Natural Gas Services Group
Annual Report 2018

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, 2018 or[ ] 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 registered Common Stock, $.01 par value New York Stock Exchange Securities 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 1934 during the preceding 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements 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 be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and postsuch files).Yes þ No oIndicate 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 best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes o No þIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer oAccelerated filer xNon-accelerated filer oSmaller reporting company oEmerging growth company oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No þIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act.oThe aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2018 was approximately $306,723,300 based on theclosing price of the common stock on that date on the New York Stock Exchange.At March 5, 2019, there were 13,193,044 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 the annual meeting ofshareholders to be held on June 20, 2019.FORM 10-K NATURAL GAS SERVICES GROUP, INC. TABLE OF CONTENTS Item No. Page PART IItem 1. Business1 Item 1A. Risk Factors9 Item 1B. Unresolved Staff Comments17 Item 2. Properties18 Item 3. Legal Proceedings18 Item 4. Mine Safety Disclosures18 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities19 Item 6. Selected Financial Data20 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk35 Item 8. Financial Statements and Supplementary Data36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure36 Item 9A. Controls and Procedures36 Item 9B. Other Information37 PART III Item 10. Directors, Executive Officers and Corporate Governance40 Item 11. Executive Compensation40 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters40 Item 13. Certain Relationships and Related Transactions, and Director Independence40 Item 14. Principal Accounting Fees and Services40 PART IV Item 15. Exhibits and Financial Statements41Item 16.Form 10-K Summary42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. i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, with an emerging position in thelarge horsepower market. 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 to data from the Energy Information Administration ("EIA"), is the single largest and fastest growingsegment of U.S. hydrocarbon production. We manufacture, fabricate and rent natural gas compressors that enhance the production of natural gas wells andprovide maintenance services for those compressors. In addition, we sell custom fabricated natural gas compressors to meet customer specifications dictatedby well pressures, production characteristics and particular applications. We also manufacture and sell flare systems for oil and gas plant and productionfacilities.The vast majority of our rental operations are in non-conventional natural gas and oil regions, which typically have lower initial reservoirpressures, lower production 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 to enable gas to continue to flowin the pipeline to its destination.Our revenue decreased to $65.5 million from $67.7 million for the year ended December 31, 2018 compared to the year ended December 31, 2017.Net income for the year ended December 31, 2018 decreased to $426,000 ($0.03 per diluted share), as compared to $19.9 million ($1.51 per diluted share) forthe year ended December 31, 2017. Net Income for the year-ended December 31, 2017 includes a net income tax benefit of approximately $18.4 million dueto a reduction in corporate income tax rates. See Note 7 to our Consolidated Financial Statements for further information.At December 31, 2018, current assets were $96.4 million, which included $52.6 million of cash and cash equivalents. Current liabilities were$10.9 million, and the amount outstanding on our line of credit at December 31, 2018 was $417,000. Our stockholders' equity as of December 31, 2018 was$260.2 million.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 at the end of December 31, 2018 we maintained our principal offices at 508 W.Wall St., Suite 550, Midland, Texas 79701. 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. An uncertain price environment typically impacts capital commitments by many energy companies. Since 2016 the result has been a moderation ofdemand for compression. The industry has seen higher prices exiting 2018 that have continued into 2019. Oil prices have continued to rebound from anaverage in 2016 below $40 per barrel to finish 2018 averaging above $56. As a result, we anticipate a continued increase in activity in E&P companies in2019. 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 in the United States increased 2.5% while natural gasconsumption increased 9.8% for the year-ended November 2018 compared to the same period 2017. This follows a 1.0% increase in oil consumption and a1.1% decrease in natural gas consumption in the periods from 2016 to 2017. EIA expects total oil and natural gas consumption in the U.S. to increase in theU.S in 2019. While we anticipate long-term increased demand for oil and natural gas, we expect our business to continue to experience pressure on revenuesin 2019 due to the delayed impact of an upturn in oil and gas prices 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 low oil price environment has made some drilling projects uneconomic. Uncertaintycontinues to exist as to the direction of future natural gas and near-term crude oil price and oil trends in the United States and worldwide. Over the lastseveral years, gas prices have not shown the resiliency that crude oil prices have typically shown. Oil-based projects tend to produce a marketable quantity ofgas. With crude prices beginning to show strength, gas production and compression is expected to follow. We also believe that natural gas is a moreenvironmentally friendly source of energy which is likely to result in increases in demand over time. Being primarily a provider of services and equipment tonatural gas producers, we are impacted by changes in natural gas, crude oil and condensate prices. Longer term natural gas prices will be determined by thesupply and demand for natural gas as well as the prices of competing fuels, such as oil and coal, and renewable energy such as wind and solar. Prices for oiland natural gas 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, as overall producing activity begins to increase.Notwithstanding the recent softness in natural gas prices, we believe that there be a growing demand for natural gas related products, 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;•the use of our equipment for gas lift on oil wells; and•the increase in worldwide mobility of natural gas via LNG.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, with an emerging position in the large horsepower market, to customers under contracts typically havingminimum initial terms of six to twenty four months. Historically, in our experience, most customers retain the equipment beyond the expiration of the initialterm. At December 31, 2018, 43% of our rented compressors were under a lease term while the remainder were leased on a month-to-month basis. Byoutsourcing their compression needs, we believe our customers are able to increase their revenues by2producing a higher volume of natural gas due to greater equipment run-time. Outsourcing also allows our customers to reduce their compressor downtime,operating and maintenance costs and capital investments and more efficiently meet their changing compression needs. We maintain and service compressorequipment 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, 2018, we had 2,572 natural gas compressors in our rental fleet totaling 398,765 horsepower, as compared to 2,546 natural gascompressors totaling 369,961 horsepower at December 31, 2017. As of December 31, 2018, we had 1,361 natural gas compressors totaling 230,089horsepower rented to 94 customers, compared to 1,259 natural gas compressors totaling 184,382 horsepower rented to 87 customers at December 31, 2017. Asof December 31, 2018, the utilization rate of our rental fleet was 52.9% compared to 49.5% as of December 31, 2017.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 downturns in the economy and adverse swings in oil and gas prices, our strategy has been to reduce expenses in line with the loweranticipated business activity, and fabricate compressor equipment only in direct response to market requirements. See “Item 7 – Management’s Discussionand Analysis of Financial Condition and Results of Operations – Our Performance Trends and Outlook" for more information. Our long-term intentions togrow our revenue and 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 future growth will be primarily driven through ourplacement of larger horsepower wellhead natural gas compressors for non-conventional natural gas and oil production, with selected fabrication ofmedium horsepower compressors to meet customer demand beyond our inventory.3•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 services to a customer base of oil and natural gas exploration andproduction companies operating in Colorado, Kansas, Michigan, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, Texas, Utah, WestVirginia 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 availability of the small to high horsepower compression has enabled us to effectively meet the evolving needs ofour customers. We believe these markets provide the maximum demand, coupled with our personalized services and in-depth knowledge of ourcustomers’ operating needs and growth plans, have allowed us to enhance our relationships with existing customers as well as attract newcustomers. The size, type and geographic diversity of our rental fleet enable us to provide customers with a range of compression units that canserve a wide variety of applications. We are able to select the correct equipment for the job, rather than the customer trying to fit its application toour 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 Occidental Permian, LTD. ("Oxy") for the year ended December 31, 2018 amounted to 28% of our revenue. Sales andrental income to Oxy and Devon Energy Production, Inc. ("Devon") for the year ended December 31, 2017 amounted to 20% and 15% of our revenue,respectively. Sales and rental income to Devon and Oxy for the year ended December 31, 2016 amounted to 21% and 19% of our revenue. No other singlecustomer accounted for more than 10% of our revenues in 2018, 2017 or 2016.4Oxy amounted to 26% of our accounts receivables as of December 31, 2018 and 14% of our accounts receivable as of December 31, 2017. No othercustomers amounted to more than 10% of our accounts receivable as of December 31, 2018 and 2017. The loss of either of these two key customers wouldhave a material adverse effect on our business, financial condition, results of operations and cash flows, depending upon the demand for our compressors atthe 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, 2018, we had a sales backlog of approximately $14.8 million compared to $7.8 million as of December 31, 2017. We arescheduled to fulfill the backlog primarily by the end of third quarter 2019. Sales backlog consists of firm customer orders for which a purchase or work orderhas been received, satisfactory credit or a financing arrangement exists, and delivery is scheduled. In addition, the major components of our compressors areacquired from suppliers through 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, 2018, we had 273 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. However, in a March 2017 executive order, President Trump directed the EPA to review the 2016 regulations and, if appropriate, to initiate arulemaking to rescind or revise them consistent with the stated policy of promoting clean and safe development of the nation’s energy resources, while at thesame time avoiding regulatory burdens that unnecessarily encumber energy production. In June 2017, the EPA published a proposed rule to stay for twoyears certain requirements of the 2016 regulations, including fugitive emission requirements. On September 11, 2018, the EPA proposed targetedimprovements to the rule, including amendments to the rule's fugitive emissions monitoring requirements, and expects to "significantly reduce" theregulatory burden of the rule in doing so. These standards, as well as any future laws and their implementing regulations, may impose stringent air permitrequirements, or mandate the use of specific equipment or technologies to control emissions. We cannot predict the final regulatory requirements or the costto comply with such requirements with any certainty.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 policies7there under, could lead to material costs of environmental compliance by us. While we may be able to pass on the additional cost of complying with suchlaws to our customers, there can be no assurance that attempts to do so will be successful. Some risk of environmental liability and other costs are inherent inthe nature of our business, however, and there can be no assurance that environmental costs will not rise. 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 six 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. Please mail requests sent beforeMarch 31, 2019 to Natural Gas Services Group, Inc. at 508 West Wall Street, Suite 550, Midland, Texas 79701. Mail all requests made after March 31, 2019to our new location at 404 Veterans AirPark Lane, Suite 300 Midland, TX 79705. The information contained on 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.8"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, and other operational safety reasons. Natural gas that is uneconomical for sale is also flared. Often naturalgas is flared as a result of the unavailability of a method 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, relatively 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 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, as they have at various times during the past several years, our revenue will suffer. Theindustry’s willingness to explore for, develop and produce oil and natural gas depends largely upon the prevailing view of future oil and natural gasprices. Prices for oil and natural gas historically have been, and are likely to continue to be, highly volatile. Many factors affect the supply and demand foroil and natural gas and, therefore, influence oil and natural gas prices, including:9•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;•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, national oil companies and other large producers to set and maintain productionlevels 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 prolonged reduction in drilling and production activities historically has materially eroded bothpricing and utilization rates for our equipment and services and adversely affects our financial results. As a result of any such prolonged reductions, we maysuffer losses, be unable to make necessary capital expenditures and 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.