10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

Form 10-K

x Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the

Period Ended December 31, 2017

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 33-92894

ALY ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware	75-2440201
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3 Riverway, Suite 920 Houston, TX	77056
(Address of Principal Executive Offices)	(Zip Code)

(713)-333-4000

(Registrant’s Telephone Number, including area code.)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Names of Each Exchange on which Registered
Common Stock, $0.001 par value per share	None

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 ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨

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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required 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 ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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

Large accelerated filer	¨	Accelerated filer	☐
Non-accelerated filer	¨	Smaller reporting company	x
Emerging growth company	¨

If 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 financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of common stock held by non-affiliates of the registrant was approximately $0.9 million as of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sales price of the registrant’s common stock on that date.

At March 31, 2018, the registrant had 13,818,795 shares of common stock, $0.001 par value, outstanding.

Documents Incorporated by Reference: None

ALY ENERGY SERVICES, INC.

(A Delaware Corporation)

INDEX

PART I
Item 1.	Business	5
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	18
Item 3.	Legal Proceedings	18
Item 4.	Mine Safety Disclosures	18
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	20
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 8.	Financial Statements and Supplementary Data	F-1
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	32
Item 9A.	Controls and Procedures	32
Item 9B.	Other Information	33
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	34
Item 11.	Executive Compensation	36
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	38
Item 13.	Certain Relationships and Related Transactions and Director Independence	39
Item 14.	Principal Accounting Fees and Services	39
PART IV
Item 15.	Exhibits	40
SIGNATURES		42

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Current Report on Form 10-K (this “Report”) contains certain statements and information that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “anticipate,” “believe,” “ensure,” “expect,” “if,” “intend,” “plan,” “estimate,” “project,” “forecasts,” “predict,” “outlook,” “aim,” “will,” “could,” “should,” “potential,” “would,” “may,” “probable,” “likely,” and similar expressions that convey the uncertainty of future events or outcomes, and the negative thereof, are intended to identify forward-looking statements. Forward-looking statements, which are not generally historical in nature, include those that express a belief, expectation or intention regarding our future activities, plans and goals and our current expectations with respect to, among other things:

· projected operating or financial results, including any accretion/dilution to earnings and cash flow;

· any plans to obtain financing to fund future operations;

· prospects for services and expected activity in potential and existing areas of operations;

· the effects of competition in areas of operations;

· the outlook of oil and gas prices;

· the current economic conditions and expected trends in the industry we serve;

· the amount, nature and timing of capital expenditures and availability of capital resources;

· future financial condition or results of operations and future revenue and expenses; and

· business strategy and other plans and objectives for future operations.

Forward-looking statements are not assurances of future performance and actual results could differ materially from our historical experience and our present expectations or projections. These forward-looking statements are based on management’s current expectations and beliefs, forecasts for our existing operations, experience, expectations and perception of historical trends, current conditions, anticipated future developments and their effect on us, and other factors believed to be appropriate. Although management believes the expectations and assumptions reflected in these forward-looking statements are reasonable as and when made, no assurance can be given that these assumptions are accurate or that any of these expectations will be achieved (in full or at all). Our forward-looking statements involve significant risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Known material factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following:

 

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· conditions in the oil and natural gas industry, especially oil and natural gas prices and capital expenditures by oil and natural gas companies;

· volatility in oil and natural gas prices;

· fluctuations in the domestic land-based rig count;

· changes in laws and regulations;

· our ability to implement price increases or maintain pricing on our core services;

· risks that we may not be able to reduce, and we may experience increases in, the costs of labor, fuel, equipment and supplies employed in our businesses;

· industry capacity;

· asset impairments or other charges;

· the periodic low demand for our services and resulting operating losses and negative cash flows;

· our highly competitive industry as well as operating risks, which are primarily self-insured, and the possibility that our insurance may not be adequate to cover all of our losses or liabilities;

· significant costs and potential liabilities resulting from compliance with applicable laws, including those resulting from environmental, health and safety laws and regulations;

· our historically high employee turnover rate and our ability to replace or add workers, including executive officers and skilled workers;

· our ability to incur debt or long-term lease obligations;

· our ability to implement technological developments and enhancements;

· severe weather impacts on our business;

· our ability to successfully identify, make and integrate future acquisitions and our ability to finance such acquisitions;

· our ability to finance future growth of our operations through investments in new equipment and service offerings;

· our ability to achieve the benefits expected from disposition transactions;

· the loss of one or more of our larger customers;

· our ability to generate sufficient cash flow to meet future debt service obligations;

· our inability to achieve our financial, capital expenditure and operational projections, including quarterly and annual projections of revenue and/or operating income, and our inaccurate assessment of future activity levels, customer demand, and pricing stability which may not materialize (whether for Aly Energy Services, Inc. as a whole or for geographic regions and/or certain business operations individually);

· business opportunities (or lack thereof) that may be presented to our company and may be pursued;

· our ability to respond to changing or declining market conditions, including our ability to reduce the costs of labor, fuel, equipment and supplies employed and used in our businesses;

· our ability to maintain sufficient liquidity;

· adverse impact of litigation; and

· other factors affecting our business described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 and in the other reports we file with the Securities and Exchange Commission.

Should one or more of the factors, risks or uncertainties described above materialize (or the other consequences of such a development worsen), or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this Report.

 

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PART I

Item 1. Business

General

Throughout this report, we refer to Aly Energy Services, Inc., together with its subsidiaries, as “we,” “our”, “us,” “Aly Energy” or the “Company.” References to financial results and operations of the Company are limited to continuing operations unless otherwise specified.

We are a growth-oriented provider of oilfield services to leading oil and gas exploration and production (“E&P”) companies operating in unconventional plays in the United States (“U.S.”). Generally, the services we offer fall within two broad categories: surface rental and solids control. Our surface rental equipment includes a wide variety of large capacity tanks with integral circulating systems, associated pumps, separators, gas busters, mud mix plants and ancillary equipment necessary to manage the flow of mud in and out of the well bore during drilling operations. We also provide environmental containment berms to safeguard against spills from the mud system. Our solids control equipment and services remove low gravity formation particulates that accumulate in mud systems during the drilling process. Solids control equipment includes large centrifuges, shakers, cuttings dryers and ancillary components that can be integrated into a closed loop mud system. Once processed, the mud can be reused which eliminates unnecessary waste and disposal.

History

On July 17, 2012, Munawar “Micki” Hidayatallah founded Aly Energy with the strategic objective of creating an oilfield services company that would serve E&P companies operating in unconventional plays. Previously, Mr. Hidayatallah had followed a similar strategy at Allis-Chalmers Energy Inc., a company which he founded in 2001. Allis-Chalmers Energy Inc. grew organically and through acquisitions over a 10-year period and generated over $675 million in revenue during 2011. Aly Energy has created a public platform to pursue a similar strategy to Allis-Chalmers Energy Inc.

From 2012 through 2014, we grew our business substantially both through the strategic acquisition of certain businesses operating in our industry and through organic growth. We have fully integrated the completed acquisitions and we operate as a single provider which offers our customers a comprehensive solution for their drilling fluid management needs.

Beginning in the fourth quarter of 2014, in conjunction with depressed commodity prices and a substantial decrease in the U.S. land-drilling rig count (“Rig Count”), there was a massive decline in demand for oilfield services which continued through the first half of 2016. The industry downturn negatively impacted our financial results in both 2015 and 2016 and we had very limited liquidity throughout both years.

Recent Trends and Outlook

By January 31, 2017, we had successfully navigated through the industry downturn by implementing an operational restructuring, including severe cost cutting measures, and significantly deleveraging the business by successfully entering into a capital restructuring transaction, the “Recapitalization”. (See further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements.) As a direct result of the Recapitalization, we were well-positioned to take advantage of growth opportunities in 2017.

Such growth opportunities were created primarily from a significant increase in demand for oilfield services when compared to the two preceding years. Two of the most significant drivers of demand for our services, the price of oil and the Rig Count, increased substantially year-over-year from 2016 to 2017. The positive impact of these improved industry conditions on the Company is reflected in the increased utilization of our equipment and services and our ability to raise the prices we charge to our customers. Increased utilization and increased pricing resulted in a significant amount of incremental revenue in 2017 when compared to 2016 and a significant overall improvement in our financial results and liquidity.

Our business depends to a significant extent on the level of unconventional resource development activity and corresponding capital spending of E&P companies onshore in the U.S. These activity and spending levels are strongly influenced by the current and expected oil price. Commodity prices declined significantly between the third quarter of 2014 and the first quarter of 2016. However, oil prices have since gradually increased and this price recovery has stimulated an increase in onshore drilling and completion activity and a consequent increase in demand for our services. The average Rig Count for the year ended December 31, 2017 increased 77.4% to 864 rigs as compared to 487 for the year ended December 31, 2016. The favorable impact of the recent increase in the Rig Count on demand for our services has been magnified by an increase in the proportion of rigs drilling directional and horizontal wells. Rigs drilling directional and horizontal wells typically utilize oil-based or other sophisticated mud systems which creates demand for our specialized mud circulating tanks, pumps, containment systems, solids control and associated equipment. The proportion of rigs drilling directional and horizontal wells as a percentage of total U.S. land-based rigs has increased to 93.1% during the fourth quarter of 2017 from approximately 88.7% in the first quarter of 2016.

 

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If the current commodity price environment holds or continues to improve, we anticipate a further increase in demand for our services. In addition, our customers are increasingly focused on efficient drilling of high intensity wells with long laterals which further enhances the demand for our services. As demand increases, we expect that utilization will increase and our ability to increase the prices for our equipment and services will improve resulting in greater margins and increased margins as a percent of revenue.

We will continue to expand our business through a low risk strategy of growing organically by replacing our sub-rented equipment with newly purchased, refurbished or fabricated equipment. We will also evaluate strategic acquisition opportunities that would provide geographic diversification, expand our products and services and introduce us to new customers.

Products and Services

We are a provider of solids control systems and surface rental equipment. Our equipment and services are primarily designed for and used in land-based horizontal drilling. Our equipment includes centrifuges and auxiliary solids control equipment, mud circulating tanks (400 and 500 barrel capacity) and auxiliary surface rental equipment (e.g. portable mud mixing plants, and containment systems). In conjunction with the rental of some of our solids control packages, we provide personnel at the customer’s well site to operate our equipment. We also provide personnel to rig-up/rig-down and haul our equipment to and from the customer’s location.

Our Rental Products:

Centrifuges: We currently own approximately 48 centrifuges. We provide two different sizes of centrifuges to meet varying client specifications (SS1000 and SS2000). We believe our centrifuges provide a competitive advantage because the rotating assembly within each centrifuge can be removed and replaced on a customer’s well site within 45 minutes if it fails thereby minimizing downtime. Certain customers rent centrifuges with auxiliary equipment such as shakers, vertical dryers, waste removal units, and/or various tanks.

Mud Circulating Tanks (“MCTs”): We currently own approximately 60 vertical 400-barrel MCTs and approximately 129 500-barrel MCTs. We developed vertical 400-barrel MCTs as an innovative solution that minimizes location size, which we believe is an attractive feature for customers. The majority of our 500-barrel MCTs are highly mobile with rounded bottoms and customized jet-lines to ensure more consistent mud and easier cleanout at the completion of a job. In addition to the 500-barrel MCTs we own, we sub-rent 500-barrel MCTs (approximately 230 sub-rented as of December 31, 2017) in order to satisfy demand for our services. MCTs are typically rented to customers with auxiliary equipment such as diesel or electric mud pumps, hoses, and wooden mats.

Mud Mixing Plants (“MMPs”): We own 9 MMPs ranging in size from 100-barrel capacity to 500-barrel capacity. We believe that the large 400-barrel and 500-barrel capacity MMPs, which are designed and fabricated in-house, are unique and offer significant advantages to our customers.

Containment Systems: Containment systems consist of berms and plastic linings constructed to ensure that all products and chemicals present on the well site, particularly those which might be environmentally undesirable if spilled, are contained. We believe the demand for containment systems will continue to increase as environmental regulations tighten.

Our Service Offerings Which Include Personnel:

Solids Control Services: When a customer’s solids control operations are complex, we provide operators on-site 24 hours a day at an additional day rate. In these instances, we typically rent a full package of solids control equipment to the customer, which may include two centrifuges, shakers, vertical dryers, waste removal units, and/or various tanks.

Hauling of Equipment and Rig-Up/Rig-Down Services: We offer hauling of our rental equipment to the well site and rig-up/rig-down of such equipment.

 

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Fabricating Capabilities

We fabricate certain equipment in our rental fleet, including 400-barrel MCTs and MMPs. Fabrication primarily takes place in our facility in Giddings, Texas. Items fabricated in-house are typically unique and we believe our ability to fabricate such products in-house provides us with cost efficiencies that result in a competitive advantage.

Geographic Markets

We operate in the U.S., primarily in Texas, Oklahoma, and New Mexico. Within these states, we have a very strong footprint in the Permian Basin, one of the largest and most prolific shale plays in the U.S., and we also provide services in the Scoop/Stack region and Eagle Ford shale.

Competition

We experience significant competition in our business. The markets in which we operate are highly fragmented and there are a large number of companies in these markets offering rental equipment and services that overlap with our offerings. We believe the principal differentiators among competitors in the sectors and markets in which we operate are safety record, service quality, existence of unique attributes of equipment that benefit the customer, customer relationships, response time and price.

The level of our revenue, earnings and cash flows are substantially dependent upon, and affected by, the level of U.S. oil and natural gas exploration, development and production activity, as well as the equipment capacity in any particular region.

Customers

We cultivate and maintain strong relationships with our customers which include some of the largest independent oil and gas E&P companies operating in the U.S. shale basins. During 2017, we serviced over 40 customers, including leading companies such as EOG Resources, Inc., Pioneer Natural Resources, XTO Energy Inc., Sanchez Oil and Gas Corporation and Devon Energy Corporation.

For the years ended December 31, 2017 and 2016, our top three customers represented approximately 56.0% and 43.5% of total revenue, respectively.

If we are unable to continue to provide services to our top three existing customers and sales to new or other existing customers do not increase sufficiently, our business and operations could be materially adversely affected.

Raw Materials

We purchase a wide variety of raw materials, parts and components that are made by other manufacturers and suppliers for our use. We are not dependent on any single source of supply for those parts, supplies or materials.

Safety

Our record and reputation for safety is important to all aspects of our business. In the oilfield services industry, an important competitive factor in establishing and maintaining long-term customer relationships is having an experienced, skilled and well-trained work force. In recent years, many of our larger customers have placed an added emphasis on the safety records and quality management systems of their vendors.

We commit substantial resources toward employee safety and quality management. We believe our policies and procedures provide a solid framework to ensure our employees minimize the hazards inherent in our work environment, meet regulatory requirements and exceed customer expectations.

 

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Employees

As of March 26, 2018, we employed approximately 65 individuals. The corporate cost center employs six individuals, including the chairman, the chief executive officer, the chief operating officer and the chief financial officer, approximately 48 individuals work primarily in the field, and the remaining employees provide selling, general, and administrative services. We believe we have good relationships with our employees.

Seasonality

We have historically experienced a slowdown during the Thanksgiving and Christmas holiday seasons and demand in the fourth quarter sometimes slows as our customers exhaust their annual spending budgets.

Intangibles

We are not dependent on any significant patents, trademarks, licenses, franchises, concessions, royalty agreements or labor contracts. In the last two years, we have not spent or incurred a material amount on research and development activities.

Governmental Regulation

Our business is impacted by federal, state and local laws and other regulations relating to the oil and natural gas industry, as well as laws and regulations relating to worker safety and environmental protection. We cannot predict the level of enforcement of existing laws and regulations or how such laws and regulations may be interpreted by enforcement agencies or court rulings, whether additional laws and regulations will be adopted, or the effect such changes may have on us, our business or financial condition.

In addition, our customers are impacted by laws and regulations relating to the exploration for and production of natural resources such as oil and natural gas. These regulations are subject to change, and new regulations may curtail or eliminate our customers’ activities in certain areas where we currently operate. We cannot determine the extent to which new legislation may impact our customers’ activity levels, and ultimately, the demand for our services.

Environmental Matters

Our operations, and those of our customers, are subject to extensive laws, regulations and treaties relating to air and water quality, generation, storage and handling of hazardous materials, and emission and discharge of materials into the environment. We believe we are in substantial compliance with all regulations affecting our business. Historically, our expenditures in furtherance of our compliance with these laws, regulations and treaties have not been material, and we do not expect the cost of compliance to be material in the future.

Access to Company Reports

We make available, free of charge, on our website, www.alyenergy.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports on the same day as they are filed with the Securities and Exchange Commission.

 

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Item 1A. Risk Factors

We face numerous risk factors. The following list contains risk factors that we believe are significant to our current and future operations. Additional risk factors that are either not known by us or that we currently deem immaterial may also impact our current and future operating results and financial condition.

Risks Related to Our Business

Our business depends on domestic drilling activity and spending by the oil and natural gas industry in the United States.

We depend on our customers’ willingness to make expenditures to explore for and to develop and produce oil and natural gas in the United States. Our customers’ willingness to undertake these activities depends largely upon prevailing industry conditions that are influenced by numerous factors over which management has no control, such as:

· domestic and worldwide economic conditions;

· the supply of and demand for oil and natural gas;

· the level of prices, and expectations about future prices, of oil and natural gas;

· the cost of exploring for, developing, producing and delivering oil and natural gas;

· the expected rates of declining current production;

· the discovery rates of new oil and natural gas reserves;

· available pipeline, storage and other transportation capacity;

· federal, state and local regulation of exploration and drilling activities;

· weather conditions, including hurricanes that can affect oil and natural gas operations over a wide area;

· political instability in oil and natural gas producing countries;

· technical advances affecting energy consumption;

· the price and availability of alternative fuels;

· the ability of oil and natural gas producers to raise equity capital and debt financing; and,

· merger and divestiture activity among oil and natural gas producers.

Current and anticipated oil and natural gas prices, the related level of drilling activity, and general production spending in the areas in which we have operations are the primary drivers of demand for our services. The level of oil and natural gas exploration and production activity in the United States is volatile and this volatility could have a material adverse effect on the level of activity by our customers. In addition, any prolonged substantial reduction in oil and natural gas prices would likely affect oil and natural gas production levels and, therefore, affect demand for the services we provide. Moreover, a decrease in the development rate of oil and natural gas reserves in our market areas, whether due to increased governmental regulation of or limitations on exploration and drilling activity or other factors, may also have an adverse impact on our business, even in an environment of stronger oil and natural gas prices.

Competition within the oilfield services industry may adversely affect our ability to market our services.

The oilfield services industry is competitive and fragmented and includes numerous small companies capable of competing in our markets on a local basis as well as several large companies that possess substantially greater financial and other resources than us. Some of our competitors hold significant market share in the markets in which we operate, which may make it difficult for us to successfully sell competing products and services. The principal competitive factors in our markets are product and service quality and availability, responsiveness, experience, equipment quality, reputation for safety and price. The competitive environment has intensified as recent mergers among exploration and production companies have reduced the number of available customers. The fact that drilling rigs and other vehicles and oilfield services equipment are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry. Our larger competitors may have greater resources which could allow them to compete more effectively than us and they may benefit from economies of scale which enable them to offer products and services at a lower cost than us. Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics, or that better address environmental concerns, than our products and services.

 

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We may be unable to implement price increases or maintain existing prices on our core services.

We periodically seek to increase the prices of our services to offset rising costs and to generate higher returns for our stockholders. Even when industry conditions are favorable, we operate in a very competitive industry and, as a result, we are not always successful in raising, or maintaining, our existing prices. Additionally, during periods of increased market demand, a significant amount of new surface rental and solids control equipment may enter the market, which also puts pressure on the pricing of our services and limits our ability to increase or maintain prices. Furthermore, during periods of declining pricing for our services, we may not be able to reduce our costs accordingly, which could further adversely affect our profitability. Even when we are able to increase our prices, we may not be able to do so at a rate that is sufficient to offset such rising costs. In periods of high demand for oilfield services, a tighter labor market may result in higher labor costs. During such periods, our labor costs could increase at a greater rate than our ability to raise prices for our services. Also, we may not be able to successfully increase prices without adversely affecting our activity levels. The inability to maintain our prices or to increase our prices as costs increase could have a material adverse effect on our business, financial position and results of operations.

Increased prices charged by suppliers and/or interruptions in deliveries of products could adversely affect our profitability, margins, and revenue.

We depend upon a number of vendors for supplies and equipment. Increased prices charged by these suppliers could materially and adversely impact our results of operations. In addition, interruptions or a work stoppage by our suppliers could adversely affect our operations until arrangements with alternate suppliers could be made. Such alternate arrangements may be less favorable to us and could further adversely affect our results of operations. We have experienced a substantial increase in third-party services as the primary surface rental products in our inventory have been fully utilized since early 2017 and the vast majority of incremental rental revenue since 2017 has been derived from equipment which we sub-rent. The availability of supply of sub-rental equipment, as well as the prices charged by such suppliers, are factors beyond our control.

We may not be able to grow successfully through future acquisitions or to integrate the businesses we do acquire effectively.

Our long-term business strategy includes growth through the acquisition of other businesses. However, we may not be able to identify attractive acquisition opportunities or successfully acquire identified targets on terms favorable to us. Competition for acquisition opportunities may be substantial and may cause us to refrain from making acquisitions. In addition, we may not be successful in integrating future acquisitions into our existing operations, which may result in unforeseen operational difficulties, diminished financial performance or our inability to report financial results and may require a disproportionate amount of our management’s attention. If we fail to manage future acquisitions effectively, our results of operations could be adversely affected.

Acquisitions that we complete could present a number of risks, including but not limited to:

· incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets;

· failure to integrate the operations or management of any acquired operations or assets successfully and timely;

· potential loss of key employees and customers of the acquired companies;

· potential lack of experience operating in a geographic market or product line of the acquired business;

· an increase in our expenses, particularly overhead expenses, and working capital requirements;

· the possible inability to achieve the intended objectives of the business combination; and

· the diversion of management’s attention from existing operations or other priorities.

  

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We may not realize the anticipated benefits of acquisitions or divestitures.

We continually seek opportunities to increase efficiency and value through various transactions, including purchases or sales of assets or businesses. These transactions are intended to result in the offering of new services or products, the entry into new markets, the generation of income or cash, the creation of efficiencies or the reduction of risk. Whether we realize the anticipated benefits from an acquisition or any other transactions depends, in part, upon our ability to timely and efficiently integrate the operations of the acquired business, the performance of the underlying product and service portfolio, and the management team and other personnel of the acquired operations. Accordingly, our financial results could be adversely affected from unanticipated performance issues, legacy liabilities, transaction-related charges, amortization of expenses related to intangibles, charges for impairment of long-term assets, credit guarantees, partner performance and indemnifications. In addition, the financing of any future acquisition completed by us could adversely impact our capital structure or increase our leverage. While we believe that we have established appropriate and adequate procedures and processes to mitigate these risks, there is no assurance that these transactions will be successful. We also may make strategic divestitures from time to time. These transactions may result in continued financial involvement in the divested businesses, such as guarantees or other financial arrangements, following the transaction. Nonperformance by those divested businesses could affect our future financial results through additional payment obligations, higher costs or asset write-downs. Except as required by law or applicable securities exchange listing standards, we do not expect to ask our shareholders to vote on any proposed acquisition or divestiture. Moreover, we generally do not announce our acquisitions or divestitures until we have entered into a preliminary or definitive agreement.

We may require additional capital in the future, which may not be available to us or the terms of such financings may negatively impact our business.

We may need to raise funds through debt or equity financings in the future. Adequate funds may not be available when needed or may not be available on favorable terms. If funding is insufficient at any time in the future, we may be unable to support and grow our ongoing operations, meet our debt obligations, fund acquisitions, take advantage of business opportunities or respond to competitive pressures, any of which could materially and adversely affect our business.

Existing and future debt service requirements may impose a significant burden on us, which may adversely affect our results of operations and financial condition. In the future, we may incur debt which requires us to meet or maintain certain financial ratios, which could limit our flexibility and adversely affect our business.

Our near-term capital requirements will primarily depend on our ability to maintain adequate working capital levels and to maintain and refurbish our equipment fleet. Future capital requirements will primarily depend on the frequency, timing, size and success of future equipment purchases and business acquisitions.

We depend on significant customers for a substantial portion of our revenue.

We derive a significant amount of our revenue from exploration and production companies that are active in our markets. For the year ended December 31, 2017, our top three customers accounted for approximately 56.0% of total revenue. If we fail to retain a number of our large existing customers or if we incur significant price reductions in order to retain the business of key customers, our business and operations could be adversely affected. Moreover, if any of these customers fails to remain competitive in their respective markets, encounters financial or operational problems or consolidates with a third party, our revenue and profitability may decline.

We are subject to the credit risk of our customers.

We provide credit to our customers in the normal course of business and generally do not require collateral in extending such credit. This exposure, coupled with material instances of default, could have an adverse effect on our business, financial condition, results of operations and cash flows. In addition, we may need to undertake collection efforts that could cause our business from certain customers to decline, or the collection of certain receivables could become impossible, requiring us to write them off.

 

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Historically, we have experienced a high employee turnover rate. Any difficulty we experience replacing or adding workers could adversely affect our business.

We believe that the high turnover rate in our industry is attributable to the nature of oilfield services work, which is physically demanding and performed outdoors. As a result, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive with ours. The potential inability or lack of desire by workers to commute to our facilities and job sites, as well as the competition for workers from competitors or other industries, are factors that could negatively affect our ability to attract and retain workers. We may not be able to recruit, train and retain an adequate number of workers to replace departing workers. The inability to maintain an adequate workforce could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to attract and retain senior management, qualified sales personnel, and a sufficient number of field personnel, our operations, financial condition and prospects will be materially adversely affected.

Our future success depends in part on the contributions of our existing management team and key personnel and on our ability to attract and retain qualified new personnel. We cannot assure you that we will be able to retain our key senior managerial and sales personnel or that we will be able to attract, integrate and retain other such personnel that we may require in the future. If we are unable to attract and retain key personnel in the future, our business, operations, financial condition, results of operations and prospects could be materially adversely affected.

Companies in our industry, including us, are dependent upon the available labor pool of skilled employees. We compete with other oilfield services businesses and other employers to attract and retain qualified personnel with the technical skills and experience required to provide our customers with the highest quality service. We are also subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions, and which can increase our labor costs or subject us to liabilities to our employees. A shortage in the labor pool of skilled workers or other general inflationary pressures or changes in applicable laws and regulations could make it more difficult for us to attract and retain personnel and could require us to enhance our wage and benefits packages. Labor costs may increase in the future or we may not be able to reduce wages when demand and pricing falls, and such changes could have a material adverse effect on our business, financial condition and results of operations.

Our future financial results could be adversely impacted by the further reduction in value of our assets or other charges.

We have recorded reductions in the value of our assets in the past. We periodically evaluate our long-lived assets, including our property and equipment and intangible assets for impairment. In performing these assessments, we project future cash flows on an undiscounted basis and compare these cash flows to the carrying amount of the related assets. These cash flow projections are based on our current operating plans, estimates and other judgmental assumptions. We perform the assessment of potential impairment for our property and equipment whenever facts and circumstances indicate that the carrying value of those assets may not be recoverable due to various external or internal factors. If conditions in our industry worsen, we could record additional impairment charges in future periods, which could have a material adverse effect on our financial position and results of operations. These cash flow projections are based on our current operating plans, estimates and judgmental assumptions. Although we did not record any impairment charges during the year ended December 31, 2017, there is no assurance as to whether we may record additional impairment charges in future periods, which could have a material adverse effect on our financial position and results of operations. During 2016, our continuing operations recorded $17.7 million in a reduction in value of assets in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements).

Severe weather could have a material adverse effect on our business.

Our business could be materially and adversely affected by severe weather. Our customers’ oil and natural gas operations located in parts of Texas may be adversely affected by hurricanes and tropical storms, resulting in reduced demand for our services. Furthermore, our customers’ operations may be adversely affected by seasonal weather conditions. Adverse weather can also directly impede our own operations. Repercussions of severe weather conditions may include:

· curtailment of services;

· weather-related damage to facilities and equipment, resulting in suspension of operations;

· inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and

· loss of productivity.

These constraints could delay our operations and materially increase our operating and capital costs.

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Our operations are subject to hazards inherent in the oil and natural gas industry.

The operational risks inherent in our industry could expose us to substantial liability for personal injury, wrongful death, property damage, loss of oil and natural gas production, pollution and other environmental damages. The frequency and severity of such incidents will affect our operating costs, insurability and relationships with customers, employees and regulators. In particular, our customers may elect not to retain our services if they view our safety record as unacceptable, which could cause us to lose substantial revenue.

We do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. We evaluate certain of our risks and insurance coverage annually. After carefully weighing the costs, risks, and benefits of retaining versus insuring various risks, we occasionally opt to retain certain risks not covered by our insurance policies. The occurrence of an event not fully insured against, or the failure of an insurer to meet its insurance obligations, could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at rates we consider reasonable and there can be no assurance that insurance will be available to cover any or all of these risks, or, even if available, that it will be adequate or that insurance premiums or other costs will not rise significantly in the future, so as to make such insurance costs prohibitive. In addition, our insurance is subject to coverage limits and some policies exclude coverage for damages resulting from environmental contamination.

We are subject to federal, state and local regulation regarding issues of health, safety and protection of the environment. Under these regulations, we may become liable for penalties, damages or costs of remediation. Any changes in laws and government regulations could increase our costs of doing business.

Our operations and the operations of our customers are subject to extensive and frequently changing regulation. More stringent legislation or regulation or taxation of drilling activity could directly curtail such activity or increase the cost of drilling, resulting in reduced levels of drilling activity and therefore reduced demand for our services. Numerous federal, state and local departments and agencies are authorized by statute to issue, and have issued, rules and regulations binding upon participants in the oil and gas industry. Our operations and the markets in which we participate are affected by these laws and regulations and may be affected by changes to such laws and regulations in the future, which may cause us to incur materially increased operating costs or realize materially lower revenue, or both.

Laws protecting the environment generally have become more stringent over time and are expected to continue to do so, which could lead to material increases in costs for future environmental compliance and remediation. The modification or interpretation of existing laws or regulations, or the adoption of new laws or regulations, could curtail exploratory or developmental drilling for oil and natural gas and could limit well site services opportunities. Additionally, environmental groups have advocated increased regulation in certain areas in which we currently operate or in which we may operate in the future. These initiatives could lead to more stringent permitting requirements, increased regulation, possible enforcement actions against the regulated community, and a moratorium or delays on permitting, which could adversely affect our well site service opportunities.

Some environmental laws and regulations may impose strict liability, which means that in some situations we could be exposed to liability as a result of our conduct that was lawful at the time it occurred as a result of conduct of, or conditions caused by, prior operators or other third parties. Clean-up costs and other damages, arising as a result of environmental laws, and costs associated with changes in environmental laws and regulations could be substantial and could have a material adverse effect on our financial condition. In addition, the occurrence of a significant event not fully insured or indemnified against could have a material adverse effect on our financial condition and operations.

We may be subject to litigation, which, if adversely determined, could result in substantial losses.

We may be, from time-to-time, during the ordinary course of business, subject to various litigation claims and legal disputes, including contract, lease, employment, and regulatory claims. Certain litigation claims may not be covered entirely or at all by our insurance policies or our insurance carriers may seek to deny coverage or impose significant deductibles. In addition, litigation claims can be expensive to defend and may divert our attention from the operations of our business. Further, litigation, even if without merit, can attract adverse media attention. As a result, litigation can have a material adverse effect on our business, financial condition, results of operations, and cash flows and, because we cannot predict the outcome of any action, it is possible that adverse judgments or settlements could significantly reduce our earnings or result in losses.

 

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Governmental taxation policies could adversely affect our business, financial condition, and results of operations.

We are subject to income and other taxes in the U.S. Changes in applicable U.S. tax laws and regulations, such as the December 2017 enactment of Federal legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”), or their interpretation and application, including the possibility of retroactive effect and changes to state tax laws that may occur in response to the Tax Act, could affect our tax expense and profitability. In addition, the final determination of any tax audits or related litigation could be materially different from our historical income tax provision and accruals. Changes in our tax provision or an increase in our tax liability, whether due to changes in applicable laws and regulation, the interpretation or application thereof, or a final determination of tax audits or litigation, could materially adversely affect our financial performance.

If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence in our company and the market price of our common stock may be adversely affected.

Our reporting obligations as a public company place a significant strain on our management, operational and financial resources and systems. We may experience difficulty in maintaining management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices required for us as a publicly traded and reporting company. It may be difficult to design and implement effective internal control over financial reporting for combined operations following the addition of other businesses which we may acquire in the future. In addition, differences in existing controls of acquired businesses may result in weaknesses that require remediation when internal controls over financial reporting are combined. For further details on our internal controls over financial reporting see Item 9A of this annual report.

We depend on computer and telecommunications systems and failures in our systems or cyber security attacks could significantly disrupt our business operations.

We have entered into agreements with third parties for hardware, software, telecommunications and other information technology services in connection with our business. In addition, we have developed management reporting and other information which requires software licensed from third parties. It is possible we could incur interruptions from cyber security attacks, computer viruses or malware. We believe that we have positive relations with our related vendors and maintain adequate anti-virus and malware software and controls; however, any interruptions to our arrangements with third parties to our computing and communications infrastructure or our information systems could significantly disrupt our business operations. For further details on our internal controls over informational technology see Item 9A of this annual report.

Future indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions.

We will likely incur future indebtedness, the terms of which could have important consequences to our stockholders. For example, agreements relating to such future indebtedness could:

· require us to maintain compliance under various covenants;

· require us to raise additional capital;

· impair our ability to make investments and obtain additional financing for working capital, capital expenditures, acquisitions or other general corporate purposes;

· limit our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to make principal and interest payments on our indebtedness;

· make us more vulnerable to a downturn in our business, our industry or the economy in general as a substantial portion of our operating cash flow will be required to make principal and interest payments on our indebtedness, making it more difficult to react to changes in our business and in industry and market conditions; or,

· put us at a competitive disadvantage to competitors that have less debt.

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We may not be able to generate sufficient cash flow to meet future debt service and other obligations.

Our ability to make payments in respect of any future indebtedness and to fund planned capital expenditures depends on our ability to generate cash flow. Due to the cyclical nature of the industry we operate in, our cash flow from operations can vary significantly from year to year. Further, our credit facility matures on December 31, 2019 and we are required to make a prepayment of principal equal to 50% of our “excess cash flow,” as defined under the credit facility, in early 2019. Consequently, our cash flow may be insufficient to service our debt and that could negatively impact our business, financial condition and results of operations. If our cash flow from operations is insufficient to service our debt in the future, we might need to sell assets, seek additional equity or change our business direction to service our debt and there can be no assurance that we could execute these actions in a timely manner sufficient to allow us to service our debt.

Any future variable rate indebtedness would subject us to interest rate risk, which could cause our debt service obligations to increase significantly.

Risks Related to Ownership of our Common Stock

The concentration of our common stock ownership limits the ability of other stockholders to influence corporate matters.

As a result of the Recapitalization, Permian Pelican, LLC (“Pelican”), a related party, owns 100% of our outstanding Series A convertible preferred stock, which represents the substantial majority of our fully diluted common stock. Pelican further owns virtually all of our secured debt. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, subject to certain SEC regulations and if Pelican were to convert the preferred stock, Pelican could begin selling shares of our common stock. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

In addition, Pelican will be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership will have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if that change of control would benefit our other stockholders.

As a “controlled company” under the rules of the national securities exchanges, our stockholders will not have all of the corporate governance protections customarily available to stockholders of other publicly held companies.

A company in which over 50% of the voting power is held by a single stockholder, such as Pelican, qualifies as a “controlled company” under the listing standards of the principal national securities exchanges and, as such, is exempt from compliance with certain corporate governance requirements generally applicable to publicly traded companies. In the event that we are able to cause our common stock to be listed by a national securities exchange, we will be entitled, and would intend, to qualify as a “controlled company” under those listing standards. As such, we would be exempt from compliance with requirements that (1) a majority of our Board of Directors consist of independent directors, (2) we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, (3) we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (4) we perform an annual performance evaluation of the nominating/corporate governance committee and compensation committee. We would intend to utilize these exemptions while we are a controlled company. As a result, we will not have a majority of independent directors nor will we establish a nominating and corporate governance committee or a compensation committee. Accordingly, our stockholders will not have all of the corporate governance protections that are customarily available to stockholders of publicly held companies which are not “controlled companies.”

The Recapitalization resulted in substantial dilution to our stockholders, and future issuances will result in additional dilution.

Consummation of the Recapitalization in January 2017 resulted in substantial dilution to our then existing stockholders, whose aggregate fully diluted percentage ownership declined from 100% to 9.9% (see further discussion in Note 2 – Recent Developments and Note 3 – Recapitalization in the notes to our consolidated financial statements). In the future, we may need to raise significant additional funds through equity financings to repay debt, to expand our operations or to execute our acquisition strategy, which would result in even further dilution. Our future capital requirements will primarily depend on our ability to service our debt from operating cash flow and the frequency, timing, and size of future growth opportunities.

 

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Because we have no current plans to pay dividends on our common stock, investors must look solely to stock appreciation for a return on their investment in us.

We have not historically paid, nor do we currently pay, any cash dividends on our common stock. We currently intend to retain all future earnings to service debt and fund the development and growth of our business. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that the board of directors deems relevant. For example, our credit agreement limits our ability to pay dividends. Investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our common stock.

Because our common stock is subject to the “penny stock” rules, brokers cannot generally solicit the purchase of our common stock, which adversely affects its liquidity and market price.

The SEC has adopted regulations, which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock on the Over-The-Counter Bulletin Board (“Bulletin Board”) is substantially less than $5.00 per share and therefore we are considered a “penny stock” according to SEC rules. This designation requires any broker-dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules limit the ability of broker-dealers to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares.

Moreover, as a result of apparent regulatory pressure from the SEC and the Financial Industry Regulatory Authority, a growing number of broker-dealers decline to permit investors to purchase and sell or otherwise make it difficult to sell shares of penny stocks. This may have a depressive effect upon our common stock price.

Certain provisions of our corporate documents and Delaware law, as well as change of control provisions in our debt agreements, could delay or prevent a change of control, even if that change would be beneficial to stockholders, or could have a material negative impact on our business.

Certain provisions in our certificate of incorporation, bylaws and debt agreements may have the effect of deterring transactions involving a change in control, including transactions in which stockholders might receive a premium for their shares.

Our certificate of incorporation provides authorization to issue up to 9,980,000 shares of preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. The authorization of preferred shares empowers our board, without further stockholder approval, to issue preferred shares with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the common stock. If issued, the preferred stock could also dilute the holders of our common stock and could be used to discourage, delay or prevent a change of control.

We are also a Delaware corporation subject to Section 203 of the Delaware General Corporation Law (the “DGCL”). In general, Section 203 of the DGCL prevents an “interested stockholder” (as defined in the DGCL) from engaging in a “business combination” (as defined in the DGCL) with us for three years following the date that person becomes an interested stockholder unless one or more of the following occurs:

· Before that person became an interested stockholder, our board of directors approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination;

· Upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding stock held by certain directors and employee stock plans; or

· Following the transaction in which that person became an interested stockholder, the business combination is approved by our board of directors and authorized at a meeting of stockholders by the affirmative vote of the holders of at least 66.7% of our outstanding voting stock not owned by the interested stockholder.

The DGCL generally defines “interested stockholder” as any person who, together with affiliates and associates, is the owner of 15% or more of our outstanding voting stock or is our affiliate or associate and was the owner of 15% or more of our outstanding voting stock at any time within the three-year period immediately before the date of determination.

All of these factors could materially adversely affect the price of our common stock.

 

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The market price of our common stock may decline.

Fluctuations in the price of the common stock could contribute to the loss of all or part of our stockholders’ investment. During the time period following our reverse merged and through the present, trading in our common stock has been limited. The trading price of the common stock is and could be volatile and subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material adverse effect on the common stock price. In such circumstances, the trading price of the common stock may not recover and may experience a further decline.

Factors affecting the trading price may include:

· actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

· changes in the market’s expectations about our operating results;

· success of competitors;

· our operating results failing to meet the expectation of securities analysts or investors in a particular period;

· changes in financial estimates and recommendations by securities analysts concerning us or our markets in general;

· operating and stock price performance of other companies that investors deem comparable to us;

· changes in laws and regulations affecting our business;

· commencement of, or involvement in, litigation involving us;

· changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;

· the volume of securities available for public sale;

· any major change in our board or management;

· sales of substantial amounts of our securities by our directors, executive officers or significant stockholders or the perception that such sales could occur; and

· general economic and political conditions such as recession; interest rate, fuel price, and international currency fluctuations; and acts of war or terrorism.

Many of the factors listed above are beyond our control. In addition, broad market and industry factors may materially harm the market price of the common stock irrespective of our operating performance. The stock market has experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected. A loss of investor confidence in the market for securities of other companies which investors perceive to be similar to us could depress the price of the common stock regardless of our business, prospects, financial conditions or results of operations. A decline in the market price of the common stock also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.

 

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Our governing instruments provide indemnification for officers, directors and employees.

Our governing instruments provide that officers, directors, employees and other agents and their affiliates shall only be liable to us for losses, judgments, liabilities and expenses that result from matters involving intentional misconduct, fraud or a knowing violation of law. Thus, certain alleged errors or omissions might not be actionable by us. The governing instruments also provide that, under the broadest circumstances allowed under law, we must indemnify our officers, directors, employees and other agents and their affiliates for losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Company, including liabilities under applicable securities laws.

Item 1B: Unresolved Staff Comments

None.

Item 2. Properties

Our corporate headquarters are located at 3 Riverway, Suite 920, Houston, Texas, 77056 and consist of approximately 2,291 square feet of office space under a lease that expires on January 31, 2020. This facility accommodates our executive offices.

We lease facilities and administrative offices in the various geographic areas in which we operate. We believe that our existing facilities are suitable and adequate and that we have sufficient capacity to meet our current anticipated needs. As of March 31, 2018, we leased properties in Texas as follows:

Location	Type of Facility	Size	Lease or Owned	Expiration of Lease
3 Riverway, Suite 920 Houston, TX 77056	Corporate office	2,291 sq. ft.	Leased	January 31, 2020
1885-E FM 448 Giddings, TX 78942	Administrative offices, fabrication/repair shop, equipment yard	6,800 sq. ft.	Leased	October 31, 2020
State Hwy. 85 West/CR 4715 Dilley, TX 78017	Administrative offices, fabrication/repair shop, equipment yard	5.5 acres, 400 sq. ft. building space	Month to Month	N/A
5039 North Chadbourne San Angelo, TX 76903	Administrative offices, equipment yard	2.25 acres, 1,000 sq. ft. of office space	Leased	May 31, 2018

Item 3. Legal Proceedings

We are subject to various legal proceedings and claims incidental to or arising in the ordinary course of our business. While many of these matters involve inherent uncertainty, we believe that the liability, if any, ultimately incurred with respect to such proceedings and claims will not have a material adverse effect on our consolidated financial position as a whole or on our liquidity, capital resources or results of operations. We will continue to evaluate proceedings and claims involving us on a quarter-by-quarter basis and will establish and adjust any reserves as appropriate to reflect our assessment of the then-current status of the matters. (See further discussion in “Note 10 – Commitments and Contingencies” in the notes to our consolidated financial statements.)

Item 4. Mine Safety Disclosures

Not Applicable.

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is listed on the OTCQB under the symbol ”ALYE”. The following table indicates the quarterly high and low bid price for our common stock on the OTCQB and OTC Pink for the years ended December 31, 2017 and 2016. Such inter-dealer quotations do not necessarily represent actual transactions and do not reflect retail mark-ups, markdowns or commissions.

Fiscal Year 2017	High		Low
4th Quarter (October 1 - December 31, 2017)	$	1.00	$	0.03
3rd Quarter (July 1 - September 30, 2017)	$	0.08	$	0.04
2nd Quarter (April 1 - June 30, 2017)	$	0.08	$	0.03
1st Quarter (January 1 - March 31, 2017)	$	0.12	$	0.01
Fiscal Year 2016	High		Low
4th Quarter (October 1 - December 31, 2016)	$	0.08	$	0.01
3rd Quarter (July 1 - September 30, 2016)	$	0.11	$	0.08
2nd Quarter (April 1 - June 30, 2016)	$	0.20	$	0.09
1st Quarter (January 1 - March 31, 2016)	$	1.00	$	1.00

Holders

The number of holders of record of our common stock as of March 23, 2018 was 83. This number does not include an undetermined number of stockholders whose stock is held in “street” or “nominee” name.

Dividends

In the past, we have not distributed earnings to our common stockholders. Our board of directors has complete discretion on whether to pay dividends and, as such, will make any future decisions regarding dividends. We currently intend to retain and use any future earnings for servicing our debt and for developing and expanding our business. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

Stock Options – 2017 Stock Option Plan (the “2017 Plan”)

Effective April 4, 2017, the 2017 Plan was approved by the board of directors. On May 30, we granted options to purchase approximately 16.9 million common shares under the 2017 Plan which was the maximum amount authorized. The option contract term is 10 years and the exercise price is $0.10. The options vested and became exercisable immediately upon grant. The fair value of the award was estimated using a Black-Scholes fair value model. The valuation of stock options requires us to estimate the expected term of the award, which was estimated using the simplified method, as the Company does not have sufficient historical exercise information. Additionally, the valuation of stock option awards is also dependent on historical stock price volatility. In view of our limited trading volume, volatility was calculated based on historical stock price volatility of the Company’s peer group. As a result, we recorded stock-based compensation of $0.6 million for the full value of the grant as a component of selling, general and administrative expenses during the year ended December 31, 2017.

As of December 31, 2017, there were options to purchase 16.9 million common shares outstanding under the plan, all of which were fully vested and exercisable.

