Occidental Permian, LTD. ("Oxy") for the year ended December 31, 2016amounted to 21% and 19% of our revenue, respectively. Sales and rental income to Devon and Oxy for the year ended December 31, 2015 amounted to 21%and 10% of our revenue, respectively. Sales and rental income to Devon and EOG Resources Inc. ("EOG") for the year ended December 31, 2014 amounted to18% and 15% of our revenue. No other single customer accounted for more than 10% of our revenues in 2016, 2015 or 2014. 4 Oxy, APR Energy, LLC and BP America Inc. amounted to 15%, 15% and 14% of our accounts receivable as of December 31, 2016. Oxy and Devonamounted to 25% and 10% of our accounts receivable as of December 31, 2015. No other customers amounted to more than 10% of our accounts receivableas of December 31, 2016 and 2015. The loss of any of the above customers could have a material adverse effect on our business, financial condition, results ofoperations and cash flows, depending upon the demand for our compressors at the time of such loss and our ability to attract new customers.Sales and MarketingOur sales force pursues the rental and sales market for compressors and flare equipment and other services in their respectiveterritories. Additionally, our personnel coordinate with each other to develop relationships with customers who operate in multiple regions. Our sales andmarketing strategy is focused on communication with current customers and potential customers through frequent direct contact, technical assistance, printliterature, direct mail and referrals. Our sales and marketing personnel coordinate with our operations personnel in order to promptly respond to and addresscustomer needs. Our overall sales and marketing efforts concentrate on demonstrating our commitment to enhancing the customer’s cash flow throughenhanced product design, fabrication, manufacturing, installation, customer service and support.CompetitionWe have a number of competitors in the natural gas compression segment, some of which have greater financial resources. We believe that wecompete effectively on the basis of price, customer service, including the ability to place personnel in remote locations, flexibility in meeting customerneeds, and quality and reliability of our compressors and related services.Compressor industry participants can achieve significant advantages through increased size and geographic breadth. As the number of rentalcompressors in our rental fleet increases, the number of sales, support, and maintenance personnel required and the minimum level of inventory do notincrease proportionately.BacklogAs of December 31, 2016, we had a sales backlog of approximately $6.0 million compared to $4.1 million as of December 31, 2015 . We expect tofulfill the backlog in the first half of 2017. Sales backlog consists of firm customer orders for which a purchase or work order has been received, satisfactorycredit or a financing arrangement exists, and delivery is scheduled. In addition, the major components of our compressors are acquired from suppliersthrough periodic purchase orders that in many instances require three or four months of lead time prior to delivery of the order.EmployeesAs of December 31, 2016, we had 217 total employees, none of which are represented by a labor union. We believe we have good relations withour employees.Liability and Other Insurance CoverageOur equipment and services are provided to customers who are subject to hazards inherent in the oil and natural gas industry, such as blowouts,explosions, craterings, fires, and oil spills. We maintain liability insurance that we believe is customary in the industry and which includes environmentalcleanup, but excludes product warranty insurance because the majority of components on our compressor unit are covered by the manufacturers. We alsomaintain insurance with respect to our facilities. Based on our historical experience, we believe that our insurance coverage is adequate. However, there is arisk that our insurance may not be sufficient to cover any particular loss or that insurance may not cover all losses. In addition, insurance rates have in thepast been subject to wide fluctuation, and changes in coverage could result in less coverage, increases in cost or higher deductibles and retentions.Government RegulationAll of our operations and facilities are subject to numerous federal, state, foreign and local laws, rules and regulations related to various aspects ofour business, including containment and disposal of hazardous materials, oilfield waste, other waste materials and acids.5To date, we have not been required to expend significant resources in order to satisfy applicable environmental laws and regulations. We do notanticipate any material capital expenditures for environmental control facilities or extraordinary expenditures to comply with environmental rules andregulations in the foreseeable future. However, compliance costs under existing laws or under any new requirements could become material and we couldincur liabilities for noncompliance.Our business is generally affected by political developments and by federal, state, foreign and local laws and regulations, which relate to the oiland natural gas industry. The adoption of laws and regulations affecting the oil and natural gas industry for economic, environmental and other policyreasons could increase our costs and could have an adverse effect on our operations. The state and federal environmental laws and regulations that currentlyapply to our operations could become more stringent in the future.We have utilized operating and disposal practices that were or are currently standard in the industry. However, materials such as solvents, thinner,waste paint, waste oil, wash down waters and sandblast material may have been disposed of or released in or under properties currently or formerly owned oroperated by us or our predecessors. In addition, some of these properties have been operated by third parties over whom we have no control either as to suchentities' treatment of materials or the manner in which such materials may have been disposed of or released.The federal Comprehensive Environmental Response Compensation and Liability Act of 1980, commonly known as CERCLA, and comparablestate statutes impose strict liability on:•owners and operators of sites, and•persons who disposed of or arranged for the disposal of "hazardous substances" found at sites.Waste Management and Disposal The federal Resource Conservation and Recovery Act ("RCRA") and analogous state laws and their implementing regulations govern thegeneration, transportation, treatment, storage and disposal of hazardous and non-hazardous solid wastes. During the course of our operations, we generatewastes (including, but not limited to, used oil, antifreeze, filters, paints, solvents and abrasive blasting materials) in quantities regulated under RCRA. TheEPA and various state agencies have limited the approved methods of disposal for these types of wastes. CERCLA and analogous state laws and theirimplementing regulations impose strict, and under certain conditions, joint and several liability without regard to fault or the legality of the original conducton classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include current andpast owners and operators of the facility or disposal site where the release occurred and any company that transported, disposed of, or arranged for thetransport or disposal of the hazardous substances released at the site. Under CERCLA, such persons may be subject to joint and several liability for the costsof cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain healthstudies. In addition, where contamination may be present, it is not uncommon for neighboring landowners and other third parties to file claims for personalinjury, property damage and recovery of response costs allegedly caused by hazardous substances or other pollutants released into the environment. We currently own or lease, and in the past have owned or leased, a number of properties that have been used in support of our operations for anumber of years. Although we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons, hazardoussubstances, or other regulated wastes may have been disposed of or released on or under the properties owned or leased by us or on or under other locationswhere such materials have been taken for disposal by companies sub-contracted by us. In addition, some of these properties may have been previously ownedor operated by third parties whose treatment and disposal or release of hydrocarbons, hazardous substances or other regulated wastes was not under ourcontrol. These properties and the materials released or disposed thereon may be subject to CERCLA, RCRA and analogous state laws. Under such laws, wecould be required to remove or remediate historical property contamination, or to perform certain operations to prevent future contamination. We are notcurrently under any order requiring that we undertake or pay for any cleanup activities. However, we cannot provide any assurance that we will not receiveany such order in the future. The Clean Water Act ("CWA") and the Oil Pollution Act of 1990 and implementing regulations govern:•the prevention of discharges, including oil and produced water spills, and•liability for drainage into waters.6The CWA and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oiland other substances, into waters of the United States. The discharge of pollutants into regulated waters and wetlands is prohibited, except in accordance withthe terms of a permit issued by the EPA or an analogous state agency. The CWA also requires the development and implementation of spill prevention,control and countermeasures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon spill or leak at hydrocarbonfacilities. In addition, the CWA and analogous state laws require individual permits or coverage under general permits for discharges of storm water runofffrom certain types of facilities. Federal and state regulatory agencies can impose administrative, civil and criminal penalties as well as other enforcementmechanisms for non-compliance with discharge permits or other requirements of the CWA and analogous state laws and regulations. Our compressionoperations do not generate process wastewaters that are discharged to waters of the U.S. However, the operations of our customers may generate suchwastewaters subject to the CWA. While it is the responsibility of our customers to follow CWA regulations and obtain proper permits, violations of the CWAmay indirectly impact our operations in a negative manner.Air EmissionsOur operations are also subject to federal, state, and local regulations. The Clean Air Act and implementing regulations and comparable state lawsand regulations regulate emissions of air pollutants from various industrial sources and also impose various monitoring and reporting requirements, includingrequirements related to emissions from certain stationary engines, such as those on our compressor units. These laws and regulations impose limits on thelevels of various substances that may be emitted into the atmosphere from our compressor units and require us to meet more stringent air emission standardsand install new emission control equipment on all of our engines built after July 1, 2008.For instance, in 2010, the U.S. Environmental Protection Agency (“EPA”) published new regulations under the CAA to control emissions ofhazardous air pollutants from existing stationary reciprocal internal combustion engines. In 2012, the EPA proposed amendments to the final rule in responseto several petitions for reconsideration, which were finalized and became effective in 2013. The rule requires us to undertake certain expenditures andactivities, including purchasing and installing emissions control equipment on certain compressor engines and/or purchasing certified engines fromcomplaint manufacturers. In recent years, the EPA has lowered the National Ambient Air Quality Standard (“NAAQs”) for several air pollutants. For example, in 2013, the EPAlowered the annual standard for fine particulate matter from 15 to 12 micrograms per cubic meter. In 2015, the EPA published the final rule strengthening thestandards for ground level ozone, and the states are expected to establish revised attainment/non-attainment regions. State implementation of the revisedNAAQS could result in stricter permitting requirements, delay or prohibit our customers’ ability to obtain such permits, and result in increased expendituresfor pollution control equipment, which could negatively impact our customers’ operations by increasing the cost of additions to equipment, and negativelyimpact our business. In 2012, the EPA finalized rules that establish new air emission controls for oil and natural gas production and natural gas processing operations.Specifically, the EPA’s rule package included New Source Performance Standards to address emissions of sulfur dioxide and volatile organic compounds(“VOCs”) and a separate set of emission standards to address hazardous air pollutants frequently associated with oil and natural gas production andprocessing activities. The rules established specific new requirements regarding emissions from compressors and controllers at natural gas processing plants,dehydrators, storage tanks and other production equipment as well as the first federal air standards for natural gas wells that are hydraulically fractured. TheEPA has taken a number of steps to amend or expand on these regulations since 2012. For example, in June 2016, the EPA published New SourcePerformance Standards that require certain new, modified or reconstructed facilities in the oil and natural gas sector to reduce methane gas and VOCemissions. These new standards, if fully and finally enacted, will expand the 2012 regulations by using certain equipment-specific emissions controlpractices, requiring additional controls for pneumatic controllers and pumps, as well as compressors, and imposing leak detection and repair requirements fornatural gas compressors.We believe that our existing environmental control procedures are adequate and that we are in substantial compliance with environmental lawsand regulations, and the phasing in of emission controls and other known regulatory requirements should not have a material adverse affect on our financialcondition or operational results. However, it is possible that future developments, such as new or increasingly strict requirements and environmental lawsand enforcement policies there under, could lead to material costs of environmental compliance by us. While we may be able to pass on the additional costof complying with such laws to our customers, there can be no assurance that attempts to do so will be successful. Some risk of environmental liability andother costs are inherent in the nature of our business, however, and there can be no assurance that environmental costs will not rise. 7To the extent that new laws or other governmental actions restrict the energy industry or impose additional environmental protection requirementsthat result in increased costs to the oil and gas industry, we could be adversely affected. We cannot determine to what extent our future operations andearnings may be affected by new legislation, new regulations or changes in existing regulations.Occupational Safety and Health We are subject to the requirements of Occupational Safety and Health Administration ("OSHA") and comparable state statutes. These laws and theimplementing regulations strictly govern the protection of the health and safety of employees. The OSHA hazard communication standard, the EPAcommunity right-to-know regulations under Title III of CERCLA, and similar state statutes require that we maintain and/or disclose information abouthazardous materials used or produced in our operations. We believe that we are in compliance with these applicable requirements and with other comparablelaws. Patents, Trademarks and Other Intellectual PropertyWe believe that the success of our business depends more on the technical competence, creativity and marketing abilities of our employees than onany individual patent, trademark, or copyright. Nevertheless, as part of our ongoing research, development and manufacturing activities, we may seekpatents when appropriate on inventions concerning new products and product improvements. We do not own any unexpired patents. Although we continueto use technology that was previously covered by a patent and consider it useful in certain applications, we do not consider the expired patent to be materialto our business as a whole.Suppliers and Raw MaterialsFabrication of our rental compressors involves the purchase by us of engines, compressors, coolers and other components, and the assembly of thesecomponents on skids for delivery to customer locations. These major components of our compressors are acquired through periodic purchase orders placedwith third-party suppliers on an "as needed" basis, which typically requires a three to four month lead time with delivery dates scheduled to coincide with ourestimated production schedules. Although we do not have formal continuing supply contracts with any major supplier, we believe we have adequatealternative sources available. In the past, we have not experienced any sudden and dramatic increases in the prices of the major components for ourcompressors. However, the occurrence of such an event could have a material adverse effect on the results of our operations and financial condition,particularly if we are unable to increase our rental rates and sale prices proportionate to any such component price increases.Available InformationWe use our website as a channel of distribution for Company information. We make available free of charge on the Investor Relations section of ourwebsite ( www.ngsgi.com ) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K. We also make availablethrough our website other reports filed with or furnished to the SEC under the Securities Exchange Act of 1934, as amended, including our proxy statementsand reports filed by officers and directors under Section 16(a) of the Exchange Act, as well as our Code of Business Ethics and the charters to our variousCommittees of our Board of Directors. Paper copies of our filings are also available, without charge upon written request, at Natural Gas Services Group, Inc.,508 West Wall Street, Suite 550, Midland, Texas 79701. The information contained in our website is not part of this Report.Glossary of Industry Terms"CiP" - A branded, proprietary gas compressor product line designed, manufactured and packaged by the Company. The 'Cylinder in Plane' designresults in a compact and vibration-free compressor unit that particularly lends itself to unconventional wellhead applications, air compression andcompressed natural gas requirements."coal bed methane" – A natural gas generated during coal formation and provided from coal seams or adjacent sandstones."flare" – A tall stack equipped with burners used as a safety device at wellheads, refining facilities, gas processing plants, and chemical plants.Flares are used for the combustion and disposal of combustible gases. The gases are piped to a remote, usually elevated, location and burned in an open flamein the open air using a specially designed burner tip, auxiliary fuel, and steam or air. Combustible gases are flared most often due to emergency relief,overpressure, process upsets, startups, shutdowns,8and other operational safety reasons. Natural gas that is uneconomical for sale is also flared. Often natural gas is flared as a result of the unavailability of amethod for transporting such gas to markets."gas lift" – A production enhancement technique whereby natural gas is injected into an oil well to increase/improve the oil production."gas shale" – Fine grained rocks where the predominant gas storage mechanism is absorption and gas is stored in volumes that are potentiallyeconomic."oil shale" – Also referred to as tight oil, is petroleum that consists of light crude oil contained in petroleum-bearing formations of low-permeability, often shale or tight sandstone."reciprocating compressors" – A reciprocating compressor is a type of compressor which compresses vapor by using a piston in a cylinder and aback-and-forth motion."screw compressors" – A type of compressor used in low-pressure and vapor compression applications where two intermesh rotors create pockets ofcontinuously decreasing volume, in which the gas is compressed and its pressure is increased."tight gas" – A gas bearing sandstone or carbonate matrix (which may or may not contain natural fractures) which exhibits a low-permeability(tight) reservoir.ITEM 1A. RISK FACTORSYou should carefully consider the following risks associated with owning our common stock. Although the risks described below are the risksthat we believe are material, they are not the only risks relating to our industry, our business and our common stock. Additional risks and uncertainties,including those that we have not yet identified or that we currently believe are immaterial, may also adversely affect our business, financial condition orresults of operations.Risks Associated With Our IndustryAdverse macroeconomic and business conditions may significantly and negatively affect our results of operations.Economic conditions in the United States and abroad have, and will likely continue to, affect our revenue and profitability. The condition ofdomestic and global financial markets, continued low natural gas and oil prices, and the potential for disruption and illiquidity in the credit markets couldhave an adverse effect on our operating results and financial condition, and if sustained for an extended period, such adverse effects could becomesignificant. Uncertainty and turmoil in the credit markets may negatively impact the ability of our customers to finance purchases of our products andservices and could result in a decrease in, or cancellation of, orders included in our backlog or adversely affect the collectability of our receivables. If theavailability of credit to our customers is reduced, they may reduce their drilling and production expenditures, thereby decreasing demand for our productsand services, which could have a negative impact on our financial condition. A prolonged period of depressed prices for gas and oil would likely result indelays or cancellation of projects by our customers, reducing the demand for our products and services.Decreased oil and natural gas prices and oil and gas industry expenditure levels could adversely affect our revenue.Our revenue is derived primarily from expenditures in the oil and natural gas industry, which, in turn, are based on budgets to explore for, developand produce oil and natural gas. When these expenditures decline, our revenue will suffer. The industry’s willingness to explore for, develop and produceoil and natural gas depends largely upon the prevailing view of future oil and natural gas prices. Prices for oil and natural gas historically have been, and arelikely to continue to be, highly volatile. Many factors affect the supply and demand for oil and natural gas and, therefore, influence oil and natural gasprices, including:•the level of oil and natural gas production;•the level of oil and natural gas inventories;•domestic and worldwide demand for oil and natural gas;•the expected cost of developing new reserves;9•the cost of producing oil and natural gas;•the level of drilling and completions activity;•inclement weather;•domestic and worldwide economic activity;•regulatory and other federal and state requirements in the United States;•the ability of the Organization of Petroleum Exporting Countries and other large producers to set and maintain production levels and prices for oil;•political conditions in or affecting oil and natural gas producing countries;•terrorist activities in the United States and elsewhere;•the cost of developing alternate energy sources;•environmental regulation; and•tax policies.Depending on the market prices of oil and natural gas, companies exploring for oil and natural gas may cancel or curtail their drilling programs,thereby reducing demand for our equipment and services. Our rental contracts are generally short-term, and oil and natural gas companies tend to respondquickly to upward or downward changes in prices. Any reduction in drilling and production activities may materially erode both pricing and utilization ratesfor our equipment and services and adversely affects our financial results. As a result, we may suffer losses, be unable to make necessary capital expendituresand be unable to meet our financial obligations.The intense competition in our industry could result in reduced profitability and loss of market share for us.We compete with the oil and natural gas industry’s largest equipment and service providers who have greater name recognition than we do. Thesecompanies also have substantially greater financial resources, larger operations and greater budgets for marketing, research and development than wedo. They may be better able to compete because of their broader geographic dispersion and ability to take advantage of international opportunities, thegreater number of compressors in their fleet or their product and service diversity. As a result, we could lose customers and market share to thosecompetitors. These companies may also be better positioned than us to successfully endure downturns in the oil and natural gas industry.Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better prices,features, performance or other competitive characteristics than our products and services. Competitive pressures or other factors also may result in significantprice competition that could harm our revenue and our business. Additionally, we may face competition in our efforts to acquire other businesses.Our industry is highly cyclical, and our results of operations may be volatile.Our industry is highly cyclical, with periods of high demand and high pricing followed by periods of low demand and low pricing. Periods of lowdemand intensify the competition in the industry and often result in rental equipment being idle for long periods of time. We may be required to enter intolower rate rental contracts in response to market conditions and our rentals and sales revenue may decrease as a result of such conditions. Due to the short-term nature of most of our rental contracts, changes in market conditions can quickly affect our business. As a result of the cyclicality of our industry, ourresults of operations may be volatile in the future.Increased regulation or ban of current fracturing techniques could reduce demand for our compressors. Fracturing (frac) is a process that results in the creation of fractures in geological formations in order to stimulate production from oil and natural gaswells. Fracturing is also done to increase the rate and ultimate recovery of oil and natural gas. Hydraulic frac is the technique that has allowed domestic oiland natural gas exploration and production companies to produce massive shale deposits often referred to as unconventional plays. Concerns have beenraised over possible environmental damages related to fluids used in the frac process. While the FRAC (Fracturing Responsibility and Awareness ofChemicals) Act has been introduced on multiple occasions in Congress, as of March 1, 2017 the Act has yet to be adopted. The FRAC Act seeks to amend theSafe Drinking Water Act so that hydraulic fracturing would be regulated on a federal level. In some sates there are initiatives at the local level to regulate orban fracing activities.10A ban of hydraulic fracing would likely halt some projects, including unconventional projects, at least temporarily. Expanded regulations are likelyto introduce a period of uncertainty as companies determine ways to proceed. Any curtailment could result in a reduction of demand for our compressors,potentially affecting both sales and rentals of our units.We are subject to extensive environmental laws and regulations that could require us to take costly compliance actions that could harm our financialcondition.Our fabrication and maintenance operations are significantly affected by stringent and complex federal, state and local laws and regulationsgoverning the discharge of substances into the environment or otherwise relating to environmental protection. In these operations, we generate and managehazardous wastes such as solvents, thinner, waste paint, waste oil, wash down wastes, and sandblast material. We attempt to use generally accepted operatingand disposal practices and, with respect to acquisitions, will attempt to identify and assess whether there is any environmental risk before completing anacquisition. Based on the nature of the industry, however, hydrocarbons or other wastes may have been disposed of or released on or under properties ownedor leased by us or on or under other locations where such wastes have been taken for disposal. The waste on these properties may be subject to federal or stateenvironmental laws that could require us to remove the wastes or remediate sites where they have been released. We could be exposed to liability for cleanupcosts, natural resource and other damages as a result of our conduct or the conduct of, or conditions caused by, prior owners, lessees or other thirdparties. Environmental laws and regulations have changed in the past, and they are likely to change in the future. If current existing regulatory requirementsor enforcement policies change, we may be required to make significant unanticipated capital and operating expenditures.Any failure by us to comply with applicable environmental laws and regulations may result in governmental authorities taking actions against ourbusiness that could harm our operations and financial condition, including the:•issuance of administrative, civil and criminal penalties;•denial or revocation of permits or other authorizations;•reduction or cessation in operations; and•performance of site investigatory, remedial or other corrective actions.Risks Associated With Our CompanyAs of December 31, 2016, a majority of our compressor rentals were for terms of six months or less which, if terminated or not renewed, would adverselyimpact our revenue and our ability to recover our initial equipment costs.The length of our compressor rental agreements with our customers varies based on customer needs, equipment configurations and geographicarea. In most cases, under currently prevailing rental rates, the initial rental periods are not long enough to enable us to fully recoup the average cost ofacquiring or fabricating the equipment. We cannot be sure that a substantial number of our customers will continue to renew their rental agreements or thatwe will be able to re-rent the equipment to new customers or that any renewals or re-rentals will be at comparable rental rates. The inability to timely renew orre-rent a substantial portion of our compressor rental fleet would have a material adverse effect upon our business, financial condition, results of operationsand cash flows.We could be subject to substantial liability claims that could harm our financial condition.Our products are used in production applications where an accident or a failure of a product can cause personal injury, loss of life, damage toproperty, equipment or the environment, or suspension of operations. While we maintain insurance coverage, we face the following risks under our insurancecoverage:•we may not be able to continue to obtain insurance on commercially reasonable terms;•we may be faced with types of liabilities that will not be covered by our insurance, such as damages from significant product liabilities and fromenvironmental contamination;•the dollar amount of any liabilities may exceed our policy limits; and•we do not maintain coverage against the risk of interruption of our business.Any claims made under our policies will likely cause our premiums to increase. Any future damages caused by our products or services that arenot covered by insurance, are in excess of policy limits or are subject to substantial deductibles, would reduce our earnings and our cash available foroperations.11The loss of one or more of our current customers could adversely affect our results of operations.Our business is dependent not only on securing new customers but also on maintaining current customers. We had two customers that accountedfor an aggregate of approximately 40% of our revenue for the year ended December 31, 2016, and two customers that accounted for an aggregate ofapproximately 31% of our revenue for the year ended December 31, 2015. At December 31, 2016, three customers accounted for an aggregate of 44% of ouraccounts receivable. Unless we are able to retain our existing customers, or secure new customers if we lose one or more of our significant customers, ourrevenue and results of operations would be adversely affected. In addition, the default on payments by one or more of these significant customers maynegatively impact our cash flow and current assets.Loss of key members of our management could adversely affect our business.In keeping with our streamlined approach to our business, our executive management team consists of three officers: our (i) Chief Executive Officer,(ii) Chief Financial Officer and (iii) Vice President of Technical Services. We depend on the continued employment and performance of these three keymembers of our executive management team. In particular, we are significantly reliant upon the leadership and guidance of Stephen C. Taylor, who has beenour President, Chief Executive Officer and Board member since 2004. In addition to his management duties, Mr. Taylor has been instrumental in ourcommunications and standing with the investment community. If any of our key executives resign or become unable to continue in his present role and is notadequately replaced, our business operations could be materially adversely affected. We do not carry any key-man insurance on any of our officers ordirectors.The erosion of the financial condition of our customers could adversely affect our business.Many of our customers finance their exploration and development activities through cash flow from operations, the incurrence of debt or theissuance of equity. During times when the oil or natural gas markets weaken, our customers are more likely to experience a downturn in their financialcondition. Many of our customers’ equity values substantially declined during the most recent fall in oil and natural gas prices, and in some cases access tocapital markets may be an unreliable source of financing for some customers. The combination of a reduction in cash flow resulting from declines incommodity prices, a reduction in borrowing bases under reserve-based credit facilities and the lack of availability of debt or equity financing may result inflat or moderate growth in our customers’ spending for our products and services in 2017. For example, our customers could seek to preserve capital bycanceling month-to-month contracts, canceling or delaying scheduled maintenance of their existing natural gas compression equipment or determining notto enter into any new natural gas compression service contracts or purchase new compression equipment.We might be unable to employ qualified technical personnel, which could hamper our present operations or increase our costs.Many of the compressors that we sell or rent are mechanically complex and often must perform in harsh conditions. We believe that our successdepends upon our ability to employ and retain a sufficient number of technical personnel who have the ability to design, utilize, enhance and maintain thesecompressors. Our ability to expand our operations depends in part on our ability to increase our skilled labor force. The demand for skilled workers is high,and supply is limited. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force or cause anincrease in the wage rates that we must pay or both. If either of these events were to occur, our cost structure could increase and our operations and growthpotential could be impaired.We may require a substantial amount of capital to expand our compressor rental fleet and grow our business.During 2017, the amount we will spend on capital expenditures related to rental compression equipment will be determined primarily by theactivity of our customers. We do not anticipate demand for our products exceeding what we can fund with cash on hand, internally generated funds and/orbank borrowing with our current credit line. The amount and timing of any of these capital expenditures may vary depending on a variety of factors,including the level of activity in the oil and natural gas exploration and production industry and the presence of alternative uses for our capital, includingany acquisitions that we may pursue.Historically, we have funded our capital expenditures through cash flows from operations and borrowings under bank credit facilities. Althoughwe believe that cash on hand and cash flows from our operations will provide us with sufficient cash12to fund our planned capital expenditures for 2017, we cannot assure you that these sources will be sufficient. We may require additional capital to fund anysignificant unanticipated capital expenditures, such as material acquisition. To the extent we would require any necessary capital, it may not be available tous when we need it or on acceptable terms. Our ability to raise additional capital will depend on the results of our operations and the status of various capitaland industry markets at the time we seek such capital. Failure to generate sufficient cash flow, together with the absence of alternative sources of capital,could have a material adverse effect on our business, financial condition, results of operations or cash flow.Of our $30 million line of credit, we owe $417,000 as of December 31, 2016. All outstanding principal and unpaid interest is due on December 31,2017. Although we believe that we will be able to renew our existing line of credit, or obtain a new line of credit with another lender, we can provide noassurance that we will be successful in renewing our line of credit or obtaining a new line. In addition, any renewal of our existing line of credit or creation ofa new line of credit may be on terms less favorable that our existing line. For instance, changes in the terms of a new line of credit may include, but not belimited to: a reduction in the borrowing amount, an increase in interest rate to be paid on borrowings under the line, or restrictive covenants that are moreonerous than those on our existing line of credit.Our debt levels may negatively impact our current and future financial stability.Should we utilize our full debt capacity, growth beyond that point could be impacted. As of December 31, 2016, we had an aggregate ofapproximately $417,000 of outstanding indebtedness, and accounts payable, accrued expenses and current income tax liability of approximately $3.9million. As a result of our indebtedness at any given point in time, we might not have the ability to incur any substantial additional indebtedness. The levelof our indebtedness could have several important effects on our future operations, including:•our ability to obtain additional financing for working capital, acquisitions, capital expenditures and other purposes may be limited;•a significant portion of our cash flow from operations may be dedicated to the payment of principal and interest on our debt, thereby reducing fundsavailable for other purposes; and•our leverage if increased to an unacceptable level, could make us more vulnerable to economic downturns.If we are unable to service our debt, we will likely be forced to take remedial steps that are contrary to our business plan.As of December 31, 2016, we had $417,000 due under our Line of Credit agreement which allows us to borrow up to $30.0 million provided wemaintain certain collateral and borrowing base requirements. We believe that our current cash positionand the amount available under the current revolver are sufficient to meet our capital needs through 2017. However, if we were to materially increase ourborrowings, it is possible that our business will not generate sufficient cash flow from operations to meet our debt service requirements and the payment ofprincipal when due depending on the amount of borrowings on the agreement at any given time. If this were to occur, we may be forced to:•sell assets at disadvantageous prices;•obtain additional financing; or•refinance all or a portion of our indebtedness on terms that may be less favorable to us.Our current credit agreement contains covenants that limit our operating and financial flexibility and, if breached, could expose us to severe remedialprovisions.Under the terms of our credit agreement, we must:•comply with a minimum leverage ratio;•comply with a commitment coverage ratio;•not exceed specified levels of debt; and•comply with limits on asset sales.Our ability to meet the financial ratios and tests under our credit agreement can be affected by events beyond our control, and we may not be able tosatisfy those ratios and tests. A breach of any one of these covenants could permit the bank to accelerate the debt so that it is immediately due andpayable. If a breach occurred, no further borrowings would be available under our credit agreement. If we were unable to repay the debt, the bank couldproceed against and foreclose on our assets, substantially all of which have been pledged as collateral to secure payment of our indebtedness.13If we fail to acquire or successfully integrate additional businesses, our growth may be limited and our results of operations may suffer.As part of our business strategy, we evaluate potential acquisitions of other businesses or assets. However, there can be no assurance that we willbe successful in consummating any such acquisitions. Successful acquisition of businesses or assets will depend on various factors, including, but notlimited to, our ability to obtain financing and the competitive environment for acquisitions. In addition, we may not be able to successfully integrate anybusinesses or assets that we acquire in the future. The integration of acquired businesses is likely to be complex and time consuming and place a significantstrain on management and may disrupt our business. We also may be adversely impacted by any unknown liabilities of acquired businesses, includingenvironmental liabilities. We may encounter substantial difficulties, costs and delays involved in integrating common accounting, information andcommunication systems, operating procedures, internal controls and human resources practices, including incompatibility of business cultures and the loss ofkey employees and customers. These difficulties may reduce our ability to gain customers or retain existing customers, and may increase operating expenses,resulting in reduced revenues and income and a failure to realize the anticipated benefits of acquisitions.Failure to effectively manage our growth and expansion could adversely affect our business and operating results and our internal controls. We have significantly expanded our operations since our formation in 1998 and anticipate that our growth will continue if we are able to executeour strategy, subject to the supply and demand for oil and natural gas. Future growth may place significant strain on our management and other resources. Tomanage our future growth, we must be able to, among other things:•accurately assess the number of additional officers and employees we will require and the areas in which they will be required;•attract, hire and retain additional highly skilled and motivated officers and employees;•train and manage our work force in a timely and effective manner;•upgrade and expand our office infrastructure so that it is appropriate for our level of activity; and•improve our financial and management controls, reporting systems and procedures.Liability to customers under warranties and indemnification provisions may materially and adversely affect our earnings.We provide warranties as to the proper operation and conformance to specifications of the equipment we manufacture. Our equipment is complexand often deployed in harsh environments. Failure of this equipment to operate properly or to meet specifications may increase our costs by requiringadditional engineering resources and services, replacement of parts and equipment or monetary reimbursement to a customer. We have in the past receivedwarranty claims and we expect to continue to receive them in the future. To the extent that we incur substantial warranty claims in any period, our reputation,our ability to obtain future business and our earnings could be materially and adversely affected.Our rental and sales contracts provide for varying forms of indemnification from our customers and in most cases may require us to indemnify ourcustomers. Under some of our rental and sales contracts, liability with respect to personnel and property is customarily assigned on a “knock-for-knock”basis, which means that we and our customers assume liability for our respective personnel and property. However, in certain rental and sales contracts weassume liability for damage to our customer’s property and other third-party on the site resulting from our negligence. Since our products are used inproduction applications in the energy industry, expenses and liabilities in connection with accidents involving our products and services could be extensiveand may exceed our insurance coverages.Failure to maintain effective internal controls could have a material adverse effect on our operations.Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financialreporting. If we fail to maintain effective internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effectiveinternal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary forus to produce reliable financial reports and to help prevent14financial fraud. If, as a result of deficiencies in our internal controls, we cannot provide reliable financial reports or prevent fraud, our business decisionprocess may be adversely affected, our business and operating results could be harmed, investors could lose confidence in our reported financial information,and the price of our stock could decrease as a result.A reduction in demand primarily for natural gas or prices for this commodity and credit markets could adversely affect our business.Our results of operations depend upon the level of activity in the energy market, including natural gas development, production, processing andtransportation. Oil and natural gas prices and the level of drilling and exploration activity can be volatile. For example, oil and natural gas exploration anddevelopment activity and the number of well completions typically decline when there is a significant reduction in oil and natural gas prices or significantinstability in energy markets. As a result, the demand for our natural gas compression services could be adversely affected. A reduction in demand could alsoforce us to reduce our pricing substantially. Additionally, our customers’ production from unconventional natural gas sources such as tight sands, shale andcoal beds constitute the majority percentage of our business. Such unconventional sources are generally less economically feasible to produce in lowernatural gas price environments. These factors could in turn negatively impact the demand for our products and services. A decline in demand for oil andnatural gas or prices for those commodities and credit markets generally have a material adverse effect on our business, financial condition and results ofoperations.The Company has witnessed the effects of the foregoing risks. Since the beginning of the steep decline in oil and gas prices in late 2014, theCompany's revenues have declined approximately 26% from 2014 and its compressor utilization rate has declined form 76.0% at December 31, 2014 to51.3% at December 31, 2016.Risks Associated With Our Common StockThe price of our common stock may fluctuate.The trading price of our common stock and the price at which we may sell securities in the future are subject to substantial fluctuations in responseto various factors, including our ability to successfully accomplish our business strategy, the trading volume of our stock, changes in governmentalregulations, actual or anticipated variations in our quarterly or annual financial results, our involvement in litigation, general market conditions, the prices ofoil and natural gas, announcements by us and our competitors, our liquidity, our ability to raise additional funds, and other events.Future sales of our common stock could adversely affect our stock price. Substantial sales of our common stock in the public market, or the perception by the market that those sales could occur, may lower our stockprice or make it difficult for us to raise additional equity capital in the future. An aggregate of 27.8% of the outstanding shares of our common stock areowned by four institutional investors, each of which owns more than 5% of our outstanding shares as of March 3, 2017. Potential sales of large amounts ofthese shares in a short period of time by one or more of these significant investors could have a negative impact on our stock price. In addition, potentialsales of our common stock by our directors and officers, who beneficially own approximately 6.7% of the outstanding shares of our common stock as ofMarch 3, 2017, and because of the negative perception of sales by insiders, could also have a negative impact on our stock price.We have a comparatively low number of shares of common stock outstanding and, therefore, our common stock may suffer from limited liquidity and itsprices will likely be volatile and its value may be adversely affected.Because of our relatively low number of outstanding shares of common stock, the trading price of our common stock will likely be subject tosignificant price fluctuations and limited liquidity. This may adversely affect the value of your investment. In addition, our common stock price could besubject to fluctuations in response to variations in quarterly operating results, changes in management, future announcements concerning us, general trendsin the industry and other events or factors as well as those described above.If we issue debt or equity securities, you may lose certain rights and be diluted.If we raise funds in the future through the issuance of debt or equity securities, the securities issued may have rights and preferences and privilegessenior to those of holders of our common stock, and the terms of the securities may impose restrictions on our operations or dilute your ownership in ourCompany. 15If securities analysts downgrade our stock or cease coverage of us, the price of our stock could decline.The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or ourbusiness. We do not control these analysts. Furthermore, there are many large, well-established, publicly traded companies active in our industry and market,which may mean that it is less likely that we will receive widespread analystcoverage. If one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline rapidly. If one or more of these analystscease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.We do not intend to pay, and have restrictions upon our ability to pay, dividends on our common stock.We have not paid cash dividends in the past and do not intend to pay dividends on our common stock in the foreseeable future. Net income fromour operations, if any, will be used for the development of our business, including capital expenditures, and to retire debt. In addition, our credit agreementcontains restrictions on our ability to pay cash dividends on our common stock.Provisions contained in our governing documents could hinder a change in control of us.Our articles of incorporation and bylaws contain provisions that may discourage acquisition bids and may limit the price investors are willing topay for our common stock. Our articles of incorporation and bylaws provide that:•directors are elected for three-year terms, with approximately one-third of the board of directors standing for election each year;•cumulative voting is not allowed, which limits the ability of minority shareholders to elect any directors;•the unanimous vote of the board of directors or the affirmative vote of the holders of not less than 80% of the votes entitled to be cast by the holdersof all shares entitled to vote in the election of directors is required to change the size of the board of directors; and•directors may be removed only for cause and only by the holders of not less than 80% of the votes entitled to be cast on the matter.Our Board of Directors has the authority to issue up to five million shares of preferred stock. The Board of Directors can fix the terms of thepreferred stock without any action on the part of our stockholders. The issuance of shares of preferred stock may delay or prevent a change in controltransaction. In addition, preferred stock could be used in connection with the Board of Directors’ adoption of a shareholders’ rights plan (also known as apoison pill), which would make it much more difficult to effect a change in control of our Company through acquiring or controlling blocks of stock. Also,our directors and officers as a group will continue to beneficially own stock and although this is not a majority of our stock, it confers substantial votingpower in the election of directors and management of our Company. This would make it difficult for other minority stockholders to effect a change in controlor otherwise extend any significant control over our management. This may adversely affect the market price and interfere with the voting and other rights ofour common stock.ITEM 1B. UNRESOLVED STAFF COMMENTSNone.16ITEM 2. PROPERTIES The table below describes the material facilities owned or leased by Natural Gas Services Group as of December 31, 2016: Location Status Square Feet UsesTulsa, Oklahoma Owned and Leased 91,780 Compressor fabrication, rental and servicesMidland, Texas Owned 70,000 Compressor fabrication, rental and servicesLewiston, Michigan Owned 15,360 Compressor fabrication, rental and servicesMidland, Texas Leased 13,135 Corporate officesBloomfield, New Mexico Owned 7,000 Office and parts and servicesBridgeport, Texas Leased 4,500 Office and parts and servicesMidland, Texas Owned 4,100 Parts and servicesGodley, Texas Leased 5,000 Parts and servicesVernal, Utah Leased 3,200 Parts and servicesCarrollton, Ohio Leased 2,600 Parts and servicesLoveland, Colorado Leased 2,400 Parts and servicesWheeler, Texas Leased 2,160 Parts and servicesGrapevine, Texas Leased 800 SalesTotal 222,035 We believe that our properties are generally well maintained and in good condition and adequate for our purposes.ITEM 3. LEGAL PROCEEDINGS 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 theultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material effect on our financial position,results of operations or cash flow. We are not currently a party to any bankruptcy, receivership, reorganization, adjustment or similar proceeding, and we arenot aware of any threatened litigation.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.17PART IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES Our common stock currently trades on the New York Stock Exchange under the symbol “NGS”. The following table sets forth for the periodsindicated the high and low sales prices for our common stock as reported for 2016 and 2015.2016 Low HighFirst Quarter $16.16 $22.41Second Quarter 20.27 24.61Third Quarter 22.18 26.00Fourth Quarter 21.00 33.902015 Low HighFirst Quarter $17.97 $22.99Second Quarter 20.09 25.57Third Quarter 18.78 22.39Fourth Quarter 18.74 23.98As of December 31, 2016 as reflected by our transfer agent records, we had 16 record holders of our common stock. This number does not includeany beneficial owners for whom shares of common stock may be held in “nominee” or “street” name. On March 6, 2017, the last reported sale price of ourcommon stock as reported by the New York Stock Exchange was $26.00 per share. The following graph shows a five year comparison of the cumulative total stockholder return on our common stock as compared to the cumulativetotal return of two other indexes: a custom composite index of the Philadelphia Oil Service Index and the Standard & Poor’s 500 Composite Stock PriceIndex. These comparisons assume an initial investment of $100 and the reinvestment of dividends.The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference the Annual Report on Form 10-Kinto any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this informationby reference, and shall not otherwise be deemed filed under those Acts.18DividendsTo date, we have not declared or paid any dividends on our common stock. We currently do not anticipate paying a cash dividend on our commonstock. Although we intend to retain our earnings, if any, to finance the growth of our business, our Board of Directors will have the discretion to declare andpay dividends in the future. Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our Board ofDirectors may deem relevant. Our credit agreement also contains restrictions on our paying dividends.Equity Compensation PlansThe following table summarizes certain information regarding our equity compensation plans as of December 31, 2016: Plan Category (a)Number of SecuritiesIssued or to be IssuedUpon Exercise ofOutstanding Options (b)Weighted-averageIssuance or ExercisePrice ofOutstanding Options (c)Number of SecuritiesRemaining Availablefor Future IssuanceUnder EquityCompensation Plans(Excluding SecuritiesReflected in Column(a))Equity compensation plans approved by security holders: Stock Option Plan 350,186 (1) $19.45 345,919Restricted Stock / Unit Plan 139,451 $21.34 268,005Total 489,637 613,924 (1)Total number of shares to be issued upon exercise of options granted to employees, officers, and directors under our 1998 Stock Option Plan.Repurchase of Equity SecuritiesNo repurchases of our securities were made by us or on our behalf by any “affiliated purchaser” during the year ended December 31, 2016.Sale of Unregistered SecuritiesWe made no sales of unregistered securities during the year ended December 31, 2016.ITEM 6. SELECTED FINANCIAL DATAIn the table below, we provide you with selected historical financial data. We have derived this information from our audited financial statementsfor each of the years in the five-year period ended December 31, 2016. In the table we also present non-GAAP financial measures, Adjusted Gross Margin andAdjusted EBITDA, which we use in our business. These measures are not calculated or presented in accordance with GAAP. We explain these measures belowand reconcile them to the most directly comparable financial measure calculated and presented in accordance with GAAP in "-- non-GAAP FinancialMeasures." This information is only a summary and it is important that you read this information along with our audited financial statements and relatednotes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 below, which discusses factors affectingthe comparability of the information presented. 19The selected financial information provided is not necessarily indicative of our future results of operations or financial performance. Year Ended December 31, 2016 2015 2014 2013 2012 (in thousands, except per share amounts)STATEMENTS OF INCOME AND OTHER INFORMATION: Revenues $71,654 $95,919 $96,974 $89,248 $93,722Costs of revenues, exclusive of depreciation and amortizationshown separately below 31,872 42,655 43,147 40,943 49,907Loss on retirement of rental equipment 545 4,370 — — —Depreciation and amortization 21,796 22,758 21,507 18,144 15,707Selling, general and administrative expenses 9,011 10,989 10,334 8,141 7,893Operating income 8,430 15,147 21,986 22,020 20,215Total other income (expense), net 35 117 172 492 (4)Income before income taxes 8,465 15,264 22,158 22,512 20,211Income tax expense 1,996 5,117 8,030 8,122 7,526Net income $6,469 $10,147 $14,128 $14,390 $12,685Net income per common share: Basic $0.51 $0.81 $1.14 $1.17 $1.04Diluted $0.50 $0.79 $1.11 $1.15 $1.03Weighted average shares of common stock outstanding: Basic 12,702 12,567 12,434 12,324 12,220Diluted 12,935 12,793 12,721 12,550 12,320Adjusted EBITDA(1) $30,814 $42,407 $43,675 $40,712 $35,936Adjusted gross margin (2) $39,782 $53,264 $53,827 $48,305 $43,815 Cash flows from: Operating Activities $32,771 $41,611 $34,564 $39,244 $35,418Investing Activities (4,400) (12,315) (53,102) (43,324) (23,761)Financing Activities 191 55 276 437 39Net change in cash and cash equivalents $28,562 $29,351 $(18,262) $(3,643) $11,696 As of December 31, 2016 2015 2014 2013 2012BALANCE SHEET INFORMATION: (in thousands) Current assets $99,759 $73,204 $55,076 $60,645 $62,036Total assets 293,524 285,553 282,712 256,589 232,751Long-term debt (including current portion) 417 417 417 577 897Stockholders’ equity 232,954 223,981 210,587 192,737 175,825(1) Adjusted EBITDA is defined, reconciled to net income and discussed immediately below under “-- Non-GAAP Financial Measures”.(2) Adjusted Gross Margin is defined, reconciled to operating income and discussed immediately below under "--Non-GAAP Financial Measures".20Non-GAAP Financial MeasuresOur definition and use of Adjusted EBITDA“Adjusted EBITDA” is a non-GAAP financial measure that we define as earnings (net income) from operations before interest, taxes, loss onretirement of rental equipment, depreciation and amortization. This term, as used and defined by us, may not be comparable to similarly titled measuresemployed by other companies and is not a measure of performance calculated in accordance with GAAP. Adjusted EBITDA should not be considered inisolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income orcash flow statement data prepared in accordance with GAAP. However, management believes Adjusted EBITDA is useful to an investor in evaluating ouroperating performance because:•it is widely used by investors in the energy industry to measure a company’s operating performance without regard to items excluded from thecalculation of Adjusted EBITDA, which can vary substantially from company to company depending upon accounting methods and book value ofassets, capital structure and the method by which assets were acquired, among other factors;•it helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the impact of ourcapital structure and asset base from our operating structure; and•it is used by our management for various purposes, including as a measure of operating performance, in presentations to our Board of Directors, as abasis for strategic planning and forecasting, and as a component for setting incentive compensation.Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results asreported under generally accepted accounting principles. Some of these limitations are:•Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;•Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;•Adjusted EBITDA does not reflect the cash requirements necessary to service interest or principal payments on our debts; and•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future,and Adjusted EBITDA does not reflect any cash requirements for such replacements.There are other material limitations to using Adjusted EBITDA as a measure of performance, including the inability to analyze the impact ofcertain recurring items that materially affect our net income or loss, and the lack of comparability of results of operations of different companies. Please readthe table below under “Reconciliation” to see how Adjusted EBITDA reconciles to our net income, the most directly comparable GAAP financial measure.21ReconciliationThe following table reconciles our net income to Adjusted EBITDA, the most directly comparable GAAP financial measure: Year Ended December 31, 2016 2015 2014 2013 2012 (in thousands)Net Income $6,469 $10,147 $14,128 $14,390 $12,685Interest expense 8 15 10 56 18Income taxes 1,996 5,117 8,030 8,122 7,526Loss on retirement of rental equipment 545 4,370 — — —Depreciation and amortization 21,796 22,758 21,507 18,144 15,707Adjusted EBITDA $30,814 $42,407 $43,675 $40,712 $35,936Our definition and use of Adjusted Gross MarginWe define “Adjusted Gross Margin” as total revenue less costs of revenues (excluding depreciation and amortization expense). Adjusted grossmargin is included as a supplemental disclosure because it is a primary measure used by our management as it represents the results of revenue and costs(excluding depreciation and amortization expense), which are key components of our operations. Adjusted gross margin differs from gross profit, in that grossprofit includes depreciation expense. We believe adjusted gross margin is important because it focuses on the current operating performance of ouroperations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in those operations, the indirect costsassociated with our selling, general and administrative activities, the impact of our financing methods and income taxes. Depreciation expense does notaccurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs from currentoperating activity. Rather, depreciation expense reflects the systematic allocation of historical property and equipment values over the estimated useful lives.Adjusted gross margin has certain material limitations associated with its use as compared to operating income. These limitations are primarily dueto the exclusion of certain expenses. Each of these excluded expenses is material to our results of operations. Because we use capital assets, depreciationexpense is a necessary element of our costs and our ability to generate revenue and selling, general and administrative expense is a necessary cost to supportour operations and required corporate activities. In order to compensate for these limitations, management uses this non-GAAP measure as a supplementalmeasure to other GAAP results to provide a more complete understanding of our performance.As an indicator of our operating performance, adjusted gross margin should not be considered an alternative to, or more meaningful than, operatingincome as determined in accordance with GAAP. Our adjusted gross margin may not be comparable to a similarly titled measure of another company becauseother entities may not calculate adjusted gross margin in the same manner.ReconciliationThe following table reconciles our operating income to adjusted gross margin, the most directly comparable GAAP financial measure: Year Ended December 31, 2016 2015 2014 2013 2012 (in thousands)Operating Income $8,430 $15,147 $21,986 $22,020 $20,215Depreciation and amortization 21,796 22,758 21,507 18,144 15,707Selling, general, and administration expenses 9,011 10,989 10,334 8,141 7,893Loss on retirement of rental equipment 545 4,370 — — —Adjusted Gross Margin $39,782 $53,264 $53,827 $48,305 $43,81522ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion is intended to assist you in understanding our financial position and results of operations for each of the years endedDecember 31, 2016, 2015 and 2014. You should read the following discussion and analysis in conjunction with our audited financial statements and therelated notes.The following discussion contains forward-looking statements. For a description of limitations inherent in forward-looking statements, see“Special Note Regarding Forward-Looking Statements” on page ii.OverviewWe fabricate, manufacture, rent and sell natural gas compressors and related equipment. Our primary focus is on the rental