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.10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 32% from 2014 and its compressor utilization rate has declined from 76.0% at December 31, 2014 to52.9% at December 31, 2018.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 have been required to enter intolower rate rental contracts in response to market conditions and our rentals and sales revenue have decreased 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, weanticipate our results of operations will be volatile in the future.Increased regulation or ban of current fracturing techniques could reduce demand for our compressors. From time to time, for example, legislation has been proposed in Congress to amend the federal Safe Drinking Water Act (“SDWA”) to requirefederal permitting of hydraulic fracturing and the disclosure of chemicals used in the hydraulic fracturing process. Further, the EPA completed a study findingthat hydraulic fracturing could potentially harm drinking water resources under adverse circumstances such as injection directly into groundwater or intoproduction wells lacking mechanical integrity. Further, legislation to amend the SDWA to repeal the exemption for hydraulic fracturing (except when dieselfuels are used) from the definition of “underground injection” and require federal permitting and regulatory control of hydraulic fracturing, as well aslegislative proposals to require disclosure of the chemical constituents of the fluids used in the fracturing process, have been proposed in recent sessions ofCongress. Several states and local jurisdictions also have adopted or are considering adopting regulations that could restrict or prohibit hydraulic fracturingin certain circumstances, impose more stringent operating standards and/or require the disclosure of the composition of hydraulic fracturing fluids.More recently, federal and state governments have begun investigating whether the disposal of produced water into underground injection wells hascaused increased seismic activity in certain areas. The results of these studies could lead federal and state governments and agencies to develop andimplement additional regulations.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; and11•performance of site investigatory, remedial or other corrective actions.Risks Associated With Our CompanyAs of December 31, 2018, 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 has and will have a material adverse effect upon our business, financial condition, results ofoperations and 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.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 one customer that accountedfor an aggregate of approximately 28% of our revenue for the year ended December 31, 2018, and two customers that accounted for an aggregate ofapproximately 35% of our revenue for the year ended December 31, 2017. At December 31, 2018, one customer accounted for an aggregate of 26% 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.12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 and liquidity substantially declined during the most recent fall in oil and natural gas prices, and in somecases access to capital markets may be an unreliable source of financing for some customers. The combination of a reduction in cash flow resulting fromdeclines in commodity prices, a reduction in borrowing bases under reserve-based credit facilities and the lack of availability of debt or equity financing mayresult in flat or moderate growth in our customers’ spending for our products and services in 2019. For example, our customers could seek to preserve capitalby canceling month-to-month contracts, canceling or delaying scheduled maintenance of their existing natural gas compression equipment or determiningnot to 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 2019, the amount we will spend on capital expenditures related to rental compression equipment will be determined primarily by theactivity of our customers. The amount and timing of any of these capital expenditures may vary depending on a variety of factors, including the level ofactivity in the oil and natural gas exploration and production industry and the presence of alternative uses for our capital, including any acquisitions that wemay 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, cash flows from our operations and/or bank borrowing from our line of credit will provide us with sufficient cash to fund ourplanned capital expenditures for 2019, we cannot assure you that these sources will be sufficient. We may require additional capital to fund any significantunanticipated capital expenditures, such as a material acquisition. To the extent we would require any necessary capital, it may not be available to us whenwe 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 capital andindustry markets at the time we seek such capital. Failure to generate sufficient cash flow, together with the absence of alternative sources of capital, couldhave 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, 2018. All outstanding principal and unpaid interest is due on December 31,2020. 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.Uncertainty relating to the LIBOR calculation process and potential phasing out of LIBOR after 2021 may adversely affect the market value of our currentor future debt obligationsOur variable rate debt is tied to the benchmark LIBOR. LIBOR is calculated by reference to a market for interbank lending, and it's based onincreasingly fewer actual transactions. This increases the subjectivity of the LIBOR calculation process and increases the risk of manipulation. Actions by theregulators or law enforcement agencies, as well as ICE Benchmark Administration (the current administrator of LIBOR), may result in changes to the mannerthat LIBOR is determined or the establishment of alternative reference rates. For example, on July 27, 2017, the U.K. Financial Conduct Authority announcedthat it intends to stop persuading or compelling banks to submit LIBOR rates after 2021.13U.S. Dollar LIBOR will likely be replaced by the Secured Overnight Financing Rate (“SOFR”) published by the Federal Reserve Bank of New York;however, the timing of this shift is currently unknown. SOFR is an overnight rate instead of a term rate, making SOFR an inexact replacement for LIBOR, andthere is not an established process to create robust, forward-looking, SOFR term rates. Changing the benchmark rate for our debt instruments from LIBOR toSOFR requires calculations of a spread. Industry organizations are attempting to structure the spread calculation in a manner that minimizes the possibility ofvalue transfer between counterparties, borrowers, and lenders by the transition, but there is no assurance that the calculated spread will be fair and accurate. Atthis time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that maybe implemented. If LIBOR ceases to exist, we may need to renegotiate our line of credit to determine the interest rate to replace LIBOR with the new standardthat is established. As such, the potential effect of any such event on our interest expense cannot yet be determined.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, 2018, we had an aggregate ofapproximately $417,000 of outstanding indebtedness, and accounts payable and accrued expenses of approximately $10.9 million. As a result ofour indebtedness at any given point in time, we might not have the ability to incur any substantial additional indebtedness. The level of our indebtednesscould 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, 2018, 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 position and the amount available under the current revolverare sufficient to meet our capital needs through 2019. However, if we were to materially increase our borrowings, it is possible that our business will notgenerate sufficient cash flow from operations to meet our debt service requirements and the payment of principal when due depending on the amount ofborrowings 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.14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.Our income taxes may change. We are subject to income tax on a jurisdictional or legal entity basis and significant judgment is required in certain instances to allocate our taxableincome to a jurisdiction and to determine the related income tax expense and benefits. Losses in one jurisdiction generally may not be used to offset profitsin other jurisdictions. As a result, changes in the mix of our earnings (or losses) between jurisdictions, among other factors, could alter our overall effectiveincome tax rate, possibly resulting in significant tax rate increases. 15We are regularly audited by various tax authorities. Income tax audit assessments or changes in tax laws, regulations, or other interpretations mayresult in increased tax provisions which could materially affect our operating results in the period or periods in which such determinations are made orchanges occur.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 prevent financial fraud. If, as a result of deficiencies in our internal controls, we cannot provide reliablefinancial reports or prevent fraud, our business decision process may be adversely affected, our business and operating results could be harmed, investorscould lose confidence in our reported financial information, and the price of our stock could decrease as a result.We are exposed to risks related to Computer systems failures or cyber security threats In the conduct of our business we are dependent upon our computing systems and those of third parties to collect, store, transmit and process dataused in our operational activities and to record, process and track financial transactions. If interruptions were to occur we would be unable to access thesesystems for a period of time and there is a risk of data loss. Data backup and storage measures are in place that would allow recovery in a time frame that webelieve would not materially impact our ability to conduct business.We are also subject to cyber security attacks and have taken steps to minimize the probability of an attack penetrating our systems. These includenetwork security, virus protection, filtering software and intrusion protection measures. While an attack could potentially disrupt our activity, we do nothouse sensitive data that would affect the privacy of our customers, employees or business partners.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 22.7% of the outstanding shares of our common stock areowned by three institutional investors, each of which owns more than 5% of our outstanding shares as of March 8, 2019. 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 6.2% of the outstanding shares of our common stock as ofMarch 8, 2019, 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.16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.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 analyst coverage. 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 analysts cease coverage of our company, we could lose visibility in the market, which inturn could cause our stock price to decline.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.17ITEM 2. PROPERTIES The table below describes the material facilities owned or leased by Natural Gas Services Group as of December 31, 2018: Location Status Square Feet UsesTulsa, Oklahoma Owned and Leased 91,780 Compressor fabrication, rental and services Midland, Texas Owned 70,000 Compressor fabrication, rental and services Lewiston, Michigan Owned 15,360 Compressor fabrication, rental and services Midland, Texas Owned 45,000 Corporate office* Midland, Texas Leased 13,135 Corporate office Bloomfield, New Mexico Owned 7,000 Office and parts and services Bridgeport, Texas Leased 4,500 Office and parts and services Midland, Texas Owned 4,100 Parts and services Godley, TexasLeased 5,000 Parts and services Vernal, UtahLeased3,200 Parts and servicesCarrollton, OhioLeased2,600 Parts and servicesLoveland, ColoradoLeased2,400 Parts and servicesWheeler, TexasLeased2,160 Parts and servicesGrapevine, TexasLeased800 Sales*In 2017, the Company purchased 3.059 acres in Midland, Texas for the location of its new corporate office. Construction of the new 45,000 sq. ft. buildingis under way, and is expected to cost approximately $12.0 million and completed in late first quarter or early second quarter of 2019.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.18PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY 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 2018 and 2017.2018Low High First Quarter $23.30 $29.10 Second Quarter 21.90 26.55 Third Quarter 20.80 24.00 Fourth Quarter 15.42 21.10 2017Low High First Quarter $24.50 $32.05 Second Quarter 22.85 28.80 Third Quarter 22.80 29.25 Fourth Quarter 24.35 29.05 As of December 31, 2018 as reflected by our transfer agent records, we had 15 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 4, 2019, the last reported sale price of ourcommon stock as reported by the New York Stock Exchange was $18.37 per share. The following graph shows a five year comparison of the cumulative total stockholder return on our common stock as compared to thecumulative total return of two other indexes: a custom composite index of the Philadelphia Oil Service Index and the Standard & Poor’s 500 CompositeStock Price Index. These comparisons assume an initial investment of $100 and the reinvestment of dividends.19The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this 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.