 

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Stock Options – Omnibus Incentive Plan (the “2013 Plan”)

The 2013 Plan, a stock-based compensation plan available to grant incentive stock options, non-qualified stock options and restricted stock to employees and non-employee members of the board of directors, was approved by the board of directors on May 2, 2013. On May 2, 2013, we granted 338,474 common shares under the 2013 Plan, which was the maximum number authorized. On June 5, 2015, a majority of our stockholders approved an amendment to our 2013 Plan to increase the maximum authorized shares to 750,000 common shares.

As of December 31, 2017 and 2016, options to purchase 234,144 and 242,507 common shares, respectively, under the 2013 Plan were outstanding and there was $0.3 million of total unrecognized compensation cost related to non-vested stock option awards. Such amount will be recognized in the future upon occurrence of a Liquidity Event that results in a vesting of the options. No options were granted during the years ended December 31, 2017 and 2016 under the 2013 Plan. No options were vested as of December 31, 2017 and 2016. During the years ended December 31, 2017 and 2016, forfeited options totaled 8,363and 87,604, respectively.

Item 6. Selected Financial Data

As a smaller reporting company, we are not required to provide the information required by this Item.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations is intended to assist you in understanding our business and results of operations together with our present financial condition. Unless otherwise noted, all discussion and analysis relate to continuing operations. This section should be read in conjunction with the audited consolidated financial statements and the related notes thereto included elsewhere in “Item 8. Financial Statements and Supplementary Data” in this Form 10-K. This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in any forward-looking statement because of various factors, including, without limitation, those described in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and Part I, Item 1A “Risk Factors” of this Form 10-K.

Overview of Our Business

Aly Energy Services, Inc. (“Aly Energy”, the “Company”, or “we”) is a growth-oriented provider of oilfield services to leading oil and gas exploration and production (“E&P”) companies operating in unconventional plays in the United States (“U.S.”). Generally, the services we offer fall within two broad categories: surface rental and solids control. Our surface rental equipment includes a wide variety of large capacity tanks with integral circulating systems, associated pumps, separators, gas busters, mud mix plants and ancillary equipment necessary to manage the flow of mud in and out of the well bore during drilling operations. We also provide environmental containment berms to safeguard against spills from the mud system. Our solids control equipment and services remove low gravity formation particulates that accumulate in mud systems during the drilling process. Solids control equipment includes large centrifuges, shakers, cuttings dryers and ancillary components that can be integrated into a closed loop mud system. Once processed, the mud can be reused which eliminates unnecessary waste and disposal.

We operate in the U.S., primarily in Texas, Oklahoma, and New Mexico. Within these states, we have a very strong footprint in the Permian Basin, one of the largest and most prolific shale plays in the U.S., and we also provide services in the Scoop/Stack region and Eagle Ford shale.

We cultivate and maintain strong relationships with our customers which include some of the largest independent oil and gas E&P companies operating in the U.S. shale basins. During 2017, we serviced over 40 customers, including leading companies such as EOG Resources, Inc., Pioneer Natural Resources, XTO Energy Inc., Sanchez Oil and Gas Corporation and Devon Energy Corporation.

 

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History

On July 17, 2012, Munawar “Micki” Hidayatallah founded Aly Energy with the strategic objective of creating an oilfield services company that would serve E&P companies operating in unconventional plays. Previously, Mr. Hidayatallah had followed a similar strategy at Allis-Chalmers Energy Inc., a company which he founded in 2001. Allis-Chalmers Energy Inc. grew organically and through acquisitions over a 10-year period and generated over $675 million in revenue during 2011. Aly Energy has created a public platform to pursue a similar strategy to Allis-Chalmers Energy Inc.

From 2012 through 2014, we grew our business substantially both through the strategic acquisition of certain businesses operating in our industry and through organic growth. We have fully integrated the completed acquisitions and we operate as a single provider which offers our customers a comprehensive solution for their drilling fluid management needs.

Beginning in the fourth quarter of 2014, in conjunction with depressed commodity prices and a substantial decrease in the U.S. land-drilling rig count (“Rig Count”), there was a massive decline in demand for oilfield services which continued through the first half of 2016. The industry downturn negatively impacted our financial results in both 2015 and 2016 and we had very limited liquidity throughout both years.

By January 31, 2017, we had successfully navigated through the industry downturn by implementing an operational restructuring, including severe cost cutting measures, and significantly delevered the business by successfully entering into a capital restructuring transaction, the “Recapitalization”. (See further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements.) As a direct result of the Recapitalization, we were well-positioned to take advantage of growth opportunities in 2017.

Such growth opportunities were created primarily from a significant increase in demand for oilfield services when compared to the two preceding years. Two of the most significant drivers of demand for our services, the price of oil and the Rig Count, increased substantially year-over-year from 2016 to 2017. The positive impact of these improved industry conditions on the Company is reflected in the increased utilization of our equipment and services and our ability to raise the prices we charge to our customers. Increased utilization and increased pricing resulted in a significant amount of incremental revenue in 2017 when compared to 2016 and a significant overall improvement in our financial results and liquidity.

How We Generate Revenue

We generate our revenues by providing drilling-related support services to E&P companies operating in some of the major onshore unconventional basins in the U.S. We typically enter into a Master Service Agreement (“MSA”) with each of our customers that provides a framework of general terms and conditions of our services that will govern any future transactions or jobs awarded to us. Although MSAs do not typically require a customer to use our equipment and services, we have long-standing relationships with most of our customers and we believe that they will continue to utilize our products and services in 2018 and beyond. Our largest customers, some of the most active E&P companies in the areas in which we operate, have consistently done business with us over the last three years even during the downturn experienced in 2015 and 2016.

During the year ended December 31, 2017, approximately 63.4% of our revenue was derived from the rental of equipment, 34.0% was derived from services we provide, such as the rig-up/rig-down and hauling of our equipment and, in certain cases, the operation of our equipment at the respective customer’s sites, and the remainder of our revenue was derived from reimbursable expenses charged to the customer, including charges for the sale of various items, such as chemicals.

Our revenues fluctuate with the utilization of and the prices we charge for our equipment and services. Utilization of our equipment is primarily determined by the Rig Count because Rig Count is typically representative of the level of activity of E&P companies. We measure equipment utilization as the quantity of days on which we have the ability to charge our customers for the rental of our equipment (“Rental Days”). The types of services we currently offer to our customers are nearly always tied directly to the equipment such customers are renting from us. As such, the utilization of the services we provide is primarily driven by Rental Days.

The prices we charge for our products and services depend on the relationship between the level of activity of E&P companies, or the demand of our potential and existing customers, and the supply of equipment and services available to such E&P companies from us and our competitors. When the supply exceeds the demand, the competitive environment in the areas in which we operate intensifies significantly, particularly because many of the products we supply are not differentiated from the products provided by our competitors. Our customers choose to use our equipment and services, as opposed to those offered by our competitors, primarily based on the pricing we offer and our ability to execute efficiently and safely. As competition increases, downward pressure on pricing strengthens and we are sometimes required to reduce the rates billed to both our existing and future customers. Similarly, when demand exceeds supply, our ability to increase the prices we charge improves significantly.

 

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Due to the significant impact of the volatility of the oil and gas industry on the activity of E&P companies, both the utilization of our equipment and related services and the prices we charge have been, and may be, significantly impacted by numerous factors outside of our control, such as oil and natural gas prices, the supply of and demand for oil and natural gas, domestic and worldwide economic conditions, political instability in oil producing countries and available supply of and demand for the services we provide.

During 2017, stability in oil prices coupled with significant increases in drilling activity resulted in increases in demand for our services and began to provide us with opportunities to increase the prices of our products and services. Oil prices increased approximately 66.9% to an average of $55.37 per barrel during the fourth quarter of 2017 from an average of $33.18 per barrel during the first quarter of 2016. Similarly, the Rig Count increased to 929 as of December 29, 2017 from a low of 374 on May 29, 2016. During the year ended December 31, 2017, the number of rigs on which we operate increased by approximately 50% which was in line with the increase in the Rig Count of 46.5% during the same time period. Pricing for our MCTs, our lead surface rental product, increased by approximately 23.0% when comparing the fourth quarter of 2017 to the third quarter of 2016 when pricing was at its lowest. In 2018, we have increased pricing even further for both surface rental and solids control equipment and services.

Costs of Conducting Our Business

Our operating expenses consist primarily of variable costs, such as labor and third-party services. Labor-related expenses typically fluctuate with the utilization of our equipment and services. Holding all else constant, in periods of increased or decreased activity, we anticipate that labor-related expenses will remain flat as a percent of revenue. However, holding all else constant, in periods of increased or decreased pricing to our customers, we anticipate that labor-related expenses will decrease or increase, respectively, as a percent of revenue.

Expenses associated with services provided by third-parties typically increase with activity. Demand for our equipment has increased so dramatically that, throughout much of 2017, the majority of our available owned equipment was fully utilized and we were required to increase our available equipment fleet and to increase our available labor resources to meet the demand from our customers. We accomplished this by sub-renting equipment, primarily surface rental equipment, and by using sub-contractors to operate our solids control equipment. Because our equipment and labor force are fully utilized, incremental dollars of revenue resulting from increased activity in the future will continue to require the use of third-party equipment and services and third-party expenses will increase as a percent of revenue. In addition, with increased demand for oilfield services, the demand for sub-rental equipment and labor will also increase and we may experience increases in costs for third-party services which would further increase third-party expenses as a percent of revenue. However, as our liquidity continues to improve, we will have the ability to partially mitigate the increase in third-party expenses with investments in new rental and transportation equipment and increases in headcount thereby reducing our reliance on third-party services.

How We Evaluate Our Operations

We utilize multiple metrics to evaluate the results of our operations and efficiently allocate personnel, equipment and capital resources, including, but not limited to, the following:

· Revenue: We monitor our revenue monthly to analyze trends in the business as it relates to historical revenue drivers and prevailing market metrics. We are particularly interested in understanding the underlying utilization and pricing metrics that drive the positive or negative revenue trends each month.

· Gross profit: Gross profit is a key metric that we use to evaluate our profitability and determine allocation of equipment and personnel resources. We define gross profit as our revenues less operating expenses. Operating expenses include direct and indirect labor costs, the cost of third-party services, including the sub-rental of equipment and the use of sub-contractors, costs for repairs and maintenance of our equipment and other miscellaneous costs. We continually evaluate our gross profit margin to assist us in making decisions regarding bidding new jobs, allocating resources among various jobs and managing our overall cost structure.

· EBITDA and Adjusted EBITDA: We disclose and discuss EBITDA as a non-GAAP financial measure in our public releases, including quarterly earnings releases, investor conference calls and other filings with the Securities and Exchange Commission. We define EBITDA as earnings (net income) before interest, income taxes, depreciation and amortization. Our measure of EBITDA may not be comparable to similarly titled measures presented by other companies, which may limit its usefulness as a comparative measure.

We also make certain adjustments to EBITDA for (i) non-cash charges, such as reduction in value of assets, bad debt expense, stock-based compensation expense, and changes in fair value of our contingent payment liability and (ii) certain expenses, such as severance, legal settlements, and professional fees and other expenses related to transactions outside the ordinary course of business, to derive a normalized EBITDA run-rate (“Adjusted EBITDA”), which we believe is a useful measure of operating results and the underlying cash generating capability of our business.

 

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The following table provides the detailed components of EBITDA and Adjusted EBITDA as we define that term for the years ended December 31, 2017 and 2016, respectively (in thousands):

	For the Years Ended December 31,
	2017			2016
	(unaudited)
Components of EBITDA:
Net loss	$	(425	)	$	(22,135	)
Less: Loss from discontinued operations, net of income taxes		-			2,491
Net loss from continuing operations		(425	)		(19,644	)
Non-GAAP adjustments:
Depreciation and amortization		3,701			5,299
Interest expense, net		24			2,378
Debt modification fee		-			629
Debt modification fee - related party		320			-
Interest expense - related party		418			111
Income tax expense (benefit)		59			(7,904	)
EBITDA		4,097			(19,131	)
Adjustments to EBITDA:
Reduction in value of assets		58			17,736
Gain on extinguishment of debt and other liabilities		(2,388	)		-
Expenses in connection with lender negotiations and Recapitalization		138			472
Employee-related reorganization expenses, including severance		(221	)		456
Bad debt expense		74			193
Settlements and other losses		80			127
Fair value adjustments to contingent payment liability		-			(372	)
Stock-based compensation		625			-
Adjusted EBITDA	$	2,463		$	(519	)

Because EBITDA and Adjusted EBITDA are not measures of financial performance calculated in accordance with GAAP, these metrics should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.

EBITDA and Adjusted EBITDA are widely used by investors and other users of our financial statements as supplemental financial measures that, when viewed with our GAAP results and the accompanying reconciliation, we believe provide additional information that is useful to gain an understanding of our ability to service debt, pay income taxes and fund growth and maintenance capital expenditures. We also believe the disclosure of EBITDA and Adjusted EBITDA helps investors meaningfully evaluate and compare our cash flow generating capacity from quarter-to-quarter and year-to-year.

EBITDA and Adjusted EBITDA are also financial metrics used by management as (i) supplemental internal measures for planning and forecasting and for evaluating actual results against such expectations; (ii) significant criteria for incentive compensation paid to our executive officers and management; (iii) reference points to compare to the EBITDA and Adjusted EBITDA of other companies when evaluating potential acquisitions; and, (iv) assessments of our ability to service existing fixed charges and incur additional indebtedness.

Set forth below are the material limitations associated with using EBITDA and Adjusted EBITDA as non-GAAP financial measures compared to cash flows provided by and used in operating, investing and financing activities:

· EBITDA and Adjusted EBITDA do not reflect growth and maintenance capital expenditures,

· EBITDA and Adjusted EBITDA do not reflect the interest, principal payments and other financing-related charges necessary to service the debt that we have incurred to finance acquisitions and invest in our fixed asset base,

· EBITDA and Adjusted EBITDA do not reflect the payment of income taxes, and

· EBITDA and Adjusted EBITDA do not reflect changes in our net working capital position.

Management compensates for the above-described limitations in using EBITDA and Adjusted EBITDA as non-GAAP financial measures by only using EBITDA and Adjusted EBITDA to supplement our GAAP results.

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General Trends and Outlook

Our business depends to a significant extent on the level of unconventional resource development activity and corresponding capital spending of E&P companies onshore in the U.S. These activity and spending levels are strongly influenced by the current and expected oil price. Commodity prices declined significantly between the third quarter of 2014 and the first quarter of 2016. However, oil prices have since gradually increased and this price recovery has stimulated an increase in onshore drilling and completion activity and a consequent increase in demand for our services. The average Rig Count for the year ended December 31, 2017 increased 77.4% to 864 rigs as compared to 487 for the year ended December 31, 2016. The favorable impact of the recent increase in the Rig Count on demand for our services has been magnified by an increase in the proportion of rigs drilling directional and horizontal wells. Rigs drilling directional and horizontal wells typically utilize oil-based or other sophisticated mud systems which creates demand for our specialized mud circulating tanks, pumps, containment systems, solids control and associated equipment. The proportion of rigs drilling directional and horizontal wells as a percentage of total U.S. land-based rigs has increased to 93.1% during the fourth quarter of 2017 from approximately 88.7% in the first quarter of 2016.

If the current commodity price environment holds or continues to improve, we anticipate a further increase in demand for our services. In addition, our customers are increasingly focused on efficient drilling of high intensity wells with long laterals which further enhances the demand for our services. As demand increases, we expect that utilization will increase and our ability to increase the prices for our equipment and services will improve resulting in greater margins and increased margins as a percent of revenue.

We will continue to expand our business through a low risk strategy of growing organically by replacing our sub-rented equipment with newly purchased, refurbished or fabricated equipment. We will also evaluate strategic acquisition opportunities that would provide geographic diversification, expand our products and services and introduce us to new customers.

Results of Operations

The following table summarizes the change in our results of operations for the year ended December 31, 2017 when compared to the year ended December 31, 2016 (in thousands):

	For the Twelve Months Ended December 31,												Change
	2017			% of Revenue			2016			% of Revenue			$			%
Revenue	$	14,637			100.00	%	$	11,002			100.00	%	$	3,635			33.04	%
Expenses:
Operating expenses		9,927			67.82	%		8,324			75.66	%		1,603			19.26	%
Depreciation and amortization		3,701			25.29	%		5,299			48.16	%		(1,598	)		-30.16	%
Selling, general and administrative expenses		2,943			20.11	%		4,073			37.02	%		(1,130	)		-27.74	%
Reduction in value of assets		58			0.40	%		17,736			161.21	%		(17,678	)		-99.67	%
Total expenses		16,629			113.61	%		35,432			322.05	%		(18,803	)		-53.07	%
Loss from continuing operations		(1,992	)	NA				(24,430	)	NA				22,438		NA
Other expense:
Debt modification fee		-			0.00	%		629			5.72	%		(629	)		-100.00	%
Debt modification fee - related party		320			1.92	%		-			0.00	%		320		NA
Interest expense, net		24			0.16	%		2,378			21.61	%		(2,354	)		-98.99	%
Interest expense - related party		418			2.86	%		111			1.01	%		307			276.58	%
Gain on extinguishment of debt and other liabilities		(2,388	)	NA				-			0.00	%		(2,388	)	NA
Total other expense		(1,626	)	NA				3,118			28.34	%		(4,744	)	NA
Loss from continuing operations before income taxes		(366	)	NA				(27,548	)	NA				27,182		NA
Income tax expense (benefit)		59			0.40	%		(7,904	)	NA				7,963		NA
Net loss from continuing operations		(425	)	NA				(19,644	)	NA				19,219		NA
Loss from discontinued operations, net of income taxes		-			0.00	%		2,491			22.64	%		(2,491	)		-100.00	%
Net loss		(425	)	NA				(22,135	)	NA				21,710		NA
Preferred stock dividends		63			0.43	%		728			6.62	%		(665	)		-91.35	%
Accretion of preferred stock, net		-			0.00	%		(126	)	NA				126			-100.00	%
Net loss available to common stockholders	$	(488	)	NA			$	(22,737	)	NA			$	22,249		NA

 

Results for the Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

Overview. Our results of operations improved significantly when comparing the year ended December 31, 2017 to the year ended December 31, 2016. The improvement was a result of multiple factors, including, but not limited to:

· Increased demand for our services: We experienced a significant increase in demand for our services when comparing 2017 to 2016 due to an increase in the activity of our customers which consist of E&P companies operating in the Permian Basin, the Eagle Ford shale, and the Scoop/Stack shale;

· Our ability to provide high quality equipment and services to satisfy demand: We successfully satisfied the increase in demand through investments in equipment and through outsourcing certain equipment and personnel needs; and,

· Our ability to maintain an efficient cost structure: We monitored our costs and imposed sufficient financial discipline in order to maintain an efficient cost structure in a period of rapidly increasing demand.

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Revenue. Our revenue for the year ended December 31, 2017 was $14.6 million, an increase of 33.0%, compared to $11.0 million for the year ended December 31, 2016. The key drivers of revenue are utilization and pricing. Utilization of equipment, which reflects our overall activity level, is directly tied to the drilling activity of E&P companies. The 77.4% increase in the Rig Count to an average of over 864 rigs during 2017 compared to an average of 487 rigs in 2016 is a reflection of the substantial increase in drilling activity of E&P companies. Throughout 2017, the key revenue generating rental products which we own, tanks, pumps and centrifuges, were fully utilized and our labor force was fully utilized. In order to take advantage of the increased demand for our services, we invested in additional equipment, sub-rented equipment from third parties, and used sub-contractors on certain solids control jobs. Rental Days, a key measure of our activity level, for our primary revenue generating rental products increased by more than 60.0% when comparing the year ended December 31, 2017 to the year ended December 31, 2016. A price increase of more than 10%, when comparing the year ended December 31, 2017 to the year ended December 31, 2016, on the day rates for our tanks and pumps further contributed to the increase in revenue. The favorable impact of increased utilization and increased pricing in the Permian Basin, the Scoop/Stack region, and the Eagle Ford shale was slightly offset by the elimination of revenue generated in the northeast, approximately $2.7 million during the year ended December 31, 2016, due to our decision to shut down operations in that region.

Operating Expenses. Our operating expenses for the year ended December 31, 2017 increased 19.3% to $9.9 million from $8.3 million for the year ended December 31, 2016. The increase in costs is a direct reflection of the increased activity when comparing the years ended December 31, 2017 and 2016. Although the costs in dollars increased, the rate at which operating expenses increased was less than the rate at which revenue increased resulting in a decline of operating expenses as a percent of revenue to 67.8% for the year ended December 31, 2017 from 75.7% for the year ended December 31, 2016. The decrease in operating expenses as a percent of revenue is primarily due to our discipline in maintaining the reduced cost structure achieved in 2016 despite the increase in demand, our ability to increase pricing to our customers more quickly than our costs increased, and the spread of certain fixed costs across a larger revenue base. Our primary operating expenses consist of payroll and third-party services. Payroll and related expenses decreased to $3.6 million, or 24.5% of revenue, for the year ended December 31, 2017 from $4.1 million, or 37.2% of revenue, for the year ended December 31, 2016. The decrease in payroll-related expenses and payroll-related expenses as a percent of revenue is primarily a result of closing the solids control operations in the northeast offset slightly by the increases in headcount and labor hours required to support incremental activity in Texas, Oklahoma and New Mexico. Third-party expenses, including the sub-rental of equipment, the use of third-party trucking and washout services, and the use of sub-contractors, increased to $3.9 million in 2017, or 26.4% of revenue, from $1.7 million, or 15.2% of revenue, for the year ended December 31, 2016. In early 2017, our owned equipment and our labor force was fully utilized requiring us to use third-party services to satisfy the significant increases in demand.

Depreciation and Amortization. Depreciation and amortization expense decreased 30.2% to $3.7 million for the year ended December 31, 2017 compared to $5.3 million for the year ended December 31, 2016. The decrease is due primarily to the disposition of assets to Tiger in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements).

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $2.9 million, or 20.1% of revenue, for the year ended December 31, 2017 compared to $4.1 million, or 37.0% of revenue, for the year ended December 31, 2016. Selling, general and administrative expenses consist of overhead costs which we generally consider to be fixed. The year-over-year decline of $1.1 million, or 27.8%, is primarily due to the reduction in headcount of selling, general and administrative employees to 15 as of December 31, 2017 from 37 as of January 1, 2016. Our headcount reductions in 2016 were primarily due to a decline in activity and a requirement to cut costs due to the impact of the downturn in the industry. Although we have operated in a time of increasing demand throughout 2017, we have improved the productivity of our employees and successfully modified our selling, general and administrative organization to create efficiencies which allow us to operate under a leaner cost structure than we did in prior years. Selling, general and administrative expenses also include expenses that are either non-recurring or non-cash in nature with an aggregate value of $0.7 million and $0.9 million during the years ended December 31, 2017 and 2016, respectively (see further discussion in “How We Evaluate Our Operations” section above).

Reduction in Value of Assets. In the years ended December 31, 2017 and 2016, we recorded a reduction in value of assets of approximately $58,000 and $17.7 million, respectively. The reduction in value recorded during the year ended December 31, 2017 resulted from the disposal of vehicles and the closure of facilities in connection with ceasing operations in the northeast in late 2016. The primary component of the reduction in value during 2016 was a $15.6 million impairment charge on the transfer of equipment to Tiger in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements). In addition, in 2016, we recorded a reduction in value of intangibles of $1.1 million and a reduction in value of property and equipment of $1.1 million. The reduction in the value of intangibles consisted of a $0.5 million reduction in an intangible associated with a non-compete which management determined was non-enforceable and a $0.6 million reduction in an intangible associated with a supply agreement which had no value subsequent to the liquidation of the supplier under bankruptcy proceedings. The $1.1 million reduction in value of property and equipment was in connection with asset sales and disposals completed during the year to fund working capital needs and repay debt.

 

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Debt Modification Fee. During the year ended December 31, 2016, we recorded $0.6 million of expense due to a debt modification fee paid to Tiger in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements).

Debt Modification Fee – Related Party. During the year ended December 31, 2017, we recorded a debt modification fee of $0.3 million which reflects the value of 1,200 shares of our Series A convertible preferred stock issued to Pelican in exchange for an amendment to our credit facility in May 2017.

Interest Expense, net. Interest expense and amortization of deferred loan costs was approximately $24,000 for the year ended December 31, 2017 compared to $2.4 million for the year ended December 31, 2016. The significant decrease is primarily due to the extinguishment of our former credit facility and certain other interest-bearing obligations on January 31, 2017 in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements).

Interest Expense – Related Party. During the years ended December 31, 2017 and 2016, we recorded $0.4 million and $0.1 million of interest expense, respectively, due to Pelican, a related party. In December 2016, Pelican became our primary lender in connection with the Recapitalization (see further discussion in “Note 2 – Recent Events” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements).

Gain on Extinguishment of Debt and Other Liabilities. During the year ended December 31, 2017, we recorded a gain on extinguishment of debt and other liabilities of $2.4 million due to our troubled debt restructuring in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our condensed consolidated financial statements).

Income Taxes. From our evaluation as of December 31, 2017 and 2016, the Company has concluded that based on the weight of available evidence, it is more likely than not that the Company will not realize the benefit of its deferred tax assets. As such, a valuation allowance of $2.4 million is included on the consolidated balance sheet for the years ended December 31, 2017 and 2016. Income tax expense was approximately $59,000 for the year ended December 31, 2017 which reflects Texas Franchise Tax. Our current tax expense continues to be indicative of the impact of state taxes, due to our continued full valuation allowance on net deferred tax assets. The income tax benefit recognized for the year ended December 31, 2016 was $7.9 million, or an effective tax rate of 28.7%. During the year ended December 31, 2016, we recorded the impact of the initial full valuation allowance which had a significant impact on our effective tax rate.

Discontinued Operations. Discontinued operations include Evolution which specialized as an operator of MWD downhole tools. The operations were completely abandoned by December 31, 2016 and there was no income or loss from discontinued operations during the year ended December 31, 2017. Losses from discontinued operations, net of income taxes, were $2.5 million for the year ended December 31, 2016. (See further discussion in “Note 16 – Discontinued Operations” in the notes to our consolidated financial statements.)

Liquidity and Capital Resources

Net Cash Provided by Operating Activities. During the years ended December 31, 2017 and 2016, cash flows from operating activities were $0.4 million and approximately $9,000, respectively. The increase in cash flows from operating activities is primarily due to the significant improvement in operating results year-over-year, partially offset by requirements to fund changes in working capital. Our working capital needs in 2017 were primarily related to the substantial increase in activity year-over-year as compared to the significant decline in activity in 2016 when compared to 2015. In addition, we had an unusually high balance of unbilled receivables as of December 31, 2017 due to an increased lag time between the end of jobs and invoicing. During the first quarter of 2018, we have addressed this issue and the lag time between the end of jobs and the invoice creation date has decreased substantially when compared to 2017. With projected improved operating results and a shorter billing cycle, we believe we will generate positive cash flows from operating activities during the year ended December 31, 2018.

 

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Capital Expenditures. Capital expenditures are the main component of our investing activities. Cash capital expenditures for the year ended December 31, 2017 increased to $1.7 million from $0.4 million for the year ended December 31, 2016. During the year ended December 31, 2017, we spent approximately $0.5 million to acquire assets, such as flare igniters and diesel mud pumps, to replace equipment which we sub-rent to meet customer demand when our owned equipment is fully utilized. In addition, we repurchased certain equipment, approximately $0.3 million, which had been sold to Tiger in connection with the Recapitalization, specifically centrifuges, in order to meet increasing demand. Every one to two years, our centrifuges require refurbishments. Due to lack of demand in 2015 and 2016, we did not refurbish any centrifuges. In 2017, we spent approximately $0.3 million to refurbish centrifuges in order to meet the increased demand for our solids control services. The remainder of our expenditures during the year ended December 31, 2017 were related to ongoing replacement capital expenditures for items such as hoses and containment liners. In 2018, in addition to capital expenditures required to support the ongoing operations, we anticipate spending at least $0.5 million to refurbish up to 24 centrifuges in order to meet the continuing increase in demand for our solids control services. We are also aggressively seeking opportunities to purchase additional tanks and diesel mud pumps at discounted prices so that we can replace equipment which we are currently sub-renting.

Although we do not budget acquisitions in the normal course of business, we regularly engage in discussions related to potential acquisitions of companies which provide oilfield services.

Liquidity. Although we faced significant challenges with respect to liquidity in 2016, we successfully completed the Recapitalization in January 2017 which significantly improved our liquidity and our access to capital. We were able to strengthen our balance sheet by converting our redeemable preferred stock and certain other obligations into common equity and by restructuring our credit facility. Given that the lender under the new credit facility is Pelican, a related party and owner of over 65.0% of the Company on a fully diluted basis, we have much greater flexibility to modify our credit facility, if and when needed, and we benefit from a credit facility which is structured with no financial covenants and principal payments based solely on free cash flow. (See further discussion in “Note 2 – Recent Developments”, “Note 3 – Recapitalization”, “Note 7 – Long-Term Debt”, and “Note 8 – Long-Term Debt – Related Party”) in the notes to our consolidated financial statements.)

As of December 31, 2017, we had $1.1 million of liquidity when considering our cash on hand and our availability to borrow under our credit facility with Pelican. The table below reflects our liquidity as of December 31, 2017 (in thousands):

	December 31, 2017
Cash	$	203
Revolving facility availability (1)		250
Delayed draw term loan availability (1) , (2)		675
Total liquidity	$	1,128

__________________

⁽¹⁾ With Permian Pelican LLC, our controlling shareholder.

⁽²⁾ Available to finance 90% of purchase price for capital expenditures.

 

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Subsequent to December 31, 2017, we have improved our liquidity position by entering into an amendment to our credit facility and by generating significant cash from changes in working capital. In January 2018, we entered into an amendment to the credit facility with Pelican in order to transfer $0.6 million of remaining availability on the delayed draw term loan, under which draws must be used to finance capital expenditures, to a swing line which permits draws and repayments with no restrictions on the use of proceeds. The swing line matures on June 30, 2018 at which time all remaining outstanding balances must be repaid. As of March 31, 2018, we have not drawn under the swing line. During the fourth quarter of 2017, we experienced certain delays in billing due to a lack of available personnel. We successfully caught up with all delayed billings in January 2018 and have collected over $4.8 million during the first quarter of 2018 compared to collections of only $3.7 million during the fourth quarter of 2017. As of March 24, 2018, our bank balance had increased to $1.5 million. These improvements in liquidity were slightly offset by a draw of $0.3 million under our revolving credit facility in January 2018 leaving no remaining availability under our revolving credit facility. The table below reflects our liquidity as of March 24, 2018 (in thousands):

	March 24, 2018
Cash	$	1,472
Outstanding checks		(534	)
Swing line availability (1)		600
Revolving facility availability (1)		-
Delayed draw term loan availability (1) , (2)		75
Total liquidity	$	1,613

__________________

⁽¹⁾ With Permian Pelican LLC, our controlling shareholder.

⁽²⁾ Available to finance 90% of purchase price for capital expenditures.

  

Credit Facility. As of March 31, 2018, we have availability to borrow an incremental $0.7 million under our credit facility with Pelican. Principal payments on the outstanding balances under our credit facility are based solely on excess free cash flows, which are calculated annually each calendar year. Accordingly, there was no principal payment due for the year ended December 31, 2017. We have no borrowings under our swing line as of March 31, 2018; however, to the extent we make a draw on the line, the full amount of any outstanding balances on June 30, 2018 will be immediately due and payable. (See further discussion in “Note 2 – Recent Developments”, “Note 3 – Recapitalization”, and “Note 8 – Long-Term Debt – Related Party” in the notes to our consolidated financial statements.)

We believe that our cash flow from operations combined with access to capital through our lender and controlling shareholder, Pelican, will be sufficient to fund our working capital needs, contractual obligations and maintenance capital expenditures for the next twelve months.

Contractual Obligations

The table below indicates our contractual obligations as of December 31, 2017 (in thousands):

	As of December 31, 2017
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Long-term debt - related party (1)	$	6,352	$	-	$	6,352	$	-	$	-
Interest on long-term debt - related party (2)		660		330		330		-		-
Severance obligations (3)		391		-		391		-		-
Operating leases		226		118		108		-		-
Equipment financing		3		3		-		-		-
Total	$	7,632	$	451	$	7,181	$	-	$	-

________________

⁽¹⁾ Maturity date is December 31, 2019 unless such debt is refinanced.

⁽²⁾ Interest payments on Pelican credit facility calculated at 5.2% per annum.

⁽³⁾ See "Note 10 - Commitments and Contingencies" for further detail.

28

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, other than normal operating leases and employee contracts, that have or are likely to have a current or future material effect on our financial condition, changes in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources.

Net Operating Losses

As of December 31, 2017 and 2016, we had approximately $31.5 million and $29.5 million, respectively, of federal net operating loss carryforwards. Based on the weight of all available evidence including the future reversal of existing U.S. taxable temporary differences as of December 31, 2017 and 2016, we believe that it is more likely than not that the benefit from certain federal and state net operating loss carryforwards and other deductible temporary differences will not be realized. In recognition of this risk, we have a valuation allowance of approximately $2.4 million as of December 31, 2017 and 2016 on the net deferred tax asset as a result of the Company being in a cumulative three-year pre-tax book loss position and absence of other objectively verifiable positive evidence including reversal of existing taxable temporary differences in these certain state tax jurisdictions.

Critical Accounting Policies and Estimates

The accounting policies described below are considered critical in obtaining an understanding of our consolidated financial statements because their application requires significant estimates and judgments by management in preparing our consolidated financial statements. Management’s estimates and judgments are inherently uncertain and may differ significantly from actual results achieved. Management considers an accounting estimate to be critical if the following conditions apply:

· the estimate requires significant assumptions; and

· changes in estimate could have a material effect on our consolidated results of operations or financial condition; or

· if different estimates that could have been selected had been used, there could be a material effect on our consolidated results of operations or financial condition.

 

It is management’s view that the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, actual results can differ significantly from those estimates under different assumptions and conditions.

We have identified the following critical accounting policies that require a significant amount of estimation or judgment to accurately present our financial position, results of operations and cash flows after the Recapitalization:

· Revenue Recognition;

· Allowance for Doubtful Accounts;

· Estimates of Depreciable Lives;

· Valuation of Long-lived Assets;

· Contingencies;

· Income Taxes; and

· Cash Flow Estimates.

 

For a detailed discussion on the application of these, relevant critical accounting policies before the Recapitalization, and other accounting policies, see “Note 4 – Summary of Significant Accounting Policies” in the notes to our consolidated financial statements included elsewhere in this document.

Revenue Recognition: We generate revenue primarily from renting equipment at per-day rates. In connection with certain of our solids control operations, we also provide personnel to operate our equipment at the customer’s location at per-day or per-hour rates. In addition, we may provide equipment transportation and rig-up/rig-down services to the customer at flat rates per job or at an hourly rate. Our services are generally sold based upon purchase orders or contracts with customers that include fixed or determinable prices. We recognize revenue when services or equipment are provided, and collectability is reasonably assured. We contract for a majority of our services on a day rate basis. We rent products on a day rate basis, and revenue from the sale of equipment is recognized when the title to the equipment has transferred to the customer.

 

29

Allowance for Doubtful Accounts: We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of some of our customers to make required payments. These estimated allowances are periodically reviewed on a case by case basis, analyzing the customer’s payment history and information regarding the customer’s creditworthiness known to us. In addition, we provide an allowance for doubtful accounts which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Provisions for doubtful accounts are recorded when it is deemed probable that the customer will not make the required payments. If the financial condition of our customers deteriorates, resulting in their inability to make payments, additional allowances may be required.

Estimates of Depreciable Lives: We use the estimated depreciable lives of our long-lived assets to compute depreciation expense, to estimate future asset retirement obligations and to conduct impairment tests. We base the estimates of our depreciable lives on a number of factors, such as the environment in which the assets operate, industry factors including forecasted prices and competition, and the assumption that we provide the appropriate amount of capital expenditures while the asset is in operation to maintain economical operation of the asset and prevent untimely demise to scrap. The useful lives of our intangible assets are determined by the years over which we expect the assets to generate a benefit based on legal, contractual or other expectations.

We depreciate our operational assets over their depreciable lives to their salvage value, which is generally 20% of the acquisition cost. Typically, these assets contain a large amount of iron in their construction. We recognize a gain or loss upon ultimate disposal of the asset based on the difference between the carrying value of the asset on the disposal date and any proceeds we receive in connection with the disposal. Maintenance and repairs, which do not improve or extend the life of the related assets, are charged to expense when incurred. Refurbishments and renewals are capitalized when the value of the equipment is enhanced for an extended period.

We periodically analyze our estimates of the depreciable lives of our fixed assets to determine if the depreciable periods and salvage value continue to be appropriate. We also analyze useful lives and salvage value when events or conditions occur that could shorten the remaining depreciable life of the asset. We review the depreciable periods and salvage values for reasonableness, given current conditions. As a result, our depreciation expense is based upon estimates of depreciable lives of the fixed assets, the salvage value and economic factors, all of which require management to make significant judgments and estimates. If we determine that the depreciable lives should be different than originally estimated, depreciation expense may increase or decrease and impairments in the carrying values of our fixed assets may result, which could negatively impact our earnings.

Valuation of Long-lived Assets: Our property and equipment and intangibles are tested for potential impairment when circumstances or events indicate a possible impairment may exist. These circumstances or events are referred to as “trigger events” and examples of such trigger events include, but are not limited to, an adverse change in market conditions, a significant decrease in benefits being derived from an acquired business, a change in the use of an asset, or a significant disposal of a particular asset or asset class.

If a trigger event occurs, an impairment test is performed based on an undiscounted cash flow analysis. To perform an impairment test, we make judgments, estimates and assumptions regarding long-term forecasts of revenue and expenses relating to the assets subject to review. Market conditions, energy prices, estimated depreciable lives of the assets, discount rate assumptions and legal factors impact our operations and have a significant effect on the estimates we use to determine whether our assets are impaired. If the results of the undiscounted cash flow analysis indicate that the carrying value of the assets being tested for impairment are not recoverable, then we record an impairment charge to write the carrying value of the assets down to their fair value. Using different judgments, assumptions or estimates, we could potentially arrive at a materially different fair value for the assets being tested for impairment, which may result in an impairment charge.

Contingencies: We are periodically required to record other loss contingencies, which relate to lawsuits, claims, proceedings and tax-related audits in the normal course of our operations, on our consolidated balance sheet. We record a loss contingency for these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We periodically review our loss contingencies to ensure that we have recorded appropriate liabilities on the balance sheet. We adjust these liabilities based on estimates and judgments made by management with respect to the likely outcome of these matters, including the effect of any applicable insurance coverage for litigation matters. Our estimates and judgments could change based on new information, changes in laws or regulations, changes in management’s plans or intentions, the outcome of legal proceedings, settlements or other factors. Actual results could vary materially from these reserves.

 

30

Income Taxes: We account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporary differences. Management determines our current tax liability as well as taxes incurred as a result of current operations yet deferred until future periods. Current taxes payable represents our liability related to our income tax returns for the current year, while net deferred tax expense or benefit represents the change in the balance of deferred tax assets and liabilities reported on our consolidated balance sheets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Our deferred tax calculation requires us to make certain estimates about our future operations. Changes in state, federal and foreign tax laws, as well as changes in our financial condition or the carrying value of existing assets and liabilities, could affect these estimates. The effect of a change in tax rates is recognized as income or expense in the period that the rate is enacted. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatment of certain items for tax and accounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved and the timing and nature of income earned, and expenditures incurred.

We record valuation allowances to reduce deferred tax assets if we determine that it is more likely than not (e.g., a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized in future periods. To assess the likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the related jurisdiction in the future. Evidence supporting this ability can include our current financial position, our results of operations, both actual and forecasted results, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions in the financial statements at their net recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in the domestic and international tax jurisdictions in which we operate.

If our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified, these changes could have potentially material negative impacts on our earnings.

Cash Flow Estimates: Our estimates of future cash flow are based on the most recent available market and operating data for the applicable asset base at the time we made the estimate. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes on us. Critical assumptions include projected revenue growth, gross profit margins, selling, general and administrative expenses, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Our cash flow estimates are used for all our valuation-based estimates detailed above.

Recently Issued Accounting Standards

For a discussion of new accounting standards, see “Note 4 – Summary of Significant Accounting Policies” in the notes to our consolidated financial statements included elsewhere in this document.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide the information required by this Item.

 

31

Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2017 and 2016	F-3
Consolidated Statements of Operations for the Years Ended December 31, 2017 and 2016	F-4
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2017 and 2016	F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and 2016	F-6
Notes to Consolidated Financial Statements	F-7

F-1

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Aly Energy Services, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Aly Energy Services, Inc. and its subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission 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 reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the 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 disclosures in the 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2015.

/S/ RSM US LLP

Houston, Texas

April 2, 2018

F-2

ALY ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
	December 31,
	2017			2016
ASSETS
Current assets
Cash	$	203		$	681
Restricted cash		30			30
Accounts receivable, net		2,358			1,120
Unbilled receivables		1,525			328
Prepaid expenses and other current assets		390			496
Total current assets		4,506			2,655
Property and equipment, net		26,888			28,226
Intangible assets, net		4,099			4,931
Other assets		9			14
Total assets	$	35,502		$	35,826
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable	$	1,640		$	912
Accrued expenses		1,131			1,163
Accrued interest and other - related party		26			1,277
Current portion of long-term debt		3			1,593
Current portion of long-term debt - related party		-			18,880
Current portion of contingent payment liability		-			810
Total current liabilities		2,800			24,635
Long-term debt, net		-			10
Long-term debt, net - related party		6,352			1,315
Other long-term liabilities		412			708
Total liabilities		9,564			26,668
Commitments and contingencies (note 10)
Aly Operating redeemable preferred stock		-			4,924
Aly Centrifuge redeemable preferred stock		-			10,080
		-			15,004
Stockholders' equity (deficit)
Series A convertible preferred stock of $0.001 par value (liquidation preference of $17,292)		6,755			-
Authorized-20,000; issued and outstanding-17,292 as of December 31, 2017
Authorized, issued and outstanding-none as of December 31, 2016
Preferred stock of $0.001 par value		-			-
Authorized-9,980,000; issued and outstanding-none as of December 31, 2017
Authorized-10,000,000; issued and outstanding-none as of December 31, 2016
Common stock of $0.001 par value		14			7
Authorized-25,000,000; Issued-13,819,020; Outstanding-13,818,795 as of December 31, 2017
Authorized-25,000,000; Issued-6,707,039; Outstanding-6,706,814 as of December 31, 2016
Additional paid-in-capital		53,754			28,307
Accumulated deficit		(34,583	)		(34,158	)
Treasury stock, 225 shares at cost		(2	)		(2	)
Total stockholders' equity (deficit)		25,938			(5,846	)
Total liabilities and stockholders' equity (deficit)	$	35,502		$	35,826

The accompanying notes are an integral part of these consolidated financial statements.

F-3

ALY ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
	For the Years Ended December 31,
	2017			2016
Revenue	$	14,637		$	11,002
Expenses:
Operating expenses		9,927			8,324
Depreciation and amortization		3,701			5,299
Selling, general and administrative expenses		2,943			4,073
Reduction in value of assets		58			17,736
Total expenses		16,629			35,432
Loss from continuing operations		(1,992	)		(24,430	)
Other expense (income):
Debt modification fee		-			629
Debt modification fee - related party		320			-
Interest expense, net		24			2,378
Interest expense - related party		418			111
Gain on extinguishment of debt and other liabilities		(2,388	)		-
Total other expense (income)		(1,626	)		3,118
Loss from continuing operations before income taxes		(366	)		(27,548	)
Income tax expense (benefit)		59			(7,904	)
Net loss from continuing operations		(425	)		(19,644	)
Loss from discontinued operations, net of income taxes		-			2,491
Net loss		(425	)		(22,135	)
Preferred stock dividends		63			728
Accretion of preferred stock, net		-			(126	)
Net loss available to common stockholders	$	(488	)	$	(22,737	)
Basic and diluted loss per share information:
Net loss from continuing operations available to common stockholders	$	(0.04	)	$	(3.02	)
Less: Loss from discontinued operations, net of income taxes		0.00			0.37
Net loss available to common stockholders	$	(0.04	)	$	(3.39	)
Weighted-average shares - basic and diluted		13,214,764			6,706,814

The accompanying notes are an integral part of these consolidated financial statements.

F-4

ALY ENERGY SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(in thousands, except share amounts)
	Series A Convertible Preferred Stock				Common Stock				Additional Paid-			Accumulated			Treasury
	Shares		Amount		Shares		Amount		In-Capital			Deficit			Stock			Total
Balance as of January 1, 2016		-	$	-		6,707,039	$	7	$	28,909		$	(12,023	)	$	(2	)	$	16,891
Preferred stock dividends		-		-		-		-		(728	)		-			-			(728	)
Accretion of preferred stock, net		-		-		-		-		126			-			-			126
Net loss		-		-		-		-		-			(22,135	)		-			(22,135	)
Balance as of December 31, 2016		-		-		6,707,039		7		28,307			(34,158	)		(2	)		(5,846	)
Preferred stock dividends										(63	)		-			-			(63	)
Issuance of common shares in exchange for the		-		-		1,657,494		2		197			-			-			199
extinguishment of debt and other liabilities (note 3)
Issuance of common shares in exchange for the		-		-		5,454,487		5		15,031			-			-			15,036
extinguishment of redeemable preferred stock (note 3)
Issuance of preferred shares in exchange for the		16,092		6,435		-		-		9,657			-			-			16,092
extinguishment of debt and other liabilities - related party (note 3)
Issuance of preferred shares in exchange for an		1,200		320		-		-		-			-			-			320
amendment to credit facility - related party
Issuance of stock options		-		-		-		-		625			-			-			625
Net loss		-		-		-		-		-			(425	)		-			(425	)
Balance as of December 31, 2017		17,292	$	6,755		13,819,020	$	14	$	53,754		$	(34,583	)	$	(2	)	$	25,938

The accompanying notes are an integral part of these consolidated financial statements.

