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EX-31.1 - CERTIFICATION - Aly Energy Services, Inc.alye_ex311.htm
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EX-31.2 - CERTIFICATION - Aly Energy Services, Inc.alye_ex312.htm

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549 

 

FORM 10-Q

 

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

 

Period Ended June 30, 2015

 

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. 

 

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.) 

 

Not Applicable 

(Former name, Former Address and Former Fiscal year, if changed since last report.) 

 

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 the filing requirements for at least 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 whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  

 

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

¨

Smaller reporting company

x

 (Do not check if a smaller reporting company)

 

 

 

 

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

 

Applicable Only to Corporate Issuers 

 

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date. 

 

Common Stock, $0.001 Par Value – 5,659,390 shares as of August 14, 2015.

 

 

 

INDEX 

 

ALY ENERGY SERVICES, INC.

 

PART I. FINANCIAL INFORMATION

 

Page

 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements  

 

 

3
 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014   

 

 

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2015 and 2014 (unaudited)  

 

 

4

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014 (unaudited)  

 

 

5

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements   

 

 

6

 

 

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

 

25

 

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk  

 

 

35

 

 

 

 

 

Item 4. 

Controls and Procedures  

 

 

35

 

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

 

 

 

Item 6.  

Exhibits 

 

 

36

 

 

 

 

 

Signatures  

 

 

 

37

 

 

 2

 

 

ALY ENERGY SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except shares)

 

 

 

June 30,

2015

 

 

December 31,

2014

 

 

 

(Unaudited) 

 

 

 

 

 

 

 

 

 

 

 

Assets 

 

 

 

 

 

 

Current Assets 

 

 

 

 

 

 

Cash and Cash Equivalents 

 

$ 376

 

 

$ 2,050

 

Accounts Receivable, Net of Allowance for Doubtful Accounts of $328 and $178, as of June 30, 2015 and December 31, 2014, respectively 

 

 

3,863

 

 

 

11,053

 

Unbilled Receivables 

 

 

1,647

 

 

 

2,479

 

Inventory 

 

 

287

 

 

 

431

 

Deferred Tax Assets 

 

 

120

 

 

 

57

 

Prepaid Expenses and Other Current Assets 

 

 

529

 

 

 

757

 

 

 

 

 

 

 

 

 

 

Total Current Assets 

 

 

6,822

 

 

 

16,827

 

 

 

 

 

 

 

 

 

 

Property and Equipment, Net 

 

 

56,364

 

 

 

56,484

 

 

 

 

 

 

 

 

 

 

Intangible Assets, Net 

 

 

9,444

 

 

 

10,475

 

Goodwill 

 

 

11,407

 

 

 

11,407

 

Deferred Loan Costs, Net 

 

 

562

 

 

 

768

 

Deferred Tax Assets 

 

 

3,057

 

 

 

774

 

Other Assets 

 

 

10

 

 

 

12

 

 

 

 

 

 

 

 

 

 

Total Assets 

 

$ 87,666

 

 

$ 96,747

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity 

 

 

 

 

 

 

 

 

Current Liabilities 

 

 

 

 

 

 

 

 

Accounts Payable 

 

$ 1,610

 

 

$ 4,628

 

Accounts Payable - Affiliates 

 

 

-

 

 

 

590

 

Accrued Expenses 

 

 

1,525

 

 

 

2,453

 

Deferred Tax Liabilities 

 

 

55

 

 

 

58

 

Current Portion of Long-Term Debt 

 

 

24,176

 

 

 

6,758

 

Current Portion of Contingent Payment Liability 

 

 

800

 

 

 

876

 

 

 

 

 

 

 

 

 

 

Total Current Liabilities 

 

 

28,166

 

 

 

15,363

 

 

 

 

 

 

 

 

 

 

Long-Term Debt, Net of Current Portion 

 

 

3,547

 

 

 

23,455

 

Contingent Payment Liability, Net of Current Portion 

 

 

1,137

 

 

 

2,233

 

Deferred Tax Liabilities 

 

 

13,800

 

 

 

12,910

 

Other Long-Term Liabilities 

 

 

33

 

 

 

28

 

 

 

 

 

 

 

 

 

 

Total Liabilities 

 

 

46,683

 

 

 

53,989

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (See Note 6) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aly Operating Redeemable Preferred Stock, $0.01 par value, 4,000,000 shares authorized, issued and outstanding at June 30, 2015 and December 31, 2014 

 

 

4,513

 

 

 

4,382

 

Aly Centrifuge Redeemable Preferred Stock, $0.01 par value, 15,000 shares authorized, 9,252 shares issued and outstanding as of June 30, 2015 and December 31, 2014 

 

 

9,741

 

 

 

9,584

 

 

 

 

 

 

 

 

 

 

 

 

 

14,254

 

 

 

13,966

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity 

 

 

 

 

 

 

 

 

Common Stock, $0.001 par value, 200,000,000 shares authorized, 5,659,615 shares issued, and 5,659,390 shares outstanding as of June 30, 2015 and 200,000,000 shares authorized, 5,511,341 issued and 5,511,116 outstanding as of December 31, 2014 

 

 

6

 

 

 

6

 

Treasury Stock, 225 Shares at Cost 

 

 

(2 )

 

 

(2 )

Additional Paid-In-Capital 

 

 

25,865

 

 

 

24,917

 

Retained Earnings 

 

 

860

 

 

 

3,871

 

 

 

 

 

 

 

 

 

 

Total Stockholders' Equity 

 

 

26,729

 

 

 

28,792

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity 

 

$ 87,666

 

 

$ 96,747

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 3

 

 

ALY ENERGY SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except shares and per share data)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues 

 

$ 7,148

 

 

$ 9,078

 

 

$ 16,144

 

 

$ 14,360

 

Expenses: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses  

 

 

4,777

 

 

 

4,505

 

 

 

11,234

 

 

 

6,959

 

Depreciation and Amortization  

 

 

1,712

 

 

 

1,259

 

 

 

3,365

 

 

 

2,065

 

Selling, General and Administrative Expenses  

 

 

2,593

 

 

 

1,949

 

 

 

5,025

 

 

 

3,049

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Expenses  

 

 

9,082

 

 

 

7,713

 

 

 

19,624

 

 

 

12,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income/(Loss)  

 

 

(1,934 )

 

 

1,365

 

 

 

(3,480 )

 

 

2,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Expense, Net  

 

 

455

 

 

 

345

 

 

 

946

 

 

 

515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income/(Loss) Before Income Tax  

 

 

(2,389 )

 

 

1,020

 

 

 

(4,426 )

 

 

1,772

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense/(Benefit)  

 

 

(817 )

 

 

474

 

 

 

(1,415 )

 

 

766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income/(Loss)  

 

 

(1,572 )

 

 

546

 

 

 

(3,011 )

 

 

1,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock Dividends  

 

 

178

 

 

 

103

 

 

 

353

 

 

 

156

 

Accretion of Preferred Stock, Net  

 

 

(32 )

 

 

1

 

 

 

(65 )

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income/(Loss) Available to Common Stockholders  

 

$ (1,718 )

 

$ 442

 

 

$ (3,299 )

 

$ 840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Net Income/(Loss) per Common Share  

 

$ (0.30 )

 

$ 0.09

 

 

$ (0.58 )

 

$ 0.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Average Common Shares Outstanding  

 

 

5,654,580

 

 

 

5,054,823

 

 

 

5,644,678

 

 

 

4,779,926

 

 

 See accompanying notes to condensed consolidated financial statements.