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 under certain circumstances.Equity Compensation PlansThe following table summarizes certain information regarding our equity compensation plans as of December 31, 2018: Plan Category(a)Number of Securities tobe issued upon exerciseof outstanding options(b)Weighted-averageissuance or exerciseprice ofoutstanding options(c)Number of securitiesremaining available forfuture issuance underequity compensation plans(excluding securitiesreflected in column (a))Equity compensation plans approved by security holders: Stock Option Plan283,686 (1)$20.46 318,503 Restricted Stock / Unit Plan214,630 $25.51 45,533 Total498,316 364,036 (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, 2018.Sale of Unregistered SecuritiesWe made no sales of unregistered securities during the year ended December 31, 2018.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, 2018. In the table we also present non-GAAP financial measures, Adjusted EBITDA andAdjusted Gross Margin, which we use in our business. These measures are not calculated or presented in accordance with GAAP. We explain these measuresbelow and 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. 20The selected financial information provided is not necessarily indicative of our future results of operations or financial performance. Year Ended December 31, 20182017201620152014 (in thousands, except per share amounts) STATEMENTS OF INCOME AND OTHERINFORMATION: Revenues $65,478 $67,693 $71,654 $95,919 $96,974 Costs of revenues, exclusive of depreciation andamortization shown separately below33,695 34,743 31,872 42,655 43,147 Loss on retirement of rental equipment— — 545 4,370 — Depreciation and amortization 22,049 21,302 21,796 22,758 21,507 Selling, general and administrative expenses9,096 10,081 9,011 10,989 10,334 Operating income 638 1,567 8,430 15,147 21,986 Total other income, net113 36 35 117 172 Income before income taxes 751 1,603 8,465 15,264 22,158 Income tax expense (benefit)325 (18,248)1,996 5,117 8,030 Net income$426 $19,851 $6,469 $10,147 $14,128 Net income per common share: Basic $0.03 $1.55 $0.51 $0.81 $1.14 Diluted $0.03 $1.51 $0.50 $0.79 $1.11 Weighted average shares of common stock outstanding: Basic 12,965 12,831 12,702 12,567 12,434 Diluted 13,233 13,110 12,935 12,793 12,721 Adjusted EBITDA(1)$22,869 $22,919 $30,814 $42,407 $43,675 Adjusted gross margin (2)$31,783 $32,950 $39,782 $53,264 $53,827 Cash flows from: Operating Activities $23,414 $17,452 $31,785 $41,566 $33,742 Investing Activities (40,010)(12,791)(3,414)(12,270)(52,280)Financing Activities 16 453 191 55 276 Net change in cash and cash equivalents $(16,580)$5,114 $28,562 $29,351 $(18,262) As of December 31, 20182017201620152014BALANCE SHEET INFORMATION: (in thousands) Current assets $96,399 $108,226 $95,359 $68,074 $49,631 Total assets 305,401 298,310 293,524 285,553 282,712 Long-term debt (including current portion) 417 417 417 417 417 Stockholders’ equity 260,181 257,319 232,954 223,981 210,587 (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".21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.22ReconciliationThe following table reconciles our net income, the most directly comparable GAAP financial measure, to Adjusted EBITDA: Year Ended December 31, 20182017201620152014 (in thousands) Net income$426 $19,851 $6,469 $10,147 $14,128 Interest expense69 14 8 15 10 Income tax expense (benefit)325 (18,248)1,996 5,117 8,030 Loss on retirement of rental equipment— — 545 4,370 — Depreciation and amortization22,049 21,302 21,796 22,758 21,507 Adjusted EBITDA$22,869 $22,919 $30,814 $42,407 $43,675 Our 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, the most directly comparable GAAP financial measure, to Adjusted Gross Margin: Year Ended December 31, 20182017201620152014 (in thousands)Operating Income$638 $1,567 $8,430 $15,147 $21,986 Depreciation and amortization22,049 21,302 21,796 22,758 21,507 Selling, general, and administration expenses9,096 10,081 9,011 10,989 10,334 Loss on retirement of rental equipment— — 545 4,370 — Adjusted Gross Margin$31,783 $32,950 $39,782 $53,264 $53,827 23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, 2018, 2017 and 2016. 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 60 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, 2018, we had 1,361 natural gas compressors totaling 230,089 horsepower rented to 94 customers, compared to 1,259 natural gas compressorstotaling 184,382 horsepower rented to 87 customers at December 31, 2017. Of the 1,361 compressors rented at December 31, 2018, 779 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, 201820172016 (in thousands) Rental $47,766 $46,046 $56,717 Sales 16,269 20,208 13,621 Service and maintenance 1,443 1,439 1,316 Total $65,478 $67,693 $71,654 24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 2018 due to increasing oil prices, in spite of continued low natural gasprices. As crude oil prices continue to rebound, demand for our products began to recover. There continues to be uncertainty as oil and gas prices have notshown long-term stability.For fiscal year 2019, 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 2019. 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.25Revenue Recognition PolicyThe Company adopted ASC 606, Revenue from Contracts with Customers ("ASC 606") on January, 1, 2018. As a result, the Company has changedits accounting policy for revenue recognition as detailed below. The Company applied ASC 606 using the cumulative effect method. We had no significant changes in our recognition of revenue at adoption andour review of all open revenue from contracts with customers on January 1, 2018 indicated we had no adjustment to be made. If an adjustment had beenneeded, we would have recognized the cumulative effect of initially applying ASC 606 with an adjustment to the opening balance of equity at January 1,2018. Therefore, our consolidated financial statements for 2017 reported under ASC 605 are comparable to the consolidated financial statements for 2018reported under ASC 606, since an adjustment was not needed, except for the respective additional disclosures as detailed below.Revenue is measured based on a consideration specified in a customer’s contract, excluding any sale incentives and taxes collected on behalf ofthird parties (i.e. sales and property taxes). We recognize revenue once a performance obligation has been satisfied and control over a product or service hastransferred to the customer. Shipping and handling costs incurred are accounted for as fulfillment costs and are included in cost of revenues in our condensedconsolidated income statement.Nature of goods and ServicesThe following is a description of principal activities from which the Company generates its revenue:Rental Revenue. The Company generates revenue from renting compressors and flare systems to our customers. These contracts may also include afee for servicing the compressor or flare during the rental contract. Our rental contracts range from six to twenty-four months, with revenue being recognizedover time, in equal payments over the term of the contract. After the terms of the contract have expired, a customer may renew their contract or continuerenting on a monthly basis thereafter. In accordance with generally accepted accounting principles, the revenue earned from servicing rental equipment isrecognized in accordance with ASC 606, while the revenue earned from the rental of the equipment is recognized in accordance with ASC 840 - Leases.Sales Revenue. The Company generates revenue by the sale of custom/fabricated compressors, flare systems and parts, as well as,exchange/rebuilding customer owned compressors and sale of used rental equipment.Custom/fabricated compressors and flare systems - The Company designs and fabricates compressors and flares based on the customer’sspecifications outlined in their contract. Though the equipment being built is customized by the customer, control under these contracts does not pass to thecustomer until the compressor or flare package is complete and shipped, or in accordance with a bill and hold arrangements the customer accepts title andassumes the risk and rewards of ownership. We request some of our customers to make progressive payments as the product is being built; these payments arerecorded as a contract liability on the Deferred Income line on the consolidated balance sheet until control has been transferred. These contracts also mayinclude an assurance warranty clause to guarantee the product is free from defects in material and workmanship for a set duration of time; this is a standardindustry practice and is not considered a performance obligation.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. Per the customer’s agreement change of control is passed to the customer once theequipment is complete and ready for shipment. We have operated using bill and hold agreements with certain customers for many years, with consistentsatisfactory results for both the customer and us. The credit terms on these agreements are consistent with the credit terms on all other sales. All control isshouldered by the customer and there are no exceptions to the customer’s commitment to accept and pay for the manufactured equipment. Revenuesrecognized related to bill and hold arrangements for the years ended December 31, 2018 and 2017 was approximately $8.3 million and $4.6 million,respectively.Parts - Revenue is recognized after the customer obtains control of the parts. Control is passed either by the customer taking physical possession orthe parts being shipped. The amount of revenue recognized is not adjusted for expected returns, as our historical part returns have been de minimis.Exchange or rebuilding customer owned compressors - Based on the contract, the Company will either exchange a new/rebuilt compressor for thecustomer’s malfunctioning compressor or rebuild the customer’s compressor. Revenue is recognized after control of the replacement compressor hastransferred to the customer by physical delivery, delivery and installment or shipment of the compressor.26Used compressors or flares - From time to time, a customer may request to purchase a used compressor or flare out of our rental fleet. Revenue fromthe sale of rental equipment is recognized when the control has passed to the customer, when the customer has taken physical possession or the equipmenthas been shipped.Service and Maintenance Revenue. The Company provides routine or call-out services on customer owned equipment. Revenue is recognized afterservices in the contract are rendered.Payment terms for sales revenue and service and maintenance revenue discussed above are generally 30 to 60 days although terms for specificcustomers can vary. Also, the transaction prices are not subject to variable consideration constraints.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, 2018, one customer accounted for 26% of our accounts receivable, and atDecember 31, 2017, one customer accounted for approximately 14% of our accounts receivable. A significant change in the liquidity or financial position ofthese customers could have a material adverse impact on the collectability of our accounts receivable and our future operating results. At December 31, 2018and 2017, our allowance for doubtful accounts balance was $291,000 and $569,000, 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.On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017Tax Act”), which made broad and complex changes to the U.S. tax code. Certain income tax effects of the 2017 Tax Act were reflected in the Company’s2017 financial results in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”), which provided SEC staff guidance regarding the application ofAccounting Standards Codification Topic 740 Income Taxes (“ASC 740”). See Note 7, “Income Taxes,” to our Consolidated Financial Statements includedhere for further information on the financial statement impact of the 2017 Tax Act.ASC Topic 740 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of atax position 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 likelyof being realized upon ultimate settlement. Our policy regarding income tax interest and penalties is to expense those items as other expense. 27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.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 2018. Ouranalysis considered multiple qualitative factors to determine whether events and circumstances indicate that we more than likely than not experiencedimpairment to the stated value of goodwill. Our qualitative 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 qualitative analysis, we concluded that it is more likely than not that we have not incurred impairment andare not required to take further action. As a result, no impairment of goodwill or indefinite-lived intangibles was recorded during the year endedDecember 31, 2018. Future impairment tests could result in impairments of our intangible assets or goodwill.InventoriesWe value our total inventory (current and long-term) at the lower of the actual cost and net realizable value of the inventory. We regularly reviewinventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand andproduction requirements. At December 31, 2018, an adjustment to the allowance of $1,360 of inventory was made to remove obsolete inventory and bringinventory to current estimated net realizable value. This adjustment was the result of our obsolescence and lower cost and net realizable value which isconducted each year. We ended 2018 with an inventory allowance balance of $19,000.