F-5

ALY ENERGY SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
(in thousands)
	For the Years Ended December 31,
	2017			2016
Cash flows from operating activities:
Net loss	$	(425	)	$	(22,135	)
Less: Loss from discontinued operations, net of income taxes		-			2,491
Net loss from continuing operations		(425	)		(19,644	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		3,701			5,299
Amortization of deferred loan costs		-			403
Reduction in value of assets		58			17,736
Stock-based compensation		625			-
Bad debt expense		74			193
Fair value adjustments to contingent payment liability		-			(372	)
Gain on extinguishment of debt and other liabilities		(2,388	)		-
Debt modification fee		-			629
Debt modification fee - related party		320			-
Deferred Taxes		-			(7,941	)
Changes in operating assets and liabilities:
Cash paid upon assumption of net liabilities from discontinued operations		-			(7	)
Receivables		(2,509	)		2,768
Prepaid expenses and other assets		80			471
Accounts payable		728			(13	)
Accrued interest and other - related party		196			111
Accrued expenses and other liabilities		(51	)		376
Net cash provided by continuing operations		409			9
Net cash used in discontinued operations		-			(47	)
Net cash provided by (used in) operating activities		409			(38	)
Cash flows from investing activities:
Purchases of property and equipment		(1,718	)		(389	)
Proceeds from disposal of property and equipment		15			465
Net cash provided by (used in) continuing operations		(1,703	)		76
Net cash used in discontinued operations		-			39
Net cash provided by (used in) investing activities		(1,703	)		115
Cash flows from financing activities:
Proceeds from line of credit - related party		-			494
Borrowings on long-term debt - related party		825			-
Repayment of long-term debt		(9	)		(348	)
Net cash provided by continuing operations		816			146
Net cash used in discontinued operations		-			(9	)
Net cash provided by financing activities		816			137
Net increase (decrease) in cash and restricted cash		(478	)		214
Cash and restricted cash, beginning of period		711			497
Cash and restricted cash, end of period	$	233		$	711

The accompanying notes are an integral part of these consolidated financial statements.

  

F-6

NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

Aly Energy Services, Inc., together with its subsidiaries (“Aly Energy” or “the Company”), provides oilfield services, including equipment rental and solids control services to exploration and production companies. The Company operates in select oil and natural gas basins of the contiguous United States. Throughout this report, we refer to Aly Energy and its subsidiaries as “we”, “our” or “us”. References to financial results and operations of the Company in these notes to the consolidated financial statements are limited to continuing operations unless otherwise specified.

On October 26, 2012, we acquired all of the stock of Austin Chalk Petroleum Services Corp. (“Austin Chalk”). Austin Chalk provides surface rental equipment as well as roustabout services which include the rig-up and rig-down of equipment and the hauling of equipment to and from the customer’s location.

On April 15, 2014, we acquired the equity interests of United Centrifuge, LLC (“United”) as well as certain assets used in United’s business that were owned by related parties of United (collectively the “United Acquisition”). In connection with the United Acquisition, United merged with and into Aly Centrifuge Inc. (“Aly Centrifuge”), a wholly-owned subsidiary of Aly Energy. Aly Centrifuge operates within the solids control and fluids management sectors of the oilfield services and rental equipment industry, offering its customers the option of renting centrifuges and auxiliary solids control equipment without personnel or the option of paying for a full-service solids control package which includes operators on-site 24 hours a day.

Discontinued Operations

In July 2014, we acquired all of the issued and outstanding stock of Evolution Guidance Systems Inc. (“Evolution”), an operator of Measurement-While-Drilling (“MWD”) downhole tools. From July 2014 through October 2016, Evolution provided directional drilling and MWD services to a variety of exploration and production companies. On October 26, 2016, we abandoned these operations as a part of a restructuring transaction. The abandonment of these operations meets the criteria established for recognition as discontinued operations under generally accepted accounting principles in the United States of America (“U.S. GAAP”). Therefore, the financial results of our directional drilling and MWD services are presented as discontinued operations in the Company’s consolidated financial statements.

By December 31, 2016, the abandonment of these operations and sell-off of the assets was completed with approximately $0.2 million of remaining liabilities assumed by the continuing operations of the Company; accordingly, there was no income or loss from discontinued operations during the year ended December 31, 2017. For the year ended December 31, 2016, the results of the discontinued operations are included in the line item “Loss from discontinued operations, net of income taxes” on the consolidated statement of operations and the cash flows from discontinued operations appear in the line items “Net cash provided by (used in) discontinued operations” on the consolidated statement of cash flows.

Basis of Presentation

Aly Centrifuge and Aly Operating Inc. (“Aly Operating”) are both wholly-owned subsidiaries of Aly Energy. Austin Chalk is a wholly-owned subsidiary of Aly Operating. We operate as one business segment which services customers within the United States.

The consolidated financial statements have been prepared in conformity with U.S. GAAP and include the accounts of Aly Energy and each of its subsidiaries in the consolidated balance sheets as of December 31, 2017 and 2016, the related consolidated statements of operations for the years ended December 31, 2017 and 2016, consolidated statements of changes in stockholders’ equity (deficit) for the years ended December 31, 2017 and 2016, and consolidated statements of cash flows for the years ended December 31, 2017 and 2016. All significant intercompany transactions and account balances have been eliminated upon consolidation.

NOTE 2 — RECENT DEVELOPMENTS

Operational Restructuring

Our activity is tied directly to the rig count and, even though we instituted significant cost cutting measures beginning in 2015, we were unable to cut costs enough to match the decline in our business. As a result, as of December 31, 2015, we were in default of our credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”).

 

F-7

During the year ended December 31, 2016, we entered into a series of forbearance agreements with our lender. Under the forbearance agreements, among other provisions, the lenders agreed to forbear from exercising their remedies under the credit agreement. These forbearance agreements permitted us to operate within the parameters of our normal course of business despite the continuing default under the credit agreement. Without these forbearance agreements, our outstanding debt would have been immediately due and payable. Throughout 2016, we remained in default and we did not have sufficient liquidity to repay all of the outstanding debt, $20.1 million as of January 31, 2016, to the lender at any point during the year. As such, we may have been forced to file for protection under Chapter 11 of the U.S. Bankruptcy Code.

In early 2016, we were hopeful that a successful operational restructuring would facilitate negotiations to modify the terms of our existing credit facility with Wells Fargo. Our operational restructuring in 2016 consisted of severe cost cuts which were incremental to the cost cuts already implemented in 2015. In 2016, action steps which resulted in significant cost cuts included, but are not limited to, (i) reducing headcount, (ii) ceasing operations in the northeast, (iii) modifying insurance policies, (iv) minimizing repair and maintenance activities and (v) eliminating new investments in equipment unless required by existing customers. The Company realized additional cost savings on variable costs, such as sub-rental equipment expense and trucking expense, as a direct result of the decline in activity.

In order to further support our working capital needs, we identified and sold idle and underutilized assets. During 2016, we realized aggregate proceeds from asset sales of approximately $0.8 million, of which $0.5 million and $0.3 million was used to fund working capital needs and pay down debt, respectively.

Capital Restructuring

Despite our successful operational restructuring efforts, the decline in our activity levels and the decline in customer pricing outpaced the impact of our cost reductions and it became evident that a capital restructuring would be necessary to continue operations and position our business for an industry turnaround.

In the second quarter of 2016, certain of the Company’s principal stockholders (“Shareholder Group”) began negotiations with Wells Fargo with the objective of consummating a recapitalization transaction (the “Recapitalization”) whereby our obligations under the credit agreement with Wells Fargo, outstanding capital leases in favor of Wells Fargo’s equipment finance affiliate, and certain other obligations of Aly Energy (collectively the “Aly Senior Obligations”) would be restructured. In August 2016, the Shareholder Group was introduced to a third party, Tiger Finance, LLC (“Tiger”), who was interested in providing bridge financing and extending forbearance until such date as sufficient capital could be raised by the Shareholder Group to complete the Recapitalization.

In September 2016, the Shareholder Group formed Permian Pelican, LLC (“Pelican”) with the objective of raising capital and executing the steps necessary to complete the restructuring, inclusive of successfully effecting the exchange of the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, a subordinated note payable and a liability for a contingent payment into approximately 10% of our common stock on a fully diluted basis.

Effective January 31, 2017, the Recapitalization was completed through the execution and delivery of a Securities Exchange Agreement and a Second Amended and Restated Credit Agreement and, as a result, the new credit facility, in which Pelican was the lender, consisted of a term loan of $5.1 million and a revolving facility of up to $1.0 million as of January 31, 2017. Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables where eligible receivables are defined as all receivables which have been billed to customers and are less than 90 days old. See further discussion in “Note 3 – Recapitalization” and “Note 8 – Long-Term Debt – Related Party”.

Subsequent to the Recapitalization, we entered into several further amendments to capitalize on improved market conditions and increased activity in our business:

· Amendment No. 1, effective March 1, 2017, provided for a delayed draw term loan to be added to the Pelican Credit Facility for the purpose of financing capital expenditures. The amendment permitted us to draw on the delayed draw term loan from time-to-time up until December 31, 2018 in order to fund up to 80% of the cost of capital expenditures subject to a $0.5 million limit on aggregate borrowings.

· Amendment No. 2, effective May 23, 2017, increased the maximum revolving credit amount from $1.0 million to $1.8 million and extended the final maturity date of the facility to December 31, 2019. In consideration of the increase in the revolving credit facility and the extension of the final maturity date, we issued Pelican an amendment fee consisting of 1,200 shares of our Series A convertible preferred stock. See further discussion in “Note 12 – Controlling Shareholder and Related Party Transactions”.

· Amendment No. 3, effective June 15, 2017, modified maximum potential borrowings under each of the revolving credit facility and the delayed draw term loan without changing the aggregate available borrowings under the credit facility. The amendment reduced the maximum revolving credit amount from $1.8 million to $1.0 million and increased the maximum delayed draw loan borrowings from $0.5 million to $1.3 million and the amendment also increased permitted draws on the delayed draw loan from 80% of the cost of capital expenditures being funded to 90% of the cost of capital expenditures being funded.

F-8

· Amendment No. 4, effective January 22, 2018, provided for a Swing Line to be added to the Pelican Credit Facility without changing the aggregate available borrowings under the credit facility. The amendment provided for a maximum availability of $0.6 million under the new Swing Line and reduced the maximum delayed draw loan borrowings from $1.3 million to $0.7 million. Amounts drawn on the Swing Loan may be repaid and reborrowed without penalty until June 30, 2018 at which time the Swing Line matures and all outstanding amounts are immediately due and payable. Interest on the Swing Line is charged at the lower of the (i) highest lawful rate or (ii) 7.0% per annum.

To the extent the Company generates free cash flow, as defined in the credit agreement, during a given calendar year, principal payments of 50% of such free cash flow are due on the earlier of (i) 60 days after the end of such year or, (ii) the date on which the Company’s independent auditors have completed their audit of the financial statements for such year. Accordingly, there was no principal payment due for the year ended December 31, 2017.The maturity date of all remaining outstanding balances under the credit facility is December 31, 2019.

The obligations under the Pelican Credit Facility are guaranteed by all of our subsidiaries and secured by substantially all of our assets. The Pelican Credit Facility contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, pay dividends or make other distributions, grant liens and sell assets. The Pelican Credit Facility does not include any financial covenants. We were in full compliance with the credit facility as of December 31, 2017.

Under the Pelican Credit Facility, as of December 31, 2017, we have the availability to borrow an incremental $0.6 million under the Swing Line and, if we have capital expenditures which are eligible to be financed, an incremental $75,000 under the delayed draw term loan to finance 90% of such expenditures.

NOTE 3 — RECAPITALIZATION

Summary

In September 2016, Pelican was formed with the primary objective of completing the Recapitalization. Pelican agreed to acquire the Aly Senior Obligations, provided the Company was successful in effecting the exchange of the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, a subordinated note payable and a liability for a contingent payment into approximately 10% of our common stock on a fully diluted basis.

The Recapitalization consisted of three restructuring events which took place in the period beginning October 26, 2016 and ended on January 31, 2017. Below is a description of each event:

The first restructuring event occurred on October 26, 2016 when Tiger acquired the Aly Senior Obligations from Wells Fargo and its equipment affiliate. Simultaneously, Tiger entered into an assignment agreement with Pelican whereby it agreed to sell the Aly Senior Obligations to Pelican on the conditions that (i) Pelican provide $0.5 million of unsecured working capital financing to the Company pending the closing and (ii) the Company transfer to Tiger (in consideration of Tiger’s reduction of the Aly Senior Obligations in the amount of $2.0 million) certain excess equipment and vehicles which the Company was not utilizing and considered unnecessary for its continuing operations.

As a result of the above, we transferred property and equipment with an estimated fair value of $2.6 million, inclusive of $0.4 million of assets associated with discontinued operations, to Tiger and recognized a corresponding reduction in the Aly Senior Obligations of $2.0 million and debt modification fee of $0.6 million. Property and equipment transferred had an aggregate net book value of $18.6 million resulting in our recording an impairment charge of $16.0 million, inclusive of a $0.4 million impairment associated with discontinued operations. As part of this transaction and upon satisfaction of such conditions, Tiger extended the forbearance period to December 9, 2016.

The second restructuring event occurred on December 12, 2016 when Pelican acquired the Aly Senior Obligations from Tiger. As the new holder of the Aly Senior Obligations, Pelican further extended the forbearance period for the obligations to January 31, 2017, provided the Company was successful in completing the third and final restructuring event on or before such date.

 

F-9

Effective January 31, 2017, the final restructuring event occurred and the Recapitalization was completed which resulted in the following:

· an exchange of certain of the Company’s outstanding obligations (namely, the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, a subordinated note payable and a contingent payment liability) for approximately 10% of our common stock, or 7,111,981 common shares, on a fully diluted basis as of January 31, 2017;

· an exchange of certain amendments to the Aly Senior Obligations (namely, a $16.1 million principal reduction, removal of restrictive covenants and extended maturity of payment obligations) for shares of our Series A convertible preferred stock (liquidation preference of $16.1 million or $1,000 per share) which represented approximately 80% of our common stock, or 53,628,842 common shares, on a fully diluted basis as of January 31, 2017; and

· the formation of a new credit agreement with Pelican (consisting of a $5.1 million term loan and $1.0 million revolving credit facility) with an extended maturity date of December 31, 2018.

The Recapitalization had a significant impact to our capital structure and to our consolidated financial statements and there was a significant dilutive effect to those shareholders who held common stock immediately before the transaction was completed.

Troubled Debt Restructuring

Except for the Pelican exchange, each exchange was accounted for as a troubled debt restructuring (“TDR”) since an equity interest in the Company was issued to fully satisfy each debt. A gain on TDR is recognized for the excess of the carrying amount of the debt over the fair value of each equity interest granted. The impact of the Recapitalization includes a “gain on the extinguishment of debt and other liabilities” from the debtors of the subordinated note payable and the contingent payment liability and a “gain on the extinguishment of redeemable preferred stock” from the holders of Aly Operating redeemable preferred stock and Aly Centrifuge redeemable preferred stock. The share price of common stock as of January 31, 2017 of $0.12 per share was used as the basis of fair value for each equity interest granted.

The impact of the TDR is as follows:

Extinguishment of Debt and Other Liabilities. The exchange of the subordinated note payable and the contingent payment liability for common stock resulted in a gain of $2.4 million, or $0.36 per share, on the consolidated statement of operations for the year ended December 31, 2017 and was recorded as an “Issuance of common stock in exchange for the extinguishment of debt and other liabilities” on the consolidated statement of changes in stockholders’ equity (deficit) for the year ended December 31, 2017. The table below summarizes stock issued and the resulting gain for each extinguishment:

Gain on the Extinguishment of Debt and Other Liabilities
Debt and Other Obligations Extinguished	Common Stock Issued		Gain Included in Other Expense (Income)
Subordinated debt and accrued interest of $1.5 million and $0.3 million, respectively		1,200,000	$1.6 million
Contingent payment liability of $0.8 million		457,494	$0.8 million

Extinguishment of Redeemable Preferred Stock. The exchange of the Aly Operating redeemable preferred stock and the Aly Centrifuge redeemable preferred stock for common stock resulted in a gain of $14.4 million, or $2.14 per share, which was recorded as an “Issuance of common stock in exchange for the extinguishment of redeemable preferred stock” on the consolidated statement of changes in stockholders’ equity (deficit) for the year ended December 31, 2017. The table below summarizes stock issued and the resulting gain for each extinguishment:

Gain on the Extinguishment of Redeemable Preferred Stock
Redeemable Preferred Stock and Other Obligations	Common Stock Issued		Gain Included in Additional Paid-in-Capital
Aly Centifuge preferred and accrued dividends of $8.9 million and $1.2 million, respectively		3,039,516	$9.8 million
Aly Operating preferred and accrued dividends of $4.0 million and $0.9 million, respectively		2,414,971	$4.6 million

F-10

On January 31, 2017, we issued 7,111,981 shares of our common stock to the former holders of the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, the subordinated note payable, and the liability for contingent payment in exchange for the above-mentioned extinguishments in connection with our TDR.

Credit Facility Restructuring

Given the nature of the related party relationship between the Company and Pelican, the extinguishment of our Aly Senior Obligations was accounted for as a capital transaction whereby we issued Series A convertible preferred stock in exchange for the extinguishment of our Aly Senior Obligations and the issuance of a new credit facility. The exchange resulted in a gain on the extinguishment of debt and other liabilities calculated as the amount above the estimated fair value of the equity interest granted. The share price of common stock as of January 31, 2017 of $0.12 per share was used as the basis of fair value for the equity interest granted.

The impact of the exchange and extinguishment of our Aly Senior Obligations is as follows:

Old Credit Facility. The partial extinguishment and exchange of our Aly Senior Obligations ($16.1 million principal reduction) for shares of our Series A convertible preferred stock resulted in a gain of $9.7 million which is recorded as an “Issuance of preferred shares in exchange for the extinguishment of debt and other liabilities – related party” on the consolidated statement of changes in stockholders’ equity (deficit) for the year ended December 31, 2017. The components of the Aly Senior Obligations were as follows (in thousands):

Aly Senior Obligations as of January 31, 2017
Debt and Other Obligations Extinguished	Amount
Credit facility	$	17,772
Accrued fees and interest on credit facility		1,414
Capital lease obligations		1,930
Accrued interest on capital lease obligations		26
Line of credit and accrued interest - related party		500
Total	$	21,642

New Credit Facility. On January 31, 2017, we completed the full extinguishment of our old credit facility and we entered into a new credit agreement with Pelican which consisted of a $5.1 million term loan and $1.0 million revolving credit facility ($5.1 million and $0.5 million outstanding as of January 31, 2017). See “Note 8 – Long-Term Debt – Related Party” for further discussion.

On January 31, 2017, we issued 16,092 shares of our Series A convertible preferred stock to Pelican in exchange for the above mentioned $16.1 million reduction of the Aly Senior Obligations.

Professional Fees - Recapitalization

During 2016, we recorded $0.2 million of expenses for professionals engaged by our former lender, Wells Fargo, whom the Company was required to pay under the terms of our credit facility. On December 12, 2016, these fees were assumed by Pelican and, on January 31, 2017, included within the Aly Senior Obligations refinanced in connection with the Recapitalization. These fees are included in “Accrued interest and other – related party” on our consolidated balance sheet as of December 31, 2016.

NOTE 4 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the amounts of revenue and expenses recognized during the reporting period. Areas where critical accounting estimates are made by management include:

· Allowance for doubtful accounts,

· Depreciation and amortization of property and equipment and intangible and other assets,

· Impairment of property and equipment, intangible and other assets, and goodwill,

· Litigation settlement accrual,

· Contingent payment liability,

· Stock-based compensation, and

· Income taxes.

The Company analyzes its estimates based on historical experience and various other indicative assumptions that it believes to be reasonable under the circumstances. Under different assumptions or conditions, the actual results could differ, possibly materially from those previously estimated. Many of the conditions impacting these assumptions are outside of the Company’s control.

 

F-11

Revenue Recognition

We generate revenue primarily from renting equipment and, in connection with certain of our solids control operations, providing personnel to operate such equipment at per-day rates. In addition, we may provide equipment transportation and rig-up/rig-down services to our customers at flat rates per job or at an hourly rate. Revenue is recognized when it is realized or realizable and earned and when collectability is reasonably assured.

We present our revenue net of any sales tax charged to our customers which is required to be remitted to local or state governmental taxing authorities.

Reimbursements for the purchase of supplies, equipment, personnel services, shipping and other services provided at the request of our customers are recorded as revenue when incurred. The related costs are recorded as operating expenses when incurred.

Major Customers and Concentration of Credit Risk

The Company’s assets that are potentially exposed to concentrations of credit risk consist primarily of cash and trade receivables.

The financial institutions in which the Company transacts business are large, investment grade financial institutions which are “well capitalized” under applicable regulatory capital adequacy guidelines, thereby minimizing its exposure to credit risks for deposits in excess of federally insured amounts.

The majority of the Company’s trade receivables are due from major and independent oil and gas companies operating within the U.S. land-based oil and gas industry. The industry has been, and will likely continue to be, characterized by significant volatility which may negatively impact our customers from time-to-time. The Company evaluates the financial strength of its customers quarterly and provides allowances for probable credit losses when deemed necessary.

During the year ended December 31, 2017, the Company derived revenue from over 40 customers of which the top three customers generated approximately $8.2 million, or 56.0%, of our revenue. Amounts due from these customers included in accounts receivable and unbilled receivables as of December 31, 2017 are approximately $1.8 million.

During the year ended December 31, 2016, the Company derived revenue from over 50 customers of which the top three customers generated approximately $4.8 million, or 43.5%, of our revenue. Amounts due from these customers included in accounts receivable and unbilled receivables as of December 31, 2016 are approximately $0.6 million.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash is defined as cash on-hand and balances in operating bank accounts. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of December 31, 2017 and 2016, we have no cash equivalents. Restricted cash serves as collateral for the Company’s corporate credit card program.

Accounts Receivable, Unbilled Receivables and Allowance for Doubtful Accounts

Accounts receivable and unbilled receivables are stated at the amount which has been or will be billed to customers. Once billed, customer payments are typically due within 30 days. We provide an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information, existing economic conditions and specific identification. Provisions for doubtful accounts are recorded when it is deemed probable that the customer will not make the required payments. As of December 31, 2017 and 2016, the allowance for doubtful accounts was approximately $73,000 and $0.6 million, respectively.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization. The cost of property and equipment currently in service less its residual value is depreciated, including property and equipment financed by capital leases, on a straight-line basis over the estimated useful lives of the related assets. A residual value of 20% is used for asset types deemed to have a salvage value. Typically, these assets contain a large amount of iron in their construction. Leasehold improvements are amortized on a straight-line basis over the shorter of their economic lives or the lease term.

 

F-12

Estimated useful lives of property and equipment are as follows:

Machinery and equipment	1 - 20 years
Vehicles, trucks and trailers	5 - 7 years
Office furniture, fixtures and equipment	3 - 7 years
Leasehold improvements	Remaining lease term
Buildings	20 years

 

When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved and the impact of any resulting gain or loss is recognized within “Reduction in value of assets” on the consolidated statement of operations for the period. Maintenance and repairs, which do not improve or extend the life of the related assets, are charged to expense when incurred. Refurbishments are capitalized when the value of the equipment is enhanced for an extended period.

Reduction in Value of Long-Lived Assets

Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of such assets to their fair value calculated, in part, by the estimated undiscounted future cash flows expected to be generated by the assets. Cash flow estimates are based upon, among other things, historical results adjusted to reflect the best estimate of future market rates, utilization levels, and operating performance. Estimates of cash flows may differ from actual cash flows due to, among other things, changes in economic conditions or changes in an asset’s operating performance. The Company’s assets are grouped by reporting unit for the impairment testing, which represents the lowest level of identifiable cash flows. If the asset grouping’s fair value is less than the carrying amount of those items, impairment losses are recorded in the amount by which the carrying amount of such assets exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less estimated costs to sell. The net carrying value of assets not fully recoverable is reduced to fair value. The estimate of fair value represents the Company’s best estimate based on industry trends and reference to market transactions and is subject to variability. The oil and gas industry is cyclical and estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows, can have a significant impact on the carrying values of these assets and, in periods of prolonged down cycles, may result in impairment charges.

Management determined that there were no events or changes in circumstances during the year ended December 31, 2017 indicating that the carrying amount of long-lived assets may not have been recoverable and, accordingly, there were no impairments recorded.

Due to the steep downturn in the oilfield services industry which began in late 2014 and continued throughout much of 2016, we evaluated recoverability quarterly during the year ended December 31, 2016. For each quarter, our estimated undiscounted net cash flow exceeded the carrying amount of the assets, and, as such, no impairment losses were recognized; however, in the quarters ended June 30 and September 30, 2016, we recognized an impairment in connection with our discontinued operations and an impairment in connection with the Recapitalization, respectively. See “Note 5 – Reduction in Value of Assets and Other Charges” and “Note 16 – Discontinued Operations” for a further discussion of the reduction in value recorded during 2016.

Intangible Assets

The Company’s intangible assets with finite lives include customer relationships, trade names, non-compete agreements, and various other contractual agreements. The value of customer relationships is estimated using the income approach, specifically the excess earnings method. The excess earnings method consists of discounting to present value the projected cash flows attributable to the customer relationships, with consideration given to customer contract renewals, the importance or lack thereof of existing customer relationships to the Company’s business plan, income taxes and required rates of return. The value of trade names is estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty in order to exploit the related benefits of this intangible asset. For contractual agreements, the specific terms of the agreements were utilized to determine the fair value attributable to the arrangement.

The Company amortizes intangible assets based upon a straight-line basis because the pattern of economic benefits consumption cannot otherwise be reliably estimated. Estimated useful lives of intangible assets are as follows:

Customer relationships	10 years
Tradename	10 years
Non-compete	4 - 5 years

F-13

Intangible assets subject to amortization are reviewed for impairment and are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For instance, a significant change in business climate or a loss of a significant customer, among other things, may trigger the need for an impairment test of intangible assets. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. Management determined that there were no events or changes in circumstances during the year ended December 31, 2017 indicating that the carrying amount of intangibles may not have been recoverable and, accordingly, there were no reductions in value of intangibles recorded. See “Note 5 – Reduction in Value of Assets and Other Charges” and “Note 16 – Discontinued Operations” for a further discussion of the reduction in value recorded during the year ended December 31, 2016.

Goodwill

The carrying amount of goodwill is tested annually for impairment in the fourth quarter and whenever events or circumstances indicate its carrying value may not be recoverable. Impairment testing is conducted at the reporting unit level.

Our detailed impairment testing involves comparing the fair value of our reporting units to their respective carrying values, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale. If the fair value exceeds carrying value, then it is concluded that no goodwill impairment has occurred. If the carrying value exceeds the fair value, a second step is required to measure possible goodwill impairment loss. The second step includes valuing our tangible and intangible assets and liabilities as if we had been acquired in a business combination. Then, the implied fair value of our goodwill is compared to the carrying value of that goodwill. If the carrying value of our goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value.

Our detailed impairment analysis employs the use of discounted cash flow models. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes on our business. Critical assumptions include projected revenue growth, gross profit margins, selling, general and administrative expenses, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. We use the capital asset pricing model to estimate the discount rates used in the discounted cash flow models.

As of January 1, 2016, we had no goodwill associated with continuing operations and $0.3 million of goodwill associated with discontinued operations. On October 26, 2016, in connection with the Recapitalization and the abandonment of the Evolution assets, we reduced the remaining value for the goodwill associated with these discontinued operations to zero. See “Note 16 – Discontinued Operations” for further discussion.

The Company did not have any goodwill recorded as of December 31, 2017 and 2016.

Income Taxes

We account for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In assessing the likelihood and extent that deferred tax assets will be realized, consideration is given to projected future taxable income and tax planning strategies. A valuation allowance is recorded when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.

We recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. Previously recognized tax positions are reversed in the first period in which it is no longer more-likely-than-not that the tax position would be sustained upon examination.

Income tax related interest and penalties, if applicable, are recorded as a component of the provision for income tax expense. However, there were no amounts recognized relating to interest and penalties in the consolidated statements of operations for the years ended December 31, 2017 and 2016. We had no uncertain tax positions as of December 31, 2017 and 2016.

 

F-14

Contingent Payment Liability

The aggregate consideration for the United Acquisition of $24.5 million included contingent consideration of an estimated fair value on the acquisition date of $3.5 million. The contingent consideration consisted of up to three future cash payments to the sellers in an amount equal to 5% of the gross revenue of the business acquired for each of the twelve-month periods ending on March 31, 2015, 2016, and 2017; provided, however, that the aggregate consideration would not exceed $5.0 million.

On May 31, 2015, we made the first cash payment of $0.9 million, or 5% of the gross revenue of the business acquired for the twelve-month period ended March 31, 2015. We did not make the second cash payment of $0.7 million, or 5% of gross revenue of the business acquired for the twelve-month period ended March 31, 2016, which was due on May 31, 2016.

On January 31, 2017, in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”), the sellers converted both (i) the second payment obligation of $0.7 million, which was past due, and (ii) the estimated third payment of $0.1 million, or 5% of estimated gross revenue of the business for the twelve-month period ended March 31, 2017, into 457,494 shares of common stock. This conversion was accounted for as a troubled debt restructuring (see further discussion in “Note 3 - Recapitalization”). There are no further payments due.

Fair Value Measurements

Prior to its conversion into common stock in connection with the Recapitalization, we measured the fair value of our contingent payment liability on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. We are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three distinct levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

The following table provides a roll forward of the fair value of our contingent payment liability which includes Level 3 measurements (in thousands):

	For the Years Ended December 31,
	2017			2016
Fair value, beginning of period	$	810		$	1,182
Changes in fair value		-			(372	)
Extinguishment of liability in connection with the Recapitalization		(810	)		-
Fair value, end of period	$	-		$	810

As of December 31, 2017, there was no contingent payment liability recorded. See “Note 2 – Recent Developments” and “Note 3 – Recapitalization” for further details on the conversion of the contingent payment liability to common stock on January 31, 2017 in connection with the Recapitalization.

  

F-15

As of December 31, 2016, the fair value of the contingent payment liability represents the sum of (i) the known required payments for periods which had then ended and (ii) the present value of projected required payments for future periods based upon our internal model and projections. Due to the industry downturn which began in late 2014 and continued through much of 2016, both actual and projected utilization levels and pricing were significantly lower than the peaks experienced in 2014. Consequently, during the year ended December 31, 2016, we recorded a decrease to the fair value of the contingent payment liability as both the actual revenue and the projected revenue on which the contingent payments were based had declined significantly. The change in fair value is included in selling, general, and administrative expenses on our consolidated statement of operations for the year ended December 31, 2016. 

As of December 31, 2016, the fair value of the contingent payment liability included (i) the past due payment for the year ended March 31, 2016, (ii) the calculated payment for the nine months ended December 31, 2016, and (iii) the fair value of the liability for the estimated additional cash payment due for the three months ended March 31, 2017.

Stock-Based Compensation

From time-to-time, we issue time-based vesting and performance-based vesting stock options, time-based vesting and performance-based vesting restricted stock units, and restricted stock awards to our employees as part of those employees’ compensation and as a retention tool for non-employee directors. We calculate the fair value of the awards on the grant date and amortize that fair value to compensation expense ratably over the vesting period of the award, net of estimated and actual forfeitures. The grant date fair value of our restricted stock awards and restricted stock units is determined using our stock price on the grant date. The fair value of our stock option awards is estimated using a Black-Scholes fair value model. The valuation of our stock options requires us to estimate the expected term of the award, which we estimate using the simplified method as we do not have sufficient historical exercise information. Additionally, the valuation of our stock option awards is also dependent on historical stock price volatility. In view of our insignificant trading volume, volatility is calculated based on historical stock price volatility of our peer group with a lookback period equivalent to the expected term of the award. Fair value of performance-based stock options and restricted stock units is estimated in the same manner as our time-based awards and assumes that performance goals will be achieved and the awards will vest. If the performance-based awards do not vest, any previously recognized compensation costs will be reversed. We record stock-based compensation as a component of general and administrative or direct operating expense based on the role of the applicable individual.

During the year ended December 31, 2017, we recorded stock-based compensation expense of $0.6 million. See further discussion in “Note 13 – Stock-Based Compensation”.

There was no stock-based compensation expense recorded during the year ended December 31, 2016.

Earnings per Share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that could have been outstanding assuming the exercise of outstanding stock options and restricted stock or other convertible instruments, as appropriate.

During the years ended December 31, 2017 and 2016, the Company incurred net losses; therefore, the impact of any incremental shares would have been anti-dilutive.

Accounting Standards Recently Adopted

In January 2017, the Financial Accounting Standards Board (FASB) issued accounting standards update (ASU) 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments eliminate Step 2 from the goodwill impairment test. The annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The amendments should be applied on a prospective basis. The new standard is effective for the Company on January 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted the accounting guidance as of January 1, 2017. The newly adopted accounting principle is preferable because it reduces the cost and complexity of evaluating goodwill for impairment. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update). Among other things, this ASU incorporates into the FASB ASC Topic 250, SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on the financial statements of recently issued accounting standards when adopted, and specifically for ASU 2014-09, ASU 2016-02, and ASU 2016-03. If a registrant does not know or cannot reasonably estimate the impact of adoption of the above standards, the SEC staff expects the registrant to make a statement to that effect. Consistent with SAB Topic 11.M, the SEC staff also expects the registrant to provide qualitative disclosures to help users assess the significance the adoption will have on the financial statements. Other than our continued assessment of ASU 2014-09 through the date of adoption, the adoption of ASU 2017-03 did not have an impact on our financial statements.

In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. Other than the revised statement of cash flows presentation of restricted cash, the adoption of ASU 2016-18 did not have an impact on our consolidated financial statements.

 

F-16

In March 2016, the FASB Issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company will adopt the accounting guidance as of January 1, 2017. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which eliminates the existing requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet and now requires that all deferred tax assets and liabilities be classified as noncurrent. The ASU is effective for annual periods beginning after December 15, 2016, with early application permitted. We elected to early adopt the provisions of this ASU and classified our deferred tax balances as a non-current liability as of December 31, 2016 and 2015. The adoption has no effect on net income or cash flows.

In September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in the ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments are effective for annual reporting periods beginning after December 15, 2015. The adoption of ASU 2015-16 did not have an impact on our financial condition or results of operations.

In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which adds comments from the Securities and Exchange Commission (SEC) addressing ASU 2015-03, as discussed above, and debt issuance costs related to line-of-credit arrangements. The SEC commented it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We adopted ASU 2015-15 in connection with our adoption of ASU 2015-03 effective January 1, 2016. The adoption of ASU 2015-15 did not have an impact on our financial condition or results of operations.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in the ASU change the balance sheet presentation requirements for debt issuance costs by requiring them to be presented as a direct reduction to the carrying amount of the related debt liability. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. Transitioning to the new guidance requires retrospective application. We implemented the required change to the presentation of our debt issuance costs in the first quarter of fiscal year 2016, as expected such change did not have a material impact to our consolidated financial statements.

In November 2014, the FASB issued ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, which clarifies how to evaluate the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the ASU requires that an entity consider all relevant terms and features in evaluating the nature of the host contract and clarifies that the nature of the host contract depends upon the economic characteristics and the risks of the entire hybrid financial instrument. An entity should assess the substance of the relevant terms and features, including the relative strength of the debt-like or equity-like terms and features given the facts and circumstances, when considering how to weight those terms and features. The adoption of ASU 2014-16 did not have an impact on our financial condition or results of operations.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which defines management’s responsibility to evaluate whether there is substantial doubt about the company’s ability to continue as a going concern and provides guidance on the related footnote disclosure. Management should evaluate whether there are conditions or events that raise substantial doubt about the company’s ability to continue as a going concern within one year after the date the annual or interim financial statements are issued. We adopted these provisions in the first quarter of 2016 and will provide such disclosures as required if there are conditions and events that raise substantial doubt about our ability to continue as a going concern, as expected such change did not have a material impact to our consolidated financial statements.

 

F-17

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force). The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. The adoption of ASU 2014-12 did not have an impact on our financial condition or results of operations.

Accounting Standards Related to Revenue from Contracts with Customers (Topic 606)

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace most existing revenue recognition guidance in GAAP and align GAAP more closely with International Financial Reporting Standards (IFRS). The objective of this ASU is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The core principle is to 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.

Entities must apply a five-step process to (1) identify the contract with a customer; (2) identify the performance obligations 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. ASU 2014-09 also mandates disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The disclosure requirements include qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 must be adopted using either a full retrospective method or a modified retrospective method.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarified the implementation guidance regarding performance obligations and licensing arrangements.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients, which clarified guidance on assessing collectability, presenting sales tax, measuring noncash consideration, and certain transition matters.

In December 2016, the FASB issued ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606)—Technical Corrections and Improvements, which provided disclosure relief, and clarified the scope and application of the new revenue standard and related cost guidance. The new guidance for Topic 606 will be effective for the annual reporting period beginning after December 15, 2017, including interim periods within that reporting period. Early adoption would be permitted for annual reporting periods beginning after December 15, 2016.

The Company has completed its assessment in determining the impacts the new standard will have on its various revenue streams. The Company’s approach included performing a detailed review of key contracts representative of the different businesses and comparing historical accounting policies and practices to the new accounting guidance. The Company does not incur significant contract costs. The Company’s services and rental contracts are primarily short-term in nature, and therefore, based on management’s assessment, the Company has determined there will be no impact on its consolidated financial statements from the adoption of Topic 606, other than the additional disclosure requirements. Remaining implementation matters include establishing new policies, procedures, and controls. Any adoption date adjustments will not materially impact the financial statements. The Company adopted this standard on January 1, 2018 utilizing the modified retrospective method and has elected to apply the revenue standard only to contracts that are not completed as of the date of initial application.

 

F-18

Accounting Standards Not Yet Adopted

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The guidance in this ASU applies to all entities that change the terms or conditions of a share-based payment award. The amendments provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to the modification of the terms and conditions of a share-based payment award. The amendments in ASU 2017-09 include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The new standard is effective for the Company beginning on January 1, 2018 and should be applied prospectively to awards modified on or after the adoption date. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide a more robust framework to use in determining when a set of assets and activities is a business. The new standard is effective for the Company beginning on January 1, 2018. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements, which makes minor corrections and clarifications that affect a wide variety of topics in the Accounting Standards Codification, including an amendment to ASC Topic 820, Fair Value Measurement, which clarifies the difference between a valuation approach and a valuation technique when applying the guidance of that Topic. The amendment also requires an entity to disclose when there has been a change in either or both a valuation approach and/or a valuation technique. The transition guidance for the ASC Topic 820 amendment must be applied prospectively because it could potentially involve the use of hindsight that includes fair value measurements. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Early application is permitted for any fiscal year or interim period for which the entity’s financial statements have not yet been issued. We are currently evaluating the impact this ASU will have on the financial position or financial statement disclosures.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The guidance in this ASU requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. The new standard is effective for the Company beginning on January 1, 2018. The Company is evaluating the effect that ASU 2016-16 will have on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-15)”, that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the effect of ASU 2016-15 on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will replace the existing lease guidance. The standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Additional disclosure requirements include qualitative disclosures along with specific quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for the Company for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.

 

F-19

NOTE 5 — REDUCTION IN VALUE OF ASSETS AND OTHER CHARGES

During 2017 and 2016, the Company recorded approximately $58,000 and $17.7 million, respectively, in expense related to reduction in value of assets. See also “Note 16 – Discontinued Operations” for a discussion of the reduction in value of assets associated with discontinued operations.

The components of reduction in value of assets are as follows (in thousands):

	For the Years Ended December 31,
	2017		2016
Reduction in value of property and equipment:
Impairment in connection with Recapitalization	$	-	$	15,562
Loss on disposal of assets		58		1,087
Reduction in value of intangibles		-		1,087
Total reduction in value of assets	$	58	$	17,736

Impairment of Property and Equipment – Recapitalization 

During 2016, the Company recorded an impairment charge of $15.6 million as part of the Recapitalization in which idle and underutilized equipment with a net book value of $18.2 million was transferred to Tiger as an inducement to provide bridge financing. Among other things, the Company received an extended forbearance agreement and a reduction in debt of $2.0 million as consideration for the sale of these assets (see below “Debt Modification Fee – Recapitalization” for further discussion).

Loss on Disposal of Assets

During the year ended December 31, 2017, the Company recorded a loss on the disposal of property and equipment of approximately $58,000 related primarily to the return of excess vehicles to the lessor in exchange for a release from the associated capital lease obligation and the write-off of leasehold improvements associated with the early termination of certain facility leases.

During 2016, the Company recorded a loss on the disposal of property and equipment of $1.1 million when the Company sold idle and underutilized equipment and vehicles with a net book value of $1.9 million for cash proceeds of approximately $0.8 million. Approximately $0.5 million of proceeds were used to fund working capital needs created by the significant deterioration in the industry throughout 2015 and approximately $0.3 million of proceeds were used to pay down outstanding balances owed to Wells Fargo under the terms of our credit facility. Due to the depressed market for oilfield services, these assets were sold for proceeds significantly less than the net book value resulting in higher losses than normal.

Reduction in Value of Intangibles

During 2016, the Company recorded a $1.1 million reduction in value of intangibles which consisted of a $0.5 million reduction in an intangible associated with a non-compete which management determined was non-enforceable and a $0.6 million reduction in an intangible associated with a supply agreement which had no value subsequent to the liquidation of the supplier under bankruptcy proceedings. As of December 31, 2016, these intangibles were recorded with no value on the consolidated balance sheet.

During the years ended December 31, 2017 and 2016, the Company incurred certain charges related to the downturn in the industry and the Recapitalization. These charges are summarized below (in thousands):

	For the Years Ended December 31,
	2017			2016
Debt modification fee - Recapitalization	$	-		$	629
Debt modification fee - related party		320			-
Professional fees - Recapitalization		138			472
Severance - operational restructuring		(221	)		456
	$	237		$	1,557

F-20

Debt Modification Fee – Recapitalization

In October 2016, in connection with our transfer of property and equipment to Tiger, we received certain modifications to our credit facility, including a $2.0 million reduction in our principal outstanding on the Aly Senior Obligations and an extension of the forbearance period to December 9, 2016. We recorded a debt modification fee of $0.6 million as the property and equipment transferred to Tiger had a fair value exceeding the reduction of our obligations. See “Note 2 – Recent Developments” and “Note 3 – Recapitalization” for further details.

Debt Modification Fee – Related Party

On May 23, 2017, in consideration of the increase in the revolving credit facility and the extension of the maturity date of the credit facility with Pelican to December 31, 2019, the Company agreed to issue Pelican an amendment fee of 1,200 shares of our Series A convertible preferred stock. Given the nature of the related party relationship between the Company and Pelican, a debt modification fee – related party of $0.3 million was recorded to interest expense and was equivalent to the estimated fair value of the equity interest granted. The share price of our common stock as of May 23, 2017 of $0.08 per share was used as the basis of fair value for the equity interest granted.

Professional Fees - Recapitalization

During the years ended December 31, 2017 and 2016, the Company incurred professional fees related to the Recapitalization of $0.1 million and $0.5 million, respectively, which are included in selling, general, and administrative expenses on the consolidated statements of operations.

The fees in 2016 were incurred both in connection with forbearance agreements and other negotiations with the Company’s former lender, Wells Fargo, and in connection with the Recapitalization. The charges include $0.2 million of expenses incurred by the Company for financial advisors that Wells Fargo required the Company to retain and $0.1 million of legal and other professional fees. In addition, the charges in 2016 include $0.2 million of expenses the Company incurred for professionals engaged by Wells Fargo whom the Company was required to pay under the terms of our credit facility. On December 12, 2016, these fees were assumed by Pelican and, on January 31, 2017, these fees were included within the Aly Senior Obligations refinanced in connection with the Recapitalization. These fees are recorded in “Accrued interest and other – related party” on our consolidated balance sheet as of December 31, 2016. See “Note 2 – Recent Developments” and “Note 3 – Recapitalization” for further details.

Severance – Operational Restructuring

During the years ended December 31, 2017 and 2016, the Company recorded a benefit of $0.2 million and an expense of $0.5 million, respectively, related to severance obligations. These severance obligations were primarily a result of decisions to reduce headcount in response to the significant downturn in the industry. Due to our limited liquidity in recent years, we did not make certain required cash severance payments. During the year ended December 31, 2017, we settled certain of the obligations; however, we do not know when or if we will be able to satisfy the remaining outstanding severance claims. As such, the accrued severance liability balance of $0.4 million and $0.7 million as of December 31, 2017 and 2016, respectively, is included in other long-term liabilities on the consolidated balance sheets. The severance liability as of December 31, 2017 and 2016 includes a liability of $0.2 million assumed by Aly Energy related to discontinued operations.

NOTE 6 — LONG-LIVED ASSETS

Property and Equipment

Major classifications of property and equipment are as follows (in thousands):

	As of December 31,
	2017			2016
Machinery and equipment	$	33,024		$	31,541
Vehicles, trucks and trailers		4,288			4,523
Office furniture, fixtures and equipment		560			544
Leasehold improvements		105			203
Buildings		212			212
		38,189			37,023
Less: Accumulated depreciation and amortization		(11,374	)		(8,807	)
		26,815			28,216
Assets not yet placed in service		73			10
Property and equipment, net	$	26,888		$	28,226

Depreciation and amortization expense related to property and equipment for the years ended December 31, 2017 and 2016 was $2.9 million and $3.9 million, respectively.

See “Note 5 – Reduction in Value of Assets and Other Charges” for further discussion on asset disposals during the years ended December 31, 2017 and 2016.

