NATURAL GAS SERVICES GROUP INC - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

( ) 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 1-31398

NATURAL GAS SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)



Colorado		75-2811855
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

508 W. Wall St., Ste 550

Midland, Texas 79701

(Address of principal executive offices)

(432) 262-2700

(Registrant’s telephone number, including area code)

Indicate 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 12 months (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 x		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 posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



Yes x		No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o	Accelerated filer x	Non-accelerated filer o	Smaller reporting company o
		(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes o		No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.



Class		November 1, 2016
Common Stock, $0.01 par value		12,868,726



Part I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets	Page	1

Unaudited Condensed Consolidated Income Statements	Page	2

Unaudited Condensed Consolidated Statements of Cash Flows	Page	3

Notes to Unaudited Condensed Consolidated Financial Statements	Page	4

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	Page	12

Item 3. Quantitative and Qualitative Disclosures about Market Risk	Page	21

Item 4. Controls and Procedures	Page	21

Part II - OTHER INFORMATION

Item 1. Legal Proceedings	Page	21

Item 1A. Risk Factors	Page	21

Item 6. Exhibits	Page	22

Signatures	Page	24

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements



NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (unaudited)

	September 30,		December 31,
	2016		2015
ASSETS
Current Assets:
Cash and cash equivalents	$	61,157	$	35,532
Trade accounts receivable, net of allowance for doubtful accounts of $616 and $833, respectively	5,332		9,107
Inventory, net	24,368		27,722
Prepaid income taxes	979		81
Prepaid expenses and other	519		762
Total current assets	92,355		73,204
Rental equipment, net of accumulated depreciation of $126,104 and $111,293, respectively	179,561		191,933
Property and equipment, net of accumulated depreciation of $11,534 and $10,825 respectively	7,817		8,527
Goodwill	10,039		10,039
Intangibles, net of accumulated amortization of $1,476 and $1,382, respectively	1,683		1,777
Other assets	169		73
Total assets	$	291,624	$	285,553
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	902	$	1,226
Accrued liabilities	2,845		3,071
Deferred income	1,900		271
Total current liabilities	5,647		4,568
Line of credit, non-current portion	417		417
Deferred income tax liability	54,685		56,458
Other long-term liabilities	271		129
Total liabilities	61,020		61,572
Commitments and contingencies (Note 9)
Stockholders’ Equity:
Preferred stock, 5,000 shares authorized, no shares issued or outstanding	—		—
Common stock, 30,000 shares authorized, par value $0.01; 12,724 and 12,603 shares issued and outstanding, respectively	127		126
Additional paid-in capital	99,623		98,310
Retained earnings	130,854		125,545
Total stockholders' equity	230,604		223,981
Total liabilities and stockholders' equity	$	291,624	$	285,553

See accompanying notes to these unaudited condensed consolidated financial statements.



NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED INCOME STATEMENTS (in thousands, except earnings per share) (unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016			2015
Revenue:
Rental income	$	13,157		$	18,491		$	44,220		$	58,806
Sales, net	2,536			2,468			9,746			10,672
Service and maintenance income	488			234			985			686
Total revenue	16,181			21,193			54,951			70,164
Operating costs and expenses:
Cost of rentals, exclusive of depreciation stated separately below	4,513			7,327			15,618			22,062
Cost of sales, exclusive of depreciation stated separately below	2,191			1,740			8,359			7,706
Cost of service and maintenance	122			70			318			151
Loss on retirement of rental equipment	—			(3		)	—			4,370
Selling, general and administrative expense	2,101			2,667			6,822			8,131
Depreciation and amortization	5,431			5,594			16,371			17,240
Total operating costs and expenses	14,358			17,395			47,488			59,660
Operating income	1,823			3,798			7,463			10,504
Other income (expense):
Interest expense	(2		)	(7		)	(6		)	(13		)
Other income	10			20			22			67
Total other income, net	8			13			16			54
Income before provision for income taxes	1,831			3,811			7,479			10,558
Provision for income taxes	322			1,249			2,170			3,688
Net income	$	1,509		$	2,562		$	5,309		$	6,870
Earnings per share:
Basic	$	0.12		$	0.20		$	0.42		$	0.55
Diluted	$	0.12		$	0.20		$	0.41		$	0.54
Weighted average shares outstanding:
Basic	12,717			12,586			12,691			12,557
Diluted	12,962			12,801			12,913			12,783

See accompanying notes to these unaudited condensed consolidated financial statements.



NATURAL GAS SERVICES GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
	Nine months ended
	September 30,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,309		$	6,870
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	16,371			17,240
Deferred income taxes	(1,773		)	(2,629		)
Stock-based compensation	1,739			2,616
Bad debt allowance	61			402
Inventory allowance	32			70
Gain on sale of assets	(49		)	(81		)
Loss on retirement of rental equipment	—			4,370
Gain on company owned life insurance	(7		)	—
Changes in current assets and liabilities:
Trade accounts receivables	3,714			2,449
Inventory	3,556			3,912
Prepaid expenses	(604		)	2,287
Accounts payable and accrued liabilities	(550		)	(7,107		)
Current income tax liability	—			5,086
Deferred income	1,629			(646		)
Other	133			(19		)
Tax benefit from equity compensation	(51		)	—
NET CASH PROVIDED BY OPERATING ACTIVITIES	29,510			34,820
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment	(3,359		)	(11,163		)
Purchase of company owned life insurance	(142		)	—
Proceeds from sale of property and equipment	49			113
NET CASH USED IN INVESTING ACTIVITIES	(3,452		)	(11,050		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments from other long-term liabilities, net	(8		)	(20		)
Proceeds from exercise of stock options	433			733
Taxes paid related to net share settlement of equity awards	(909		)	(686		)
Tax benefit from equity compensation	51			—
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES	(433		)	27
NET CHANGE IN CASH AND CASH EQUIVALENTS	25,625			23,797
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	35,532			6,181
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	61,157		$	29,978
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	6		$	13
Income taxes paid	$	4,795		$	3,185
NON-CASH TRANSACTIONS
Transfer of rental equipment components to inventory	$	164		$	1,065
Transfer from inventory to property and equipment	$	—		1,622

See accompanying notes to these unaudited condensed consolidated financial statements.

