UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FormFORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the Period Ended September 30, 2018x Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the Period Ended March 31, 2019
or
¨ Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For
| ¨ | 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 033-92894
ALY ENERGY SERVICES, INC. |
(Exact name of registrant as specified in its charter) |
Delaware | 75-2440201 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
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3 Riverway, Suite 920 Houston, TX | 77056 | |
(Address of Principal Executive Offices) | (Zip Code) |
(713) 333-4000
(Registrant’s Telephone Number, including area code.)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Names of Each Exchange on which Registered | |
Common Stock, $0.001 par value per share | None |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |
Non-accelerated filer | ¨ | Smaller reporting company | x | |
Emerging growth company | ¨ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨No x
At November 13, 2018,May 15, 2019, the registrant had 940,9183,822,329 shares of common stock, $0.001 par value, outstanding.
Documents Incorporated by Reference: None
ALY ENERGY SERVICES, INC.
(A Delaware Corporation)
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART I – FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements |
The accompanying notes are an integral part of these condensed consolidated financial statements.
September 30, 2018 December 31, 2017 (unaudited) ASSETS Current assets Cash Restricted cash Receivables, net Prepaid expenses and other current assets Total current assets Property and equipment, net Intangible assets, net Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable, accrued expenses and other current liabilities Accrued interest - related party Current portion of long-term debt - related party Total current liabilities Long-term debt - related party, net Other long-term liabilities Total liabilities Commitments and contingencies Stockholders' equity Series A convertible preferred stock of $0.001 par value (liquidation preference of $17,292) Authorized-20,000; issued and outstanding-17,292 as of September 30, 2018 and December 31, 2017 Preferred stock of $0.001 par value Authorized-4,980,000; issued and outstanding-none as of September 30, 2018 Authorized-9,980,000; issued and outstanding-none as of December 31, 2017 Common stock of $0.001 par value Authorized-15,000,000; issued and outstanding-940,918 as of September 30, 2018 Authorized-25,000,000; issued and outstanding-690,918 as of December 31, 2017 Additional paid-in-capital Accumulated deficit Treasury stock, 11 shares at cost as of December 31, 2017 Total stockholders' equity Total liabilities and stockholders' equity
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) For the Three Months Ended March 31, 2019 2018 (restated) Revenue Expenses: Operating expenses Depreciation and amortization Selling, general and administrative expenses Total expenses Income (loss) from operations Other expense: Interest expense, net Interest expense - related party, net Total other expense Income (loss) before income taxes Income tax expense Net income (loss) Basic earnings (loss) per share information: Net income (loss) available to common stockholders Weighted-average shares - basic Diluted earnings (loss) per share information: Net income (loss) available to common stockholders Weighted-average shares - diluted The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
ALY ENERGY SERVICES, INC. (in thousands, except share and per share amounts) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2018 2017 2018 2017 (unaudited) (unaudited) Revenue Expenses: Operating expenses Depreciation and amortization Selling, general and administrative expenses Total expenses Income (loss) from operations Other expense (income): Interest expense, net Interest expense - related party Gain on extinguishment of debt and other liabilities Total other expense (income) Income (loss) from operations before income taxes Income tax expense (benefit) Net income (loss) Preferred stock dividends Net income (loss) available to common stockholders Basic earnings per share information: Net income (loss) available to common stockholders ($0.04) ($0.04) Weighted average shares - basic Diluted earnings per share information: Net income (loss) available to common stockholders ($0.04) ($0.04) Weighted average shares - diluted
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Three Months Ended March 31, 2019 2018 (restated) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization Non-cash operating lease expense Bad debt expense Changes in operating assets and liabilities: Receivables Prepaid expenses and other assets Accounts payable, accrued expenses, and operating lease and other liabilities Accrued interest - related party Net cash provided by (used in) operating activities Cash flows from investing activities: Purchases of property and equipment Net cash used in investing activities Cash flows from financing activities: Borrowings on long-term debt - related party Repayment of long-term debt - related party Net cash provided by financing activities Net increase (decrease) in cash and restricted cash Cash and restricted cash, beginning of period Cash and restricted cash, end of period Supplemental disclosure of cash flow information: Cash paid for interest - related party Cash paid for interest Cash received for income taxes, net Non-cash financing activities: Cancellation of preferred stock and issuance of common stock in connection with the Merger The accompanying notes are an integral part of these condensed consolidated financial statements.
ALY ENERGY SERVICES, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 (in thousands, except share amounts) Series A Convertible Preferred Stock Common Stock Additional Paid-In- Accumulated Treasury Shares Amount Shares Amount Capital Deficit Stock Total Balance as of January 1, 2018 Net loss Exercise of options Reissuance of treasury stock Balance as of September 30, 2018
ALY ENERGY SERVICES, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (in thousands) For the Nine Months Ended September 30, 2018 2017 (unaudited) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Loss on disposal of assets Stock-based compensation Bad debt expense Gain on extinguishment of debt and other liabilities Debt modification fee - related party Changes in operating assets and liabilities: Receivables, net Prepaid expenses and other assets Accounts payable, accrued expenses and other liabilities Accrued interest and other - related party Net cash provided by operating activities Cash flows from investing activities: Purchases of property and equipment Proceeds from disposal of property and equipment Net cash used in investing activities Cash flows from financing activities: Proceeds from exercise of options Borrowings on long-term debt - related party Repayments on long-term debt - related party Repayments on long-term debt Net cash provided by financing activities Net increase (decrease) in cash and restricted cash Cash and restricted cash, beginning of period Cash and restricted cash, end of period Supplemental disclosure of cash flow information: Cash paid for interest - related party Cash paid for interest Cash paid (received) for income taxes, net
Aly Energy Services, Inc., together with its subsidiaries (“Aly Energy” or the “Company”), is a provider of oilfield services to leading oil and gas exploration and production (“E&P”) companies operating in unconventional plays in the United States (“U.S.”). Generally, the services we offer fall within two broad categories: surface rental and solids control. Our surface rental equipment includes a wide variety of large capacity tanks with circulating systems, associated pumps, separators, gas busters, mud mix plants and ancillary equipment. We also provide environmental containment berms to safeguard against spills from mud systems on the drilling rig site. Our solids control equipment includes large centrifuges, shakers, cuttings dryers and ancillary components that can be integrated into a closed loop mud system. We operate in the U.S., primarily in Texas, Oklahoma, and New Mexico.
Aly Energy has two wholly-owned subsidiaries with continuing operations: Aly Operating, Inc. and Aly Centrifuge Inc. Aly Operating, Inc. has one wholly-owned subsidiary, Austin Chalk Petroleum Services Corp. We operate as one business segment which services customers within the U.S. The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of Aly Energy and each of its subsidiaries in the condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018, in the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018, in the condensed consolidated statements of changes in stockholders’ equity for the three months ended March 31, 2019 and 2018, and in the condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018. All significant intercompany transactions and account balances have been eliminated upon consolidation. Reverse Stock Split On August 7, 2018, 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 common shares, price per share and per share amounts, including such information related to options and the conversion feature of the Series A convertible preferred stock, have been retroactively restated to give effect to the Reverse Split. See Note 5 – Stockholders’ Equity for further detail. Interim Financial Information The condensed consolidated balance sheet as of December 31, 2018 has been derived from our audited financial statements and the unaudited condensed consolidated financial statements of the Company are prepared in conformity with U.S. GAAP for interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these condensed consolidated financial statements should be read along with the annual audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented. Interim results for the three months ended March 31, 2019 may not be indicative of results that will be realized for the full year ending December 31, 2019. Reclassifications Certain reclassifications have been made to prior period condensed consolidated financial statements to conform to the current period presentation. These reclassifications had no effect on our consolidated financial position, results of operations or cash flows.
