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 |
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for the Period Ended |
or
| ¨ | Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
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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 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 May 15,August 14, 2019, the registrant had 3,822,329 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
CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) March 31, 2019 December 31, 2018 (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 Operating right-of-use assets Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses Accrued interest - related party Current portion of long-term debt - related party Total current liabilities Operating lease liabilities, net 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 $0 and $17,292 as of March 31, 2019 and December 31, 2018, respectively Authorized-20,000; issued and outstanding-none as of March 31, 2019 Authorized-20,000; issued and outstanding-17,292 as of December 31, 2018 Preferred stock of $0.001 par value Authorized-4,980,000; issued and outstanding-none as of March 31, 2019 and December 31, 2018 Common stock of $0.001 par value Authorized-15,000,000; issued and outstanding-3,822,329 as of March 31, 2019 Authorized-15,000,000; issued and outstanding-940,918 as of December 31, 2018 Additional paid-in-capital Accumulated deficit 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
ALY ENERGY SERVICES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (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 December 31, 2017 (restated) Net income (restated) Balance as of March 31, 2018 (restated) Balance as of December 31, 2018 $ $ $ $ $ $ Net loss Issuance of common stock in connection with the Merger Cancellation of Series A convertible preferred stock in connection with the Merger Impact of adoption of ASC 842 Balance as of March 31, 2019 ALY ENERGY SERVICES, INC. (in thousands, except share and per share amounts) June 30, 2019 December 31, 2018 (unaudited) ASSETS Current assets Cash Restricted cash Receivables, net Receivables - related party Prepaid expenses and other current assets Total current assets Property and equipment, net Intangible assets, net Operating right-of-use assets Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses Accrued interest - related party Current portion of long-term debt - related party Total current liabilities Operating lease liabilities, net 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 $0 and $17,292 as of June 30, 2019 and December 31, 2018, respectively Authorized-20,000; issued and outstanding-none as of June 30, 2019 Authorized-20,000; issued and outstanding-17,292 as of December 31, 2018 Preferred stock of $0.001 par value Authorized-4,980,000; issued and outstanding-none as of June 30, 2019 and December 31, 2018 Common stock of $0.001 par value Authorized-15,000,000; issued and outstanding-3,822,329 as of June 30, 2019 Authorized-15,000,000; issued and outstanding-940,918 as of December 31, 2018 Additional paid-in-capital Accumulated deficit Total stockholders' equity Total liabilities and stockholders' equity
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
ALY ENERGY SERVICES, INC. (in thousands, except share and per share amounts) For the Three Months Ended June 30, For the Six Months Ended June 30, 2019 2018 2019 2018 (restated) (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 unaudited condensed consolidated financial statements.
ALY ENERGY SERVICES, INC. UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands, except share amounts) Series A Convertible Additional Preferred Stock Common Stock Paid-In- Accumulated Treasury Shares Amount Shares Amount Capital Deficit Stock Total Balance as of December 31, 2018 Net loss Issuance of common stock in connection with the Merger Cancellation of Series A convertible preferred stock in connection with the Merger Impact of adoption of ASC 842 Standard Balance as of March 31, 2019 Net income Balance as of June 30, 2019 Series A Convertible Additional Preferred Stock Common Stock Paid-In- Accumulated Treasury Shares Amount Shares Amount Capital Deficit Stock Total Balance as of December 31, 2017 (restated) Net income (restated) Balance as of March 31, 2018 (restated) Reinstatement of treasury shares Net loss (restated) Balance as of June 30, 2018 (restated) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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 unaudited condensed consolidated financial statements.
NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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 major basins 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. Throughout this report, we may also refer to Aly Energy and its subsidiaries as “we”, “our” or “us”. Basis of Presentation 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 unaudited 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 June 30, 2019 and December
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 unaudited 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 and six months ended June 30, 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 in consideration for all of the shares of Pelican common stock outstanding as of the Merger on January 28, 2019. 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 had 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:
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.
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 unaudited condensed consolidated balance sheet as of June 30, 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 rent expense was (in thousands): For the Three Months Ended June 30, For the Six Months Ended June 30, 2019 2018 2019 2018 (unaudited) (unaudited) Rent expense: Operating right-of-use assets Long-term operating leases Month-to-month operating leases Operating leases maturing within twelve months and other Total rent expense The Company has entered into several leases with Permian Pelican Rentals, LLC (“PPR”) for the long-term rental of 500bbl round-bottom tanks at fixed day rates which are more favorable than the day rates charged by existing vendors for comparable equipment. As a part of this arrangement, any costs required to refurbish equipment will be paid by the Company and reimbursed by PPR. Aggregate refurbishment costs during the three and six months ended June 30, 2019 were approximately $91,000 of which approximately $41,000 remained in receivables as of June 30, 2019. The Company intends to continue entering into similar leases for flat-bottom tanks and diesel mud pumps, in addition to incremental round-bottom tanks, for the remainder of 2019 and beyond. PPR is a wholly-owned subsidiary of Permian Pelican Financial, LLC (“PPF”) which is the Company’s lender and a related party due to the common ownership of PPF and the Company. Supplemental Balance Sheet Information Operating leases were as follows (in thousands): June 30, 2019 (unaudited) Operating right-of-use assets Operating lease liabilities: Accounts payable and accrued expenses Operating lease liabilities, net Total operating lease liabilities
Supplemental Cash Flow Information The following table summarizes the supplemental cash flow information related to leases: June 30, 2019 (unaudited) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases Non-cash activities from adoption of ASC 842 as of January 1, 2019: Operating lease assets Operating lease liabilities Other long-term liabilities Retained earnings
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
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 June 30, 2019 (unaudited) Remainder of 2019 2020 2021 2022 Total lease payments Less: imputed interest Total Accounting Standards Adopted in 2018 Revenue recognition. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 On January 1, 2018, we adopted 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. Revenue is 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 revenue 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 ASC 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 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 consists of fees charged to customers for use of the Company’s rental equipment and, in certain cases, fees charged to customers for the use of personnel supplied by the Company to operate its solids control equipment over the term of the rental period, which is generally less than twelve months. These fees are primarily charged on a per day, per hour or similar basis.