Natural Gas Services Group, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1) Basis of Presentation and Summary of Significant Accounting Policies

These notes apply to the unaudited condensed consolidated financial statements of Natural Gas Services Group, Inc. a Colorado corporation (the "Company", “NGSG”, "Natural Gas Services Group", "we" or "our").

The accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, which are necessary to make our financial position at September 30, 2016 and the results of our operations for the three months and nine months ended September 30, 2016 and 2015 not misleading. As permitted by the rules and regulations of the Securities and Exchange Commission (SEC), the accompanying condensed consolidated financial statements do not include all disclosures normally required by generally accepted accounting principles in the United States of America (GAAP). These financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015 on file with the SEC. In our opinion, the condensed consolidated financial statements are a fair presentation of the financial position, results of operations and cash flows for the periods presented.

The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2016.

Revenue Recognition

Revenue from the sales of custom and fabricated compressors, and flare systems is recognized when title passes to the customer, the customer assumes risks and rewards of ownership, collectability is reasonably assured and delivery occurs as directed by our customer. From time to time, we have customers that request units and flares to be built under a bill and hold arrangement. In order to recognize revenue under a bill and hold arrangement the following criteria must be met: risk of ownership was passed to the customer, customer made a fixed commitment to purchase the goods, the customer requested the bill and hold, there was a fixed schedule for delivery, we no longer had any specific performance obligations, the purchase was segregated at our facility and the equipment was complete and ready to ship. As of September 30, 2016, we recognized revenue of $4.4 million under these bill and hold arrangements. Exchange and rebuilt compressor revenue is recognized when the replacement compressor has been delivered and the rebuild assessment has been completed. Revenue from compressor service and retrofitting services is recognized upon providing services to the customer. Maintenance agreement revenue is recognized as services are rendered. Rental revenue is recognized over the terms of the respective rental agreements. Deferred income represents payments received before a product is shipped. Revenue from the sale of rental units is included in sales revenue when equipment is shipped or title is transferred to the customer.

Fair Value of Financial Instruments

Our financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable, deferred compensation plan (cash portion) and our line of credit. Pursuant to ASC 820 (Accounting Standards Codification), the fair value of our cash equivalents is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. We believe that the recorded values of all of our other financial instruments approximate their fair values because of their nature and relatively short maturity dates or durations.

Recently Issued Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) 2016-15, Classification of Certain Cash Receipts and Cash Payments, seeking to eliminate diversity in practice related to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities, including both business entities and not-for-profit entities that are required to present a statement of cash flows under FASB ASC 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The new standard will be effective during our first quarter ending March 31, 2018. We are currently evaluating the potential impact of this accounting standard on our financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU identifies areas for simplification involving several areas of accounting for share-based compensation arrangements, including the income tax impact, classification of awards as equity or liabilities, classifications on the statement of cash flows and forfeitures. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted provided that presentation is applied to the beginning of the fiscal year of adoption. The new standard will be effective during our first quarter ending March 31, 2017. We are currently evaluating the potential impact this new standard may have on our financial statements.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as part of a joint project with the International Accounting Standards Board (IASB) to clarify revenue-recognizing principles and develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (IFRS). ASU No. 2014-09 finalizes Proposed ASU Nos. 1820-100, 2011-230 and 2011-250 and is expected, among other things, to remove inconsistencies and weaknesses in revenue requirements and improve comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. In particular, the amendments in this ASU will be added to the FASB Accounting Standards Codification (FASB ASC) as Topic 606, Revenue from Contracts with Customers, and will supersede the revenue recognition requirements in FASB ASC 605, Revenue Recognition, as well as some cost guidance in FASB ASC Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts. The core principle of this ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligation in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU No. 2015-14 deferring the effective date of ASU No. 2014-09, by one year. In March 2016, the FASB issued ASU 2016-08 which further clarifies the guidance on the principal versus agent considerations within ASU 2014-09. In April 2016, the FASB issued ASU 2016-10 to expand the guidance on identifying performance obligations and licensing within ASU 2014-09. In May 2016, the FASB issued ASU 2016-12 to clarify the assessment of the likelihood that revenue will be collected from a contract ,the guidance for recognizing sales taxes and similar taxes and the timing for measuring customers payments that are not in cash within ASU 2014-09. For public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is permitted only for annual reporting periods beginning after December 15, 2016, including interim periods within that year. Additionally, an entity should apply the amendments either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects the latter, transition method, then it must also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes. The new standard will be effective during our first quarter ending March 31, 2018. We are currently evaluating the new standard to determine which reporting option allows us to report the most meaningful information and are still evaluating the potential impact this new standard may have on our financial statements.

(2) Stock-Based Compensation

Stock Options:

A summary of option activity under our 1998 Stock Option Plan as of December 31, 2015, and changes during the nine months ended September 30, 2016 is presented below.