Merger with Related Party On January 28, 2019, we executed an Agreement and Plan of Merger (“Merger Agreement”) with Permian Pelican Inc. (“Pelican”), a related party, pursuant to which Pelican merged with and into the Company (the “Merger”). By virtue of the Merger, each issued and outstanding share of Pelican common stock, 7,429 shares in aggregate, was converted into 387.858 shares of our common stock and each share of Series A convertible preferred stock was canceled. We issued an aggregate of 2,881,411 new shares of our common stock, representing approximately 75.4% of our outstanding common stock, with a value of approximately $14.4 million (based on a stock price of $5.00 per share on January 28, 2019) in consideration for all of the shares of Pelican common stock outstanding as of the date of the Merger. The new shares of our common stock were issued directly to the individual shareholders of Pelican and, as a result, effective January 28, 2019, we no longer have a controlling shareholder. See Note 6 – Related Party Transactions for further detail. Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the amounts of revenue and expenses recognized during the reporting period. Areas where critical accounting estimates are made by management include:
September 30, 2018 December 31, 2017 (unaudited) Machinery and equipment Vehicles, trucks and trailers Office furniture, fixtures and equipment Buildings Leasehold improvements Less: Accumulated depreciation and amortization Assets not yet placed in service Property and equipment, net The Company analyzes its estimates based on historical experience and various other indicative assumptions it believes to be reasonable under the circumstances. Under different assumptions or conditions, the actual results could differ, possibly materially, from those previously estimated. Many of the conditions impacting these assumptions are outside of the Company’s control. NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS Recent Accounting Pronouncements From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), which we adopt as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption. Accounting Standard Adopted in 2019 Leases. On January 1, 2019, the Company adopted accounting standards update (“ASU”) 2016-02, Leases and all the related amendments (“New Lease Standard” or “ASC 842”) and used the effective date as the date of initial application. Therefore, prior period financial information has not been adjusted and continues to be reflected in accordance with the Company’s historical accounting policy. The standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months. The standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients,” which, among other things, allows the Company to carry forward its historical lease classification. The adoption of this standard resulted in the recording of operating lease assets and operating lease liabilities of approximately $0.3 million as of January 1, 2019, with no material related impact on the Company’s condensed consolidated statement of equity or condensed consolidated statement of operations. Short-term leases have not been recorded on the balance sheet. Accounting Policy for Leases The Company determines if an arrangement is a lease with a term longer than twelve months at inception. All existing arrangements identified by the Company as leases are operating and are included in operating ROU assets, accounts payable and accrued expenses and operating lease liabilities in the condensed consolidated balance sheet as of March 31, 2019.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligations to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease. Overview The Company’s operating leases are primarily for real estate and office equipment. The terms and conditions for these leases vary by the type of underlying asset. Total operating lease expense for the three months ended March 31, 2019 and 2018 was (in thousands): For the Three Months Ended March 31, 2019 2018 (unaudited) Operating lease expense: Operating right-of-use assets Long-term operating leases Month-to month operating leases Operating leases maturing within twelve months and other Total operating lease expense Supplemental Balance Sheet Information Operating leases as of March 31, 2019 were as follows (in thousands): March 31, 2019 (unaudited) Operating right-of-use assets Operating lease liabilities Accounts payable and accrued expenses Operating lease liabilities, net Total operating lease liabilities Weighted average remaining lease term 2 years Weighted average discount rate Maturities of operating lease liabilities as of March 31, 2019 are as follows (in thousands): Stranded Tax Effects from the Tax Cuts and Jobs Act. In February 2018, the FASB issued ASU No. 2018-02 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. U.S. GAAP requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates, with the effect included in income from continuing operations in the reporting period that includes the enactment date, even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (referred to as “stranded tax effects”). The amendments in this ASU allow a specific exception for reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. In addition, the amendments in this update also require certain disclosures about stranded tax effects. The standard will take effect for public companies with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this guidance had no impact on our consolidated financial statements.
Accounting Standards Adopted in 2018 Revenue recognition. On January 1, 2018, we adopted accounting standards update (“ASU”) 2014-09, Revenue from Contracts with Customers and all the related amendments (“new revenue standard” or “ASC 606”) to all contracts using the full retrospective method. Revenues are recognized when performance obligations are satisfied in accordance with contractual terms, in an amount that reflects the consideration the Company expects to be entitled to in exchange for services rendered or rentals provided. Taxes collected from customers and remitted to governmental authorities are not included in revenues in the Company’s financial statements. Performance Obligations A performance obligation arises under contracts with customers to render services or provide rentals and is the unit of account under Topic 606. The Company accounts for services rendered and rentals provided separately if they are distinct and the service or rental is separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered or rentals provided on its own or with other resources that are readily available to the customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. A contract’s standalone selling prices are determined based on the prices that the Company charges for its services rendered and rentals provided. The majority of the Company’s performance obligations are satisfied over time, generally over a period measured in days or months. The Company’s payment terms vary by the type of products or services offered. The term between invoicing and when the payment is due is typically 30 days. We invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our revenue contracts do not give rise to contract assets or liabilities under ASC 606. Rentals revenue, primarily priced on a per day, per man hour or similar basis, consists of fees charged to customers for use of the Company’s rental equipment over the term of the rental period, which is generally less than twelve months. Services revenue, including transportation of equipment and rig-up/rig-down charges, primarily represents amounts charged to customers for the completion of services rendered, including labor, products and supplies necessary to perform the service. Rates for these services vary depending on the type of services provided and can be based on a per job, per hour or per day basis. The Company expenses sales commissions when incurred because the amortization period would have been one year or less. The following table presents our revenue disaggregated by revenue source (in thousands): For the Three Months Ended March 31, 2019 2018 (unaudited) Rental services Transportation services Rig-up/rig-down services Other Total Accounting Standards Issued But Not Yet Adopted Fair Value Measurement Disclosure. In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (topic 820) – Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurement. This new guidance eliminated, modified and added certain disclosure requirements related to fair value measurements. The amended disclosure requirements are effective for all entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We are evaluating the impact of adopting this guidance. However, we currently expect that the adoption of this guidance will not have a material impact on our consolidated financial statements. Financial Instruments—Credit Losses. In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326), which introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. It requires an entity to estimate credit losses expected over the life of an exposure based on historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This guidance will take effect for public companies with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact of adopting this guidance.
NOTE 3 — DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS Property and Equipment Major classifications of property and equipment are as follows (in thousands): March 31, 2019 December 31, 2018 (unaudited) Machinery and equipment Vehicles, trucks and trailers Office furniture, fixtures and equipment Leasehold improvements Buildings Less: Accumulated depreciation and amortization Assets not yet placed in service Property and equipment, net Depreciation and amortization expense related to property and equipment for the three months ended March 31, 2019 and 2018 was $0.7 million and $0.6 million (restated), respectively.
Accounts payable and accrued expenses consisted of the following (in thousands): March 31, 2019 December 31, 2018 (unaudited) Accounts payable Insurance payable Sales tax payable Accrued compensation Current portion of operating lease liabilities Accrued severance Other accrued expenses Total accrued expenses NOTE 4 — LONG-TERM DEBT – RELATED PARTY Long-term debt – related party consists of the following (in thousands): March 31, 2019 December 31, 2018 Current Long-Term Current Long-Term (unaudited) Credit facility Term loan Revolving credit facility Total On June 30, 2018, the Company entered into the Third Amended and Restated Credit Agreement with Pelican (“Related Party Credit Facility”) which, among other things, (i) combined the outstanding balances on the delayed draw term loan and the term loan and initiated a required monthly principal payment of approximately $83,000 on the aggregate outstanding balance of the term loan, (ii) expanded availability on the revolving credit facility by $0.7 million while simultaneously reducing the aggregate availability under the other lines of the facility by the same amount, and (iii) extended the maturity date of the facility to June 30, 2021. Borrowings under the Related Party Credit Facility are subject to monthly interest payments at an annual base rate of the six-month LIBOR rate on the last day of the calendar month plus a margin of 3.0%. The obligations under the Related Party Credit Facility are guaranteed by all our subsidiaries and secured by substantially all of our assets. The Related Party Credit Facility contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, pay dividends or make other distributions, grant liens and sell assets. The Related Party Credit Facility does not include any financial covenants.