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 relevant amortization period would be 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 $ 2,573 $ 3,005 737 691 585 626 24 14 $ 3,919 $ 4,336
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The following table presents our revenue disaggregated by revenue source (in thousands):
For the Three Month Ended June 30, For the Six Months Ended June 30, 2019 2018 2019 2018 (unaudited) (unaudited) Rental services Transportation services Rig-up/rig-down services Other Total $ 2,760 $ 3,243 $ 5,333 $ 6,248 783 589 1,520 1,280 750 527 1,335 1,153 10 29 34 43 $ 4,303 $ 4,388 $ 8,222 $ 8,724
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 Major classifications of |
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 $ 35,428 $ 33,503 4,257 4,242 567 567 63 63 212 212 40,527 38,587 (14,149 ) (13,490 ) 26,378 25,097 139 711 $ 26,517 $ 25,808
Depreciation and amortization expense related to property and equipment for the three months ended March 31,property and equipment are as follows (in thousands):
June 30, 2019 December 31, 2018 (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 $ 36,628 $ 33,503 4,279 4,242 567 567 212 212 63 63 41,749 38,587 (14,804 ) (13,490 ) 26,945 25,097 2 711 $ 26,947 $ 25,808
Depreciation and amortization expense related to property and equipment for the three months ended June 30, 2019 and 2018 (restated) was $0.7 million. Depreciation and amortization expense related to property and equipment for the six months ended June 30, 2019 and 2018 (restated) was $1.3 million and $1.4 million, and $0.6 million (restated), respectively.
Accounts Payable and Accrued Expenses
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 $ 1,317 $ 1,098 211 366 206 211 187 384 139 - 34 281 359 262 $ 2,453 $ 2,602
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 $ 1,000 $ 3,935 $ 1,000 $ 4,185 - 1,675 - 1,000 $ 1,000 $ 5,610 $ 1,000 $ 5,185
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Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consists of the following (in thousands):
June 30, 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 $ 1,827 $ 1,098 174 366 215 211 301 384 127 - - 281 379 262 $ 3,023 $ 2,602
NOTE 4 — LONG-TERM DEBT – RELATED PARTY
Long-term debt – related party consists of the following (in thousands):
June 30, 2019 December 31, 2018 Current Long-Term Current Long-Term (unaudited) (unaudited) Credit facility Term loan Revolving credit facility Total $ 1,000 $ 3,685 $ 1,000 $ 4,185 - 1,675 - 1,000 $ 1,000 $ 5,360 $ 1,000 $ 5,185
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.
EffectivePPF and the Company, PPF is a related party.
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 June 30, 2018, Pelican assigned and transferred its rights under the Related Party Credit Facility to an affiliated entity, Permian Pelican Financial, LLC (“PPF”). The members and membership interests of PPF are the same as Pelican and PPF is a related party.
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 $1.7 million of borrowings outstanding and 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 for all fractional shares was $231.35. Shares of common stock previously issued and held as treasury shares were escheated to applicable governmental authorities and, in connection with the Reverse Split, were reinstated as outstanding shares of common stock. All share and per share amounts in these unaudited condensed consolidated financial statements, including such amounts related to options and the conversion feature of the Series A convertible preferred stock, have been retroactively restated to reflect the Reverse Split.
On August 7, 2018, we filed an amendment to our certificate of formation reducing our authorized common shares from 25,000,000 to 15,000,000.
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On August 20, 2018, our former Chief Executive Officer, Shauvik Kundagrami, exercised options to purchase 250,000 shares of common stock for an exercise price of $2.00 per share, or $500,000 in aggregate.
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,June 30, 2019 and December 31, 2018, respectively, of which, none were issued and outstanding as of March 31,June 30, 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 1 – Nature of Operations and Basis of Presentation and Note 6 – Related Party Transactionsfor additional detail on the Merger.detail.
NOTE 6 — RELATED PARTY TRANSACTIONS
Former Controlling Shareholder – Pelican
Beginning on January 31, 2017, Pelican had the power to vote the substantial majority of the Company’s outstanding common stock. SixFive of our seven board members, including two of our executive officers, and our chief financial officer held an ownership interest in Pelican.
As of December 31, 2018, Pelican owned 17,292 shares of Series A convertible preferred stock which was convertible into 2,881,400 common shares. On an as-if-converted basis, Pelican owned approximately 75.4% of our common stock (excluding the impact of options) as of December 31, 2018. The shares of Series A convertible preferred stock carried a liquidation preference of $1,000 per share or $17.3 million.