	Number of Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (in thousands)
Outstanding, December 31, 2015	414,769		$	19.07	5.08	$	1,814
Exercised	(27,250	)	15.93
Canceled/Forfeited	(1,667	)	22.90
Outstanding, September 30, 2016	385,852		$	19.28	4.47	$	2,370
Exercisable, September 30, 2016	333,353		$	18.29	3.88	$	2,312

The following table summarizes information about our stock options outstanding at September 30, 2016:



Range of Exercise Prices	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$0.01-15.70	79,352	2.90	$	10.64	79,352	$	10.64
$15.71-17.81	85,750	3.00	17.55		85,750	17.55
$17.82-20.48	114,917	3.39	19.62		114,917	19.62
$20.49-33.36	105,833	8.00	26.78		53,334	28.03
	385,852	4.47	$	19.28	333,353	$	18.29

The summary of the status of our unvested stock options as of December 31, 2015 and changes during the nine months ended September 30, 2016 is presented below.



Unvested stock options:	Shares		Weighted Average Grant Date Fair Value Per Share
Unvested at December 31, 2015	101,836		$	12.67
Vested	(47,670	)	12.75
Canceled/Forfeited	(1,667	)	10.33
Unvested at September 30, 2016	52,499		$	12.67

As of September 30, 2016, there was $367,232 of unrecognized compensation cost related to unvested options. Such cost is expected to be recognized over a weighted-average period of one year. Total compensation expense for stock options was $388,732 and $429,925 for the nine months ended September 30, 2016 and 2015, respectively.

Restricted Stock:

In accordance with the Company's employment agreement with Stephen Taylor, the Company's Chief Executive Officer, the Compensation Committee reviewed his performance in determining the issuance of restricted common stock. Based on this review which included consideration of the Company's 2015 performance, Mr. Taylor, was awarded 75,915 restricted shares on January 6, 2016, which vest over two years, in equal installments, beginning January 6, 2017. On April 6, 2016, the Compensation Committee awarded 20,000 shares of restricted common stock to each of G. Larry Lawrence, our CFO, and James Hazlett, our Vice President of Technical Services. The restricted shares to Messrs. Hazlett and Lawrence vest over two years, in equal installments, beginning April 6, 2017. We also awarded and issued 23,536 shares of restricted common stock to our Board of Directors as partial payment for 2016 directors' fees. The restricted stock issued to our directors vests over one year, in quarterly installments, beginning March 31, 2017. Total compensation expense related to restricted stock awards was $1,350,427 and $2,186,330 for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, there was a total of $2,077,829 of unrecognized compensation expense related to these shares which is expected to be recognized over the next two years.

(3) Inventory

Our inventory, net of allowance for obsolescence of $44,000 and $12,000 at September 30, 2016 and December 31, 2015, respectively, consisted of the following amounts:



	September 30, 2016		December 31, 2015
	(in thousands)
Raw materials	$	19,300	$	20,726
Finished Goods	1,039		1,051
Work in process	4,029		5,945
	$	24,368	$	27,722

During the nine months ended September 30, 2016 and 2015, there were no write-offs of obsolete inventory against the allowance for obsolescence.

(4) Retirement of Long-Lived Assets

As a result of a decline in market conditions during the first half of 2015, management reviewed our rental compressor units that were not of the type, configuration, make or model that our customers were demanding or that were not cost efficient to refurbish, maintain and operate. As a result of that review, we determined that 258 units representing total horsepower of 32,259 should be retired from our rental fleet with key components from those units being re-utilized in future unit builds and/or repairs. We performed an optimization review and recorded a $4.4 million loss on the retirement of rental equipment to reduce the book value of each unit to the estimated aggregate fair value of approximately $967,000 for the key components being kept. The retirement was recorded in second quarter of 2015. No retirements have been made in 2016.

(5) Deferred Compensation Plans

Effective January 1, 2016, the Company established a non-qualified deferred compensation plan for executive officers, directors and certain eligible employees. 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 or insolvency of the Company. The plan allows for deferral up to 90% of a participant’s base salary, bonus, commissions, director fees and restricted stock awards. 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 life insurance policy is $149,000 as of September 30, 2016, with a gain related to the policy of $7,000 reported in other income in our condensed consolidated income statement for the nine months ending September 30, 2016.

For deferrals of base salary, bonus, commissions and director fees, settlement payments are made to participants in cash, either in a lump sum or in periodic installments. The deferred obligation to pay the deferred compensation and the deferred director

fees is adjusted to reflect the positive or negative performance of investment measurement options selected by each participant and was $151,000 as of September 30, 2016. The deferred obligation is included in other long-term liabilities in the condensed consolidated balance sheet.

For deferrals of restricted stock, the plan does not allow for diversification, therefore, distributions are paid in shares and the obligation is carried at grant value. As of September 30, 2016, no shares had been deferred.

(6) Credit Facility

We have a senior secured revolving credit agreement the "Amended Credit Agreement" with JP Morgan Chase Bank, N.A (the "Lender") with an aggregate commitment of $30 million, subject to collateral availability. We also have a right to request from the Lender, on an uncommitted basis, an increase of up to $20 million on the aggregate commitment (which could potentially increase the commitment amount to $50 million).

Borrowing Base. At any time before the maturity of the Amended Credit Agreement, we may draw, repay and re-borrow amounts available under the borrowing base up to the maximum aggregate availability discussed above. Generally, the borrowing base equals the sum of (a) 80% of our eligible accounts receivable 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 the book value of our eligible equipment inventory. The Lender may adjust the borrowing base components if material deviations in the collateral are discovered in future audits of the collateral. We had $29.5 million borrowing base availability at September 30, 2016 under the terms of our Amended 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, or portion thereof, of either (a) LIBOR multiplied by the Statutory Reserve Rate (as defined in the Amended Credit Agreement), with respect to this rate, for Eurocurrency 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 1.50%. For the nine month period ended September 30, 2016, our weighted average interest rate was 1.81%.