Customer Relationships Tradename Total As of September 30, 2018 (unaudited): Cost Less: Accumulated amortization Net book value As of December 31, 2017: Cost Less: Accumulated amortization Net book value September 30, 2018 December 31, 2017 Current Long-Term Current Long-Term (unaudited) Credit facility Term loan Revolving credit facility Delayed draw term loan Total
Under the revolving credit facility, the Company has the ability to borrow the lesser of 80% of eligible receivables, as defined in the credit agreement, and $1.7 million. As of March 31, 2019, the Company had no further borrowing availability under the facility.
NOTE 5 – STOCKHOLDERS’ EQUITY Common Shares
On August 7, 2018, 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 further action by the stockholder. In lieu of issuing fractional shares in connection with the Reverse Split, holders received the proportionate fraction of $7.00 per share in cash. The aggregate payment
On August 20, 2018, our former
On January 28, 2019, in connection with the Merger, we issued an aggregate of 2,881,411 new shares of our common stock, representing approximately 75.4% of our outstanding common stock, in consideration for all of the shares of Pelican common stock outstanding as of the effective date of the Merger. Please see Note 1 – Nature of Operations and Basis of Presentation and Note 6 – Related Party Transactions for additional detail. Preferred Shares On August 7, 2018, we filed an amendment to our certificate of formation reducing our aggregate authorized preferred stock from 10,000,000 to 5,000,000 shares. Previously, the Company allocated 20,000 of the authorized preferred shares to be authorized Series A convertible preferred shares. Authorized preferred shares, with a par value of $0.001 per share, total 4,980,000 as of March 31, 2019 and December 31, 2018, of which, none were issued and outstanding as of March 31, 2019 and December 31, 2018. On January 28, 2019, by virtue of the Merger, each issued and outstanding share of our Series A convertible preferred stock was canceled. Please see Note 6 – Related Party Transactions for additional detail on the Merger. NOTE 6 —
Former Controlling Shareholder – Pelican
As of
On January 28, 2019, we executed the Merger with Pelican pursuant to which Pelican merged with and into the Company and, as a result, effective January 28, 2019, we no longer have a controlling shareholder. See Note 1 – Nature of Operations and Basis of Presentation for further detail.
Related Party Lender – PPF
In January 2017, we entered into the Related Party Credit Facility with Pelican. Effective June 30, 2018, Pelican assigned and transferred its rights under the Related Party Credit Facility to PPF.
In connection with our Related Party Credit Facility, during the three
Our
For the Three Months Ended September 30, For the Nine Months Ended September 30, 2018 2017 2018 2017 (unaudited) (unaudited) Rental services Rig-up/rig-down services Transportation services Other Total revenue
For The Three Months Ended September 30, 2017 For The Nine Months Ended September 30, 2017 ` As Reported Adoption of ASC 606 As Adjusted As Reported Adoption of ASC 606 As Adjusted (unaudited) (unaudited) (unaudited) (unaudited) Rental services Rig-up/rig-down services Transportation services Other Total revenue Operating expenses Depreciation and amortization Selling, general and administrative expenses Total expenses Loss from operations
NOTE
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that could have been outstanding assuming the exercise of outstanding stock options and restricted stock or other convertible instruments, as appropriate.
Due to
For the Three Months Ended September 30, For the Nine Months Ended September 30, 2018 2017 (unaudited) (unaudited) Numerator: Net income Less: Aly Operating redeemable preferred stock dividends Numerator for diluted earnings per share Less: Aly Centrifuge redeemable preferred stock dividends Numerator for basic earnings per share Denominator: (1) Weighted average shares used in basic earnings per share Effect of dilutive shares: Aly Centrifuge redeemable preferred stock (2) Series A convertible preferred stock Stock options (2017 Plan) Weighted average shares used in diluted earnings per share Basic earnings per share Diluted earnings per share For the Three Months Ended March 31, 2018 (restated) Numerator: Net income available to common stockholders �� Denominator: Weighted average shares used in basic earnings per share Series A convertible preferred stock Stock options* Weighted average shares used in diluted earnings per share Basic earnings per share Diluted earnings per share ___________
For the Three Months Ended September 30, For the Nine Months Ended September 30, 2018 2017 Unvested stock options (2013 Plan) (1) Exchange of Aly Operating redeemable preferred stock (2) NA
NOTE
During the first quarter of 2019, we We determined it would be necessary to restate the financial statements for the years ended December 31, 2017 and 2016 and the quarters ended March 31, 2018 and 2017, June 30, 2018 and 2017 and September 30, 2018 and 2017. The adjustments to the consolidated statements of
Condensed Consolidated Balance Sheet As of March 31, 2018 (unaudited) As Reported Adjustment As Restated Assets Property and equipment, net Total assets Liabilities and stockholders' equity Accumulated deficit Total stockholders' equity Total liabilities and stockholders' equity
Condensed Consolidated Statement of Operations For the Three Months Ended March 31, 2018 (unaudited) As Reported Adjustment As Restated Depreciation and amortization Total expenses Income from operations Income before income taxes Net income (loss) Earnings per common share - basic Earnings per common share - diluted
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 is intended to assist you in understanding our business and results of operations together with our present financial condition. This section should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in “Item 1. Condensed Consolidated Financial Statements” in this Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain statements and information that may constitute
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. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us, that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. These forward-looking statements are based on our current plans and expectations and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations, and our future financial condition and results. Known material factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, volatility in the price of oil, fluctuations in the domestic rig count, intense competition in our industry and the other risk factors described in our Annual Report on Form 10-K for the year ended December 31,
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur. We qualify any and all of our forward-looking statements entirely by these cautionary factors. You are cautioned not to place undue reliance on these statements which speak only as of the date of this Quarterly Report on Form 10-Q.
Overview of Our Business
Aly Energy Services, Inc., together with its subsidiaries (“Aly Energy” We operate in the U.S., primarily in Texas, Oklahoma, and New Mexico.
How We Generate Revenue and the Costs of Conducting Our Business
We generate our revenue by providing drilling-related support services to E&P companies operating in some of the major onshore unconventional basins in the U.S. Our revenue streams include: (i) rental services - revenue derived from the rental of equipment and on-site operators of such equipment, (ii) rig-up/rig down services – revenue derived from the rig-up/rig-down of our equipment at the customer site, (iii) transportation services – revenue derived from the hauling of our equipment to and from the customer site, and (iv) other - revenue derived from the sale of consumable items, including chemicals. Fluctuations in the mix of services are driven primarily by the timing of and frequency with which our respective customers move their rigs from well to well and by the number of mobilizations and demobilizations of our equipment. The contribution of each revenue stream to total revenue is shown in the table below:
Our total
Our operating expenses consist primarily of variable costs, such as labor and third-party expenses. Labor-related expenses typically fluctuate with the utilization of our equipment and services. Expenses associated with services provided by third-parties typically increase with activity as well.