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 2019. The expected slow increase in capital commitments and the inherent delay in demand for ourproducts may result in modestly higher activity levels for 2019. In addition, we may continue to experience price pressure from our competitors until a morestable demand for oilfield products and services is established. We believe our fabrication business will likely reflect this level of activity in our productionlevel through 2019. We believe growth in our rental operations business will also be moderated by this sluggish recovery.28Results of OperationsYear Ended December 31, 2018 Compared to the Year Ended December 31, 2017 The table below shows our revenues and percentage of total revenues for each of our product lines for the years ended December 31, 2018 andDecember 31, 2017. Revenue Year Ended December 31, 20182017(dollars in thousands)Rental $47,766 72.9 %$46,046 68.0 %Sales 16,269 24.8 %20,208 29.9 %Service & Maintenance 1,443 2.3 %1,439 2.1 %Total $65,478 $67,693 Total revenue decreased to $65.5 million from $67.7 million, or 3.3%, for the year ended December 31, 2018, compared to 2017. This was theresult of a 19.5% decrease in sales revenue, which was offset by a 3.7% increase in rental revenue and a 0.3% increase in service and maintenance revenue.Rental revenue increased to $47.8 million from $46.0 million, or 3.7%, for the year ended December 31, 2018, compared to 2017. This increase isdue to an increase in the average oil and natural prices for the year ended December 31, 2018, resulting in units being deployed, as well as a rise in thedemand for our higher horsepower units. As of December 31, 2018, we had 2,572 natural gas compressors in our rental fleet totaling 398,765 horsepower, ascompared to 2,546 natural gas compressors totaling 369,961 horsepower as of December 31, 2017. As of December 31, 2018, we had 1,361 natural gascompressors totaling 230,089 horsepower rented to 94 customers, compared to 1,259 natural gas compressors totaling 184,382 horsepower rented to 87customers as of December 31, 2017. The rental fleet had a utilization of 52.9% as of December 31, 2018 as compared to 49.5% at December 31, 2017.Sales revenue decreased to $16.3 million from $20.2 million, or 19.5%, for the year ended December 31, 2018, compared to 2017. Our salesactivity can fluctuate depending on the demand from our customers' investments in non-conventional shale plays which require compression for producingnatural gas and scheduling of projects in our fabrication facility. Due to economic uncertainty and continued tight credit markets, the energy industrycontinued to encounter reduced 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 build and sell custom fabricated equipment. In support of this, we intend to cultivate new sales oriented customers and are activelypursuing small, medium and large 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 $638,000 from $1.6 million, for the year ended December 31, 2018, compared to 2017. This decrease is attributed toa 3.4% drop in our rental margins, due to costs incurred in the deploying units.During the fourth quarter of 2018, management performed a review of our rental compressor units and determined there were 13 units fullydepreciated in our rental fleet which needed to be retired, representing total horsepower of 1,360. Selling, general, and administrative expenses decreased to $9.1 million for the year ended December 31, 2018, as compared to $10.1 million for2017. This 9.8% decrease is primarily a result in a decrease in stock compensation of $1.7 million. Depreciation and amortization expense increased to $22.0 million from $21.3 million, or 3.5%, for the year ended December 31, 2018, comparedto 2017. The increase is the result of larger horsepower units being added to the fleet. We added 31 units (approximately 29,508 horsepower) to our fleetover the past twelve months. Twenty-seven of these were 400 horsepower or larger, representing 99% of the horsepower added.29Provision for income tax decreased to $325,000 from a $18.2 million benefit for the year ended December 31, 2018 compared to 2017. Asdiscussed in Note 13 to the financial statements, during the fourth quarter of 2018, the Company discovered a potentially uncertain tax position attributabledeductibility of certain executive compensation expense for federal income tax purposes aggregating approximately $168,000, $149,000, $230,000 for theyears ended December 31, 2017, 2016 and 2015, respectively. As a result, in accordance with ASC Topic 740, during the fourth quarter of 2018, theCompany recorded a tax adjustment of $547,000 and accrued penalty and interest expense of $55,000 attributable to the uncertain tax position. In 2017, the$18.2 million tax benefit was the result of the $18.4 million income tax benefit recorded in connection with the 2017 Tax Act, due to the re-measurement ofour deferred tax assets and liabilities at the new federal statutory rate.Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016 The table below shows our revenue and percentage of total revenues for each of our product lines for the years ended December 31, 2017 andDecember 31, 2016. Revenue Year Ended December 31, 20172016(dollars in thousands)Rental$46,046 68.0 %$56,717 79.2 %Sales20,208 29.9 %13,621 19.0 %Service & Maintenance1,439 2.1 %1,316 1.8 %Total$67,693 $71,654 Total revenue decreased to $67.7 million from $71.7 million, or 5.5%, for the year ended December 31, 2017, compared to 2016. This was the resultof a 18.8% decrease in rental revenue offset by a 48.4% increase in sales revenue and a 9.3% increase in service and maintenance revenue.Rental revenue decreased to $46.0 million from $56.7 million, or 18.8%, for the year ended December 31, 2017, compared to 2016. This decrease isdue to reduced demand from the lower average oil and natural prices for the year ended December31, 2017, resulting in units being returned. As of December31, 2017, we had 2,546 natural gas compressors in our rental fleet totaling 369,961 horsepower, as compared to 2,530 natural gas compressors totaling362,408 horsepower as of December 31, 2016. As of December 31, 2017, we had 1,259 natural gas compressors totaling 184,382 horsepower rented to 87customers, compared to 1,298 natural gas compressors totaling 186,328 horsepower rented to 79 customers as of December 31, 2016. The rental fleet had autilization of 49.5% as of December 31, 2017 as compared to 51.3% at December 31, 2016.Sales revenue increased to $20.2 million from $13.6 million, or 48.4%, for the year ended December 31, 2017, compared to 2016. Our sales activitycontinues to reflect a demand from our customers' investments in non-conventional shale plays which require compression for producing natural gas. Due tolagging crude oil prices, along with economic uncertainty and continued tight credit markets, the energy industry continued to encounter reduced capitalspending. While our strategy is to maintain our rental revenues so that they are a larger component of total revenue, we will continue to build and sell customfabricated equipment. In support of this, we intend to cultivate new sales oriented customers and are actively pursuing small, medium and large reciprocatingcompressor fabrication projects, as well as, building rotary screw-type equipment of any size. Sales include: (1) compressor unit sales, (2) flare sales, (3) partssales and (4) compressor rebuilds.Operating income decreased to $1.6 million from $8.4 million, for the year ended December 31, 2017, compared to 2016. This decrease is attributedto a 18.8% drop in our rental revenue, due to the low oil and natural gas prices, resulting in the return of our units, as mentioned earlier.During the fourth quarter of 2017, management performed a review of our rental compressor units and determined there were no units in our rentalfleet which needed to be retired. In management’s annual review performed in 2016, we determined that 63 units should be retired, with certain keycomponents being re-utilized, representing total horsepower of 7,749. Based on this review, at December 31, 2016 we recorded a $545,000 non-cash loss onthe retirement of rental equipment to reduce the book value to approximately $242,000, the estimated fair value of the key components being kept.Selling, general, and administrative expenses increased to $10.1 million for the year ended December 31, 2017, as compared to $9.0 million for2016. This 11.9% increase is primarily a result in an increase in stock compensation of $1.7 million offset by a decrease in the executive incentive cashbonus of $570,000.30Depreciation and amortization expense decreased to $21.3 million from $21.8 million, or 2.3%, for the year ended December 31, 2017, compared to2016. The decrease is the result of fewer units being added to the fleet and older units becoming fully depreciated. We added only 20 units to our fleet overthe past twelve months.On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“2017 TaxAct’), which makes broad and complex changes to the U.S. tax code. Certain income tax effects of the 2017 Tax Act are reflected in our financial results inaccordance with SAB 118. SAB 118 provides SEC staff guidance regarding the application of Accounting Standards Codification Topic 740 (“ASC 740”)Income Taxes, and the required disclosures due to the enactment of the 2017 Tax Act. The income tax effects of the 2017 Tax Act include a $18.4 millionincome tax benefit related to the re-measurement of our deferred tax assets and liabilities at the reduced rate of 21 percent. Refer to Note 7, “Income Taxes,”in the Notes to the Consolidated Financial Statements for further information on the financial statement impact of the 2017 Tax Act.Provision for income tax decreased to a benefit of $18.2 million from $2.0 million in expense for the year ended December 31, 2017 compared to2016. This is a result of the $18.4 million income tax benefit recorded in connection with the 2017 Tax Act, due to the re-measurement of our deferred taxassets and liabilities at the new federal statutory rate.Adjusted Gross Margin Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017 The table below shows our adjusted gross margin and related percentages for each of our product lines for the years ended December 31, 2018 andDecember 31, 2017. 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, 20182017(dollars in thousands)Rental $27,020 56.6 %$27,959 60.7 %Sales 3,705 22.8 %3,922 19.4 %Service & Maintenance 1,058 73.3 %1,069 74.3 %Total $31,783 48.5 %$32,950 48.7 %(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 dropped to 48.5% for the year ended December 31, 2018 compared to 48.7% for the year endedDecember 31, 2017, exclusive of depreciation and amortization. Our drop in gross margins is mainly due to the drop in rental revenue margins due to costsincurred in deploying units. Rental margins decreased for the year ended December 31, 2018 compared to 2017 to 56.6% from 60.7%. Sales margin increasedto 22.8% from 19.4% for the year ended 2018 compared to 2017. Third party service and maintenance margins decreased to 73.3% from 74.3% for the yearended December 31, 2018 compared to 2017. Service and maintenance represents 2% of our revenue providing minimal impact on our overall adjusted grossmargin.31Adjusted Gross Margin Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016 The table below shows our adjusted gross margin and related percentages for each of our product lines for the years ended December 31, 2017 andDecember 31, 2016. 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 31,20172016(dollars in thousands)Rental $27,959 60.7 %$36,367 64.1 %Sales 3,922 19.4 %2,497 18.3 %Service & Maintenance 1,069 74.3 %918 69.8 %Total $32,950 48.7 %$39,782 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 dropped to 48.7% for the year ended December 31, 2017 compared to 55.5% for the year endedDecember 31, 2016, exclusive of depreciation and amortization. The drop in gross margins was mainly due to the drop in rental revenue margins due to somepricing pressures from our customers. Rental margins decreased for the year ended December 31, 2017 compared to 2016 to 60.7% from 64.1%. Sales marginincreased to 19.4% from 18.3% for the year ended 2017 compared to 2016. Third party service and maintenance margins increased to 74.3% from 69.8% forthe year ended December 31, 2017 compared to 2016. Service and maintenance represents 2% of our revenue providing minimal impact on our overalladjusted gross margin.Liquidity and Capital ResourcesOur working capital positions as of December 31, 2018 and 2017 are set forth below. 20182017 (in thousands) Current Assets: Cash and cash equivalents $52,628 $69,208 Trade accounts receivable, net 7,219 8,534 Inventory, net 30,974 26,224 Prepaid income taxes 3,148 3,443 Prepaid expenses and other 2,430 817 Total current assets 96,399 108,226 Current Liabilities: Accounts payable $2,122 $4,162 Accrued liabilities 8,743 3,106 Deferred income 81 185 Total current liabilities 10,946 7,453 Net working capital $85,453 $100,773 Historically, 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, 2018, we invested approximately $39.8 million in equipment for our rental fleet service vehicles and land for ournew corporate office. We financed this activity with cash on hand. 32Cash flowsAt December 31, 2018, we had cash and cash equivalents of $52.6 million and working capital of $85.5 million, and total debt of $417,000 underour credit agreement, which is due in 2020. Our cash and cash equivalents decreased from 2017 due to an increase on our capital program for contracted newlarge horsepower compressor builds and the construction of our new corporate office. We had positive net cash flow from operating activities ofapproximately $23.4 million during 2018. This was primarily from net income of $426,000 and non-cash items of depreciation and amortization of $22.0million and $2.4 million related to stock-based compensation, a decrease in deferred income taxes of $5,000 and a decrease in cash flows related to workingcapital and other of $1.4 million.At December 31, 2017, we had cash and cash equivalents of $69.2 million, working capital of $100.8 million and total debt of $417,000, underour credit agreement which is due in 2020. Our cash and cash equivalents increased from 2016 due to a the continued hold on our capital program for non-contracted compressor builds due to the continued depressed oil and natural gas prices. We had positive net cash flow from operating activities ofapproximately $17.5 million during 2017. This was primarily from net income of $19.9 million and non-cash items of depreciation and amortization of $21.3million, $4.0 million related to stock-based compensation, offset by a decrease in deferred income taxes of $21.6 million and a decrease in working capital of$6.1 million.Inventory increased to $31.0 million as of the end of 2018, as compared to $26.2 million as of the end of 2017. This increase is mainly due topurchases related to future jobs and the timing of jobs closing from work in progress to finished goods. Contractual Obligations and CommitmentsWe have contractual obligations and commitments that affect our results of operations, financial condition and liquidity. The following table is asummary of our significant cash contractual obligations (in thousands):Cash Contractual Obligations 20192020202120222023ThereafterTotal Line of credit$— $417 $— $— $— $— $417 Interest on line of credit 17 17 — — — — 34 Purchase obligations 400 400 111 — — — 911 Other long term liabilities — — — 57 — — 57 Facilities and office leases 298 118 97 44 35 15 607 Total $715 $952 $208 $101 $35 $15 $2,026 The Company also has a contractual obligation related to the construction of a new corporate office of $4.3 million, which we have and continue tofinance by cash on hand. Construction on the new office began in late 2017 and is expected to be completed in early 2019.Senior Bank Borrowings We have a senior secured revolving credit agreement the ("Amended Credit Agreement") with JP Morgan Chase Bank, N.A (the "Lender") with anaggregate commitment of $30 million, subject to collateral availability. We also have a right to request from the Lender, on an uncommitted basis, anincrease of up to $20 million on the aggregate commitment (which could potentially increase the commitment amount to $50 million). On August 31, 2017,we amended and renewed the Amended Credit Agreement extending the maturity date to December 31, 2020. No other material revisions were made to thecredit facility. As of December 31, 2018, 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. 