Accrued interest is payable monthly on outstanding principal amounts, provided that accrued interest on LIBOR-based loans is payable at the end of each interest period, but in no event less frequently than quarterly. In addition, fees and expenses are payable in connection with our requests for letters of credit (generally equal to the Applicable Margin for LIBOR-related borrowings multiplied by the face amount of the requested letter of credit) and administrative and legal costs.

Maturity . The maturity date of the Amended Credit Agreement is December 31, 2017, at which time all amounts borrowed under the agreement will be due and outstanding letters of credit must be cash collateralized. The agreement may be terminated early upon our request or the occurrence of an event of default.

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 which 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 as of 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 our ability to incur additional indebtedness and liens; enter into transactions with affiliates; make acquisitions in excess of certain amounts; pay dividends; redeem or repurchase capital stock or senior notes; make investments or loans; make negative pledges; consolidate, merge or effect asset sales; or change the nature of our business. In addition, we also have certain financial covenants that require us to maintain on a consolidated basis a leverage ratio less than or equal to 2.50 to 1.00 as of the 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, and includes, without limitation, payment defaults; defaults in performance of covenants or other agreements contained in the loan documents; inaccuracies in representations and warranties; certain defaults, termination events or similar events; certain defaults with respect to any other Company indebtedness in excess of $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 facility. Obligations under the Amended Credit Agreement may be accelerated upon the occurrence of an event of default.

As of September 30, 2016, we were in compliance with all covenants in our Amended Credit Agreement. A default under our Credit Agreement could 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. At September 30, 2016 and December 31, 2015 our outstanding balance on the line of credit was $417,000.

(7) Earnings per Share

The following table reconciles the numerators and denominators of the basic and diluted earnings per share computation(in thousands, except per share data).



	Three months ended				Nine months ended
	September 30,				September 30,
	2016		2015		2016		2015
Numerator:
Net income	$	1,509	$	2,562	$	5,309	$	6,870
Denominator for basic net income per common share:
Weighted average common shares outstanding	12,717		12,586		12,691		12,557

Denominator for diluted net income per share:
Weighted average common shares outstanding	12,717		12,586		12,691		12,557
Dilutive effect of stock options and restricted stock	245		215		222		226
Diluted weighted average shares	12,962		12,801		12,913		12,783
Earnings per common share:
Basic	$	0.12	$	0.20	$	0.42	$	0.55
Diluted	$	0.12	$	0.20	$	0.41	$	0.54

In the three months ended September 30, 2016, options to purchase 52,500 shares of common stock with exercise prices ranging from $30.41 to $33.36 were not included in the computation of dilutive income per share, due to their antidilutive effect.

In the nine months ended September 30, 2016, options to purchase 105,833 shares of common stock with exercise prices ranging from $22.90 to $33.36 were not included in the computation of dilutive income per share, due to their antidilutive effect.

In the three and nine months ended September 30, 2015, options to purchase 107,500 shares of common stock with exercise prices ranging from $22.90 to $33.36 were not included in the computation of dilutive income per share, due to their antidilutive effect.

(8) Segment Information

ASC 280-10-50, “Operating Segments", defines the characteristics of an operating segment as a) being engaged in business activity from which it may earn revenue and incur expenses, b) being reviewed by the Company's chief operating decision maker (CODM) for decisions about resources to be allocated and assess its performance and c) having discrete financial information. Although we look at our products to analyze the nature of our revenue, other financial information, such as certain costs and expenses, net income and EBITDA are not captured or analyzed by these categories. Our CODM does not make resource allocation decisions or access the performance of the business based on these categories, but rather in the aggregate. Based on this, management believes that it operates in one business segment.

In their analysis of product lines as potential operating segments, management also considered ASC 280-10-50-11, “Aggregation Criteria”, which allows for the aggregation of operating segments if the segments have similar economic characteristics and if the segments are similar in each of the following areas:


•	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 our customers. In addition, we provide service and maintenance on compressors in our fleet and to third parties. These business activities are similar in all geographic areas. Our manufacturing process is essentially the same for the entire Company and is performed in-house at our facilities in Midland, Texas and Tulsa, Oklahoma. Our customers primarily consist of entities in the business of producing natural gas and crude oil. The maintenance and service of our products is consistent across the entire Company and is performed via an internal fleet of vehicles. The regulatory environment is similar in every jurisdiction in that the most impacting regulations and practices are the result of federal energy policy. In addition, the economic characteristics of each customer arrangement are similar in that we maintain policies at the corporate level.



For the three months ended September 30, 2016 (in thousands):
	Rental		Sales		Service & Maintenance		Corporate			Total
Revenue	$	13,157	$	2,536	$	488	$	—		$	16,181
Operating costs and expenses	4,513		2,191		122		7,532			14,358
Total other expense, net	—		—				8			8
Income before provision for income taxes	$	8,644	$	345	$	366	$	(7,524	)	$	1,831



For the three months ended September 30, 2015 (in thousands):
	Rental		Sales		Service & Maintenance		Retirement of Rental Equipment			Corporate			Total
Revenue	$	18,491	$	2,468	$	234	$	—		$	—		$	21,193
Operating costs and expenses	7,327		1,740		70		(3		)	8,261			17,395
Total other income, net	—		—				—			13			13
Income before provision for income taxes	$	11,164	$	728	$	164	$	3		$	(8,248	)	$	3,811



For the nine months ended September 30, 2016 (in thousands):
	Rental		Sales		Service & Maintenance		Corporate			Total
Revenue	$	44,220	$	9,746	$	985	$	—		$	54,951
Operating costs and expenses	15,618		8,359		318		23,193			47,488
Total other income, net	—		—		—		16			16
Income before provision for income taxes	$	28,602	$	1,387	$	667	$	(23,177	)	$	7,479