In order to mitigate To date, we During the remainder of 2019, we
How We Evaluate Our Operations
We utilize multiple metrics to evaluate the results of our operations and efficiently allocate personnel, equipment and capital resources, including, but not limited to, the following:
For the Three Months Ended September 30, For the Nine Months Ended September 30, 2018 2017 2018 2017 (unaudited) (unaudited) Revenue Operating expenses Gross margin % of revenue
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Because EBITDA and Adjusted EBITDA are not measures of financial performance calculated in accordance with GAAP, these metrics should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EBITDA and Adjusted EBITDA are widely used by investors and other users of our financial statements as supplemental financial measures that, when viewed with our GAAP results and the accompanying reconciliation, we believe provide additional information that is useful to gain an understanding of our ability to service debt, pay income taxes and fund growth and maintenance capital expenditures. We also believe the disclosure of EBITDA and Adjusted EBITDA helps investors meaningfully evaluate and compare our cash flow generating capacity and performance from quarter-to-quarter and year-to-year. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Set forth below are the material limitations associated with using EBITDA and Adjusted EBITDA as non-GAAP financial measures compared to cash flows provided by and used in operating, investing and financing activities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| · | EBITDA and Adjusted EBITDA do not reflect growth and maintenance capital expenditures, |
| · | EBITDA and Adjusted EBITDA do not reflect the interest, principal payments and other financing-related charges necessary to service our debt, |
| ||
| · | EBITDA and Adjusted EBITDA do not reflect the payment of income taxes, and | |
| · | EBITDA and Adjusted EBITDA do not reflect changes in our net working capital position. |
| Management compensates for the above-described limitations in using EBITDA and Adjusted EBITDA as non-GAAP financial measures by only using EBITDA and Adjusted EBITDA to supplement our GAAP results. |
| 18 |
| Table of Contents |
The following table provides the detailed components of EBITDA and Adjusted EBITDA as we define that term for each of the three months ended March 31, 2019 and nine months ended September 30, 2018 and 2017 (in thousands):
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, |
| |||||||||||||||||||
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| For the Three Months Ended March 31, |
| |||||||||
|
| (unaudited) |
| (unaudited) |
|
| 2019 |
|
| 2018 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| (restated) |
| ||||||||||
Components of EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net income (loss) |
| $ | 282 |
| $ | (26 | ) |
| $ | (31 | ) |
| $ | 508 |
|
| $ | (162 | ) |
| $ | 8 |
| |
Non-GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Depreciation and amortization |
| 862 |
| 944 |
| 2,641 |
| 2,793 |
|
| 846 |
| 870 |
| ||||||||||
Interest expense - related party, net |
| 91 |
| 86 |
| |||||||||||||||||||
Interest expense, net |
| 3 |
| 2 |
| 12 |
| 18 |
|
| 5 |
| 6 |
| ||||||||||
Interest expense - related party |
| 92 |
| 69 |
| 270 |
| 664 |
| |||||||||||||||
Income tax expense (benefit) |
|
| (30 | ) |
|
| 6 |
|
|
| 12 |
|
|
| 18 |
| ||||||||
Income tax expense |
|
| 10 |
|
|
| 21 |
| ||||||||||||||||
EBITDA |
| 1,209 |
| 995 |
| 2,904 |
| 4,001 |
|
| 790 |
| 991 |
| ||||||||||
Adjustments to EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Severance, settlements, and other losses |
| 12 |
| (98 | ) |
| 353 |
| (68 | ) | ||||||||||||||
Transaction costs |
| 41 |
| - |
| 91 |
| - |
| |||||||||||||||
Settlements and other losses |
| - |
| 24 |
| |||||||||||||||||||
Bad debt expense |
| 22 |
| 21 |
| 66 |
| 56 |
|
|
| 39 |
|
|
| 22 |
| |||||||
Stock-based compensation |
| - |
| - |
| - |
| 625 |
| |||||||||||||||
Expenses in connection with lender negotiations and Recapitalization |
| - |
| 47 |
| - |
| 112 |
| |||||||||||||||
Loss on disposal of assets |
| - |
| 18 |
| - |
| 58 |
| |||||||||||||||
Gain on extinguishment of debt and other liabilities |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,387 | ) | ||||||||
Adjusted EBITDA |
| $ | 1,284 |
|
| $ | 983 |
|
| $ | 3,414 |
|
| $ | 2,397 |
|
| $ | 829 |
|
| $ | 1,037 |
|
Adjusted EBITDA increaseddecreased by approximately $0.3$0.2 million to $0.8 million for the three months ended September 30, 2018March 31, 2019 from approximately $1.0 million for the three months ended September 30, 2017 to $1.3 million for the three months ended September 30, 2017 and increased by $1.0 million to $3.4 million for the nine months ended September 30, 2018 from $2.4 million for the nine months ended September 30, 2017.March 31, 2018. The improved performancedecrease was driven primarily by increasesa decline in gross margin resulting from price increases and minimal increases in variable expensesactivity which was only partially offset by increases in selling, generalpricing.
General Trends and administrative expensesOutlook
Our business depends to a significant extent on the level of unconventional resource development activity and corresponding capital spending of E&P companies onshore in the U.S. These activity and spending levels are strongly influenced by the current and expected oil price. Oil prices have been and will continue to be volatile as major drivers determining the price of oil, including the rate of GDP growth in consuming nations and the political stability of oil-producing countries, are unpredictable. From 2016 throughout most of 2018, oil prices steadily increased from a low of approximately $26.00 in February 2016 to a high of approximately $75.00 in October 2018. The consistent improvement in oil price stimulated an increase in onshore drilling and completion activity: the Rig Count increased from a low of approximately 375 rigs in May 2016 to a high of approximately 1,060 rigs in November 2018.
Although oil prices declined almost 40.0% during the fourth quarter of 2018, they have rebounded during the first four months of 2019, increasing by more than 30.0% since January. However, despite stronger oil prices, the Rig Count has decreased from approximately 1,050 rigs in early January 2019 to approximately 970 rigs at the end of April 2019. Looking forward into the remainder of 2019, we believe oil prices will remain fairly stable at current levels, but we anticipate a potential further decline in the Rig Count of up to 10% as E&P companies cut back on capital expenditures for drilling programs.
In order to mitigate the impact of a declining Rig Count, we will focus on (i) maintaining current pricing levels and increasing activity and utilization of our equipment, particularly with existing customers who are not reducing the number of rigs they operate and (ii) replacing sub-rented equipment if our purchased or owned equipment is not needed for new jobs. During the first four months of 2019, we have increased the number of rigs on which we service our largest existing surface rental customers and we anticipate that demand from these customers will continue to increase. Although our owned equipment is fully utilized and we are reluctant to increase our dependence on third-parties, we will be able to satisfy the new demand with purchases under our 2019 capital expenditure plan. To date, we have placed 25 new tanks into service in 2019 and we expect to place another 25 tanks in service during the second quarter. In addition, Permian Pelican Rentals, LLC (“PPR”), a related party, has committed to purchasing an additional 40 tanks. PPR will sub-rent these tanks to us at day rates which are more favorable than our existing vendors and PPR will guarantee the availability of the tanks for our use at fixed rates for several years. To the extent our newly purchased tanks and/or the tanks sub-rented from PPR are not used to satisfy new customer demand, they will be used to replace equipment which is currently sub-rented from third parties. As such, we believe we will see a significant improvement in our margins beginning in the second quarter resulting from incremental headcount to strengthen internal controlsa combination of increased activity using less costly equipment and processes.decreased costs as sub-rented equipment is returned.
| 19 |
| Table of Contents |
Results for the Three Months Ended September 30, 2018March 31, 2019 Compared to the Three Months Ended September 30, 2017March 31, 2018
The condensed consolidated financial statements for the three months ended March 31, 2018 have been restated due to an accounting error in conjunction with assets sold in 2016. (See further discussion in “Note 8 – Restatement of Prior Year Financial Statements” in the notes to our consolidated financial statements included elsewhere in this document). The following table summarizes the change in our results of operations for the three months ended September 30, 2018 fromMarch 31, 2019 when compared to the three months ended September 30, 2017 (inMarch 31, 2018 (unaudited and in thousands):.