 

 

 4

 

 

ALY ENERGY SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net Income/(Loss)  

 

$ (3,011 )

 

$ 1,006

 

Adjustments to Reconcile Net Income/(Loss) to Net Cash Provided by Operating Activities 

 

 

 

 

 

 

 

 

Depreciation and Amortization of Property and Equipment  

 

 

2,334

 

 

 

1,587

 

Amortization of Deferred Loan Costs  

 

 

234

 

 

 

126

 

Amortization of Intangible Assets  

 

 

1,031

 

 

 

478

 

Stock-Based Compensation  

 

 

100

 

 

 

-

 

Bad Debt Expense  

 

 

144

 

 

 

57

 

Fair Value Adjustments to Contingent Payment Liability  

 

 

(310 )

 

 

87

 

Deferred Taxes  

 

 

(1,459 )

 

 

263

 

Changes in Operating Assets and Liabilities  

 

 

 

 

 

 

 

 

Accounts Receivable  

 

 

7,046

 

 

 

(1,472 )

Unbilled Receivables  

 

 

832

 

 

 

(1,685 )

Inventory  

 

 

144

 

 

 

(205 )

Prepaid Expenses and Other Assets  

 

 

230

 

 

 

(526 )

Accounts Payable  

 

 

(3,018 )

 

 

(389 )

Accrued Expenses and Other Liabilities  

 

 

(923 )

 

 

1,495

 

 

 

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

 

3,374

 

 

 

822

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of Property and Equipment  

 

 

(1,147 )

 

 

(3,973 )

Cash Paid for United Acquisition, Net of Cash Acquired  

 

 

-

 

 

 

(15,063 )
 

 

 

 

 

 

 

 

 

Net Cash Used in Investing Activities

 

 

(1,147 )

 

 

(19,036 )
 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from Issuance of Common Stock, Net of Transaction Cost  

 

 

550

 

 

 

6,820

 

Proceeds from Borrowing on Debt  

 

 

-

 

 

 

25,000

 

Payment of Contingent Consideration  

 

 

(862 )

 

 

 

 

Repayment of Debt  

 

 

(3,557 )

 

 

(11,934 )

Payment of Deferred Loan Costs  

 

 

(32 )

 

 

(434 )
 

 

 

 

 

 

 

 

 

Net Cash Used in Financing Activities

 

 

(3,901 )

 

 

19,452

 

 

 

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

 

(1,674 )

 

 

1,238

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents, Beginning of Period

 

 

2,050

 

 

 

1,440

 

Cash and Cash Equivalents, End of Period

 

 

376

 

 

$ 2,678

 

 

 See accompanying notes to condensed consolidated financial statements.

 

 

 5

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – NATURE OF OPERATIONS 

 

Aly Energy Services, Inc. (“Aly Energy” or the “Company”) provides oilfield services, including surface equipment rental, solids control services, and directional drilling services, to exploration and production companies. The Company has grown rapidly since inception through both organic growth and the completion of three acquisitions. 

 

On October 26, 2012, Aly Operating, Inc. (“Aly Operating”) 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, Aly Energy 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. United 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.  

 

On July 1, 2014, the Company acquired all of the issued and outstanding stock of Evolution Guidance Systems Inc. (“Evolution”), an operator of Measurement-While-Drilling (“MWD”) downhole tools. 

 

The Company, which has three wholly-owned subsidiaries, Aly Operating, Aly Centrifuge and Evolution, operates as one business segment which services customers within the United States. 

 

NOTE 2 – LIQUIDITY

 

At June 30, 2015, the Company was not in compliance with certain financial covenants set forth in its credit agreement.

 

The Company has classified its indebtedness under the credit agreement as a current liability. This classification of its indebtedness creates substantial doubt about the Company’s ability to continue as a going concern as of June 30, 2015.

 

Based upon preliminary discussions with its lender, the Company anticipates that it will enter into an amendment and extension to its credit agreement that will reinstate its compliance with all applicable financial covenants, provided that the Company is successful in enhancing its liquidity with proceeds from an equity financing. On June 24, 2015, the Company commenced a private offering to accredited investors of 1,562,500 shares of its common stock at a price of $3.20 per share. The expiration date of the private offering has been extended from August 10, 2015 to the earlier of (i) the date on which the Company finalizes an amendment to its bank credit agreement or (ii) September 15, 2015, unless further extended in the Company’s sole discretion. The offering is conditioned upon the Company’s acceptance of a minimum of 937,500 shares ($3.0 million) on or before the expiration date. As of August 14, 2015, subscription agreements in excess of the minimum offering have been received by the Company. Subsequent to the completion of the private offering and the subsequent execution of an amendment and extension to the credit facility, it is anticipated that the Company will resume classification of its long-term credit facility indebtedness (other than the regularly scheduled current portion) as long-term indebtedness. 

 

 

 6

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

 

Basis of Presentation and Principles of Consolidation: The accompanying condensed consolidated financial statements of the Company have not been audited by the Company’s independent registered public accounting firm, except the condensed consolidated balance sheet at December 31, 2014 is derived from audited consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for fair presentation have been included. 

 

These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2014, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on April 1, 2015. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. 

 

These condensed consolidated financial statements include the accounts of Aly Energy and its subsidiaries. All significant inter-company transactions and accounts have been eliminated upon consolidation. 

 

Reverse Stock Split: On June 19, 2015, the Company effected a 1-for-20 reverse stock split of its common stock (“Reverse Split”), as approved by its Board of Directors and stockholders. All information in this Quarterly Report on Form 10-Q relating to the number of shares, price per share and per share amounts have been retroactively restated to give effect to the Reverse Split.

 

Revenue Recognition: The Company generates revenues primarily from renting equipment at per-day rates. In connection with certain of its solids control, skimming operations and directional drilling and MWD operations, the Company also provides personnel to operate its equipment at the customer’s location at per-day or per-hour rates. In addition, the Company may provide equipment transportation and rig-up/rig-down services to the customer 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. 

 

Fair Value of Financial Instruments: Financial instruments consist of cash and cash equivalents, accounts receivable, unbilled receivables, accounts payable, accrued expenses, and a liability for contingent payments. The carrying values of cash and cash equivalents, accounts receivable, unbilled receivables, accounts payable, and accrued expenses approximate fair value due to their short-term nature. 

 

The Company measures its liability for contingent payments at fair value 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. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different 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. 

 

 

 7

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company’s liability for contingent payments represents the fair value of estimated additional cash payments related to the United Acquisition. The payments are subject to the achievement of certain financial performance goals. As of June 30, 2015, the fair value of the liability for contingent payments is the present value of the estimated remaining payments. The present value calculation for the remaining payments due on May 31, 2016 and 2017 is considered a Level 3 measurement and is based upon the Company’s internal model and projections. 

 

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

 

 

 

For the Three Months Ended

June 30,

 

 

For the Six Months Ended

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value, Beginning of Period 

 

$ 2,769

 

 

$ -

 

 

$ 3,109

 

 

$ -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions 

 

 

-

 

 

 

3,517

 

 

 

-

 

 

 

3,517

 

Changes in Fair Value 

 

 

30

 

 

 

87

 

 

 

(310 )

 

 

87

 

Payments 

 

 

(862 )

 

 

-

 

 

 

(862 )

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value, End of Period 

 

$ 1,937

 

 

$ 3,604

 

 

$ 1,937

 

 

$ 3,604

 

 

Changes in fair value are recognized in selling, general and administrative expenses in the condensed consolidated statement of operations during the three and six months ended June 30, 2015 and 2014. 

 

Property, Plant and Equipment: Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. 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. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operating income. 

 

 

 8

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The cost of property and equipment currently in service is depreciated, on a straight-line basis, over the estimated useful lives of the related assets, which range from one to 20 years. A residual value is used for asset types deemed to have a salvage value. Typically, these assets contain a large amount of iron in their construction. Major classifications of property, plant and equipment and their respective useful lives are as follows (in thousands):

 

 

 

Estimated

Useful Lives

 

June 30,

2015

 

 

December 31,

2014

 

 

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Machinery and Equipment

 

1-20 years

 

$ 56,178

 

 

$ 55,353

 

Vehicles, Trucks & Trailers  

 

5-7 years

 

 

6,859

 

 

 

5,243

 

Office Furniture, Fixtures and Equipment  

 

3-7 years

 

 

297

 

 

 

266

 

Software  

 

3-5 years

 

 

232

 

 

 

100

 

Leasehold Improvements  

 

Remaining Term of Lease

 

 

192

 

 

 

180

 

Buildings  

 

20 years

 

 

212

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63,970

 

 

 

61,142

 

Less: Accumulated Depreciation and Amortization  

 

 

 

 

(7,947 )

 

 

(5,615 )
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56,023

 

 

 

55,527

 

Assets Not Yet Placed In Service  

 

 

 

 

341

 

 

 

957

 

 

 

 

 

 

 

 

 

 

 

 

Property, Plant and Equipment, Net  

 

 

 

$ 56,364

 

 

$ 56,484

 

 

Depreciation and amortization of property and equipment for the three months ended June 30, 2015 and 2014 was $1.2 million and $0.9 million, respectively. Depreciation and amortization of property and equipment for the six months ended June 30, 2015 and 2014 was $2.3 million and $1.6 million, respectively.  

 

Impairment of Long-Lived Assets: Long-lived assets, which include property, plant and equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense. The impairment loss is determined by comparing the fair value with the carrying value of the related assets. The Company recorded no impairment for the three and six months ended June 30, 2015 and 2014. 

 

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. During the three and six months ended June 30, 2015, there have been no events or circumstances indicating that the carrying value of goodwill may not be recoverable. 