For the nine months ended September 30, 2015 (in thousands):
	Rental		Sales		Service & Maintenance		Retirement of Rental Equipment			Corporate			Total
Revenue	$	58,806	$	10,672	$	686	$	—		$	—		$	70,164
Operating costs and expenses	22,062		7,706		151		4,370			25,371			59,660
Total other income, net	—		—		—		—			54			54
Income before provision for income taxes	$	36,744	$	2,966	$	535	$	(4,370	)	$	(25,317	)	$	10,558

(9) Commitments and Contingencies

From time to time, we are a party to various legal proceedings in the ordinary course of our business. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on our financial position, results of operations or cash flow. We are not currently a party to any material legal proceedings, and we are not aware of any threatened material litigation.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis of our financial condition and results of operations are based on, and should be read in conjunction with, our condensed, consolidated financial statements and the related notes included elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.

Overview

We fabricate, manufacture, rent and sell natural gas compressors and related equipment. Our primary focus is on the rental of natural gas compressors. Our rental contracts generally provide for initial terms of six to 24 months. After the initial term of our rental contracts, most of our customers have continued to rent our compressors on a month-to-month basis. Rental amounts are billed monthly in advance and include maintenance of the rented compressors. As of September 30, 2016, we had 1,387 natural gas compressors totaling 196,721 horsepower rented to 79 customers compared to 1,922 natural gas compressors totaling 267,202 horsepower rented to 89 customers at September 30, 2015.

We also fabricate natural gas compressors for sale to our customers, designing compressors to meet unique specifications dictated by well pressures, production characteristics and particular applications for which compression is sought. Fabrication of compressors involves our purchase of engines, compressors, coolers and other components, and our assembling of these components on skids for delivery to customer locations. The major components of our compressors are acquired through periodic purchase orders placed with third-party suppliers on an “as needed” basis, which presently requires a two to three month lead time with delivery dates scheduled to coincide with our estimated production schedules. Although we do not have formal continuing supply contracts with any major supplier, we believe we have adequate alternative sources available. In the past, we have not experienced any sudden and dramatic increases in the prices of the major components for our compressors. 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 were unable to increase our rental rates and sales prices proportionate to 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 use finished CiP component products in the fabrication of compressor units for sale or rental by us or sell the finished component products to other compressor fabricators. We also design, fabricate, sell, install and service flare stacks and related ignition and control devices for onshore and offshore incineration of gas compounds such as hydrogen sulfide, carbon dioxide, natural gas and liquefied petroleum gases. To provide customer support for our compressor and flare sales businesses, we stock varying levels of replacement parts at our Midland, Texas facility and at field service locations. We also provide an exchange and rebuild program for screw compressors and maintain an inventory of new and used compressors to facilitate this business.

We provide service and maintenance to our customers under written maintenance contracts or on an as-required basis in the absence of a service contract. Maintenance agreements typically have terms of nine months to one year and require payment of a monthly fee.

The oil and natural gas equipment rental and services industry is cyclical in nature. The most critical factor in assessing the outlook for the industry is the worldwide supply and demand for natural gas and crude oil and the corresponding changes in commodity prices. As demand and prices increase, oil and natural gas producers increase their capital expenditures for drilling, development and production activities. Generally, the increased capital expenditures ultimately result in greater revenues and profits for services 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 domestic natural gas production and consumption levels and prices more significantly affecting our business than changes in crude oil and condensate production and consumption levels and prices. However, we have increased our rental and sales in the non-conventional shale plays which are more dependent on crude oil prices. We also believe that demand for compression services and products is driven by declining reservoir pressure in maturing natural gas producing fields and, more recently, by increased focus by producers on non-conventional natural gas production, such as coalbed methane, gas shales and tight gas, which typically requires more compression than production from conventional natural gas reservoirs.

Demand for our products and services have been historically strong. However, a decline in demand is experienced during periods of low crude oil and natural gas prices. Low crude oil and natural gas prices experienced throughout 2015 have continued in the first nine months of 2016, with some price strengthening. Through much of this period, producers maintained their focus on non-conventional opportunities. The continued low price environment has caused reduced project spending on both conventional and non-conventional plays. While the timing of a return to aggressive investment in the projects is uncertain, we believe the long-

term trend in our market is favorable. We believe this outlook is supported by our ability to withstand temporary disruptions and position the Company for the long term.

Results of Operations

Three months ended September 30, 2016, compared to the three months ended September 30, 2015.

The table below shows our revenues and percentage of total revenues of each of our product lines for the three months ended September 30, 2016 and 2015.



	Revenue Three months ended September 30,
	(in thousands)
	2016				2015
Rental	$	13,157	81	%	$	18,491	87	%
Sales	2,536		16	%	2,468		12	%
Service and Maintenance	488		3	%	234		1	%
Total	$	16,181			$	21,193

Total revenue decreased to $16.2 million from $21.2 million, or 24%, for the three months ended September 30, 2016, compared to the same period ended September 30, 2015. The $5.0 million drop in revenue is due to rental units being returned in connection with the low oil and gas price environment.

Rental revenue decreased to $13.2 million from $18.5 million for the three months ended September 30, 2016, compared to the same period ended September 30, 2015. This decrease is due to the reduced demand from the drop in oil prices resulting in units being returned. We ended the quarter with 2,626 compressor packages, down from 2,664 units at September 30, 2015. The rental fleet had a utilization of 52.8% as of September 30, 2016 compared to 72.1% utilization as of September 30, 2015. This drop in utilization is mainly the result of compressor rental units being returned. In the event that oil and natural gas prices increase, we should see an increase in the utilization of our fleet.