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. BecauseDue to the members and membershipcommon ownership interests of PPF areand the same as Pelican,Company, PPF is a related party. See Note 4 – Long-Term Debt – Related Party for further detail on the Related Party Credit Facility.
In connection with our Related Party Credit Facility, during the three months ended March 31,June 30, 2019, and 2018, we recorded principal payments and interest expense of $0.3 million and approximately $88,000, respectively. During the three months ended June 30, 2018, we did not make any principal payments and we recorded interest expense of approximately $91,000 and $86, 000, respectively. $92,000.
In addition,connection with our Related Party Credit Facility, during the threesix months ended March 31,June 30, 2019, we recorded principal payments and interest expense of $0.5 million and $0.2 million, respectively, and we borrowed an additional $0.7 million under the revolving credit facility thereby reducing availability under the facility to zero. During the six months ended June 30, 2018, we did not make any principal payments and we recorded interest expense of approximately $0.2 million.
Our consolidated balance sheet includes accrued interest under the Related Party Credit Facility of approximately $33,000$27,000 and $31,000 as of March 31,June 30, 2019 and December 31, 2018, respectively.
Related Party Vendor – Permian Pelican Rentals, LLC
Permian Pelican Rentals, LLC (“PPR”)PPR is a wholly-owned subsidiary of PPF, a related party. On April 30, 2019, PPR executed a bill of sale to purchase 40 tanks with the intent to sub-rent the tanks to Aly Energy. As a part of this arrangement, any costs required to refurbish equipment will be paid by the Company and reimbursed by PPR. Aggregate refurbishment costs during the three and six months ended June 30, 2019 were approximately $91,000 of which approximately $41,000 remained in receivables as of June 30, 2019. See Note 2 – Recent Accounting Pronouncements for further detail on the leases.
| 14 |
| Table of Contents |
NOTE 7 – EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that could have been outstanding assuming the exercise of outstanding stock options and restricted stock or other convertible instruments, as appropriate.
Due to the net loss incurred by the Company for the three months ended March 31,June 30, 2018 and the six months ended June 30, 2019 and 2018, the effect of incremental shares is antidilutive so the diluted earnings per share will be the same as the basic earnings per share. The calculations of basic and diluted earnings per share for the three months ended March 31, 2018June 30, 2019 are shown below (unaudited and in thousands, except for shares and per share data):
|
| For the Three Months Ended |
| |||||
|
| For the Three Months Ended |
|
| June 30, 2019 |
| ||
|
| March 31, 2018 |
|
| (unaudited) |
| ||
|
| (restated) |
|
|
|
| ||
Numerator: |
|
|
|
|
|
| ||
Net income available to common stockholders | �� | $ | 8 |
|
| $ | 59 |
|
Denominator: |
|
|
|
|
|
| ||
Weighted average shares used in basic earnings per share |
| 690,907 |
|
| 3,822,329 |
| ||
Series A convertible preferred stock |
| 2,881,400 |
| |||||
Stock options* |
|
| 843,094 |
| ||||
Stock options issued under the 2017 Plan |
|
| 590,166 |
| ||||
Weighted average shares used in diluted earnings per share |
|
| 4,415,401 |
|
|
| 4,412,495 |
|
|
|
|
|
|
|
| ||
Basic earnings per share |
| $ | 0.01 |
|
| $ | 0.02 |
|
Diluted earnings per share |
| $ | 0.00 | ** |
| $ | 0.01 |
|
___________
*The Company hadUnvested stock options outstanding under two plans as of March 31, 2018. There were 11,706 unvested options as of March 31, 2018 thatthe 2013 Plan are excluded from the calculation abovecomputation of basic and diluted earnings per share because they vest upon the occurrence of certain events which may or may not occuras defined in the future.2013 Plan. As of June 30, 2019, there were 11,706 stock options outstanding and unvested under the 2013 Plan.
**Diluted earnings per share is $0.0018.Please see our Annual Report on Form 10-K for the year ended December 31, 2018 for additional detail on the options issued under the 2013 Plan and for detail on options issued under the 2017 Plan.
NOTE 8 – RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS
Prior to the issuance of the Company’s consolidated financial statements for the year ended December 31, 2018, the Company concluded that its previously issued consolidated financial statements for the years ended December 31, 2017 and 2016 and for the quarters ending March 31, 2018 and 2017, June 30, 2018 and 2017 and September 30, 2018 and 2017 should be restated due to accounting errors discovered in conjunction with certain remediation activities for our internal controls over financial reporting.
During the first quarter of 2019, we reviewed our existing fixed asset inventory, our current and historical fixed asset records, and the accounting for a significant transaction in 2016 in which we sold assets with a net book value of $18.6 million to Tiger Finance, LLC (“Tiger”). As a result of this review, we (i) identified certain assets which were included in the asset purchase agreement with Tiger and had not been written off in connection with the sale, and (ii) identified certain other assets which had been disposed of on or prior to December 31, 2016 which had not been written off at the time of disposal.