 

F-21

Intangible Assets

Intangible assets consist of the following (in thousands):

	Customer Relationships			Tradename			Non-Compete			Total
As of December 31, 2017:
Cost	$	5,323		$	2,174		$	492		$	7,989
Less: Accumulated amortization		(2,432	)		(966	)		(492	)		(3,890	)
Net book value	$	2,891		$	1,208		$	-		$	4,099
As of December 31, 2016:
Cost	$	5,323		$	2,174		$	492			7,989
Less: Accumulated amortization		(1,900	)		(749	)		(409	)		(3,058	)
Net book value	$	3,423		$	1,425		$	83		$	4,931

Estimated amortization expense for the next five years and thereafter is as follows (in thousands):

For the Year Ending December 31,
2018	$	750
2019		750
2020		750
2021		750
2022		679
Thereafter		420
	$	4,099

Total amortization expense for the years ended December 31, 2017 and 2016 was approximately $0.8 million and $1.4 million, respectively.

See further discussion of reduction in value of intangibles during the year ended December 31, 2016 in “Note 5 – Reduction in Value of Assets and Other Charges” and “Note 16 – Discontinued Operations”.

NOTE 7 — LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

	December 31, 2017				December 31, 2016
	Current		Long-Term		Current		Long-Term
Subordinated note payable	$	-	$	-	$	1,500	$	-
Equipment financing and capital leases		3		-		93		10
Total	$	3	$	-	$	1,593	$	10

Subordinated Note Payable

On August 15, 2014, we completed a bulk equipment purchase for total consideration of $10.3 million of which $2.0 million was in the form of a subordinated note payable (“Subordinated Note Payable”). Prior to the Recapitalization, payments of interest, incurred at 10% per annum, and principal were not required until the maturity date of June 30, 2017. The Subordinated Note Payable was generally subordinated in right of payment to our indebtedness to its lenders.

In connection with the Recapitalization, the Subordinated Note Payable was converted into 1,200,000 common shares of the Company. This conversion was accounted for as a troubled debt restructuring, see further details in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”. As of January 31, 2017, there were no further obligations due under the Subordinated Note Payable.

 

F-22

Equipment Financing and Capital Leases

We finance the purchase of certain vehicles and equipment using long-term equipment loans and using non-cancelable capital leases. Repayment occurs over the term of the loan or lease, typically three to five years, in equal monthly installments which include principal and interest.

Effective June 30, 2016, the Company entered into an amendment for each capital lease outstanding with Wells Fargo Equipment Finance, aggregating $1.9 million, whereby the maturity date was extended by six months and principal payments suspended for a period of six months.

Effective October 26, 2016, our equipment financing and capital leases with Wells Fargo Equipment Finance were included in the Aly Senior Obligations which were acquired by Tiger, then subsequently acquired on December 12, 2016 by Pelican. See further discussion in “Note 2 – Recent Developments”, “Note 3 – Recapitalization” and “Note 8 – Long-term Debt – Related Party”.

In January 2017, in order to reduce our debt service obligations, we returned certain underutilized and idle vehicles under capital leases with a net book value of $0.1 million to the lessor in exchange for the release of all outstanding obligations, aggregating to approximately $0.1 million, resulting in a reduction in value of assets of approximately $38,000.

As of December 31, 2017, we had one remaining capital lease with a balance of approximately $3,000 which was assumed by the continuing operations of the Company in connection with our discontinued operations effective December 31, 2016.

As of December 31, 2017 and December 31, 2016, we had approximately $3,000 and $0.1 million outstanding under equipment financing and capital leases, respectively. As of December 31, 2017, no value was recorded for equipment held under capital lease as the asset under lease was transferred to Tiger in October 2016 in connection with the Recapitalization. As of December 31, 2016, the gross amount of equipment held under capital leases was approximately $0.3 million and the associated accumulated amortization was $0.2 million.

Credit Facility: Term Loan, Delayed Draw Term Loan, and Revolving Credit Facility

Our primary credit facility with Wells Fargo consisted of a term loan, a delayed draw term loan, and a revolving credit facility (“Credit Facility”, as amended). Obligations under the Credit Facility were as follows:

· Term loan – In April 2014, our original principal balance on the term loan was $25.0 million; this loan required principal payments each quarter of $1.3 million.

· Delayed draw term loan – In November 2014, we entered into an amendment to the Credit Facility, primarily to provide for a delayed draw term loan with a maximum availability of $5.0 million, and, as of December 2014, the full $5.0 million had been drawn; beginning in June 2015, this loan required principal payments each quarter of $0.3 million.

· Revolving credit facility – In April 2014, our original availability under the revolving credit facility was $5.0 million; however, after subsequent amendments, our availability was reduced to $1.0 million as of December 31, 2015 and then to zero as of December 31, 2016. As such, there were no outstanding borrowings under this loan as of December 31, 2016.

In October 2015, in conjunction with an amendment to the Credit Facility, our interest rate was fixed at 5.25%. Beginning in July 2016, our rate increased to the default rate of 7.25% in connection with further amendments to the Credit Facility and related forbearance agreements.

The obligations under the Credit Facility were guaranteed by all of our subsidiaries and secured by substantially all of our assets. The credit agreement contained customary events of default and covenants including restrictions on our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, grant liens and sell assets.

Due to the significant downturn in the oilfield services industry throughout 2015, as of January 1, 2016, we were not in compliance with certain financial covenants set forth in our Credit Facility due to our poor financial results.

On March 31, 2016, we completed the execution and delivery of a forbearance agreement and amendment to the Credit Facility. Among other provisions, the lenders agreed to forbear from exercising their remedies under the Credit Facility until the earlier of July 10, 2016 or the date on which forbearance was terminated due to specified events, including (i) the occurrence of other defaults under the Credit Facility, (ii) our failure to hire an independent financial advisor prior to April 10, 2016 or (iii) our failure to present a detailed plan for asset sales or equity capital acceptable to the lenders yielding net cash proceeds to us of at least $2.5 million by May 25, 2016. In conjunction with agreeing to forbear from exercising their remedies under the Credit Facility, the lenders reduced the revolving credit portion of the Credit Facility to zero thereby eliminating our ability to borrow additional funds under the Credit Facility.

 

F-23

On May 13, 2016, we further amended the Credit Facility and the forbearance agreement related to such facility to increase our basket of permitted asset sales to $0.6 million in any calendar year provided that any proceeds from permitted asset sales be deposited in a blocked deposit account with Wells Fargo. We also acknowledged that we were unable to comply with certain financial covenants as of March 31, 2016.

On August 5, 2016, we entered into a new agreement with Wells Fargo, the Limited Forbearance Agreement, in which Wells Fargo agreed to forbear from exercising their remedies under the credit agreement until August 31, 2016, conditioned upon the following, among other items: (i) hiring a Chief Restructuring Officer (“CRO”) on terms acceptable to the lender; (ii) having the CRO provide an initial cash forecast budget prior to August 10, 2016 and weekly updates thereafter; (iii) not incurring a variance of more than 10% from the cash flow budgets; and, (iv) paying accrued interest monthly effective July 21, 2016 at the default rate specified in the Credit Facility. As mandated, effective August 5, 2016, our board selected Chris Quinn to serve as CRO of the Company. On October 5, 2016, Wells Fargo extended the forbearance period until October 19, 2016.

On October 26, 2016, in connection with the Recapitalization, the Aly Senior Obligations, which included the Credit Facility and the outstanding equipment financing and capital leases in favor of Wells Fargo and Well Fargo Equipment Finance, respectively, were acquired by Tiger. Simultaneously, we entered into the Third Limited Forbearance Agreement which extended the forbearance period to December 9, 2016 and reduced the Aly Senior Obligations in the amount of $2.0 million, conditioned upon the following, among other items: (i) Tiger entering into an assignment agreement with Pelican; (ii) Pelican providing $500,000 of unsecured working capital financing to the Company pending the closing; and, (iii) the Company transferring to Tiger certain excess equipment and vehicles which the Company was not utilizing and did not consider as necessary for its operations. The Company recorded a debt modification fee of $0.6 million in connection with the execution of the Third Limited Forbearance Agreement. See “Note 2 – Recent Developments” and “Note 3 – Recapitalization” for further detail.

Effective December 12, 2016, the Aly Senior Obligations were acquired by Pelican. See further discussion in “Note 8 – Long-term Debt – Related Party”.

NOTE 8 — LONG-TERM DEBT – RELATED PARTY

Long-term debt – related party consists of the following (in thousands):

	December 31, 2017				December 31, 2016
	Current		Long-Term		Current		Long-Term
Credit facility
Term loan	$	-	$	5,027	$	13,339	$	-
Revolving credit facility		-		750		-		-
Delayed draw term loan		-		575		4,433		-
Line of credit - related party		-		-		494		-
Equipment financing and capital leases		-		-		614		1,315
Total	$	-	$	6,352	$	18,880	$	1,315

Line of Credit – Related Party

On October 26, 2016, we entered into an agreement with Tiger and Pelican, in conjunction with the Recapitalization, requiring Pelican to provide a working capital line of credit of $0.5 million. Borrowings under the line accrued interest at a rate of 5% per annum. The line was unsecured and had a maturity date of January 31, 2017.

As of December 31, 2017, there was no outstanding balance under the line. The outstanding balance of $0.5 million as of January 31, 2017 was aggregated with the Aly Senior Obligations and subsequently exchanged into a new credit facility with Pelican in connection with the Recapitalization (see “Note 3 – Recapitalization for further detail). As of December 31, 2016, there was $0.5 million outstanding under the line and no further availability to borrow under the line.

 

F-24

Credit Facility – Related Party: Term Loan, Delayed Draw Term Loan, and Revolving Credit Facility

Effective October 26, 2016, our Credit Facility with Wells Fargo was included in the Aly Senior Obligations which were acquired by Tiger and then subsequently acquired on December 12, 2016 by Pelican. During this time, interest and ticking fees continued to accrue and there were no modifications to the components of the Credit Facility as a result of these transactions; however, a Fourth Limited Forbearance Agreement was executed with Pelican. The agreement extended the forbearance period to January 31, 2017, conditioned upon the Company using its best efforts to consummate a recapitalization plan, satisfactory to Pelican, that would, at a minimum, result in the conversion of all outstanding Aly Operating redeemable preferred stock and associated accrued dividends, all outstanding Aly Centrifuge redeemable preferred stock and associated accrued dividends, the subordinated note payable and associated accrued interest, and the contingent payment liability into common stock on or prior to January 31, 2017.

Effective January 31, 2017, the Recapitalization was completed, and the Credit Facility was amended in its entirety. The amended facility consisted of a term loan of $5.1 million and a revolving credit facility of up to $1.0 million (“Pelican Credit Facility”). Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables where eligible receivables are defined as all receivables which have been billed to customers and are less than 90 days old.

Borrowings under the Pelican Credit Facility are subject to monthly interest payments at an annual base rate of the six-month LIBOR rate on the last day of the calendar month plus a margin of 3.0%. To the extent the Company generates free cash flow, as defined in the credit agreement, during a given calendar year, principal payments of 50% of such free cash flow are due on the earlier of (i) 60 days after the end of such year or, (ii) the date on which the Company’s independent auditors have completed their audit of the financial statements for such year. Accordingly, there was no principal payment due for the year ended December 31, 2017.

Subsequent to the Recapitalization, we entered into several further amendments to capitalize on improved market conditions and increased activity in our business:

· Amendment No. 1, effective March 1, 2017, provided for a delayed draw term loan to be added to the Pelican Credit Facility for the purpose of financing capital expenditures. The amendment permitted us to draw on the delayed draw term loan from time-to-time up until December 31, 2018 in order to fund up to 80% of the cost of capital expenditures subject to a $0.5 million limit on aggregate borrowings.

· Amendment No. 2, effective May 23, 2017, increased the maximum revolving credit amount from $1.0 million to $1.8 million and extended the final maturity date of the facility to December 31, 2019. In consideration of the increase in the revolving credit facility and the extension of the final maturity date, we issued Pelican an amendment fee consisting of 1,200 shares of our Series A convertible preferred stock. See further discussion in “Note 12 – Controlling Shareholder and Related Party Transactions”.

· Amendment No. 3, effective June 15, 2017, modified maximum potential borrowings under each of the revolving credit facility and the delayed draw term loan without changing the aggregate available borrowings under the credit facility. The amendment reduced the maximum revolving credit amount from $1.8 million to $1.0 million and increased the maximum delayed draw loan borrowings from $0.5 million to $1.3 million and the amendment also increased permitted draws on the delayed draw loan from 80% of the cost of capital expenditures being funded to 90% of the cost of capital expenditures being funded.

· Amendment No. 4, effective January 22, 2018, provided for a Swing Line to be added to the Pelican Credit Facility without changing the aggregate available borrowings under the credit facility. The amendment provided for a maximum availability of $0.6 million under the new Swing Line and reduced the maximum delayed draw term loan borrowings from $1.3 million to $0.7 million. Amounts drawn on the Swing Loan may be repaid and reborrowed without penalty until June 30, 2018 at which time the Swing Line matures and all outstanding amounts are immediately due and payable. Interest on the Swing Line is charged at the lower of the (i) highest lawful rate or (ii) 7.0% per annum.

The obligations under the Pelican Credit Facility are guaranteed by all of our subsidiaries and secured by substantially all of our assets. The Pelican Credit Facility contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, pay dividends or make other distributions, grant liens and sell assets. The Pelican Credit Facility does not include any financial covenants. We were in full compliance with the credit facility as of December 31, 2017.

As of December 31, 2017, we had the availability to borrow an incremental $0.3 million under the revolving credit facility, and an incremental $0.7 million under the delayed draw term loan.

In January 2018, we borrowed an incremental $0.3 million under the revolving credit facility and the Pelican Credit Facility was amended to include the Swing Line. As of March 31, 2018, we have the availability to borrow an $0.6 million under the Swing Line and, if we have capital expenditures which are eligible to be financed, an incremental $75,000 under the delayed draw term loan to finance 90% of such expenditures.

 

F-25

Equipment Financing and Capital Leases – Related Party

Effective December 12, 2016, Pelican acquired the Aly Senior Obligations which included $1.9 million of outstanding equipment financing and capital leases plus associated accrued interest.

On January 31, 2017, in connection with the Recapitalization, the Aly Senior Obligations, including the equipment financing and capital leases, were refinanced under the Pelican Credit Facility, see “Note 2 – Recent Developments” and “Note 3 – Recapitalization”. Future borrowings required for equipment financing are likely to be funded through the delayed term loan included in the Pelican Credit Facility.

Based on the impact of the Recapitalization on January 31, 2017, coupled with the Company’s current forecasts, cash-on-hand, cash flow from operations and borrowing capacity under the Pelican Credit Facility, the Company expects to have sufficient liquidity and capital resources to meet its obligations for at least the next twelve months; however, our forecasts are based on many factors outside the Company’s control. See further details in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”.

NOTE 9 — INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (“U.S. Tax Reform”) was enacted by the U.S. federal government. The legislation significantly changed U.S. income tax law, by, among other things, lowering the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. In addition, there are many new provisions, including changes to expensing of qualified tangible property and the deductions for executive compensation and interest expense. The Company’s consolidated financial statements for the year ended December 31, 2017 were not impacted by the corporate income tax rate reduction going from 35% to 21% due to our full valuation allowance on net deferred tax assets. This rate reduction required the revaluation of the Company’s deferred tax assets and liabilities as of the U.S. Tax Reform enactment date. The revaluation reflects an assumption that the new federal corporate income tax rate will remain in place for the years in which temporary differences are expected to reverse. The Company estimates that the reduction in the federal tax rate applicable to deferred tax balances will reduce the net deferred tax asset balance, before valuation allowance, by approximately $0.8 million, with a corresponding reduction in the recorded valuation allowance.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”). SAB 118 provides the registrant with up to a one-year period to finalize the accounting for the impacts of U.S. Tax Reform. During the one-year period in which the initial accounting for U.S. Tax Reform impacts is incomplete, a registrant may include a provisional amount when reasonable estimates can be made or continue to apply the prior tax law if a reasonable estimate cannot be made. As discussed above, the Company has estimated the tax provision impacts related to the corporate income tax rate reduction and the impact on its deferred tax assets and liabilities, after corresponding adjustments to the reported valuation allowance. The deferred tax assets and liabilities table below include the adjustments from the revaluation of deferred tax balances to reflect the rate reduction for the year ended December 31, 2017. Before U.S. Tax Reform adjustments, the ending net deferred tax asset would have been $3.2 million compared to the reflected ending net deferred tax asset of $2.4 million as of December 31, 2017. The ultimate impact of remeasuring the deferred tax assets and liabilities may differ from the provisional amounts due to gathering additional information to more precisely compute the amount of tax, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions the Company may take. The Company expects to finalize accounting for the impacts of U.S. Tax Reform when the 2017 U.S. corporate income tax return is filed in 2018.

 

F-26

The provision for income taxes consists of the following (in thousands):

	For the Years Ended December 31,
	2017		2016
Current provision:
Federal	$	-	$	-
State		59		33
Total current provision		59		33
Deferred benefit:
Federal		-		(7,298	)
State		-		(639	)
Total deferred benefit		-		(7,937	)
Provision for income taxes	$	59	$	(7,904	)

F-27

The following table reconciles the statutory tax rates to our effective tax rate:

	For the Years Ended December 31,
	2017			2016
Federal statutory rate		34.00	%		34.00	%
State taxes, net of federal benefit		-5.56	%		1.85	%
Deferred income taxes - Tax Reform Rate Change		-77.90	%		0.00	%
Valuation allowance - Tax Reform Rate Change		77.90	%		0.00	%
Valuation allowance - other		-178.02	%		-8.60	%
Gain on cancellation of debt income - Restructuring		163.55	%		0.00	%
Accrued interest on equity - Restructuring		-25.70	%		0.00	%
Other miscellaneous		-4.61	%		1.46	%
Effective income tax rate		-16.34	%		28.71	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income taxes. Components of our deferred income taxes are as follows (in thousands):

	As of December 31,
	2017			2016
Deferred tax assets:
Allowance for doubtful accounts	$	15		$	191
Net operating loss		6,622			10,024
Start-up costs		9			17
State net operating loss, net of federal benefit		980			604
Accrued compensation		84			220
Charitable contributions and other		9			26
Total deferred tax assets		7,719			11,082
Deferred tax liabilities:
Prepaid assets		82			32
Property and equipment		4,496			7,334
Intangibles		595			1,208
State deferreds, net of federal benefit		160			139
Total deferred tax liabilities		5,333			8,713
Net deferred tax assets (liabilities) before valuation allowance		2,386			2,369
Valuation allowance		(2,386	)		(2,369	)
Net deferred tax liabilities after valuation allowance	$	-		$	-

We have a loss for the year ended December 31, 2017, for federal income tax purposes and in certain state income tax jurisdictions. As of December 31, 2017, we had a gross net operating loss (“NOL”) carryforward for U.S. federal income tax purposes of approximately $31.5 million. This NOL will begin to expire in 2033 if not utilized. We will carryforward the net federal NOL of approximately $6.6 million. We also have state NOL carryforwards that will affect state taxes of approximately $1.2 million as of December 31, 2017. State NOLs begin to expire in 2034. Carryback provisions are not allowed by all states, accordingly the state NOLs also give rise to a deferred tax asset.

 

F-28

The Company’s ability to utilize its NOL carryforwards to offset future taxable income and to reduce U.S. federal income tax liability is subject to certain requirements and restrictions. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. An ownership change generally occurs if one or more shareholders (or groups of shareholders) who are each deemed to own at least 5% of the Company’s stock have aggregate increases in their ownership of such stock of more than 50 percentage points over such stockholders’ lowest ownership percentage during the testing period (generally a rolling three-year period). The Company believes it has not experienced an ownership change in January 2017 as a result of the Recapitalization; however, the Company remains subject to ongoing testing for future ownership changes based on shareholder ownership that may create a restrictive Section 382 limitation on the NOLs in subsequent reporting periods.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has evaluated the available evidence and the likelihood of realizing the benefit of its net deferred tax assets. Management considers cumulative losses and other negative evidence as well as positive evidence such as the scheduled reversal of deferred tax liabilities, future profitability, and tax planning strategies in making this assessment. From its evaluation, the Company has concluded that based on the weight of available evidence, it is not more likely than not to realize the benefit of its deferred tax assets. Therefore, the Company had a valuation allowance of $2.4 million for as of December 31, 2017 and 2016. Should the factors underlying management’s analysis change, future valuation adjustments to net deferred tax assets may be necessary. The benefit from any reversal of the valuation allowance will be charged directly to income tax expense.

We follow accounting guidance under ASC 740-10 Income Taxes related to uncertainty in income tax positions, which clarifies the accounting and disclosure requirements for uncertainty in tax positions. We assessed our filing positions in all significant jurisdictions where we are required to file income tax returns for all open tax years and determined no liability existed or there was no liability for uncertain positions. Our major taxing jurisdictions include the U.S. federal income taxes and the Texas franchise tax. Our federal tax returns remain open for tax years 2012 forward and our state tax returns remain open for tax years 2011 forward. None of our federal or state income tax returns are currently under examination by the Internal Revenue Service or state authorities.

NOTE 10 — COMMITMENTS AND CONTINGENCIES

Litigation

We are subject to certain claims arising in the ordinary course of business. Management does not believe that any claims will have a material adverse effect on our financial position or results of operations.

In 2015, we ceased compensating our employees on a day rate basis in order to ensure full compliance with the Fair Labor Standards Act (“FLSA”). Certain former employees of Aly Centrifuge who were paid a day rate for their work prior to February 2015 alleged that we failed to pay overtime when they worked over 40 hours per week. Certain of these employees pursued legal action against us based on such allegations:

· In February 2015, multiple plaintiffs filed a proposed collective action against us alleging overtime violations under the FLSA. We settled this matter for business purposes with no admission of liability. The settlement amount was fully accrued as of December 31, 2015 and the case was fully paid and dismissed with prejudice, by the end of January 2016.

· In August 2016, several former employees filed a lawsuit against us alleging overtime violations of the FLSA. In May 2017, we settled the matter for business purposes with no admission of liability. The settlement amount was fully accrued as of December 31, 2016 and, as of June 30, 2017, the settlement was fully paid and the case had been dismissed with prejudice.

· We continue to explore settlement options with five prior employees who allege overtime violations of the FLSA. If a settlement is not feasible, we may be required to proceed to arbitration. An estimated settlement amount was fully accrued as of December 31, 2017 and 2016.

The Company entered into certain employment agreements in connection with the acquisition of United and Evolution in 2014 which provided for specified severance obligations of the Company in the event of a termination of employment of the subject employees. The Company also entered into a similar employment agreement in 2014 in connection with the recruitment of an additional employee for the solids control operations. During 2015 and 2016, the employment of these individuals was terminated and the Company did not pay the severance obligations that were contemplated by the employment agreements in the event that the cessation of employment would be determined to have been a termination by the Company “without cause.” During the year ended December 31, 2017, we settled certain of these obligations reducing the recorded liability. As of December 31, 2017 and 2016, the aggregate unpaid severance obligation under these agreements was approximately $0.4 million and $0.7 million, respectively.

 

F-29

Contractual Commitments

We have numerous contractual commitments in the ordinary course of business including debt service requirements and operating leases. We lease land, facilities and equipment from non-affiliates. Certain of these leases extend to 2020.

Operating Leases

We lease certain property and equipment under non-cancelable operating leases. The terms of our operating leases generally range from one to five years. Lease expense under all non-cancelable operating leases totaled approximately $0.2 million and $0.4 million for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, the future minimum lease payments under non-cancelable operating leases were as follows (in thousands):

Year Ending December 31,
2018	$	118
2019		83
2020		25
	$	226

NOTE 11 — REDEEMABLE PREFERRED STOCK

As of December 31, 2017, the Company did not have any redeemable preferred stock outstanding; however, as of December 31, 2016, two of our subsidiaries had redeemable preferred stock outstanding. Aly Operating issued redeemable preferred stock in connection with the acquisition of Austin Chalk (“Aly Operating Redeemable Preferred Stock”) and Aly Centrifuge issued redeemable preferred stock in connection with the United Acquisition (“Aly Centrifuge Redeemable Preferred Stock”).

On January 31, 2017, in connection with the Recapitalization, the Aly Operating Redeemable Preferred Stock, the Aly Centrifuge Redeemable Preferred Stock and all accrued dividends on such stock were converted into 5,454,487 shares of common stock.

Aly Operating Redeemable Preferred Stock

As part of the acquisition of Austin Chalk, Aly Operating agreed to issue up to 4 million shares of Aly Operating Redeemable Preferred Stock, with a par value of $0.01, to the seller, with a fair value and liquidation value of $3.8 million and $4.0 million, respectively. The preferred stock was valued as of the date of acquisition by discounting the sum of (i) the liquidation value at issuance and (ii) the future cumulative accrued dividends as of the date of optional redemption for a lack of marketability.

The Aly Operating Redeemable Preferred Stock was entitled to a cumulative paid-in-kind dividend of 5% per year on its liquidation preference, compounded quarterly. Aly Operating was not required to pay cash dividends.

The following table describes the changes in Aly Operating Redeemable Preferred Stock (in thousands, except for shares) for the years ended December 31, 2017 and 2016:

	Carrying Value of Aly Operating Redeemable Preferred Stock			Number of Outstanding Aly Operating Redeemable Preferred Shares			Liquidation Value of Aly Operating Redeemable Preferred Stock
January 1, 2016	$	4,647			4,000,000		$	4,685
Accrued dividends		239			-			239
Accretion		38			-			-
December 31, 2016		4,924			4,000,000			4,924
Accrued dividends		21			-			21
Exchange for common stock in connection with the Recapitalization		(4,945	)		(4,000,000	)		(4,945	)
December 31, 2017	$	-			-		$	-

The Aly Operating Redeemable Preferred Stock was classified outside of permanent equity in our consolidated balance sheet because the settlement provisions provided the holder the option to require Aly Operating to redeem the Aly Operating Redeemable Preferred Stock at the liquidation price plus any accrued dividends upon a liquidity event, as defined in the agreement, or upon an initial public offering, as defined in the agreement.

On January 31, 2017, the Aly Operating Redeemable Preferred Stock and all accrued dividends were converted into 2,414,971 shares of common stock in connection with the Recapitalization. This conversion was accounted for as a troubled debt restructuring, see further details in “Note 3 – Recapitalization”.

 

F-30

Aly Centrifuge Redeemable Preferred Stock

On April 15, 2014, as part of the United Acquisition, Aly Centrifuge issued 5,000 shares of Aly Centrifuge Redeemable Preferred Stock, with a par value of $0.01, to the sellers in the transaction, with a fair value and liquidation value of $5.1 million and $5.0 million, respectively. The preferred stock was valued as of the date of acquisition by discounting the sum of (i) the value of the preferred stock without a conversion option using the option pricing method and (ii) the value of the conversion option using the Black-Scholes option pricing model for a lack of marketability. In 2015, Aly Centrifuge asserted an indemnification claim of 124 shares against shares that were subject to an eighteen-month holdback for general indemnification purposes pursuant to the purchase agreement.

On August 15, 2014, in connection with a bulk equipment purchase, Aly Centrifuge issued an additional 4,000 shares of Aly Centrifuge Redeemable Preferred Stock, with a par value of $0.01, to the sellers in the transaction, with a fair value and liquidation value of $4.3 million and $4.0 million, respectively. The preferred stock was valued as of the date of the equipment purchase by discounting the sum of (i) the value of the preferred stock without a conversion option using the option pricing method and (ii) the value of the conversion option using the Black-Scholes option pricing model for a lack of marketability.

The Aly Centrifuge Redeemable Preferred Stock was entitled to a cumulative paid-in-kind dividend of 5% per year on its liquidation preference, compounded quarterly. Aly Centrifuge was not required to pay cash dividends.

The following table describes the changes in the Aly Centrifuge Redeemable Preferred Stock (in thousands, except for shares) for the years ended December 31, 2017 and 2016:

	Carrying Value of Aly Centrifuge Redeemable Preferred Stock			Number of Outstanding Aly Centrifuge Redeemable Preferred Shares			Liquidation Value of Aly Centrifuge Redeemable Preferred Stock
January 1, 2016	$	9,755			8,876		$	9,591
Accrued dividends		489			-			489
Accretion		(164	)		-			-
December 31, 2016		10,080			8,876			10,080
Accrued dividends		42			-			42
Exchange for common stock in connection with the Recapitalization		(10,122	)		(8,876	)		(10,122	)
December 31, 2017	$	-			-		$	-

The Aly Centrifuge Redeemable Preferred Stock was classified outside of permanent equity on our consolidated balance sheet because the settlement provisions provided the holder the option to require Aly Centrifuge to redeem the Aly Centrifuge Redeemable Preferred Stock at the liquidation price plus any accrued dividends.

Aly Centrifuge Redeemable Preferred Stock also included a conversion feature; specifically, the right to exchange into shares of our common stock on any date, from time-to-time, at the option of the holder, into the number of shares equal to the quotient of (i) the sum of (A) the liquidation preference plus (B) an amount per share equal to accrued but unpaid dividends not previously added to the liquidation preference on such share of preferred stock, divided by (ii) 1,000, and (iii) multiplied by the exchange rate in effect at such time (“Conversion Feature”). The exchange rate in effect as of December 31, 2016 was 71.4285 or $14.00 per share of our common stock.

On January 31, 2017, the Aly Centrifuge Redeemable Preferred Stock and all accrued dividends were converted into 3,039,516 shares of common stock in connection with the Recapitalization; however, the shares were not converted according to the terms of the Conversion Feature but instead the conversion rate was negotiated independently as a part of the Recapitalization. This conversion was accounted for as a troubled debt restructuring, see further details in “Note 3 – Recapitalization”.

 

F-31

NOTE 12 — CONTROLLING SHAREHOLDER AND RELATED PARTY TRANSACTIONS

From time-to-time, the Company engages in business transactions with its controlling shareholder, Pelican, and other related parties.

Controlling Shareholder – Pelican

On December 12, 2016, Pelican purchased our Aly Senior Obligations from Tiger for $5.1 million as a part of the Recapitalization. Effective January 31, 2017, the Recapitalization was completed and resulted in the following:

· Pelican’s contribution of approximately $16.1 million of the Aly Senior Obligations into shares of Series A convertible preferred stock that represented approximately 80% of our common stock as of January 31, 2017, or 53,628,842 common shares, on a fully diluted basis. The preferred shares carry a liquidation preference of $1,000 per share or $16.1 million upon issuance.

· Amendment of the Company’s credit agreement acquired by Pelican into a new credit agreement (consisting of a $5.1 million term loan and $1.0 million revolving credit arrangement) with an extended maturity date of December 31, 2018.

On January 31, 2017 upon completion of the Recapitalization, Pelican had the power to vote the substantial majority of the Company’s outstanding common stock. As of March 31, 2018, seven of our eight board members, including two of our executive officers, and our chief financial officer hold an ownership interest in Pelican.

On May 23, 2017, in consideration of the increase in the revolving credit facility and the extension of the maturity date of the Pelican Credit Facility to December 31, 2019, the Company agreed to issue Pelican an amendment fee of 1,200 shares of our Series A convertible preferred stock. Given the nature of the related party relationship between the Company and Pelican, a debt modification fee – related party of $0.3 million was recorded to interest expense and was equivalent to the estimated fair value of the equity interest granted. The share price of our common stock as of May 23, 2017 of $0.08 per share was used as the basis of fair value for the equity interest granted. The debt modification fee – related party is recorded on the consolidated statement of operations and is recorded as an “Issuance of preferred shares in exchange for the amendment to credit facility – related party” on the consolidated statement of changes in stockholders’ equity (deficit). See further details in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”.

During the years ended December 31, 2017 and 2016, we recorded interest expense due to Pelican of $0.4 million and $0.1 million, respectively. As of December 31, 2017 and 2016, our consolidated balance sheet includes accrued expenses and interest due to Pelican of approximately $26,000 and $1.3 million, respectively.

Other Related Party Transactions

One of our directors, Tim Pirie, appointed March 3, 2015, was one of the sellers involved with the United Acquisition in April 2014. Although part of the acquisition price was payable in contingent consideration, we did not make any contingent payments during the years ended December 31, 2017 and 2016.

As of December 31, 2016, we estimated the fair value of future contingent payments to be $0.8 million. On January 31, 2017, in connection with the Recapitalization, the aggregate contingent payment liability was converted into 457,494 shares of the Company’s common stock, of which Mr. Pirie controls all of the voting rights to 326,834 shares. See further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”.

As part of the acquisition price of United, the sellers also received Aly Centrifuge Redeemable Preferred Stock. On January 31, 2017, the outstanding Aly Centrifuge Redeemable Preferred Stock and accrued dividends were converted into 3,039,516 shares of the Company’s common stock of which Mr. Pirie controls all of the voting rights to 593,815 shares. See further discussion in “Note 2 – Recent Developments”, “Note 3 – Recapitalization” and “Note 11 – Redeemable Preferred Stock (Aly Centrifuge Redeemable Preferred Stock)”.

NOTE 13 — STOCK-BASED COMPENSATION

As of December 31, 2017 and 2016, we had two stock-based compensation plans with outstanding options. Only one of our plans is currently available to grant incentive stock options, non-qualified stock options and restricted stock to employees and non-employee members of the board of directors.

 

F-32

2017 Stock Option Plan

Effective April 4, 2017, the 2017 Stock Option Plan (the “2017 Plan”) was approved by the board of directors. On May 30, we granted options to purchase approximately 16.9 million shares of common stock under the 2017 Plan which was the maximum amount authorized. The option contract term is 10 years and the exercise price is $0.10. The options vested and became exercisable immediately upon grant. The fair value of the award was estimated using a Black-Scholes fair value model. The valuation of stock options requires us to estimate the expected term of award, which was estimated using the simplified method, as the Company does not have sufficient historical exercise information. Additionally, the valuation of stock option awards is also dependent on historical stock price volatility. In view of our limited trading volume, volatility was calculated based on historical stock price volatility of the Company’s peer group.

Options to purchase 16.9 million common shares under the 2017 Plan were outstanding as of December 31, 2017. These options were granted, vested and became exercisable during the year ended December 31, 2017. As a result, we recorded stock-based compensation of $0.6 million, the full value of the grant of options to purchase common stock, as a component of selling, general and administrative expenses during the year ended December 31, 2017.

Omnibus Incentive Plan

The Omnibus Incentive Plan (the “2013 Plan”) was approved by the board of directors on May 2, 2013. On May 2, 2013, we granted 338,474 common shares under the 2013 Plan, which was the maximum number authorized. On June 5, 2015, a majority of our stockholders approved an amendment to our 2013 Plan to increase the maximum authorized shares to 750,000 common shares.

The option contract term is 10 years and the exercise price is $4.00. The options vest and are exercisable if a “Liquidity Event” occurs and certain conditions are met. A Liquidity Event is defined as an IPO or a change of control, as defined in the plan. Pursuant to the plan, an IPO is defined as an underwritten public offering of shares. If the first Liquidity Event is an IPO, then the options vest and are exercisable immediately if the IPO is effected at a price of $8.00 per share or greater. If the IPO is effected at a price less than $8.00 per share, but the stock price post-IPO reaches $8.00 per share during the six-month period immediately following the IPO, then the options vest and are exercisable. If the IPO is effected at a price less than $8.00 per share and the share price does not reach $8.00 per share prior to the sixth month anniversary of the IPO, the options do not vest and expire. If the first Liquidity Event to occur is a change of control, then the options vest if the change of control takes place at a price of at least $8.00 per share. If such change in control occurs at a price less than $8.00 per share, the options do not vest and expire.

The fair value of each option award granted under the 2013 Plan is estimated on the date of grant using the Monte Carlo simulation method. The same Monte Carlo simulation method is used to determine the derived service period of five years. In addition, expected volatilities have been based on comparable public company data, with consideration given to our limited historical data. We make estimates with respect to employee termination and forfeiture rates of the options within the valuation model. The risk-free rate is based on the approximate U.S. Treasury yield rate in effect at the time of grant. For options granted prior to the Share Exchange, the calculation of our stock price involved the use of different valuation techniques, including a combination of an income and/or market approach. Determination of the fair value was a matter of judgment and often involved the use of significant estimates and assumptions.

Options to purchase 234,144 and 242,507 common shares under the Plan were outstanding as of December 31, 2017 and 2016, respectively. The aggregate unrecognized compensation cost related to these non-vested stock option awards was approximately $0.3 million as of December 31, 2017 and 2016. Such amount will be recognized in the future upon occurrence of a Liquidity Event that results in a vesting of the options. No options were granted under the Plan during the years ended December 31, 2017 and 2016. No options were vested as of December 31, 2017 and 2016. During the years ended December 31, 2017 and 2016, forfeited options totaled 8,363 and 87,604, respectively.

NOTE 14 — STOCKHOLDERS’ EQUITY (DEFICIT)

Common Shares

Authorized common shares total 25,000,000 with a par value of $0.001 per share, of which, 13,819,020 and 13,818,795 were issued and outstanding, respectively, as of December 31, 2017 and 6,707,039 and 6,706,814 were issued and outstanding, respectively, as of December 31, 2016. Common stock held in treasury as of December 31, 2017 and 2016 were 225 shares.

On January 31, 2017, we issued 7,111,981 shares of our common stock to the former holders of the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, a subordinated note payable, and a contingent payment liability (an aggregate of six individual entities and persons) in connection with the Recapitalization.

Preferred Shares

Authorized preferred shares, with a par value of $0.001 per share, total 9,980,000 and 10,000,000 as of December 31, 2017 and 2016, respectively, of which, none were issued and outstanding as of December 31, 2017 and 2016.

 

F-33

As a result of the Recapitalization, the Company allocated 20,000 of its authorized shares from available authorized preferred shares to authorized Series A convertible preferred stock. The Series A convertible preferred stock has a par value of $0.001 per share and retains a liquidation preference equal to $1,000 per share. The conversion feature provides that each Series A convertible preferred share shall be convertible into 3,332.64 common shares at any time at the option of the shareholder.

On January 31, 2017, we issued 16,092 shares of Series A convertible preferred stock to Pelican in connection with the Recapitalization. On May 23, 2017, in consideration of the increase in the revolving credit facility and the extension of the final maturity date of the Pelican Credit Facility, the Company issued Pelican an amendment fee of 1,200 shares of our Series A convertible preferred stock. See further discussion in Note 2 – Recent Developments and Note 3 – Recapitalization.

All shares of the Series A convertible preferred stock vote on an “as if converted” basis. As such, Pelican, who owns 100% of the Series A convertible preferred stock, controls the substantial majority of votes of Aly Energy. (See further discussion in “Note 12 – Controlling Shareholder and Related Party Transactions”.)

NOTE 15 — SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flows and non-cash investing and financing activities are as follows (in thousands):

	For the Years Ended December 31,
	2017		2016
Supplemental disclosure of cash flow information:
Cash paid for interest - related party	$	222	$	-
Cash paid for interest		12		973
Cash paid for interest - discontinued operations		-		1
Cash paid for income taxes, net		50		2
Non-cash investing and financing activities:
Extinguishment of debt and other liabilities - related party	$	16,092	$	-
in exchange for Series A convertible preferred stock in connection with the Recapitalization
Extinguishment of redeemable preferred stock		15,036		-
in exchange for common stock in connection with the Recapitalization
Returned equipment to lessor in exchange for release from capital lease obligation		91		-
Paid-in-kind dividends on preferred stock		63		728
Principal payments financed through disposition of assets		23		301
Assumption of Aly Senior Obligations by Pelican in connection with the Recapitalization		-		20,867
Exchange of property and equipment for reduction in debt in connection with Recapitalization		-		2,000
Accretion of preferred stock, net		-		126

NOTE 16 — DISCONTINUED OPERATIONS

On October 26, 2016, we abandoned the operations of Evolution, our directional drilling and MWD business, as a part of the Recapitalization (See further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”). The abandonment of these operations meets the criteria established for recognition as discontinued operations under generally accepted accounting principles in U.S. GAAP.

By December 31, 2016, the abandonment of these operations and sell-off of the remaining assets was completed with approximately $0.2 million of remaining liabilities assumed by the continuing operations of the Company. As such, there is no contribution from discontinued operations on our consolidated financial statements for the year ended December 31, 2017.

 

F-34

The following table summarizes the components of loss from discontinued operations, net of income taxes included in the consolidated statement of operations for the year ended December 31, 2016 (in thousands):

Revenue	$	250
Expenses:
Operating expenses		124
Depreciation and amortization		572
Selling, general and administrative expenses		222
Reduction in value of assets		2,591
Total expenses		3,509
Loss from discontinued operations		(3,259	)
Interest expense, net		1
Loss from discontinued operations before income taxes		(3,260	)
Income tax benefit		(769	)
Loss from discontinued operations, net of income taxes	$	(2,491	)

The reduction in value of assets included in the loss from discontinued operations for the year ended December 31, 2016 consisted of the following (in thousands):

Reduction in value of property and equipment:
Impairment in connection with Recapitalization	$	1,676
Reduction in value of intangibles		651
Impairment of goodwill		264
Total reduction in value of assets	$	2,591

On October 26, 2016, in connection with the Recapitalization and the abandonment of the Evolution assets, we recorded an impairment of property and equipment. The value remaining for intangibles and goodwill associated with these discontinued operations was reduced to zero.

F-35

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under supervision and with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based upon this evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of December 31, 2017, due to a combination of deficiencies in our internal controls over financial reporting (“ICFR”), a material weakness in ICFR existed and our disclosure controls and procedures were not effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that required information to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that required information to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate ICFR, as defined under Exchange Act Rules 13a-15(f) and 14d-14(f). All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial reporting reliability and financial statement preparation and presentation. In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our ICFR as of December 31, 2017. In making the assessment, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework 2013. As defined by Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements” established by the Public Company Accounting Oversight Board (“PCAOB”), a material weakness is a deficiency or combination of deficiencies that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. Based on its assessment, management concluded that, as of December 31, 2017, a combination of deficiencies in ICFR resulted in a material weakness.

Based on our evaluation, management believes this weakness did not have an effect on our financial results and we did not discover any fraud involving management or any other personnel who play a significant role in our disclosure controls and procedures or internal controls over financial reporting. Management believes that the material weakness in ICFR was a direct result of our significant reduction in headcount in 2015 and 2016 in response to the downturn in the industry as well as the overall scale of our operations.

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In connection with the assessment described above, management identified the following combination of control deficiencies that result in a material weakness as of December 31, 2017. These deficiencies are in various stages of remediation as described below:

Material Weakness	Remediation Actions
Lack of an independent audit committee or audit committee financial expert. These factors may be counter to corporate governance practices as defined by the various stock exchanges and may lead to less supervision over management.	During the first quarter of 2018, we strengthened the governance of our board by identifying and bringing on a financial expert that now serves as our independent audit committee chair. See Item 10, for further background on James Hennessy.
Insufficient written policies and procedures, and personnel, for accounting and financial reporting with respect to the requirements and application of U.S. GAAP and SEC disclosure requirements, specifically to address technical accounting around complex transactions.	During the second quarter of 2017, we engaged an accounting consultant with expertise in U.S. GAAP to address technical accounting for complex transactions and financial reporting requirements and disclosures. Management is currently in the process of documenting the new reporting and disclosure controls that were implemented in 2017.
Lack of control over information technology applications and the processing of transactions, specifically segregation of duties and elevated access to our accounting information systems.	Since December 2017, management has hired additional personnel which will enable us to segregate duties more effectively and minimize elevated access privileges. In addition, management is in the process of seeking an experienced external resource to assess the information technology general control environment for purposes of remediation during 2018.
Controls were not designed and in place to ensure all disclosures required were originally addressed in our financial statements or other required reports filed or submitted under the Securities Exchange Act.	During the second quarter of 2017, management implemented a review process with an accounting consultant with expertise in U.S. GAAP to ensure financial statements disclosures are in compliance with the Securities Exchange Act. Effective with the Form 10-Q for the period ended September 30, 2017, the Company has returned to being a timely filer under SEC guidelines.

We will implement further controls as circumstances, cash flows, and working capital permits. Notwithstanding the assessment that there was a material weakness in our ICFR resulting from a combination of deficiencies identified above, we believe that our financial statements contained in our Annual Report on Form 10-K for the period ended December 31, 2017 fairly present our financial position, results of operations, and cash flows for the periods covered in all material respects.

Changes in Internal Control over Financial Reporting

During the period covered by this report, there were no changes in our ICFR, other than the changes implemented as detailed in our remediation plan above, that have materially affected, or are reasonably likely to materially affect, our ICFR.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to an exemption provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) enacted into law in July 2010. The Dodd-Frank Act provides smaller public companies and debt-only issuers with a permanent exemption from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls provided in Section 404(b) of the Sarbanes-Oxley Act. Aly Energy is a smaller reporting company and is eligible for this exemption under the Dodd-Frank Act.

Item 9B. Other Information.

None.

 

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The table below sets forth information about our directors and executive officers:

Name	Age	Position
Munawar H. Hidayatallah	73	Chairman
Shauvik Kundagrami	54	Chief Executive Officer and Vice-Chairman
Greg Price	66	President and Chief Operating Officer and Director
Alya Hidayatallah	42	Chief Financial Officer
James Hennessy	68	Director
Kouros Sariri	62	Director
Saeed M. Sheikh	81	Director
Timothy J. Pirie	51	Director
Zane Tankel	78	Director

Munawar H. “Micki” Hidayatallah has served on the board of directors of the Company since he founded it in July 2012. From July 2012 until May 2017, Mr. Hidayatallah served as the Company’s chief executive officer. Mr. Hidayatallah founded Allis-Chalmers Energy Inc. (“Allis-Chalmers”) in 2001 and served as chairman, chief executive officer and a director of the company until 2011. From 2004 to 2010, Allis-Chalmers’ revenue increased by more than tenfold (from $47.7 million to $659.7 million) and market capitalization increased by over seven times (from $72.2 million to $565.4 million). In February 2011, Archer Ltd. acquired Allis-Chalmers for $1.1 billion. Mr. Hidayatallah is a qualified chartered accountant and served in various capacities at Stewart & Stevenson, LLC, including as chairman of the audit committee from 2011 through 2015 and vice chairman of financial affairs from 2016 through 2017.

Shauvik Kundagrami has served as the Company’s chief executive officer since May 2017 and joined the board of directors in December 2016. Mr. Kundagrami has been an energy investment banker focused on oilfield services for 30 years. Prior to joining the company, he was employed by RBC Capital Markets where he was the co-head of the energy group for over 10 years.