Sales revenue remained constant at $2.5 million for the three months ended September 30, 2016 and September 30, 2015. We had an increase in our compressors product line offset by a decrease in our flare sales during this comparative period.

Our overall operating income decreased $2.0 million to $1.8 million from $3.8 million for the three months ended September 30, 2016 compared to the same period ended September 30, 2015, primarily due to a decrease in revenue. Operating margin percentage decreased to 11% from 18% for the three months ended September 30, 2016 and September 30, 2015, respectively. The operating margin decreased due the reduction in total revenue.

Selling, general, and administrative expense decreased to $2.1 million from $2.7 million for the three months ended September 30, 2016, and September 30, 2015, primarily due to changing the vesting periods of newly issued restricted stock grants, from one to two years.

Depreciation and amortization expense decreased to $5.4 million for the three months ended September 30, 2016, compared to $5.6 million for the period ended September 30, 2015. This decrease is the result of fewer units being added to the fleet, older units becoming fully depreciated and the retirement of 258 rental units during the second quarter of 2015. We added only 18 units over the past 12 months to our fleet.

Provision for income tax was $322,000 and $1.2 million for the three months ended September 30, 2016 and September 30, 2015, respectively. The decrease in the provision is due to a decrease in taxable income and a change in effective tax rate between the two periods. The decrease in the provision is due to a decrease in taxable income which is largely driven by a decrease in revenues, for the three months ended September 30, 2016 compared to three months ended September 30, 2015.

Nine months ended September 30, 2016, compared to the nine months ended September 30, 2015.

The table below shows our revenues and percentage of total revenues of each of our product lines for the nine months ended September 30, 2016 and 2015.



	Revenue Nine months ended September 30,
	(in thousands)
	2016				2015
Rental	$	44,220	80	%	$	58,806	84	%
Sales	9,746		18	%	10,672		15	%
Service and Maintenance	985		2	%	686		1	%
Total	$	54,951			$	70,164

Total revenue decreased to $55.0 million from $70.2 million, or 21.7%, for the nine months ended September 30, 2016, compared to the same period ended September 30, 2015. Comparing the nine months ended September 30, 2016 to the same period in 2015, rental revenue decreased 25% and sales revenue decreased 9%. This decrease was due to rental units being returned in connection with the low oil and gas price environment and timing of unit sales.

Rental revenue decreased to $44.2 million from $58.8 million for the nine months ended September 30, 2016, compared to the same period ended September 30, 2015. This decrease is the result of the decline in demand from the oil and natural gas industry, due to the continued depressed oil and gas prices. We ended the quarter with 2,626 compressor packages in our rental fleet, down from 2,664 units at September 30, 2015. The rental fleet had a utilization of 52.8%, as of September 30, 2016 compared to 72.1% utilization as of September 30, 2015. This utilization decrease mainly results from compressor returns reflecting the impact of the low price environment. In the event that oil and natural gas prices increase, we should see incremental utilization of our fleet.

Sales revenue decreased to $9.7 million from $10.7 million for the nine months ended September 30, 2016, compared to the same period ended September 30, 2015. This decrease is the result of the inconsistent timing of industry activity related to capital projects. We believe this timing is reflective of the typical sales cycle, resulting in inconsistent compressor units sales to third parties from our Tulsa and Midland operations. There was also a decrease in demand for flares during this comparative period.

Our overall operating income decreased $3.0 million to $7.5 million from $10.5 million for the nine months ended September 30, 2016, compared to the same period ended September 30, 2015, primarily due to a decrease in revenue. Operating margin percentage decreased slightly to 14% from 15%, for the nine months ended September 30, 2016, compared to the same period ended September 30, 2015. When excluding the rental fleet retirement for the comparative nine months, operating margin percentage for September 30, 2015 was 21%, this 7% decrease in margin is due to the reduction in total revenue.

As a result of a decline in market conditions, in 2015, management reviewed our rental compressor units and determined that 258 units should be retired (with certain key components being re-utilized), representing total horsepower of 32,259. Based on this optimization review, at June 30, 2015, we recorded a $4.4 million non-cash loss on the retirement of rental equipment for the six months ended June 30, 2015, to reduce the book value to approximately $967,000, the estimated fair value of the key components being kept. This loss on the retirement of rental equipment is reported under operating costs and expenses in our condensed consolidated income statement for the nine months ended September 30, 2015.

Selling, general, and administrative expense decreased to $6.8 million from $8.1 million for the nine months ended September 30, 2016, as compared to the same period ended September 30, 2015, primarily due to changing the vesting periods of newly issued restricted stock grants, from one to two years.

Depreciation and amortization expense decreased to $16.4 million for the nine months ended September 30, 2016, compared to $17.2 million for the period ended September 30, 2015. This decrease is the result of fewer units being added to the fleet, older units becoming fully depreciated and the retirement of 258 rental units during second quarter of 2015. We added only 18 units over the past 12 months to our fleet.

Provision for income tax decreased to $2.2 million from $3.7 million, or 41.0%, and is the result of the decrease in taxable income and a change in effective tax rate between the two periods. The decrease in the provision is due to a decrease in taxable income which is largely driven by a decrease in revenues, for the nine months ended September 30, 2016 compared to nine months ended September 30, 2015.