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 operations consist of an increased impairment and increased loss on disposal of assets in 2016 and a reduction in depreciation expense during all periods from November 1, 2016 through September 30, 2018. The adjustments to the consolidated balance sheets consist of a reduction of property and equipment, net in all periods to reflect the write-off of certain assets in 2016. The Company’s consolidated statements of cash flows had no changes to net cash flows from operating, investing or financing activities as a result of the restatement. The impact of the restatement to the unaudited condensed consolidated balance sheet as of March 31, 2018 and to the unaudited condensed consolidated statementstatements of operations for the quarterthree and six months ended March 31,June 30, 2018 was as follows (in thousands)thousands, except per share data):
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 $ 26,449 $ (1,245 ) $ 25,204 35,173 (1,245 ) 33,928 (34,596 ) (1,245 ) (35,841 ) 25,925 (1,245 ) 24,680 $ 35,173 $ (1,245 ) $ 33,928
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 Condensed Consolidated Statements of Operations For the Three Months Ended For the Six Months Ended June 30, 2018 (unaudited) June 30, 2018 (unaudited) As Reported Adjustment As Restated As Reported Adjustment As Restated Depreciation and amortization Total expenses Loss from operations Loss before income taxes Net loss Loss per common share - basic and diluted $ 891 $ (21 ) $ 870 4,236 (21 ) 4,215 100 21 121 8 21 29 $ (13 ) $ 21 $ 8 $ (0.02 ) $ 0.03 $ 0.01 $ (0.02 ) $ 0.00 $ 0.00 $ 888 $ (21 ) $ 867 $ 1,779 $ (42 ) $ 1,737 4,572 (21 ) 4,551 8,808 (42 ) 8,766 (184 ) 21 (163 ) (84 ) 42 (42 ) (279 ) 21 (258 ) (271 ) 42 (229 ) $ (300 ) $ 21 $ (279 ) $ (313 ) $ 42 $ (271 ) $ (0.43 ) $ 0.03 $ (0.40 ) $ (0.45 ) $ 0.06 $ (0.39 )
| 15 |
| Table of Contents |
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. Unaudited 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”"forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements which are not historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “may,” “project,” “plan” or “continue,” and similar expressions are intended to identify forward-looking statements.
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, 2018.
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” or the “Company”), is a provider of oilfield services to leading oil and gas exploration and production (“E&P”) companies operating in unconventional playsthe major basins 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.
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:
For the Three Months Ended March 31, 2019 2018 (unaudited) Rental services Transportation services Rig-up/rig-down services Other Total 65.7 % 69.3 % 18.8 % 15.9 % 14.9 % 14.4 % 0.6 % 0.4 % 100.0 % 100.0 %
| 16 |
| Table of Contents |
For the Three Months Ended June 30, For the Six Months Ended June 30, 2019 2018 2019 2018 (unaudited) (unaudited) Rental services Transportation services Rig-up/rig-down services Other Total 64.1 % 73.9 % 64.9 % 71.6 % 18.2 % 13.4 % 18.5 % 14.7 % 17.4 % 12.0 % 16.2 % 13.2 % 0.3 % 0.7 % 0.4 % 0.5 % 100.0 % 100.0 % 100.0 % 100.0 %
Our total revenue fluctuates with the utilization of and the prices we charge for our equipment and services. Utilization of our equipment is generally determined by the U.S. land-based drilling rig count (“Rig Count”) as it is typically representative of the level of activity of E&P companies. The prices we charge for our products and services depend on the relationship between the level of activity of E&P companies, or the demand of our potential and existing customers, and the supply of equipment and services available to such E&P companies from us and our competitors.
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. Most of our available owned equipment has been fully utilized since early 2017 and we have been required to increase our available equipment fleet and our available labor resources by sub-renting surface rental equipment and by using sub-contractors to operate our solids control equipment. With increased demand for oilfield services, the demand for sub-rental equipment has also increased and, effective January 1, 2019, we experienced significant increases in costs for third-party equipment which increased third-party expenses and reduced operating margins.
In order to mitigate increases in third-party expenses and our overall reliance on third-party vendors, we initiated a capital expenditure plan in early 2018 to invest in new rental and transportation equipment, some of which was fabricated in-house. During the year ended December 31, 2018, we took delivery of forklifts, completed the fabrication of open top tanks and diesel transfer pumps and refurbished diesel mud pumps. All the incremental equipment purchased in 2018 had been placed in service by the end of the first quarter of 2019 to replace similar equipment which was previously sub-rented. We will recognize the full benefit of these cost savings in the second quarter of 2019.
To date, we have purchased or committed to purchase 50 new 500bbl round-bottom mud circulating tanks ("500bbl MCTs") of which 25 were in service as of March 31, 2019. Due to strong demand, the purchased tanks are being deployed on new jobs as soon as they are ready to go into service. As such, the financial impact of the equipment purchased during the first quarter of 2019 will be in the form of an increase in revenue (and associated costs of a job) as opposed to a reduction in sub-rental expense. We believe that the incremental margin from a new job exceeds the savings to be obtained by returning a piece of sub-rented equipment.
During the remainder of 2019, we will continue our focus on investing in equipment which, if incremental demand is not present, could be used to replace sub-rented equipment resulting in additional cost savings and reduced reliance on third-party vendors. The capital expenditure plan for the remainder of the year includes 500bbl MCTs, pumps and open top tanks, among other items.