Greg Price was elected as President and chief operating officer of the Company in December 2016 and elected as a director of the Company in January 2018. From April 2016 until such date, he served as a Special Advisor to the CEO of the Company. From 2005 to 2016, he served in various positions, including President of Directional Drilling Services and President of Rental Tubular Division, at Allis-Chalmers Energy Inc., which was acquired in 2011 and subsequently named Archer.

Alya H. Hidayatallah became chief financial officer of the Company in January 2013. Previously, from 2005 through 2012, she served as director of planning and budgeting at Allis-Chalmers, which was acquired in 2011 and subsequently named Archer. From 2000 until 2004, Ms. Hidayatallah was an investment banker in the financial restructuring group of Houlihan Lokey Howard & Zukin. Ms. Hidayatallah graduated summa cum laude with a degree in Business Economics from the University of California at Los Angeles in 1997. Ms. Hidayatallah is Mr. Hidayatallah’s daughter.

Kouros Sariri joined the board of directors in October 2012. Mr. Sariri is the founder and chief executive officer of Frequency Management International (“FMI”) Inc. Founded in 2003, FMI is a manufacturer of high reliability & extreme environment electronic components used in advanced electronic system applications. In 2003, Mr. Sariri also founded Chronos Technology (merged with FMI) which serves in a research and development capacity, conducting advanced research for NASA and DOE in the area of extreme environment electronic solutions and the related manufacturing processes. Innovations envisioned and introduced by Mr. Sariri have been used in commercial satellites and scientific/robotic space missions as well as in numerous oil, gas and geothermal fields worldwide. FMI is a globally recognized brand for the high reliability solutions used successfully in LWD, MWD, wire-line and digital oilfield systems.

Saeed M. Sheikh joined the board of directors in October 2012. He founded Star Trading & Marine, Inc., a transportation and shipping company, in 1973 and has served as its president since inception. In October 2013, Mr. Sheikh was appointed to serve as Ambassador at Large for the Government of Pakistan.

 

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Timothy J. Pirie joined the board of directors in March 2015. Mr. Pirie has over 30 years of oilfield experience. In 2003, he founded United Oilfield International, a Canadian solids control equipment& service provider with operations in Canada, United States and Peru and remained as president and director from its inception until its acquisition by the Company in 2014. He also founded Canadian Nitrogen Services in 2005 and has been president and director since its inception. It is a Canadian based N2 pumping service utilizing membrane technology with operations in Canada, United States and Saudi Arabia. In 2013 was a founder of Decisive Dividend Corporation, a publicly traded Canadian corporation. Mr. Pirie is also a founder and director of a privately held engineering / construction company currently working on E&P projects in the Middle East and a Director of Upland Oil & Gas a Peruvian focused Oil & Gas Exploration Company.

Zane Tankel has served on the board of directors since October 2012. Mr. Tankel is the Chairman and CEO of Apple-Metro, Inc., a multi-unit operator of family restaurants in the New York metropolitan area, which he co-founded in 1994. Mr. Tankel was a director of Morton’s Restaurant Group, Inc., a New York Stock Exchange company, from February 2006 until February 2012, and a director of Allis-Chalmers Energy Inc. from February 2007 until February 2011, as well as the Caribbean Restaurant Group, the San Juan, Puerto Rico based owner/operator of Burger King restaurants in and around the Caribbean. Mr. Tankel is a frequent “on air commentator” regarding the overall economy and the oil sector in particular on television shows such as Varney & Co. with Stuart Varney, Cavuto Coast to Coast with Neil Cavuto, Making Money with Charles Payne, After the Bell with David Asman. Mr. Tankel is a member of various non-profit organizations, such as the Federal Law Enforcement Foundation, and has served as Chairman of NY Chapter of Young Presidents’ Organization. In addition, Mr. Tankel is a past recipient of the Entrepreneur of the Year award from Ernst & Young.

James Hennessy was elected to the board of directors in January 2018. Mr. Hennessy has, since 2013 and 2016, respectively, served as a director of the general partners of two private equity funds: Waterton Precious Metals Fund II Cayman, LP and Waterton Mining Parallel Fund. The two funds are headquartered in Toronto and invest in precious metal mining assets located primarily in Nevada, Arizona and Ontario, Canada. From 2002 to 2007, Mr. Hennessy was the chief executive officer of ING Funds, which was the U.S. mutual funds division of the Netherlands-based ING Group. Before that, Mr. Hennessy practiced corporate law in New York City and then joined a private equity firm and served as a corporate officer with various financial service companies including a California-based mortgage bank where he served as chief executive officer. Mr. Hennessy is also Chairman of the Law, Science and Innovation Center at the Sandra Day O’Connor School of Law at Arizona State University.

Director Independence

Using the definition of independence set forth in the NASDAQ Capital Market listing rules, all of our directors except Mr. Hidayatallah (our former chief executive officer), Mr. Kundagrami (our current chief executive officer), and Mr. Price (our president and chief operating officer) are independent.

Board Committees and Charters

Because Pelican owns substantially in excess of a majority of our issued and outstanding voting stock, we are a “controlled company” within the meaning of the Nasdaq corporate governance standards. Under the rules pertaining to “controlled companies,” we are required to have an audit committee made up entirely of independent directors, which we have established, but we are not required to maintain a compensation committee or a nominating committee, and we no longer do so.

Our Board has established an Audit Committee, comprised of Mr. Hennessy, Chairman, and Mr. Pirie. The Audit Committee assists our Board in fulfilling its oversight responsibility relating to (i) the integrity of our financial statements and other financial information furnished by the Company, (ii) our compliance with legal and regulatory requirements, (iii) our system of internal accounting and financial controls, (iv) our independent registered public accounting firm’s qualifications, performance, compensation and independence, (v) the performance of our internal audit function, and (vi) compliance with our code of business conduct and ethics. Our board of directors has determined that Mr. Hennessy and Mr. Pirie meet the independence standards of Audit Committee members prescribed by the NASDAQ Capital Market listing rules and that Mr. Hennessy qualifies as an “audit committee financial expert” under Item 407 of Regulation S-K promulgated by the SEC. The Audit Committee is governed by a written charter. The full text of the Audit Committee charter is available on our website located at www.alyenergy.com or in print to any interested party who requests it. Requests should be sent in writing to the attention of the Secretary at 3 Riverway, Suite 920, Houston, Texas 77056, 713-333-4000.

Code of Ethics

The board of directors has adopted a code of business ethics that applies to its directors, officers and management employees generally. A copy of this code of business ethics may be obtained, at no cost, from our investor relations website (www.alyenergy.com), by writing or by telephoning us at: Aly Energy Services, Inc., 3 Riverway, Suite 920, Houston, Texas 77056, 713-333-4000, Attn: Secretary.

 

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Stockholder Communications

We do not have a formal policy regarding communications with our board of directors; however, stockholders may communicate with the board of directors by writing to us at: Aly Energy Services, Inc., 3 Riverway, Suite 920, Houston, Texas 77056, Attention: Chief Financial Officer. Stockholders who would like their submission directed to a member of the board of directors may so specify and the communication will be forwarded, as appropriate.

Board Assessment of Risk

The board of directors has an active role in overseeing management of our risks. The board of directors regularly receives reports from senior management on our areas of material risk, including our credit, liquidity, operational and legal and regulatory risks. Pursuant to its charter, the audit committee reviews our major financial risk exposures and the steps management has taken to monitor and control such exposures, and it also meets periodically with management to discuss policies with respect to risk assessment and risk management. While the audit committee oversees certain risks and the management of such risks, the entire board of directors is regularly informed through committee reports about such risks.

Board Diversity

While we do not have a formal policy on diversity, our board of directors considers diversity to include the skill set, background, reputation, type and length of business experience of our board of director’s members as well as a particular nominee’s contributions to that mix. Our board of directors believes that diversity brings a variety of ideas, judgments and considerations that benefit our stockholders and us. Although there are many other factors, the board of directors seeks individuals with experience in operating growing businesses.

Item 11. Executive Compensation

Executive Compensation

The following table summarizes the overall compensation earned over each of the past two fiscal years ended December 31, 2017 by the persons named below (collectively the “Named Executive Officers”):

	Year	Salary			Bonus		All Other Compensation			Total
Name and Principal Position
Micki Hidayatallah	2017	$	25,000	(1)	$	-	$	212,628	(2),(3)	$	237,628
Chairman	2016		53,673	(1)		-		20,000	(2)		73,673
Shauvik Kundagrami	2017	$	63,462	(4)	$	-	$	187,628	(3)	$	251,090
Chief Executive Officer	2016		-			-		-			-
Alya Hidayatallah	2017	$	179,538	(5)	$	-	$	125,086	(3)	$	304,624
Chief Financial Officer	2016		163,245	(5)		-		-			163,245
Greg Price	2017	$	142,308	(6)	$	-	$	140,086	(3),(7)	$	282,394
President and Chief Operating Officer	2016		-			-		48,500	(7)		48,500

______________

(1)	In January 2016, Mr. Hidayatallah accepted a voluntary reduction in salary to $25,000 per annum. Mr. Hidayatallah resigned as chief executive officer in May 2017.
(2)	Reflects reimbursement of commuting expenses from Los Angeles to Houston.
(3)	Reflects the value of stock options granted to Mr. Hidayatallah, Mr. Kundagrami, Ms. Hidayatallah, and Mr. Price in May 2017.
(4)	Mr. Kundagrami became chief executive officer and vice-chairman in May 2017. His contractual salary began in October 2017.
(5)	In May 2016, the Board reduced Ms. Hidayatallah's salary by an incremental 20% from a salary already reduced from the contractual rate. In May 2017, Ms. Hidayatallah's salary was returned to its contractual rate.
(6)	Mr. Price became president and chief operating officer in April 2017. Prior to that, Mr. Price served as a special advisor to Mr. Hidayatallah.
(7)	Includes consulting fees paid to Mr. Price when he served as a special advisor to the chief executive officer from April 2016 through March 2017.

36

Executive Employment Agreements

On May 30, 2017, we executed employment agreements with each of Shauvik Kundagrami, Greg Price and Alya Hidayatallah. The employment agreements provide for the following:

¨ Annual base salaries of $300,000 to Shauvik Kundagrami and $200,000 to each of Greg Price and Alya Hidayatallah

¨ Target EBITDA to be set annually by the board

¨ If the Company achieves EBITDA target (after giving effect to deductions for executive bonuses), bonus will equal 100% of base salary

¨ If the Company does not achieve such target but achieves EBITDA target prior to giving effect to deductions for execution bonuses, a lesser bonus will be determined at discretion of the board

¨ Severance (salary continuation for 12 months) to be paid for termination without cause or termination by executive for good reason (which includes a change of control). A terminated executive will receive 50% of bonus (when and if otherwise earned by management) if terminated in first six months of year and 100% of bonus if terminated in second six months of year.

¨ Stock option plan grants as described under “Adoption of Equity Awards Plan” below.

Director Compensation

During the year ended December 31, 2017, we did not compensate our independent directors.

Adoption of Equity Awards Plan

On April 4, 2017, we adopted a 2017 Stock Option Plan (the “Stock Option Plan”) and reserved an aggregate of 16,861,908 shares of common stock (20% of our outstanding shares on a fully diluted basis) for the issuance of shares pursuant to options to be granted under the Stock Option Plan.

On May 30, 2017, we granted stock options under the Stock Option Plan to Micki Hidayatallah (our Chairman), Shauvik Kundagrami (our CEO), Greg Price (our President and COO) and Alya Hidayatallah (our CFO) to purchase 5,058,572 shares, 5,058,572 shares, 3,372,382 shares and 3,372,382 shares, respectively, at an exercise price of $.10 per share. The options are fully vested and expire 10 years from the date of grant.

 

37

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding beneficial ownership of our common stock as of March 31, 2018 by (i) each person or group who is known by us to beneficially own more than 10% of our common stock; (ii) each director; (iii) each of the Named Executive Officers and (iv) all such executive officers and directors as a group. Except as indicated in the footnotes to this table, the persons named in the table to our knowledge have sole voting and investment power with respect to all shares of securities shown as beneficially owned by them. Unless otherwise noted in the table below, each of our executive officers, directors and principal stockholders may be contacted at 3 Riverway, Suite 920, Houston, Texas 77056. The information in this table is based upon 88,308,714 common shares which is comprised of 13,818,795 shares of common stock outstanding as of June 30, 2017, 57,628,011 additional shares of common stock issuable if all of the outstanding shares of our Series A convertible preferred stock were converted into common shares and 16,861,908 shares of common stock issuable upon exercise of stock options.

		Common Stock
Name		Number of Shares Beneficially Owned		Percent of Class
Permian Pelican LLC	(1)		57,628,011		65.26	%
Munawar H. Hidayatallah	(2)		5,712,701		6.47	%
Shauvik Kundagrami	(3)		5,058,572		5.73	%
Greg Price	(4)		3,376,362		3.82	%
Alya Hidayatallah	(5)		3,372,382		3.82	%
Timothy J. Pirie	(6)		931,843		1.06	%
Zane Tankel	(7)		297,834		0.34	%
Kouros Sariri	(8)		164,804		0.19	%
Saeed M. Sheikh	(9)		122,817		0.14	%
James Hennessy			0		0.00	%
All directors and officers as a group			19,037,315		21.56	%

________________

(1)	Permian Pelican LLC ("Pelican") owns 17,292 shares of the Company's convertible preferred stock which are convertible into an aggregate of 57,628,011 shares of common stock (approximately 65.3% of fully diluted shares). Munawar H. Hidayatallah and Ali Afdhal are the sole managers of Pelican and therefore share voting and dispositive power over the shares owned by Pelican.
(2)	Mr. Hidayatallah and his spouse beneficially own 447,750 shares of common stock and an additional 206,379 shares of common stock are owned by a trust for which Mr. Hidayatallah is a trustee. Mr. Hidayatallah also has options to acquire an additional 5,058,572 shares of common stock. Mr. Hidayatallah owns approximately 9.8% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of shares of common stock owned by Pelican.
(3)	Mr. Kundagrami has options to acquire 5,058,572 shares of common stock. Mr. Kundagrami owns approximately 9.8% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.
(4)	Mr. Price has options to acquire 3,372,382 shares of common stock. Mr. Price owns approximately 0.2% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.
(5)	Ms. Hidayatallah has options to acquire 3,372,382 shares of common stock. Ms. Hidayatallah owns approximately 0.2% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.
(6)	Canadian Nitrogen Services Ltd, in which Mr. Pirie has a beneficial ownership interest, owns 920,649 shares of common stock. In addition, Mr. Pirie owns 11,194 shares of common stock.
(7)	Mr. Tankel owns approximately 4.1% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.
(8)	Mr. Sariri owns approximately 1.4% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.
(9)	Mr. Sheikh owns approximately 1.4% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.

38

Item 13. Certain Relationships and Related Transactions and Director Independence

Recapitalization

As described in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements, we consummated a recapitalization transaction with Pelican, an entity organized by certain of the Company’s directors and principal stockholders. Pursuant to the transaction, on December 12, 2016, Pelican agreed to acquire the Company’s outstanding secured indebtedness and certain other liabilities provided that the Company was successful in effecting the exchange of the Aly Operating preferred stock, Aly Centrifuge preferred stock, subordinated note payable and contingent payment liability into approximately 10% of our common stock on a fully diluted basis. Effective January 31, 2017, the recapitalization was completed and resulted in the following:

o Pelican’s conversion of approximately $16.1 million of debt and certain other liabilities into shares of Series A convertible preferred stock that represented approximately 80% of our common stock on a fully diluted basis as of January 31, 2017.

o Amendment of the Company’s credit agreement acquired by Pelican into a new credit agreement (then consisting of a $5.1 million term loan and $1.0 million revolving credit arrangement) with an extended maturity date of December 31, 2018.

Item 14. Principal Accountant Fees and Services

Our independent auditors for the year ended December 31, 2017, RSM US LLP (“RSM”) have no direct interest in us and have been our auditors since October 13, 2015.

Audit and audit related fees by RSM related to their audits of our December 31, 2017 and 2016 consolidated financial statements and their review of those consolidated financial statements included in the Company’s quarterly reports on Form 10-Q totaled approximately $170,000 and $128,000, respectively.

 

39

PART IV

Item 15. Exhibits

Exhibit
Number	Exhibit Description
2.1	Share Exchange Agreement, dated May 14, 2013, by and among Preferred Voice, Inc., Aly Energy Services, Inc. and the stockholders of Aly Energy Services, Inc. (1)
2.2	Stock Purchase Agreement, dated as of September 27, 2012, by and between Aly Energy Services, Inc. and Kurt Chew (1)
2.3	Securities Exchange Agreement, dated January 31, 2017, by and among Aly Energy Services, Inc. and the holders named therein (10)
3.1	Certificate of Incorporation, filed on August 3, 1992 with the Secretary of State of Delaware (1)
3.2	Certificate of Amendment, filed on May 2, 1994 with the Secretary of State of Delaware (1)
3.3	Certificate of Amendment, filed on March 21, 1995 with the Secretary of State of Delaware (1)
3.4	Certificate of Amendment, filed on July 27, 1995 with the Secretary of State of Delaware (1)
3.5	Certificate of Amendment, filed on March 7, 1997 with the Secretary of State of Delaware (1)
3.6	Certificate of Amendment, filed on April 27, 2007 with the Secretary of State of Delaware (1)
3.7	Certificate of Amendment, filed on May 14, 2013 with the Secretary of State of Delaware (1)
3.8	Certificate of Amendment, filed on April 10, 2014 with the Secretary of State of Delaware (2)
3.9	Certificate of Amendment, filed on June 18, 2015 with the Secretary of State of Delaware (6)
3.10	Certificate of Amendment, filed on December 21, 2015 with the Secretary of State of Delaware (7)
3.11	Certificate of Amendment, filed on May 18, 2016 with the Secretary of State of Delaware (8)
3.12	Certificate of Designation of Convertible Preferred Stock, filed on February 10, 2017 with the Secretary of State of Delaware (7)
3.13	Bylaws of the Registrant (1)
4.1	Second Amended and Restated Credit Agreement, dated as of January 31, 2017, by and between Aly Energy Services, Inc. and Pelican Permian, LLC, including amendments #1 through #3 thereto (10)
4.2	Amendment #4 to Second Amended and Restated Credit Agreement, dated as of January 31, 2017, by and between Aly Energy Services, Inc. and Pelican Permian, LLC, including amendments #1 through #3 thereto (4)
10.1	Employment Agreement, dated May 30, 2017, by and between Aly Energy Services, Inc. and Shauvik Kundagrami (10)
10.2	Employment Agreement, dated May 30, 2017, by and between Aly Energy Services, Inc. and Greg Price (10)
10.3	Employment Agreement, dated May 30, 2017, by and between Aly Energy Services, Inc. and Alya Hidayatallah (10)
10.4	Aly Energy Services, Inc. 2017 Stock Option Plan (10)
10.5	Form of Stock Option Agreement under Aly Energy Services, Inc. 2017 Stock Option Plan (10)
21.1	List of Subsidiaries (5)
31.1	Certification of Chief Executive Officer (4)
31.2	Certification of Chief Financial Officer (4)
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (4)
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (4)

 

40

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

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(1)	Filed as exhibit to Report on Form 8-K, dated May 15, 2013
(2)	Filed as exhibit to Report on Form 8-K, dated April 16, 2014
(3)	Filed as exhibit to Report on Form 8-K/A, dated July 31, 2013
(4)	Filed herewith
(5)	Filed as exhibit to Report on Form 10-K for the year ended December 31, 2014
(6)	Filed as exhibit to Report on Form 8-K, dated June 22, 2015
(7)	Filed as exhibit to Report on Form 8-K, dated February 16, 2017
(8)	Filed as exhibit to Report on Form 8-K dated May 23, 2016
(9)	Filed as exhibit to Report on Form 8-K dated February 16, 2017
(10)	Filed as exhibit to Report on Form 10-K for the year ended December 31, 2016

41

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.

 

	ALY ENERGY SERVICES, INC.
April 2, 2018	By:	/s/ Shauvik Kundagrami
		Date Shauvik Kundagrami Vice-Chairman 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 the registrant in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Munawar H. Hidayatallah	Chairman	April 2, 2018
Munawar H. Hidayatallah
/s/ Shauvik Kundagrami	Vice-Chairman and Chief Executive Officer (principal	April 2, 2018
Shauvik Kundagrami	executive officer)
/s/ Greg Price	President, Chief Operating Officer, and Director	April 2, 2018
Greg Price
/s/ Alya Hidayatallah	Chief Financial Officer (principal financial and	April 2, 2018
Alya Hidayatallah	accounting officer)
/s/ James Hennessy	Director	April 2, 2018
James Hennessy
/s/ Kouros Sariri	Director	April 2, 2018
Kouros Sariri
/s/ Saeed M. Sheikh	Director	April 2, 2018
Saeed M. Sheikh
/s/ Zane Tankel	Director	April 2, 2018
Zane Tankel
/s/ Timothy J. Pirie	Director	April 2, 2018
Timothy J. Pirie

42

EX-4.2

EXHIBIT 4.2

AMENDMENT NO. 4 TO

SECOND AMENDED AND RESTATED CREDIT AGREEMENT

This AMENDMENT NO. 4 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this “Amendment”) is entered into as of January 22, 2018, by and between Pelican Permian, LLC, a Texas limited liability company (“Lender”), and Aly Energy Services, Inc., a Delaware corporation (“Borrower”).

WHEREAS, Borrower and Lender have entered into that certain Second Amended and Restated Credit Agreement, dated as of January 31, 2017 (as amended to date, the “Credit Agreement”); and

WHEREAS, Lender and the Borrower mutually desire to amend the Credit Agreement as set forth herein;

NOW, THEREFORE, the parties do hereby agree as follows:

1. Article 2 of the Credit Agreement shall be amended to add a new Section 2.2A to read as follows:

“Swing Line. Subject to and upon the terms and conditions of this Agreement, Borrower may request Swing Line Advances of $100,000 or multiples thereof in an aggregate outstanding amount not to exceed $500,000. Amounts borrowed pursuant to this Section 2.2A may be repaid and reborrowed at any time without penalty or premium prior to June 30, 2018, at which time all Swing Line Advances under this Section 2.2A shall be immediately due and payable. For the purposes of this Section 2.3A, the terms set forth below shall have the following meanings:

“Swing Line Advance” means a cash advance under the Swing Line.

“Swing Line” means Credit Extensions which are made in accordance with the provisions of Section 2.2A.

2. The first sentence of Section 2.3A shall be amended to read as follows:

“Lender agrees, on the terms and conditions set forth in this Agreement, to make CapEx Advances to the Borrower from time to time until the Final Maturity Date; provided that after giving effect to such CapEx Advances, the sum of the aggregate outstanding amount of all CapEx Advances shall not exceed $750,000.”

3. Section 2.4 shall be amended to read as follows:

“2.4 Interest. The Company shall pay interest on the unpaid principal amount of the Credit Extensions until the principal amount thereof shall be paid in full. The interest rate shall be the lower of (i) the Highest Lawful Rate or (ii) 6 month LIBOR + 3% per annum; provided, however, that the interest rate in respect of Swing Line Advances shall be the lower of (i) the Highest Lawful Rate or (ii) 7% per annum. Further, upon the occurrence and during the continuance of an Event of Default, the unpaid principal amount of the Credit Extensions other than Swing Line Advances shall bear interest (after as well as before judgment) at the rate of 6 month LIBOR + 5% but not to exceed 6% per annum. Interest shall be paid in arrears on the last Business Day of each month commencing on the last business day of February 2017, until the principal amount of, and all accrued and unpaid interest on, the Credit Extensions has been paid in full. All computations of interest shall be determined by the Lender on a daily basis and for the actual number of days elapsed based on a 360 day year.”

4. Except as modified hereby, the remaining terms of the Credit Agreement shall continue in full force and effect.

1

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written.

ALY ENERGY SERVICES, INC.
By:	/s/ ALYA HIDAYATALLAH
	Alya Hidayatallah, Chief Financial Officer
PERMIAN PELICAN, LLC
By:	/s/ MICKI HIDAYATALLAH
	Micki Hidayatallah, Manager

2

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Shauvik Kundagrami, certify that:

1.	I have reviewed this annual report on Form 10-K of Aly Energy Services, Inc.;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
4.	I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and I have:

a.	designed such disclosure controls and procedures to ensure 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 annual report is being prepared;
b.	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c.	presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date;

5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

a.	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

April 2, 2018	By:	/s/ Shauvik Kundagrami
		Shauvik Kundagrami Vice-Chairman and Chief Executive Officer (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Alya Hidayatallah, certify that:

1.	I have reviewed this annual report on Form 10-K of Aly Energy Services, Inc.;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.
4.	I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and I have:

a.	designed such disclosure controls and procedures to ensure 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 annual report is being prepared;
b.	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c.	presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date;

5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

a.	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

April 2, 2018	By:	/s/ Alya Hidayatallah
		Alya Hidayatallah Chief Financial Officer (Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Aly Energy Services, Inc. (the "Company") on Form 10-K for the period ending December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Shauvik Kundagrami, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

April 2, 2018	By:	/s/ Shauvik Kundagrami
		Shauvik Kundagrami Principal Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Aly Energy Services, Inc. (the "Company") on Form 10-K for the period ending December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alya Hidayatallah, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 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; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

April 2, 2018	By:	/s/ Alya Hidayatallah
		Alya Hidayatallah Principal Financial Officer

XML

Document and Entity Information - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Mar. 31, 2018	Jun. 30, 2017
Document And Entity Information
Entity Registrant Name	Aly Energy Services, Inc.
Entity Central Index Key	0000946822
Document Type	10-K
Document Period End Date	Dec. 31, 2017
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity a Well-known Seasoned Issuer	No
Entity a Voluntary Filer	No
Entity's Reporting Status Current	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		13,818,795
Entity Public Float			$ 900
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2017

XML

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Current assets
Cash	$ 203	$ 681
Restricted cash	30	30
Accounts receivable, net	2,358	1,120
Unbilled receivables	1,525	328
Prepaid expenses and other current assets	390	496
Total current assets	4,506	2,655
Property and equipment, net	26,888	28,226
Intangible assets, net	4,099	4,931
Other assets	9	14
Total assets	35,502	35,826
Current liabilities
Accounts payable	1,640	912
Accrued expenses	1,131	1,163
Accrued interest and other - related party	26	1,277
Current portion of long-term debt	3	1,593
Current portion of long-term debt - related party		18,880
Current portion of contingent payment liability		810
Total current liabilities	2,800	24,635
Long-term debt, net		10
Long-term debt, net - related party	6,352	1,315
Other long-term liabilities	412	708
Total liabilities	9,564	26,668
Aly Operating redeemable preferred stock		4,924
Aly Centrifuge redeemable preferred stock		10,080
Redeemable Preferred Stock		15,004
Stockholders' equity (deficit)
Preferred stock
Common stock of $0.001 par value Authorized-25,000,000; Issued-13,819,020; Outstanding-13,818,795 as of December 31, 2017 Authorized-25,000,000; Issued-6,707,039; Outstanding-6,706,814 as of December 31, 2016	14	7
Additional paid-in-capital	53,754	28,307
Accumulated deficit	(34,583)	(34,158)
Treasury stock, 225 shares at cost	(2)	(2)
Total stockholders' equity (deficit)	25,938	(5,846)
Total liabilities and stockholders' equity (deficit)	35,502	35,826
Series A Convertible Preferred Stock
Stockholders' equity (deficit)
Preferred stock	$ 6,755

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Stockholders' equity (deficit)
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, authorized shares	9,980,000	10,000,000
Preferred stock, issued shares	0	0
Preferred stock, outstanding shares	0	0
Common stock, par value	$ 0.001	$ 0.001
Common stock, authorized shares	25,000,000	25,000,000
Common stock, issued shares	13,819,020	6,707,039
Common stock, outstanding shares	13,818,795	6,706,814
Treasury Stock	225	225
Series A Convertible Preferred Stock
Stockholders' equity (deficit)
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, authorized shares	20,000	0
Preferred stock, issued shares	17,292	0
Preferred stock, outstanding shares	17,292	0
Preferred stock, liquidation preference	$ 17,292

XML

CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Consolidated Statements Of Operations
Revenue	$ 14,637	$ 11,002
Expenses:
Operating expenses	9,927	8,324
Depreciation and amortization	3,701	5,299
Selling, general and administrative expenses	2,943	4,073
Reduction in value of assets	58	17,736
Total expenses	16,629	35,432
Loss from continuing operations	(1,992)	(24,430)
Other expense (income):
Debt modification fee		629
Debt modification fee - related party	320
Interest expense, net	24	2,378
Interest expense - related party	418	111
Gain on extinguishment of debt and other liabilities	(2,388)
Total other expense (income)	(1,626)	3,118
Loss from continuing operations before income taxes	(366)	(27,548)
Income tax expense (benefit)	59	(7,904)
Net loss from continuing operations	(425)	(19,644)
Loss from discontinued operations, net of income taxes		2,491
Net loss	(425)	(22,135)
Preferred stock dividends	63	728
Accretion of preferred stock, net		(126)
Net loss available to common stockholders	$ (488)	$ (22,737)
Basic and diluted loss per share information:
Net loss from continuing operations available to common stockholders	$ (0.04)	$ (3.02)
Less: Loss from discontinued operations, net of income taxes	0.00	0.37
Net loss available to common stockholders	$ (0.04)	$ (3.39)
Weighted-average shares - basic and diluted	13,214,764	6,706,814

XML

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) - USD ($) $ in Thousands	Series A Convertible Preferred Stock	Common Stock	Additional Paid-In Capital	Accumulated Deficit	Treasury Stock	Total
Beginning Balance, Shares at Dec. 31, 2015		6,707,039
Beginning Balance, Amount at Dec. 31, 2015		$ 7	$ 28,909	$ (12,023)	$ (2)	$ 16,891
Preferred stock dividends			(728)			(728)
Accretion of preferred stock, net			126			126
Net loss				(22,135)		(22,135)
Ending Balance, Shares at Dec. 31, 2016		6,707,039
Ending Balance, Amount at Dec. 31, 2016		$ 7	28,307	(34,158)	(2)	(5,846)
Preferred stock dividends			(63)			(63)
Accretion of preferred stock, net
Issuance of common shares in exchange for the extinguishment of debt and other liabilities, Shares		1,657,494
Issuance of common shares in exchange for the extinguishment of debt and other liabilities, Amount		$ 2	197			199
Issuance of common shares in exchange for the extinguishment of redeemable preferred stock, Shares		5,454,487
Issuance of common shares in exchange for the extinguishment of redeemable preferred stock, Amount		$ 5	15,031			15,036
Issuance of preferred shares in exchange for the extinguishment of debt and other liabilities - related party, Shares	16,092
Issuance of preferred shares in exchange for the extinguishment of debt and other liabilities - related party, Amount	$ 6,435		9,657			16,092
Issuance of preferred shares in exchange for an amendment to credit facility - related party, Shares	1,200
Issuance of preferred shares in exchange for an amendment to credit facility - related party, Amount	$ 320					320
Issuance of stock options			625			625
Net loss				(425)		(425)
Ending Balance, Shares at Dec. 31, 2017	17,292	13,819,020
Ending Balance, Amount at Dec. 31, 2017	$ 6,755	$ 14	$ 53,754	$ (34,583)	$ (2)	$ 25,938

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Cash flows from operating activities:
Net income (loss)	$ (425)	$ (22,135)
Less: Loss from discontinued operations, net of income taxes		2,491
Net loss from continuing operations	(425)	(19,644)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	3,701	5,299
Amortization of deferred loan costs		403
Reduction in value of assets	58	17,736
Stock-based compensation	625
Bad debt expense	74	193
Fair value adjustments to contingent payment liability		(372)
Gain on extinguishment of debt and other liabilities	(2,388)
Debt modification fee		629
Debt modification fee - related party	320
Deferred taxes		(7,941)
Changes in operating assets and liabilities:
Cash paid upon assumption of net liabilities from discontinued operations		(7)
Receivables	(2,509)	2,768
Prepaid expenses and other assets	80	471
Accounts payable	728	(13)
Accrued interest and other - related party	196	111
Accrued expenses and other liabilities	(51)	376
Net cash provided by continuing operations	409	9
Net cash used in discontinued operations		(47)
Net cash provided by (used in) operating activities	409	(38)
Cash flows from investing activities:
Purchases of property and equipment	(1,718)	(389)
Proceeds from disposal of property and equipment	15	465
Net cash provided by (used in) continuing operations	(1,703)	76
Net cash used in discontinued operations		39
Net cash provided by (used in) investing activities	(1,703)	115
Cash flows from financing activities:
Proceeds from line of credit - related party		494
Borrowings on long-term debt - related party	825
Repayment of long-term debt	(9)	(348)
Net cash provided by continuing operations	816	146
Net cash used in discontinued operations		(9)
Net cash provided by financing activities	816	137
Net increase (decrease) in cash and restricted cash	(478)	214
Cash and restricted cash, beginning of period	711	497
Cash and restricted cash, end of period	$ 233	$ 711

XML

NATURE OF OPERATIONS AND BASIS OF PRESENTATION

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

Aly Energy Services, Inc., together with its subsidiaries (“Aly Energy” or “the Company”), provides oilfield services, including equipment rental and solids control services to exploration and production companies. The Company operates in select oil and natural gas basins of the contiguous United States. Throughout this report, we refer to Aly Energy and its subsidiaries as “we”, “our” or “us”. References to financial results and operations of the Company in these notes to the consolidated financial statements are limited to continuing operations unless otherwise specified.

On October 26, 2012, we acquired all of the stock of Austin Chalk Petroleum Services Corp. (“Austin Chalk”). Austin Chalk provides surface rental equipment as well as roustabout services which include the rig-up and rig-down of equipment and the hauling of equipment to and from the customer’s location.

On April 15, 2014, we acquired the equity interests of United Centrifuge, LLC (“United”) as well as certain assets used in United’s business that were owned by related parties of United (collectively the “United Acquisition”). In connection with the United Acquisition, United merged with and into Aly Centrifuge Inc. (“Aly Centrifuge”), a wholly-owned subsidiary of Aly Energy. Aly Centrifuge operates within the solids control and fluids management sectors of the oilfield services and rental equipment industry, offering its customers the option of renting centrifuges and auxiliary solids control equipment without personnel or the option of paying for a full-service solids control package which includes operators on-site 24 hours a day.

Discontinued Operations

In July 2014, we acquired all of the issued and outstanding stock of Evolution Guidance Systems Inc. (“Evolution”), an operator of Measurement-While-Drilling (“MWD”) downhole tools. From July 2014 through October 2016, Evolution provided directional drilling and MWD services to a variety of exploration and production companies. On October 26, 2016, we abandoned these operations as a part of a restructuring transaction. The abandonment of these operations meets the criteria established for recognition as discontinued operations under generally accepted accounting principles in the United States of America (“U.S. GAAP”). Therefore, the financial results of our directional drilling and MWD services are presented as discontinued operations in the Company’s consolidated financial statements.

By December 31, 2016, the abandonment of these operations and sell-off of the assets was completed with approximately $0.2 million of remaining liabilities assumed by the continuing operations of the Company; accordingly, there was no income or loss from discontinued operations during the year ended December 31, 2017. For the year ended December 31, 2016, the results of the discontinued operations are included in the line item “Loss from discontinued operations, net of income taxes” on the consolidated statement of operations and the cash flows from discontinued operations appear in the line items “Net cash provided by (used in) discontinued operations” on the consolidated statement of cash flows.

Basis of Presentation

Aly Centrifuge and Aly Operating Inc. (“Aly Operating”) are both wholly-owned subsidiaries of Aly Energy. Austin Chalk is a wholly-owned subsidiary of Aly Operating. We operate as one business segment which services customers within the United States.

The consolidated financial statements have been prepared in conformity with U.S. GAAP and include the accounts of Aly Energy and each of its subsidiaries in the consolidated balance sheets as of December 31, 2017 and 2016, the related consolidated statements of operations for the years ended December 31, 2017 and 2016, consolidated statements of changes in stockholders’ equity (deficit) for the years ended December 31, 2017 and 2016, and consolidated statements of cash flows for the years ended December 31, 2017 and 2016. All significant intercompany transactions and account balances have been eliminated upon consolidation.

XML

RECENT DEVELOPMENTS

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 2 - RECENT DEVELOPMENTS

Operational Restructuring

Our activity is tied directly to the rig count and, even though we instituted significant cost cutting measures beginning in 2015, we were unable to cut costs enough to match the decline in our business. As a result, as of December 31, 2015, we were in default of our credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”).

During the year ended December 31, 2016, we entered into a series of forbearance agreements with our lender. Under the forbearance agreements, among other provisions, the lenders agreed to forbear from exercising their remedies under the credit agreement. These forbearance agreements permitted us to operate within the parameters of our normal course of business despite the continuing default under the credit agreement. Without these forbearance agreements, our outstanding debt would have been immediately due and payable. Throughout 2016, we remained in default and we did not have sufficient liquidity to repay all of the outstanding debt, $20.1 million as of January 31, 2016, to the lender at any point during the year. As such, we may have been forced to file for protection under Chapter 11 of the U.S. Bankruptcy Code.

In early 2016, we were hopeful that a successful operational restructuring would facilitate negotiations to modify the terms of our existing credit facility with Wells Fargo. Our operational restructuring in 2016 consisted of severe cost cuts which were incremental to the cost cuts already implemented in 2015. In 2016, action steps which resulted in significant cost cuts included, but are not limited to, (i) reducing headcount, (ii) ceasing operations in the northeast, (iii) modifying insurance policies, (iv) minimizing repair and maintenance activities and (v) eliminating new investments in equipment unless required by existing customers. The Company realized additional cost savings on variable costs, such as sub-rental equipment expense and trucking expense, as a direct result of the decline in activity.

In order to further support our working capital needs, we identified and sold idle and underutilized assets. During 2016, we realized aggregate proceeds from asset sales of approximately $0.8 million, of which $0.5 million and $0.3 million was used to fund working capital needs and pay down debt, respectively.

Capital Restructuring

Despite our successful operational restructuring efforts, the decline in our activity levels and the decline in customer pricing outpaced the impact of our cost reductions and it became evident that a capital restructuring would be necessary to continue operations and position our business for an industry turnaround.

In the second quarter of 2016, certain of the Company’s principal stockholders (“Shareholder Group”) began negotiations with Wells Fargo with the objective of consummating a recapitalization transaction (the “Recapitalization”) whereby our obligations under the credit agreement with Wells Fargo, outstanding capital leases in favor of Wells Fargo’s equipment finance affiliate, and certain other obligations of Aly Energy (collectively the “Aly Senior Obligations”) would be restructured. In August 2016, the Shareholder Group was introduced to a third party, Tiger Finance, LLC (“Tiger”), who was interested in providing bridge financing and extending forbearance until such date as sufficient capital could be raised by the Shareholder Group to complete the Recapitalization.

In September 2016, the Shareholder Group formed Permian Pelican, LLC (“Pelican”) with the objective of raising capital and executing the steps necessary to complete the restructuring, inclusive of successfully effecting the exchange of the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, a subordinated note payable and a liability for a contingent payment into approximately 10% of our common stock on a fully diluted basis.

Effective January 31, 2017, the Recapitalization was completed through the execution and delivery of a Securities Exchange Agreement and a Second Amended and Restated Credit Agreement and, as a result, the new credit facility, in which Pelican was the lender, consisted of a term loan of $5.1 million and a revolving facility of up to $1.0 million as of January 31, 2017. Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables where eligible receivables are defined as all receivables which have been billed to customers and are less than 90 days old. See further discussion in “Note 3 – Recapitalization” and “Note 8 – Long-Term Debt – Related Party”.

Subsequent to the Recapitalization, we entered into several further amendments to capitalize on improved market conditions and increased activity in our business:

· Amendment No. 1, effective March 1, 2017, provided for a delayed draw term loan to be added to the Pelican Credit Facility for the purpose of financing capital expenditures. The amendment permitted us to draw on the delayed draw term loan from time-to-time up until December 31, 2018 in order to fund up to 80% of the cost of capital expenditures subject to a $0.5 million limit on aggregate borrowings.

· Amendment No. 2, effective May 23, 2017, increased the maximum revolving credit amount from $1.0 million to $1.8 million and extended the final maturity date of the facility to December 31, 2019. In consideration of the increase in the revolving credit facility and the extension of the final maturity date, we issued Pelican an amendment fee consisting of 1,200 shares of our Series A convertible preferred stock. See further discussion in “Note 12 – Controlling Shareholder and Related Party Transactions”.

· Amendment No. 3, effective June 15, 2017, modified maximum potential borrowings under each of the revolving credit facility and the delayed draw term loan without changing the aggregate available borrowings under the credit facility. The amendment reduced the maximum revolving credit amount from $1.8 million to $1.0 million and increased the maximum delayed draw loan borrowings from $0.5 million to $1.3 million and the amendment also increased permitted draws on the delayed draw loan from 80% of the cost of capital expenditures being funded to 90% of the cost of capital expenditures being funded.

· Amendment No. 4, effective January 22, 2018, provided for a Swing Line to be added to the Pelican Credit Facility without changing the aggregate available borrowings under the credit facility. The amendment provided for a maximum availability of $0.6 million under the new Swing Line and reduced the maximum delayed draw loan borrowings from $1.3 million to $0.7 million. Amounts drawn on the Swing Loan may be repaid and reborrowed without penalty until June 30, 2018 at which time the Swing Line matures and all outstanding amounts are immediately due and payable. Interest on the Swing Line is charged at the lower of the (i) highest lawful rate or (ii) 7.0% per annum.

To the extent the Company generates free cash flow, as defined in the credit agreement, during a given calendar year, principal payments of 50% of such free cash flow are due on the earlier of (i) 60 days after the end of such year or, (ii) the date on which the Company’s independent auditors have completed their audit of the financial statements for such year. Accordingly, there was no principal payment due for the year ended December 31, 2017.The maturity date of all remaining outstanding balances under the credit facility is December 31, 2019.

The obligations under the Pelican Credit Facility are guaranteed by all of our subsidiaries and secured by substantially all of our assets. The Pelican Credit Facility contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, pay dividends or make other distributions, grant liens and sell assets. The Pelican Credit Facility does not include any financial covenants. We were in full compliance with the credit facility as of December 31, 2017.

Under the Pelican Credit Facility, as of December 31, 2017, we have the availability to borrow an incremental $0.6 million under the Swing Line and, if we have capital expenditures which are eligible to be financed, an incremental $75,000 under the delayed draw term loan to finance 90% of such expenditures.

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RECAPITALIZATION

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 3 - RECAPITALIZATION

Summary

In September 2016, Pelican was formed with the primary objective of completing the Recapitalization. Pelican agreed to acquire the Aly Senior Obligations, provided the Company was successful in effecting the exchange of the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, a subordinated note payable and a liability for a contingent payment into approximately 10% of our common stock on a fully diluted basis.

The Recapitalization consisted of three restructuring events which took place in the period beginning October 26, 2016 and ended on January 31, 2017. Below is a description of each event:

The first restructuring event occurred on October 26, 2016 when Tiger acquired the Aly Senior Obligations from Wells Fargo and its equipment affiliate. Simultaneously, Tiger entered into an assignment agreement with Pelican whereby it agreed to sell the Aly Senior Obligations to Pelican on the conditions that (i) Pelican provide $0.5 million of unsecured working capital financing to the Company pending the closing and (ii) the Company transfer to Tiger (in consideration of Tiger’s reduction of the Aly Senior Obligations in the amount of $2.0 million) certain excess equipment and vehicles which the Company was not utilizing and considered unnecessary for its continuing operations.

As a result of the above, we transferred property and equipment with an estimated fair value of $2.6 million, inclusive of $0.4 million of assets associated with discontinued operations, to Tiger and recognized a corresponding reduction in the Aly Senior Obligations of $2.0 million and debt modification fee of $0.6 million. Property and equipment transferred had an aggregate net book value of $18.6 million resulting in our recording an impairment charge of $16.0 million, inclusive of a $0.4 million impairment associated with discontinued operations. As part of this transaction and upon satisfaction of such conditions, Tiger extended the forbearance period to December 9, 2016.

The second restructuring event occurred on December 12, 2016 when Pelican acquired the Aly Senior Obligations from Tiger. As the new holder of the Aly Senior Obligations, Pelican further extended the forbearance period for the obligations to January 31, 2017, provided the Company was successful in completing the third and final restructuring event on or before such date.

Effective January 31, 2017, the final restructuring event occurred and the Recapitalization was completed which resulted in the following:

· an exchange of certain of the Company’s outstanding obligations (namely, the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, a subordinated note payable and a contingent payment liability) for approximately 10% of our common stock, or 7,111,981 common shares, on a fully diluted basis as of January 31, 2017;

· an exchange of certain amendments to the Aly Senior Obligations (namely, a $16.1 million principal reduction, removal of restrictive covenants and extended maturity of payment obligations) for shares of our Series A convertible preferred stock (liquidation preference of $16.1 million or $1,000 per share) which represented approximately 80% of our common stock, or 53,628,842 common shares, on a fully diluted basis as of January 31, 2017; and

· the formation of a new credit agreement with Pelican (consisting of a $5.1 million term loan and $1.0 million revolving credit facility) with an extended maturity date of December 31, 2018.

The Recapitalization had a significant impact to our capital structure and to our consolidated financial statements and there was a significant dilutive effect to those shareholders who held common stock immediately before the transaction was completed.

Troubled Debt Restructuring

Except for the Pelican exchange, each exchange was accounted for as a troubled debt restructuring (“TDR”) since an equity interest in the Company was issued to fully satisfy each debt. A gain on TDR is recognized for the excess of the carrying amount of the debt over the fair value of each equity interest granted. The impact of the Recapitalization includes a “gain on the extinguishment of debt and other liabilities” from the debtors of the subordinated note payable and the contingent payment liability and a “gain on the extinguishment of redeemable preferred stock” from the holders of Aly Operating redeemable preferred stock and Aly Centrifuge redeemable preferred stock. The share price of common stock as of January 31, 2017 of $0.12 per share was used as the basis of fair value for each equity interest granted.