|
| For the Three Months Ended March 31, |
| Change |
| |||||||||||||||||||||||||||||||||||||||||||
|
| For the Three Months Ended September 30, |
| Change |
|
| 2019 |
|
| % of Revenue |
|
| 2018 |
|
| % of Revenue |
|
| $ |
|
| % |
| |||||||||||||||||||||||||
|
| 2018 |
| % of Revenue |
| 2017 |
| % of Revenue |
| $ |
| % |
|
|
|
| (restated) |
|
|
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Revenue |
| $ | 4,518 |
| 100.00 | % |
| $ | 4,122 |
| 100.00 | % |
| $ | 396 |
| 9.61 | % |
| $ | 3,919 |
| 100.0 | % |
| $ | 4,336 |
| 100.0 | % |
| $ | (417 | ) |
| -9.6 | % | |||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Operating expenses |
| 2,473 |
| 54.74 | % |
| 2,608 |
| 63.27 | % |
| (135 | ) |
| -5.18 | % |
| 2,348 |
| 59.9 | % |
| 2,610 |
| 60.2 | % |
| (262 | ) |
| -10.0 | % | ||||||||||||||||
Depreciation and amortization |
| 862 |
|
| 19.08 | % |
| 944 |
|
| 22.90 | % |
| (82 | ) |
| -8.69 | % |
| 846 |
| 21.6 | % |
| 870 |
| 20.1 | % |
| (24 | ) |
| -2.8 | % | ||||||||||||||
Selling, general and administrative expenses |
|
| 836 |
|
| 18.50 | % |
|
| 519 |
|
| 12.59 | % |
|
| 317 |
|
| 61.08 | % |
|
| 781 |
|
|
| 19.9 | % |
|
| 735 |
|
|
| 17.0 | % |
|
| 46 |
|
|
| 6.3 | % | |||
Total expenses |
|
| 4,171 |
|
| 92.32 | % |
|
| 4,071 |
|
| 98.76 | % |
|
| 100 |
|
| 2.46 | % |
|
| 3,975 |
|
|
| 101.4 | % |
|
| 4,215 |
|
|
| 97.2 | % |
|
| (240 | ) |
|
| -5.7 | % | |||
Income from operations |
| 347 |
| 7.68 | % |
| 51 |
| 1.24 | % |
| 296 |
| 580.39 | % | |||||||||||||||||||||||||||||||||
Income (loss) from operations |
| (56 | ) |
| NA |
| 121 |
| 2.8 | % |
| (177 | ) |
| NA |
| ||||||||||||||||||||||||||||||||
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Interest expense, net |
| 3 |
| 0.07 | % |
| 2 |
| 0.05 | % |
| 1 |
| 50.00 | % |
| 5 |
| 0.1 | % |
| 6 |
| 0.1 | % |
| (1 | ) |
| -16.7 | % | |||||||||||||||||
Interest expense - related party |
|
| 92 |
|
| 2.04 | % |
|
| 69 |
|
| 1.67 | % |
|
| 23 |
|
| 33.33 | % | |||||||||||||||||||||||||||
Interest expense - related party, net |
|
| 91 |
|
|
| 2.3 | % |
|
| 86 |
|
|
| 2.0 | % |
|
| 5 |
|
|
| 5.8 | % | ||||||||||||||||||||||||
Total other expense |
|
| 95 |
|
| 2.10 | % |
|
| 71 |
|
| 1.72 | % |
|
| 24 |
|
| 33.80 | % |
|
| 96 |
|
|
| 2.4 | % |
|
| 92 |
|
|
| 2.1 | % |
|
| 4 |
|
|
| 4.3 | % | |||
Income (loss) from operations before income taxes |
| 252 |
| 5.58 | % |
| (20 | ) |
| NA |
| 272 |
| NA |
| |||||||||||||||||||||||||||||||||
Income tax expense (benefit) |
|
| (30 | ) |
| NA |
|
| 6 |
|
| 0.15 | % |
|
| (36 | ) |
| NA |
| ||||||||||||||||||||||||||||
Net income (loss) available to common stockholders |
|
| 282 |
|
| 6.24 | % |
|
| (26 | ) |
| NA |
|
| 308 |
|
| NA |
| ||||||||||||||||||||||||||||
Income (loss) before income taxes |
| (152 | ) |
| NA |
| 29 |
| 0.7 | % |
| (181 | ) |
| NA |
| ||||||||||||||||||||||||||||||||
Income tax expense |
|
| 10 |
|
|
| 0.3 | % |
|
| 21 |
|
|
| 0.5 | % |
|
| (11 | ) |
|
| -52.4 | % | ||||||||||||||||||||||||
Net income (loss) |
| $ | (162 | ) |
| NA |
| $ | 8 |
|
|
| 0.2 | % |
| $ | (170 | ) |
| NA |
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Overview. Our results of operations improved significantly whenWhen comparing the three months ended September 30, 2018March 31, 2019 to the three months ended September 30, 2017 due primarily to revenue increasing at a faster rate than expenses. TwoMarch 31, 2018, our results of the most significant drivers of demand for our services, the price of oil and the U.S. land-based drilling rig count, increased when comparing the two periods: the price of oil increased approximately 45.0% and the U.S. land-based drilling rig count increased approximately 10.0%. As a result, demand for our products and services remained strong period-over-period. We maintained full utilization of our fleet and,operations weakened slightly due to an increasingly tight supplydeclines in activity, primarily in our solids control product line. Our variable costs declined with activity and remained fairly flat as a percentage of equipment in 2018, we were ablerevenue; however, our fixed costs remained flat and increased as a percentage of revenue due to significantly raise the prices we charge to our new and existing customers.costs being spread over a smaller revenue base.
Revenue. Our revenue for the three months ended September 30, 2018March 31, 2019 was $4.5$3.9 million, an increasea decrease of 9.6%, compared to $4.1$4.3 million for the three months ended September 30, 2017 resulting primarily fromMarch 31, 2018. The key drivers of revenue are pricing and utilization or activity. Although pricing on our tanks, our lead surface rental product, increased by more than 20% period-over-period, pricing on most other products remained relatively flat. The impact of the increased pricing on tanks and non-rental services such as rig-up/rig-down and hauling. Whenwas not sufficient to offset the overall decline in activity when comparing the three months ended September 30, 2018 to the three months ended September 30, 2017, the pricing ontwo periods. Demand for tanks and non-rentalpumps did not vary significantly; however, due to a change in customer mix, the demand for auxiliary surface rental equipment declined substantially. In addition, revenue from our solids control products and services increased bydeclined more than 30% on relatively flat activity. Although robust demand for our tanks and non-rental services enabled usdue primarily to increase pricing to our customers, activity remained fairly flat period-over-period because our tanks were fully utilized and,loss of revenue from a significant customer which laid down rigs beginning in certain circumstances, we determined that it was not cost effective to sub-rent additional tanks in order to take advantagethe fourth quarter of 2018. Most of the increased demand. The significant pricing increases on tanks and non-rental services were partially offset byrevenue loss has been recovered with a decrease in revenue generated from other surface rental products and a change in the mixnew customer as of our solids control jobs. Revenue generated by our solids control product line declined by almost 10% due to a decline in the utilization of operators. Certain major customers which require full-time solids control operators typically slow activity at year-end and resume activity in the first quarter. As certain centrifuges were released from jobs requiring personnel, we were able to redeploy them with new and existing customers resulting in flat period-over-period activity for our centrifuges.April 2019.
Operating Expenses. Our operating expenses for the three months ended September 30, 2018March 31, 2019 decreased 5.2%slightly to $2.5$2.3 million, or 54.7%59.9% of revenue, from $2.6 million, or 63.3%60.2% of revenue, for the three months ended September 30, 2017. The slightMarch 31, 2018. Operating expenses include primarily variable costs, such as payroll and related costs, third-party expenses (sub-rental of equipment, sub-contractors, hauling of equipment, washout of equipment), and repair and maintenance expenses. Payroll and related costs, including third-party sub-contractors, declined significantly with the decrease in costs wasactivity. Sub-rental expense for surface rental equipment increased due primarily to vendor day rate increases of more than 60% which were only partially offset by the reductiondecline in third-party expense for sub-contractorsthe quantity of sub-rented pumps and other third-party services related to the change inopen top tanks as our mix of solids control revenue away from rigs requiring operatorsnewly fabricated equipment went into service and auxiliary sub-rentedreplaced equipment towards rigs requiring centrifuges only. Most otherwhich was previously sub-rented. Aggregate operating expenses remained stable as there was little change in overall activity period-over-period; however, operating expensesfairly flat as a percentpercentage of revenue declined significantly as wethe benefits of increased pricing toon certain rental equipment was offset by increased day rates charged by our customers more quickly than our costs increased.sub-rental vendors.