of natural gascompressors. Our rental contracts generally provide for initial terms of six to 24 months. After the initial term of our rental contracts, most of our customershave continued to rent our compressors on a month-to-month basis. Rental amounts include maintenance charges and are paid monthly in advance. As ofDecember 31, 2016, we had 1,298 natural gas compressors totaling 186,328 horsepower rented to 79 customers, compared to 1,818 natural gas compressorstotaling 256,204 horsepower rented to 84 customers at December 31, 2015. Of the 1,298 compressors rented at December 31, 2016, 1,009 were rented on amonth-to-month basis.We also fabricate natural gas compressors for sale to our customers, designing compressors to meet unique specifications dictated by wellpressures, production characteristics and particular applications for which compression is sought. Fabrication of compressors involves the purchase by us ofengines, compressors, coolers and other components, and then assembling these components on skids for delivery to customer locations. These majorcomponents of our compressors are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presentlyrequires a three to four month lead time with delivery dates scheduled to coincide with our estimated production schedules. Although we do not have formalcontinuing supply contracts with any major supplier, we believe we have adequate alternative sources available. In the past, we have not experienced anysudden and dramatic increases in the prices of the major components for our compressors. However, the occurrence of such an event could have a materialadverse effect on the results of our operations and financial condition, particularly if we were unable to increase our rental rates and sales prices proportionateto any such component price increases.We also manufacture a proprietary line of compressor frames, cylinders and parts, known as our CiP (Cylinder-in-Plane) product line. We usefinished CiP component products in the fabrication of compressor units for sale or rental by us or sell the finished component products to other compressorfabricators. We also design, fabricate, sell, install and service flare stacks and related ignition and control devices for onshore and offshore incineration of gascompounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. To provide customer support for our compressor and flaresales businesses, we stock varying levels of replacement parts at our Midland, Texas facility and at field service locations. We also provide an exchange andrebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this business.We provide service and maintenance to our non-rental customers under written maintenance contracts or on an as required basis in the absence ofa service contract. Maintenance agreements typically have terms of six months to one year and require payment of a monthly fee.The following table sets forth our revenues from each of our three operating categories for the periods presented: Year Ended December 31, 2016 2015 2014 (in thousands)Rental $56,717 $76,432 $78,983Sales 13,621 18,519 17,200Service and maintenance 1,316 968 791Total $71,654 $95,919 $96,97423Our strategy for growth is focused on our compressor rental business. Margins, exclusive of depreciation and amortization, for our rental businesshistorically run in the high 50% to low 60% range, while margins for the compressor sales business tend to be in the mid 20% range. If our rental businessgrows and contributes a larger percentage of our total revenues, we expect our overall company-wide margins, exclusive of depreciation and amortization, toimprove over time.The oil and natural gas equipment rental and services industry is cyclical in nature. The most critical factor in assessing the outlook for theindustry is the worldwide supply and demand for natural gas and oil and the corresponding changes in commodity prices. As demand and prices increase, oiland natural gas producers increase their capital expenditures for drilling, development and production activities. Generally, the increased capitalexpenditures ultimately result in greater revenues and profits for service and equipment companies.In general, we expect our overall business activity and revenues to track the level of activity in the natural gas industry, with changes in domesticnatural gas production and consumption levels and prices more significantly affecting our business than changes in crude oil and condensate production andconsumption levels and prices. We also believe that demand for compression services and products is driven by declining reservoir pressure in maturingnatural gas producing fields and, more recently, by increased focus by producers on non-conventional natural gas production, such as coal bed methane, gasand oil shale and tight gas, which typically requires more compression than production from conventional natural gas reservoirs.Demand for our products and services was relatively strong through most of 2014 due to increasing oil prices, in spite of continued low natural gasprices. Towards the end of 2014 and throughout 2015 and 2016, crude oil prices collapsed, placing uncertainty on the growth in demand for our products andservices.For fiscal year 2017, our forecasted capital expenditures will be directly dependent upon our customers’ compression requirements and are notanticipated to exceed our internally generated cash flows. Any required capital will be for additions to our compressor rental fleet and/or addition orreplacement of service vehicles. We believe that cash on hand and cash flows from operations will be sufficient to satisfy our capital and liquidityrequirements through 2017. If we require additional capital to fund any significant unanticipated expenditures, including any material acquisitions of otherbusinesses, joint ventures or other opportunities, which exceed our current resources. To the extent needed, any such additional capital may not be availableto us when we need it or on acceptable terms.Notwithstanding the continued low energy price environment, we believe the long-term trend in our market is favorable.Critical Accounting Policies and PracticesWe have identified the policies below as critical to our business operations and the understanding of our results of operations. In the ordinarycourse of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in thepreparation of our financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differsignificantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most criticalaccounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our mostdifficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.Our critical accounting policies are as follows:•revenue recognition;•estimating the allowance for doubtful accounts receivable;•accounting for income taxes;•valuation of long-lived and intangible assets and goodwill; and•valuation of inventory.Revenue RecognitionRevenue from the sales of custom and fabricated compressors and flare systems is recognized when title passes to the customer, the customer assumesrisks and rewards of ownership, collectability is reasonably assured and delivery occurs as directed by our customer. Exchange and rebuild compressorrevenue is recognized when both the replacement compressor has been delivered and the rebuild assessment has been completed. Revenue from compressorservices is recognized upon providing services to the24customer. Maintenance agreement revenue is recognized as services are rendered. Rental revenue is recognized over the terms of the respective rentalagreements. Deferred income represents payments received before a product is shipped. Revenue from the sale of rental units is included in sales revenuewhen equipment is shipped or title is transferred to the customer.From time to time, upon the customer’s written request, we recognize revenue when manufacturing is complete and the equipment is ready forshipment. At the customer’s request, we will bill the customer upon completing all performance obligations, but before shipment.The customer will formallyrequest we ship the equipment per their direction from our manufacturing facility at a later specified date and that we segregate the equipment from ourfinished goods, such that they are not available to fill other orders. Title of the equipment and risk of loss passes to the customer when the equipment iscomplete and ready for shipment, per the customer’s agreement. At the transfer of title, all risks of ownership has passed to the customer on the manufactureditems that have not yet been shipped. We have operated using bill and hold agreements with certain customers for many years, with consistent satisfactoryresults for both the customer and us. The credit terms on this agreement are consistent with the credit terms on all other sales. All risks of loss are shoulderedby the customer, and there are no exceptions to the customer’s commitment to accept and pay for these manufactured equipment. Revenues recognized at thecompletion of manufacturing in 2016 and 2015 were approximately $5.6 million and $4 million, respectively.Allowance for Doubtful Accounts ReceivableWe perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current creditworthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers andmaintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we haveidentified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continueto experience the same credit loss rates that we have in the past. At December 31, 2016, three customers accounted for approximately 15%, 15% and 14% ofour accounts receivable, and at December 31, 2015, two customers accounted for approximately 25% and 10% of our accounts receivable. A significantchange in the liquidity or financial position of these customers could have a material adverse impact on the collectability of our accounts receivable and ourfuture operating results. At December 31, 2016 and 2015, our allowance for doubtful accounts balance was $597,000 and $833,000, respectively.Accounting for Income TaxesAs part of the process of preparing our financial statements, we are required to estimate our federal income taxes as well as income taxes in each ofthe states in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resultingfrom differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in ourconsolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent webelieve that recovery is not probable, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance ina period, we must include an expense in the tax provision in the statement of operations.Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and anyvaluation allowance recorded against our net deferred tax assets. We currently have no valuation allowance and fully expect to utilize all of our deferred taxassets.Valuation of Long-Lived and Intangible Assets and GoodwillWe assess the impairment of identifiable intangibles, long-lived assets and related goodwill annually or whenever events or changes incircumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include thefollowing:•significant underperformance relative to expected historical or projected future operating results;•significant changes in the manner of our use of the acquired assets or the strategy for our overall business;•significant negative industry or economic trends; and•significant decline in the market value of our stock.25When we determine that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existenceof one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount ratedetermined by our management to be commensurate with the risk inherent in our current business model.We completed a review for impairment on our goodwill and indefinite-lived intangibles assets during the fourth quarter of 2016 under theguidance of Accounting Standards Update 2012-02, Intangibles--Goodwill and Other (Topic 350): Testing Indefinite-lived Intangibles for Impairment (ASU2012-02). Our analysis considered multiple qualitative factors to determine whether events and circumstances indicate that we more than likely than notexperienced impairment to the stated value of goodwill. Our assessment included a review of changes in key company financial metrics, stock performanceand other measures that are important to the company's success. The other measure included demand for our products and services, maintenance of customersand cost of producing our product. Based on the analysis we concluded that it is more likely than not that we have not incurred impairment and are notrequired to take further action. As a result, no impairment of goodwill was recorded in the year ending at December 31, 2016. Future impairment tests couldresult in impairments of our intangible assets or goodwill.InventoriesWe value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of theinventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimatedforecast of product demand and production requirements. At December 31, 2016, an adjustment to the allowance of $563,000 or 3% inventory was made toremove obsolete inventory and bring inventory to current estimated market value. This adjustment was the result of our obsolescence and lower cost ormarket review which is conducted each year. We ended 2016 with an inventory allowance balance of $15,000.Our Performance Trends and OutlookIn anticipation of a slow recovery of natural gas and oil prices our customers are expected to be cautious in capital investments. We expect theoverall activity levels will increase as we move through 2017. The expected slow increase in capital commitments and the inherent delay in demand for ourproducts may result in modestly higher activity levels for 2017. In addition, we may continue to experience price pressure from our competitors until a morestable demand for products and services is established. We believe our fabrication business will likely reflect this level of activity in our production levelthrough 2017. We believe growth in our rental operations business will also be moderated by this slow recovery.Results of OperationsYear Ended December 31, 2016 Compared to the Year Ended December 31, 2015The table below shows our revenues and percentage of total revenues for each of our product lines for the years ended December 31, 2016 andDecember 31, 2015. Revenue Year Ended December 31, 2016 2015 (dollars in thousands)Rental $56,717 79.2% $76,432 79.7%Sales 13,621 19.0% 18,519 19.3%Service & Maintenance 1,316 1.8% 968 1.0%Total $71,654 $95,919 26Total revenue decreased to $71.7 million from $95.9 million, or 25.3%, for the year ended December 31, 2016, compared to 2015. This was theresult of a 25.8% decrease in rental revenue and a 26.4% decrease in sales revenue offset, partially, by a 36.0% increase in service and maintenance revenue.Rental revenue decreased to $56.7 million from $76.4 million, or 25.8%, for the year ended December 31, 2016, compared to 2015. This decreaseis due to reduced demand from the significant drop in oil and natural prices resulting in units being returned. As of December 31, 2016, we had 2,530 naturalgas compressors in our rental fleet totaling 362,408 horsepower, as compared to 2,622 natural gas compressors totaling 372,482 horsepower as ofDecember 31, 2015. As of December 31, 2016, we had 1,298 natural gas compressors totaling 186,328 horsepower rented to 79 customers, compared to 1,818natural gas compressors totaling 256,204 horsepower rented to 84 customers as of December 31, 2015. The rental fleet had a utilization of 51.3% as ofDecember 31, 2016 as compared to 69.3% at year end 2015.Sales revenue decreased to $13.6 million from $18.5 million, or 26.4%, for the year ended December 31, 2016, compared to 2015. Our salesactivity continues to reflect a softening of demand from our customers' investments in non-conventional shale plays which require compression for producingnatural gas. Due to lagging crude oil prices, along with economic uncertainty and continued tight credit markets, the energy industry continues to encounterreduced capital spending. While our strategy is to maintain our rental revenues so that they are a larger component of total revenue, we will continue to buildand sell custom fabricated equipment. In support of this, we intend to cultivate new sales oriented customers and are actively pursuing small, medium andlarge reciprocating compressor fabrication projects, as well as, building rotary screw-type equipment of any size. Sales include: (1) compressor unit sales, (2)flare sales, (3) parts sales and (4) compressor rebuilds.Operating income decreased to $8.4 million from $15.1 million, for the year ended December 31, 2016, compared to 2015. This decrease isattributed to a 25.8% drop in our rental revenue, due to the significant drop in oil and natural gas prices, resulting in the return of our units, as mentionedearlier.During the fourth quarter of 2016 management performed a review of our rental compressor units and determined that 63 units should be retired,with certain key components being re-utilized, representing total horsepower of 7,749. Based on this review, at December 31, 2016 we recorded a $545,000non-cash loss on the retirement of rental equipment to reduce the book value to approximately $242,000, the estimated fair value of the key componentsbeing kept.Selling, general, and administrative expenses decreased to $9.0 million for the year ended December 31, 2016, as compared to $11.0 million for2015. This 18.0% decrease is primarily a result in a reduction in stock compensation of $1.0 million due to moving from a one year vesting period to a twovesting period for our 2016 restricted stock awards to our executive officers and a decrease in the executive incentive cash bonus of $400,000.Depreciation and amortization expense decreased to $21.8 million from $22.8 million, or 4.4%, for the year ended December 31, 2016, comparedto 2015. The decrease in depreciation expense is driven by the 258 units we retired in 2015 that had a net book value of $5.3 million, which was slightlyoffset by the full year of deprecation recognized on the 52 units added to our rental fleet in 2015 and the 18 units we added in 2016.Provision for income tax decreased to $2.0 million from $5.1 million, or 61.0%. This is the result of the decrease in pre-tax income and effectivetax rate, due to research and development credits taken in 2016. Our effective tax rate was 23.6% for 2016 and 33.5% for 2015.27Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014The table below shows our revenue and percentage of total revenues for each of our product lines for the years ended December 31, 2015 andDecember 31, 2014. Revenue Year Ended December 31, 2015 2014 (dollars in thousands)Rental $76,432 79.7% $78,983 81.5%Sales 18,519 19.3% 17,200 17.7%Service & Maintenance 968 1.0% 791 0.8%Total $95,919 $96,974 Total revenue decreased to $95.9 million from $97.0 million, or 1.1%, for the year ended December 31, 2015, compared to 2014. This was theresult of a 3.2% decrease in rental revenue offset by a 7.7% increase in sales revenue and a 22.4% increase in service and maintenance revenue.Rental revenue decreased to $76.4 million from $79.0 million, or 3.2%, for the year ended December 31, 2015, compared to 2014. This decreaseis due to reduced demand from the drop in oil and natural gas prices resulting in units being returned. As of December 31, 2015, we had 2,622 natural gascompressors in our rental fleet totaling 372,482 horsepower, as compared to 2,879 natural gas compressors totaling 401,361 horsepower at December 31,2014. As of December 31, 2015, we had 1,818 natural gas compressors totaling 256,204 horsepower rented to 84 customers, compared to 2,189 natural gascompressors totaling 301,392 horsepower rented to 102 customers at December 31, 2014. The rental fleet had a utilization of 69.3% as of December 31, 2015as compared to 76.0% at year end 2014.Sales revenue increased to $18.5 million from $17.2 million, or 7.7%, for the year ended December 31, 2015, compared to 2014. Our normal salesactivity continues to reflect demand from our customers' continued investments in non-conventional shale plays which require compression for producednatural gas. The price of natural gas on December 31, 2015 was $2.28/MMBtu, down from $3.14/MMBtu one year ago. The price of natural gas remains atlevels that are considered depressed. Because of lagging natural gas prices, along with economic uncertainty and continued tight credit markets, the energyindustry continues to encounter reduced capital spending, particularly for goods and services with respect to natural gas activities. During 2015, capitalproject funding continued to shift from gas projects to oil projects as the price of oil in early 2015 was not as volatile as gas, and many companies had lockedin oil prices in support of those projects. Since our compressors are increasingly used in the production of oil and natural gas from shale plays which aredriven by oil economics and typically by hedged prices, we have been able to increase our sales. Our strategy over time has been to increase our rentalrevenues so that they are a larger component of total revenue, but we intend to maintain our ability to build and sell custom fabricated equipment. In supportof this, we continued to cultivate new sales oriented customers and are actively pursuing small, medium and large reciprocating compressors as well as rotaryscrew-type equipment of any size. Sales included: (1) compressor unit sales, (2) flare sales, (3) parts sales and (4) compressor rebuilds.Operating income decreased to $15.1 million from $22.0 million, for the year ended December 31, 2015, compared to 2014. This decrease is dueto the $4.4 million loss the Company incurred on the retirement of rental equipment and a $1.2 million increase in depreciation, please see separatediscussions on each item below.As a result of a decline in market conditions, management reviewed our rental compressor units and determined that 258 units should be retired, withcertain key components being re-utilized, representing total horsepower of 32,259. Based on this optimization review, at June 30, 2015 we recorded a $4.4million non-cash loss on the retirement of rental equipment to reduce the book value to approximately $967,000, the estimated fair value of the keycomponents being kept.Selling, general, and administrative expenses increased to $11.0 million for the year ended December 31, 2015, as compared to $10.3 million for2014. This 6.3% increase is primarily due to our need to maintain consistent staffing levels, salary increases for existing staff of $180,000 and non-cashexpenses related to stock compensation of $300,000 mainly due to more stock options vesting between the comparative periods.28Depreciation and amortization expense increased to $22.8 million from $21.5 million, or 5.8%, for the year ended December 31, 2015, comparedto 2014. This increase was the net result of 52 new gas compressor rental units being added to the rental fleet in 2015, which increased the depreciable baseand a full year's of depreciation realized from the 323 rental units added in 2014.Provision for income tax decreased to $5.1 million from $8.0 million, or 36.3%. This is the result of the decrease in pre-tax income and effectivetax rate, due to an increase in our domestic production deduction. Our effective tax rate was 33.5% for 2015 and 36.2% for 2014.Adjusted Gross Margin Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015The table below shows our adjusted gross margin and related percentages for each of our product lines for the years ended December 31, 2016 andDecember 31, 2015. Adjusted gross margin is the difference between revenue and cost of revenues, exclusive of depreciation and amortization expense. Adjusted Gross Margin (1) Year Ended December 31, 2016 2015 (dollars in thousands)Rental$36,367 64.1% $47,682 62.4%Sales2,497 18.3% 4,886 26.4%Service & Maintenance918 69.8% 696 71.9%Total$39,782 55.5% $53,264 55.5%(1) For a reconciliation of adjusted gross margin to its most directly comparable financial measure calculated and presented in accordance with GAAP, pleaseread "Item 6. Selected Financial Data - Non-GAAP Financial Measures" in this Report.The overall adjusted gross margin percentage remained steady at 55.5% for the twelve months ended December 31, 2016 and December 31, 2015,exclusive of depreciation and amortization. Our ability to maintain the percentage during the depressed market is the result of the relatively higher marginrentals comprising a larger share of total revenue. Rental margins increased for the year ended December 31, 2016 compared to 2015 to 64.1% from 62.4%.Sales margin decreased to 18.3% from 26.4% for the year ended 2016 compared to 2015. Third party service and maintenance margins decreased to 69.8%from 71.9% for the year ended December 31, 2016 compared to 2015. Service and maintenance represents 2% of our revenue providing minimal impact onour overall adjusted gross margin.Adjusted Gross Margin Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014The table below shows our adjusted gross margin and related percentages for each of our product lines for the years ended December 31, 2015 andDecember 31, 2014. Adjusted gross margin is the difference between revenue and cost of revenues, exclusive of depreciation and amortization expense. Adjusted Gross Margin (1) Year Ended December 31, 2015 2014 (dollars in thousands)Rental$47,682 62.4% $47,461 60.1%Sales4,886 26.4% 5,903 34.3%Service & Maintenance696 71.9% 463 58.5%Total$53,264 55.5% $53,827 55.5%(1) For a reconciliation of adjusted gross margin to its most directly comparable financial measure calculated and presented in accordance with GAAP, pleaseread "Item 6. Selected Financial Data - Non-GAAP Financial Measures" in this Report. 