The impact of the TDR is as follows:

Extinguishment of Debt and Other Liabilities. The exchange of the subordinated note payable and the contingent payment liability for common stock resulted in a gain of $2.4 million, or $0.36 per share, on the consolidated statement of operations for the year ended December 31, 2017 and was recorded as an “Issuance of common stock in exchange for the extinguishment of debt and other liabilities” on the consolidated statement of changes in stockholders’ equity (deficit) for the year ended December 31, 2017. The table below summarizes stock issued and the resulting gain for each extinguishment:

Gain on the Extinguishment of Debt and Other Liabilities
Debt and Other Obligations Extinguished	Common Stock Issued		Gain Included in Other Expense (Income)
Subordinated debt and accrued interest of $1.5 million and $0.3 million, respectively		1,200,000	$1.6 million
Contingent payment liability of $0.8 million		457,494	$0.8 million

Extinguishment of Redeemable Preferred Stock. The exchange of the Aly Operating redeemable preferred stock and the Aly Centrifuge redeemable preferred stock for common stock resulted in a gain of $14.4 million, or $2.14 per share, which was recorded as an “Issuance of common stock in exchange for the extinguishment of redeemable preferred stock” on the consolidated statement of changes in stockholders’ equity (deficit) for the year ended December 31, 2017. The table below summarizes stock issued and the resulting gain for each extinguishment:

Gain on the Extinguishment of Redeemable Preferred Stock
Redeemable Preferred Stock and Other Obligations	Common Stock Issued		Gain Included in Additional Paid-in-Capital
Aly Centifuge preferred and accrued dividends of $8.9 million and $1.2 million, respectively		3,039,516	$9.8 million
Aly Operating preferred and accrued dividends of $4.0 million and $0.9 million, respectively		2,414,971	$4.6 million

On January 31, 2017, we issued 7,111,981 shares of our common stock to the former holders of the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, the subordinated note payable, and the liability for contingent payment in exchange for the above-mentioned extinguishments in connection with our TDR.

Credit Facility Restructuring

Given the nature of the related party relationship between the Company and Pelican, the extinguishment of our Aly Senior Obligations was accounted for as a capital transaction whereby we issued Series A convertible preferred stock in exchange for the extinguishment of our Aly Senior Obligations and the issuance of a new credit facility. The exchange resulted in a gain on the extinguishment of debt and other liabilities calculated as the amount above the estimated fair value of the equity interest granted. The share price of common stock as of January 31, 2017 of $0.12 per share was used as the basis of fair value for the equity interest granted.

The impact of the exchange and extinguishment of our Aly Senior Obligations is as follows:

Old Credit Facility. The partial extinguishment and exchange of our Aly Senior Obligations ($16.1 million principal reduction) for shares of our Series A convertible preferred stock resulted in a gain of $9.7 million which is recorded as an “Issuance of preferred shares in exchange for the extinguishment of debt and other liabilities – related party” on the consolidated statement of changes in stockholders’ equity (deficit) for the year ended December 31, 2017. The components of the Aly Senior Obligations were as follows (in thousands):

Aly Senior Obligations as of January 31, 2017
Debt and Other Obligations Extinguished	Amount
Credit facility	$	17,772
Accrued fees and interest on credit facility		1,414
Capital lease obligations		1,930
Accrued interest on capital lease obligations		26
Line of credit and accrued interest - related party		500
Total	$	21,642

New Credit Facility. On January 31, 2017, we completed the full extinguishment of our old credit facility and we entered into a new credit agreement with Pelican which consisted of a $5.1 million term loan and $1.0 million revolving credit facility ($5.1 million and $0.5 million outstanding as of January 31, 2017). See “Note 8 – Long-Term Debt – Related Party” for further discussion.

On January 31, 2017, we issued 16,092 shares of our Series A convertible preferred stock to Pelican in exchange for the above mentioned $16.1 million reduction of the Aly Senior Obligations.

Professional Fees - Recapitalization

During 2016, we recorded $0.2 million of expenses for professionals engaged by our former lender, Wells Fargo, whom the Company was required to pay under the terms of our credit facility. On December 12, 2016, these fees were assumed by Pelican and, on January 31, 2017, included within the Aly Senior Obligations refinanced in connection with the Recapitalization. These fees are included in “Accrued interest and other – related party” on our consolidated balance sheet as of December 31, 2016.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the amounts of revenue and expenses recognized during the reporting period. Areas where critical accounting estimates are made by management include:

· Allowance for doubtful accounts,

· Depreciation and amortization of property and equipment and intangible and other assets,

· Impairment of property and equipment, intangible and other assets, and goodwill,

· Litigation settlement accrual,

· Contingent payment liability,

· Stock-based compensation, and

· Income taxes.

The Company analyzes its estimates based on historical experience and various other indicative assumptions that it believes to be reasonable under the circumstances. Under different assumptions or conditions, the actual results could differ, possibly materially from those previously estimated. Many of the conditions impacting these assumptions are outside of the Company’s control.

Revenue Recognition

We generate revenue primarily from renting equipment and, in connection with certain of our solids control operations, providing personnel to operate such equipment at per-day rates. In addition, we may provide equipment transportation and rig-up/rig-down services to our customers at flat rates per job or at an hourly rate. Revenue is recognized when it is realized or realizable and earned and when collectability is reasonably assured.

We present our revenue net of any sales tax charged to our customers which is required to be remitted to local or state governmental taxing authorities.

Reimbursements for the purchase of supplies, equipment, personnel services, shipping and other services provided at the request of our customers are recorded as revenue when incurred. The related costs are recorded as operating expenses when incurred.

Major Customers and Concentration of Credit Risk

The Company’s assets that are potentially exposed to concentrations of credit risk consist primarily of cash and trade receivables.

The financial institutions in which the Company transacts business are large, investment grade financial institutions which are “well capitalized” under applicable regulatory capital adequacy guidelines, thereby minimizing its exposure to credit risks for deposits in excess of federally insured amounts.

The majority of the Company’s trade receivables are due from major and independent oil and gas companies operating within the U.S. land-based oil and gas industry. The industry has been, and will likely continue to be, characterized by significant volatility which may negatively impact our customers from time-to-time. The Company evaluates the financial strength of its customers quarterly and provides allowances for probable credit losses when deemed necessary.

During the year ended December 31, 2017, the Company derived revenue from over 40 customers of which the top three customers generated approximately $8.2 million, or 56.0%, of our revenue. Amounts due from these customers included in accounts receivable and unbilled receivables as of December 31, 2017 are approximately $1.8 million.

During the year ended December 31, 2016, the Company derived revenue from over 50 customers of which the top three customers generated approximately $4.8 million, or 43.5%, of our revenue. Amounts due from these customers included in accounts receivable and unbilled receivables as of December 31, 2016 are approximately $0.6 million.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash is defined as cash on-hand and balances in operating bank accounts. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of December 31, 2017 and 2016, we have no cash equivalents. Restricted cash serves as collateral for the Company’s corporate credit card program.

Accounts Receivable, Unbilled Receivables and Allowance for Doubtful Accounts

Accounts receivable and unbilled receivables are stated at the amount which has been or will be billed to customers. Once billed, customer payments are typically due within 30 days. We provide an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information, existing economic conditions and specific identification. Provisions for doubtful accounts are recorded when it is deemed probable that the customer will not make the required payments. As of December 31, 2017 and 2016, the allowance for doubtful accounts was approximately $73,000 and $0.6 million, respectively.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization. The cost of property and equipment currently in service less its residual value is depreciated, including property and equipment financed by capital leases, on a straight-line basis over the estimated useful lives of the related assets. A residual value of 20% is used for asset types deemed to have a salvage value. Typically, these assets contain a large amount of iron in their construction. Leasehold improvements are amortized on a straight-line basis over the shorter of their economic lives or the lease term.

Estimated useful lives of property and equipment are as follows:

Machinery and equipment	1 - 20 years
Vehicles, trucks and trailers	5 - 7 years
Office furniture, fixtures and equipment	3 - 7 years
Leasehold improvements	Remaining lease term
Buildings	20 years

When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved and the impact of any resulting gain or loss is recognized within “Reduction in value of assets” on the consolidated statement of operations for the period. Maintenance and repairs, which do not improve or extend the life of the related assets, are charged to expense when incurred. Refurbishments are capitalized when the value of the equipment is enhanced for an extended period.

Reduction in Value of Long-Lived Assets

Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of such assets to their fair value calculated, in part, by the estimated undiscounted future cash flows expected to be generated by the assets. Cash flow estimates are based upon, among other things, historical results adjusted to reflect the best estimate of future market rates, utilization levels, and operating performance. Estimates of cash flows may differ from actual cash flows due to, among other things, changes in economic conditions or changes in an asset’s operating performance. The Company’s assets are grouped by reporting unit for the impairment testing, which represents the lowest level of identifiable cash flows. If the asset grouping’s fair value is less than the carrying amount of those items, impairment losses are recorded in the amount by which the carrying amount of such assets exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less estimated costs to sell. The net carrying value of assets not fully recoverable is reduced to fair value. The estimate of fair value represents the Company’s best estimate based on industry trends and reference to market transactions and is subject to variability. The oil and gas industry is cyclical and estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows, can have a significant impact on the carrying values of these assets and, in periods of prolonged down cycles, may result in impairment charges.

Management determined that there were no events or changes in circumstances during the year ended December 31, 2017 indicating that the carrying amount of long-lived assets may not have been recoverable and, accordingly, there were no impairments recorded.

Due to the steep downturn in the oilfield services industry which began in late 2014 and continued throughout much of 2016, we evaluated recoverability quarterly during the year ended December 31, 2016. For each quarter, our estimated undiscounted net cash flow exceeded the carrying amount of the assets, and, as such, no impairment losses were recognized; however, in the quarters ended June 30 and September 30, 2016, we recognized an impairment in connection with our discontinued operations and an impairment in connection with the Recapitalization, respectively. See “Note 5 – Reduction in Value of Assets and Other Charges” and “Note 16 – Discontinued Operations” for a further discussion of the reduction in value recorded during 2016.

Intangible Assets

The Company’s intangible assets with finite lives include customer relationships, trade names, non-compete agreements, and various other contractual agreements. The value of customer relationships is estimated using the income approach, specifically the excess earnings method. The excess earnings method consists of discounting to present value the projected cash flows attributable to the customer relationships, with consideration given to customer contract renewals, the importance or lack thereof of existing customer relationships to the Company’s business plan, income taxes and required rates of return. The value of trade names is estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty in order to exploit the related benefits of this intangible asset. For contractual agreements, the specific terms of the agreements were utilized to determine the fair value attributable to the arrangement.

The Company amortizes intangible assets based upon a straight-line basis because the pattern of economic benefits consumption cannot otherwise be reliably estimated. Estimated useful lives of intangible assets are as follows:

Customer relationships	10 years
Tradename	10 years
Non-compete	4 - 5 years

Intangible assets subject to amortization are reviewed for impairment and are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For instance, a significant change in business climate or a loss of a significant customer, among other things, may trigger the need for an impairment test of intangible assets. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. Management determined that there were no events or changes in circumstances during the year ended December 31, 2017 indicating that the carrying amount of intangibles may not have been recoverable and, accordingly, there were no reductions in value of intangibles recorded. See “Note 5 – Reduction in Value of Assets and Other Charges” and “Note 16 – Discontinued Operations” for a further discussion of the reduction in value recorded during the year ended December 31, 2016.

Goodwill

The carrying amount of goodwill is tested annually for impairment in the fourth quarter and whenever events or circumstances indicate its carrying value may not be recoverable. Impairment testing is conducted at the reporting unit level.

Our detailed impairment testing involves comparing the fair value of our reporting units to their respective carrying values, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale. If the fair value exceeds carrying value, then it is concluded that no goodwill impairment has occurred. If the carrying value exceeds the fair value, a second step is required to measure possible goodwill impairment loss. The second step includes valuing our tangible and intangible assets and liabilities as if we had been acquired in a business combination. Then, the implied fair value of our goodwill is compared to the carrying value of that goodwill. If the carrying value of our goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value.

Our detailed impairment analysis employs the use of discounted cash flow models. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes on our business. Critical assumptions include projected revenue growth, gross profit margins, selling, general and administrative expenses, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. We use the capital asset pricing model to estimate the discount rates used in the discounted cash flow models.

As of January 1, 2016, we had no goodwill associated with continuing operations and $0.3 million of goodwill associated with discontinued operations. On October 26, 2016, in connection with the Recapitalization and the abandonment of the Evolution assets, we reduced the remaining value for the goodwill associated with these discontinued operations to zero. See “Note 16 – Discontinued Operations” for further discussion.

The Company did not have any goodwill recorded as of December 31, 2017 and 2016.

Income Taxes

We account for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In assessing the likelihood and extent that deferred tax assets will be realized, consideration is given to projected future taxable income and tax planning strategies. A valuation allowance is recorded when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.

We recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. Previously recognized tax positions are reversed in the first period in which it is no longer more-likely-than-not that the tax position would be sustained upon examination.

Income tax related interest and penalties, if applicable, are recorded as a component of the provision for income tax expense. However, there were no amounts recognized relating to interest and penalties in the consolidated statements of operations for the years ended December 31, 2017 and 2016. We had no uncertain tax positions as of December 31, 2017 and 2016.

Contingent Payment Liability

The aggregate consideration for the United Acquisition of $24.5 million included contingent consideration of an estimated fair value on the acquisition date of $3.5 million. The contingent consideration consisted of up to three future cash payments to the sellers in an amount equal to 5% of the gross revenue of the business acquired for each of the twelve-month periods ending on March 31, 2015, 2016, and 2017; provided, however, that the aggregate consideration would not exceed $5.0 million.

On May 31, 2015, we made the first cash payment of $0.9 million, or 5% of the gross revenue of the business acquired for the twelve-month period ended March 31, 2015. We did not make the second cash payment of $0.7 million, or 5% of gross revenue of the business acquired for the twelve-month period ended March 31, 2016, which was due on May 31, 2016.

On January 31, 2017, in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”), the sellers converted both (i) the second payment obligation of $0.7 million, which was past due, and (ii) the estimated third payment of $0.1 million, or 5% of estimated gross revenue of the business for the twelve-month period ended March 31, 2017, into 457,494 shares of common stock. This conversion was accounted for as a troubled debt restructuring (see further discussion in “Note 3 - Recapitalization”). There are no further payments due.

Fair Value Measurements

Prior to its conversion into common stock in connection with the Recapitalization, we measured the fair value of our contingent payment liability on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. We are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three distinct levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

The following table provides a roll forward of the fair value of our contingent payment liability which includes Level 3 measurements (in thousands):

	For the Years Ended December 31,
	2017			2016
Fair value, beginning of period	$	810		$	1,182
Changes in fair value		-			(372	)
Extinguishment of liability in connection with the Recapitalization		(810	)		-
Fair value, end of period	$	-		$	810

As of December 31, 2017, there was no contingent payment liability recorded. See “Note 2 – Recent Developments” and “Note 3 – Recapitalization” for further details on the conversion of the contingent payment liability to common stock on January 31, 2017 in connection with the Recapitalization.

As of December 31, 2016, the fair value of the contingent payment liability represents the sum of (i) the known required payments for periods which had then ended and (ii) the present value of projected required payments for future periods based upon our internal model and projections. Due to the industry downturn which began in late 2014 and continued through much of 2016, both actual and projected utilization levels and pricing were significantly lower than the peaks experienced in 2014. Consequently, during the year ended December 31, 2016, we recorded a decrease to the fair value of the contingent payment liability as both the actual revenue and the projected revenue on which the contingent payments were based had declined significantly. The change in fair value is included in selling, general, and administrative expenses on our consolidated statement of operations for the year ended December 31, 2016. 

As of December 31, 2016, the fair value of the contingent payment liability included (i) the past due payment for the year ended March 31, 2016, (ii) the calculated payment for the nine months ended December 31, 2016, and (iii) the fair value of the liability for the estimated additional cash payment due for the three months ended March 31, 2017.

Stock-Based Compensation

From time-to-time, we issue time-based vesting and performance-based vesting stock options, time-based vesting and performance-based vesting restricted stock units, and restricted stock awards to our employees as part of those employees’ compensation and as a retention tool for non-employee directors. We calculate the fair value of the awards on the grant date and amortize that fair value to compensation expense ratably over the vesting period of the award, net of estimated and actual forfeitures. The grant date fair value of our restricted stock awards and restricted stock units is determined using our stock price on the grant date. The fair value of our stock option awards is estimated using a Black-Scholes fair value model. The valuation of our stock options requires us to estimate the expected term of the award, which we estimate using the simplified method as we do not have sufficient historical exercise information. Additionally, the valuation of our stock option awards is also dependent on historical stock price volatility. In view of our insignificant trading volume, volatility is calculated based on historical stock price volatility of our peer group with a lookback period equivalent to the expected term of the award. Fair value of performance-based stock options and restricted stock units is estimated in the same manner as our time-based awards and assumes that performance goals will be achieved and the awards will vest. If the performance-based awards do not vest, any previously recognized compensation costs will be reversed. We record stock-based compensation as a component of general and administrative or direct operating expense based on the role of the applicable individual.

During the year ended December 31, 2017, we recorded stock-based compensation expense of $0.6 million. See further discussion in “Note 13 – Stock-Based Compensation”.

There was no stock-based compensation expense recorded during the year ended December 31, 2016.

Earnings per Share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that could have been outstanding assuming the exercise of outstanding stock options and restricted stock or other convertible instruments, as appropriate.

During the years ended December 31, 2017 and 2016, the Company incurred net losses; therefore, the impact of any incremental shares would have been anti-dilutive.

Accounting Standards Recently Adopted

In January 2017, the Financial Accounting Standards Board (FASB) issued accounting standards update (ASU) 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments eliminate Step 2 from the goodwill impairment test. The annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The amendments should be applied on a prospective basis. The new standard is effective for the Company on January 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted the accounting guidance as of January 1, 2017. The newly adopted accounting principle is preferable because it reduces the cost and complexity of evaluating goodwill for impairment. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update). Among other things, this ASU incorporates into the FASB ASC Topic 250, SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on the financial statements of recently issued accounting standards when adopted, and specifically for ASU 2014-09, ASU 2016-02, and ASU 2016-03. If a registrant does not know or cannot reasonably estimate the impact of adoption of the above standards, the SEC staff expects the registrant to make a statement to that effect. Consistent with SAB Topic 11.M, the SEC staff also expects the registrant to provide qualitative disclosures to help users assess the significance the adoption will have on the financial statements. Other than our continued assessment of ASU 2014-09 through the date of adoption, the adoption of ASU 2017-03 did not have an impact on our financial statements.

In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. Other than the revised statement of cash flows presentation of restricted cash, the adoption of ASU 2016-18 did not have an impact on our consolidated financial statements.

In March 2016, the FASB Issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company will adopt the accounting guidance as of January 1, 2017. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which eliminates the existing requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet and now requires that all deferred tax assets and liabilities be classified as noncurrent. The ASU is effective for annual periods beginning after December 15, 2016, with early application permitted. We elected to early adopt the provisions of this ASU and classified our deferred tax balances as a non-current liability as of December 31, 2016 and 2015. The adoption has no effect on net income or cash flows.

In September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in the ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments are effective for annual reporting periods beginning after December 15, 2015. The adoption of ASU 2015-16 did not have an impact on our financial condition or results of operations.

In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which adds comments from the Securities and Exchange Commission (SEC) addressing ASU 2015-03, as discussed above, and debt issuance costs related to line-of-credit arrangements. The SEC commented it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We adopted ASU 2015-15 in connection with our adoption of ASU 2015-03 effective January 1, 2016. The adoption of ASU 2015-15 did not have an impact on our financial condition or results of operations.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in the ASU change the balance sheet presentation requirements for debt issuance costs by requiring them to be presented as a direct reduction to the carrying amount of the related debt liability. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. Transitioning to the new guidance requires retrospective application. We implemented the required change to the presentation of our debt issuance costs in the first quarter of fiscal year 2016, as expected such change did not have a material impact to our consolidated financial statements.

In November 2014, the FASB issued ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, which clarifies how to evaluate the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the ASU requires that an entity consider all relevant terms and features in evaluating the nature of the host contract and clarifies that the nature of the host contract depends upon the economic characteristics and the risks of the entire hybrid financial instrument. An entity should assess the substance of the relevant terms and features, including the relative strength of the debt-like or equity-like terms and features given the facts and circumstances, when considering how to weight those terms and features. The adoption of ASU 2014-16 did not have an impact on our financial condition or results of operations.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which defines management’s responsibility to evaluate whether there is substantial doubt about the company’s ability to continue as a going concern and provides guidance on the related footnote disclosure. Management should evaluate whether there are conditions or events that raise substantial doubt about the company’s ability to continue as a going concern within one year after the date the annual or interim financial statements are issued. We adopted these provisions in the first quarter of 2016 and will provide such disclosures as required if there are conditions and events that raise substantial doubt about our ability to continue as a going concern, as expected such change did not have a material impact to our consolidated financial statements.

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force). The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. The adoption of ASU 2014-12 did not have an impact on our financial condition or results of operations.

Accounting Standards Related to Revenue from Contracts with Customers (Topic 606)

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace most existing revenue recognition guidance in GAAP and align GAAP more closely with International Financial Reporting Standards (IFRS). The objective of this ASU is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The core principle is to 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.

Entities must apply a five-step process to (1) identify the contract with a customer; (2) identify the performance obligations 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. ASU 2014-09 also mandates disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The disclosure requirements include qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 must be adopted using either a full retrospective method or a modified retrospective method.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarified the implementation guidance regarding performance obligations and licensing arrangements.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients, which clarified guidance on assessing collectability, presenting sales tax, measuring noncash consideration, and certain transition matters.

In December 2016, the FASB issued ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606)—Technical Corrections and Improvements, which provided disclosure relief, and clarified the scope and application of the new revenue standard and related cost guidance. The new guidance for Topic 606 will be effective for the annual reporting period beginning after December 15, 2017, including interim periods within that reporting period. Early adoption would be permitted for annual reporting periods beginning after December 15, 2016.

The Company has completed its assessment in determining the impacts the new standard will have on its various revenue streams. The Company’s approach included performing a detailed review of key contracts representative of the different businesses and comparing historical accounting policies and practices to the new accounting guidance. The Company does not incur significant contract costs. The Company’s services and rental contracts are primarily short-term in nature, and therefore, based on management’s assessment, the Company has determined there will be no impact on its consolidated financial statements from the adoption of Topic 606, other than the additional disclosure requirements. Remaining implementation matters include establishing new policies, procedures, and controls. Any adoption date adjustments will not materially impact the financial statements. The Company adopted this standard on January 1, 2018 utilizing the modified retrospective method and has elected to apply the revenue standard only to contracts that are not completed as of the date of initial application.

Accounting Standards Not Yet Adopted

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The guidance in this ASU applies to all entities that change the terms or conditions of a share-based payment award. The amendments provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to the modification of the terms and conditions of a share-based payment award. The amendments in ASU 2017-09 include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The new standard is effective for the Company beginning on January 1, 2018 and should be applied prospectively to awards modified on or after the adoption date. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide a more robust framework to use in determining when a set of assets and activities is a business. The new standard is effective for the Company beginning on January 1, 2018. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements, which makes minor corrections and clarifications that affect a wide variety of topics in the Accounting Standards Codification, including an amendment to ASC Topic 820, Fair Value Measurement, which clarifies the difference between a valuation approach and a valuation technique when applying the guidance of that Topic. The amendment also requires an entity to disclose when there has been a change in either or both a valuation approach and/or a valuation technique. The transition guidance for the ASC Topic 820 amendment must be applied prospectively because it could potentially involve the use of hindsight that includes fair value measurements. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Early application is permitted for any fiscal year or interim period for which the entity’s financial statements have not yet been issued. We are currently evaluating the impact this ASU will have on the financial position or financial statement disclosures.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The guidance in this ASU requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. The new standard is effective for the Company beginning on January 1, 2018. The Company is evaluating the effect that ASU 2016-16 will have on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-15)”, that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the effect of ASU 2016-15 on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will replace the existing lease guidance. The standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Additional disclosure requirements include qualitative disclosures along with specific quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for the Company for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.

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REDUCTION IN VALUE OF ASSETS AND OTHER CHARGES

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 5 - REDUCTION IN VALUE OF ASSETS AND OTHER CHARGES

During 2017 and 2016, the Company recorded approximately $58,000 and $17.7 million, respectively, in expense related to reduction in value of assets. See also “Note 16 – Discontinued Operations” for a discussion of the reduction in value of assets associated with discontinued operations.

The components of reduction in value of assets are as follows (in thousands):

	For the Years Ended December 31,
	2017		2016
Reduction in value of property and equipment:
Impairment in connection with Recapitalization	$	-	$	15,562
Loss on disposal of assets		58		1,087
Reduction in value of intangibles		-		1,087
Total reduction in value of assets	$	58	$	17,736

Impairment of Property and Equipment – Recapitalization 

During 2016, the Company recorded an impairment charge of $15.6 million as part of the Recapitalization in which idle and underutilized equipment with a net book value of $18.2 million was transferred to Tiger as an inducement to provide bridge financing. Among other things, the Company received an extended forbearance agreement and a reduction in debt of $2.0 million as consideration for the sale of these assets (see below “Debt Modification Fee – Recapitalization” for further discussion).

Loss on Disposal of Assets

During the year ended December 31, 2017, the Company recorded a loss on the disposal of property and equipment of approximately $58,000 related primarily to the return of excess vehicles to the lessor in exchange for a release from the associated capital lease obligation and the write-off of leasehold improvements associated with the early termination of certain facility leases.

During 2016, the Company recorded a loss on the disposal of property and equipment of $1.1 million when the Company sold idle and underutilized equipment and vehicles with a net book value of $1.9 million for cash proceeds of approximately $0.8 million. Approximately $0.5 million of proceeds were used to fund working capital needs created by the significant deterioration in the industry throughout 2015 and approximately $0.3 million of proceeds were used to pay down outstanding balances owed to Wells Fargo under the terms of our credit facility. Due to the depressed market for oilfield services, these assets were sold for proceeds significantly less than the net book value resulting in higher losses than normal.

Reduction in Value of Intangibles

During 2016, the Company recorded a $1.1 million reduction in value of intangibles which consisted of a $0.5 million reduction in an intangible associated with a non-compete which management determined was non-enforceable and a $0.6 million reduction in an intangible associated with a supply agreement which had no value subsequent to the liquidation of the supplier under bankruptcy proceedings. As of December 31, 2016, these intangibles were recorded with no value on the consolidated balance sheet.

During the years ended December 31, 2017 and 2016, the Company incurred certain charges related to the downturn in the industry and the Recapitalization. These charges are summarized below (in thousands):

	For the Years Ended December 31,
	2017			2016
Debt modification fee - Recapitalization	$	-		$	629
Debt modification fee - related party		320			-
Professional fees - Recapitalization		138			472
Severance - operational restructuring		(221	)		456
	$	237		$	1,557

Debt Modification Fee – Recapitalization

In October 2016, in connection with our transfer of property and equipment to Tiger, we received certain modifications to our credit facility, including a $2.0 million reduction in our principal outstanding on the Aly Senior Obligations and an extension of the forbearance period to December 9, 2016. We recorded a debt modification fee of $0.6 million as the property and equipment transferred to Tiger had a fair value exceeding the reduction of our obligations. See “Note 2 – Recent Developments” and “Note 3 – Recapitalization” for further details.

Debt Modification Fee – Related Party

On May 23, 2017, in consideration of the increase in the revolving credit facility and the extension of the maturity date of the credit facility with Pelican to December 31, 2019, the Company agreed to issue Pelican an amendment fee of 1,200 shares of our Series A convertible preferred stock. Given the nature of the related party relationship between the Company and Pelican, a debt modification fee – related party of $0.3 million was recorded to interest expense and was equivalent to the estimated fair value of the equity interest granted. The share price of our common stock as of May 23, 2017 of $0.08 per share was used as the basis of fair value for the equity interest granted.

Professional Fees - Recapitalization

During the years ended December 31, 2017 and 2016, the Company incurred professional fees related to the Recapitalization of $0.1 million and $0.5 million, respectively, which are included in selling, general, and administrative expenses on the consolidated statements of operations.

The fees in 2016 were incurred both in connection with forbearance agreements and other negotiations with the Company’s former lender, Wells Fargo, and in connection with the Recapitalization. The charges include $0.2 million of expenses incurred by the Company for financial advisors that Wells Fargo required the Company to retain and $0.1 million of legal and other professional fees. In addition, the charges in 2016 include $0.2 million of expenses the Company incurred for professionals engaged by Wells Fargo whom the Company was required to pay under the terms of our credit facility. On December 12, 2016, these fees were assumed by Pelican and, on January 31, 2017, these fees were included within the Aly Senior Obligations refinanced in connection with the Recapitalization. These fees are recorded in “Accrued interest and other – related party” on our consolidated balance sheet as of December 31, 2016. See “Note 2 – Recent Developments” and “Note 3 – Recapitalization” for further details.

Severance – Operational Restructuring

During the years ended December 31, 2017 and 2016, the Company recorded a benefit of $0.2 million and an expense of $0.5 million, respectively, related to severance obligations. These severance obligations were primarily a result of decisions to reduce headcount in response to the significant downturn in the industry. Due to our limited liquidity in recent years, we did not make certain required cash severance payments. During the year ended December 31, 2017, we settled certain of the obligations; however, we do not know when or if we will be able to satisfy the remaining outstanding severance claims. As such, the accrued severance liability balance of $0.4 million and $0.7 million as of December 31, 2017 and 2016, respectively, is included in other long-term liabilities on the consolidated balance sheets. The severance liability as of December 31, 2017 and 2016 includes a liability of $0.2 million assumed by Aly Energy related to discontinued operations.

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LONG-LIVED ASSETS

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 6 - LONG-LIVED ASSETS

Property and Equipment

Major classifications of property and equipment are as follows (in thousands):

	As of December 31,
	2017			2016
Machinery and equipment	$	33,024		$	31,541
Vehicles, trucks and trailers		4,288			4,523
Office furniture, fixtures and equipment		560			544
Leasehold improvements		105			203
Buildings		212			212
		38,189			37,023
Less: Accumulated depreciation and amortization		(11,374	)		(8,807	)
		26,815			28,216
Assets not yet placed in service		73			10
Property and equipment, net	$	26,888		$	28,226

Depreciation and amortization expense related to property and equipment for the years ended December 31, 2017 and 2016 was $2.9 million and $3.9 million, respectively.

See “Note 5 – Reduction in Value of Assets and Other Charges” for further discussion on asset disposals during the years ended December 31, 2017 and 2016.

Intangible Assets

Intangible assets consist of the following (in thousands):

	Customer Relationships			Tradename			Non-Compete			Total
As of December 31, 2017:
Cost	$	5,323		$	2,174		$	492		$	7,989
Less: Accumulated amortization		(2,432	)		(966	)		(492	)		(3,890	)
Net book value	$	2,891		$	1,208		$	-		$	4,099
As of December 31, 2016:
Cost	$	5,323		$	2,174		$	492			7,989
Less: Accumulated amortization		(1,900	)		(749	)		(409	)		(3,058	)
Net book value	$	3,423		$	1,425		$	83		$	4,931

Estimated amortization expense for the next five years and thereafter is as follows (in thousands):

For the Year Ending December 31,
2018	$	750
2019		750
2020		750
2021		750
2022		679
Thereafter		420
	$	4,099

Total amortization expense for the years ended December 31, 2017 and 2016 was approximately $0.8 million and $1.4 million, respectively.

See further discussion of reduction in value of intangibles during the year ended December 31, 2016 in “Note 5 – Reduction in Value of Assets and Other Charges” and “Note 16 – Discontinued Operations”.

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LONG-TERM DEBT

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 7 - LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

	December 31, 2017				December 31, 2016
	Current		Long-Term		Current		Long-Term
Subordinated note payable	$	-	$	-	$	1,500	$	-
Equipment financing and capital leases		3		-		93		10
Total	$	3	$	-	$	1,593	$	10

Subordinated Note Payable

On August 15, 2014, we completed a bulk equipment purchase for total consideration of $10.3 million of which $2.0 million was in the form of a subordinated note payable (“Subordinated Note Payable”). Prior to the Recapitalization, payments of interest, incurred at 10% per annum, and principal were not required until the maturity date of June 30, 2017. The Subordinated Note Payable was generally subordinated in right of payment to our indebtedness to its lenders.

In connection with the Recapitalization, the Subordinated Note Payable was converted into 1,200,000 common shares of the Company. This conversion was accounted for as a troubled debt restructuring, see further details in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”. As of January 31, 2017, there were no further obligations due under the Subordinated Note Payable.

Equipment Financing and Capital Leases

We finance the purchase of certain vehicles and equipment using long-term equipment loans and using non-cancelable capital leases. Repayment occurs over the term of the loan or lease, typically three to five years, in equal monthly installments which include principal and interest.

Effective June 30, 2016, the Company entered into an amendment for each capital lease outstanding with Wells Fargo Equipment Finance, aggregating $1.9 million, whereby the maturity date was extended by six months and principal payments suspended for a period of six months.

Effective October 26, 2016, our equipment financing and capital leases with Wells Fargo Equipment Finance were included in the Aly Senior Obligations which were acquired by Tiger, then subsequently acquired on December 12, 2016 by Pelican. See further discussion in “Note 2 – Recent Developments”, “Note 3 – Recapitalization” and “Note 8 – Long-term Debt – Related Party”.

In January 2017, in order to reduce our debt service obligations, we returned certain underutilized and idle vehicles under capital leases with a net book value of $0.1 million to the lessor in exchange for the release of all outstanding obligations, aggregating to approximately $0.1 million, resulting in a reduction in value of assets of approximately $38,000.

As of December 31, 2017, we had one remaining capital lease with a balance of approximately $3,000 which was assumed by the continuing operations of the Company in connection with our discontinued operations effective December 31, 2016.

As of December 31, 2017 and December 31, 2016, we had approximately $3,000 and $0.1 million outstanding under equipment financing and capital leases, respectively. As of December 31, 2017, no value was recorded for equipment held under capital lease as the asset under lease was transferred to Tiger in October 2016 in connection with the Recapitalization. As of December 31, 2016, the gross amount of equipment held under capital leases was approximately $0.3 million and the associated accumulated amortization was $0.2 million.

Credit Facility: Term Loan, Delayed Draw Term Loan, and Revolving Credit Facility

Our primary credit facility with Wells Fargo consisted of a term loan, a delayed draw term loan, and a revolving credit facility (“Credit Facility”, as amended). Obligations under the Credit Facility were as follows:

· Term loan – In April 2014, our original principal balance on the term loan was $25.0 million; this loan required principal payments each quarter of $1.3 million.

· Delayed draw term loan – In November 2014, we entered into an amendment to the Credit Facility, primarily to provide for a delayed draw term loan with a maximum availability of $5.0 million, and, as of December 2014, the full $5.0 million had been drawn; beginning in June 2015, this loan required principal payments each quarter of $0.3 million.

· Revolving credit facility – In April 2014, our original availability under the revolving credit facility was $5.0 million; however, after subsequent amendments, our availability was reduced to $1.0 million as of December 31, 2015 and then to zero as of December 31, 2016. As such, there were no outstanding borrowings under this loan as of December 31, 2016.

In October 2015, in conjunction with an amendment to the Credit Facility, our interest rate was fixed at 5.25%. Beginning in July 2016, our rate increased to the default rate of 7.25% in connection with further amendments to the Credit Facility and related forbearance agreements.

The obligations under the Credit Facility were guaranteed by all of our subsidiaries and secured by substantially all of our assets. The credit agreement contained customary events of default and covenants including restrictions on our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, grant liens and sell assets.

Due to the significant downturn in the oilfield services industry throughout 2015, as of January 1, 2016, we were not in compliance with certain financial covenants set forth in our Credit Facility due to our poor financial results.

On March 31, 2016, we completed the execution and delivery of a forbearance agreement and amendment to the Credit Facility. Among other provisions, the lenders agreed to forbear from exercising their remedies under the Credit Facility until the earlier of July 10, 2016 or the date on which forbearance was terminated due to specified events, including (i) the occurrence of other defaults under the Credit Facility, (ii) our failure to hire an independent financial advisor prior to April 10, 2016 or (iii) our failure to present a detailed plan for asset sales or equity capital acceptable to the lenders yielding net cash proceeds to us of at least $2.5 million by May 25, 2016. In conjunction with agreeing to forbear from exercising their remedies under the Credit Facility, the lenders reduced the revolving credit portion of the Credit Facility to zero thereby eliminating our ability to borrow additional funds under the Credit Facility.

On May 13, 2016, we further amended the Credit Facility and the forbearance agreement related to such facility to increase our basket of permitted asset sales to $0.6 million in any calendar year provided that any proceeds from permitted asset sales be deposited in a blocked deposit account with Wells Fargo. We also acknowledged that we were unable to comply with certain financial covenants as of March 31, 2016.

On August 5, 2016, we entered into a new agreement with Wells Fargo, the Limited Forbearance Agreement, in which Wells Fargo agreed to forbear from exercising their remedies under the credit agreement until August 31, 2016, conditioned upon the following, among other items: (i) hiring a Chief Restructuring Officer (“CRO”) on terms acceptable to the lender; (ii) having the CRO provide an initial cash forecast budget prior to August 10, 2016 and weekly updates thereafter; (iii) not incurring a variance of more than 10% from the cash flow budgets; and, (iv) paying accrued interest monthly effective July 21, 2016 at the default rate specified in the Credit Facility. As mandated, effective August 5, 2016, our board selected Chris Quinn to serve as CRO of the Company. On October 5, 2016, Wells Fargo extended the forbearance period until October 19, 2016.

On October 26, 2016, in connection with the Recapitalization, the Aly Senior Obligations, which included the Credit Facility and the outstanding equipment financing and capital leases in favor of Wells Fargo and Well Fargo Equipment Finance, respectively, were acquired by Tiger. Simultaneously, we entered into the Third Limited Forbearance Agreement which extended the forbearance period to December 9, 2016 and reduced the Aly Senior Obligations in the amount of $2.0 million, conditioned upon the following, among other items: (i) Tiger entering into an assignment agreement with Pelican; (ii) Pelican providing $500,000 of unsecured working capital financing to the Company pending the closing; and, (iii) the Company transferring to Tiger certain excess equipment and vehicles which the Company was not utilizing and did not consider as necessary for its operations. The Company recorded a debt modification fee of $0.6 million in connection with the execution of the Third Limited Forbearance Agreement. See “Note 2 – Recent Developments” and “Note 3 – Recapitalization” for further detail.

Effective December 12, 2016, the Aly Senior Obligations were acquired by Pelican. See further discussion in “Note 8 – Long-term Debt – Related Party”.

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LONG-TERM DEBT – RELATED PARTY

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 8 - LONG-TERM DEBT – RELATED PARTY

Long-term debt – related party consists of the following (in thousands):

	December 31, 2017				December 31, 2016
	Current		Long-Term		Current		Long-Term
Credit facility
Term loan	$	-	$	5,027	$	13,339	$	-
Revolving credit facility		-		750		-		-
Delayed draw term loan		-		575		4,433		-
Line of credit - related party		-		-		494		-
Equipment financing and capital leases		-		-		614		1,315
Total	$	-	$	6,352	$	18,880	$	1,315

Line of Credit – Related Party

On October 26, 2016, we entered into an agreement with Tiger and Pelican, in conjunction with the Recapitalization, requiring Pelican to provide a working capital line of credit of $0.5 million. Borrowings under the line accrued interest at a rate of 5% per annum. The line was unsecured and had a maturity date of January 31, 2017.

As of December 31, 2017, there was no outstanding balance under the line. The outstanding balance of $0.5 million as of January 31, 2017 was aggregated with the Aly Senior Obligations and subsequently exchanged into a new credit facility with Pelican in connection with the Recapitalization (see “Note 3 – Recapitalization for further detail). As of December 31, 2016, there was $0.5 million outstanding under the line and no further availability to borrow under the line.

Credit Facility – Related Party: Term Loan, Delayed Draw Term Loan, and Revolving Credit Facility

Effective October 26, 2016, our Credit Facility with Wells Fargo was included in the Aly Senior Obligations which were acquired by Tiger and then subsequently acquired on December 12, 2016 by Pelican. During this time, interest and ticking fees continued to accrue and there were no modifications to the components of the Credit Facility as a result of these transactions; however, a Fourth Limited Forbearance Agreement was executed with Pelican. The agreement extended the forbearance period to January 31, 2017, conditioned upon the Company using its best efforts to consummate a recapitalization plan, satisfactory to Pelican, that would, at a minimum, result in the conversion of all outstanding Aly Operating redeemable preferred stock and associated accrued dividends, all outstanding Aly Centrifuge redeemable preferred stock and associated accrued dividends, the subordinated note payable and associated accrued interest, and the contingent payment liability into common stock on or prior to January 31, 2017.

Effective January 31, 2017, the Recapitalization was completed, and the Credit Facility was amended in its entirety. The amended facility consisted of a term loan of $5.1 million and a revolving credit facility of up to $1.0 million (“Pelican Credit Facility”). Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables where eligible receivables are defined as all receivables which have been billed to customers and are less than 90 days old.

Borrowings under the Pelican Credit Facility are subject to monthly interest payments at an annual base rate of the six-month LIBOR rate on the last day of the calendar month plus a margin of 3.0%. To the extent the Company generates free cash flow, as defined in the credit agreement, during a given calendar year, principal payments of 50% of such free cash flow are due on the earlier of (i) 60 days after the end of such year or, (ii) the date on which the Company’s independent auditors have completed their audit of the financial statements for such year. Accordingly, there was no principal payment due for the year ended December 31, 2017.

Subsequent to the Recapitalization, we entered into several further amendments to capitalize on improved market conditions and increased activity in our business:

· Amendment No. 1, effective March 1, 2017, provided for a delayed draw term loan to be added to the Pelican Credit Facility for the purpose of financing capital expenditures. The amendment permitted us to draw on the delayed draw term loan from time-to-time up until December 31, 2018 in order to fund up to 80% of the cost of capital expenditures subject to a $0.5 million limit on aggregate borrowings.

· Amendment No. 2, effective May 23, 2017, increased the maximum revolving credit amount from $1.0 million to $1.8 million and extended the final maturity date of the facility to December 31, 2019. In consideration of the increase in the revolving credit facility and the extension of the final maturity date, we issued Pelican an amendment fee consisting of 1,200 shares of our Series A convertible preferred stock. See further discussion in “Note 12 – Controlling Shareholder and Related Party Transactions”.

· Amendment No. 3, effective June 15, 2017, modified maximum potential borrowings under each of the revolving credit facility and the delayed draw term loan without changing the aggregate available borrowings under the credit facility. The amendment reduced the maximum revolving credit amount from $1.8 million to $1.0 million and increased the maximum delayed draw loan borrowings from $0.5 million to $1.3 million and the amendment also increased permitted draws on the delayed draw loan from 80% of the cost of capital expenditures being funded to 90% of the cost of capital expenditures being funded.

· Amendment No. 4, effective January 22, 2018, provided for a Swing Line to be added to the Pelican Credit Facility without changing the aggregate available borrowings under the credit facility. The amendment provided for a maximum availability of $0.6 million under the new Swing Line and reduced the maximum delayed draw term loan borrowings from $1.3 million to $0.7 million. Amounts drawn on the Swing Loan may be repaid and reborrowed without penalty until June 30, 2018 at which time the Swing Line matures and all outstanding amounts are immediately due and payable. Interest on the Swing Line is charged at the lower of the (i) highest lawful rate or (ii) 7.0% per annum.

The obligations under the Pelican Credit Facility are guaranteed by all of our subsidiaries and secured by substantially all of our assets. The Pelican Credit Facility contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, pay dividends or make other distributions, grant liens and sell assets. The Pelican Credit Facility does not include any financial covenants. We were in full compliance with the credit facility as of December 31, 2017.

As of December 31, 2017, we had the availability to borrow an incremental $0.3 million under the revolving credit facility, and an incremental $0.7 million under the delayed draw term loan.

In January 2018, we borrowed an incremental $0.3 million under the revolving credit facility and the Pelican Credit Facility was amended to include the Swing Line. As of March 31, 2018, we have the availability to borrow an $0.6 million under the Swing Line and, if we have capital expenditures which are eligible to be financed, an incremental $75,000 under the delayed draw term loan to finance 90% of such expenditures.

Equipment Financing and Capital Leases – Related Party

Effective December 12, 2016, Pelican acquired the Aly Senior Obligations which included $1.9 million of outstanding equipment financing and capital leases plus associated accrued interest.

On January 31, 2017, in connection with the Recapitalization, the Aly Senior Obligations, including the equipment financing and capital leases, were refinanced under the Pelican Credit Facility, see “Note 2 – Recent Developments” and “Note 3 – Recapitalization”. Future borrowings required for equipment financing are likely to be funded through the delayed term loan included in the Pelican Credit Facility.

Based on the impact of the Recapitalization on January 31, 2017, coupled with the Company’s current forecasts, cash-on-hand, cash flow from operations and borrowing capacity under the Pelican Credit Facility, the Company expects to have sufficient liquidity and capital resources to meet its obligations for at least the next twelve months; however, our forecasts are based on many factors outside the Company’s control. See further details in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”.

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INCOME TAXES

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 9 - INCOME TAXES

On December 22, 2017, the Tax Cuts and Jobs Act (“U.S. Tax Reform”) was enacted by the U.S. federal government. The legislation significantly changed U.S. income tax law, by, among other things, lowering the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. In addition, there are many new provisions, including changes to expensing of qualified tangible property and the deductions for executive compensation and interest expense. The Company’s consolidated financial statements for the year ended December 31, 2017 were not impacted by the corporate income tax rate reduction going from 35% to 21% due to our full valuation allowance on net deferred tax assets. This rate reduction required the revaluation of the Company’s deferred tax assets and liabilities as of the U.S. Tax Reform enactment date. The revaluation reflects an assumption that the new federal corporate income tax rate will remain in place for the years in which temporary differences are expected to reverse. The Company estimates that the reduction in the federal tax rate applicable to deferred tax balances will reduce the net deferred tax asset balance, before valuation allowance, by approximately $0.8 million, with a corresponding reduction in the recorded valuation allowance.