 

 

 9

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Intangible Assets: Intangible assets consist of the following (in thousands): 

 

 

 

Estimated

Useful Lives

 

June 30,

2015

 

 

December 31,

2014

 

 

 

 

 

(unaudited) 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer Relationships  

 

2-10 years

 

$ 5,441

 

 

$ 5,441

 

Trade Name  

 

4-10 years

 

 

2,355

 

 

 

2,355

 

Non-Compete  

 

4-5 years

 

 

2,586

 

 

 

2,586

 

Sales Contract  

 

4 years

 

 

524

 

 

 

524

 

Supply Agreement  

 

4 years

 

 

1,686

 

 

 

1,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,592

 

 

 

12,592

 

Less: Accumulated Amortization  

 

 

 

 

(3,148 )

 

 

(2,117 )
 

 

 

 

 

 

 

 

 

 

 

Intangible Assets, Net  

 

 

 

$ 9,444

 

 

$ 10,475

 

 

Total amortization expense for the three months ended June 30, 2015 and 2014 was approximately $0.5 million and $0.3 million, respectively. Total amortization expense for the six months ended June 30, 2015 and 2014 was approximately $1.0 million and $0.5 million, respectively. 

 

Income Taxes: The Company accounts 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. 

 

The Company recognizes 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.  

 

 

 10

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014. The Company had no uncertain tax positions as of June 30, 2015. 

 

Use of Estimates: The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 

 

Reclassifications: Certain reclassifications have been made to prior period condensed consolidated financial statements to conform to the current period presentations. These reclassifications had no effect on the consolidated financial position, results of operations or cash flows of the Company. 

 

Recent Accounting Pronouncements: In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers(Topic 606), which provides for a single five-step model to be applied in determining the amount and timing of the recognition of revenue related to contracts with customers. The new guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. Companies have an option to use either a retrospective approach or cumulative effect adjustment approach to implement the guidance. The provisions of the new guidance are effective for annual reporting periods beginning after December 15, 2016, including interim periods within those reporting periods. However, in July 2015, the FASB voted to defer the effective date by one year to be effective for annual reporting periods beginning after December 15, 2017. The ASU does not provide an option for early adoption, but under the FASB’s decision, entities would be permitted to early adopt the new guidance using the original effective date in ASU No. 2014-09. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements. 

 

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Companies have an option of using either a full retrospective or modified retrospective adoption approach. The updated guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements. 

 

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. The Company plans to make the required change to the presentation of its debt issuance costs in the first quarter of fiscal year 2016, but it does not believe such change will have a material impact to its consolidated financial statements. 

 

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) – Simplifying the Measurement of Inventory. The amendments in the ASU require entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost and net realizable value to more closely align the measurement of inventory in U.S. GAAP with International Financial Reporting Standards. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. ASU 2015-11 is effective on a prospective basis for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, with earlier application permitted. The Company does not believe the adoption of ASU 2015-11 will have a material impact on its consolidated financial statements.

 

 

 11

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4 – BUSINESS COMBINATION

 

United Acquisition 

 

On April 15, 2014, Aly Energy acquired the equity interests of United as well as certain assets used in United’s business that were owned by related parties of United. The acquisition expanded Aly Energy’s service offering by adding solids control services and expanded Aly Energy’s geographical footprint into the Northeast. Total consideration for the United Acquisition was approximately $24.5 million, comprised of the following (in thousands): 

 

Cash Consideration Paid, Net of Cash Acquired 

 

$ 15,063

 

Fair Value of Aly Centrifuge Redeemable Preferred Stock Issued 

 

 

5,101

 

Fair Value of Contingent Consideration 

 

 

3,517

 

Accounts Payable - Affiliates 

 

 

821

 

 

 

 

 

 

Total Consideration 

 

 

24,502

 

 

The cash portion of the consideration was $15.1 million, net of cash acquired of $0.6 million. Redeemable preferred stock issued as consideration in the United Acquisition (“Aly Centrifuge Redeemable Preferred Stock”) consists of 5,000 shares with an estimated fair value of $5.1 million (Note 7). The contingent consideration consisted of up to three future cash payments to the sellers in an amount equal to 5% of the gross revenues of the business acquired for each of the 12 month periods ending on March 31, 2015, 2016 and 2017; provided, however, that the aggregate contingent consideration will not exceed $5.0 million. On May 31, 2015, the Company made the first cash payment in the amount of $0.9 million, or 5% of the gross revenues of the business acquired for the twelve months ended March 31, 2015. 

 

The business combination was accounted for using the acquisition method of accounting and the purchase price was allocated to the net assets acquired at their estimated fair value. The preliminary purchase price was allocated to the net assets acquired upon their estimated fair value as follows (in thousands): 

 

Current Assets 

 

$ 2,981

 

Property and Equipment 

 

 

18,170

 

Intangible Assets 

 

 

6,105

 

Goodwill 

 

 

2,309

 

 

 

 

 

 

Total Assets Acquired 

 

 

29,565

 

 

 

 

 

 

Liabilities Assumed 

 

 

2,401

 

Deferred Tax Liabilities 

 

 

2,662

 

 

 

 

 

 

Total Liabilities Assumed 

 

 

5,063

 

 

 

 

 

 

Net Assets Acquired 

 

$ 24,502

 

 

 

 12

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Goodwill, which is not deductible for tax purposes, has a total value of $2.3 million primarily attributable to the rapid growth opportunities that the acquisition could provide to Aly Energy’s existing operations through geographic expansion and opportunities to cross-sell and bundle other product offerings of Aly Energy. Other intangible assets have a total value of $6.1 million with a weighted average amortization period of 7 years. Other intangible assets consist of customer relationships of $2.2 million, amortizable over 10 years, trade name of $1.1 million, amortizable over 10 years, a non-compete agreement of $1.1 million, amortizable over 4 years, and a supply agreement of $1.7 million, amortizable over 4 years. Included within liabilities assumed is $0.3 million of capital leases. 

 

During the three months ended June 30, 2015 and 2014, the United Acquisition contributed $3.8 million and $3.0 million, respectively, in revenues to the condensed consolidated financial results of the Company. The condensed consolidated financial results of the Company during the three months ended June 30, 2015 and 2014 include a net loss available to common stockholders of $0.6 million and net income of $0.1 million, respectively, prior to any allocation of the Company’s financing costs and corporate expenses, generated by the United Acquisition. 

 

During the six months ended June 30, 2015 and 2014, the United Acquisition contributed $7.8 million and $3.0 million, respectively, in revenues to the condensed consolidated financial results of the Company. The condensed consolidated financial results of the Company during the six months ended June 30, 2015 and 2014 include a net loss available to common stockholders of $0.7 million and net income of $0.1 million, respectively, prior to any allocation of the Company’s financing costs and corporate expenses, generated by the United Acquisition. 

 

Evolution Acquisition 

 

On July 1, 2014, Aly Energy acquired all of the issued and outstanding stock of Evolution. The acquisition expanded Aly Energy’s service offering by adding MWD services. Total consideration was approximately $2.0 million, comprised of the following (in thousands): 

 

Fair Value of Common Stock Issued 

 

$ 1,650

 

Accounts Payable - Affiliates 

 

 

340

 

 

 

 

 

 

Total Consideration 

 

$ 1,990

 

 

Common Stock issued as consideration for the acquisition of Evolution consists of 150,000 shares with an estimated fair value of $1.7 million as of the date of the acquisition. As of June 30, 2015, no further cash payments are due to the sellers. 

 

 

 13

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The business combination was accounted for using the acquisition method of accounting and the purchase price was allocated to the net assets acquired at their estimated fair value. The preliminary purchase price was allocated to the net assets acquired upon their estimated value as follows (in thousands): 

 

Current Assets 

 

$ 902

 

Property and Equipment 

 

 

62

 

Intangible Assets 

 

 

1,758

 

Goodwill 

 

 

264

 

 

 

 

 

 

Total Assets Acquired 

 

 

2,986

 

 

 

 

 

 

Liabilities Assumed 

 

 

398

 

Deferred Tax Liabilities 

 

 

598

 

 

 

 

 

 

Total Liabilities Assumed 

 

 

996

 

 

 

 

 

 

Net Assets Acquired 

 

$ 1,990

 

 

Goodwill, which is not tax deductible, has a value of $0.3 million and is primarily attributable to the cross-selling opportunities that Evolution could provide to the existing Aly Energy operations. Other intangible assets have a total value of $1.8 million with a weighted average amortization period of 4 years. Other intangible assets consist of customer relationships of $0.1 million, amortizable over 1.5 years, trade name of $0.2 million, amortizable over 4.5 years, a sales contract of $0.5 million, amortizable over 3.5 years, and a non-compete agreement of $1.0 million, amortizable over 4 years. 