How We Evaluate Our OperationsEBITDA and Adjusted EBITDA
We utilize multipleEBITDA and Adjusted EBITDA are financial metrics used by management as (i) supplemental internal measures for planning and forecasting and for evaluating actual results against such expectations; (ii) significant criteria for incentive compensation paid to evaluateour executive officers and management; (iii) reference points to compare to the resultsEBITDA and Adjusted EBITDA of other companies when evaluating potential acquisitions; and, (iv) assessments of our operationsability to service existing fixed charges and efficiently allocate personnel, equipment and capital resources, including, but not limited to, the following:incur additional indebtedness.
| We disclose and discuss EBITDA as a non-GAAP financial measure in our filings with the Securities and Exchange Commission. We define EBITDA as earnings (net income) before interest, income taxes, and depreciation and amortization. Our measure of EBITDA may not be comparable to similarly titled measures presented by other companies, which may limit its usefulness as a comparative measure. | |
|
We also make certain adjustments to EBITDA for (i) non-cash charges and (ii) certain expenses, such as severance, legal settlements, and professional fees and other expenses related to transactions outside the ordinary course of business, to derive a normalized EBITDA run-rate ("Adjusted EBITDA"), which we believe is a useful measure of operating results and the underlying cash generating capability of our business.
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. |
| Table of Contents |
The following table provides the detailed components of EBITDA and Adjusted EBITDA as we define that term for the three and six months ended March 31,June 30, 2019 and 2018 (in(unaudited and in thousands):
|
| For the Three Months Ended March 31, |
|
| For the Three Months Ended June 30, |
| For the Six Months Ended June 30, |
| ||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||
|
|
|
| (restated) |
|
|
|
| (restated) |
|
|
| (restated) |
| ||||||||||
Components of EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Net income (loss) |
| $ | (162 | ) |
| $ | 8 |
|
| $ | 59 |
| $ | (279 | ) |
| $ | (103 | ) |
| $ | (271 | ) | |
Non-GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Depreciation and amortization |
| 846 |
| 870 |
|
| 843 |
| 867 |
| 1,689 |
| 1,737 |
| ||||||||||
Interest expense - related party, net |
| 91 |
| 86 |
|
| 88 |
| 92 |
| 179 |
| 178 |
| ||||||||||
Interest expense, net |
| 5 |
| 6 |
|
| 4 |
| 3 |
| 9 |
| 9 |
| ||||||||||
Income tax expense |
|
| 10 |
|
|
| 21 |
|
|
| 11 |
|
|
| 21 |
|
|
| 21 |
|
|
| 42 |
|
EBITDA |
| 790 |
| 991 |
|
| 1,005 |
| 704 |
| 1,795 |
| 1,695 |
| ||||||||||
Adjustments to EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Settlements and other losses |
| - |
| 24 |
| |||||||||||||||||||
Severance, settlements and other losses |
| - |
| 317 |
| - |
| 341 |
| |||||||||||||||
Bad debt expense |
|
| 39 |
|
|
| 22 |
|
| 17 |
| 22 |
| 56 |
| 44 |
| |||||||
Transaction costs |
|
| 24 |
|
|
| 50 |
|
|
| 24 |
|
|
| 50 |
| ||||||||
Adjusted EBITDA |
| $ | 829 |
|
| $ | 1,037 |
|
| $ | 1,046 |
|
| $ | 1,093 |
|
| $ | 1,875 |
|
| $ | 2,130 |
|
Adjusted EBITDA decreased by approximately $0.2 million to $0.8 million for the three months ended March 31,June 30, 2019 fromand 2018 was approximately $1.0 million and $1.1 million, respectively, and adjusted EBITDA for the threesix months ended March 31, 2018.June 30, 2019 and 2018 was $1.9 million and $2.1 million, respectively. The decrease was driven primarily by a decline in activityyear-over-year Adjusted EBITDA was due primarily to a decrease in utilization of our solids control equipment which was only partially offset by increases in pricing.pricing and utilization of our lead surface rental products.
General Trends and Outlook
Our business depends to a significant extent on the level of unconventional resource development activity and corresponding capital spending of E&P companies onshore in the U.S. These activity and spending levels are strongly influenced by the current and expected oil price. 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,
Despite a rebound in 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 reboundedmore than 20.0% during the first foursix 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 atdeclined by more than 10.0% during the end of April 2019. Looking forward into the remainder of 2019, we believe oil prices will remain fairly stable at current levels, butsame period and we anticipate a potentialthat it may decline further decline in the Rig Count of up to 10% as E&P companies continue to cut back on capital expenditures for drilling programs.