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”). SAB 118 provides the registrant with up to a one-year period to finalize the accounting for the impacts of U.S. Tax Reform. During the one-year period in which the initial accounting for U.S. Tax Reform impacts is incomplete, a registrant may include a provisional amount when reasonable estimates can be made or continue to apply the prior tax law if a reasonable estimate cannot be made. As discussed above, the Company has estimated the tax provision impacts related to the corporate income tax rate reduction and the impact on its deferred tax assets and liabilities, after corresponding adjustments to the reported valuation allowance. The deferred tax assets and liabilities table below include the adjustments from the revaluation of deferred tax balances to reflect the rate reduction for the year ended December 31, 2017. Before U.S. Tax Reform adjustments, the ending net deferred tax asset would have been $3.2 million compared to the reflected ending net deferred tax asset of $2.4 million as of December 31, 2017. The ultimate impact of remeasuring the deferred tax assets and liabilities may differ from the provisional amounts due to gathering additional information to more precisely compute the amount of tax, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions the Company may take. The Company expects to finalize accounting for the impacts of U.S. Tax Reform when the 2017 U.S. corporate income tax return is filed in 2018.

The provision for income taxes consists of the following (in thousands):

	For the Years Ended December 31,
	2017		2016
Current provision:
Federal	$	-	$	-
State		59		33
Total current provision		59		33
Deferred benefit:
Federal		-		(7,298	)
State		-		(639	)
Total deferred benefit		-		(7,937	)
Provision for income taxes	$	59	$	(7,904	)

The following table reconciles the statutory tax rates to our effective tax rate:

	For the Years Ended December 31,
	2017			2016
Federal statutory rate		34.00	%		34.00	%
State taxes, net of federal benefit		-5.56	%		1.85	%
Deferred income taxes - Tax Reform Rate Change		-77.90	%		0.00	%
Valuation allowance - Tax Reform Rate Change		77.90	%		0.00	%
Valuation allowance - other		-178.02	%		-8.60	%
Gain on cancellation of debt income - Restructuring		163.55	%		0.00	%
Accrued interest on equity - Restructuring		-25.70	%		0.00	%
Other miscellaneous		-4.61	%		1.46	%
Effective income tax rate		-16.34	%		28.71	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income taxes. Components of our deferred income taxes are as follows (in thousands):

	As of December 31,
	2017			2016
Deferred tax assets:
Allowance for doubtful accounts	$	15		$	191
Net operating loss		6,622			10,024
Start-up costs		9			17
State net operating loss, net of federal benefit		980			604
Accrued compensation		84			220
Charitable contributions and other		9			26
Total deferred tax assets		7,719			11,082
Deferred tax liabilities:
Prepaid assets		82			32
Property and equipment		4,496			7,334
Intangibles		595			1,208
State deferreds, net of federal benefit		160			139
Total deferred tax liabilities		5,333			8,713
Net deferred tax assets (liabilities) before valuation allowance		2,386			2,369
Valuation allowance		(2,386	)		(2,369	)
Net deferred tax liabilities after valuation allowance	$	-		$	-

We have a loss for the year ended December 31, 2017, for federal income tax purposes and in certain state income tax jurisdictions. As of December 31, 2017, we had a gross net operating loss (“NOL”) carryforward for U.S. federal income tax purposes of approximately $31.5 million. This NOL will begin to expire in 2033 if not utilized. We will carryforward the net federal NOL of approximately $6.6 million. We also have state NOL carryforwards that will affect state taxes of approximately $1.2 million as of December 31, 2017. State NOLs begin to expire in 2034. Carryback provisions are not allowed by all states, accordingly the state NOLs also give rise to a deferred tax asset.

The Company’s ability to utilize its NOL carryforwards to offset future taxable income and to reduce U.S. federal income tax liability is subject to certain requirements and restrictions. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. An ownership change generally occurs if one or more shareholders (or groups of shareholders) who are each deemed to own at least 5% of the Company’s stock have aggregate increases in their ownership of such stock of more than 50 percentage points over such stockholders’ lowest ownership percentage during the testing period (generally a rolling three-year period). The Company believes it has not experienced an ownership change in January 2017 as a result of the Recapitalization; however, the Company remains subject to ongoing testing for future ownership changes based on shareholder ownership that may create a restrictive Section 382 limitation on the NOLs in subsequent reporting periods.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has evaluated the available evidence and the likelihood of realizing the benefit of its net deferred tax assets. Management considers cumulative losses and other negative evidence as well as positive evidence such as the scheduled reversal of deferred tax liabilities, future profitability, and tax planning strategies in making this assessment. From its evaluation, the Company has concluded that based on the weight of available evidence, it is not more likely than not to realize the benefit of its deferred tax assets. Therefore, the Company had a valuation allowance of $2.4 million for as of December 31, 2017 and 2016. Should the factors underlying management’s analysis change, future valuation adjustments to net deferred tax assets may be necessary. The benefit from any reversal of the valuation allowance will be charged directly to income tax expense.

We follow accounting guidance under ASC 740-10 Income Taxes related to uncertainty in income tax positions, which clarifies the accounting and disclosure requirements for uncertainty in tax positions. We assessed our filing positions in all significant jurisdictions where we are required to file income tax returns for all open tax years and determined no liability existed or there was no liability for uncertain positions. Our major taxing jurisdictions include the U.S. federal income taxes and the Texas franchise tax. Our federal tax returns remain open for tax years 2012 forward and our state tax returns remain open for tax years 2011 forward. None of our federal or state income tax returns are currently under examination by the Internal Revenue Service or state authorities.

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COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Litigation

We are subject to certain claims arising in the ordinary course of business. Management does not believe that any claims will have a material adverse effect on our financial position or results of operations.

In 2015, we ceased compensating our employees on a day rate basis in order to ensure full compliance with the Fair Labor Standards Act (“FLSA”). Certain former employees of Aly Centrifuge who were paid a day rate for their work prior to February 2015 alleged that we failed to pay overtime when they worked over 40 hours per week. Certain of these employees pursued legal action against us based on such allegations:

· In February 2015, multiple plaintiffs filed a proposed collective action against us alleging overtime violations under the FLSA. We settled this matter for business purposes with no admission of liability. The settlement amount was fully accrued as of December 31, 2015 and the case was fully paid and dismissed with prejudice, by the end of January 2016.

· In August 2016, several former employees filed a lawsuit against us alleging overtime violations of the FLSA. In May 2017, we settled the matter for business purposes with no admission of liability. The settlement amount was fully accrued as of December 31, 2016 and, as of June 30, 2017, the settlement was fully paid and the case had been dismissed with prejudice.

· We continue to explore settlement options with five prior employees who allege overtime violations of the FLSA. If a settlement is not feasible, we may be required to proceed to arbitration. An estimated settlement amount was fully accrued as of December 31, 2017 and 2016.

The Company entered into certain employment agreements in connection with the acquisition of United and Evolution in 2014 which provided for specified severance obligations of the Company in the event of a termination of employment of the subject employees. The Company also entered into a similar employment agreement in 2014 in connection with the recruitment of an additional employee for the solids control operations. During 2015 and 2016, the employment of these individuals was terminated and the Company did not pay the severance obligations that were contemplated by the employment agreements in the event that the cessation of employment would be determined to have been a termination by the Company “without cause.” During the year ended December 31, 2017, we settled certain of these obligations reducing the recorded liability. As of December 31, 2017 and 2016, the aggregate unpaid severance obligation under these agreements was approximately $0.4 million and $0.7 million, respectively.

Contractual Commitments

We have numerous contractual commitments in the ordinary course of business including debt service requirements and operating leases. We lease land, facilities and equipment from non-affiliates. Certain of these leases extend to 2020.

Operating Leases

We lease certain property and equipment under non-cancelable operating leases. The terms of our operating leases generally range from one to five years. Lease expense under all non-cancelable operating leases totaled approximately $0.2 million and $0.4 million for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, the future minimum lease payments under non-cancelable operating leases were as follows (in thousands):

Year Ending December 31,
2018	$	118
2019		83
2020		25
	$	226

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REDEEMABLE PREFERRED STOCK

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 11 - REDEEMABLE PREFERRED STOCK

As of December 31, 2017, the Company did not have any redeemable preferred stock outstanding; however, as of December 31, 2016, two of our subsidiaries had redeemable preferred stock outstanding. Aly Operating issued redeemable preferred stock in connection with the acquisition of Austin Chalk (“Aly Operating Redeemable Preferred Stock”) and Aly Centrifuge issued redeemable preferred stock in connection with the United Acquisition (“Aly Centrifuge Redeemable Preferred Stock”).

On January 31, 2017, in connection with the Recapitalization, the Aly Operating Redeemable Preferred Stock, the Aly Centrifuge Redeemable Preferred Stock and all accrued dividends on such stock were converted into 5,454,487 shares of common stock.

Aly Operating Redeemable Preferred Stock

As part of the acquisition of Austin Chalk, Aly Operating agreed to issue up to 4 million shares of Aly Operating Redeemable Preferred Stock, with a par value of $0.01, to the seller, with a fair value and liquidation value of $3.8 million and $4.0 million, respectively. The preferred stock was valued as of the date of acquisition by discounting the sum of (i) the liquidation value at issuance and (ii) the future cumulative accrued dividends as of the date of optional redemption for a lack of marketability.

The Aly Operating Redeemable Preferred Stock was entitled to a cumulative paid-in-kind dividend of 5% per year on its liquidation preference, compounded quarterly. Aly Operating was not required to pay cash dividends.

The following table describes the changes in Aly Operating Redeemable Preferred Stock (in thousands, except for shares) for the years ended December 31, 2017 and 2016:

	Carrying Value of Aly Operating Redeemable Preferred Stock			Number of Outstanding Aly Operating Redeemable Preferred Shares			Liquidation Value of Aly Operating Redeemable Preferred Stock
January 1, 2016	$	4,647			4,000,000		$	4,685
Accrued dividends		239			-			239
Accretion		38			-			-
December 31, 2016		4,924			4,000,000			4,924
Accrued dividends		21			-			21
Exchange for common stock in connection with the Recapitalization		(4,945	)		(4,000,000	)		(4,945	)
December 31, 2017	$	-			-		$	-

The Aly Operating Redeemable Preferred Stock was classified outside of permanent equity in our consolidated balance sheet because the settlement provisions provided the holder the option to require Aly Operating to redeem the Aly Operating Redeemable Preferred Stock at the liquidation price plus any accrued dividends upon a liquidity event, as defined in the agreement, or upon an initial public offering, as defined in the agreement.

On January 31, 2017, the Aly Operating Redeemable Preferred Stock and all accrued dividends were converted into 2,414,971 shares of common stock in connection with the Recapitalization. This conversion was accounted for as a troubled debt restructuring, see further details in “Note 3 – Recapitalization”.

Aly Centrifuge Redeemable Preferred Stock

On April 15, 2014, as part of the United Acquisition, Aly Centrifuge issued 5,000 shares of Aly Centrifuge Redeemable Preferred Stock, with a par value of $0.01, to the sellers in the transaction, with a fair value and liquidation value of $5.1 million and $5.0 million, respectively. The preferred stock was valued as of the date of acquisition by discounting the sum of (i) the value of the preferred stock without a conversion option using the option pricing method and (ii) the value of the conversion option using the Black-Scholes option pricing model for a lack of marketability. In 2015, Aly Centrifuge asserted an indemnification claim of 124 shares against shares that were subject to an eighteen-month holdback for general indemnification purposes pursuant to the purchase agreement.

On August 15, 2014, in connection with a bulk equipment purchase, Aly Centrifuge issued an additional 4,000 shares of Aly Centrifuge Redeemable Preferred Stock, with a par value of $0.01, to the sellers in the transaction, with a fair value and liquidation value of $4.3 million and $4.0 million, respectively. The preferred stock was valued as of the date of the equipment purchase by discounting the sum of (i) the value of the preferred stock without a conversion option using the option pricing method and (ii) the value of the conversion option using the Black-Scholes option pricing model for a lack of marketability.

The Aly Centrifuge Redeemable Preferred Stock was entitled to a cumulative paid-in-kind dividend of 5% per year on its liquidation preference, compounded quarterly. Aly Centrifuge was not required to pay cash dividends.

The following table describes the changes in the Aly Centrifuge Redeemable Preferred Stock (in thousands, except for shares) for the years ended December 31, 2017 and 2016:

	Carrying Value of Aly Centrifuge Redeemable Preferred Stock			Number of Outstanding Aly Centrifuge Redeemable Preferred Shares			Liquidation Value of Aly Centrifuge Redeemable Preferred Stock
January 1, 2016	$	9,755			8,876		$	9,591
Accrued dividends		489			-			489
Accretion		(164	)		-			-
December 31, 2016		10,080			8,876			10,080
Accrued dividends		42			-			42
Exchange for common stock in connection with the Recapitalization		(10,122	)		(8,876	)		(10,122	)
December 31, 2017	$	-			-		$	-

The Aly Centrifuge Redeemable Preferred Stock was classified outside of permanent equity on our consolidated balance sheet because the settlement provisions provided the holder the option to require Aly Centrifuge to redeem the Aly Centrifuge Redeemable Preferred Stock at the liquidation price plus any accrued dividends.

Aly Centrifuge Redeemable Preferred Stock also included a conversion feature; specifically, the right to exchange into shares of our common stock on any date, from time-to-time, at the option of the holder, into the number of shares equal to the quotient of (i) the sum of (A) the liquidation preference plus (B) an amount per share equal to accrued but unpaid dividends not previously added to the liquidation preference on such share of preferred stock, divided by (ii) 1,000, and (iii) multiplied by the exchange rate in effect at such time (“Conversion Feature”). The exchange rate in effect as of December 31, 2016 was 71.4285 or $14.00 per share of our common stock.

On January 31, 2017, the Aly Centrifuge Redeemable Preferred Stock and all accrued dividends were converted into 3,039,516 shares of common stock in connection with the Recapitalization; however, the shares were not converted according to the terms of the Conversion Feature but instead the conversion rate was negotiated independently as a part of the Recapitalization. This conversion was accounted for as a troubled debt restructuring, see further details in “Note 3 – Recapitalization”.

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CONTROLLING SHAREHOLDER AND RELATED PARTY TRANSACTIONS

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 12 - CONTROLLING SHAREHOLDER AND RELATED PARTY TRANSACTIONS

From time-to-time, the Company engages in business transactions with its controlling shareholder, Pelican, and other related parties.

Controlling Shareholder – Pelican

On December 12, 2016, Pelican purchased our Aly Senior Obligations from Tiger for $5.1 million as a part of the Recapitalization. Effective January 31, 2017, the Recapitalization was completed and resulted in the following:

· Pelican’s contribution of approximately $16.1 million of the Aly Senior Obligations into shares of Series A convertible preferred stock that represented approximately 80% of our common stock as of January 31, 2017, or 53,628,842 common shares, on a fully diluted basis. The preferred shares carry a liquidation preference of $1,000 per share or $16.1 million upon issuance.

· Amendment of the Company’s credit agreement acquired by Pelican into a new credit agreement (consisting of a $5.1 million term loan and $1.0 million revolving credit arrangement) with an extended maturity date of December 31, 2018.

On January 31, 2017 upon completion of the Recapitalization, Pelican had the power to vote the substantial majority of the Company’s outstanding common stock. As of March 31, 2018, seven of our eight board members, including two of our executive officers, and our chief financial officer hold an ownership interest in Pelican.

On May 23, 2017, in consideration of the increase in the revolving credit facility and the extension of the maturity date of the Pelican Credit Facility to December 31, 2019, the Company agreed to issue Pelican an amendment fee of 1,200 shares of our Series A convertible preferred stock. Given the nature of the related party relationship between the Company and Pelican, a debt modification fee – related party of $0.3 million was recorded to interest expense and was equivalent to the estimated fair value of the equity interest granted. The share price of our common stock as of May 23, 2017 of $0.08 per share was used as the basis of fair value for the equity interest granted. The debt modification fee – related party is recorded on the consolidated statement of operations and is recorded as an “Issuance of preferred shares in exchange for the amendment to credit facility – related party” on the consolidated statement of changes in stockholders’ equity (deficit). See further details in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”.

During the years ended December 31, 2017 and 2016, we recorded interest expense due to Pelican of $0.4 million and $0.1 million, respectively. As of December 31, 2017 and 2016, our consolidated balance sheet includes accrued expenses and interest due to Pelican of approximately $26,000 and $1.3 million, respectively.

Other Related Party Transactions

One of our directors, Tim Pirie, appointed March 3, 2015, was one of the sellers involved with the United Acquisition in April 2014. Although part of the acquisition price was payable in contingent consideration, we did not make any contingent payments during the years ended December 31, 2017 and 2016.

As of December 31, 2016, we estimated the fair value of future contingent payments to be $0.8 million. On January 31, 2017, in connection with the Recapitalization, the aggregate contingent payment liability was converted into 457,494 shares of the Company’s common stock, of which Mr. Pirie controls all of the voting rights to 326,834 shares. See further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”.

As part of the acquisition price of United, the sellers also received Aly Centrifuge Redeemable Preferred Stock. On January 31, 2017, the outstanding Aly Centrifuge Redeemable Preferred Stock and accrued dividends were converted into 3,039,516 shares of the Company’s common stock of which Mr. Pirie controls all of the voting rights to 593,815 shares. See further discussion in “Note 2 – Recent Developments”, “Note 3 – Recapitalization” and “Note 11 – Redeemable Preferred Stock (Aly Centrifuge Redeemable Preferred Stock)”.

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STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 13 - STOCK-BASED COMPENSATION

As of December 31, 2017 and 2016, we had two stock-based compensation plans with outstanding options. Only one of our plans is currently available to grant incentive stock options, non-qualified stock options and restricted stock to employees and non-employee members of the board of directors.

2017 Stock Option Plan

Effective April 4, 2017, the 2017 Stock Option Plan (the “2017 Plan”) was approved by the board of directors. On May 30, we granted options to purchase approximately 16.9 million shares of common stock under the 2017 Plan which was the maximum amount authorized. The option contract term is 10 years and the exercise price is $0.10. The options vested and became exercisable immediately upon grant. The fair value of the award was estimated using a Black-Scholes fair value model. The valuation of stock options requires us to estimate the expected term of award, which was estimated using the simplified method, as the Company does not have sufficient historical exercise information. Additionally, the valuation of stock option awards is also dependent on historical stock price volatility. In view of our limited trading volume, volatility was calculated based on historical stock price volatility of the Company’s peer group.

Options to purchase 16.9 million common shares under the 2017 Plan were outstanding as of December 31, 2017. These options were granted, vested and became exercisable during the year ended December 31, 2017. As a result, we recorded stock-based compensation of $0.6 million, the full value of the grant of options to purchase common stock, as a component of selling, general and administrative expenses during the year ended December 31, 2017.

Omnibus Incentive Plan

The Omnibus Incentive Plan (the “2013 Plan”) was approved by the board of directors on May 2, 2013. On May 2, 2013, we granted 338,474 common shares under the 2013 Plan, which was the maximum number authorized. On June 5, 2015, a majority of our stockholders approved an amendment to our 2013 Plan to increase the maximum authorized shares to 750,000 common shares.

The option contract term is 10 years and the exercise price is $4.00. The options vest and are exercisable if a “Liquidity Event” occurs and certain conditions are met. A Liquidity Event is defined as an IPO or a change of control, as defined in the plan. Pursuant to the plan, an IPO is defined as an underwritten public offering of shares. If the first Liquidity Event is an IPO, then the options vest and are exercisable immediately if the IPO is effected at a price of $8.00 per share or greater. If the IPO is effected at a price less than $8.00 per share, but the stock price post-IPO reaches $8.00 per share during the six-month period immediately following the IPO, then the options vest and are exercisable. If the IPO is effected at a price less than $8.00 per share and the share price does not reach $8.00 per share prior to the sixth month anniversary of the IPO, the options do not vest and expire. If the first Liquidity Event to occur is a change of control, then the options vest if the change of control takes place at a price of at least $8.00 per share. If such change in control occurs at a price less than $8.00 per share, the options do not vest and expire.

The fair value of each option award granted under the 2013 Plan is estimated on the date of grant using the Monte Carlo simulation method. The same Monte Carlo simulation method is used to determine the derived service period of five years. In addition, expected volatilities have been based on comparable public company data, with consideration given to our limited historical data. We make estimates with respect to employee termination and forfeiture rates of the options within the valuation model. The risk-free rate is based on the approximate U.S. Treasury yield rate in effect at the time of grant. For options granted prior to the Share Exchange, the calculation of our stock price involved the use of different valuation techniques, including a combination of an income and/or market approach. Determination of the fair value was a matter of judgment and often involved the use of significant estimates and assumptions.

Options to purchase 234,144 and 242,507 common shares under the Plan were outstanding as of December 31, 2017 and 2016, respectively. The aggregate unrecognized compensation cost related to these non-vested stock option awards was approximately $0.3 million as of December 31, 2017 and 2016. Such amount will be recognized in the future upon occurrence of a Liquidity Event that results in a vesting of the options. No options were granted under the Plan during the years ended December 31, 2017 and 2016. No options were vested as of December 31, 2017 and 2016. During the years ended December 31, 2017 and 2016, forfeited options totaled 8,363 and 87,604, respectively.

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STOCKHOLDERS’ EQUITY (DEFICIT)

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 14 - STOCKHOLDERS’ EQUITY (DEFICIT)

Common Shares

Authorized common shares total 25,000,000 with a par value of $0.001 per share, of which, 13,819,020 and 13,818,795 were issued and outstanding, respectively, as of December 31, 2017 and 6,707,039 and 6,706,814 were issued and outstanding, respectively, as of December 31, 2016. Common stock held in treasury as of December 31, 2017 and 2016 were 225 shares.

On January 31, 2017, we issued 7,111,981 shares of our common stock to the former holders of the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, a subordinated note payable, and a contingent payment liability (an aggregate of six individual entities and persons) in connection with the Recapitalization.

Preferred Shares

Authorized preferred shares, with a par value of $0.001 per share, total 9,980,000 and 10,000,000 as of December 31, 2017 and 2016, respectively, of which, none were issued and outstanding as of December 31, 2017 and 2016.

As a result of the Recapitalization, the Company allocated 20,000 of its authorized shares from available authorized preferred shares to authorized Series A convertible preferred stock. The Series A convertible preferred stock has a par value of $0.001 per share and retains a liquidation preference equal to $1,000 per share. The conversion feature provides that each Series A convertible preferred share shall be convertible into 3,332.64 common shares at any time at the option of the shareholder.

On January 31, 2017, we issued 16,092 shares of Series A convertible preferred stock to Pelican in connection with the Recapitalization. On May 23, 2017, in consideration of the increase in the revolving credit facility and the extension of the final maturity date of the Pelican Credit Facility, the Company issued Pelican an amendment fee of 1,200 shares of our Series A convertible preferred stock. See further discussion in Note 2 – Recent Developments and Note 3 – Recapitalization.

All shares of the Series A convertible preferred stock vote on an “as if converted” basis. As such, Pelican, who owns 100% of the Series A convertible preferred stock, controls the substantial majority of votes of Aly Energy. (See further discussion in “Note 12 – Controlling Shareholder and Related Party Transactions”.)

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SUPPLEMENTAL CASH FLOW INFORMATION

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flows and non-cash investing and financing activities are as follows (in thousands):

	For the Years Ended December 31,
	2017		2016
Supplemental disclosure of cash flow information:
Cash paid for interest - related party	$	222	$	-
Cash paid for interest		12		973
Cash paid for interest - discontinued operations		-		1
Cash paid for income taxes, net		50		2
Non-cash investing and financing activities:
Extinguishment of debt and other liabilities - related party	$	16,092	$	-
in exchange for Series A convertible preferred stock in connection with the Recapitalization
Extinguishment of redeemable preferred stock		15,036		-
in exchange for common stock in connection with the Recapitalization
Returned equipment to lessor in exchange for release from capital lease obligation		91		-
Paid-in-kind dividends on preferred stock		63		728
Principal payments financed through disposition of assets		23		301
Assumption of Aly Senior Obligations by Pelican in connection with the Recapitalization		-		20,867
Exchange of property and equipment for reduction in debt in connection with Recapitalization		-		2,000
Accretion of preferred stock, net		-		126

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DISCONTINUED OPERATIONS

12 Months Ended

Dec. 31, 2017

Notes to Financial Statements

NOTE 16 - DISCONTINUED OPERATIONS

On October 26, 2016, we abandoned the operations of Evolution, our directional drilling and MWD business, as a part of the Recapitalization (See further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”). The abandonment of these operations meets the criteria established for recognition as discontinued operations under generally accepted accounting principles in U.S. GAAP.

By December 31, 2016, the abandonment of these operations and sell-off of the remaining assets was completed with approximately $0.2 million of remaining liabilities assumed by the continuing operations of the Company. As such, there is no contribution from discontinued operations on our consolidated financial statements for the year ended December 31, 2017.

The following table summarizes the components of loss from discontinued operations, net of income taxes included in the consolidated statement of operations for the year ended December 31, 2016 (in thousands):

Revenue	$	250
Expenses:
Operating expenses		124
Depreciation and amortization		572
Selling, general and administrative expenses		222
Reduction in value of assets		2,591
Total expenses		3,509
Loss from discontinued operations		(3,259	)
Interest expense, net		1
Loss from discontinued operations before income taxes		(3,260	)
Income tax benefit		(769	)
Loss from discontinued operations, net of income taxes	$	(2,491	)

The reduction in value of assets included in the loss from discontinued operations for the year ended December 31, 2016 consisted of the following (in thousands):

Reduction in value of property and equipment:
Impairment in connection with Recapitalization	$	1,676
Reduction in value of intangibles		651
Impairment of goodwill		264
Total reduction in value of assets	$	2,591

On October 26, 2016, in connection with the Recapitalization and the abandonment of the Evolution assets, we recorded an impairment of property and equipment. The value remaining for intangibles and goodwill associated with these discontinued operations was reduced to zero.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2017

Summary Of Significant Accounting Policies Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the amounts of revenue and expenses recognized during the reporting period. Areas where critical accounting estimates are made by management include:

· Allowance for doubtful accounts,

· Depreciation and amortization of property and equipment and intangible and other assets,

· Impairment of property and equipment, intangible and other assets, and goodwill,

· Litigation settlement accrual,

· Contingent payment liability,

· Stock-based compensation, and

· Income taxes.

The Company analyzes its estimates based on historical experience and various other indicative assumptions that it believes to be reasonable under the circumstances. Under different assumptions or conditions, the actual results could differ, possibly materially from those previously estimated. Many of the conditions impacting these assumptions are outside of the Company’s control. 

Revenue Recognition

We generate revenue primarily from renting equipment and, in connection with certain of our solids control operations, providing personnel to operate such equipment at per-day rates. In addition, we may provide equipment transportation and rig-up/rig-down services to our customers at flat rates per job or at an hourly rate. Revenue is recognized when it is realized or realizable and earned and when collectability is reasonably assured.

We present our revenue net of any sales tax charged to our customers which is required to be remitted to local or state governmental taxing authorities.

Reimbursements for the purchase of supplies, equipment, personnel services, shipping and other services provided at the request of our customers are recorded as revenue when incurred. The related costs are recorded as operating expenses when incurred.

Major Customers and Concentration of Credit Risk

The Company’s assets that are potentially exposed to concentrations of credit risk consist primarily of cash and trade receivables.

The financial institutions in which the Company transacts business are large, investment grade financial institutions which are “well capitalized” under applicable regulatory capital adequacy guidelines, thereby minimizing its exposure to credit risks for deposits in excess of federally insured amounts.

The majority of the Company’s trade receivables are due from major and independent oil and gas companies operating within the U.S. land-based oil and gas industry. The industry has been, and will likely continue to be, characterized by significant volatility which may negatively impact our customers from time-to-time. The Company evaluates the financial strength of its customers quarterly and provides allowances for probable credit losses when deemed necessary.

During the year ended December 31, 2017, the Company derived revenue from over 40 customers of which the top three customers generated approximately $8.2 million, or 56.0%, of our revenue. Amounts due from these customers included in accounts receivable and unbilled receivables as of December 31, 2017 are approximately $1.8 million.

During the year ended December 31, 2016, the Company derived revenue from over 50 customers of which the top three customers generated approximately $4.8 million, or 43.5%, of our revenue. Amounts due from these customers included in accounts receivable and unbilled receivables as of December 31, 2016 are approximately $0.6 million.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash is defined as cash on-hand and balances in operating bank accounts. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. As of December 31, 2017 and 2016, we have no cash equivalents. Restricted cash serves as collateral for the Company’s corporate credit card program.

Accounts Receivable, Unbilled Receivables and Allowance for Doubtful Accounts

Accounts receivable and unbilled receivables are stated at the amount which has been or will be billed to customers. Once billed, customer payments are typically due within 30 days. We provide an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information, existing economic conditions and specific identification. Provisions for doubtful accounts are recorded when it is deemed probable that the customer will not make the required payments. As of December 31, 2017 and 2016, the allowance for doubtful accounts was approximately $73,000 and $0.6 million, respectively.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization. The cost of property and equipment currently in service less its residual value is depreciated, including property and equipment financed by capital leases, on a straight-line basis over the estimated useful lives of the related assets. A residual value of 20% is used for asset types deemed to have a salvage value. Typically, these assets contain a large amount of iron in their construction. Leasehold improvements are amortized on a straight-line basis over the shorter of their economic lives or the lease term.

Estimated useful lives of property and equipment are as follows:

Machinery and equipment	1 - 20 years
Vehicles, trucks and trailers	5 - 7 years
Office furniture, fixtures and equipment	3 - 7 years
Leasehold improvements	Remaining lease term
Buildings	20 years

When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved and the impact of any resulting gain or loss is recognized within “Reduction in value of assets” on the consolidated statement of operations for the period. Maintenance and repairs, which do not improve or extend the life of the related assets, are charged to expense when incurred. Refurbishments are capitalized when the value of the equipment is enhanced for an extended period.

Reduction in Value of Long-Lived Assets

Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of such assets to their fair value calculated, in part, by the estimated undiscounted future cash flows expected to be generated by the assets. Cash flow estimates are based upon, among other things, historical results adjusted to reflect the best estimate of future market rates, utilization levels, and operating performance. Estimates of cash flows may differ from actual cash flows due to, among other things, changes in economic conditions or changes in an asset’s operating performance. The Company’s assets are grouped by reporting unit for the impairment testing, which represents the lowest level of identifiable cash flows. If the asset grouping’s fair value is less than the carrying amount of those items, impairment losses are recorded in the amount by which the carrying amount of such assets exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less estimated costs to sell. The net carrying value of assets not fully recoverable is reduced to fair value. The estimate of fair value represents the Company’s best estimate based on industry trends and reference to market transactions and is subject to variability. The oil and gas industry is cyclical and estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows, can have a significant impact on the carrying values of these assets and, in periods of prolonged down cycles, may result in impairment charges.

Management determined that there were no events or changes in circumstances during the year ended December 31, 2017 indicating that the carrying amount of long-lived assets may not have been recoverable and, accordingly, there were no impairments recorded.

Due to the steep downturn in the oilfield services industry which began in late 2014 and continued throughout much of 2016, we evaluated recoverability quarterly during the year ended December 31, 2016. For each quarter, our estimated undiscounted net cash flow exceeded the carrying amount of the assets, and, as such, no impairment losses were recognized; however, in the quarters ended June 30 and September 30, 2016, we recognized an impairment in connection with our discontinued operations and an impairment in connection with the Recapitalization, respectively. See “Note 5 – Reduction in Value of Assets and Other Charges” and “Note 16 – Discontinued Operations” for a further discussion of the reduction in value recorded during 2016.

Intangible Assets

The Company’s intangible assets with finite lives include customer relationships, trade names, non-compete agreements, and various other contractual agreements. The value of customer relationships is estimated using the income approach, specifically the excess earnings method. The excess earnings method consists of discounting to present value the projected cash flows attributable to the customer relationships, with consideration given to customer contract renewals, the importance or lack thereof of existing customer relationships to the Company’s business plan, income taxes and required rates of return. The value of trade names is estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty in order to exploit the related benefits of this intangible asset. For contractual agreements, the specific terms of the agreements were utilized to determine the fair value attributable to the arrangement.

The Company amortizes intangible assets based upon a straight-line basis because the pattern of economic benefits consumption cannot otherwise be reliably estimated. Estimated useful lives of intangible assets are as follows:

Customer relationships	10 years
Tradename	10 years
Non-compete	4 - 5 years

Intangible assets subject to amortization are reviewed for impairment and are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For instance, a significant change in business climate or a loss of a significant customer, among other things, may trigger the need for an impairment test of intangible assets. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. Management determined that there were no events or changes in circumstances during the year ended December 31, 2017 indicating that the carrying amount of intangibles may not have been recoverable and, accordingly, there were no reductions in value of intangibles recorded. See “Note 5 – Reduction in Value of Assets and Other Charges” and “Note 16 – Discontinued Operations” for a further discussion of the reduction in value recorded during the year ended December 31, 2016.

Goodwill

The carrying amount of goodwill is tested annually for impairment in the fourth quarter and whenever events or circumstances indicate its carrying value may not be recoverable. Impairment testing is conducted at the reporting unit level.

Our detailed impairment testing involves comparing the fair value of our reporting units to their respective carrying values, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale. If the fair value exceeds carrying value, then it is concluded that no goodwill impairment has occurred. If the carrying value exceeds the fair value, a second step is required to measure possible goodwill impairment loss. The second step includes valuing our tangible and intangible assets and liabilities as if we had been acquired in a business combination. Then, the implied fair value of our goodwill is compared to the carrying value of that goodwill. If the carrying value of our goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value.

Our detailed impairment analysis employs the use of discounted cash flow models. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes on our business. Critical assumptions include projected revenue growth, gross profit margins, selling, general and administrative expenses, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. We use the capital asset pricing model to estimate the discount rates used in the discounted cash flow models.

As of January 1, 2016, we had no goodwill associated with continuing operations and $0.3 million of goodwill associated with discontinued operations. On October 26, 2016, in connection with the Recapitalization and the abandonment of the Evolution assets, we reduced the remaining value for the goodwill associated with these discontinued operations to zero. See “Note 16 – Discontinued Operations” for further discussion.

The Company did not have any goodwill recorded as of December 31, 2017 and 2016.

Income Taxes

We account for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In assessing the likelihood and extent that deferred tax assets will be realized, consideration is given to projected future taxable income and tax planning strategies. A valuation allowance is recorded when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.

We recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. Previously recognized tax positions are reversed in the first period in which it is no longer more-likely-than-not that the tax position would be sustained upon examination.

Income tax related interest and penalties, if applicable, are recorded as a component of the provision for income tax expense. However, there were no amounts recognized relating to interest and penalties in the consolidated statements of operations for the years ended December 31, 2017 and 2016. We had no uncertain tax positions as of December 31, 2017 and 2016.

Contingent Payment Liability

The aggregate consideration for the United Acquisition of $24.5 million included contingent consideration of an estimated fair value on the acquisition date of $3.5 million. The contingent consideration consisted of up to three future cash payments to the sellers in an amount equal to 5% of the gross revenue of the business acquired for each of the twelve-month periods ending on March 31, 2015, 2016, and 2017; provided, however, that the aggregate consideration would not exceed $5.0 million.

On May 31, 2015, we made the first cash payment of $0.9 million, or 5% of the gross revenue of the business acquired for the twelve-month period ended March 31, 2015. We did not make the second cash payment of $0.7 million, or 5% of gross revenue of the business acquired for the twelve-month period ended March 31, 2016, which was due on May 31, 2016.

On January 31, 2017, in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”), the sellers converted both (i) the second payment obligation of $0.7 million, which was past due, and (ii) the estimated third payment of $0.1 million, or 5% of estimated gross revenue of the business for the twelve-month period ended March 31, 2017, into 457,494 shares of common stock. This conversion was accounted for as a troubled debt restructuring (see further discussion in “Note 3 - Recapitalization”). There are no further payments due.

Fair Value Measurements

Prior to its conversion into common stock in connection with the Recapitalization, we measured the fair value of our contingent payment liability on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. We are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three distinct levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

The following table provides a roll forward of the fair value of our contingent payment liability which includes Level 3 measurements (in thousands):

	For the Years Ended December 31,
	2017			2016
Fair value, beginning of period	$	810		$	1,182
Changes in fair value		-			(372	)
Extinguishment of liability in connection with the Recapitalization		(810	)		-
Fair value, end of period	$	-		$	810

As of December 31, 2017, there was no contingent payment liability recorded. See “Note 2 – Recent Developments” and “Note 3 – Recapitalization” for further details on the conversion of the contingent payment liability to common stock on January 31, 2017 in connection with the Recapitalization.

As of December 31, 2016, the fair value of the contingent payment liability represents the sum of (i) the known required payments for periods which had then ended and (ii) the present value of projected required payments for future periods based upon our internal model and projections. Due to the industry downturn which began in late 2014 and continued through much of 2016, both actual and projected utilization levels and pricing were significantly lower than the peaks experienced in 2014. Consequently, during the year ended December 31, 2016, we recorded a decrease to the fair value of the contingent payment liability as both the actual revenue and the projected revenue on which the contingent payments were based had declined significantly. The change in fair value is included in selling, general, and administrative expenses on our consolidated statement of operations for the year ended December 31, 2016. 

As of December 31, 2016, the fair value of the contingent payment liability included (i) the past due payment for the year ended March 31, 2016, (ii) the calculated payment for the nine months ended December 31, 2016, and (iii) the fair value of the liability for the estimated additional cash payment due for the three months ended March 31, 2017.

Stock-Based Compensation

From time-to-time, we issue time-based vesting and performance-based vesting stock options, time-based vesting and performance-based vesting restricted stock units, and restricted stock awards to our employees as part of those employees’ compensation and as a retention tool for non-employee directors. We calculate the fair value of the awards on the grant date and amortize that fair value to compensation expense ratably over the vesting period of the award, net of estimated and actual forfeitures. The grant date fair value of our restricted stock awards and restricted stock units is determined using our stock price on the grant date. The fair value of our stock option awards is estimated using a Black-Scholes fair value model. The valuation of our stock options requires us to estimate the expected term of the award, which we estimate using the simplified method as we do not have sufficient historical exercise information. Additionally, the valuation of our stock option awards is also dependent on historical stock price volatility. In view of our insignificant trading volume, volatility is calculated based on historical stock price volatility of our peer group with a lookback period equivalent to the expected term of the award. Fair value of performance-based stock options and restricted stock units is estimated in the same manner as our time-based awards and assumes that performance goals will be achieved and the awards will vest. If the performance-based awards do not vest, any previously recognized compensation costs will be reversed. We record stock-based compensation as a component of general and administrative or direct operating expense based on the role of the applicable individual.

During the year ended December 31, 2017, we recorded stock-based compensation expense of $0.6 million. See further discussion in “Note 13 – Stock-Based Compensation”.

There was no stock-based compensation expense recorded during the year ended December 31, 2016.

Earnings per Share

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that could have been outstanding assuming the exercise of outstanding stock options and restricted stock or other convertible instruments, as appropriate.

During the years ended December 31, 2017 and 2016, the Company incurred net losses; therefore, the impact of any incremental shares would have been anti-dilutive.

Accounting Standards Recently Adopted

In January 2017, the Financial Accounting Standards Board (FASB) issued accounting standards update (ASU) 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments eliminate Step 2 from the goodwill impairment test. The annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The amendments should be applied on a prospective basis. The new standard is effective for the Company on January 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted the accounting guidance as of January 1, 2017. The newly adopted accounting principle is preferable because it reduces the cost and complexity of evaluating goodwill for impairment. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update). Among other things, this ASU incorporates into the FASB ASC Topic 250, SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on the financial statements of recently issued accounting standards when adopted, and specifically for ASU 2014-09, ASU 2016-02, and ASU 2016-03. If a registrant does not know or cannot reasonably estimate the impact of adoption of the above standards, the SEC staff expects the registrant to make a statement to that effect. Consistent with SAB Topic 11.M, the SEC staff also expects the registrant to provide qualitative disclosures to help users assess the significance the adoption will have on the financial statements. Other than our continued assessment of ASU 2014-09 through the date of adoption, the adoption of ASU 2017-03 did not have an impact on our financial statements.

In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. Other than the revised statement of cash flows presentation of restricted cash, the adoption of ASU 2016-18 did not have an impact on our consolidated financial statements.

In March 2016, the FASB Issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company will adopt the accounting guidance as of January 1, 2017. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which eliminates the existing requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet and now requires that all deferred tax assets and liabilities be classified as noncurrent. The ASU is effective for annual periods beginning after December 15, 2016, with early application permitted. We elected to early adopt the provisions of this ASU and classified our deferred tax balances as a non-current liability as of December 31, 2016 and 2015. The adoption has no effect on net income or cash flows.

In September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in the ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments are effective for annual reporting periods beginning after December 15, 2015. The adoption of ASU 2015-16 did not have an impact on our financial condition or results of operations.

In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which adds comments from the Securities and Exchange Commission (SEC) addressing ASU 2015-03, as discussed above, and debt issuance costs related to line-of-credit arrangements. The SEC commented it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We adopted ASU 2015-15 in connection with our adoption of ASU 2015-03 effective January 1, 2016. The adoption of ASU 2015-15 did not have an impact on our financial condition or results of operations.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in the ASU change the balance sheet presentation requirements for debt issuance costs by requiring them to be presented as a direct reduction to the carrying amount of the related debt liability. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. Transitioning to the new guidance requires retrospective application. We implemented the required change to the presentation of our debt issuance costs in the first quarter of fiscal year 2016, as expected such change did not have a material impact to our consolidated financial statements.

In November 2014, the FASB issued ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, which clarifies how to evaluate the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the ASU requires that an entity consider all relevant terms and features in evaluating the nature of the host contract and clarifies that the nature of the host contract depends upon the economic characteristics and the risks of the entire hybrid financial instrument. An entity should assess the substance of the relevant terms and features, including the relative strength of the debt-like or equity-like terms and features given the facts and circumstances, when considering how to weight those terms and features. The adoption of ASU 2014-16 did not have an impact on our financial condition or results of operations.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which defines management’s responsibility to evaluate whether there is substantial doubt about the company’s ability to continue as a going concern and provides guidance on the related footnote disclosure. Management should evaluate whether there are conditions or events that raise substantial doubt about the company’s ability to continue as a going concern within one year after the date the annual or interim financial statements are issued. We adopted these provisions in the first quarter of 2016 and will provide such disclosures as required if there are conditions and events that raise substantial doubt about our ability to continue as a going concern, as expected such change did not have a material impact to our consolidated financial statements.

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force). The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. The adoption of ASU 2014-12 did not have an impact on our financial condition or results of operations.

Accounting Standards Related to Revenue from Contracts with Customers (Topic 606)

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace most existing revenue recognition guidance in GAAP and align GAAP more closely with International Financial Reporting Standards (IFRS). The objective of this ASU is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The core principle is to 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.

Entities must apply a five-step process to (1) identify the contract with a customer; (2) identify the performance obligations 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. ASU 2014-09 also mandates disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The disclosure requirements include qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 must be adopted using either a full retrospective method or a modified retrospective method.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarified the implementation guidance regarding performance obligations and licensing arrangements.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients, which clarified guidance on assessing collectability, presenting sales tax, measuring noncash consideration, and certain transition matters.

In December 2016, the FASB issued ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606)—Technical Corrections and Improvements, which provided disclosure relief, and clarified the scope and application of the new revenue standard and related cost guidance. The new guidance for Topic 606 will be effective for the annual reporting period beginning after December 15, 2017, including interim periods within that reporting period. Early adoption would be permitted for annual reporting periods beginning after December 15, 2016.

The Company has completed its assessment in determining the impacts the new standard will have on its various revenue streams. The Company’s approach included performing a detailed review of key contracts representative of the different businesses and comparing historical accounting policies and practices to the new accounting guidance. The Company does not incur significant contract costs. The Company’s services and rental contracts are primarily short-term in nature, and therefore, based on management’s assessment, the Company has determined there will be no impact on its consolidated financial statements from the adoption of Topic 606, other than the additional disclosure requirements. Remaining implementation matters include establishing new policies, procedures, and controls. Any adoption date adjustments will not materially impact the financial statements. The Company adopted this standard on January 1, 2018 utilizing the modified retrospective method and has elected to apply the revenue standard only to contracts that are not completed as of the date of initial application.

Accounting Standards Not Yet Adopted

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The guidance in this ASU applies to all entities that change the terms or conditions of a share-based payment award. The amendments provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to the modification of the terms and conditions of a share-based payment award. The amendments in ASU 2017-09 include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The new standard is effective for the Company beginning on January 1, 2018 and should be applied prospectively to awards modified on or after the adoption date. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide a more robust framework to use in determining when a set of assets and activities is a business. The new standard is effective for the Company beginning on January 1, 2018. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements, which makes minor corrections and clarifications that affect a wide variety of topics in the Accounting Standards Codification, including an amendment to ASC Topic 820, Fair Value Measurement, which clarifies the difference between a valuation approach and a valuation technique when applying the guidance of that Topic. The amendment also requires an entity to disclose when there has been a change in either or both a valuation approach and/or a valuation technique. The transition guidance for the ASC Topic 820 amendment must be applied prospectively because it could potentially involve the use of hindsight that includes fair value measurements. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Early application is permitted for any fiscal year or interim period for which the entity’s financial statements have not yet been issued. We are currently evaluating the impact this ASU will have on the financial position or financial statement disclosures.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The guidance in this ASU requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. The new standard is effective for the Company beginning on January 1, 2018. The Company is evaluating the effect that ASU 2016-16 will have on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-15)”, that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the effect of ASU 2016-15 on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will replace the existing lease guidance. The standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Additional disclosure requirements include qualitative disclosures along with specific quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for the Company for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.