 

During the three and six months ended June 30, 2015, Evolution contributed $0.9 million and $2.9 million, respectively, of revenues to the condensed consolidated financial results of the Company. The condensed consolidated financial results of the Company during the three and six months ended June 30, 2015 include a net loss available to common stockholders of $0.7 million and $1.2 million, respectively, prior to any allocation of the Company’s financing costs and corporate expenses, generated by Evolution. 

 

 

 14

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – LONG-TERM DEBT

 

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

 

 

 

June 30,

2015

 

 

December 31,

2014

 

 

 

(unaudited) 

 

 

 

 

Credit Facility  

 

 

 

 

 

 

Term Loan  

 

$ 18,750

 

 

 

21,250

 

Delayed Draw Term Loan  

 

 

4,750

 

 

 

5,000

 

Subordinated Note Payable  

 

 

1,500

 

 

 

2,000

 

Equipment Financing and Capital Leases  

 

 

2,723

 

 

 

1,963

 

 

 

 

 

 

 

 

 

 

 

 

$ 27,723

 

 

$ 30,213

 

Less: Current Portion  

 

 

(24,176 )

 

 

(6,758 )
 

 

 

 

 

 

 

 

 

Long-Term Debt, Net of Current Portion  

 

$ 3,547

 

 

$ 23,455

 

 

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

 

On October 26, 2012, we entered into a credit agreement which provided us with an $8.3 million term loan facility and a committed revolving credit facility of up to $5.0 million. 

 

On April 19, 2013, we entered into Amendment No.1 to the credit agreement in order to, among other things, provide for a $5.0 million delayed draw term loan to be added to the credit facility for the purpose of financing capital expenditures.  

 

On April 15, 2014, in connection with the United Acquisition, we entered into an Amended and Restated Credit Agreement with a maturity date of April 30, 2017. The new agreement increased the size of our credit facility to $30.0 million, consisting of a $25.0 million term loan and a revolving credit facility with a maximum availability of $5.0 million.  

 

On November 26, 2014, we entered into Amendment No. 1 to the Amended and Restated Credit Agreement in order to, among other things, provide for a $5.0 million delayed draw term loan to be added to the credit facility for the purpose of financing capital expenditures. 

 

The obligations under the agreement are guaranteed by all of the Company’s subsidiaries and secured by substantially all of the assets of the Company and its subsidiaries. The credit agreement contains customary events of default and covenants including restrictions on the ability of the Company and its subsidiaries to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, grant liens and sell assets. The Company is also required to satisfy certain financial and reporting covenants in conjunction with the debt facilities. At June 30, 2015, the Company was not in compliance with certain financial covenants set forth in its credit agreement. Such noncompliance was waived by the lender as of such date. 

 

 

 15

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Borrowings under the credit facility bear interest at a floating rate based on the Wells Fargo Prime Rate, the Federal Funds Rate, or LIBOR Rate plus a margin which may fluctuate depending on our then current leverage ratio. 

 

Borrowings under the term loan and delayed draw term loan are repayable in quarterly principal payments of $1.3 million and $0.3 million, respectively, with a balloon payment of the remaining outstanding borrowings on April 30, 2017. 

 

As of June 30, 2015, we had a borrowing base of $2.4 million under the revolving credit facility. The borrowing base, recalculated monthly, is determined by the balance and aging of our accounts receivable and may decrease subject to a decline in revenue resulting from the current market conditions. 

 

Subordinated Note Payable 

 

On August 15, 2014, we completed a bulk equipment purchase (the “Saskatchewan Equipment Purchase”), consisting of centrifuges, shakers, service vehicles and other associated equipment, for total consideration of $10.3 million of which $2.0 million was in the form of a Subordinated Note Payable. The Subordinated Note Payable, in the principal amount of $2.0 million, required repayment in four quarterly principal payments of $0.5 million, beginning on March 31, 2015 and ending on the maturity date of December 31, 2015, bearing interest at a rate of 5% per annum on the unpaid principal balance. 

 

On March 18, 2015, the Subordinated Note Payable was amended to extend the final maturity date to June 30, 2017 and to increase the interest rate to 10% per annum. Subsequent to an aggregate principal and interest payment of approximately $0.6 million on March 31, 2015, additional payments of interest and principal are not required until June 30, 2017. Interest and principal payments may be paid in amounts determined by the Company’s board of directors on any date or dates prior to June 30, 2017, subject to approval of both the Company’s board of directors and the Company’s lenders. The Subordinated Note Payable is generally subordinated in right of payment to the Company’s indebtedness to its lenders. 

 

Equipment Financing and Capital Leases

 

The Company finances 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. At June 30, 2015 and December 31, 2014, we had $2.7 million and $2.0 million outstanding under equipment loans and capital leases, respectively. 

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

Litigation 

 

The Company is 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 the Company’s financial position or results of operations. 

 

 

 16

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

In November 2014, Kenneth Slusher filed a lawsuit on behalf of himself and others in the U.S. District Court, Southern District of Texas, based on the Fair Labor Standards Act (“FLSA”), alleging that he and others were not paid overtime wages for the prior three years. Aly Centrifuge was served with this lawsuit in March 2015 and has answered the complaint. 

 

In February 2015, Michael Mallett filed a similar lawsuit against Aly Centrifuge in the U.S. District Court, Western District of Texas. Aly Centrifuge answered this complaint in February 2015. By agreement of the parties, the Mallett lawsuit will be consolidated with the Slusher lawsuit and transferred to Houston. 

 

Discovery in the consolidated case has not commenced and it is accordingly too premature to assess a range of liability if the plaintiffs were to prevail on their claims. We intend to vigorously defend any assertions related to the above lawsuits. Due to the inherent uncertainties of the lawsuit at this time, we cannot accurately predict the ultimate outcome of the matter. 

 

Contractual Commitments

 

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

 

NOTE 7 – REDEEMABLE PREFERRED STOCK

 

Two of the Company’s subsidiaries have redeemable preferred stock outstanding as of June 30, 2015. Aly Operating issued redeemable preferred stock in connection with the acquisition of Austin Chalk (“Aly Operating Redeemable Preferred Stock”) and Aly Centrifuge issued the Aly Centrifuge Redeemable Preferred Stock in connection with the United Acquisition. 

 

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 first tranche of 2 million shares was issued on December 31, 2012 and the second tranche of 2 million shares was issued on March 31, 2013. 

 

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

 

The holder of the Aly Operating Redeemable Preferred Stock and Aly Operating can, at either’s option, require the other party to redeem the preferred stock for cash on the fourth anniversary of the closing date of the sale or October 26, 2016. However, there is no requirement for either party to redeem the preferred stock. 

 

 

 17

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The rights of the preferred stock also include the right to exchange into shares of Company common stock or to redeem the preferred stock for cash should the Company transact a liquidity event, as defined in the agreement, or if the Company transacts an initial public offering, as defined in the agreement. The conversion ratio, determined by a calculation defined in the agreement of which the components include trailing twelve month financial performance and magnitude of investment in new equipment, is undeterminable until the Aly Operating Redeemable Preferred Stock becomes exchangeable into common shares. 

 

The Aly Operating Redeemable Preferred Stock is classified outside of permanent equity in the Company’s condensed consolidated balance sheet because the settlement provisions provide the holder the option to require Aly Operating to redeem the Aly Operating Redeemable Preferred Stock at the liquidation price plus any accrued dividends. 

 

The following table describes the changes in Aly Operating Redeemable Preferred Stock (in thousands, except for shares):  

 

 

 

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, 2015 

 

$ 4,382

 

 

 

4,000,000

 

 

$ 4,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued Dividends 

 

 

112

 

 

 

-

 

 

 

112

 

Accretion 

 

 

19

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015 

 

$ 4,513

 

 

 

4,000,000

 

 

$ 4,570

 

 

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. As of June 30, 2015, 500 shares of Aly Centrifuge Redeemable Preferred Stock remain subject to an 18-month holdback for general indemnification purposes pursuant to the purchase agreement.  

 

On August 15, 2014, in connection with the Saskatchewan 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 is entitled to a cumulative paid-in-kind dividend of 5% per year on its liquidation preference, compounded quarterly. Aly Centrifuge is not required to pay cash dividends.  

 

 

 18

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The holder of the Aly Centrifuge Redeemable Preferred Stock and Aly Centrifuge can, at either’s option, require the other party to redeem the preferred stock for cash on or after December 31, 2016. However, there is no requirement for either party to redeem the preferred stock. 