In order to mitigateGiven the impact of a declining Rig Count and the uncertainty regarding the current market environment, we have implemented a low-risk growth strategy. 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. DuringWe believe there is significant growth potential for our solids control product line as we currently have the first four monthscapacity to more than double our existing solids control job count without incremental capital expenditures. In order to accelerate the addition of 2019,solids control jobs, we have increasedexpanded our sales team to include individuals with extensive experience in selling solids control products. As new jobs are added, the numberincome from such jobs will have a significant positive impact on financial performance as the variable costs associated with the rental of rigs on which we service our largest existingsolids control products are minimal. Variable costs associated with the rental of surface rental customersequipment are also minimal and we anticipate that demand from these customers will continueseek to increase. Althoughincrease our owned equipmentsurface rental activity; however, growth of our surface rental product line is more limited than growth of our solids control product line as our lead surface rental products, consisting primarily of tanks and pumps, are fully utilized and we are reluctant to increase our dependence on third-parties,high cost sub-rental vendors. In an effort to alleviate the impact of this limitation, we have invested, and continue to invest, in purchasing equipment which can either generate incremental rental income at a high margin by satisfying additional demand or generate cost savings by replacing equipment which is currently being sub-rented. In addition, beginning in the third quarter, we will be ablehave access to satisfy the new demand with purchases under our 2019 capital expenditure plan. To date, we have placed 25 newincremental tanks into service in 2019 and we expect to place another 25 tanks in service during the second quarter. In addition,pumps from Permian Pelican Rentals, LLC (“PPR”), a related party, which has committed to purchasing an additional 40 tanks. PPR will sub-rent these tanksproviding equipment to us at day rates which are significantly more favorable than the rates charged by our existing vendors and PPR will guaranteesub-rental vendors. We believe 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 a combination of (i) increased contribution from our solids control product line as we improve utilization of our existing equipment fleet, (ii) increased surface rental activity using owned or less costly equipment, and (iii) decreased costs as sub-rented equipment is returned.returned will result in increased margins during the remainder of the year.
| Table of Contents |
Results for the Three Months Ended March 31,June 30, 2019 Compared to the Three Months Ended March 31,June 30, 2018
The condensed consolidated financial statements for the three months ended March 31,June 30, 2018 have been restated due to an accounting error in conjunctionconnection with certain assets sold in 2016. (See further discussion in “Note 8 – Restatement of Prior Year Financial Statements” in the notes to our unaudited condensed consolidated financial statements included elsewhere in this document).
The following table summarizes the change in our results of operations for the three months ended March 31,June 30, 2019 when compared to the three months ended March 31,June 30, 2018 (unaudited and in thousands).
|
| For the Three Months Ended March 31, |
| Change |
|
| For the Three Months Ended June 30, |
| Change |
| ||||||||||||||||||||||||||||||||||||||
|
| 2019 |
|
| % of Revenue |
|
| 2018 |
|
| % of Revenue |
|
| $ |
|
| % |
|
| 2019 |
| % of Revenue |
| 2018 |
| % of Revenue |
| $ |
| % |
| |||||||||||||||||
|
|
|
| (restated) |
|
|
|
|
|
|
|
| (restated) |
|
|
|
|
| ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Revenue |
| $ | 3,919 |
| 100.0 | % |
| $ | 4,336 |
| 100.0 | % |
| $ | (417 | ) |
| -9.6 | % |
| $ | 4,303 |
| 100.0 | % |
| $ | 4,388 |
| 100.0 | % |
| $ | (85 | ) |
| -1.9% |
| ||||||||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Operating expenses |
| 2,348 |
| 59.9 | % |
| 2,610 |
| 60.2 | % |
| (262 | ) |
| -10.0 | % |
| 2,503 |
| 58.2 | % |
| 2,529 |
| 57.6 | % |
| (26 | ) |
| -1.0% |
| ||||||||||||||||
Depreciation and amortization |
| 846 |
| 21.6 | % |
| 870 |
| 20.1 | % |
| (24 | ) |
| -2.8 | % |
| 843 |
| 19.6 | % |
| 867 |
| 19.8 | % |
| (24 | ) |
| -2.8% |
| ||||||||||||||||
Selling, general and administrative expenses |
|
| 781 |
|
|
| 19.9 | % |
|
| 735 |
|
|
| 17.0 | % |
|
| 46 |
|
|
| 6.3 | % |
|
| 795 |
|
| 18.5 | % |
|
| 1,155 |
|
| 26.3 | % |
|
| (360 | ) |
| -31.2% |
| |||
Total expenses |
|
| 3,975 |
|
|
| 101.4 | % |
|
| 4,215 |
|
|
| 97.2 | % |
|
| (240 | ) |
|
| -5.7 | % |
|
| 4,141 |
|
| 96.2 | % |
|
| 4,551 |
|
| 103.7 | % |
|
| (410 | ) |
| -9.0% |
| |||
Income (loss) from operations |
| (56 | ) |
| NA |
| 121 |
| 2.8 | % |
| (177 | ) |
| NA |
|
| 162 |
| 3.8 | % |
| (163 | ) |
| NA |
| 325 |
| NA |
| |||||||||||||||||
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Interest expense, net |
| 5 |
| 0.1 | % |
| 6 |
| 0.1 | % |
| (1 | ) |
| -16.7 | % |
| 4 |
| 0.1 | % |
| 3 |
| 0.1 | % |
| 1 |
| 33.3 | % | |||||||||||||||||
Interest expense - related party, net |
|
| 91 |
|
|
| 2.3 | % |
|
| 86 |
|
|
| 2.0 | % |
|
| 5 |
|
|
| 5.8 | % |
|
| 88 |
|
| 2.0 | % |
|
| 92 |
|
| 2.1 | % |
|
| (4 | ) |
| -4.3% |
| |||
Total other expense |
|
| 96 |
|
|
| 2.4 | % |
|
| 92 |
|
|
| 2.1 | % |
|
| 4 |
|
|
| 4.3 | % |
|
| 92 |
|
| 2.1 | % |
|
| 95 |
|
| 2.2 | % |
|
| (3 | ) |
| -3.2% |
| |||
Income (loss) before income taxes |
| (152 | ) |
| NA |
| 29 |
| 0.7 | % |
| (181 | ) |
| NA |
|
| 70 |
| 1.6 | % |
| (258 | ) |
| NA |
| 328 |
| NA |
| |||||||||||||||||
Income tax expense |
|
| 10 |
|
|
| 0.3 | % |
|
| 21 |
|
|
| 0.5 | % |
|
| (11 | ) |
|
| -52.4 | % |
|
| 11 |
|
| 0.3 | % |
|
| 21 |
|
| 0.5 | % |
|
| (10 | ) |
| -47.6% |
| |||
Net income (loss) |
| $ | (162 | ) |
| NA |
| $ | 8 |
|
|
| 0.2 | % |
| $ | (170 | ) |
| NA |
|
| $ | 59 |
|
| 1.4 | % |
| $ | (279 | ) |
| NA |
| $ | 338 |
|
| NA |
| |||||||
Overview. When comparingExcluding a non-recurring severance charge of $0.3 million in May 2018, the financial performance during the three months ended March 31,June 30, 2019 toand 2018 was very similar as the three months ended March 31, 2018,positive year-over-year impact of increased pricing and utilization of our resultssurface rental products and services was offset by the negative year-over-year impact of operations weakened slightly due to declines in activity, primarily indecreased utilization of our solids control product line. Our variable costs declined with activityproducts and remained fairly flat as a percentage of revenue; however, our fixed costs remained flat and increased as a percentage of revenue due to the costs being spread over a smaller revenue base.services.