Depreciation and Amortization. Depreciation and amortization remained fairly flat atdecreased slightly to $0.8 million for the three months ended March 31, 2019 from $0.9 million for the three months ended September 30,March 31, 2018 and 2017 asdue primarily to the decline in depreciation and amortization fromimpact of certain assets becoming fully depreciated and amortized was partially offset by the impactpurchase and fabrication of capital investments.new assets.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $0.8 million, or 19.9% of revenue, for the three months ended March 31, 2019 compared to $0.7 million, or 17.0% of revenue, for the three months ended March 31, 2018. Selling, general and administrative expenses consist of overhead costs which we generally consider to be fixed. The year-over-year increase of approximately $46,000, or 6.3%, is primarily due to increases in franchise taxes and insurance premiums.
Interest Expense, Net. Interest expense, net, consisting primarily of interest on insurance financing and other miscellaneous interest expense, was approximately $5,000 and $6,000 for the three months ended March 31, 2019 and 2018, respectively.
Interest Expense – Related Party. During the three months ended March 31, 2019 and 2018, we recorded approximately $91,000 and $86,000, respectively, of interest expense on borrowings under the credit facility (“Related Party Credit Facility”) with Permian Pelican Financial, LLC (“PPF”), a related party.
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Selling, GeneralIncome Taxes. From our evaluation as of March 31, 2019 and Administrative Expenses. Selling, generalDecember 31, 2018, the Company has concluded that based on the weight of available evidence, it is more likely than not that the Company will not realize the benefit of its deferred tax assets. As such, a valuation allowance of $2.0 million and administrative expenses increased to $0.8$1.9 million or 18.5%is included on the condensed consolidated balance sheet as of revenue,March 31, 2019 and December 31, 2018, respectively. Income tax expense was approximately $10,000 and $21,000 for the three months ended September 30,March 31, 2019 and 2018, compared to $0.5 million, or 12.6% of revenue, for the three months ended September 30, 2017. Selling, general and administrative expenses consist of overhead costsrespectively, which we generally consider to be fixed. The year-over-year increase of $0.3 million, or 61.1%, is primarily due to increases in compensation to existing employees and by an increase in headcount of selling, general and administrative employees to an average of 15 employees during the three months ended September 30, 2018 from 11 employees during the three months ended September 30, 2017. With the improved financial results we are experiencing, we have increased headcount in order to facilitate the segregation of duties and to strengthen our internal controls. In addition, non-recurring and non-cash items increased by approximately $97,000 to an aggregate expense of approximately $75,000 for the three months ended September 30, 2018 from an aggregate benefit of $12,000 for the three months ended September 30, 2017 (see further discussion in “How We Evaluate Our Operations” section above). These increases were partially offset by a decline in third-party audit and accounting fees as the expenses incurred in 2017 to catch up on prior year filings did not recur in 2018.
Interest Expense, Net. Interest expense, net, consisting of interest on insurance financing and other miscellaneous interest expense, was approximately $3,000 for the three months ended September 30, 2018 and approximately $2,000 for the three months ended September 30, 2017.
Interest Expense – Related Party. During the three months ended September 30, 2018 and 2017, we recorded approximately $92,000 and $69,000, respectively, of interest expense on borrowings under the Related Party Credit Facility. The period-over-period increase is primarily due to an increase in borrowings under the facility.
Income Taxes.reflects Texas Franchise Tax. The difference in the effective tax rate from the statutory rate is due to our continued full valuation allowance on net deferred tax assets. Income tax expense and benefit is related to the Texas Margin Tax. The Company has sufficient NOL carryforwards to offset federal income tax and other state income taxes.
Results for the Nine Months Ended June 30, 2018 Compared to the Nine Months Ended June 30, 2017
The following table summarizes the change in our results of operations for the nine months ended September 30, 2018 from the nine months ended September 30, 2017 (in thousands):
For the Nine Months Ended September 30, Change 2018 % of Revenue 2017 % of Revenue $ % Revenue Expenses: Operating expenses Depreciation and amortization % Selling, general and administrative expenses Total expenses Income (loss) from operations NA NA Other expense (income): Interest expense, net % Interest expense - related party % Gain on extinguishment of debt and other liabilities NA NA Total other expense (income) NA NA Income (loss) from operations before income taxes NA NA Income tax expense % Net income (loss) NA NA Preferred stock dividends % Net income (loss) available to common stockholders NA NA $ 13,242 100.00 % $ 11,134 100.00 % $ 2,108 18.93 % 7,612 57.48 % 7,167 64.37 % 445 6.21 % 2,641 19.94 % 2,793 25.09 % (152 ) -5.44 2,726 20.59 % 2,353 21.13 % 373 15.85 % 12,979 98.01 % 12,313 110.59 % 666 5.41 % 263 1.99 % (1,179 ) 1,442 12 0.09 % 18 0.16 % (6 ) -33.33 270 2.04 % 664 5.96 % (394 ) -59.34 - 0.00 % (2,387 ) 2,387 282 2.13 % (1,705 ) 1,987 (19 ) 526 4.72 % (545 ) 12 0.09 % 18 0.16 % (6 ) -33.33 (31 ) 508 4.56 % (539 ) - 0.00 % 63 0.57 % (63 ) -100.00 $ (31 ) $ 445 4.00 % $ (476 )
Overview. Our results of operations, excluding the one-time gain on extinguishment of debt and other liabilities, improved significantly when comparing the nine months ended September 30, 2018 to the nine months ended September 30, 2017 due to significant price increases on the products and services we offer and effective management of variable and fixed costs. Two of the most significant drivers of demand for our services, the price of oil and the U.S. land-based drilling rig count, increased substantially when comparing the two periods: the price of oil increased over 35.0% and the U.S. land-based drilling rig count increased approximately 20.0%. The robust demand enabled us to increase utilization of our centrifuges and we accelerated our refurbishment program to ensure we had available centrifuges to meet demand. There was also incremental demand for our surface rental equipment; however, it became more difficult for us, and other competitors, to service this demand as access to third-party surface rental equipment at reasonable costs began to diminish. Although our surface rental activity remained fairly flat, the incremental demand combined with the tight supply of equipment provided us the ability to increase prices substantially. Excluding the impact of one-time items related to the Recapitalization in January 2017, we maintained a lean cost structure and were able to improve operating margins as a result of pricing to our customers increasing more quickly than costs from our vendors. Please see our Annual Report on Form 10-K for the year ended December 31, 2017 for a complete description of the Recapitalization and the impact on our consolidated financial statements for the year ended December 31, 2017.
Revenue. Our revenue for the nine months ended September 30, 2018 was $13.2 million, an increase of 18.9%, compared to $11.1 million for the nine months ended September 30, 2017. Increased pricing on our tanks, pumps and non-rental services and increased activity for our solids control equipment were the primary drivers of the increase. When comparing the nine months ended September 30, 2018 to the nine months ended September 30, 2017, pricing on our lead surface rental products, tanks and pumps, and pricing on our non-rental services, rig-up/rig down and hauling, increased more than 20%. Although robust demand for our tanks and non-rental services enabled us to increase pricing to our customers, activity remained fairly flat period-over-period because our tanks and pumps were fully utilized and, in certain circumstances, we determined that it was not cost effective to sub-rent additional equipment in order to take advantage of the increased demand. The increase in revenue generated by solids control products was driven by a greater than 20% increase in the count of revenue-generating days for centrifuges as we were able to satisfy increasing demand due to our refurbishment program which expanded our available fleet by 12 centrifuges during the first nine months of 2018. In addition, our average day rate for centrifuges increased 5-10% as we were able to price new work significantly higher than existing work. Revenue generated by solids control operators remained flat as most of the jobs which were added did not require us to provide personnel to operate our centrifuges. The increases in revenue from pricing of lead surface rental products and non-rental services and from increased utilization of centrifuges were partially offset by a decrease in revenue generated from other surface rental products. Rental of auxiliary equipment is customer specific and fluctuates as our customers’ needs vary.