 

Aly Centrifuge Redeemable Preferred Stock also includes the right to exchange into shares of Company 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. The exchange rate currently in effect is 71.4285 or $14.00 per share of Company common stock.  

 

The Aly Centrifuge Redeemable Preferred Stock is classified outside of permanent equity in the Company’s condensed consolidated balance sheet because the settlement provisions provide the holder the option to require Aly Centrifuge to redeem the Aly Centrifuge Redeemable Preferred Stock at the liquidation price plus any accrued dividends. 

 

The following table describes the changes in the Aly Centrifuge Redeemable Preferred Stock (in thousands, except for shares, and per share amounts): 

 

 

 

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, 2015 

 

$ 9,584

 

 

 

9,252

 

 

$ 9,254

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued Dividends 

 

 

241

 

 

 

-

 

 

 

241

 

Amortization 

 

 

(84 )

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015 

 

$ 9,741

 

 

 

9,252

 

 

$ 9,495

 

 

NOTE 8 – EARNINGS PER SHARE

 

Basic earnings per share is based on the weighted average number of shares of common stock (“Common Shares”) outstanding during the applicable period. Diluted earnings per share is computed based on the weighted average number of Common Shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to outstanding stock options and restricted stock or other convertible instruments, as appropriate. 

 

 

 19

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The calculations of the denominator used in basic and diluted earnings per share are shown below:  

 

 

 

For the Three Months

Ended June 30,

 

For the Six Months

Ended June 30,

 

 

 

2015 

 

 

2014 

 

 

2015 

 

 

2014 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator Used for Basic Earnings per Share 

 

 

5,654,580

 

 

 

5,054,823

 

 

 

5,644,678

 

 

 

4,779,926

 

Aly Centrifuge Redeemable Preferred Stock 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator Used for Diluted Earnings per Share 

 

 

5,654,580

 

 

 

5,054,823

 

 

 

5,644,678

 

 

 

4,779,926

 

 

Securities excluded from the computation of diluted earnings per share for the three and six months ended June 30, 2015 are shown below: 

 

 

 

For the Three Months

Ended June 30,

 

 

  For the Six Months

Ended June 30,

 

 

 

2015 

 

 

2014 

 

 

2015 

 

 

2014 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested Stock Options (1) 

 

 

338,474

 

 

 

338,474

 

 

 

338,474

 

 

 

338,474

 

Exchange of Aly Operating Redeemable Preferred Stock (2) 

 

 

(2)

 

 

(2)

 

 

(2)

 

 

(2)

_____________

(1) The stock options vest upon the occurrence of certain events as defined in the Omnibus Incentive Plan. No vesting events have occurred as of June 30, 2015.
(2) The Aly Operating Redeemable Preferred Stock becomes exchangeable upon the occurrence of certain events, as defined in the Aly Operating Redeemable Preferred Stock Agreement. Upon occurrence of such events, the Aly Operating Redeemable Preferred Stock may, at the holder's option, be converted into Common Shares. The conversion ratio, determined by a calculation defined in the agreement of which the components include trailing twelve month financial performance and magnitude of investment in new equipment, is undeterminable until the Aly Operating Redeemable Preferred Stock becomes exchangeable into Common Shares.

 

 

20

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 – STOCK-BASED COMPENSATION 

 

Stock-Based Compensation Expense 

 

The Company issued 15,625 shares of company stock during the three months ended June 30, 2015 as part of compensation to a former employee of the Company in accordance with his employment agreement. The Company recognized share-based compensation expense of $100,000 for the three months ended June 30, 2015 in connection with this issuance.

  

Stock Options 

 

The Company has 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. 

 

The Omnibus Incentive Plan (the “Plan”) was approved by the Board of Directors on May 2, 2013. On May 2, 2013, the Company granted 338,474 Common Shares under the Plan which was the maximum number authorized. As of June 30, 2015, options to purchase 338,474 Common Shares under the Plan were outstanding.  

 

At June 30, 2015, there is approximately $0.5 million of total unrecognized compensation cost related to the 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.  

 

NOTE 10 – STOCKHOLDERS’ EQUITY

 

On June 19, 2015, the Company effected the Reverse Split, a 1-for-20 reverse stock split of its common stock, as approved by its Board of Directors and stockholders. Under the terms of the Reverse Split, each 20 shares of common stock, issued and outstanding as of such effective date, was automatically reclassified and changed into one share of common stock, without any further action by the stockholder. Fractional shares were rounded up to the nearest whole share. All share and per share amounts in this Quarterly Report on Form 10-Q have been retroactively restated to reflect the Reverse Split.

 

In January 2015, we issued an aggregate of 50,000 shares of our common stock in a private placement at a price of $11.00 per share for gross proceeds of approximately $0.6 million. 

 

We agreed to issue 79,215 and 3,434 shares of our common stock during the year ended December 31, 2014 and the six months ended June 30, 2015, respectively, to one of our directors in respect of his arrangement of certain issuances of common stock in 2014 and 2015. These shares were issued during the three months ended June 30, 2015.  

 

 

 21

 

 

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11 – SUPPLEMENTAL CASH FLOW INFORMATION 

 

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

 

 

 

Six Months Ended June 30,

 

 

2015

 

 

2014

 

Supplemental Disclosure of Cash Flow Information 

 

 

 

 

 

 

Cash Paid for Interest 

 

$ 766

 

 

$ 220

 

Cash Paid for State and Federal Income Taxes 

 

 

200

 

 

 

130

 

 

 

 

 

 

 

 

 

 

Non-Cash Investing Activities in Connection with United Acquisition 

 

 

 

 

 

 

 

 

Issuance of Aly Centrifuge Preferred Stock 

 

$ -

 

 

$ 5,101

 

Issuance of Liability for Contingent Payment 

 

 

-

 

 

 

3,517

 

Accounts Payable - Affiliates 

 

 

-

 

 

 

821

 

Non-Cash Investing and Financing Activities 

 

 

 

 

 

 

 

 

Purchase of Equipment through Capital Lease Obligations 

 

$ 1,067

 

 

$ 681

 

Accretion (Amortization) of Preferred Stock Liquidation Preference, Net 

 

 

(65 )

 

 

10

 

Paid-in-Kind Dividends on Preferred Stock 

 

 

353

 

 

 

156

 

Liability for Transaction Cost of Equity Raise 

 

 

26

 

 

 

437

 

Common Shares Issued for Transaction Cost of Equity Raise 

 

 

618

 

 

 

-

 

 

 

 22

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS  

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) includes 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:  

 

·

our future revenues, income and operating performance;  

 

·

our ability to sustain and improve our utilization and margins;  

 

·

operating cash flows and availability of capital;  

 

·

the timing and success of future acquisitions and other special projects; and, 

 

·

our ability to finance working capital and capital expenditures.  

 

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:  

 

·

a sustained decrease in domestic spending by the oil and natural gas exploration and production industry;  

 

·

a decline in or substantial volatility of crude oil and natural gas commodity prices;  

 

·

overcapacity and competition in our industry;  

 

 

 23

 

 

·

increased pressures on pricing due to competition and economic conditions;  

 

 

 

 

·

unanticipated costs, delays, regulatory compliance requirements and other difficulties in executing our long-term growth strategy, including those related to expansion into new geographic regions and new business lines;  

 

·

the incurrence of significant costs and liabilities in the future resulting from our failure to comply, or our compliance with, new or existing environmental regulations or an accidental release of hazardous substances into the environment;  

 

·

the loss of, or inability to attract new, key management personnel;  

 

·

the loss of, or failure to pay amounts when due by, one or more significant customers;  

 

·

a shortage of qualified workers;  

 

·

operating hazards inherent in our industry;  

 

·

accidental damage to or malfunction of equipment;  

 

·

an increase in interest rates;  

 

·

the potential inability to comply with the financial and other covenants in our debt agreements as a result of reduced revenues and financial performance or our inability to raise sufficient funds through asset sales or equity issuances should we need to raise funds through such methods; and  

 

·

the potential failure to maintain effective internal controls over financial reporting.  

 

For additional information regarding known material factors that could affect our operating results and performance, please read (1) “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and (2) “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Form 10-Q and in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Should one or more of these known material risks occur, or should the underlying assumptions prove incorrect, our actual results, performance, achievements or plans could differ materially from those expressed or implied in any forward-looking statement.  

 

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise, except as required by law.  

 

 

 24

 

 

ITEM 2. 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 should be read in conjunction with the unaudited consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q, together with the audited consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2014. 