Revenue. Our revenue for the three months ended March 31,June 30, 2019 was $3.9$4.3 million, a decrease of 9.6%1.9%, compared to $4.3$4.4 million for the three months ended March 31,June 30, 2018. The key drivers of revenue areWhen comparing the two periods, pricing and utilization or activity. Although pricing onof our tanks, our lead surface rental product, increased by approximately 10.0% and 20.0%, respectively, year-over-year while utilization of our centrifuges, our lead solids control product, decreased by approximately 50.0% and revenue generated from the rental of auxiliary equipment, both surface rental and solids control products, decreased by more than 20% period-over-period, pricing on most other products remained relatively flat. The40.0%. Although the net impact of the increased pricing on tanksthese changes was not sufficient to offset the overalla decline in activityrevenue from rental services of 15.0% when comparing the three months ended June 30, 2019 to the three months ended June 30, 2018, aggregate revenue from rig-up/rig-down and trucking services increased by more than 35.0% when comparing the two periods. Demand forRevenue generated from rig-up/rig-down and trucking services is tied closely to utilization of our tanks and pumps did not vary significantly; however, due to a changeother core surface rental products which increased period-over-period. In addition, we implemented certain pricing increases for rig-up/rig-down and trucking services and changes in the customer and product mix theresulted in more demand for auxiliarythese services at an increased frequency. Although the market outlook is uncertain for the remainder of the year, we believe revenue generated from surface rental equipment declined substantially. In addition,and services will remain steady or increase slightly as a result of strong demand from our existing customers and we believe revenue fromgenerated by our solids control productsequipment and services declined more than 30% due primarily to losswill increase as a result of revenue from a significant customer which laid down rigs beginning in the fourth quarter of 2018. Most of the revenue loss has been recovered with a new customer as of April 2019.our intensified focus on improving utilization and our expanded sales team.
Operating Expenses. Our operating expenses for the three months ended March 31,June 30, 2019 decreased slightly to $2.3and 2018 were $2.5 million, or 59.9% of revenue, from $2.6 million, or 60.2%58.2% of revenue for the three months ended March 31,June 30, 2019 and 57.6% of revenue for the three months ended June 30, 2018. Operating expenses include primarily variable costs, such as payroll and related costs, including sub-contractors, third-party expenses, (sub-rentalsuch as hauling and washout of equipment, sub-contractors, hauling of equipment, washout of equipment), and repair and maintenancesub-rental expenses. Payroll and related costs, including third-party sub-contractors, declined significantly withA significant decline in sub-contractor expenses due to the decrease in activity. Sub-rental expense for surface rentalutilization of our solids control equipment increased due primarilyand services was offset by an increase in washout and trucking expenses related to the increase in rig-up/rig-down and trucking revenue. Third-party sub-rental expenses remained relatively flat as vendor day rate increases of more than 60% which60.0% effective January 1, 2019 were only partiallymostly offset by the decline in the quantity of sub-rented pumps and open top tanksequipment as our newly fabricated equipment purchased during the second half of 2018 went into service and replaced equipment which was previously sub-rented. Aggregate operating expenses remained fairly flatWe anticipate a further decrease in sub-rental expense during the remainder of the year as certain equipment rented on a percentage of revenue asday rate basis is replaced with either equipment under long-term lease with a low-cost related party provider or equipment purchased by the benefits of increased pricing on certain rental equipment was offset by increased day rates charged by our sub-rental vendors.Company.
Depreciation and Amortization. Depreciation and amortization decreased slightly to $0.8 million for the three months ended March 31,June 30, 2019 from $0.9 million for the three months ended March 31,June 30, 2018 due primarily to the impact of certain assets becoming fully depreciated and amortized partially offset by the purchase and fabrication of new assets.