33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, 2020, 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 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, 2018, 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, 2018:Expenditure Category 201820172016 (in thousands) Rental equipment and property and equipment$39,790 $13,489 $3,321 The 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 available bank line of credit are adequate to fully fundour net capital expenditures requirements for 2019 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.34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, 2018, 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, 2018, we had met $3.9 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 31,2018 was $57,000.Recently Issued Accounting PronouncementsSee Notes to Consolidated Financial Statements on page F-13.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.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, 2018 and 2017, 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 our35significant customers, our revenue and results of operations would be adversely affected. At December 31, 2018, we had one customers that accounted for atotal of approximately 26% 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 ExecutiveOfficer and our Vice President and Chief Financial Officer, of the effectiveness of the design of our “disclosure controls and procedures” (as such term isdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended or, the “Exchange Act”) as of December 31, 2018, pursuantto Exchange Act Rule 13a-15.In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily appliesits judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the President and Chief Executive Officer andour Vice President and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures werenot effective due to a material weakness in internal control over financial reporting discussed below in Management’s Annual Report on Internal ControlOver 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 over timebecause of changes in conditions or deterioration in the degree of compliance with the policies or procedures. Therefore, even those systems determined tobe effective can provide only reasonable assurance with respect to financial statement preparation and presentation.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.Management, including our President and Chief Executive Officer and our Vice President and Chief Financial Officer, assessed the effectiveness ofthe Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway36Commission (COSO) in Internal Control—Integrated Framework (2013). Based on this assessment, management has concluded that our internal control overfinancial reporting was not effective as of December 31, 2018, due to the material weakness in our internal control over financial reporting discussed below.During the fourth quarter of fiscal 2018, we identified a material weakness in internal controls over financial reporting related to the preparation andreview of our tax provision. Specifically, we did not design and maintain effective controls to identify and account for nondeductible expenses.. Thismaterial weakness did not have, but could have resulted in various material adjustments to our income tax accounts. Therefore, we concluded that ourinternal control over financial reporting was not effective as of December 31, 2018.RemediationManagement plans to address the control deficiency that led to the material weakness during fiscal year 2019. Our plan is to perform an in-depthreview over controls regarding taxes which may involve external experts and internal audit. We currently plan to have our review complete, new controlsimplemented and operating by the second quarter of 2019. Our goal is to remediate this material weakness by the end of 2019.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, 2018. BDO USA, LLP, our independent registered publicaccounting firm, has issued an attestation report dated March 18, 2019 on the effectiveness of internal control over financial reporting on page 37.Changes in Internal Control Over Financial ReportingExcept for the control deficiency discussed there were no changes in our internal control over financial reporting that occurred during the quarterended December 31, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We willcontinue to review and document our disclosure controls and procedures, including our internal control over financial reporting, and may from time to timemake changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.ITEM 9B. OTHER INFORMATIONNone.37Report of Independent Registered Public Accounting FirmBoard of Directors and StockholdersNatural Gas Services Group, Inc.Midland, TexasOpinion on Internal Control over Financial ReportingWe have audited Natural Gas Services Group, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2018, based on criteriaestablished in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the“COSO criteria”). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31,2018, based on the COSO criteria. We do not express an opinion or any other form of assurance on management's statements referring to any correctiveactions taken by the Company after the date of management's assessment.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidatedbalance sheets of the Company and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of income, stockholders’ equity, andcash flows for each of the three years in the period ended December 31, 2018, and the related notes, and our report dated March 18, 2019 expressed anunqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicablerules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Ouraudit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures aswe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibilitythat a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weaknessregarding management’s failure to design and maintain controls over income taxes has been identified and described in management’s assessment. Thismaterial weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 financial statements, and thisreport does not affect our report dated March 18, 2018 on those financial statements.Definition and Limitations of Internal Control over Financial ReportingA 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.38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./s/ BDO USA, LLP Austin, TexasMarch 18, 2019 39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, 2018.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 before March 31, 2019 to Natural Gas Services Group, Inc., Attn: Investor Relations, 508 W. Wall Street, Suite 550 Midland, Texas 79701and after March 31, 2019 to 404 Veterans Airpark Lane Midland, TX 79705.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, 2018.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe 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, 2018.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, 2018.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, 2018.40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.)10.1Lease Agreement, dated January 9, 2018, 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, 2017 and filed with the Securities and ExchangeCommission on March 9, 2018.)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.)10.4Credit 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.)10.5Fifth Amendment of Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated August 31, 2017(Incorporated by reference to Exhibit 10.2 of the Registrant's Current report on Form 8-K filed with the Securities and Exchange Commissionon September 7, 2017.)10.6Security 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.)10.7Fourth Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated August 31, 2017 (Incorporated byreference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 7,2017.)10.8Promissory Note in the aggregate amount of $30,000,000 issued to JPMorgan Chase Bank, N.A., dated August 31, 2017, in connection withthe revolving credit line under the Credit Agreement with JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.3 of theRegistrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 7, 2017.)10.9Amended 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.)10.10The 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.)4110.11Annual 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.)*21.1Subsidiaries of the registrant*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.42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 18, 2019By: /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: Signature Title Date /s/ Stephen C. Taylor Chairman of the Board of Directors, Chief Executive Officer andPresident (Principal Executive Officer) March 18, 2019Stephen C. Taylor /s/ G. Larry Lawrence Vice President and Chief Financial Officer (Principal AccountingOfficer) March 18, 2019G. Larry Lawrence /s/ Charles G. Curtis Director March 18, 2019Charles G. Curtis /s/ William F. Hughes, Jr. Director March 18, 2019William F. Hughes, Jr. /s/ David L. Bradshaw Director March 18, 2019David L. Bradshaw /s/ John W. Chisholm Director March 18, 2019John W. Chisholm 43INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm1 Consolidated Balance Sheets as of December 31, 2018 and 20172 Consolidated Statements of Income for the Years Ended December 31, 2018, 2017 and 20162 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2018, 2017 and 20164 Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 20165 Notes to Consolidated Financial Statements6 Report of Independent Registered Public Accounting FirmBoard of Directors and StockholdersNatural Gas Services Group, Inc.Midland, TexasOpinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Natural Gas Services Group, Inc. (the “Company”) and subsidiaries as of December 31,2018 and 2017, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period endedDecember 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financialstatements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results oftheir operations and their cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generallyaccepted in the United States of America.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company'sinternal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued bythe Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 18, 2019 expressed an adverse opinionthereon.