 

The financial results of United and Evolution are included in the results of operations beginning on April 16, 2014 and July 1, 2014, respectively. 

 

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 those described in the section titled “Cautionary Note Regarding Forward-Looking Statements” of this Form 10-Q.  

 

Overview of Our Business 

 

We are a provider of surface rental equipment, solids control systems, and directional drilling services, including MWD services. Our equipment and services are primarily designed for and used in land-based horizontal drilling. Our equipment includes mud circulating tanks (400 and 500 barrel capacity), mud pumps (diesel and electric), live oil skimming systems with mud gas separators, flare lines with flare stacks, containment systems with stairs, portable mud mixing plants, centrifuges, shakers/vertical dryers, and MWD kits. We also provide personnel at the customer’s well site to operate certain pieces of our equipment, such as skimming systems, centrifuges, downhole drilling motors and MWD kits, when requested by the customer and, in certain cases, we provide personnel to rig-up/rig-down and haul our equipment to and from the customer's location. We service the Permian Basin (in Texas and New Mexico), Eagle Ford Shale, Utica Shale, Marcellus Shale, Woodford Shale, Granite Wash, Mississippian Lime, and Tuscaloosa Marine Shale. Our primary operating yards, shop and repair facilities, and management offices are located at various locations in Texas, including Giddings, San Angelo, Prosper, and Houston.  

 

We derive the majority of our operating revenues from day rates or hourly rates charged for the rental of our equipment and for the services provided by our personnel. The price we charge for our services depends on both the level of activity within the geographic area in which we operate and also the competitive environment. 

 

Our operating costs do not fluctuate in direct proportion to changes in revenues. Our operating expenses consist of both fixed and variable costs. Although most variable costs are highly correlated with revenues and activity, certain variable costs, such as sub-rental equipment expenses and third party trucking expenses, can be reduced as a percentage of revenues by our investment in new rental and transportation equipment. 

 

Industry Trends and Outlook

 

We operate in the commodity-driven, cyclical oil and gas industry. From 2011 and through mid-2014, the industry operated in an environment where crude oil prices largely avoided this cycle. However, subsequent to the third quarter of 2014, crude oil prices have declined significantly due to continued growth in U.S. oil production, weakened outlooks for the global economy and continued strong international crude oil supply resulting in part from OPEC’s unexpected decision to maintain oil production levels. As a result of the weaker crude oil price environment, many crude oil development prospects have become less economical for exploration and production operators, leading to an expected downturn in demand for our products and services and an overall weaker demand for oilfield services. 

 

 

 25

 

 

In April 2015, we committed to a reorganization initiative to strengthen our sales and marketing efforts, consolidate support functions, and operate more efficiently in order to partially mitigate the significant declines in pricing and utilization of our equipment and the depressed market conditions. The reorganization effort includes, but is not limited to, training our salesforce to enable the cross-selling of all of our product lines in all markets, sharing a common support services infrastructure across all reporting units, reducing headcount and wage rates, and rebranding and launching a new web site to increase awareness of our service lines. In May 2015, we moved forward aggressively with the first step of the reorganization plan, including significant reductions in headcount, field wage rates, and salaries of the management team and support personnel. We will experience the full impact of these cost cutting measures during the third quarter of 2015. We expect the reorganization to be substantially complete prior to the end of 2015. However, our reorganization and cost savings may not be enough to completely offset the negative impact of the current market conditions on our revenues.  

 

We believe we will continue to face significant challenges in 2015, primarily due to depressed oil and gas prices, and these challenges may have a significant negative impact on our operations, financial results and ability to access capital in 2015 and beyond.

 

Results for the Three Months Ended June 30, 2015 Compared to the Three Months Ended June 30, 2014 

 

The following table summarizes the change in the results of operations of the Company for the three months ended June 30, 2015 when compared to the three months ended June 30, 2014. The results of operations for the three months ended June 30, 2014 include the financial results of United beginning on April 16, 2014. The results of operations for the three months ended June 30, 2014 do not include any financial results of Evolution which was acquired on July 1, 2014 (in thousands): 

 

 

 

Three Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues 

 

$ 7,148

 

 

$ 9,078

 

Expenses: 

 

 

 

 

 

 

 

 

Operating Expenses 

 

 

4,777

 

 

 

4,505

 

Depreciation and Amortization 

 

 

1,712

 

 

 

1,259

 

Selling, General and Administrative Expenses 

 

 

2,593

 

 

 

1,949

 

 

 

 

 

 

 

 

 

 

Total Expenses 

 

 

9,082

 

 

 

7,713

 

 

 

 

 

 

 

 

 

 

Operating Income/(Loss) 

 

 

(1,934 )

 

 

1,365

 

 

 

 

 

 

 

 

 

 

Interest Expense, Net 

 

 

455

 

 

 

345

 

 

 

 

 

 

 

 

 

 

Income/(Loss) Before Income Taxes 

 

 

(2,389 )

 

 

1,020

 

 

 

 

 

 

 

 

 

 

Income Tax Expense/(Benefit) 

 

 

(817 )

 

 

474

 

 

 

 

 

 

 

 

 

 

Net Income/(Loss) 

 

 

(1,572 )

 

 

546

 

 

 

 

 

 

 

 

 

 

Preferred Stock Dividends 

 

 

178

 

 

 

103

 

Accretion of Preferred Stock, Net 

 

 

(32 )

 

 

1

 

 

 

 

 

 

 

 

 

 

Net Income/(Loss) Available to Common Stockholders 

 

$ (1,718 )

 

$ 442

 

 

 

 26

 

 

Our revenues for the three months ended June 30, 2015 were $7.1 million, a decrease of $2.0 million from revenues for the three months ended June 30, 2014 of $9.1 million. The decrease was primarily due to the steep decline in oil prices during the fourth quarter of 2014 and the first half of 2015 which resulted in a weakening of demand for our products. During the three months ended June 30, 2015 when compared to the three months ended June 30, 2014, the impact of weakened demand was reflected in pricing decreases on our core rental products of approximately 25% and activity decreases, or decreases in the number of revenue generating days, on our core rental products in excess of 40%. When comparing the three months ended June 30, 2015 and 2014, the decline in revenue associated with the depressed market conditions was slightly offset by the impact of the inclusion of the financial results related to the United acquisition and the Evolution acquisition for 91 days during the three months ended June 30, 2015 compared to 76 days and no days, respectively, during the three months ended June 30, 2014. 

 

Our operating expenses for the three months ended June 30, 2015 increased to $4.8 million compared to $4.5 million for the three months ended June 30, 2014. The $0.3 million increase resulted from incremental costs from the inclusion of the financial results related to the United acquisition and the Evolution acquisition for 91 days during the three months ended June 30, 2015 compared to 76 days and no days, respectively, during the three months ended June 30, 2014 offset by significant cost cuts in 2015 in response to the downturn in the industry. Operating expenses increased as a percentage of revenue by 34.7% to 66.8% for the three months ended June 30, 2015 from 49.6% for the three months ended June 30, 2014 reflecting the full impact of pricing decreases offset by a partial period of cost reductions. During the first half of 2015, we aggressively pursued pricing concessions from our vendors and we decreased the salaries and wages of virtually all employees by 10%. In addition, we responded to the decline in activity by decreasing our headcount and decreasing our use of third party services. Our cost cutting measures were primarily implemented during the three months ended June 30, 2015 and we expect to reap the full benefit of these actions in the second half of 2015. 

 

Depreciation and amortization expense for the three months ended June 30, 2015 increased to $1.7 million compared to $1.3 million for the three months ended June 30, 2014. The increase is due to the inclusion of the financial results related to the United acquisition and the Evolution acquisition for 91 days during the three months ended June 30, 2015 compared to 76 days and no days, respectively, during the three months ended June 30, 2014. 

 

Selling, general and administrative expense increased to $2.6 million for the three months ended June 30, 2015 compared to $1.9 million for the three months ended June 30, 2014. The increase relates to the inclusion of the financial results related to the United acquisition and the Evolution acquisition for 91 days during the three months ended June 30, 2015 compared to 76 days and no days, respectively, during the three months ended June 30, 2014 and an increase in non-recurring and non-cash expenses. For the three months ended June 30, 2015 and 2014, selling, general and administrative expenses include non-recurring expenses, primarily severance and professional fees, of $0.3 million and $0.1 million, respectively, and non-cash expenses, primarily bad debt and share-based compensation expense, of $0.3 million and $0.1 million, respectively. 