29The overall adjusted gross margin percentage remained steady at 55.5% for the twelve months ended December 31, 2015 and December 31, 2014,exclusive of depreciation and amortization. Our ability to remain flat in today's market is the result of the relatively higher margin rentals comprising a largershare of total revenue. Rental margins increased for the year ended December 31, 2015 compared to 2014 to 62.4 % from 60.1%. Sales margin decreased to26.4% from 34.3% for the year ended 2015 compared to 2014. Third party service and maintenance margins increased to 71.9% from 58.5% for the yearended December 31, 2015 compared to 2014. Service and maintenance represents 1% of our revenue providing minimal impact on our overall adjusted grossmargin.Liquidity and Capital ResourcesOur working capital positions as of December 31, 2016 and 2015 are set forth below. 2016 2015 (in thousands)Current Assets: Cash and cash equivalents $64,094 $35,532Trade accounts receivable, net 7,378 9,107Inventory, net 25,833 27,722Prepaid income taxes 1,482 81Prepaid expenses and other 972 762Total current assets 99,759 73,204Current Liabilities: Line of credit $417 $—Accounts payable 971 1,226Accrued liabilities 2,887 3,071Deferred income 2,225 271Total current liabilities 6,500 4,568Net working capital $93,259 $68,636Historically, we have funded our operations through cash flows from operations and borrowings under bank credit facilities. In recent years, wehave primarily funded our operations through cash flow from operations and, to a lesser extent, borrowings under our bank line of credit, which is describedbelow. For the year ended December 31, 2016, we invested approximately $4.3 million in equipment for our rental fleet and service vehicles. We financedthis activity with cash on hand. Cash flowsAt December 31, 2016, we had cash and cash equivalents of $64.1 million and working capital of $93.3 million, and total debt of $417,000 underour credit agreement, which is due in 2017. Our cash and cash equivalents increased from 2015 due to a decrease in our capital program which was the resultof a decrease in compressor rentals due to the decrease in oil and natural gas prices.We had positive net cash flow from operating activities of approximately$32.8 million during 2016. This was primarily from net income of $6.5 million and non-cash items of depreciation and amortization of $21.8 million, $2.3million related to stock-based compensation, a loss on retirement of rental fleet of $545,000, a decrease in deferred income taxes of $2.7 million and anincrease in working capital of $4.4 million.At December 31, 2015, we had cash and cash equivalents of $35.5 million, working capital of $68.6 million and total debt of $417,000, under ourline of credit which is due in 2017. Our cash and cash equivalents increased from 2014 due to a decrease in our capital program which was the result of adecrease in compressor rentals due to the decrease in oil and natural gas prices. We had positive net cash flow from operating activities of approximately$41.6 million during 2015. This was primarily from net income of $10.1 million and non-cash items of depreciation and amortization of $22.8 million, $3.5million related to stock-based compensation, a loss on retirement of rental fleet of $4.4 million, a decrease in deferred income taxes of $1.8 million and anincrease in working capital of $2.6 million. 30Inventory decreased to $25.8 million as of the end of 2016, as compared to $27.7 million as of the end of 2015. This decrease is mainly a reflectionof inventory management activity and the timing of jobs closing from work in progress to finished goods. Contractual Obligations and CommitmentsWe have contractual obligations and commitments that affect our results of operations, financial condition and liquidity. The following table is asummary of our significant cash contractual obligations (in thousands):Cash Contractual Obligations 2017 2018 2019 2020 Thereafter TotalLine of credit $417 $— $— $— $— $417Interest on line of credit 17 — — — — 17Purchase obligations 300 300 300 300 639 1,839Other long term liabilities — — — — 115 115Facilities and office leases 422 284 59 — — 765Total $1,156 $584 $359 $300 $754 $3,153Senior Bank Borrowings On November 19, 2014, we amended and renewed our $30 million Credit Agreement with JP Morgan Chase Bank, N.A. ("the Amended CreditAgreement"). The Amended Credit Agreement was extended to December 31, 2017, and the interest rate terms were amended. We also have a right to requestfrom the lender, on an uncommitted basis, an increase of up to $20 million on the aggregate commitment (which could potentially increase the commitmentamount to $50 million). As of December 31, 2016, we owed $417,000 on the line of credit under the Credit Agreement.Borrowing Base. At any time before the maturity of the Amended Credit Agreement, we may draw, repay and re-borrow amounts available under theborrowing base up to the maximum aggregate availability discussed above. Generally, the borrowing base equals the sum of (a) 80% of our eligible accountsreceivable plus (b) 50% of the book value of our eligible general inventory (not to exceed 50% of the commitment amount at the time) plus (c) 75% of thebook value of our eligible equipment inventory. JPMorgan Chase Bank (the “Lender”) may adjust the borrowing base components if material deviations inthe collateral are discovered in future audits of the collateral. Interest and Fees. Under the terms of the Amended Credit Agreement, we have the option of selecting the applicable variable rate for each revolving loan, orportion thereof, of either (a) LIBOR multiplied by the Statutory Reserve Rate (as defined in the Amended Credit Agreement), with respect to this rate, forEurocurrency funding, plus the Applicable Margin (“LIBOR-based”), or (b) CB Floating Rate, which is the Lender’s Prime Rate less the Applicable Margin;provided, however, that no more than three LIBOR-based borrowings under the agreement may be outstanding at any one time. For purposes of the LIBOR-based interest rate, the Applicable Margin is 1.50%. For purposes of the CB Floating Rate, the Applicable Margin is 1.25%. Accrued interest is payablemonthly on outstanding principal amounts, provided that accrued interest on LIBOR-based loans is payable at the end of each interest period, but in no eventless frequently than quarterly. In addition, fees and expenses are payable in connection with our requests for letters of credit (generally equal to theApplicable Margin for LIBOR-related borrowings multiplied by the face amount of the requested letter of credit) and administrative and legal costs. Maturity. The maturity date of the Amended Credit Agreement is December 31, 2017, at which time all amounts borrowed under the agreement will be dueand outstanding letters of credit must be cash collateralized. The agreement may be terminated early upon our request or the occurrence of an event ofdefault. We expect to extend our credit agreement prior to the agreement expiring in December of 2017. Security. The obligations under the Amended Credit Agreement are secured by a first priority lien on all of our inventory and accounts and leases receivables,along with a first priority lien on a variable number of our leased compressor equipment the book value of must be maintained at a minimum of 2.00 to 1.00commitment coverage ratio (such ratio being equal to (i) the amount of the borrowing base as of such date to (ii) the amount of the commitment as of suchdate.) 31Covenants. The Amended Credit Agreement contains customary representations and warranties, as well as covenants which, among other things, limit ourability 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 thenature of our business. Events of Default and Acceleration. The Amended Credit Agreement contains customary events of default for credit facilities of this size and type, andincludes, without limitation, payment defaults; defaults in performance of covenants or other agreements contained in the transaction documents;inaccuracies in representations and warranties; certain defaults, termination events or similar events; certain defaults with respect to any other Companyindebtedness in excess of $50,000; certain bankruptcy or insolvency events; the rendering of certain judgments in excess of $150,000; certain ERISA events;certain change in control events and the defectiveness of any liens under the secured revolving credit agreement. Obligations under the Amended CreditAgreement may be accelerated upon the occurrence of an event of default. As of December 31, 2016, we were in compliance with all covenants in our Amended Credit Agreement. A default under our Amended CreditAgreement could trigger the acceleration of our bank debt so that it is immediately due and payable. Such default would have a material adverse effect onour liquidity, financial position and operations if we were to borrow a significant amount under facility.Components of Our Principal Capital ExpendituresCapital expenditures for the three years ended December 31, 2016:Expenditure Category 2016 2015 2014 (in thousands)Rental equipment, vehicles and shop equipment $4,307 $12,504 $53,342The level of our expenditures will vary in future periods depending on energy market conditions and other related economic factors. Based uponexisting economic and market conditions, we believe that our cash on hand, operating cash flow and additional bank borrowings are adequate to fully fundour net capital expenditures requirements for 2017 and beyond. We also believe we have significant flexibility with respect to our financing alternatives andadjustment of our expenditure plans if circumstances warrant. We do not have any material continuing commitments related to our current operations thatcannot be met with our cash on hand and our current line of credit.Off-Balance Sheet ArrangementsFrom time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As ofDecember 31, 2016, the off-balance sheet arrangements and transactions that we have entered into include operating lease agreements and purchaseagreements. We do not believe that these arrangements are reasonably likely to materially affect our liquidity or availability of, or requirements for, capitalresources.We entered into a purchase agreement with a vendor in July 2008 pursuant to which we agreed to purchase up to $4.8 million of our paint andcoating requirements exclusively from the vendor. In connection with the execution of the agreement, the vendor paid us a $300,000 fee which is consideredto be a discount toward future purchases from the vendor. As of December 31, 2016, we had met $2.9 million of this obligation. The $300,000 payment wereceived is recorded as a long-term liability and will decrease as the purchase commitment is fulfilled. The long-term liability remaining as of December 31,2016 was $115,000.Recently Issued Accounting PronouncementsIn August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-15, Classification ofCertain Cash Receipts and Cash Payments, seeking to eliminate diversity in practice related to how certain cash receipts and cash payments are presented andclassified in the statement of cash flows. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities, including bothbusiness entities and not-for-profit entities that are required to present a statement of cash flows under FASB ASC 230, Statement of Cash Flows. Theamendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within thosefiscal years. Early adoption is permitted, including adoption in an interim period. The new standard will be effective during our first quarter ending March 31,2018. We do not foresee this new standard having a significant impact on our consolidated financial statements.32In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" (Topic 326). The provisions of thisstandard require financial assets measured at amortized cost to be presented at the net amount expected to be collected. An allowance account would beestablished to present the net carrying value at the amount expect to be collected. The provisions of this ASU are effective for fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2019, but early adoption is permitted. We are currently evaluating the impact of implementation ofthis standard on our consolidated financial statements.In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting. This ASU identifies areas for simplification involving several areas of accounting for share-based compensation arrangements,including the income tax impact, classification of awards as equity or liabilities, classifications on the statement of cash flows and forfeitures. The provisionsof this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permittedprovided that presentation is applied to the beginning of the fiscal year of adoption. The new standard will be effective during our first quarter ending March31, 2017. Based upon our evaluation, we noted the following: (1) there is no impact to our consolidated statement of cash flows, as we previously disclosedtaxes paid related to net share settlement of equity awards as a financing activity; (2) we do not plan on making a change to our forfeiture policy; (3) wecurrently do not have any employees interested in withholding at the maximum statutory withholding, but if we did, this could have an impact to our cash onhand balance; and (4) we foresee the new requirement to recognize share-based payments excess tax benefits and deficiencies as income tax expense willbring a new element of volatility to our provision for income taxes that could impact our consolidated financial statements.On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, a lessee will be required to recognize assetsand liabilities for capital and operating leases with lease terms of more than 12 months. Additionally, this ASU will require disclosures to help investors andother financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitativerequirements. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2018, including interim periods withinthose fiscal years, with early adoption permitted. The new standard will be effective during our first quarter ending March 31, 2019. We are currentlydetermining the impacts of the new standard on our consolidated financial statements.On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a five-stepanalysis on how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires more detailed disclosures toenable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts withcustomers. In August 2015, the FASB issued an accounting standards update for a one-year deferral of the revenue recognition standard’s effective date for allentities, which changed the effectiveness to interim and annual reporting periods beginning after December 15, 2017. As a result, we expect to adopt thisguidance on January 1, 2018. This standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with thecumulative effect of initially applying it recognized at the date of initial application. We have not yet selected the transition method. We are currentlydetermining the impacts of the new standard on our consolidated financial statements. Our approach includes performing a detailed review of key contractsrepresentative of our revenue units and comparing historical accounting policies and practices to the new standard. A majority of our revenue transactions areshort-term in nature, and our assessment at this stage is that we do not expect the new revenue recognition standard will have a material impact on ourfinancial position or results of operations upon adoption.Environmental RegulationsVarious federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to protection ofhuman safety and health and the environment, affect our operations and costs. Compliance with these laws and regulations could cause us to incurremediation or other corrective action costs or result in the assessment of administrative, civil and criminal penalties and the issuance of injunctions delayingor prohibiting operations. In addition, we have acquired certain properties and plant facilities from third parties whose actions with respect to themanagement and disposal or release of hydrocarbons or other wastes were not under our control. Under environmental laws and regulations, we could berequired to remove or remediate wastes disposed of or released by prior owners. In addition, we could be responsible under environmental laws andregulations for properties and plant facilities we lease, but do not own. Compliance with such laws and regulations increases our overall cost of business, buthas not had a material adverse effect on our operations or financial condition. It is not anticipated, based on current laws and regulations, that we will berequired in the near future to expend amounts that are material in relation to our total expenditure budget in order to comply with environmental laws andregulations but such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. We also could incur costsrelated to the cleanup of sites to which we send equipment and for damages to natural resources or other claims related to releases of regulated substances atsuch sites.33ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKCommodity RiskOur commodity risk exposure is the pricing applicable primarily to natural gas production and to lesser extent oil production. Realizedcommodity prices received for such production are primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to naturalgas. Depending on the market prices of oil and natural gas, companies exploring for such resources may cancel or curtail their drilling programs, therebyreducing demand for our equipment and services.Financial Instruments and Debt MaturitiesOur financial instruments consist of cash and cash equivalents, trade receivables, accounts payable and our line of credit. The carrying amounts ofcash and cash equivalents, trade receivables, and accounts payable approximate fair value because of the short-term nature of the instruments. The fair valueof our bank borrowings approximate the carrying amounts as of December 31, 2016 and 2015, and were determined based upon interest rates currentlyavailable to us.Customer Credit RiskWe are exposed to the risk of financial non-performance by our customers. Our ability to collect on rentals and sales to our customers isdependent on the liquidity of our customer base. To manage customer credit risk, we monitor credit ratings of our customers. Unless we are able to retain ourexisting customers, or secure new customers if we lose one or more of our significant customers, our revenue and results of operations would be adverselyaffected. At December 31, 2016, we had two customers that accounted for a total of approximately 46% of our accounts receivable.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAOur audited financial statements and supplementary financial data are included in this Annual Report on Form 10-K beginning on page F-1.ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresAn evaluation was carried out under the supervision and with the participation of our management, including our President and Chief Executive Officer andour Vice President and Chief Financial Officer, of the effectiveness of the design of our “disclosure controls and procedures” (as such term is defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended or, the “Exchange Act”) as of December 31, 2016, pursuant to Exchange ActRule 13a-15. Based upon that evaluation, the President and Chief Executive Officer and our Principal Accounting Officer have concluded that our disclosurecontrols and procedures as of December 31, 2016, are effective to ensure that information required to be disclosed by us in the reports filed or submitted by usunder the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and include controlsand procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management,including our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosures. Due to the inherentlimitations of control systems, not all misstatements may be detected. Those inherent limitations include the realities that judgments in decision-making canbe faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls could be circumvented by the individual acts of somepersons or by collusion of two or more people. Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectiveshave been met.34Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) ofExchange Act Rules 13a-15 or 15d-15 that occurred during our last quarter that have materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.Management’s Report on Internal Control Over Financial Reporting Our management, including the President and Chief Executive Officer and our Principal Accounting Officer, is responsible for establishing andmaintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal controlsystem is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and proceduresthat:•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accountingprinciples generally accepted in the United States of America, and that our receipt and expenditures are being made only in accordance withauthorizations of management and our Board of Directors; and•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have amaterial effect on the financial statements.All internal control systems, no matter how well designed, have inherent limitations. A system of internal control may become inadequate overtime because of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determinedto be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016 using the criteria set forth by theCommission of Sponsoring Organizations of the Treadway Commission (COSO) in their Internal Control-Integrated Framework (2013). Based on thisassessment, our management concluded that, as of December 31, 2016, our internal control over financial reporting was effective.Pursuant to the Section 404 of the Sarbanes-Oxley Act of 2002, we have included a report of management's assessment of the effectiveness of ourinternal controls as part of this annual report on Form 10-K for the fiscal year December 31, 2016. BDO USA, LLP, our independent registered publicaccounting firm, has issued an attestation report dated March 10, 2017 on the effectiveness of internal control over financial reporting on page 36.ITEM 9B. OTHER INFORMATIONNone.35Report of Independent Registered Public Accounting FirmTo the Board of Directors and StockholdersNatural Gas Services Group, Inc.Midland, TexasWe have audited Natural Gas Services Group, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2016, based on criteriaestablished in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSOcriteria). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying “Item 9A. Management’s Report on Internal Control Over FinancialReporting." Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.In our opinion, Natural Gas Services Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31,2016, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheetsof Natural Gas Services Group, Inc. as of December 31, 2016 and 2015 and the related consolidated statements of income, stockholders’ equity and cash flowsfor each of the three years in the period ended December 31, 2016 and our report dated March 10, 2017 expressed an unqualified opinion thereon./s/ BDO USA, LLP Houston, TexasMarch 10, 201736PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item is incorporated herein by reference to the sections “Election of Directors,” “Executive Officers,” “CorporateGovernance” and “The Board of Directors and its Committees” in our definitive proxy statement which will be filed with the Securities and ExchangeCommission within 120 days after December 31, 2016.We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and employees. The Code of Business Conduct andEthics is posted in the "Investor Relations" section of our website at www.ngsgi.com. The Code of Business Conduct and Ethics maybe obtained free ofcharge by writing to Natural Gas Services Group, Inc., Attn: Investor Relations, 508 W. Wall Street, Suite 550 Midland, Texas 79701.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item is incorporated herein by reference to the section “Executive Compensation” in our definitive proxystatement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2016.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information required by this item is incorporated herein by reference to the section “Principal Shareholders and Security Ownership ofManagement” in our definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2016.ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item is incorporated herein by reference to the sections “Related Person Transactions” and “CorporateGovernance” in our definitive proxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2016.ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item is incorporated herein by reference to the section “Principal Accountant Fees and Services” in our definitiveproxy statement which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2016.37PART IVITEM 15. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENTSThe following documents are filed as part of this Annual Report on Form 10-K:(a)(1) and (a)(2) Consolidated Financial StatementsFor a list of Consolidated Financial Statements, see “Index to Consolidated Financial Statements” and incorporated herein by reference.(a)(3) Exhibits A list of exhibits to this Annual Report on Form 10-K is set forth below:Exhibit No. Description3.1Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10-QSB filed and dated November 10, 2004).3.2Bylaws, as amended (Incorporated by reference to Exhibit 3.11 of the Registrant's Current Report on Form 8-K filed with the Securities andExchange Commission on June 21, 2016.)4.1Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on August 30, 2005)10.1Lease Agreement, dated March 26, 2008, between WNB Tower, LTD and Natural Gas Services Group, Inc. (Incorporated by reference toExhibit 10.15 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2008 and filed with the Securities and ExchangeCommission on March 9, 2009)10.22009 Restricted Stock/Unit Plan, as amended (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K datedJune 3, 2014 and filed with the Securities and Exchange Commission on June 6, 2014.)10.3Stock Option Plan, as amended and restated (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filedwith the Securities and Exchange Commission on June 21, 2016.)10.4Lease Agreement, dated December 11, 2008, between Klement-Wes Partnership, LTD and Natural Gas Services Group, Inc. and commencingon January 1, 200910.5Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 10, 2010 (Incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24,2014.)10.6Third Amendment of Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated November 19, 2014(Incorporated by reference to Exhibit 10.1 of the Registrant's Current report on Form 8-K filed with the Securities and Exchange Commissionon January 9, 2012.)10.7Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 10, 2010 (Incorporated byreference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 16,2011.)10.8First Amendment of Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 31, 2011(Incorporated by reference to Exhibit 10.2 of the Registrant's Current report on Form 8-K filed with the Securities and Exchange Commissionon January 9, 2012.)10.9Promissory Note in the aggregate amount of $30,000,000 issued to JPMorgan Chase Bank, N.A., dated December 31, 2014, in connection withthe revolving credit line under the Credit Agreement with JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.2 of theRegistrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24, 2014.)10.1Amended and restated Employment Agreement dated April 27, 2015 between Natural Gas Services Group, Inc. and Stephen C. Taylor(Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commissionon April 29, 2015.)10.11The Executive Nonqualified Excess Plan Adoption Agreement, referred to as the Nonqualified Deferred Compensation Plan (Incorporated byreference to Exhibit 10.11 of the Registrant's Quarterly report on Form 10-Q filed with the Securities and Exchange Commission on May 6,2016.)3810.12Annual Incentive Bonus Plan (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with theSecurities and Exchange Commission on December 18, 2012.)*23.1Consent of BDO USA, LLP*31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*31.2Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32.1Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*32.2Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101.INSXBRL Instance Document101.SCHXBRL Taxonomy Extension Schema Document101.CALXBRL Taxonomy Extension Calculation Linkbase Document101.DEFXBRL Taxonomy Extension Definition Linkbase Document101.LABXBRL Taxonomy Extension Label Linkbase Document101.PREXBRL Taxonomy Extension Presentation Linkbase Document * Filed herewith.ITEM 16. FORM 10-K SUMMARYNone.39SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized. NATURAL GAS SERVICES GROUP, INC. Date: March 10, 2017By:/s/ Stephen C. Taylor Stephen C. Taylor Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated: SignatureTitleDate/s/ Stephen C. Taylor Chairman of the Board of Directors, Chief Executive Officer andPresident (Principal Executive Officer)March 10, 2017Stephen C. Taylor /s/ G. Larry Lawrence Vice President and Chief Financial Officer (Principal AccountingOfficer) March 10, 2017G. Larry Lawrence/s/ Charles G. Curtis DirectorMarch 10, 2017Charles G. Curtis /s/ William F. Hughes, Jr. DirectorMarch 10, 2017William F. Hughes, Jr. /s/ David L. Bradshaw DirectorMarch 10, 2017David L. Bradshaw /s/ John W. Chisholm DirectorMarch 10, 2017John W. Chisholm 40INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting FirmF-1 Consolidated Balance Sheets as of December 31, 2016 and 2015F-2 Consolidated Statements of Income for the Years Ended December 31, 2016, 2015 and 2014F-3 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2016, 2015 and 2014F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and 2014F-5 Notes to Consolidated Financial StatementsF-6 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and StockholdersNatural Gas Services Group, Inc.Midland, TexasWe have audited the accompanying consolidated balance sheets of Natural Gas Services Group, Inc. (the "Company") as of December 31, 2016 and 2015 andthe related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2016. Theseconsolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Natural Gas ServicesGroup, Inc. as of December 31, 2016 and 2015 and the results of its operations and its cash flows for each of the three years in the period ended December 31,2016, in conformity with accounting principles generally accepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Natural Gas Services Group,Inc.’s, internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO) and our report dated March 10, 2017 expressed an unqualifiedopinion thereon. /s/ BDO USA, LLP Houston, TexasMarch 10, 2017F- 1NATURAL GAS SERVICES GROUP, INC.CONSOLIDATED BALANCE SHEETS(in thousands) December 31, 2016 2015ASSETS Current Assets: Cash and cash equivalents$64,094 $35,532Trade accounts receivable, net of allowance for doubtful accounts of $597 and $833, respectively7,378 9,107Inventory, net of allowance for obsolescence of $15 and $12, respectively25,833 27,722Prepaid income taxes1,482 81Prepaid expenses and other972 762Total current assets99,759 73,204Rental equipment, net of accumulated depreciation of $126,096 and $111,293, respectively174,060 191,933Property and equipment, net of accumulated depreciation of $11,267 and $10,825, respectively7,753 8,527Goodwill10,039 10,039Intangibles, net of accumulated amortization of $1,508 and $1,382, respectively1,651 1,777Other assets262 73Total assets$293,524 $285,553LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Line of credit$417 $—Accounts payable971 1,226Accrued liabilities2,887 3,071Deferred income2,225 271Total current liabilities6,500 4,568Line of credit— 417Deferred income tax liability53,745 56,458Other long-term liabilities325 129Total liabilities60,570 61,572Commitments and contingencies (Note 11) Stockholders’ Equity: Preferred stock, 5,000 shares authorized, no shares issued or outstanding— —Common stock, 30,000 shares authorized, par value $0.01; 12,764 and 12,603 shares issued and outstanding,respectively128 126Additional paid-in capital100,812 98,310Retained earnings132,014 125,545Total stockholders' equity232,954 223,981Total liabilities and stockholders' equity$293,524 $285,553See accompanying notes to these consolidated financial statements.F- 2NATURAL GAS SERVICES GROUP, INC.CONSOLIDATED STATEMENTS OF INCOME(in thousands, except earnings per share) For the Years Ended December 31, 2016 2015 2014Revenue: Rental income$56,717 $76,432 $78,983Sales13,621 18,519 17,200Service and maintenance income1,316 968 791Total revenue71,654 95,919 96,974Operating costs and expenses: Cost of rentals, exclusive of depreciation stated separately below20,350 28,750 31,522Cost of sales, exclusive of depreciation stated separately below11,124 13,633 11,297Cost of service and maintenance, exclusive of depreciation stated separately below398 272 328Loss on retirement of rental equipment545 4,370 —Selling, general, and administrative expenses9,011 10,989 10,334Depreciation and amortization21,796 22,758 21,507Total operating costs and expenses63,224 80,772 74,988Operating income8,430 15,147 21,986Other income (expense): Interest expense(8) (15) (10)Other income43 132 182Total other income, net35 117 172Income before provision for income taxes8,465 15,264 22,158Provision for income taxes: Current4,709 6,963 1,190Deferred(2,713) (1,846) 6,840Total income tax expense1,996 5,117 8,030Net income$6,469 $10,147 $14,128Earnings per share: Basic$0.51 $0.81 $1.14Diluted$0.50 $0.79 $1.11Weighted average shares outstanding: Basic12,702 12,567 12,434Diluted12,935 12,793 12,721See accompanying notes to these consolidated financial statements.F- 3NATURAL GAS SERVICES GROUP, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands) Preferred Stock Common Stock AdditionalPaid-InCapital RetainedEarnings TotalStockholders'Equity Shares Amount Shares Amount BALANCES, December 31, 2013— $— 12,366 $123 $91,344 $101,270 $192,737Exercise of common stock options— — 3 — 59 — 59Compensation expense on common stockoptions— — — — 426 — 426Issuance of restricted stock— — 97 — — — —Tax benefit of equity compensation — — 419 — 419Compensation expense on restrictedcommon stock— — — 1 2,817 — 2,818Net income— — — — — 14,128 14,128BALANCES, December 31, 2014— $— 12,466 $124 $95,065 $115,398 $210,587Exercise of common stock options— — 66 1 775 — 776Compensation expense on common stockoptions— — — — 601 — 601Issuance of restricted stock— — 71 — — — —Tax benefit of equity compensation— — — — (379) — (379)Compensation expense on restrictedcommon stock— — — 1 2,943 — 2,944Taxes paid related to net sharessettlement of equity awards— (695) (695)Net income— — — — — 10,147 10,147BALANCES, December 31, 2015— $— 12,603 $126 $98,310 $125,545 $223,981Exercise of common stock options— — 62 1 1,041 — 1,042Compensation expense on common stockoptions— — — — 506 — 506Issuance of restricted stock— — 99 — — — —Tax expense of equity compensation— — — — 72 — 72Compensation expense on restrictedcommon stock— — — 1 1,792 — 1,793Taxes paid related to net sharessettlement of equity awards— — — — (909) — (909)Net income— — — — — 6,469 6,469BALANCES, December 31, 2016— $— 12,764 $128 $100,812 $132,014 $232,954See accompanying notes to these consolidated financial statements.F- 4NATURAL GAS SERVICES GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) For the Years Ended December 31, 2016 2015 2014CASH FLOWS FROM OPERATING ACTIVITIES: Net income$6,469 $10,147 $14,128Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization21,796 22,758 21,507Deferred taxes(2,713) (1,846) 6,840Gain on disposal of assets(86) (179) (160)Loss on retirement of rental equipment545 4,370 —Bad debt allowance61 477 121Inventory allowance566 205 395Stock based compensation2,299 3,545 3,244Gain on company owned life insurance(14) — —Changes in operating assets (increase) decrease in: Trade accounts receivables1,668 824 (3,779)Inventory2,117 5,382 (6,112)Prepaid income taxes and prepaid expenses(1,539) 5,774 (3,997)Changes in operating liabilities increase (decrease) in: Accounts payable and accrued liabilities(439) (7,220) 1,126Current income tax liability— (1,230) 920Deferred income1,954 (1,364) 762Other159 (32) (12)Tax benefit from equity compensation(72) — (419)NET CASH PROVIDED BY OPERATING ACTIVITIES32,771 41,611 34,564CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of rental, property and equipment(4,307) (12,504) (53,342)Purchase of company owned life insurance(194) — —Proceeds from sale of property and equipment101 189 240NET CASH USED IN INVESTING ACTIVITIES(4,400) (12,315) (53,102)CASH FLOWS FROM FINANCING ACTIVITIES: Payments of other long-term liabilities, net(14) (26) (42)Repayments of line of credit, net— — (160)Proceeds from exercise of stock options1,042 776 59 Tax benefit from equity compensation72 — 419 Taxes paid related to net share settlement of equity awards(909) (695) —NET CASH PROVIDED BY FINANCING ACTIVITIES191 55 276NET CHANGE IN CASH AND CASH EQUIVALENTS28,562 29,351 (18,262)CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD35,532 6,181 24,443CASH AND CASH EQUIVALENTS AT END OF PERIOD$64,094 $35,532 $6,181SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid$8 $15 $10Income taxes paid$5,825 $6,530 $4,108NON-CASH TRANSACTIONS Transfer of rental equipment to inventory$724 $2,309 $131Transfer of inventory to property and equipment$— $1,624 $—Property and equipment purchases included in accounts payable$— $— $218See accompanying notes to these consolidated financial statements.F- 5NATURAL GAS SERVICES GROUP INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Summary of Significant Accounting PoliciesOrganization and Principles of ConsolidationThese notes apply to the consolidated financial statements of Natural Gas Services Group, Inc. (the "Company", “NGSG”, "Natural Gas ServicesGroup", "we" or "our") (a Colorado corporation). Natural Gas Services Group, Inc. was formed on December 17, 1998 for the purposes of combining theoperations of certain manufacturing, service and leasing entities. The accompanying consolidated financial statements include the accounts of the Companyand the rabbi trust associated with the Company’s deferred compensation plan, see Note 5. All significant intercompany accounts and transactions for theperiods presented have been eliminated in consolidation.Nature of Operations Natural Gas Services Group, Inc. is a leading provider of small to medium horsepower compression equipment to the natural gas industry. Wefocus primarily on the non-conventional natural gas and oil production business in the United States (such as coal bed methane, gas shale, tight gas and oilshale). We manufacture, fabricate and rent natural gas compressors that enhance the production of natural gas wells. NGSG provides maintenance servicesfor its natural gas compressors. In addition, we sell custom fabricated natural gas compressors to meet customer specifications dictated by well pressures,production characteristics and particular applications. We also manufacture and sell flare systems for oil and natural gas plant and production facilities.Use of EstimatesThe preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States ofAmerica requires our management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements andaccompanying notes. Actual results could differ from those estimates. Significant estimates include fixed asset lives, bad debt allowance and the allowancefor inventory obsolescence. It is at least reasonably possible these estimates could be revised in the near term and the revisions could be material.Cash EquivalentsFor purposes of reporting cash flows, we consider all short-term investments with an original maturity of three months or less to be cashequivalents.Accounts ReceivableOur trade receivables consist of customer obligations for the sale of compressors and flare systems due under normal trade terms, and operatingleases for the use of our natural gas compressors. The receivables are not collateralized except as provided for under lease agreements. However, we typicallyrequire deposits of as much as 50% or use of progress payments for large custom sales contracts. We extend credit based on management's assessment of thecustomer's financial condition, receivable aging, customer disputes and general business and economic conditions. The allowance for doubtful accounts was$597,000 and $833,000 at December 31, 2016 and 2015, respectively. Management believes that the allowance is adequate; however, actual write-offs mayexceed the recorded allowance.Revenue RecognitionRevenue from the sales of custom and fabricated compressors, and flare systems is recognized when title passes to the customer, the customerassumes risks and rewards of ownership, collectability is reasonably assured and delivery occurs as directed by our customer. Exchange and rebuiltcompressor revenue is recognized when both the replacement compressor has been delivered and the rebuild assessment has been completed. Revenue fromcompressor service and retrofitting services is recognized upon providing services to the customer. Maintenance agreement revenue is recognized as servicesare rendered. Rental revenue is recognized over the terms of the respective rental agreements. Deferred income represents payments received before a productis shipped. Revenue from the sale of rental units is included in sales revenue when equipment is shipped or title is transferred to the customer. Revenue fromthe sale of rental units is included in sales revenue when equipment is