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’sconsolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosuresin the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion./s/ BDO USA, LLPWe have served as the Company's auditor since 2010.Austin, TexasMarch 18, 2019 F - 1NATURAL GAS SERVICES GROUP, INC.CONSOLIDATED BALANCE SHEETS(in thousands)December 31, 20182017ASSETS Current Assets: Cash and cash equivalents$52,628 $69,208 Trade accounts receivable, net of allowance for doubtful accounts of $291 and $569, respectively 7,219 8,534 Inventory30,974 26,224 Prepaid income taxes3,148 3,443 Prepaid expenses and other2,430 817 Total current assets96,399 108,226 Long-Term Inventory, net of allowance for obsolescence of $19 and $15, respectively3,980 2,829 Rental equipment, net of accumulated depreciation of $165,428 and $145,851, respectively175,886 167,099 Property and equipment, net of accumulated depreciation of $11,556 and $11,274, respectively16,587 7,652 Goodwill10,039 10,039 Intangibles, net of accumulated amortization of $1,758 and $1,632, respectively1,401 1,526 Other assets1,109 939 Total assets$305,401 $298,310 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable$2,122 $4,162 Accrued liabilities8,743 3,106 Deferred income81 185 Total current liabilities10,946 7,453 Line of credit417 417 Deferred income tax liability32,158 32,163 Other long-term liabilities 1,699 958 Total liabilities 45,220 40,991 Commitments 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; 13,005 and 12,880 shares issued and outstanding,respectively130 129 Additional paid-in capital107,760 105,325 Retained earnings152,291 151,865 Total stockholders' equity260,181 257,319 Total liabilities and stockholders' equity$305,401 $298,310 See 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, 201820172016Revenue: Rental income$47,766 $46,046 $56,717 Sales16,269 20,208 13,621 Service and maintenance income1,443 1,439 1,316 Total revenue 65,478 67,693 71,654 Operating costs and expenses: Cost of rentals, exclusive of depreciation stated separately below 20,746 18,087 20,350 Cost of sales, exclusive of depreciation stated separately below 12,564 16,286 11,124 Cost of service and maintenance, exclusive of depreciation stated separately below 385 370 398 Loss on retirement of rental equipment— — 545 Selling, general and administrative expenses9,096 10,081 9,011 Depreciation and amortization22,049 21,302 21,796 Total operating costs and expenses 64,840 66,126 63,224 Operating income638 1,567 8,430 Other income Interest expense(69)(14)(8)Other income182 50 43 Total other income, net 113 36 35 Income before provision for income taxes751 1,603 8,465 Provision for income taxesCurrent (248)3,334 4,709 Deferred 573 (21,582)(2,713)Total income tax expense (benefit) 325 (18,248)1,996 Net income$426 $19,851 $6,469 Earnings per share: Basic$0.03 $1.55 $0.51 Diluted$0.03 $1.51 $0.50 Weighted average shares outstanding: Basic12,965 12,831 12,702 Diluted13,233 13,110 12,935 See 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-In Capital RetainedEarnings Total Stockholders'Equity Shares Amount Shares Amount BALANCES, December 31, 2015 — $— 12,603 $126 $98,310 $125,545 $223,981 Exercise of common stock options — — 62 1 1,041 — 1,042 Compensation expense on commonstock options — — — — 506 — 506 Issuance of restricted stock— — 99 — — — — Tax benefit of equity compensation— — 72 — 72 Compensation expense on restrictedcommon stock — — — 1 1,792 — 1,793 Taxes paid related to net sharessettlement of equity awards— — — — (909)— (909)Net income — — — — 6,469 6,469 BALANCES, December 31, 2016 — $— 12,764 $128 $100,812 $132,014 $232,954 Exercise of common stock options — — 56 — 1,120 — 1,120 Compensation expense on commonstock options — — — — 363 — 363 Issuance of restricted stock— — 60 — — — — Compensation expense on restrictedcommon stock— — — 1 3,674 — 3,675 Taxes paid related to net sharessettlement of equity awards— — — — (644)— (644)Net income— — — — — 19,851 19,851 BALANCES, December 31, 2017 — $— 12,880 $129 $105,325 $151,865 $257,319 Exercise of common stock options — — 38 — 680 — 680 Compensation expense on commonstock options — — — — 159 — 159 Issuance of restricted stock— — 87 — — — — Compensation expense on restrictedcommon stock — — — 1 2,225 — 2,226 Taxes paid related to net sharessettlement of equity awards— — — — (629)— (629)Net income— — — — — 426 426 BALANCES, December 31, 2018 — $— 13,005 $130 $107,760 $152,291 $260,181 See 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, 201820172016CASH FLOWS FROM OPERATING ACTIVITIES: Net income$426 $19,851 $6,469 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization22,049 21,302 21,796 Deferred taxes(5)(21,582)(2,713)Gain on disposal of assets(69)(87)(86)Loss on retirement of rental equipment— — 545 Bad debt allowance(185)90 61 Inventory allowance— 273 566 Stock based compensation2,385 4,038 2,299 (Loss) Gain on company owned life insurance154 (67)(14)Changes in assets (increase) decrease in: Trade accounts receivables1,500 (1,246)1,668 Inventory(5,757)(5,350)1,131 Prepaid income taxes and prepaid expenses(1,318)(1,806)(1,539)Changes in liabilities increase (decrease) in: Accounts payable and accrued liabilities3,597 3,410 (439)Deferred income(104)(2,040)1,954 Other741 666 159 Tax benefit from equity compensation— — (72)NET CASH PROVIDED BY OPERATING ACTIVITIES 23,414 17,452 31,785 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of rental, property and equipment(39,790)(13,489)(3,321)Purchase of company owned life insurance(289)(620)(194)Proceeds from insurance claim— 1,231 — Proceeds from sale of property and equipment69 87 101 NET CASH USED IN INVESTING ACTIVITIES (40,010)(12,791)(3,414)CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds of other long-term liabilities(35)(23)(14)Proceeds from exercise of stock options680 1,120 1,042 Tax Benefit from equity compensation— — 72 Taxes paid related to net share settlement of equity awards(629)(644)(909)NET CASH PROVIDED BY FINANCING ACTIVITIES 16 453 191 NET CHANGE IN CASH AND CASH EQUIVALENTS (16,580)5,114 28,562 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 69,208 64,094 35,532 CASH AND CASH EQUIVALENTS AT END OF PERIOD $52,628 $69,208 $64,094 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid$14 $14 $8 Income taxes paid$85 $3,725 $5,825 NON-CASH TRANSACTIONS Transfer of rental equipment to inventory$144 $55 $724 See 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 was formed on December 17, 1998 for the purposes of combining the operationsof certain manufacturing, service and leasing entities. The accompanying consolidated financial statements include the accounts of the Company, itssubsidiary, NGSG Properties, LLC and the rabbi trust associated with the Company’s deferred compensation plan, see Note 5. All significant intercompanyaccounts and transactions for the periods presented have been eliminated in consolidation.Nature of Operations Natural Gas Services Group is a leading provider of small to medium horsepower compression equipment to the natural gas industry, with anemerging position in the large horsepower market. 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 shale). We manufacture, fabricate and rent natural gas compressors that enhance the production ofnatural gas wells. NGSG provides maintenance services for its natural gas compressors. In addition, we sell custom fabricated natural gas compressors tomeet customer specifications dictated by well pressures, production characteristics and particular applications. We also manufacture and sell flare systems foroil 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. Additionally, NGS conducts a yearly review of impairment of long-lived assets. Throughout the review, determining factors arebased on estimates that can significantly impact the carrying value of these assets. It is at least reasonably possible these estimates could be revised in thenear 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$291,000 and $569,000 at December 31, 2018 and 2017, respectively. Management believes that the allowance is adequate; however, actual write-offs mayexceed the recorded allowance.Revenue Recognition PolicyThe Company adopted ASC 606, Revenue from Contracts with Customers ("ASC 606") on January, 1, 2018. As a result, the Company has changedits accounting policy for revenue recognition as detailed below. The Company applied ASC 606 using the cumulative effect method. We had no significant changes in our recognition of revenue at adoption andour review of all open revenue from contracts with customers on January 1, 2018 indicated we had no adjustment to be made. Therefore, our consolidatedfinancial statements for 2017 reported under ASC 605 are comparable to the consolidated financial statements for 2018 reported under ASC 606, since anadjustment was not needed, except for the respective additional disclosures as detailed below.F - 6Revenue is measured based on a consideration specified in a customer’s contract, excluding any sale incentives and taxes collected on behalf ofthird parties (i.e. sales and property taxes). We recognize revenue once a performance obligation has been satisfied and control over a product or service hastransferred to the customer. Shipping and handling costs incurred are accounted for as fulfillment costs and are included in cost of revenues in our condensedconsolidated income statement.Nature of goods and ServicesThe following is a description of principal activities from which the Company generates its revenue:Rental Revenue. The Company generates revenue from renting compressors and flare systems to our customers. These contracts may also include afee for servicing the compressor or flare during the rental contract. Our rental contracts range from six to twenty-four months, with revenue being recognizedover time, in equal payments over the term of the contract. After the terms of the contract have expired, a customer may renew their contract or continuerenting on a monthly basis thereafter. In accordance with generally accepted accounting principles, the revenue earned from servicing rental equipment isrecognized in accordance with ASC 606, while the revenue earned from the rental of the equipment is recognized in accordance with ASC 840 - Leases.Sales Revenue. The Company generates revenue by the sale of custom/fabricated compressors, flare systems and parts, as well as,exchange/rebuilding customer owned compressors and sale of used rental equipment.Custom/fabricated compressors and flare systems - The Company designs and fabricates compressors and flares based on the customer’sspecifications outlined in their contract. Though the equipment being built is customized by the customer, control under these contracts does not pass to thecustomer until the compressor or flare package is complete and shipped, or in accordance with a bill and hold arrangements the customer accepts title andassumes the risk and rewards of ownership. We request some of our customers to make progressive payments as the product is being built; these payments arerecorded as a contract liability on the Deferred Income line on the consolidated balance sheet until control has been transferred. These contracts also mayinclude an assurance warranty clause to guarantee the product is free from defects in material and workmanship for a set duration of time; this is a standardindustry practice and is not considered a performance obligation.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. Per the customer’s agreement change of control is passed to the customer once theequipment is complete and ready for shipment. We have operated using bill and hold agreements with certain customers for many years, with consistentsatisfactory results for both the customer and us. The credit terms on these agreements are consistent with the credit terms on all other sales. All control isshouldered by the customer and there are no exceptions to the customer’s commitment to accept and pay for the manufactured equipment. Revenuesrecognized related to bill and hold arrangements for the years ended December 31, 2018 and 2017 was approximately $8.3 million and $4.6 million,respectively.Parts - Revenue is recognized after the customer obtains control of the parts. Control is passed either by the customer taking physical possession orthe parts being shipped. The amount of revenue recognized is not adjusted for expected returns, as our historical part returns have been de minimis.Exchange or rebuilding customer owned compressors - Based on the contract, the Company will either exchange a new/rebuilt compressor for thecustomer’s malfunctioning compressor or rebuild the customer’s compressor. Revenue is recognized after control of the replacement compressor hastransferred to the customer by physical delivery, delivery and installment or shipment of the compressor.Used compressors or flares - From time to time, a customer may request to purchase a used compressor or flare out of our rental fleet. Revenue fromthe sale of rental equipment is recognized when the control has passed to the customer, when the customer has taken physical possession or the equipmenthas been shipped.Service and Maintenance Revenue. The Company provides routine or call-out services on customer owned equipment. Revenue is recognized afterservices in the contract are rendered.Payment terms for sales revenue and service and maintenance revenue discussed above are generally 30 to 60 days although terms for specificcustomers can vary. Also, the transaction prices are not subject to variable consideration constraints.F - 7Disaggregation of RevenueThe following table shows the Company's revenue disaggregated by product or service type for the years ended: Year Ended December 31,(in thousands)201820172016Compressors - sales$10,994 $13,382 $10,038 Flares - sales2,535 2,755 1,183 Other (Parts/Rebuilds) - sales2,740 4,071 2,400 Service and maintenance 120,537 19,857 24,016 Total revenue from contracts with customers36,806 40,065 37,637 Add: non-ASC 606 rental revenue28,672 27,628 34,017 Total revenue$65,478 $67,693 $71,654 1Service and maintenance includes revenue from servicing our own rental equipment contracted to customers and third party equipment.Contract BalancesAs of December 31, 2018 and December 31, 2017, we had the following receivables and deferred income from contracts with customers:December 31, 2018December 31, 2017(in thousands) Accounts Receivable Accounts receivable - contracts with customers $4,353 $5,454 Accounts receivable - non-ASC 606 3,157 3,649 Total Accounts Receivable 7,510 9,103 Less: Allowance for doubtful accounts (291)(569)Total Accounts Receivable, net 7,219 8,534 Deferred income $81 $185 The Company recognized $176,000 in revenue for the period ended December, 2018 that was included in deferred income at the beginning of2018. For the period ended December 31, 2017, the Company recognized revenue of $1.9 million from amounts related to sales that were included in deferredincome at the beginning of 2017.The increases (decreases) of accounts receivable and deferred income were primarily due to normal timing differences between our performance andthe customers’ payments.F - 8Transaction Price Allocated to the Remaining Performance ObligationsThe following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (orpartially unsatisfied) at the end of the reporting period:(in thousands) 2020 2021 2022 2023 2024 Total Service and Maintenance $2,223 $1,842 $1,763 $704 $— $6,532 All consideration from contracts with customers is included in the amounts presented above.The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose information about remaining performance obligationsthat have original expected durations of one year or less.The Company applies the transition practical expedient in ASC 606-10-65-1(f)(3) and does not disclose the amount of the transaction priceallocated to the remaining performance obligations and an explanation of when the Company expects to recognize that amount as revenue for 2018.Contract CostsThe Company applies the practical expedient in ASC 340-40-25-4 and recognizes the incremental costs of obtaining contracts as an expense when incurred ifthe amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in selling, general andadministrative expense on our consolidated income statement.Major Customers and Concentration of Credit RiskSales and rental income to Occidental Permian, LTD. ("Oxy") in 2018 amounted to 28% of revenue. Sales and rental income to Oxy and DevonEnergy Production, Inc. ("Devon") in 2017 amounted to 20% and 15% of revenue, respectively. Sales and rental income to Devon and Oxy in 2016 amountedto 21% and 19% of revenue. No other single customer accounted for more than 10% of our revenues in 2018, 2017 or 2016. Oxy amounted to 26% of ouraccounts receivable as of December 31, 2018. Oxy amounted to 14% of our accounts receivable as of December 31, 2017. No other customers amounted tomore than 10% of our accounts receivable as of December 31, 2018 and 2017.InventoryInventory (current and long-term) is valued at the lower of cost and net realizable value. The cost of inventories is determined by the weightedaverage method. A reserve is recorded against inventory balances for estimated obsolescence. This reserve is based on specific identification and historicalexperience and totaled $19,000 and $15,000 at December 31, 2018 and 2017, respectively. There were 7 newly completed compressor units at December 31,2018 and December 31, 2017 available for sale or for use in our rental fleet. Our long-term inventory consists of raw materials that remain viable but that theCompany does not expect to sell within the next year. At December 31, 2018 and 2017, inventory consisted of the following (in thousands): 20182017Raw materials - current$26,152 $22,813 Raw materials - long term3,980 2,829 Finished Goods1,022 1,022 Work in process3,800 2,389 Total$34,954 $29,053 Rental Equipment and Property and EquipmentRental equipment and property and equipment are recorded at cost less accumulated depreciation, except for work-in-progress on new rentalequipment which is recorded at cost until it’s complete and added to the fleet. At December 31, 2018 and 2017, we had $11.9 million and $6.4 million inrental equipment work-in-progress, respectively. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Ourrental equipment has an estimated useful life of 15 years, while our property and equipment has an estimate useful lives which range from three to thirty-nineyears. TheF - 9majority of our property and equipment, including rental equipment, is a direct cost to generating revenue and the following table depicts the depreciationassociated with each product line at December 31, 2018 , 2017 and 2015 (in thousands): 201820172016Rentals$21,588 $20,861 $21,325 Sales265 265 291 Service & Maintenance22 21 25 Total$21,875 $21,147 $21,641 We 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 units or flares. An impairment loss is recognized if the future undiscounted cash flows associatedwith the asset and the estimated fair value of the asset are less than the asset's carrying value. We recognized no impairments in years ended December 31,2018, 2017 or 2016.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. We performed a qualitative analysis each quarter of 2018 and our annual review was performed in the fourthquarter of 2018. We experienced no impairment of goodwill during the years ended December 31, 2018 or 2017.IntangiblesAt December 31, 2018 and 2017, NGSG had intangible assets, which relate to developed technology and a trade name. The carrying amount net ofaccumulated amortization at December 31, 2018 and 2017 was $1.4 million and $1.5 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 six years as of December 31, 2018. Amortization expenserecognized in each of the years ending December 31, 2018, 2017, and 2016 was $125,000. Estimated amortization expense for the years 2019-2024 is$125,000 per year. NGSG has an intangible asset with a gross carrying value of $654,000 at December 31, 2018 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, 2018December 31, 2017Useful Life(years) GrossCarryingValue AccumulatedAmortization Net BookValue GrossCarryingValue AccumulatedAmortization Net BookValue Developed Technology20$2,505 $1,758 $747 $2,505 $1,633 $872 Trade NameIndefinite 654 — 654 654 — 654 Total$3,159 $1,758 $1,401 $3,159 $1,633 $1,526 Our 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, 2018 or 2017. Separately, we reviewed our indefinite life intangible for impairment with our goodwill qualitativeanalysis, which we performed each quarter in 2018 due to a continued decline in our rental utilization and then annually in theF - 10fourth quarter of 2018. Based on this analysis, we experienced no impairment on our indefinite life intangible during the years ended December 31, 2018 or2017.WarrantyWe accrue amounts for estimated warranty claims based upon current and historical product warranty costs and any other related informationknown. The warranty reserve was $22,000 and $65,000 for December 31, 2018 and 2017, respectively, and is included in accrued liabilities on theconsolidated balance sheet.Financial Instruments and Concentrations of Credit RiskWe 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. We believe that the risk to our cash balance is minimal because we have chosen one of the nation’s largestmost successful banks, with strong long-term ratings of Aa2/A+/AA.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 2018, 2017 and 2016.The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts): Year Ended December 31, 201820172016Numerator: Net income $426 $19,851 $6,469 Denominator for basic net income per common share: Weighted average common shares outstanding 12,965 12,831 12,702 Denominator for diluted net income per share: Weighted average common shares outstanding 12,965 12,831 12,702 Dilutive effect of stock options and restricted shares 268 279 233 Diluted weighted average shares 13,233 13,110 12,935 Earnings per common share: Basic $0.03 $1.55 $0.51 Diluted $0.03 $1.51 $0.50 In the year-ended December 31, 2018, options to purchase 82,167 shares of common stock with exercise prices ranging from $23.30 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, 2017, options to purchase 83,917 shares of common stock with exercise prices ranging from $28.15 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, 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 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.F - 11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, 2018 or 2017.Our policy regarding income tax interest and penalties is to expense those items as other expense.On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017Tax Act”), which made broad and complex changes to the U.S. tax code. Certain income tax effects of the 2017 Tax Act are reflected in the Company’sfinancial results in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”), which provides SEC staff guidance regarding the application ofAccounting Standards Codification Topic 740 Income Taxes (“ASC 740”). The effect of this change impacts our effective tax rate. The estimated impact on2017 was to reduce the deferred tax liabilities by approximately $18.4 million and has been reflected in our effective tax rate reconciliation. At December 31,2018, we have completed our accounting for the income tax effects of the Tax Act on our deferred tax assets in accordance with the Securities and ExchangeCommission Staff Accounting Bulletin No. 118 and ASC 740, and no material adjustments were required.During the fourth quarter of 2018, the Company discovered a potential uncertain tax position attributable to the deductibility of certain executivecompensation expense for federal income tax purposes aggregating approximately $168,000, $149,000 and $230,000 for the years ended December 31,2017, 2016 and 2015, respectively. As a result, in accordance with ASC Topic 740, during the fourth quarter of 2018, the Company recorded a tax adjustmentof $547,000 and accrued penalty and interest expense of $55,000 attributable to the uncertain tax position. Management of the Company determined thateffect of the potential uncertain tax position on previously reported results of operations for the years ended December 31, 2017 and 2016 was not material.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: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, 2018 and2017 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. F - 12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 PronouncementsOn February 25, 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842). Under the new guidance, a lessee willbe required to recognize assets and liabilities for finance and operating leases with lease terms of more than 12 months. Additionally, this ASU will requiredisclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases,including qualitative and quantitative requirements. The ASU initially required a modified retrospective transition method where a company applies the newleases standard at the beginning of the earliest period presented in the financial statements, but in July 2018 the FASB issued ASU 2018-11. ASU 2018-11added an optional transition method where a company applies the new leases standard at the adoption date and recognizes a cumulative effect adjustment tothe opening balance of retained earnings. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2018,including interim periods within those fiscal years, with early adoption permitted.The new standard will be adopted by the Company on January 1, 2019. We anticipate applying certain practical expedients provided by ASU 2016-02 that allow companies to not reassess leases that are in effect prior to adoption, the practical expedient in ASU 2018-11 that allows lessors to not separatelease and non-lease components for certain asset classes and the practical expedient in ASU 2018-20 that allows lessors to exclude third party taxes fromlease revenue and lease-related expenses. We have reviewed and evaluated the impact the new standard will have on our accounting policies, internalcontrols and consolidated balance sheet. In our assessment, we determined an increase in lease assets and lease liabilities on the consolidated balance sheetwill be approximately $700,000 at adoption. The adoption by the Company of Topic 842, in regards to the increase in liabilities, will not impact the debtcovenants on our existing line of credit, as leases are not considered new indebtedness in our credit agreement as confirmed with our bank. The new standardwill create an adjustment to retained earnings produced by the difference in lease assets and lease liabilities brought on to the consolidated balance sheet.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 $20.9 million, $20.0 million and $20.2 million for the years ended December 31, 2018, 2017 and 2016, respectively. Future minimum rentpayments for arrangements not on a month-to-month basis at December 31, 2018 are as follows:F - 13Years Ending December 31, (in thousands) 2019$ 7,245 2020$ 3,334 2021$ 2,763 2022$ 2,644 2023$ 1,058 Total $ 17,044 3. Property and EquipmentProperty and equipment consists of the following at December 31, 2018 and 2017 (in thousands): Useful Lives(Years) 20182017Land— $1,290 $1,290 Building396,116 6,116 Leasehold improvements 39808 808 Office equipment and furniture 51,492 1,490 Software 5573 573 Machinery and equipment 73,275 3,133 Vehicles 36,270 5,516 Construction in Progress — 8,319 — Total28,143 18,926 Less accumulated depreciation (11,556)(11,274)Total $16,587 $7,652 Depreciation expense for property and equipment was $1.1 million, $1.2 million and $1.4 million for the year ended December 31, 2018, 2017 and2016, respectively.In 2017, the Midland fabrication facility suffered damages two separate times, due to hailstorms. We did not incur a loss, as our insurance proceedsfully covered the estimated cost for the repairs. In accordance with ASC 605-40, we reduced the value of the building for these damages.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 2018, we retired 13 units from our rentalfleet. We recorded no loss on the retirement, due to the units being completely depreciated at the time of retirement. We had no retirement from our rentalfleet in 2017. From our review in 2016, we determined 63 units should be retired from our rental fleet with key components from those units being re-utilizedin future unit builds and/or repairs. We performed an optimization review and recorded a $545,000 loss on retirement of rental equipment to reduce the bookvalue of each unit to the estimated fair value of approximately $242,000 for key components being kept.F - 14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 $1.0 million and $894,000 as of December 31, 2018 and 2017, respectively, with a loss related to the policy of $153,900 and a gain of$66,400 reported in other income in our consolidated income statement for the year ended December 31, 2018 and 2017, respectively.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 $1.1 million and $866,000 as of December 31, 2018 and 2017,respectively. The deferred obligation is included in other long-term liabilities in the consolidated balance sheet.For deferrals of restricted stock units, the plan does not allow for diversification, therefore, distributions are paid in shares of common stock and theobligation is carried at grant value. As of December 31, 2018, 101,895 unvested restricted stock units have been deferred of which 34,732 units have beenreleased and issued to the deferred compensation plan with a value of $871,300.6. Credit FacilityWe have a senior secured revolving credit agreement with JP Morgan Chase Bank, N.A (the "Amended Credit Agreement") aggregate commitmentof $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 millionon the aggregate commitment (which could potentially increase the commitment amount to $50 million). On August 31, 2017, we amended and renewed theAmended Credit Agreement, which was set to expire on December 31, 2017. The Credit Agreement Amendment extends the maturity date to December 31,2020. No other material revisions were made to the credit facility. 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, 2018 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, 2020, 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 lease receivables,along with a first priority lien on a variable number of our leased compressor equipment theF - 15book value of must be maintained at a minimum of 2.00 to 1.00 commitment coverage ratio (such ratio being equal to (i) the amount of the borrowing base asof such date to (ii) the amount of the commitment as of such date.) 