Operating Expenses. Our operating expenses for the nine months ended September 30, 2018 increased 6.2% to $7.6 million, or 57.5% of revenue, from $7.2 million, or 64.4% of revenue, for the nine months ended September 30, 2017. Although activity remained fairly flat when comparing the nine months ended September 30, 2018 to the nine months ended September 30, 2017, we experienced increases in operating expenses due to (i) increased headcount as we strengthened our employee base, specifically middle management, (ii) cost increases from sub-rental vendors of approximately 10%, and (iii) increased repair and maintenance activity as we maximized the amount of available equipment in our fleet in order to meet demand. Although operating expenses increased, the benefit of increased pricing on most products and services resulted in operating expenses decreasing significantly as a percentage of revenue.
Depreciation and Amortization. Depreciation and amortization decreased to $2.6 million for the nine months ended September 30, 2018 from $2.8 million for the nine months ended September 30, 2017 due primarily to the impact of certain assets becoming fully depreciated and amortized partially offset by the impact of capital investments in assets with shorter than average useful lives.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased slightly to $2.7 million, or 20.6% of revenue, for the nine months ended September 30, 2018 compared to $2.4 million, or 21.1% of revenue, for the nine months ended September 30, 2017. Selling, general and administrative expenses consist of overhead costs which we generally consider to be fixed. The year-over-year increase of approximately $0.4 million, or 15.9%, is primarily due to increases in compensation to executive management to return to contractual levels and by an increase in headcount of selling, general and administrative employees to an average of 15 employees during the nine months ended September 30, 2018 from 11 employees during the nine months ended September 30, 2017. With the improved financial results we are experiencing, we have increased headcount in order to improve our ability to segregate duties and strengthen our internal controls as well as to manage the increased activity levels. These increases were partially offset by a decrease in non-recurring and non-cash expenses to $0.5 million from $0.8 million for the nine months ended September 30, 2018 and 2017, respectively (see further discussion in “How We Evaluate Our Operations” section above).
Interest Expense, Net. Interest expense, net, consisting primarily of interest on insurance financing and other miscellaneous interest expense, was approximately $12,000 for the nine months ended September 30, 2018. Interest expense, net was slightly higher during the nine months ended September 30, 2017, approximately $18,000, due to interest expense of $13,000 during the first quarter of 2017 which was eliminated in the Recapitalization. Please see our Annual Report on Form 10-K for the year ended December 31, 2017 for a complete description of the Recapitalization and the impact on interest expense.
Interest Expense – Related Party. During the nine months ended September 30, 2018, we recorded $0.3 million of interest expense on borrowings under the Related Party Credit Facility. Interest expense on the facility for the nine months ended September 30, 2017 was $0.7 million and included an amendment fee of $0.3 million.
Income Taxes. The difference in the effective tax rate from the statutory rate is due to our continued full valuation allowance on net deferred tax assets. Income tax expense is related to the Texas Margin Tax. The Company has sufficient NOL carryforwards to offset federal income tax and other state income taxes.
Liquidity and Capital Resources
Net Cash Provided by (Used in) Operating Activities. During the ninethree months ended September 30,March 31, 2019 and 2018, and 2017, operating activities used approximately $27,000 and generated $2.9 million and $0.2approximately $0.7 million in cash, respectively. The increasedecrease in cash flows from operating activities is partially due to an improvementa weakening in operating results when comparing the two periods. In addition, changes in operating assets and liabilities provided $0.2used $0.8 million of cash during the ninethree months ended September 30, 2018March 31, 2019 compared to using $1.8$0.2 million during the ninethree months ended September 30, 2017.March 31, 2018. The primary driver of the increase in cash providedused by operating activities is the change in receivables which providedused $0.4 million in cash during the ninethree months ended September 30, 2018March 31, 2019 compared to using $2.7generating $0.4 million in cash during the ninethree months ended September 30, 2017. The significantMarch 31, 2018. During the three months ended March 31, 2019, days of receivables outstanding increased from 68 days to 76 days resulting in a use of cash in 2017 was due primarilycash. In April 2019, we received catch-up collections and we anticipate the days of receivables outstanding to a rapid increase in revenuedecrease significantly during the period as monthly revenue increased in excess of 90% from the beginning of the period to the end of the period compared to the ninethree months ended SeptemberJune 30, 2019. The same measure for the prior year period decreased from 102 days as of December 31, 2017 to 72 days as of March 31, 2018 when monthly revenue remained fairly flat.resulting in a significant source of cash during the three months ended March 31, 2018 as we billed and collected receivables which had been delayed during the fourth quarter of 2017. We anticipate generating positive cash flow from operations during the remainder of 2019 as results from operations strengthen and we reduce our days of receivables outstanding.
Capital Expenditures. Capital expenditures are the main component of our investing activities. Cash capital expenditures for the ninethree months ended September 30,March 31, 2019 and 2018 and 2017 were $1.7$1.4 million and $1.3$0.3 million, respectively. Although we spent approximately $0.3 million to refurbish centrifuges, rotating assemblies and related auxiliary equipmentOur primary investing focus in order to grow our available fleet of solids control equipment to meet demand, our primary spending focus was on2019 is purchasing and fabricating equipment which wouldcould replace equipment we are currently sub-renting from third-party vendors. During the nine months ended September 30, 2018, we paid approximately $1.3 million to purchase or fabricate forklifts, open top tanks, diesel mud pumps, diesel transfer pumps and 500bbl round-bottom-frac-on-wheels tanks. In addition, we have committed to spending an additional $0.7 million on forklifts and diesel transfer pumps during the remainder of 2018. In aggregate, once the new equipment is in service and the sub-rental equipment has been returned, these investments will result in cost savings of approximately $0.9 million annually, of which less than $0.1 million has been recognized during the first nine months of 2018. We anticipate continuing our capital expenditure program during the remainder of 2018 and throughout 2019 with a focus on purchasing and fabricating equipment to replace items which we are currently sub-renting. Other capital expenditures in the fourth quarter of 2018 and throughout 2019 will likely consist of liners, hoses, vehicles and similar assets which are required to support the ongoing operations. The successful implementation of our capital expenditure plan will enable us to service additional customers and rigs if demand continues to grow and, evenvendors if there is no incremental demand to be satisfied. During the three months ended March 31, 2019, aggregate expenditures on 500bbl MCTs were approximately $1.3 million and we placed 25 new 500bbl MCTs in service. To date, virtually all of these tanks have been used to satisfy incremental demand and we will see the full beneficial impact on operating results in the second quarter of 2019. We believe the positive impact on net income will be in excess of $0.3 million annually. We anticipate purchasing and placing another 25 new 500bbl MCTs into service during the second and third quarter of 2019. Our remaining 2019 capital expenditure plan also includes the fabrication of pumps and open top tanks which will be used for our services, our investment in items which we sub-rent, such asnew work or to replace sub-rented equipment. At a minimum, the incremental tanks and pumps purchased or fabricated during the remainder of 2019 will reduce our expenses and reduce our reliancesave approximately $0.6 million per year in sub-rental expense; however, the positive impact will be much greater if the equipment is used on third-party vendors.new jobs instead of to replace sub-rented equipment.
Although we do not budget acquisitions, mergers or similar transactions in the normal course of business, we are currently engaged in multiple discussions related to potential acquisitionstransactions. We would anticipate requiring additional debt and/or equity financing in order to complete some of companies which provide oilfield services. We are actively seeking opportunities to acquire companies which will add new products and services, expand our geographic reach, diversify our customer base and/or increase our available fleet of equipment.the transactions being evaluated.
Liquidity and Credit Facility.As of September 30, 2018,March 31, 2019, we had a cash balance of approximately $2.0$0.6 million (excluding restricted cash) and aggregate related party debt of $6.4$6.6 million. Because the lender under our credit facility is a related party, we benefit from a credit facility which is structured with no financial covenants and we have significant flexibility to modify our credit facility, if, and when, needed.