shipped or title is transferred to the customer.F- 6 From time to time, upon the customer’s written request, we recognize revenue when manufacturing is complete and the equipment is ready forshipment. At the customer’s request, we will bill the customer upon completing all performance obligations, but before shipment.The customer will formallyrequest we ship the equipment per their direction from our manufacturing facility at a later specified date and that we segregate the equipment from ourfinished goods, such that they are not available to fill other orders. Title of the equipment and risk of loss passes to the customer when the equipment iscomplete and ready for shipment, per the customer’s agreement. At the transfer of title, all risks of ownership has passed to the customer on the manufactureditems that have not yet been shipped. We have operated using bill and hold agreements with certain customers for many years, with consistent satisfactoryresults for both the customer and us. The credit terms on this agreement are consistent with the credit terms on all other sales. All risks of loss are shoulderedby the customer, and there are no exceptions to the customer’s commitment to accept and pay for these manufactured equipment. Revenues recognized at thecompletion of manufacturing in 2016 and 2015 were approximately $5.6 million and $4 million, respectively.Major Customers and Concentration of Credit RiskSales and rental income to Devon Energy Production, Inc. ("Devon") and Occidental Permian, LTD. ("Oxy") in 2016 amounted to 21% and 19% ofrevenue, respectively. Sales and rental income to Devon and Oxy in 2015 amounted to 21% and 10% of revenue, respectively. Sales and rental income toDevon and EOG Resources Inc. ("EOG") in 2014 amounted to 18% and 15% of revenue. No other single customer accounted for more than 10% of ourrevenues in 2016, 2015 or 2014. Oxy, APR Energy, LLC and BP America Inc. amounted to 15%, 15% and 14%, respectively, of our accounts receivable as ofDecember 31, 2016. Oxy and Devon amounted to 25% and 10%, respectively, of our accounts receivable as of December 31, 2015. No other customersamounted to more than 10% of our accounts receivable as of December 31, 2016 and 2015.InventoryInventory is valued at the lower of cost or market. The cost of inventories is determined by the weighted average method. A reserve is recordedagainst inventory balances for estimated obsolescence. This reserve is based on specific identification and historical experience and totaled $15,000 and$12,000 at December 31, 2016 and 2015, respectively. There were 7 newly completed compressor units at December 31, 2016 and December 31, 2015available for sale or for use in our rental fleet. At December 31, 2016 and 2015, inventory consisted of the following (in thousands): 2016 2015Raw materials$18,365 $20,726Finished goods2,558 1,051Work in process4,910 5,945Total$25,833 $27,722Rental Equipment and Property and EquipmentRental Equipment and property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Our rental equipment has an estimated useful life of 15 years, while our property and equipment hasan estimate useful lives which range from three to thirty-nine years. The majority of our property and equipment, including rental equipment, is a direct costto generating revenue and the following table depicts the depreciation associated with each product line at December 31, 2016 , 2015 and 2014 (inthousands): 2016 2015 2014Rentals$21,325 $22,308 $20,973Sales291 281 339Service & Maintenance25 16 12Total$21,641 $22,605 $21,324We assess the impairment of rental equipment and property and equipment whenever events or changes in circumstances indicate that the netrecorded amount may not be recoverable. The following factors could trigger an impairment review: significant underperformance relative to historical orprojected future cash flows, significant adverse changes in the extent or manner in which asset is being used or its condition, significant negative industrytrends or legislative changes prohibiting us from leasing our unitsF- 7or flares. An impairment loss is recognized if the future undiscounted cash flows associated with the asset and the estimated fair value of the asset are less thanthe asset's carrying value. We recognized no impairments in years ended December 31, 2016, 2015 or 2014.Gains and losses resulting from sales and dispositions of property and equipment are included in current operations. Maintenance and repairs arecharged to operations as incurred.GoodwillGoodwill represents the cost in excess of fair value of the identifiable net assets acquired. Goodwill is tested for impairment annually or wheneverevents indicate impairment may have occurred. Due to a continued decline in rental utilization, we determined a triggering event occurred during eachquarter and we performed a goodwill impairment test each quarter of 2016 and our annual goodwill impairment test was performed in the fourth quarter of2016. We experienced no impairment of goodwill during the years ended December 31, 2016 or 2015.IntangiblesAt December 31, 2016, NGSG had intangible assets, which relate to developed technology and a trade name. The carrying amount net ofaccumulated amortization at December 31, 2016 and 2015 was $1.7 million and $1.8 million respectively. Developed technology is amortized on a straight-line basis with a useful life of 20 years, with a weighted average remaining life of approximately eight years as of December 31, 2016. Amortization expenserecognized in each of the years ending December 31, 2016, 2015, and 2014 was $125,000. Estimated amortization expense for the years 2017-2024 is$125,000 per year. NGSG has an intangible asset with a gross carrying value of $654,000 at December 31, 2016 related to the trade name of SCS which wasacquired in our acquisition of Screw Compression Systems in January 2005. This asset is not being amortized as it has been deemed to have an indefinitelife.The following table represents the identified intangible assets by major asset class (in thousands): December 31, 2016 December 31, 2015 Useful Life(years) Gross CarryingValue AccumulatedAmortization Net BookValue Gross CarryingValue AccumulatedAmortization Net BookValueDeveloped Technology 20 $2,505 $1,508 $997 $2,505 $1,382 $1,123Trade Name Indefinite 654 — 654 654 — 654Total $3,159 $1,508 $1,651 $3,159 $1,382 $1,777Our policy is to periodically review intangibles for impairment through an assessment of the estimated future cash flows related to such assets. Inthe event that assets are found to be carried at amounts in excess of estimated undiscounted future cash flows, then the assets will be adjusted for impairmentto a level commensurate with a discounted cash flow analysis of the underlying assets. Based upon our analysis, we experienced no impairment of intangibleassets during the years ended December 31, 2016 or 2015. Separately, we reviewed our indefinite life intangible for impairment with our goodwillimpairment review, which we performed each quarter in 2016 due to a continued decline in our rental utilization and then annually in the fourth quarter of2016. Based on this analysis, we experienced no impairment on our indefinite life intangible during the years ended December 31, 2016 or 2015.WarrantyWe accrue amounts for estimated warranty claims based upon current and historical product warranty costs and any other related informationknown. The warranty reserve was $103,000 for December 31, 2016 and 2015 and is included in accrued liabilities on the consolidated balance sheet.Financial Instruments and Concentrations of Credit RiskF- 8We invest our cash primarily in deposits and money market funds with commercial banks. At times, cash balances at banks and financialinstitutions may exceed federally insured amounts.Per Share DataBasic earnings per common share is computed using the weighted average number of common shares outstanding during the period. Dilutedearnings per common share is computed using the weighted average number of common stock and common stock equivalent shares outstanding during theperiod. There were anti-dilutive securities in 2016, 2015 and 2014.The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): Year Ended December 31, 2016 2015 2014Numerator: Net income$6,469 $10,147 $14,128Denominator for basic net income per common share: Weighted average common shares outstanding12,702 12,567 12,434Denominator for diluted net income per share: Weighted average common shares outstanding12,702 12,567 12,434Dilutive effect of stock options and restricted shares233 226 287Diluted weighted average shares12,935 12,793 12,721Earnings per common share: Basic$0.51 $0.81 $1.14Diluted$0.50 $0.79 $1.11In the year-ended December 31, 2016, options to purchase 51,167 shares of common stock with exercise prices ranging from $30.41 to $33.36 were notincluded in the computation of dilutive income per share, due to their anti-dilutive effect.In the year-ended December 31, 2015, options to purchase 107,500 shares of common stock with exercise prices ranging from $22.90 to $33.36 were notincluded in the computation of dilutive income per share, due to their anti-dilutive effect.In the year-ended December 31, 2014, options to purchase 55,000 shares of common stock with exercise prices ranging from $30.41 to $33.36 were notincluded in the computation of dilutive income per share, due to their anti-dilutive effectIncome TaxesDeferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financialstatement carrying amounts of assets and liabilities and their respective tax bases, and operating losses and tax credit carry-forwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to berecovered or settled.ASC Topic 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. In order to record any financial statement benefit, we are required to determine, based on technicalmerits of the position, whether it is more likely than not (a likelihood of more than 50 percent) that a tax position will be sustained upon examination,including resolution of any related appeals or litigation processes. If that step is satisfied, then we must measure the tax position to determine the amount ofbenefit to recognize in the financial statements. The tax position is measured at the largest amount of the benefit that is greater than 50 percent likely ofbeing realized upon ultimate settlement. We have no uncertain tax positions as of December 31, 2016 or 2015.Fair Value MeasurementFair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date under current market conditions. ASC Topic 820 established a fair value hierarchy, which requires an entity to maximizethe use of observable inputs when measuring fair value. These inputs are categorized as follows:F- 9Level 1- quoted prices in an active market for identical assets or liabilities;Level 2- quoted prices in an active market for similar assets or liabilities, inputs other than quoted prices that are observable for similar assets or liabilities,inputs derived principally from or corroborated by observable market data by correlation or other means; andLevel 3- valuation methodology with unobservable inputs that are significant to the fair value measurement. Management believes that the fair value of our cash and cash equivalents, trade receivables, accounts payable and line of credit at December 31, 2016 and2015 approximate their carrying values due to the short-term nature of the instruments or the use of prevailing market interest rates. Segments and Related InformationASC 280-10-50, “Operating Segments”, define the characteristics of an operating segment as a) being engaged in business activity from which itmay earn revenue and incur expenses, b) being reviewed by the company's chief operating decision maker (CODM) for decisions about resources to beallocated and assess its performance and c) having discrete financial information. Although we indeed look at our products to analyze the nature of ourrevenue, other financial information, such as certain costs and expenses, net income and EBITDA are not captured or analyzed by these categories. OurCODM does not make resource allocation decisions or access the performance of the business based on these categories, but rather in the aggregate. Based onthis, management believes that it operates in one business segment. In their analysis of product lines as potential operating segments, management also considered ASC 280-10-50-11, “Aggregation Criteria”, whichallows for the aggregation of operating segments if the segments have similar economic characteristics and if the segments are similar in each of the followingareas: •The nature of the products and services;•The nature of the production processes;•The type or class of customer for their products and services;•The methods used to distribute their products or provide their services; and•The nature of the regulatory environment, if applicable. We are engaged in the business of designing and manufacturing compressors and flares. Our compressors and flares are sold and rented to ourcustomers. In addition, we provide service and maintenance on compressors in our fleet and to third parties.These business activities are similar in allgeographic areas. Our manufacturing process is essentially the same for the entire Company and is performed in house at our facilities in Midland, Texas andTulsa, Oklahoma. Our customers primarily consist of entities in the business of producing natural gas. The maintenance and service of our products isconsistent across the entire Company and is performed via an internal fleet of vehicles. The regulatory environment is similar in every jurisdiction in that themost impacting regulations and practices are the result of federal energy policy. In addition, the economic characteristics of each customer arrangement aresimilar in that we maintain policies at the corporate level.Recently Issued Accounting PronouncementsIn August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-15, Classification ofCertain Cash Receipts and Cash Payments, seeking to eliminate diversity in practice related to how certain cash receipts and cash payments are presented andclassified in the statement of cash flows. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities, including bothbusiness entities and not-for-profit entities that are required to present a statement of cash flows under FASB ASC 230, Statement of Cash Flows. Theamendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within thosefiscal years. Early adoption is permitted, including adoption in an interim period. The new standard will be effective during our first quarter ending March 31,2018. We do not foresee this new standard having a significant impact on our consolidated financial statements.F- 10In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" (Topic 326). The provisions of thisstandard require financial assets measured at amortized cost to be presented at the net amount expected to be collected. An allowance account would beestablished to present the net carrying value at the amount expect to be collected. The provisions of this ASU are effective for fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2019, but early adoption is permitted. We are currently evaluating the impact of implementation ofthis standard on our consolidated financial statements.In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-BasedPayment Accounting. This ASU identifies areas for simplification involving several areas of accounting for share-based compensation arrangements,including the income tax impact, classification of awards as equity or liabilities,classifications on the statement of cash flows and forfeitures. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscalyears, beginning after December 15, 2016. Early adoption is permitted provided that presentation is applied to the beginning of the fiscal year of adoption.The new standard will be effective during our first quarter ending March 31, 2017. Based upon our evaluation, we noted the following: (1) there is no impactto our consolidated statement of cash flows, as we are already, disclosing taxes paid related to net share settlement of equity awards as a financing activity;(2) we do not plan on making a change to our forfeiture policy; (3) we currently do not have any employees interested in withholding at the maximumstatutory withholding, but if we did, this could have an impact to our cash on hand balance; and we foresee the new requirement to recognize share-basedpayments excess tax benefits and deficiencies as income tax expense will bring a new element of volatility to our provision for income taxes that couldsignificantly impact our consolidated financial statements.On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, a lessee will be required to recognize assetsand liabilities for capital and operating leases with lease terms of more than 12 months. Additionally, this ASU will require disclosures to help investors andother financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitativerequirements. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2018, including interim periods withinthose fiscal years, with early adoption permitted. The new standard will be effective during our first quarter ending March 31, 2019. We are currentlydetermining the impacts of the new standard on our consolidated financial statements.On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a five-stepanalysis on how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects theconsideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires more detailed disclosures toenable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts withcustomers. In August 2015, the FASB issued an accounting standards update for a one-year deferral of the revenue recognition standard’s effective date for allentities, which changed the effectiveness to interim and annual reporting periods beginning after December 15, 2017. As a result, we expect to adopt thisguidance on January 1, 2018. This standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with thecumulative effect of initially applying it recognized at the date of initial application. We have not yet selected the transition method. We are currentlydetermining the impacts of the new standard on our consolidated financial statements. Our approach includes performing a detailed review of key contractsrepresentative of our revenue units and comparing historical accounting policies and practices to the new standard. A majority of our revenue transactions areshort-term in nature, and our assessment at this stage is that we do not expect the new revenue recognition standard will have a material impact on ourconsolidated financial position or results of operations upon adoption. F- 112. Rental ActivityWe rent natural gas compressor packages to entities in the petroleum industry. These rental arrangements are classified as operating leases andgenerally have original terms of six months to twenty-four months and continue on a month-to-month basis thereafter. Depreciation expense for rentalequipment was $20.2 million, $21.0 million and $19.8 million for the years ended December 31, 2016, 2015 and 2014, respectively. Future minimum rentpayments for arrangements not on a month-to-month basis at December 31, 2016 are as follows :Years Ending December 31, (in thousands)2017$6,2072018500Total$6,7073. Property and EquipmentProperty and equipment consists of the following at December 31, 2016 and 2015 (in thousands): Useful Lives(Years) 2016 2015Land and building30 $7,025 $7,025Leasehold improvements39 794 794Office equipment and furniture5 1,454 1,380Software5 573 573Machinery and equipment7 3,111 3,105Vehicles3 6,063 6,475Total 19,020 19,352Less accumulated depreciation (11,267) (10,825)Total $7,753 $8,527 Depreciation expense for property and equipment was $1.4 million for the year ended December 31, 2016 and $1.6 million for the years endedDecember 31, 2015 and 2014.4. Retirement of Long-Lived AssetsDuring the annual review of our rental compressor units, management looks for any units that are not of the type, configuration, make or model thatour customers are demanding or that were not cost efficient to refurbish, maintain and/or operate. From our review in 2016, we determined 63 units should beretired from our rental fleet with key components from those units being re-utilized in future unit builds and/or repairs. We performed an optimization reviewand recorded a $545,000 thousand loss on retirement of rental equipment to reduce the book value of each unit to the estimated fair value of approximately$242,000 thousand for key components being kept. As a result of our 2015 review, we retired 258 units from our rental fleet with key components from thoseunits being re-utilized in future unit builds and/or repairs. Based on our optimization review we recorded a $4.4 million loss on the retirement of rentalequipment to reduce the book value of each unit to the estimated fair value of approximately $967,000 for the key components being kept. These retirementsare recorded in the consolidated income statement under loss on retirement of rental equipment.5. Deferred Compensation PlansEffective January 1, 2016, the Company established a non-qualified deferred compensation plan for executive officers, directors and certain eligibleemployees. The assets of the deferred compensation plan are held in a rabbi trust and are subject to additional risk of loss in the event of bankruptcy orinsolvency of the Company. The plan allows for deferral up to 90% of a participant’s base salary, bonus, commissions, director fees and restricted stockawards. A Company owned life insurance policy held in a rabbi trust is utilized as a source of funding for the plan. The cash surrender value of the lifeinsurance policy is $207,000F- 12as of December 31, 2016, with a gain related to the policy of $13,900 reported in other income in our consolidated income statement for the year endedDecember 31, 2016.For deferrals of base salary, bonus, commissions and director fees, settlement payments are made to participants in cash, either in a lump sum or inperiodic installments. The deferred obligation to pay the deferred compensation and the deferred director fees is adjusted to reflect the positive or negativeperformance of investment measurement options selected by each participant and was $208,000 as of December 31, 2016. The deferred obligation is includedin other long-term liabilities in the consolidated balance sheet.For deferrals of restricted stock, the plan does not allow for diversification, therefore, distributions