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 similar events; certain defaults with respect to any other Company indebtedness inexcess of $50,000; certain bankruptcy or insolvency events; the rendering of certain judgments in excess of $150,000; certain ERISA events; certain changein control events and the defectiveness of any liens under the secured revolving credit facility. Obligations under the Amended Credit Agreement may beaccelerated upon the occurrence of an event of default. As of December 31, 2018, 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, 2018 our balance on the line of credit was $417,000. Our weighted average interest rate for the year ended December 31, 2018 was 3.81%.7. Income TaxesThe provision for income taxes for the years ended December 31, 2018, 2017 and 2016, consists of the following (in thousands): 201820172016Current provision: Federal $(164)$3,074 $4,280 State (84)260 429 Total current (benefit) provision(248)3,334 4,709 Deferred provision: Federal expense (benefit)573 (21,582)(2,713)Total deferred expense (benefit)573 (21,582)(2,713)Total expense (benefit) provision$325 $(18,248)$1,996 On December 22, 2017, the U.S. government enacted the 2017 Tax Act. The 2017 Tax Act made broad and complex changes to the U.S. tax codethat affected the Company’s 2017 financial results. The 2017 Tax Act also established new tax laws that will affect the Company’s financial results after2017, including a reduction in the U.S. federal corporate income tax rate from 35 percent to 21 percent; additional limitations on the deductibility ofexecutive compensation; limitations on the deductibility of interest; and repeal of the domestic manufacturing deduction. As such, the Company recognizeda $18.4 million income tax benefit related to the re-measurement of our deferred tax assets and liabilities in our 2017 financial statements in accordance withSAB 118, which provides SEC staff guidance for the application of ASC 740 in the reporting period in which the 2017 Tax Act was signed into law. Wecompleted our detailed analysis in 2018 with no material adjustments.F - 16The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and (liabilities) as of December 31, 2018and 2017, are as follows (in thousands): 20182017Deferred income tax assets: Net operating loss carryover$2,415 $— Stock Compensation746 843 Other 441 201 Total deferred income tax assets $3,602 $1,044 Deferred income tax liabilities: Property and equipment $(34,968)(32,377)Goodwill and other intangible assets (573)(604)Other (219)(226)Total deferred income tax liabilities (35,760)(33,207)Net deferred income tax liabilities $(32,158)$(32,163)The effective tax rate for the years ended December 31, 2018, 2017 and 2016, differs from the statutory rate as follows: 201820172016Statutory rate 21.0 %34.0 %34.0 %State and local taxes1.5 %1.5 %1.6 %Uncertain tax position 72.9 %— %— %Research and development credit (48.3)%— %(7.5)%Stock based compensation (5.2)%(13.4)%0.3 %Nondeductible compensation 4.1 %— %— %Domestic production credit — %(14.3)%(5.4)%Other(2.7)%(1.5)%0.6 %Effective rate 43.3 %6.3 %23.6 %Deferred re-measurement for rate change— %(1,144.4)%— %Effective rate 43.3 %(1,138.1)%23.6 %During the fourth quarter of 2018, the Company discovered a potential uncertain tax position attributable to the deductibility of certain executivecompensation expense for federal income tax purposes aggregating approximately $168,000, $149,000 and $230,000 for the years ended December 31,2017, 2016 and 2015, respectively. As a result, in accordance with ASC Topic 740, during the fourth quarter of 2018, the Company recorded a tax adjustmentof $547,000 and accrued penalty and interest expense of $55,000 attributable to the uncertain tax position. Management of the Company determined thateffect of the potential uncertain tax position on previously reported results of operations for the years ended December 31, 2017 and 2016 was not material.We account for uncertain tax positions in accordance with guidance in FASB ASC 740, which prescribes the minimum recognition threshold a taxposition taken or expected to be taken in a tax return is required to meet before being recognized in the financial statements. A reconciliation of thebeginning and ending amount of uncertain tax positions is as follows (in thousands):Balance at January 1, 2018 $— Additions based on tax positions related to current year 31 Additions to tax positions of prior years 547 Balance at December 31, 2018 $578 Our policy regarding income tax interest and penalties is to expense those items as incurred. During the years ended December 31, 2018, 2017 and2016, there were no significant income tax interest or penalty items in the statement of income.F - 17We had a regular income tax net operating loss carry forward of $10.7 million for federal income taxes as of December 31, 2018. This netoperating loss will be carried forward indefinitely but subject to 80% limitation. 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 2014. 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 $57,000 and $92,000 as of December 31, 2018 and2017, 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 31,2018 and 2017, there were no issued or outstanding preferred shares.10. Stock-Based CompensationRestricted Stock/Units 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 2017 performance, Mr. Taylor, was awarded 84,700 restricted shares/units on March 15, 2018, which vest over three years, in equal installmentsbeginning March 15, 2019. On March 15, 2018, the Compensation Committee awarded 20,000 restricted shares/units to each G. Larry Lawrence, our CFO,and James Hazlett, our Vice President of Technical Services. The restricted shares/units to Messrs. Hazlett and Lawrence vest over three years, in equalinstallments, beginning March 15, 2019. We also awarded and issued 16,288 shares of restricted common stock/units to our Board of Directors as partialpayment for 2018 directors' fees. The restricted stock/units issued to our directors vests over one year, in quarterly installments, beginning March 31, 2019.Compensation expense related to the restricted shares/units was approximately $2,226,000, $3,675,000 and $1,793,000 for the years ended December 31,2018, 2017, and 2016, respectively. As of December 31, 2018, there was a total of approximately $2,620,000 of unrecognized compensation expense relatedto the nonvested portion of these restricted shares/units. This expense is expected to be recognized over the next three years and a quarter. As ofDecember 31, 2018, 45,533 shares were still available for issuance under the Plan.F - 18A summary of all restricted stock/units activity as of December 31, 2016, 2017 and 2018 and changes during the years then ended are presented below. Number ofSharesWeighted AverageExercise PriceWeightedAverageRemainingContractual Life(years)AggregateIntrinsicValue(in thousands)Outstanding, December 31, 2015145,588 $19.17 9.12$3,246 Granted139,451 $21.34 — $3,007 Vested(145,558)$19.17 — $2,963 Canceled/Forfeited— $— — $— Outstanding, December 31, 2016139,451 $21.34 9.13$4,483 Granted126,432 $27.06 — $3,421 Vested(81,494)$21.20 — $2,361 Canceled/Forfeited— $— — $— Outstanding, December 31, 2017184,389 $25.32 8.83$4,831 Granted140,988 24.55 — 3,461 Vested(110,747)23.97 — 2,806 Canceled/Forfeited— — — — Outstanding, December 31, 2018214,630 $25.51 8.85$3,529 Stock 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 to 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 31,2018, 318,503 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 year ended December 31, are as follows:2017Risk free rate2.12 %Expected life6 yearsExpected volatility39.59 %Expected dividend yield— There were no stock option grants made in 2018 or 2016.F - 19A summary of all option activity as of December 31, 2016, 2017 and 2018 and changes during the years then ended are presented below: Number ofSharesWeighted AverageGrant Date FairValueWeightedAverageRemainingContractual Life(years)AggregateIntrinsicValue(in thousands)Outstanding, December 31, 2015414,769 $19.07 5.08$1,814 Granted— $— Exercised(62,083)$16.79 625 Canceled/Forfeited(2,500)$22.90 $— Outstanding, December 31, 2016350,186 $19.45 4.25$4,453 Granted32,750 $28.15 Exercised(55,666)$20.12 446 Outstanding, December 31, 2017327,270 $20.21 4.28$2,255 Granted— — Exercised(38,250)17.19 216 Canceled/Forfeited(5,334)24.02 — Outstanding, December 31, 2018283,686 $20.46 3.58$434 Exercisable, December 31, 2018262,821 $19.85 3.22$434 The weighted average grant date fair value of options granted during the years was $11.93 in 2017 and none in 2018. The total intrinsic value, orthe difference between the exercise price and the market price on the date of exercise, of options exercised during the years ended December 31, 2018, 2017,and 2016 was approximately $216,000, $446,000, and $625,000 respectively. Cash received from stock options exercised during the years endedDecember 31, 2018, 2017, and 2016 was approximately $680,000, $1.12 million, and $1.0 million, respectively.The following table summarizes information about our stock options outstanding at December 31, 2018: Range of Exercise PricesOptions Outstanding Options Exercisable Shares WeightedAverageRemainingContractualLife (years)WeightedAverageExercisePriceShares WeightedAverageExercisePrice$0.01-15.7064,852 0.52$9.75 64,852 $9.75 $15.71-17.8142,000 1.57$17.54 42,000 $17.54 $17.82-20.4850,500 2.34$19.43 50,500 $19.43 $20.49-33.36126,334 6.32$27.33 105,469 $27.19 283,686 3.58$20.46 262,821 $19.85 F - 20The summary of the status of our unvested stock options as of December 31, 2018 and changes during the year then ended is presented below. Unvested stock options:Shares Weighted AverageGrant Date FairValueUnvested at December 31, 201748,581 $11.41 Granted— $— Vested(26,549)$10.97 Canceled/Forfeited(1,167)$11.93 Unvested at December 31, 201820,865 $11.93 We recognized stock compensation expense from stock options vesting of $159,000, $363,000, and $506,000 for the years ended December 31,2018, 2017 and 2016, respectively. As of December 31, 2018, there was approximately $131,000 of total unamortized compensation cost related to unvestedstock options. We expect to recognize such cost over a weighted-average period of 1.0 year. There were no stock option grants in 2018.11. Related PartyIn 2016, we entered into a joint venture partnership, N-G, LLC (‘N-G”), with Genis Holdings, LLC (“Genis”) to explore new technologies forwellhead compression. NGS and Genis both share 50% ownership of N-G. In 2018, we ordered some compressor packages from Genis, totaling $1.0 million.The compressors were not completed by December 31, 2018. As of December 31, 2018, we have prepaid $500,000 which is included in prepaid expenses andother in the consolidated balance sheet. The outstanding balance at year end December 31, 2018 is due at the time of completion.12. 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 $355,000, $301,000, and $295,000 to the 401(k) Plan in 2018, 2017 and 2016,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)2019$298 2020118 202197 202244 202335 Thereafter15 Total$607 Rent expense under such leases was $433,000, $310,000, and $325,000 for the years ended December 31, 2018, 2017 and 2016, respectively.F - 21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.13. Quarterly Financial Data (in thousands, except per share data) – Unaudited2018 Q1 Q2 Q3 Q4 Total Total revenue $14,718 $18,204 $16,396 $16,160 $65,478 Operating income (loss) 350 226 (44)106 638 Net income (loss)225 247 236 (282)426 Net income (loss) per share - Basic 0.02 0.02 0.02 (0.02)0.03 Net income (loss) per share - Diluted 0.02 0.02 0.02 (0.02)0.03 2017 Q1 Q2 Q3 Q4 Total Total revenue $18,902 $16,218 $15,913 $16,660 $67,693 Operating income 343 414 593 217 1,567 Net income (1)252 375 522 18,702 19,851 Net income per share - Basic 0.02 0.03 0.04 1.46 1.55 Net income per share - Diluted 0.02 0.03 0.04 1.42 1.51 (1) The increase in fourth quarter net income is largely a result of the 2017 Tax Act, see Note 7.Amounts may not add due to rounding differences.F - 22Exhibit 21.1Subsidiaries of the RegistrantListed below are subsidiaries of Natural Gas Services Group, Inc. with their jurisdiction of organization shown in parenthesis:NGSG Properties, LLC (Colorado)Rabbi Trust associated with the Company's Non-qualified Deferred Compensation Plan (Texas) 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, 333-160068, 333-160063, 333-147311, and 333-110954) of Natural Gas Services Group, Inc. of our reports dated March 18, 2019, relating tothe 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. Our report on the effectiveness of internal control over financial reportingexpresses an adverse opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. /s/ BDO USA, LLP Austin, TexasMarch 18, 2019Exhibit 31.1CertificationsI, Stephen C. Taylor, certify that:1I have reviewed this Annual Report on Form 10-K of Natural Gas Services Group, Inc;2Based 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;3Based 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;4The 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:aDesigned 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;bDesigned 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;cEvaluated 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; anddDisclosed 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; and1The 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):aAll 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; andbAny 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 18, 2019 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 the financialcondition, 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 in ExchangeAct 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 registrantand 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 18, 2019 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, 2018 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 18, 2019 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, 2018 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 18, 2019 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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