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RECAPITALIZATION (Tables)

12 Months Ended

Dec. 31, 2017

Recapitalization Tables

Extinguishment of Debt and Other Liabilities

Gain on the Extinguishment of Debt and Other Liabilities
Debt and Other Obligations Extinguished	Common Stock Issued		Gain Included in Other Expense (Income)
Subordinated debt and accrued interest of $1.5 million and $0.3 million, respectively		1,200,000	$1.6 million
Contingent payment liability of $0.8 million		457,494	$0.8 million

Gain on the Extinguishment of Redeemable Preferred Stock

Gain on the Extinguishment of Redeemable Preferred Stock
Redeemable Preferred Stock and Other Obligations	Common Stock Issued		Gain Included in Additional Paid-in-Capital
Aly Centifuge preferred and accrued dividends of $8.9 million and $1.2 million, respectively		3,039,516	$9.8 million
Aly Operating preferred and accrued dividends of $4.0 million and $0.9 million, respectively		2,414,971	$4.6 million

Exchange and extinguishment of our Aly Senior Obligations

Aly Senior Obligations as of January 31, 2017
Debt and Other Obligations Extinguished	Amount
Credit facility	$	17,772
Accrued fees and interest on credit facility		1,414
Capital lease obligations		1,930
Accrued interest on capital lease obligations		26
Line of credit and accrued interest - related party		500
Total	$	21,642

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)

12 Months Ended

Dec. 31, 2017

Summary Of Significant Accounting Policies Tables

Classifications of property, plant and equipment

Machinery and equipment	1 - 20 years
Vehicles, trucks and trailers	5 - 7 years
Office furniture, fixtures and equipment	3 - 7 years
Leasehold improvements	Remaining lease term
Buildings	20 years

Intangible assets

Customer relationships	10 years
Tradename	10 years
Non-compete	4 - 5 years

Fair value of our liability for contingent payments

	For the Years Ended December 31,
	2017			2016
Fair value, beginning of period	$	810		$	1,182
Changes in fair value		-			(372	)
Extinguishment of liability in connection with the Recapitalization		(810	)		-
Fair value, end of period	$	-		$	810

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REDUCTION IN VALUE OF ASSETS AND OTHER CHARGES (Tables)

12 Months Ended

Dec. 31, 2017

Reduction In Value Of Assets And Other Charges Tables

Components of reduction in value of assets

	For the Years Ended December 31,
	2017		2016
Reduction in value of property and equipment:
Impairment in connection with Recapitalization	$	-	$	15,562
Loss on disposal of assets		58		1,087
Reduction in value of intangibles		-		1,087
Total reduction in value of assets	$	58	$	17,736

Recapitalization of debts

	For the Years Ended December 31,
	2017			2016
Debt modification fee - Recapitalization	$	-		$	629
Debt modification fee - related party		320			-
Professional fees - Recapitalization		138			472
Severance - operational restructuring		(221	)		456
	$	237		$	1,557

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LONG-LIVED ASSETS (Tables)

12 Months Ended

Dec. 31, 2017

Long-lived Assets Tables

Property and equipment long-lived assets

	As of December 31,
	2017			2016
Machinery and equipment	$	33,024		$	31,541
Vehicles, trucks and trailers		4,288			4,523
Office furniture, fixtures and equipment		560			544
Leasehold improvements		105			203
Buildings		212			212
		38,189			37,023
Less: Accumulated depreciation and amortization		(11,374	)		(8,807	)
		26,815			28,216
Assets not yet placed in service		73			10
Property and equipment, net	$	26,888		$	28,226

Intangible Assets

	Customer Relationships			Tradename			Non-Compete			Total
As of December 31, 2017:
Cost	$	5,323		$	2,174		$	492		$	7,989
Less: Accumulated amortization		(2,432	)		(966	)		(492	)		(3,890	)
Net book value	$	2,891		$	1,208		$	-		$	4,099
As of December 31, 2016:
Cost	$	5,323		$	2,174		$	492			7,989
Less: Accumulated amortization		(1,900	)		(749	)		(409	)		(3,058	)
Net book value	$	3,423		$	1,425		$	83		$	4,931

Estimated amortization expense

For the Year Ending December 31,
2018	$	750
2019		750
2020		750
2021		750
2022		679
Thereafter		420
	$	4,099

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LONG-TERM DEBT (Tables)

12 Months Ended

Dec. 31, 2017

Long-term Debt Tables

LONG-TERM DEBT

	December 31, 2017				December 31, 2016
	Current		Long-Term		Current		Long-Term
Subordinated note payable	$	-	$	-	$	1,500	$	-
Equipment financing and capital leases		3		-		93		10
Total	$	3	$	-	$	1,593	$	10

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LONG-TERM DEBT – RELATED PARTY (Tables)

12 Months Ended

Dec. 31, 2017

Long-term Debt Related Party Tables

Long-term debt

	December 31, 2017				December 31, 2016
	Current		Long-Term		Current		Long-Term
Credit facility
Term loan	$	-	$	5,027	$	13,339	$	-
Revolving credit facility		-		750		-		-
Delayed draw term loan		-		575		4,433		-
Line of credit - related party		-		-		494		-
Equipment financing and capital leases		-		-		614		1,315
Total	$	-	$	6,352	$	18,880	$	1,315

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INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2017

Income Taxes Tables

Summary of provision for income taxes

	For the Years Ended December 31,
	2017		2016
Current provision:
Federal	$	-	$	-
State		59		33
Total current provision		59		33
Deferred benefit:
Federal		-		(7,298	)
State		-		(639	)
Total deferred benefit		-		(7,937	)
Provision for income taxes	$	59	$	(7,904	)

Reconciliation of the statutory tax rates to our effective tax rate

	For the Years Ended December 31,
	2017			2016
Federal statutory rate		34.00	%		34.00	%
State taxes, net of federal benefit		-5.56	%		1.85	%
Deferred income taxes - Tax Reform Rate Change		-77.90	%		0.00	%
Valuation allowance - Tax Reform Rate Change		77.90	%		0.00	%
Valuation allowance - other		-178.02	%		-8.60	%
Gain on cancellation of debt income - Restructuring		163.55	%		0.00	%
Accrued interest on equity - Restructuring		-25.70	%		0.00	%
Other miscellaneous		-4.61	%		1.46	%
Effective income tax rate		-16.34	%		28.71	%

Deferred tax assets and liabilities

	As of December 31,
	2017			2016
Deferred tax assets:
Allowance for doubtful accounts	$	15		$	191
Net operating loss		6,622			10,024
Start-up costs		9			17
State net operating loss, net of federal benefit		980			604
Accrued compensation		84			220
Charitable contributions and other		9			26
Total deferred tax assets		7,719			11,082
Deferred tax liabilities:
Prepaid assets		82			32
Property and equipment		4,496			7,334
Intangibles		595			1,208
State deferreds, net of federal benefit		160			139
Total deferred tax liabilities		5,333			8,713
Net deferred tax assets (liabilities) before valuation allowance		2,386			2,369
Valuation allowance		(2,386	)		(2,369	)
Net deferred tax liabilities after valuation allowance	$	-		$	-

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COMMITMENTS AND CONTINGENCIES (Tables)

12 Months Ended

Dec. 31, 2017

Commitments And Contingencies Tables

Operating leases

Year Ending December 31,
2018	$	118
2019		83
2020		25
	$	226

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REDEEMABLE PREFERRED STOCK (Tables)

12 Months Ended

Dec. 31, 2017

Redeemable Preferred Stock Tables

Changes in the Aly Operating Redeemable Preferred Stock

	Carrying Value of Aly Operating Redeemable Preferred Stock			Number of Outstanding Aly Operating Redeemable Preferred Shares			Liquidation Value of Aly Operating Redeemable Preferred Stock
January 1, 2016	$	4,647			4,000,000		$	4,685
Accrued dividends		239			-			239
Accretion		38			-			-
December 31, 2016		4,924			4,000,000			4,924
Accrued dividends		21			-			21
Exchange for common stock in connection with the Recapitalization		(4,945	)		(4,000,000	)		(4,945	)
December 31, 2017	$	-			-		$	-

Changes in the Aly Centrifuge Redeemable Preferred Stock

	Carrying Value of Aly Centrifuge Redeemable Preferred Stock			Number of Outstanding Aly Centrifuge Redeemable Preferred Shares			Liquidation Value of Aly Centrifuge Redeemable Preferred Stock
January 1, 2016	$	9,755			8,876		$	9,591
Accrued dividends		489			-			489
Accretion		(164	)		-			-
December 31, 2016		10,080			8,876			10,080
Accrued dividends		42			-			42
Exchange for common stock in connection with the Recapitalization		(10,122	)		(8,876	)		(10,122	)
December 31, 2017	$	-			-		$	-

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SUPPLEMENTAL CASH FLOW INFORMATION (Tables)

12 Months Ended

Dec. 31, 2017

Supplemental Cash Flow Information Tables

SUPPLEMENTAL CASH FLOW INFORMATION

	For the Years Ended December 31,
	2017		2016
Supplemental disclosure of cash flow information:
Cash paid for interest - related party	$	222	$	-
Cash paid for interest		12		973
Cash paid for interest - discontinued operations		-		1
Cash paid for income taxes, net		50		2
Non-cash investing and financing activities:
Extinguishment of debt and other liabilities - related party	$	16,092	$	-
in exchange for Series A convertible preferred stock in connection with the Recapitalization
Extinguishment of redeemable preferred stock		15,036		-
in exchange for common stock in connection with the Recapitalization
Returned equipment to lessor in exchange for release from capital lease obligation		91		-
Paid-in-kind dividends on preferred stock		63		728
Principal payments financed through disposition of assets		23		301
Assumption of Aly Senior Obligations by Pelican in connection with the Recapitalization		-		20,867
Exchange of property and equipment for reduction in debt in connection with Recapitalization		-		2,000
Accretion of preferred stock, net		-		126

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DISCONTINUED OPERATIONS (Tables)

12 Months Ended

Dec. 31, 2017

Discontinued Operations Tables

Summary of the components of loss from discontinued operations, net of income taxes

Revenue	$	250
Expenses:
Operating expenses		124
Depreciation and amortization		572
Selling, general and administrative expenses		222
Reduction in value of assets		2,591
Total expenses		3,509
Loss from discontinued operations		(3,259	)
Interest expense, net		1
Loss from discontinued operations before income taxes		(3,260	)
Income tax benefit		(769	)
Loss from discontinued operations, net of income taxes	$	(2,491	)

Summary of reduction in value of assets included in the loss from discontinued operations

Reduction in value of property and equipment:
Impairment in connection with Recapitalization	$	1,676
Reduction in value of intangibles		651
Impairment of goodwill		264
Total reduction in value of assets	$	2,591

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NATURE OF OPERATIONS AND BASIS OF PRESENTATION ( Details Narrative) $ in Thousands	1 Months Ended
	Dec. 31, 2016 USD ($)
Nature Of Operations And Basis Of Presentation Details Narrative
Assumed liabilities	$ 200

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RECENT DEVELOPMENTS (Details Narrative) - USD ($)
$ in Thousands

1 Months Ended

12 Months Ended

Jan. 31, 2017

Oct. 26, 2016

Sep. 30, 2016

Jan. 31, 2016

Dec. 31, 2017

Dec. 31, 2016

Outstanding debt

$ 20,100

Proceeds from sales of assets

$ 800

Repayment of debt

$ 300

Maximum availability limit

$ 600

Capital expenditures description

We have capital expenditures which are eligible to be financed, an incremental $75,000 under the delayed draw term loan to finance 90% of such expenditures.

LLC (Pelican) [Member]

Contingent payment description

Aly Centrifuge redeemable preferred stock, a subordinated note payable and a liability for a contingent payment into approximately 10% of our common stock on a fully diluted basis.

Credit facility loan, Amount

$ 5,100

Credit Facility [Member]

Current revolving credit, Amount

$ 300

Credit Facility [Member] | LLC (Pelican) [Member]

Working capital fund

$ 500

Credit facility loan, Amount

$ 1,000

Credit facility description

Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables where eligible receivables are defined as all receivables which have been billed to customers and are less than 90 days old.

Credit Facility [Member] | Amendment No.4 [Member] | January 22, 2018 [Member]

Maximum availability limit

$ 600

Amendment description

The maximum delayed draw loan borrowings from $1.3 million to $0.7 million. Amounts drawn on the Swing Loan may be repaid and reborrowed without penalty until June 30, 2018 at which time the Swing Line matures and all outstanding amounts are immediately due and payable. Interest on the Swing Line is charged at the lower of the (i) highest lawful rate or (ii) 7.0% per annum.

Current revolving credit, Amount

$ 1,300

Maximum revolving credit, Amount

$ 700

Credit Facility [Member] | Amendment No.3 [Member] | June 15, 2017 [Member]

Amendment description

the maximum delayed draw loan borrowings from $0.5 million to $1.3 million and the amendment also increased permitted draws on the delayed draw loan from 80% of the cost of capital expenditures being funded to 90% of the cost of capital expenditures being funded.

Current revolving credit, Amount

$ 1,000

Maximum revolving credit, Amount

$ 1,800

Credit Facility [Member] | Amendment No.2 [Member] | May 23, 2017 [Member]

Amendment description

In consideration of the increase in the revolving credit facility and the extension of the final maturity date, we agreed to issue to Pelican, the lender, as an amendment fee, 1,200 shares of our Series A Convertible Preferred Stock.

Current revolving credit, Amount

$ 1,000

Maximum revolving credit, Amount

$ 1,800

Maturity date of credit facility

Dec. 31, 2019

Credit Facility [Member] | Amendment No.1 [Member] | March 1, 2017 [Member]

Amendment description

The amendment permitted us to draw on the delayed draw term loan from time-to-time up until December 31, 2018 in order to fund up to 80% of the cost of capital expenditures subject to a $0.5 million limit on aggregate borrowings.

Maturity date of credit facility

Dec. 31, 2018

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RECAPITALIZATION (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Gain Included in Other Expense(Income) Debt and Other Obligations Extinguished	$ 2,388
Contingent Liability [Member]
Common stock issued for debt and other obligations extinguished	457,494
Gain Included in Other Expense(Income) Debt and Other Obligations Extinguished	$ 800
Subordinated Debt [Member]
Common stock issued for debt and other obligations extinguished	1,200,000
Gain Included in Other Expense(Income) Debt and Other Obligations Extinguished	$ 1,600

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RECAPITALIZATION (Details 1) $ in Thousands	12 Months Ended
	Dec. 31, 2017 USD ($) shares
Aly Centifuge [Member]
Common stock issued for redeemable preferred stock and other obligations | shares	3,039,516
Gain Included in Additional Paid-in-Capital on redeemable preferred stock and other obligations | $	$ 9,800
Aly Operating [Member]
Common stock issued for redeemable preferred stock and other obligations | shares	2,414,971
Gain Included in Additional Paid-in-Capital on redeemable preferred stock and other obligations | $	$ 4,600

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RECAPITALIZATION (Details 2) $ in Thousands	1 Months Ended
	Jan. 31, 2017 USD ($)
Debt and Other Obligations Extinguished	$ 21,642
Capital Lease [Member]
Debt and Other Obligations Extinguished	1,930
Accrued interest on capital lease obligations [Member]
Debt and Other Obligations Extinguished	26
Credit Facility [Member]
Debt and Other Obligations Extinguished	17,772
Accrued fees and interest on credit facility [Member]
Debt and Other Obligations Extinguished	1,414
Line of Credit - Pelican [Member]
Debt and Other Obligations Extinguished	$ 500

XML

RECAPITALIZATION (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands	1 Months Ended		12 Months Ended
	Jan. 31, 2017	Oct. 26, 2016	Dec. 31, 2017	Dec. 31, 2016	Aug. 15, 2014	Apr. 15, 2014
Obligation amount			$ 2,000
Property and equipment estimated fair value			2,600
Assets value associated with discontinued operation			400
Debt modification fee			600
Property and equipment aggregate net book value			18,600
Assets impairment charge			16,000
Assets impairment charge of discontinued operation			$ 400	$ 400
Common stock shares, issued			13,819,020	6,707,039
Shares issued price per share			$ 0.36
Subordinated debt and contingent payment liability			$ 2,400
Gains losses on extinguishment of debt			$ 2,388
Preferred stock, issued shares			0	0
Professional fees				$ 200
Aly Centrifuge Redeemable Preferred Stock [Member]
Shares issued price per share			$ 2.14
Gains losses on extinguishment of debt			$ 14,400
Preferred stock, issued shares					4,000	5,000
LLC (Pelican) [Member]
Credit facility loan, amount	$ 5,100
LLC (Pelican) [Member] | Credit Facility [Member]
Working capital fund		$ 500
Credit facility loan, amount	$ 1,000
Series A Preferred Stock [Member]
Preferred stock, liquidation preference per share	$ 1,000
Preferred stock, issued shares	16,092
Aly Senior Obligations [Member]
Common stock, percentage	10.00%
Common stock shares, issued	7,111,981
Shares issued price per share	$ 0.12
Aly Senior Obligations [Member] | Tiger [Member]
Obligation amount		$ 2,000
Preferred stock, liquidation preference per share	$ 1,000
Maturity date of credit facility	Dec. 31, 2018
Aly Senior Obligations [Member] | Series A Preferred Stock [Member]
Common stock, percentage	80.00%
Common stock shares, issued	53,628,842
Principal reduction, amount	$ 16,100
Preferred stock, liquidation preference per share	$ 1,000
New credit agreement [Member] | LLC (Pelican) [Member]
Credit facility loan, amount	$ 5,100
Maturity date of credit facility	Dec. 31, 2018
New credit agreement [Member] | LLC (Pelican) [Member] | Credit Facility [Member]
Credit facility loan, amount	$ 1,000		5,100
Maturity date of credit facility	Dec. 31, 2018
Credit facility outstanding borrowing, amount			500
Aly Senior Obligations [Member] | Series A Preferred Stock [Member]
Principal reduction, amount			16,100
Gains losses on extinguishment of debt			$ 9,700

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details)	12 Months Ended
	Dec. 31, 2017
Building [Member]
Estimated useful lives of property and equipment	20 years
Leasehold improvements [Member]
Estimated useful lives of property and equipment	Remaining lease term
Office furniture, fixtures and equipment [Member] | Minimum [Member]
Estimated useful lives of property and equipment	3 years
Office furniture, fixtures and equipment [Member] | Maximum [Member]
Estimated useful lives of property and equipment	7 years
Vehicles trucks & trailers [Member | Minimum [Member]
Estimated useful lives of property and equipment	5 years
Vehicles trucks & trailers [Member | Maximum [Member]
Estimated useful lives of property and equipment	7 years
Machinery and equipment [Member] | Minimum [Member]
Estimated useful lives of property and equipment	1 years
Machinery and equipment [Member] | Maximum [Member]
Estimated useful lives of property and equipment	20 years

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 1)	12 Months Ended
	Dec. 31, 2017
Tradename [Member]
Estimated useful lives of intangible assets	10 years
Customer Relationships [Member]
Estimated useful lives of intangible assets	10 years
Non-Compete [Member] | Minimum [Member]
Estimated useful lives of intangible assets	4 years
Non-Compete [Member] | Maximum [Member]
Estimated useful lives of intangible assets	5 years

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details 2) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Summary Of Significant Accounting Policies Details 2
Fair Value, Beginning of Period	$ 810	$ 1,182
Changes in Fair Value		(372)
Extinguishment of liability in connection with the Recapitalization	(810)
Fair Value, Ending of Period		$ 810

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative)
$ in Thousands

1 Months Ended

12 Months Ended

Jan. 31, 2017

May 31, 2015

Dec. 31, 2017

USD ($)

Number

Dec. 31, 2016

USD ($)

Number

Number of customers | Number

40

50

Revenue

$ 14,637

$ 11,002

Allowance for doubtful accounts

73

600

Business acquisition consideration amount

24,500

Goodwill associated with discontinued operations

300

Stock-based compensation

625

Three Customers [Member]

Revenue

$ 8,200

$ 4,800

Percentage of revenue

56.00%

43.50%

Accounts receivable

$ 1,800

$ 600

Contingent Payment Liability [Member]

Fair value of business on acquisition date

$ 3,500

Contingent consideration description

Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization”), the sellers converted both (i) the second payment obligation of $0.7 million, which was past due, and (ii) the estimated third payment of $0.1 million, or 5% of estimated gross revenue of the business for the twelve-month period ended March 31, 2017, into 457,494 shares of common stock.

We made the first cash payment of $0.9 million, or 5% of the gross revenue of the business acquired for the twelve-month period ended March 31, 2015. We did not make the second cash payment of $0.7 million, or 5% of gross revenue of the business acquired for the twelve-month period ended March 31, 2016, which was due on May 31, 2016.

The contingent consideration consisted of up to three future cash payments to the sellers in an amount equal to 5% of the gross revenue of the business acquired for each of the twelve-month periods ending on March 31, 2015, 2016, and 2017; provided, however, that the aggregate consideration would not exceed $5.0 million.

XML

REDUCTION IN VALUE OF ASSETS AND OTHER CHARGES (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Reduction In Value Of Assets And Other Charges Details
Impairment in connection with Recapitalization		$ 15,562
Loss on disposal of assets	58	1,087
Reduction in value of intangibles		1,087
Total reduction in value of assets	$ 58	$ 17,736

XML

REDUCTION IN VALUE OF ASSETS AND OTHER CHARGES (Details 1) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Reduction In Value Of Assets And Other Charges Details
Debt modification fee		$ 629
Debt modification fee - related party	320
Professional fees - Recapitalization	138	472
Severance - operational restructuring	(221)	456
Total recapitalization charges	$ 237	$ 1,557

XML

REDUCTION IN VALUE OF ASSETS AND OTHER CHARGES (Details Narrative) - USD ($)
$ / shares in Units, $ in Thousands

12 Months Ended

Dec. 31, 2017

Dec. 31, 2016

May 23, 2017

Oct. 31, 2016

Reduction in value of assets

$ 58

$ 17,736

Impairment charge

400

400

Debt modification fee

629

Debt modification fee - related party

320

Professional fees - Recapitalization

138

472

Price per share

$ 0.08

Professional fees

200

Severance Expense

200

(500)

Accrued severance liability

$ 400

700

Accrued severance liability description

The severance liability as of December 31, 2017 and 2016 includes a liability of $0.2 million assumed by Aly Energy related to discontinued operations.

Redaction in principal outstanding

$ 2,000

Reduction in Value of Intangibles [Member]

Reduction in value of assets

1,100

Reduction intangible assets due to non-compete

600

Reduction intangible assets

500

Recapitalization [Member]

Impairment charge

15,600

Underutilized equipment net book value

18,200

Reduction in debt for sale of assets

2,000

Debt modification fee

600

Professional fees

200

Legal fees

100

Loss on Disposal of Assets [Member]

Underutilized equipment net book value

1,900

Loss on property and equipment

$ 58

1,100

Proceeds from sale of assets

$ 800

Proceeds from sale of assets amount utilization description

Approximately $0.5 million of proceeds were used to fund working capital needs created by the significant deterioration in the industry throughout 2015 and approximately $0.3 million of proceeds were used to pay down outstanding balances owed to Wells Fargo under the terms of our credit facility.

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LONG-LIVED ASSETS (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Property plant and equipment gross	$ 38,189	$ 37,023
Accumulated depreciation and amortization	(11,374)	(8,807)
Property and equipment, net of depreciation and amortization	26,815	28,216
Assets not yet placed in service	73	10
Property and equipment, net	26,888	28,226
Machinery and equipment [Member]
Property plant and equipment gross	33,024	31,541
Vehicles trucks & trailers [Member
Property plant and equipment gross	4,288	4,523
Office furniture, fixtures and equipment [Member]
Property plant and equipment gross	560	544
Leasehold improvements [Member]
Property plant and equipment gross	105	203
Building [Member]
Property plant and equipment gross	$ 212	$ 212

XML

LONG-LIVED ASSETS (Details 1) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Cost	$ 7,989	$ 7,989
Less: Accumulated amortization	(3,890)	(3,058)
Net book value	4,099	4,931
Customer Relationships [Member]
Cost	5,323	5,323
Less: Accumulated amortization	(2,432)	(1,900)
Net book value	2,891	3,423
Tradename [Member]
Cost	2,174	2,174
Less: Accumulated amortization	(966)	(749)
Net book value	1,208	1,425
Non-Compete [Member]
Cost	492	492
Less: Accumulated amortization	(492)	(409)
Net book value		$ 83

XML

LONG-LIVED ASSETS (Details 2) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Long-lived Assets Details 2
2018	$ 750
2019	750
2020	750
2021	750
2022	679
Thereafter	420
Intangible assets, net	$ 4,099	$ 4,931

XML

LONG-LIVED ASSETS (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Long-lived Assets Details Narrative
Depreciation and amortization expense	$ 2,900	$ 3,900
Amortization expense	$ 800	$ 1,400

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LONG-TERM DEBT (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016	Aug. 15, 2014
Subordinated note payable			$ 2,000
Total		$ 10
Current [Member]
Subordinated note payable		1,500
Equipment financing and capital leases	3	93
Total	3	1,593
Long-term Debt [Member]
Subordinated note payable
Equipment financing and capital leases		10
Total		$ 10

XML

LONG-TERM DEBT (Details Narrative) - USD ($)
$ in Thousands

1 Months Ended

12 Months Ended

Aug. 05, 2016

May 13, 2016

Aug. 15, 2014

Jan. 31, 2017

Oct. 26, 2016

Jul. 31, 2016

Mar. 31, 2016

Oct. 31, 2015

Nov. 30, 2014

Dec. 31, 2017

Dec. 31, 2016

Jun. 30, 2016

Dec. 31, 2015

Apr. 30, 2014

Term loan

$ 25,000

Quaterly repayment of loan

1,300

Description of forbearance agreement and amendment Credit Facility

which forbearance was terminated due to specified events, including (i) the occurrence of other defaults under the Credit Facility, (ii) our failure to hire an independent financial advisor prior to April 10, 2016 or (iii) our failure to present a detailed plan for asset sales or equity capital acceptable to the lenders yielding net cash proceeds to us of at least $2.5 million by May 25, 2016.

Debt modification fee

$ 629

Total consideration

900

Subordinated note payable

$ 2,000

Capital lease outstanding obligations

$ 100

3

100

Capital leases book value, net

100

Reduction in value of assets

$ 38

58

Remaining capital lease amount

3

Gross amount of equipment under capital leases

$ 3,000

100

Accumulated amortization under capital leases

200

Third Limited Forbearance Agreement [Member]

Senior debt obligations amount

$ 2,000

Unsecured working capital

500,000

Debt modification fee

$ 600

Credit Facility [Member]

Reduced credit facility Loan

$ 0

$ 1,000

Wells Fargo [Member]

Description of forbearance agreement and amendment Credit Facility

Wells Fargo agreed to forbear from exercising their remedies under the credit agreement until August 31, 2016, conditioned upon the following, among other items: (i) hiring a Chief Restructuring Officer (“CRO”) on terms acceptable to the lender; (ii) having the CRO provide an initial cash forecast budget prior to August 10, 2016 and weekly updates thereafter; (iii) not incurring a variance of more than 10% from the cash flow budgets; and, (iv) paying accrued interest monthly effective July 21, 2016 at the default rate specified in the Credit Facility. As mandated, effective August 5, 2016, our board selected Chris Quinn to serve as CRO of the Company. On October 5, 2016, Wells Fargo extended the forbearance period until October 19, 2016.

Subordinated Notes Payable [Member]

Interest rate

10.00%

Total consideration

$ 10,300

Maturity date

Jun. 30, 2017

Converted common shares

1,200,000

Equipment Financing and Capital Leases [Member]

Capital lease outstanding obligations

$ 1,900

Credit Facility [Member]

Term loan

$ 5,000

Interest rate

5.25%

Default rate increased

7.25%

Description of forbearance agreement and amendment Credit Facility

the Credit Facility and the forbearance agreement related to such facility to increase our basket of permitted asset sales to $0.6 million in any calendar year provided that any proceeds from permitted asset sales be deposited in a blocked deposit account with Wells Fargo.

Delayed Draw Term Loan [Member]

Term loan

$ 5,000

Quaterly repayment of loan

300

Principal Amount

$ 5,000

XML

LONG-TERM DEBT RELATED PARTY (Details) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Credit facility
Total		$ 10
Current [Mumber] | Related party [Member]
Credit facility
Term loan		13,339
Revolving credit facility
Delayed draw term loan		4,433
Line of credit - Pelican		494
Equipment financing and capital leases		614
Total		18,880
Long-term Debt [Member] | Related party [Member]
Credit facility
Term loan	5,027
Revolving credit facility	750
Delayed draw term loan	575
Line of credit - Pelican
Equipment financing and capital leases		1,315
Total	$ 6,352	$ 1,315

XML

LONG-TERM DEBT RELATED PARTY (Details Narrative) - USD ($)
$ in Thousands

1 Months Ended

12 Months Ended

Jan. 31, 2018

Jan. 31, 2017

Oct. 26, 2016

Dec. 31, 2017

Dec. 31, 2018

Dec. 12, 2016

Maximum availability limit

$ 600

LLC (Pelican) [Member]

Credit facility loan, amount

$ 5,100

Delayed Draw Term Loan [Member]

Current revolving credit, amount

700

Credit Facility [Member]

Current revolving credit, amount

$ 300

Credit Facility [Member] | LLC (Pelican) [Member]

Credit facility loan, amount

$ 1,000

Credit facility description

Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables where eligible receivables are defined as all receivables which have been billed to customers and are less than 90 days old.

Credit Facility [Member] | Amendment No.4 [Member] | January 22, 2018 [Member]

Amendment description

The maximum delayed draw loan borrowings from $1.3 million to $0.7 million. Amounts drawn on the Swing Loan may be repaid and reborrowed without penalty until June 30, 2018 at which time the Swing Line matures and all outstanding amounts are immediately due and payable. Interest on the Swing Line is charged at the lower of the (i) highest lawful rate or (ii) 7.0% per annum.

Current revolving credit, amount

$ 1,300

Maximum revolving credit, amount

700

Maximum availability limit

$ 600

Credit Facility [Member] | Amendment No.3 [Member] | June 15, 2017 [Member]

Amendment description

the maximum delayed draw loan borrowings from $0.5 million to $1.3 million and the amendment also increased permitted draws on the delayed draw loan from 80% of the cost of capital expenditures being funded to 90% of the cost of capital expenditures being funded.

Current revolving credit, amount

$ 1,000

Maximum revolving credit, amount

$ 1,800

Credit Facility [Member] | Amendment No.2 [Member] | May 23, 2017 [Member]

Amendment description

In consideration of the increase in the revolving credit facility and the extension of the final maturity date, we agreed to issue to Pelican, the lender, as an amendment fee, 1,200 shares of our Series A Convertible Preferred Stock.

Current revolving credit, amount

$ 1,000

Maximum revolving credit, amount

$ 1,800

Maturity date of credit facility

Dec. 31, 2019

Credit Facility [Member] | Amendment No.1 [Member] | March 1, 2017 [Member]

Amendment description

The amendment permitted us to draw on the delayed draw term loan from time-to-time up until December 31, 2018 in order to fund up to 80% of the cost of capital expenditures subject to a $0.5 million limit on aggregate borrowings.

Maturity date of credit facility

Dec. 31, 2018

New credit facility [Member] | LLC (Pelican) [Member] | Aly Senior Obligations [Member]

Credit facility outstanding borrowing, amount

$ 500

Aly Senior Obligations [Member]

Acquired outstanding equipment financing and capital leases plus associated accrued interest

$ 1,900

Pelican Credit Facility [Member]

Subsequent description

we have the availability to borrow an $0.6 million under the Swing Line and, if we have capital expenditures which are eligible to be financed, an incremental $75,000 under the delayed draw term loan to finance 90% of such expenditures.

Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables (less than 90 days old). Borrowings under the Pelican Credit Facility are subject to monthly interest payments at an annual base rate of the six-month LIBOR rate on the last day of the calendar month plus a margin of 3.0%. To the extent there is free cash flow, as defined in the credit agreement, principal payments of 50% of such free cash flow are due annually.

Pelican Credit Facility [Member] | Credit Facility [Member]

Current revolving credit, amount

$ 300

Tiger and Pelican [Member]

Line of credit

$ 500

Accrued Interest Rate

5.00%

Maturity date of credit facility

Jan. 31, 2017

XML

INCOME TAXES (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Current provision
Federal
State	59	33
Total Current Provision	59	33
Deferred benefit:
Federal		(7,298)
State		(639)
Total deferred benefit		(7,937)
Provision For Income Taxes	$ 59	$ (7,904)

XML

INCOME TAXES (Details 1)	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Income Taxes Details 1
Federal Statutory Rate	34.00%	34.00%
State Taxes, Net of Federal Benefit	(5.56%)	1.85%
Deferred income taxes - Tax Reform Rate Change	(77.90%)	0.00%
Valuation allowance - Tax Reform Rate Change	77.90%	0.00%
Valuation allowance - other	(178.02%)	(8.60%)
Gain on cancellation of debt income - Restructuring	163.55%	0.00%
Accrued interest on equity - Restructuring	(25.70%)	0.00%
Other miscellaneous	(4.61%)	1.46%
Effective Income Tax Rate	(16.34%)	28.71%

XML

INCOME TAXES (Details 2) - USD ($) $ in Thousands	Dec. 31, 2017	Dec. 31, 2016
Deferred Tax Assets:
Allowance for Doubtful Accounts	$ 15	$ 191
Net Operating Loss	6,622	10,024
Start-Up Costs	9	17
State Net Operating Loss, Net of Fedral Benefit	980	604
Accrued Compensation	84	220
Charitable Contributions and Other	9	26
Total Deferred Tax Assets	7,719	11,082
Deferred Tax Liabilities:
Prepaid Assets	82	32
Property, and Equipment	4,496	7,334
Intangibles	595	1,208
State Deferreds, Net of Federal Benefit	160	139
Total Deferred Tax Liabilities	5,333	8,713
Net deferred tax assets (liabilities) before valuation allowance	2,386	2,369
Valuation allowance	(2,386)	(2,369)
Net deferred tax liabilities after valuation allowance

XML

INCOME TAXES (Details Narrative) - USD ($)
$ in Thousands

12 Months Ended

Dec. 31, 2017

Dec. 31, 2016

Income Taxes Details Narrative

Net operating loss carry forwards

$ 31,500

Net operating loss state

$ 1,200

Federal net operating loss expiration year

2033

State net operating loss expiration year

2034

Valuation allowance

$ 2,400

$ 2,400

Net operating loss federal

6,600

Deferred tax assets

800

Net deferred tax assets

$ 3,200

Shareholders ownership description

An ownership change generally occurs if one or more shareholders (or groups of shareholders) who are each deemed to own at least 5% of the Company’s stock have aggregate increases in their ownership of such stock of more than 50 percentage points over such stockholders

XML

COMMITMENTS AND CONTINGENCIES (Details) $ in Thousands	Dec. 31, 2017 USD ($)
Commitments And Contingencies Details
2018	$ 118
2019	83
2020	25
Total	$ 226

XML

COMMITMENTS AND CONTINGENCIES (Details Narrative) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Commitments And Contingencies Details Narrative
Unpaid severance obligation	$ 400	$ 700
Operating leases	$ 200	$ 400

XML

REDEEMABLE PREFERRED STOCK (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Beginning Balance	$ 15,004
Accrued dividends	63	$ 728
Accretion		126
Ending Balance		$ 15,004
Number of Outstanding Aly Operating Redeemable Preferred Shares
Beginning Balance	0
Ending Balance	0	0
Aly Operating Redeemable Preferred Stock [Member]
Beginning Balance	$ 4,924	$ 4,647
Accrued dividends	21	239
Accretion		38
Exchange for common stock in connection with Recapitalization	(4,945)
Ending Balance		$ 4,924
Number of Outstanding Aly Operating Redeemable Preferred Shares
Beginning Balance	4,000,000	4,000,000
Accrued dividends
Exchange for common stock in connection with Recapitalization	(4,000,000)
Ending Balance		4,000,000
Liquidation Value of Aly Operating Redeemable Preferred Stock
Beginning Balance	$ 4,924	$ 4,685
Accrued dividends	21	239
Exchange for common stock in connection with Recapitalization	(4,945)
Ending Balance		$ 4,924

XML

REDEEMABLE PREFERRED STOCK (Details 1) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Beginning Balance	$ 15,004
Accrued dividends	63	$ 728
Accretion		126
Ending Balance		$ 15,004
Number of Outstanding Aly Centrifuge Redeemable Preferred Shares
Beginning Balance	0
Ending Balance	0	0
Aly Centrifuge Redeemable Preferred Stock [Member]
Beginning Balance	$ 10,080	$ 9,755
Accrued dividends	42	489
Accretion		(164)
Exchange for common stock in connection with Recapitalization	(10,122)
Ending Balance		$ 10,080
Number of Outstanding Aly Centrifuge Redeemable Preferred Shares
Beginning Balance	8,876	8,876
Accrued Dividends
Exchange for common stock in connection with Recapitalization	(8,876)
Ending Balance		8,876
Liquidation Value of Aly Operating Redeemable Preferred Stock
Beginning Balance	$ 10,080	$ 9,591
Accrued dividends	42	489
Exchange for common stock in connection with Recapitalization	(10,122)
Ending Balance		$ 10,080

XML

REDEEMABLE PREFERRED STOCK (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands	1 Months Ended	12 Months Ended
	Jan. 31, 2017	Dec. 31, 2017	Dec. 31, 2016	Aug. 15, 2014	Apr. 15, 2014
Issuance of common shares in exchange for the extinguishment of redeemable preferred stock, Shares	5,454,487
Preferred stock, issued shares		0	0
Preferred stock, par value		$ 0.001	$ 0.001
Aly Operating Redeemable Preferred Stock [Member]
Issuance of common shares in exchange for the extinguishment of redeemable preferred stock, Shares	2,414,971
Preferred stock, issued shares		4,000,000
Preferred stock, par value		$ 0.01
Preferred stock fair value		$ 3,800
Preferred stock liquidation value		$ 4,000
Dividend paid-in-kind		5.00%
Aly Centrifuge Redeemable Preferred Stock [Member]
Issuance of common shares in exchange for the extinguishment of redeemable preferred stock, Shares	3,039,516
Preferred stock, issued shares				4,000	5,000
Preferred stock, par value				$ 0.01	$ 0.01
Preferred stock fair value				$ 4,300	$ 5,100
Preferred stock liquidation value				$ 4,000	$ 5,000
Dividend paid-in-kind				5.00%	5.00%
Shares subject to holdback					124
Debt conversion feature, description		The right to exchange into shares of our common stock on any date, from time-to-time, at the option of the holder, into the number of shares equal to the quotient of (i) the sum of (A) the liquidation preference plus (B) an amount per share equal to accrued but unpaid dividends not previously added to the liquidation preference on such share of preferred stock, divided by (ii) 1,000, and (iii) multiplied by the exchange rate in effect at such time ("Conversion Feature").
Exchange rate, description		The exchange rate in effect as of December 31, 2016 was 71.4285 or $14.00 per share of our common stock.

XML

CONTROLLING SHAREHOLDER AND RELATED PARTY TRANSACTIONS (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands		1 Months Ended	12 Months Ended
	Dec. 12, 2016	Jan. 31, 2017	Dec. 31, 2017	Dec. 31, 2016
Purchased for recapitalization				$ 15,562
Business acquisition			$ 900
Fair value of future payments				$ 800
Common stock, issued shares			13,819,020	6,707,039
Common stock, price per shares			$ 0.36
Debt modification fee				$ 629
Credit Facility [Member] | Amendment [Member] | May 23, 2017 [Member]
Maturity date			Dec. 31, 2019
Shares issued for fees			1,200
Common stock, price per shares			$ 0.08
Debt modification fee			$ 300
LLC (Pelican) [Member]
Interest expense			400	100
Accrued expenses and interest			$ 26	$ 1,300
Mr. Pirie [Member]
Converted shares		457,494
Voting rights shares		326,834
Mr. Pirie [Member] | PIK dividends [Member]
Converted shares		3,039,516
Voting rights shares		593,815
Aly Senior Obligations [Member]
Common stock, issued shares		7,111,981
Common stock, price per shares		$ 0.12
Aly Senior Obligations [Member] | Tiger [Member]
Purchased for recapitalization	$ 5,100
Contribution amount		$ 16,100
Stock description		approximately 80% of our common stock, or 53,628,842 common shares, on a fully diluted basis
Issuance of preferred share		$ 16,100
Term loan		5,100
Revolving credit arrangement		$ 1,000
Maturity date		Dec. 31, 2018
Preferred Stock, Liquidation Preference Per Share		$ 1,000

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STOCK-BASED COMPENSATION (Details Narrative) - USD ($)
$ / shares in Units, $ in Thousands

1 Months Ended

12 Months Ended

May 02, 2013

May 30, 2017

Dec. 31, 2017

Dec. 31, 2016

Jun. 05, 2015

Unrecognized compensation cost

$ 300

$ 300

Share-based compensation expense

$ 625

Options to purchase common shares

234,144

242,507

Common stock, authorized shares

25,000,000

25,000,000

Stock option contract term

10 years

Stock option exercise price

$ 4.00

Stock option description

If the first Liquidity Event is an IPO, then the options vest and are exercisable immediately if the IPO is effected at a price of $8.00 per share or greater. If the IPO is effected at a price less than $8.00 per share, but the stock price post-IPO reaches $8.00 per share during the six-month period immediately following the IPO, then the options vest and are exercisable. If the IPO is effected at a price less than $8.00 per share and the share price does not reach $8.00 per share prior to the sixth month anniversary of the IPO, the options do not vest and expire. If the first Liquidity Event to occur is a change of control, then the options vest if the change of control takes place at a price of at least $8.00 per share. If such change in control occurs at a price less than $8.00 per share, the options do not vest and expire.

Share-based compensation options, forfeitures in period

8,363

87,604

Omnibus Incentive Plan [Member]

Common stock granted

338,474

2017 Stock Option Plan

Share-based compensation expense

$ 600

Stock option contract term

10 years

Stock option exercise price

$ 0.10

2017 Stock Option Plan | Maximum [Member]

Common stock, authorized shares

16,900,000

Omnibus Incentive Plan [Member] | Maximum [Member]

Common stock, authorized shares

750,000

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STOCKHOLDERS’ EQUITY (DEFICIT) (Details Narrative) - $ / shares	Dec. 31, 2017	May 23, 2017	Jan. 31, 2017	Dec. 31, 2016
Common stock, authorized shares	25,000,000			25,000,000
Common stock, par value	$ 0.001			$ 0.001
Common stock, issued shares	13,819,020			6,707,039
Common stock, outstanding shares	13,818,795			6,706,814
Treasury Stock	225			225
Common shares issued			7,111,981
Preferred stock, issued shares	0			0
Preferred stock, authorized shares	9,980,000			10,000,000
Preferred stock, par value	$ 0.001			$ 0.001
Series A Preferred Stock [Member]
Preferred stock, issued shares			16,092
Preferred stock, authorized shares			20,000
Preferred stock, par value			$ 0.001
Preferred Stock, liquidation preference per share			$ 1,000
Convertible common shares			3,332.64
Ownership percentage			100.00%
Shares issued for fees		1,200

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SUPPLEMENTAL CASH FLOW INFORMATION (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Supplemental disclosure of cash flow information:
Cash paid for interest - related party	$ 222
Cash Paid for Interest	12	973
Cash paid for interest - discontinued operations		1
Cash paid for income taxes, net	50	2
Non-cash investing and financing activities:
Extinguishment of debt and other liabilities - related party in exchange for Series A convertible preferred stock in connection with the Recapitalization	16,092
Extinguishment of redeemable preferred stock in exchange for common stock in connection with the Recapitalization	15,036
Returned equipment to lessor in exchange for release from capital lease obligation	91
Paid-in-kind dividends on preferred stock	63	728
Principal payments financed through disposition of assets	23	301
Assumption of Aly Senior Obligations by Pelican in connection with the Recapitalization		20,867
Exchange of property and equipment for reduction in debt in connection with Recapitalization		2,000
Accretion of preferred stock liquidation preference, net		$ 126

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DISCONTINUED OPERATIONS (Details) - USD ($) $ in Thousands	1 Months Ended	12 Months Ended
	Jan. 31, 2017	Dec. 31, 2017	Dec. 31, 2016
Revenue		$ 14,637	$ 11,002
Expenses:
Operating expenses		9,927	8,324
Depreciation and amortization		3,701	5,299
Reduction in value of assets	$ 38	58
Total expenses		16,629	35,432
Loss from discontinued operations		(1,992)	(24,430)
Interest expense, net		(24)	(2,378)
Loss from discontinued operations before income taxes		(366)	(27,548)
Income tax benefit		59	(7,904)
Loss from discontinued operations, net of income taxes			(2,491)
Discontinued Operations [Member]
Revenue			250
Expenses:
Operating expenses			124
Depreciation and amortization			572
Selling, general and administrative expenses			222
Reduction in value of assets			2,591
Total expenses			3,509
Loss from discontinued operations			(3,259)
Interest expense, net			1
Loss from discontinued operations before income taxes			(3,260)
Income tax benefit			(769)
Loss from discontinued operations, net of income taxes			$ (2,491)

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DISCONTINUED OPERATIONS (Details 1) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2017	Dec. 31, 2016
Impairment in connection with Recapitalization		$ 15,562
Discontinued Operations [Member]
Impairment in connection with Recapitalization		1,676
Reduction in value of intangibles		651
Impairment of goodwill		264
Total reduction in value of assets		$ 2,591

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DISCONTINUED OPERATIONS (Details Narrative) $ in Thousands	12 Months Ended
	Dec. 31, 2016 USD ($)
Discontinued Operations Details Narrative
Outstanding remaining liabilities	$ 200