On June 30, 2018,In February 2019, we borrowed the Company entered into the Third Amended and Restated Credit Agreement which, among other things, (i) combined the outstanding balances on the delayed draw term loan and the term loan and initiated a required monthly principal payment of approximately $83,000 on the aggregate outstanding balance of the term loan, (ii) expanded availability onremaining $0.7 million available under the revolving credit facility by $0.7 million while simultaneously reducingto partially fund the purchase of new 500bbl MCTs. Our existing capital expenditure plan for 2019 focuses primarily on purchasing and fabricating equipment which could be used to reduce sub-rental expense; however, if demand continues to increase as it has during the first quarter of 2019, new equipment may be used to service incremental jobs for which the gross margin generated will exceed the projected cost savings of replacing sub-rented equipment on existing jobs. As of April 30, 2019, we have purchased 37 new 500bbl MCTs for which the remaining payments aggregate availability underto approximately $0.6 million. Expenditures planned for the other linesremainder of the facility by the same amount,year will be committed to and (iii) extended the maturity date of the facility to June 30, 2021. In addition, effective June 30, 2018, Pelican assigned and transferred its rights under the credit agreement to an affiliated entity, Permian Pelican Financial, LLC (“PPF”). The members and membership interests of PPF are the samefunded as Pelican and PPF is a related party.we generate cash flow from operations.
The table below reflects our liquidity asAs of SeptemberApril 30, 2018 (in thousands):
September 30, 2018 (unaudited) Cash Revolving facility availability (1) Total liquidity $ 1,988 675 $ 2,663
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2019, we had approximately $0.8 million of cash on hand. We believe that this cash combined with our cash flow from operations combined with access to capital through our lender, PPF, and our controlling shareholder, Pelican, will be sufficient to fund our working capital needs, contractual obligations andthe 2019 capital expenditure plan, principal and interest payments, and other contractual obligations for the next twelve months. Our existing capital expenditure plan focuses primarily on reducing sub-rental expense at current activity levels. We believe that the U.S. land-based rig count and price of oil may continue to increase, but these metrics are more likely to remain stable at their current levels. We will continue to have opportunities to gain market share; however, we believe that the most meaningful growth will come from the acquisition of one or more companies which provide complementary products and services. As such, we are actively seeking attractive acquisition candidates and we are currently in early discussions with several potential targets. We would anticipate requiring additional debt and/or equity financing in order to complete any such acquisitions.
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Merger with a Related-Party
On January 28, 2019, we executed an Agreement and Plan of Merger (“Merger Agreement”) with Permian Pelican Inc. (“Pelican”), a related party, pursuant to which Pelican merged with and into the Company (the “Merger”) in a non-cash transaction. By virtue of the Merger, each issued and outstanding share of Pelican common stock, 7,429 shares in aggregate, was converted into 387.858 shares of our common stock and each share of Series A convertible preferred stock was canceled. We issued an aggregate of 2,881,411 new shares of our common stock, representing approximately 75.4% of our outstanding common stock, with a value of approximately $14.4 million (based on a stock price of $5.00 per share on January 28, 2019) in consideration for all the shares of Pelican common stock outstanding as of the date of the Merger. The new shares of our common stock were issued directly to the individual shareholders of Pelican and, as a result, effective January 28, 2019, we no longer have a controlling shareholder.
Off-Balance Sheet Arrangements
As of September 30, 2018,March 31, 2019, we did not, and we currently do not, have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources notwithstanding any impact of ASU 2016-02, Leases (Topic 842). See further discussion contained within Item 1. Financial Statements under the caption "Recent Accounting Developments" in Note 4 to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017.
Net Operating Losses
As of December 31, 2017,2018, we had approximately $31.5$32.8 million of federal net operating loss carryforwards. Based on the weight of all available evidence including the future reversal of existing U.S. taxable temporary differences as of September 30, 2018March 31, 2019 and December 31, 2017,2018, we believe that it is more likely than not that the benefit from certain federal and state net operating loss carryforwards and other deductible temporary differences will not be realized. In recognition of this risk, we have provided a valuation allowance of approximately $2.0. and $1.9 million as of March 31, 2019 and December 31, 2018, respectively, on the net deferred tax asset as a result of the Company being in a cumulative three-year pre-tax book loss position and the absence of other objectively verifiable positive evidence including reversal of existing taxable temporary differences in these certain state tax jurisdictions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under supervision and with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based upon this evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of December 31, 2017, due2018, as a result of the conditions that led to the restatement of prior year financial statements, a combination of deficienciesmaterial weakness in our internal controls over financial reporting (“ICFR”), a material weakness in ICFR existed and our disclosure controls and procedures were not effective.effective as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that required information to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that required information to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate ICFR,Internal Control over Financial Reporting (“ICFR”), as defined under Exchange Act Rules 13a-15(f) and 14d-14(f). All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial reporting reliability and financial statement preparation and presentation. In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
Management updated theour assessment of the effectiveness of our ICFR as of September 30, 2018. In making the assessment, management usedMarch 31, 2019 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework 2013. As defined by Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements” established by the Public Company Accounting Oversight Board (“PCAOB”), a material weakness is a deficiency or combination of deficiencies that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. Based on its assessment, management concludedWe determined that as of September 30, 2018, a combination of deficiencies in ICFR resulted in awe did not maintain effective internal controls over financial reporting. Specifically, we identified material weakness.weaknesses over management’s review controls over significant accounting estimates and review controls over accounting for non-routine and complex accounting transactions.
Based on our evaluation, management believeswe believe this weakness did not have ana significant effect on our financial results for the three months ended March 31, 2019 and we did not discover any fraud involving management or any other personnel who play a significant role in our disclosure controls and procedures or internal controls over financial reporting. Management believes that the material weakness in ICFR was a direct result of our significant reduction in headcount in 2015 and 2016 in response to the downturn in the industry as well as the overall scale of our operations.
In connection with the assessment described above, management identified the following combination of control deficiencies that result in a material weakness as of September 30, 2018. These deficiencies are in various stages of remediation as described below:
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We will implement further controls as circumstances, cash flows, and working capital permits. Notwithstanding the assessment that there was a material weakness in our ICFR resulting from a combination of deficiencies identified above, we believe that our financial statements contained in our Quarterly Report on Form 10-Q for the period ended September 30, 2018 fairly present our financial position, results of operations, and cash flows for the periods covered in all material respects.
Changes in Internal Control over Financial Reporting
During the beginning of 2017, controls were not designed and in place to ensure all disclosures required were originally addressed in our financial statements or other required reports filed or submitted under the Securities Exchange Act. We later implemented a review process with an accounting consultant with expertise in U.S. GAAP to ensure financial statements disclosures comply with the Securities Exchange Act and, simultaneous with the filing of our 10-Q for the period ended September 30, 2017, we returned to being a timely filer under SEC guidelines.
During the period covered by this report, we strengthened the governance of our board by identifying and bringing on a financial expert that now serves as our independent audit committee chair. See Item 10 in our Annual Report on Form 10-K for the year ended December 31, 2017 for further background on James Hennessy.
Therethere were no other changes into our ICFR during the period, other than the changes implemented as detailed in our remediation plan above, that occurred that have materially affected, or are reasonably likely to materially affect, our ICFR.
This Quarterly Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to an exemption provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) enacted into law in July 2010. The Dodd-Frank Act provides smaller public companies and debt-only issuers with a permanent exemption from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls provided in Section 404(b) of the Sarbanes-Oxley Act. Aly Energy is a smaller reporting company and is eligible for this exemption under the Dodd-Frank Act.
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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: | By: | /s/ Munawar H. Hidayatallah | |
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| Munawar H. Hidayatallah | |
Chairman and Chief Executive Officer | |||
(Principal Executive Officer) | |||
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In October 2018, our Board of Directors determined that Micki Hidayatallah, our then Interim Chief Executive Officer, should be elected as Chief Executive Officer. The board approved an annual salary of $150,000 for Mr. Hidayatallah with an effective date of May 26, 2018.
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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 |
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** 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.
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