 

Interest expense increased to approximately $0.5 million for the three months ended June 30, 2015 from approximately $0.3 million for the three months ended June 30, 2014. The increase in interest expense is primarily due to the expansion of our credit facility in November 2014 to include a $5.0 million delayed draw term loan and the issuance of a subordinated note payable in August 2014 in connection with a bulk purchase of equipment. Interest expense includes non-cash amortization of deferred loan costs of $0.1 million and $0.1 million for the three months ended June 30, 2015 and 2014, respectively. 

 

For the three months ended June 30, 2015, we recorded an income tax benefit of $0.8 million compared to income tax expense of approximately $0.5 million for the three months ended June 30, 2014. The income tax benefit recorded was primarily the result of our pre-tax net loss of $2.4 million incurred for the three months ended June 30, 2015 compared to pre-tax net income of $1.0 million for the three months ended June 30, 2014. 

 

 

 27

 

  

Results for the Six Months Ended June 30, 2015 Compared to the Six Months Ended June 30, 2014 

 

The following table summarizes the change in the results of operations of the Company for the six months ended June 30, 2015 when compared to the six months ended June 30, 2014. The results of operations for the six months ended June 30, 2014 include the financial results of United beginning on April 16, 2014. The results of operations for the six months ended June 30, 2014 do not include any financial results of Evolution which was acquired on July 1, 2014 (in thousands): 

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues 

 

$ 16,144

 

 

$ 14,360

 

Expenses: 

 

 

 

 

 

 

 

 

Operating Expenses 

 

 

11,234

 

 

 

6,959

 

Depreciation and Amortization 

 

 

3,365

 

 

 

2,065

 

Selling, General and Administrative Expenses 

 

 

5,025

 

 

 

3,049

 

 

 

 

 

 

 

 

 

 

Total Expenses 

 

 

19,624

 

 

 

12,073

 

 

 

 

 

 

 

 

 

 

Operating Income/(Loss) 

 

 

(3,480 )

 

 

2,287

 

 

 

 

 

 

 

 

 

 

Interest Expense, Net 

 

 

946

 

 

 

515

 

 

 

 

 

 

 

 

 

 

Income/(Loss) Before Income Taxes 

 

 

(4,426 )

 

 

1,772

 

 

 

 

 

 

 

 

 

 

Income Tax Expense/(Benefit) 

 

 

(1,415 )

 

 

766

 

 

 

 

 

 

 

 

 

 

Net Income/(Loss) 

 

 

(3,011 )

 

 

1,006

 

 

 

 

 

 

 

 

 

 

Preferred Stock Dividends 

 

 

353

 

 

 

156

 

Accretion of Preferred Stock, Net 

 

 

(65 )

 

 

10

 

 

 

 

 

 

 

 

 

 

Net Income/(Loss) Available to Common Stockholders 

 

$ (3,299 )

 

$ 840

 

 

Our revenues for the six months ended June 30, 2015 were $16.1 million, an increase of $1.7 million from revenues for the six months ended June 30, 2014 of $14.4 million. The increase in revenue from the inclusion of the financial results related to the United acquisition and the Evolution acquisition for 181 days during the six months ended June 30, 2015 compared to 76 days and no days, respectively, during the six months ended June 30, 2014 was partially offset by the impact of pricing decreases on our core rental products in excess of 15% and activity decreases, or decreases in the number of revenue generating days, on our core rental products in excess of 30%.  

 

 

 28

 

 

Our operating expenses for the six months ended June 30, 2015 increased to $11.2 million compared to $7.0 million for the six months ended June 30, 2014. The $4.2 million increase resulted primarily from incremental costs from the inclusion of the financial results related to the United acquisition and the Evolution acquisition for 181 days during the six months ended June 30, 2015 compared to 76 days and no days, respectively, during the six months ended June 30, 2014 offset by cost cuts in 2015 in response to the downturn in the industry. The increase in operating expenses as a percentage of revenue to 69.6% for the six months ended June 30, 2015 from 48.5% for the six months ended June 30, 2014 reflects the impact of the significant pricing decreases implemented in early 2015. Our cost cutting measures in response to the decline in pricing were primarily implemented during the three months ended June 30, 2015 and we expect to reap the full benefit of these actions in the second half of 2015. If our pricing remains flat in the second half of 2015, we anticipate a decline in operating expenses as a percentage of revenue. 

 

Depreciation and amortization expense for the six months ended June 30, 2015 increased to $3.4 million compared to $2.1 million for the six months ended June 30, 2014. The increase is due to the inclusion of the financial results related to the United acquisition and the Evolution acquisition for 181 days during the six months ended June 30, 2015 compared to 76 days and no days, respectively, during the six months ended June 30, 2014 and a bulk equipment purchase in the third quarter of 2014. 

 

Selling, general and administrative expense increased to $5.0 million for the six months ended June 30, 2015 compared to $3.0 million for the six months ended June 30, 2014. The increase is primarily due to the inclusion of the financial results related to the United acquisition and the Evolution acquisition for 181 days during the six months ended June 30, 2015 compared to 76 days and no days, respectively, during the six months ended June 30, 2014. For the six months ended June 30, 2015 and 2014, selling, general and administrative expenses include non-recurring expenses, primarily severance and professional fees, of $0.4 million and $0.1 million, respectively. Non-cash items, such as share-based compensation expense, bad debt expense, and fair value adjustments to the contingent payment liability, included in selling, general and administrative expenses aggregate to a benefit of $66,000 and an expense of $0.1 million for the six months ended June 30, 2015 and 2014, respectively. 

 

Interest expense increased to approximately $0.9 million for the six months ended June 30, 2015 from approximately $0.5 million for the six months ended June 30, 2014. The increase in interest expense is primarily due to the expansion of our credit facility in connection with the United acquisition. Interest expense includes non-cash amortization of deferred loan costs of $0.2 million and $0.1 million for the six months ended June 30, 2015 and 2014, respectively. 

 

For the six months ended June 30, 2015, we recorded an income tax benefit of $1.4 million compared to income tax expense of approximately $0.8 million for the six months ended June 30, 2014. The income tax benefit recorded was the primarily the result of our pre-tax net loss of $4.4 million incurred for the six months ended June 30, 2015 compared to pre-tax net income of $1.8 million for the six months ended June 30, 2014. 

 

Non-GAAP Financial Measures 

 

We disclose and discuss EBITDA as 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-recurring expenses, such as severance and professional fees related to acquisitions, and (ii) non-cash charges, such as bad debt expense, share-based compensation expense, and the changes in fair value of our liability for contingent payments, 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. 

 

 

 29

 

 

 

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 deferred 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. 

 

The following table provides the detailed components of EBITDA and Adjusted EBITDA as we define that term for the three months ended June 30, 2015 and 2014 and for the six months ended June 30, 2015 and 2014 (in thousands): 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of EBITDA: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income 

 

$ (1,572 )

 

$ 546

 

 

$ (3,011 )

 

$ 1,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Adjustments: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization 

 

 

1,712

 

 

 

1,259

 

 

 

3,365

 

 

 

2,065

 

Interest Expense, Net 

 

 

455

 

 

 

345

 

 

 

946

 

 

 

515

 

Income Tax Expense/(Benefit) 

 

 

(817 )

 

 

474

 

 

 

(1,415 )

 

 

766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA 

 

$ (222 )

 

$ 2,624

 

 

$ (115 )

 

$ 4,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments to EBITDA: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-Based Compensation Expense 

 

 

100

 

 

 

-

 

 

 

100

 

 

 

-

 

Bad Debt Expense 

 

 

129

 

 

 

31

 

 

 

144

 

 

 

57

 

Fair Value Adjustments to Contingent Payment Liability 

 

 

30

 

 

 

87

 

 

 

(310 )

 

 

87

 

Non-Recurring Expenses 

 

 

267

 

 

 

119

 

 

 

350

 

 

 

119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA 

 

$ 304

 

 

$ 2,861

 

 

$ 169

 

 

$ 4,615

 

 

 

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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 operating 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 deferred 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. 

 

Liquidity and Capital Resources 

 

The Company’s primary sources of liquidity and capital resources are cash flows from operating activities, borrowings under our credit facility, equipment financings and the issuance of equity securities. Declines in oil and natural gas prices subsequent to the third quarter of 2014 negatively impacted the Company’s cash from operations as the number of rigs drilling declined, reducing the demand for the Company’s services and the prices for services provided by the Company. We anticipate that continued volatility in oil and gas prices during 2015 will impact our operations, financial results, and ability to access sources of capital. Should our projected cash flow and credit facilities not be sufficient, we may reduce capital expenditures and future investments and/or consider the issuance of debt and/or additional equity securities; however, continued low oil and natural gas prices, or further declines in such prices, could also adversely affect the Company’s ability to incur additional indebtedness or access the capital markets on favorable terms. 