Liquidity and Capital Resources

Our working capital positions as of September 30, 2016 and December 31, 2015 are set forth below:



	September 30,		December 31,
	2016		2015
	(in thousands)
Current Assets:
Cash and cash equivalents	$	61,157	$	35,532
Trade accounts receivable, net	5,332		9,107
Inventory, net	24,368		27,722
Prepaid income taxes	979		81
Prepaid expenses and other	519		762
Total current assets	92,355		73,204
Current Liabilities:
Accounts payable	902		1,226
Accrued liabilities	2,845		3,071
Deferred income	1,900		271
Total current liabilities	5,647		4,568
Total working capital	$	86,708	$	68,636

For the nine months ended September 30, 2016, we invested $3.4 million in equipment for our rental fleet and service vehicles. Even though we have idle rental equipment, at times we do not have the specific type of equipment that our customers require, therefore we have to build new equipment to satisfy their needs. We financed this activity with cash flow from operations and cash on hand.

Cash flows

At September 30, 2016, we had cash and cash equivalents of $61.2 million compared to $35.5 million at December 31, 2015. Our cash flow from operations of $29.5 million was offset by capital expenditures of $3.4 million, during the nine months ended September 30, 2016. We had working capital of $86.7 million at September 30, 2016 compared to $68.6 million at December 31, 2015. On September 30, 2016 and December 31, 2015, we had outstanding debt of $417,000, which is all related to our line of credit and is classified as non-current. We had positive net cash flow from operating activities of $29.5 million during the first nine months of 2016 compared to $34.8 million for the first nine months of 2015. The cash flow from operations of $29.5 million was primarily the result of the net income of $5.3 million and the non-cash items of depreciation of $16.4 million, $1.7 million related to the expenses associated with stock options and restricted shares, an increase in working capital of $7.9 million and a decrease in deferred income taxes of $1.8 million.

Strategy

For the remainder of the fiscal year 2016 and into 2017, our overall plan is to continue monitoring and holding expenses in line with the anticipated level of activity, fabricate rental fleet equipment only in direct response to market requirements, emphasize marketing of our idle gas compressor units and limit bank borrowing in line with market conditions. For the remainder of 2016, our forecasted capital expenditures will be directly dependent upon our customers’ compression requirements and are not anticipated to exceed our internally generated cash flows and cash on hand. Any required capital will be for additions to our compressor rental fleet and/or addition or replacement of service vehicles. We believe that cash flows from operations, our current cash position and our line of credit will be sufficient to satisfy our capital and liquidity requirements for the foreseeable future. We may require additional capital to fund any unanticipated expenditures, including any acquisitions of other businesses, although that capital, beyond our line of credit, as discussed below may not be available to us when we need it or on acceptable terms.

Bank Borrowings

We have a senior secured revolving credit agreement the "Amended Credit Agreement" with JP Morgan Chase Bank, N.A. (the "Lender") with an aggregate commitment of $30 million, subject to collateral availability. We also have a right to request from the lender, on an uncommitted basis, an increase of up to $20 million on the aggregate commitment (which could potentially increase the commitment amount to $50 million).

Maturity. The maturity date of the Amended Credit Agreement is December 31, 2017, at which time all amounts borrowed under the agreement will be due and outstanding letters of credit must be cash collateralized. The agreement may be terminated early upon our request or the occurrence of an event of default.

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 1.00 commitment 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 such date.)

Contractual Obligations and Commitments

We have contractual obligations and commitments that affect the results of operations, financial condition and liquidity. The following table is a summary of our significant cash contractual obligations as of September 30, 2016:



	Obligations Due in Period (in thousands)
Cash Contractual Obligations	2016 ⁽¹⁾		2017		2018		2019		Thereafter		Total
Line of credit (secured)	$	—	$	417	$	—	$	—	$	—	$	417
Interest on line of credit⁽²⁾	4		17		—		—		—		21
Purchase obligations⁽³⁾	297		400		400		400		437		1,934
Other long-term liabilities	—		—		—		—		121		121
Facilities and office leases	106		422		284		59		—		871
Total	$	407	$	1,256	$	684	$	459	$	558	$	3,364

(1)For the three months remaining in 2016.

(2)Assumes an interest rate of 4.0% and no additional borrowings.

(3)Vendor exclusive purchase agreement related to paint and costings.

Critical Accounting Policies and Practices

There have been no changes in the critical accounting policies disclosed in the Company's Form 10-K for the year ended December 31, 2015.

Recently Issued Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU is identifies areas for simplification involving several areas of accounting for share-based compensation arrangements, including the income tax impact, classification of awards as equity or liabilities, classifications on the statement of cash flows and forfeitures. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted provided that presentation is applied to the beginning of the fiscal year of adoption. The new standard will be effective during our first quarter ending March 31, 2017. We are currently evaluating the potential impact this new standard may have on our financial statements.

the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligation in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU No. 2015-14 deferring the effective date of ASU No. 2014-09, by one year. In March 2016, the FASB issued ASU 2016-08 which further clarifies the guidance on the principal versus agent considerations within ASU 2014-09. In April 2016, the FASB issued ASU 2016-10 to expand the guidance on identifying performance obligations and licensing within ASU 2014-09. For public entities, the amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is permitted only for annual reporting periods beginning after December 15, 2016, including interim periods within that year. Additionally, an entity should apply the amendments either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. If an entity elects the latter, transition method, then it must also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes. The new standard will be effective during our first quarter ending March 31, 2018. We are currently evaluating the new standard to determine which reporting option allows us to report the most meaningful information and are still evaluating the potential impact this new standard may have on our financial statements.

Off-Balance Sheet Arrangements

From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of September 30, 2016, the off-balance sheet arrangements and transactions that we have entered into include operating lease agreements and purchase agreements. We do not believe that these arrangements are reasonably likely to materially affect our liquidity, availability of, or requirements for, capital resources.