are paid in shares and the obligation is carried atgrant value. As of December 31, 2016, no shares had been deferred.6. Credit FacilityWe have a senior secured revolving credit agreement with JP Morgan Chase Bank, N.A (the "Amended Credit Agreement") aggregate commitment$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 $20 million onthe aggregate commitment (which could potentially increase the commitment amount to $50 million). Borrowing Base. At any time before the maturity of the Amended Credit Agreement, we may draw, repay and re-borrow amounts available under theborrowing base up to the maximum aggregate availability discussed above. Generally, the borrowing base equals the sum of (a) 80% of our eligible accountsreceivable plus (b) 50% of the book value of our eligible general inventory (not to exceed 50% of the commitment amount at the time) plus (c) 75% of thebook value of our eligible equipment inventory. JPMorgan Chase Bank (the “Lender”) may adjust the borrowing base components if material deviations inthe collateral are discovered in future audits of the collateral. We had $29.5 million borrowing base availability at December 31, 2016 under the terms of ourAmended Credit Agreement. Interest and Fees. Under the terms of the Amended Credit Agreement, we have the option of selecting the applicable variable rate for each revolving loan, orportion thereof, of either (a) LIBOR multiplied by the Statutory Reserve Rate (as defined in the Amended Credit Agreement), with respect to this rate, forEurocurrency funding, plus the Applicable Margin (“LIBOR-based”), or (b) CB Floating Rate, which is the Lender's Prime Rate less the Applicable Margin;provided, however, that no more than three LIBOR-based borrowings under the agreement may be outstanding at any one time. For purposes of the LIBOR-based interest rate, the Applicable Margin is 1.50%. For purposes of the CB Floating Rate, the Applicable Margin is 1.25%.Accrued interest is payable monthly on outstanding principal amounts, provided that accrued interest on LIBOR-based loans is payable at the end ofeach interest period, but in no event less frequently than quarterly. In addition, fees and expenses are payable in connection with our requests for letters ofcredit (generally equal to the Applicable Margin for LIBOR-related borrowings multiplied by the face amount of the requested letter of credit) andadministrative and legal costs. Maturity . The maturity date of the Amended Credit Agreement is December 31, 2017, at which time all amounts borrowed under the agreement will be dueand outstanding letters of credit must be cash collateralized. The agreement may be terminated early upon our request or the occurrence of an event ofdefault. Security. The obligations under the Amended Credit Agreement are secured by a first priority lien on all of our inventory and accounts and leases receivables,along with a first priority lien on a variable number of our leased compressor equipment the book value of must be maintained at a minimum of 2.00 to 1.00commitment coverage ratio (such ratio being equal to (i) the amount of the borrowing base as of such date to (ii) the amount of the commitment as of suchdate.) Covenants. The Amended Credit Agreement contains customary representations and warranties, as well as covenants which, among other things, limit ourability 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 thenature of our business. In addition, we also have certain financial covenants that require us to maintain a leverage ratio less than or equal to 2.50 to 1.00 as ofthe last day of each fiscal quarter.Events of Default and Acceleration. The Amended Credit Agreement contains customary events of default for credit facilities of this size and type, andincludes, without limitation, payment defaults; defaults in performance of covenants or other agreements contained in the loan documents; inaccuracies inrepresentations and warranties; certain defaults, termination events or similarF- 13events; certain defaults with respect to any other Company indebtedness in excess of $50,000; certain bankruptcy or insolvency events; the rendering ofcertain judgments in excess of $150,000; certain ERISA events; certain change in control events and the defectiveness of any liens under the securedrevolving credit facility. Obligations under the Amended Credit Agreement may be accelerated upon the occurrence of an event of default. As of December 31, 2016, we were in compliance with all covenants in our Amended Credit Agreement. A default under our Credit Agreementcould trigger the acceleration of our bank debt so that it is immediately due and payable. Such default would likely limit our ability to access other credit. AtDecember 31, 2016 our balance on the line of credit was $417,000. Our weighted average interest rate for the year ended December 31, 2016 was 2.04%.7. Income TaxesThe provision for income taxes for the years ended December 31, 2016, 2015 and 2014, consists of the following (in thousands): 2016 2015 2014Current provision: Federal$4,280 $6,440 $995State429 523 195Total current provision4,709 6,963 1,190Deferred provision: Federal(2,713) (1,846) 6,840Total deferred provision(2,713) (1,846) 6,840Total provision$1,996 $5,117 $8,030The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and (liabilities) as of December 31, 2016and 2015, are as follows (in thousands): 2016 2015Deferred income tax assets: Stock Compensation$664 $1,011Other84 4Total deferred income tax assets$748 $1,015 Deferred income tax liabilities: Property and equipment$(53,120) (56,132)Goodwill and other intangible assets(973) (998)Other(400) (343)Total deferred income tax liabilities(54,493) (57,473)Net deferred income tax liabilities$(53,745) $(56,458)F- 14The effective tax rate for the years ended December 31, 2016, 2015 and 2014, differs from the statutory rate as follows: 2016 2015 2014Statutory rate34.0 % 34.0 % 34.0%State and local taxes1.6 % 1.5 % 1.5%Other(12.0)% (2.0)% 0.7%Effective rate23.6 % 33.5 % 36.2%Our policy regarding income tax interest and penalties is to expense those items as general and administrative expense. During the years endedDecember 31, 2016, 2015 and 2014, there were no significant income tax interest or penalty items in the statement of income. We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, we are no longer subject to U.S.federal or state income tax examination by tax authorities for years before 2012.8. Other Long-term LiabilitiesWe entered into a purchase agreement with a vendor on July 30, 2008 pursuant to which we agreed to purchase up to $4.8 million of our paint andcoating requirements exclusively from the vendor. In connection with the execution of the agreement, the vendor paid us a $300,000 fee which is consideredto be a discount toward future purchases from the vendor. The $300,000 payment we received is recorded as a long-term liability and will decrease as thepurchase commitment is fulfilled. The long-term liability remaining for the purchase commitment was $115,000 and $129,000 as of December 31, 2016 and2015, respectively.9. Stockholders' EquityPreferred StockWe have a total of 5.0 million authorized preferred shares with rights and preferences as designated by the Board of Directors. As of December 31,2016 and 2015, there were no issued or outstanding preferred shares.10. Stock-Based CompensationRestricted Stock On June 18, 2014, at our annual meeting of shareholders, our shareholders approved a proposed amendment to the 2009 Restricted Stock/UnitPlan (the "Plan") to add additional 500,000 shares of common stock to the Plan, thereby authorizing the issuance of up to 800,000 shares of common stockunder the Plan. In accordance with the Company's employment agreement with Stephen Taylor, the Company's Chief Executive Officer, the CompensationCommittee reviewed his performance in determining the issuance of restricted common stock. Based on this review which included consideration of theCompany's 2015 performance, Mr. Taylor, was awarded 75,915 restricted shares on January 6, 2016, which vest over two years, in equal installmentsbeginning January 6, 2017. On April 6, 2016, the Compensation Committee awarded 20,000 shares of restricted common stock each to G. Larry Lawrence,our CFO, and James Hazlett, our Vice President of Technical Services. The restricted shares to Messrs. Hazlett and Lawrence vest over two years, in equalinstallments, beginning April 6, 2017. We also awarded and issued 23,536 shares of restricted common stock to our Board of Directors as partial payment for2016 directors' fees. The restricted stock issued to our directors vests over one year, in quarterly installments, beginning March 31, 2017. Compensationexpense related to the restricted shares was approximately $1,793,000, $2,944,000 and $2,818,000 for the years ended December 31, 2016, 2015, and 2014,respectively. As of December 31, 2016, there was a total of approximately $1,638,000 of unrecognized compensation expense related to the nonvestedportion of these restricted shares. This expense is expected to be recognized over two years. As of December 31, 2016, 268,005 shares were still available forissuance under the Plan.A summary of all restricted stock activity as of December 31, 2016 and changes during the year then ended is presented below.F- 15 Number ofShares Weighted AverageGrant Date FairValue WeightedAverageRemainingContractual Life(years) AggregateIntrinsicValue(in thousands)Outstanding, December 31, 2015145,558 $19.17 9.07 $3,246Granted139,451 21.34 — 3,007Vested(145,558) 19.17 — 2,963Canceled/Forfeited— — — —Outstanding, December 31, 2016139,451 $21.34 9.13 $4,483Stock Option PlanOur Stock Option Plan which is stockholder approved, permits the granting of stock options to its employees for up to 550,000 shares of commonstock. On June 16, 2009, at our annual meeting of shareholders, our shareholders approved to add an additional 200,000 shares of common stock to theStock Option Plan. On June 16, 2016, at our annual meeting of shareholders, our shareholders approved a proposed amendment to the Stock Option Plan toadd an additional 250,000 shares of common stock ot the Stock Option Plan, thereby authorizing the issuance of up to 1.0 million shares of common stockunder the Stock Option Plan. We believe that such awards better align the interests of our employees with our stockholders. Option awards are generallygranted with an exercise price equal to the market price of our stock at the date of grant; those option awards generally vest based on three years ofcontinuous service and have ten-year contractual terms. Certain option and share awards provide for accelerated vesting if there is a change in control of theCompany (as defined in the Stock Option Plan). The last date that grants can be made under the Stock Option Plan is February 28, 2026. As of December 31,2016, 345,919 shares were still available for issue under the Stock Option Plan.The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptionsnoted in the following table. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at thetime of grant. The expected life of options granted is based on the vesting period and historical exercise and post-vesting employment termination behaviorfor similar grants. We use historical data to estimate option exercise and employee termination within the valuation model; separate groups of employeesthat have similar historical exercise behavior are considered separately for valuation purposes.Weighted average Black -Scholes fair value assumption during the years ended December 31, are as follows:2015 2014Risk free rate1.56% 1.96% Expected life6 years 6 years Expected volatility45.07% 58.44% Expected dividend yield— — F- 16A summary of all option activity as of December 31, 2016 and changes during the year then ended is presented below. Number ofStock Options Weighted AverageExercise Price WeightedAverageRemainingContractual Life(years) AggregateIntrinsicValue(in thousands)Outstanding, December 31, 2015414,769 $19.07 5.08 $1,814Granted— — Exercised(62,083) 16.79 625Canceled/Forfeited(2,500) 22.90 —Expired— — Outstanding, December 31, 2016350,186 $19.45 4.25 $4,453Exercisable, December 31, 2016299,353 $18.41 3.63 $4,118 The weighted average grant date fair value of options granted during the years 2015 and 2014 was $10.33 and $16.56, respectively. The totalintrinsic value, or the difference between the exercise price and the market price on the date of exercise, of options exercised during the years endedDecember 31, 2016, 2015, and 2014 was approximately $625,000, $481,000, and $48,000 respectively. Cash received from stock options exercised duringthe years ended December 31, 2016, 2015, and 2014 was approximately $1,042,000, $776,000, and $59,000, respectively.The following table summarizes information about our stock options outstanding at December 31, 2016: Range of Exercise Prices Options Outstanding Options Exercisable Shares WeightedAverageRemainingContractualLife (years) WeightedAverageExercisePrice Shares WeightedAverageExercisePrice$0.01-15.70 67,352 2.62 $9.94 67,352 $9.94$15.71-17.81 72,750 2.79 $17.53 72,750 $17.53$17.82-20.48 107,250 2.92 $19.68 107,250 $19.68$20.49-33.36 102,834 7.74 $26.80 52,001 $27.98 350,186 4.25 $19.45 299,353 $18.41The summary of the status of our unvested stock options as of December 31, 2016 and changes during the year then ended is presented below. Unvested stock options:Shares Weighted AverageGrant Date FairValueUnvested at December 31, 2015101,836 $12.67Granted— $—Vested(49,336) $12.74Cancelled/Forfeited(1,667) $10.33Unvested at December 31, 201650,833 $12.67We recognized stock compensation expense from stock options vesting of $506,000, $601,000, and $426,000 for the years ended December 31,2016, 2015 and 2014, respectively. As of December 31, 2016, there was approximately $262,000 of total unamortized compensation cost related to unvestedstock options. We expect to recognize such cost over a weighted-average period of 2.0 years. F- 1711. Commitments and Contingencies401(k) PlanWe offer a 401(k) Plan to all employees that have reached the age of eighteen and have completed six months of service. The participants maycontribute up to 100% of their salary subject to IRS limitations. Employer contributions are subject to Board discretion and are subject to a vesting scheduleof 20% each year after the first year and 100% after six years. We contributed $295,000, $387,000, and $296,000 to the 401(k) Plan in 2016, 2015 and 2014,respectively.Rented Facilities, Vehicles and EquipmentWe lease certain of our facilities and equipment under operating leases with terms generally ranging from month-to-month to five years. Mostleases contain renewal options. Remaining future minimum rental payments (excluding month to month) due under these leases are as follows: Years Ending December 31, (in thousands)2017$42220182842019592020—Total$765Rent expense under such leases was $325,000, $375,000, and $380,000 for the years ended December 31, 2016, 2015 and 2014, respectively.Legal ProceedingsFrom time to time, we are a party to various legal proceedings in the ordinary course of our business. While management is unable to predict theultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material effect on our financial position,results of operations or cash flow. We are not currently a party to any bankruptcy, receivership, reorganization, adjustment or similar proceeding, and we arenot aware of any other threatened litigation.12. Quarterly Financial Data (in thousands, except per share data) – Unaudited2016 Q1 Q2 Q3 Q4 TotalTotal revenue $21,576 $17,194 $16,181 $16,703 $71,654Operating income 3,767 1,873 1,823 967 8,430Net income 2,541 1,259 1,509 1,160 6,469Net income per share - Basic 0.20 0.10 0.12 0.09 0.51Net income per share - Diluted 0.20 0.10 0.12 0.09 0.502015 Q1 Q2 Q3 Q4 TotalTotal revenue $24,741 $24,230 $21,193 $25,755 $95,919Operating income 5,787 919 3,798 4,643 15,147Net income 3,694 614 2,562 3,277 10,147Net income per share - Basic 0.30 0.05 0.20 0.26 0.81Net income per share - Diluted 0.29 0.05 0.20 0.26 0.79Amounts may not add due to rounding differences.F- 18********INDEX TO EXHIBITSExhibit No.Description3.1Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10-QSB filed and dated November 10, 2004).3.2Bylaws, as amended (Incorporated by reference to Exhibit 3.11 of the Registrant's Current Report on Form 8-K filed with the Securities andExchange Commission on June 21, 2016.)4.1Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on August 30, 2005)10.1Lease Agreement, dated March 26, 2008, between WNB Tower, LTD and Natural Gas Services Group, Inc. (Incorporated by reference toExhibit 10.15 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2008 and filed with the Securities and ExchangeCommission on March 9, 2009)10.22009 Restricted Stock/Unit Plan, as amended (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K datedJune 3, 2014 and filed with the Securities and Exchange Commission on June 6, 2014.)10.3Stock Option Plan, as amended and restated (Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filedwith the Securities and Exchange Commission on June 21, 2016.)10.4Lease Agreement, dated December 11, 2008, between Klement-Wes Partnership, LTD and Natural Gas Services Group, Inc. and commencingon January 1, 200910.5Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 10, 2010 (Incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24,2014.)10.6Third Amendment of Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated November 19, 2014(Incorporated by reference to Exhibit 10.1 of the Registrant's Current report on Form 8-K filed with the Securities and Exchange Commissionon January 9, 2012.)10.7Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 10, 2010 (Incorporated byreference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 16,2011.)10.8First Amendment of Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 31, 2011(Incorporated by reference to Exhibit 10.2 of the Registrant's Current report on Form 8-K filed with the Securities and Exchange Commissionon January 9, 2012.)10.9Promissory Note in the aggregate amount of $30,000,000 issued to JPMorgan Chase Bank, N.A., dated December 31, 2014, in connection withthe revolving credit line under the Credit Agreement with JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.2 of theRegistrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24, 2014.)10.10Amended and restated Employment Agreement dated April 27, 2015 between Natural Gas Services Group, Inc. and Stephen C. Taylor(Incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commissionon April 29, 2015.)10.11The Executive Nonqualified Excess Plan Adoption Agreement, referred to as the Nonqualified Deferred Compensation Plan (Incorporated byreference to Exhibit 10.11 of the Registrant's Quarterly report on Form 10-Q filed with the Securities and Exchange Commission on May 6,2016.)10.12Annual Incentive Bonus Plan (Incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K filed with theSecurities and Exchange Commission on December 18, 2012.)*23.1Consent of BDO USA, LLP*31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*31.2Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002E-1*32.1Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*32.2Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101.INSXBRL Instance Document101.SCHXBRL Taxonomy Extension Schema Document101.CALXBRL Taxonomy Extension Calculation Linkbase Document101.DEFXBRL Taxonomy Extension Definition Linkbase Document101.LABXBRL Taxonomy Extension Label Linkbase Document101.PREXBRL Taxonomy Extension Presentation Linkbase Document * Filed herewith.E-2Exhibit 23.1Consent of Independent Registered Public Accounting FirmNatural Gas Services Group, Inc.Midland, TexasWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-212411, 333-196578, 333-147311, 333-110954, 333-160068 and 333-160063) of Natural Gas Services Group, Inc. of our reports dated March 10, 2017, relatingto the consolidated financial statements and the effectiveness of Natural Gas Services Group, Inc.’s internal control over financialreporting, which appear in this Annual Report on Form 10-K. /s/ BDO USA, LLP Houston, TexasMarch 10, 2017Exhibit 31.1CertificationsI, Stephen C. Taylor, certify that:1.I have reviewed this Annual Report on Form 10-K of Natural Gas Services Group, Inc;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Dated:March 10, 2017 Natural Gas Services Group, Inc. By:/s/ Stephen C. Taylor Stephen C. Taylor, President, CEO and Chairman of the Board of Directors (Principal Executive Officer)Exhibit 31.2CertificationsI, G. Larry Lawrence, certify that:1. I have reviewed this Annual Report on Form 10-K of Natural Gas Services Group, Inc;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for theregistrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant's internal control over financial reporting; and5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Dated:March 10, 2017 Natural Gas Services Group, Inc. By:/s/ G. Larry Lawrence G. Larry Lawrence Vice President, Chief Financial Officer (Principal Accounting Officer)Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. §1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Natural Gas Services Group, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2016 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen C. Taylor, Chief Executive Officer of the Company, certify,pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Dated:March 10, 2017 Natural Gas Services Group, Inc. By:/s/ Stephen C. Taylor Stephen C. Taylor, President, CEO and Chairman of the Board of Directors (Principal Executive Officer)The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or afterthe date hereof, regardless of any general incorporation language in such filing.Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. §1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Natural Gas Services Group, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2016 as filedwith the Securities and Exchange Commission on the date hereof (the “Report”), I, G. Larry Lawrence, Chief Financial Officer of the Company, certify,pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Dated:March 10, 2017 Natural Gas Services Group, Inc. By:/s/ G. Larry Lawrence G. Larry Lawrence, Vice President and Chief Financial Officer (Principal Accounting Officer)The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or afterthe date hereof, regardless of any general incorporation language in such filing.

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