 

The Company’s uses of capital are expenditures that arise primarily from our need to service our debt, to fund our working capital requirements, and to maintain and expand our rental fleet and service offerings. We believe that we will have the ability to provide for our operating needs, including our working capital requirements, and planned capital expenditures in 2015 through projected operating cash flow and our revolving credit facility. 

 

Because the Company was not in compliance with certain covenants set forth in its credit agreement as of June 30, 2015, the Company has classified its indebtedness under the credit agreement as a current liability, creating substantial doubt about the Company’s ability to continue as a going concern as of June 30, 2015.  

 

 

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Based upon preliminary discussions and documentation with its lender, the Company anticipates that it will enter into an amendment and extension to its credit agreement that will reinstate its compliance with all applicable financial covenants, provided that the Company is successful in enhancing its liquidity with proceeds of a minimum of $3.0 million from an equity financing. The benefits of a restructuring of the credit facility may include a reduction or delay in scheduled principal payments and/or a modified set of financial covenants. 

 

On June 24, 2015, the Company commenced a private offering to accredited investors which will expire on the earlier of (i) the date on which the Company finalizes an amendment to its bank credit agreement or (ii) September 15, 2015, unless further extended in the Company’s sole discretion. The offering is conditioned upon the Company’s acceptance of a minimum of 937,500 shares ($3.0 million) on or before the expiration date. As of August 14, 2015, the subscription agreements received by the Company exceed $3.0 million and the Company is in discussions with its lender regarding an amendment and extension of the credit facility. 

 

The net cash provided by or used in our operating, investing and financing activities during the six months ended June 30, 2015 and 2014 is summarized below (in thousands): 

 

 

 

Six Months Ended June 30,

 

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

Cash Provided By/(Used In): 

 

 

 

 

 

 

Operating Activities  

 

$ 3,374

 

 

$ 822

 

Investing Activities  

 

 

(1,147 )

 

 

(19,036 )

Financing Activities  

 

 

(3,901 )

 

 

19,452

 

 

 

 

 

 

 

 

 

 

Decrease in Cash and Cash Equivalents 

 

$ (1,674 )

 

$ 1,238

 

 

Operating Activities 

 

For the six months ended June 30, 2015, we generated $3.4 million of cash from operating activities. Our net loss for the period was $3.0 million. Non-cash additions to net income totaled $2.1 million consisting primarily of an aggregate of $3.6 million in depreciation, amortization of intangibles and amortization of deferred loan costs and an aggregate of $0.2 million of share-based compensation expense, and bad debt expense, partially offset by a $0.3 million fair value adjustment to a contingent payment liability and a $1.4 million increase in net deferred tax assets.  

 

During the six months ended June 30, 2015, changes in working capital generated $4.3 million in cash. Cash was provided by an aggregate net decrease of $8.2 million in accounts receivable, unbilled receivables, inventory, and prepaid expenses and other assets, offset by an aggregate decrease in accounts payable and accrued expenses of $3.9 million.  

 

 

 32

 

 

For the six months ended June 30, 2014, we generated $0.8 million of cash from operating activities. Our net income for the period was $1.0 million. Non-cash additions to net income totaled $2.6 million consisting of $2.1 million of depreciation and amortization, a $0.3 million increase in net deferred tax liability, approximately $57,000 of bad debt expense, and approximately $87,000 of accretion to our liability for contingent payments.

 

During the six months ended June 30, 2014, changes in working capital used $2.8 million in cash. Cash was provided by a net increase in accounts payable and accrued expenses of $1.1 million. Cash provided was offset by an increase in accounts receivable and unbilled receivables of approximately $3.2 million.

 

Investing Activities

 

During the six months ended June 30, 2015, we used $1.1 million in investing activities related to the purchase or fabrication of capital assets. 

 

During the six months ended June 30, 2014, we used $19.0 million in investing activities of which $15.1 million was the cash purchase price, net of cash acquired, associated with the United Acquisition and $4.0 million was related to the purchase or fabrication of capital assets.

 

Financing Activities

 

During the six months ended June 30, 2015, financing activities used $3.9 million of cash. Principal payments of $3.6 million and a contingent consideration payment of $0.9 million made to the sellers of United were partially offset by an equity raise of $0.6 million. 

 

During the six months ended June 30, 2014, financing activities generated $19.5 million of cash. Net borrowings of $13.1 million during the period resulted from the expansion of our credit facility to finance the United Acquisition. We also issued common equity during the period raising $6.8 million in net proceeds through a private placement to accredited investors. Payment of deferred financing costs used $0.4 million of cash during the period.

 

On October 26, 2012, we entered into a credit agreement which provided us with an $8.3 million term loan facility and a committed revolving credit facility of up to $5.0 million. 

 

On April 19, 2013, we entered into Amendment No.1 to the credit agreement in order to, among other things, provide for a $5.0 million delayed draw term loan to be added to the credit facility for the purpose of financing capital expenditures.  

 

 

 33

 

 

On April 15, 2014, in connection with the United Acquisition, we entered into an Amended and Restated Credit Agreement with a maturity date of April 30, 2017. The new agreement increased the size of our credit facility to $30.0 million, consisting of a $25.0 million term loan and a revolving credit facility with a maximum availability of $5.0 million.  

 

On November 26, 2014, we entered into Amendment No. 1 to the Amended and Restated Credit Agreement in order to, among other things, provide for a $5.0 million delayed draw term loan to be added to the credit facility for the purpose of financing capital expenditures.

 

Borrowings under the credit facility bear interest at a floating rate based on the Wells Fargo Prime Rate, the Federal Funds Rate, or LIBOR Rate plus a margin which may fluctuate depending on our then current leverage ratio. 

 

Borrowings under the term loan and delayed draw term loan are repayable in quarterly principal payments of $1.3 million and $0.3 million, respectively, with a balloon payment of the remaining outstanding borrowings on April 30, 2017. 

 

As of June 30, 2015, we had a borrowing base of $2.4 million under the revolving credit facility. The borrowing base, recalculated monthly, is determined by the balance and aging of our accounts receivable and may decrease subject to a decline in revenue resulting from the current market conditions. 

 

On August 15, 2014, we completed a bulk equipment purchase (the “Saskatchewan Equipment Purchase”), consisting of centrifuges, shakers, service vehicles and other associated equipment, for total consideration of $10.3 million of which $2.0 million was in the form of a Subordinated Note Payable. The Subordinated Note Payable, in the principal amount of $2.0 million, required repayment in four quarterly principal payments of $0.5 million, beginning on March 31, 2015 and ending on the maturity date of December 31, 2015, bearing interest at a rate of 5% per annum on the unpaid principal balance. 

 

On March 18, 2015, the Subordinated Note Payable was amended to extend the final maturity date to June 30, 2017 and to increase the interest rate to 10% per annum. Subsequent to a an aggregate principal and interest payment of approximately $0.6 million on March 31, 2015, all remaining payments of interest and principal will be paid in amounts determined by the Company’s board of directors after reviewing then current market conditions and projected financial results of operations subject to approval of the Company’s lenders. The Subordinated Note Payable is generally subordinated in right of payment to the Company’s indebtedness to its lenders. 

 

The Company finances 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. At June 30, 2015 and December 31, 2014, we had $2.7 million and $2.0 million outstanding under equipment loans and capital leases, respectively. 

 

 

 34

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

Not required by smaller reporting companies. 

 

Item 4. Controls and Procedures  

 

Evaluation of disclosure controls and procedures. The Chief Executive Officer and Chief Financial Officer, of the Company have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Company’s disclosure controls and procedures as of the end of the quarter covered by this Quarterly Report on Form 10-Q are effective as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act.  

 

Changes in internal controls. There were no changes in our internal controls over financial reporting identified in connection with our evaluation that occurred during our last fiscal quarter ended June 30, 2015 that materially affected, or was reasonably likely to materially affect our internal control over financial reporting. 

 

 

 35

 

 

PART II. OTHER INFORMATION

 

ITEM 6. EXHIBITS 

 

Exhibit Number

 

Exhibit Description 

 

 

 

31.1

 

Certification of Chief Executive Officer

 

31.2

 

Certification of Chief Financial Officer

 

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

 

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

 

 

 

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. 

 

 

 36

 

 

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

 

       
Date: August 14, 2015 By /s/ Munawar H. Hidayatallah  

 

 

 

Munawar H. Hidayatallah 

Chairman and Chief Executive Officer 

(Principal Executive Officer) 

 

 

 

 

 37