Special Note Regarding Forward-Looking Statements

Except for historical information contained herein, the statements in this report are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks include, among other things, the loss of market share through competition or otherwise; the introduction of competing technologies by other companies; a prolonged, substantial reduction in oil and natural gas prices which could cause a decline in the demand for our products and services; and new governmental safety, health and environmental regulations which could require us to make significant capital expenditures. The forward-looking statements included in this Form 10-Q are only made as of the date of this report, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. A discussion of these and other risk factors is included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no changes in the market risks disclosed in the Company's Form 10-K for the year ended December 31, 2015.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

An evaluation was carried out under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Vice President and Principal Accounting Officer, of the effectiveness of the design and of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended or, the “Exchange Act”) as of the end of the period covered by this report pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the President and Chief Executive Officer and our Vice President and Principal Accounting Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosures. Due to the inherent limitations of control systems, not all misstatements or omissions may be detected. Those inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people. Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

Changes in Internal Controls.

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. 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 the ultimate outcome of these actions, it believes that any ultimate liability arising from these actions will not have a material adverse effect on our financial position, results of operations or cash flow. We are not currently a party to any material legal proceedings and we are not aware of any threatened litigation.

Item 1A. Risk Factors

Please refer to and read “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 for a discussion of the risks associated with our Company and industry.

Item 6. Exhibits

The following exhibits are filed herewith or incorporated herein by reference, as indicated:



Exhibit No.	Description

3.1	Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10-QSB filed and dated November 10, 2004)

3.2	Bylaws (Incorporated by reference to Exhibit 3.4 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

4.1	Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on August 30, 2005)



10.1	Lease Agreement, dated March 26, 2008, between WNB Tower, LTD and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 10.15 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2008 and filed with the Securities and Exchange Commission on March 9, 2009)

10.2	2009 Restricted Stock/Unit Plan, as amended (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K dated June 3, 2014 and filed with the Securities and Exchange Commission on June 6, 2014.)

10.3	1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K dated September 18, 2009 and filed with the Securities and Exchange Commission on September 18, 2009.)

10.4	Lease Agreement, dated December 11, 2008, between Klement-Wes Partnership, LTD and Natural Gas Services Group, Inc. and commencing on January 1, 2009

10.5	Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 10, 2010 (Incorporated by reference 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.)

10.6	Third Amendment of Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated November 19, 2014 (Incorporated by reference to Exhibit 10.1 of the Registrant's Current report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2012.)

10.7	Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 10, 2010 (Incorporated by reference 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.)

10.8	First Amendment of Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 31, 2011 (Incorporated by reference to Exhibit 10.2 of the Registrant's Current report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2012.)

10.9	Promissory Note in the aggregate amount of $30,000,000 issued to JPMorgan Chase Bank, N.A., dated December 31, 2014, in connection with the revolving credit line under the Credit Agreement with JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24, 2014.)

10.10	Amended 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 Commission on April 29, 2015.)

10.11	The Executive Nonqualified Excess Plan Adoption Agreement, referred to as the Nonqualified Deferred Compensation Plan (Incorporated by reference 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.)

*31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*31.2	Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



*32.2	Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

	* Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NATURAL GAS SERVICES GROUP, INC.



/s/ Stephen C. Taylor		/s/ G. Larry Lawrence
Stephen C. Taylor		G. Larry Lawrence
President and Chief Executive Officer		Vice President and Chief Financial Officer
(Principal Executive Officer)		(Principal Accounting Officer)

November 4, 2016

INDEX TO EXHIBITS

The following exhibits are filed herewith or incorporated herein by reference, as indicated:



Exhibit No.	Description

3.1	Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 of the 10-QSB filed and dated November 10, 2004)

3.2	Bylaws (Incorporated by reference to Exhibit 3.4 of the Registrant's Registration Statement on Form SB-2, No. 333-88314)

4.1	Non-Statutory Stock Option Agreement (Incorporated by reference to Exhibit 10.2 to Form 8-K filed with the SEC on August 30, 2005)



10.1	Lease Agreement, dated March 26, 2008, between WNB Tower, LTD and Natural Gas Services Group, Inc. (Incorporated by reference to Exhibit 10.15 of the Registrant’s Form 10-K for the fiscal year ended December 31, 2008 and filed with the Securities and Exchange Commission on March 9, 2009)

10.2	2009 Restricted Stock/Unit Plan, as amended (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K dated June 3, 2014 and filed with the Securities and Exchange Commission on June 6, 2014.)

10.3	1998 Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K dated September 18, 2009 and filed with the Securities and Exchange Commission on September 18, 2009.)

10.4	Lease Agreement, dated December 11, 2008, between Klement-Wes Partnership, LTD and Natural Gas Services Group, Inc. and commencing on January 1, 2009

10.5	Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 10, 2010 (Incorporated by reference 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.)

10.6	Third Amendment of Credit Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated November 19, 2014 (Incorporated by reference to Exhibit 10.1 of the Registrant's Current report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2012.)

10.7	Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 10, 2010 (Incorporated by reference 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.)

10.8	First Amendment of Security Agreement between Natural Gas Services Group, Inc. and JPMorgan Chase Bank, N.A., dated December 31, 2011 (Incorporated by reference to Exhibit 10.2 of the Registrant's Current report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2012.)

10.9	Promissory Note in the aggregate amount of $30,000,000 issued to JPMorgan Chase Bank, N.A., dated December 31, 2014, in connection with the revolving credit line under the Credit Agreement with JPMorgan Chase Bank, N.A. (Incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 24, 2014.)

10.10	Amended 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 Commission on April 29, 2015.)

10.11	The Executive Nonqualified Excess Plan Adoption Agreement, referred to as the Nonqualified Deferred Compensation Plan (Incorporated by reference 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.)




*31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*31.2	Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

*32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*32.2	Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

	* Filed herewith.