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Selling, General and Administrative Expenses. Selling, general and administrative expenses increaseddecreased to $0.8 million, or 19.9%18.5% of revenue, for the three months ended March 31,June 30, 2019 compared to $0.7from $1.2 million, or 17.0%26.3% of revenue, for the three months ended March 31,June 30, 2018. Selling, general and administrative expenses consist of overhead costs which we generally consider to be fixed. The year-over-year increasedecrease of approximately $46,000, or 6.3%,$0.4 million is primarily due to increasesa severance charge of $0.3 million during the three months ended June 30, 2018 which did not recur in franchise taxes and insurance premiums.2019.
Interest Expense, Net. Interest expense, net, consisting primarily of interest on insurance financing and other miscellaneous interest expense, was approximately $5,000$4,000 and $6,000$3,000 for the three months ended March 31,June 30, 2019 and 2018, respectively.
Interest Expense – Related Party. During the three months ended March 31,June 30, 2019 and 2018, we recorded approximately $91,000$88,000 and $86,000, respectively,$92,000 of interest expense on borrowings under the credit facility (“Related Party Credit Facility”) with Permian Pelican Financial, LLC (“PPF”), a related party.
Income Taxes. From our evaluation as of March 31,June 30, 2019 and December 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 $1.9 million is included on the condensed consolidated balance sheet as of March 31,June 30, 2019 (unaudited) and December 31, 2018, respectively.2018. Income tax expense was approximately $10,000$11,000 and $21,000 for the three months ended MarchJune 30, 2019 and 2018, respectively, which primarily 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. The Company has sufficient NOL carryforwards to offset federal income tax and other state income taxes.
Results for the Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018
The condensed consolidated financial statements for the six months ended June 30, 2018 have been restated due to an accounting error in connection with certain assets sold in 2016. (See further discussion in “Note 8 – Restatement of Prior Year Financial Statements” in the notes to our unaudited condensed consolidated financial statements included elsewhere in this document.)
The following table summarizes the change in our results of operations for the six months ended June 30, 2019 when compared to the six months ended June 30, 2018 (unaudited and in thousands).
For the Six Months Ended June 30, Change 2019 % of Revenue 2018 % of Revenue $ % (restated) Revenue Expenses: Operating expenses Depreciation and amortization Selling, general and administrative expenses Total expenses Income (loss) from operations NA NA Other expense: Interest expense, net Interest expense - related party, net Total other expense Loss before income taxes NA NA NA Income tax expense Net loss NA NA NA $ 8,222 100.0 % $ 8,724 100.0 % $ (502 ) -5.8% 4,851 59.0 % 5,139 58.9 % (288 ) -5.6% 1,689 20.5 % 1,737 19.9 % (48 ) -2.8% 1,576 19.2 % 1,890 21.7 % (314 ) -16.6% 8,116 98.7 % 8,766 100.5 % (650 ) -7.4% 106 1.3 % (42 ) 148 9 0.1 % 9 0.1 % - 0.0 % 179 2.2 % 178 2.0 % 1 0.6 % 188 2.3 % 187 2.1 % 1 0.5 % (82 ) (229 ) 147 21 0.3 % 42 0.5 % (21 ) -50.0% $ (103 ) $ (271 ) $ 168
Overview. Excluding a non-recurring severance charge of $0.3 million in May 2018, the financial performance during the six months ended June 30, 2019 worsened slightly when compared to the six months ended June 30, 2018. The decline was due primarily to the negative impact of decreased utilization of our solids control products and services.
Revenue. Our revenue for the six months ended June 30, 2019 was $8.2 million, a decrease of 5.8%, compared to $8.7 million for the six months ended June 30, 2018 due primarily to a 50.0% decline in utilization of our solids control products and services partially offset by a more than 15.0% increase in revenue generated by rig-up/rig-down and trucking services. We believe our volume of solids control work will increase during the remainder of the year as a result of a renewed focus on marketing our solids control product line and an expanded sales team.
Operating Expenses. Our operating expenses for the six months ended June 30, 2019 were $4.9 million, or 59.0% of revenue, compared to $5.1 million, or 58.9% of revenue, for the six months ended June 30, 2018. Operating expenses include primarily variable costs, such as payroll and related costs, including sub-contractors, and expenses associated with various third-party vendors which haul equipment, wash out equipment, or rent equipment to the Company when we are unable to meet demand with our internal resources. The decline in operating expenses of $0.3 million year-over-year was driven primarily by a reduction in payroll and related costs, including third-party sub-contractors, resulting from the decrease in utilization of our solids control equipment and services and a continued focus on labor productivity. The decline in payroll and sub-contractor expenses was partially offset by an increase in third-party expenses. When comparing the six months ended June 30, 2019 to the same period in the prior year, activity associated with rig-up/rig-down and trucking services increased and the Company outsourced more of these services to third-party vendors. In addition, the Company was impacted by cost increases of more than 60.0% for certain equipment which is sub-rented from third-parties. We believe that our operating expenses as a percentage of revenue will decrease during the remainder of the year as we continue to focus on labor productivity and as we replace sub-rented equipment from high cost vendors with newly purchased equipment or equipment which is sub-rented at a lower cost.
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Depreciation and Amortization. Depreciation and amortization was $1.7 million for the six months ended June 30, 2019 and 2018 as the impact of certain assets becoming fully depreciated and amortized was mostly offset by the purchase and fabrication of new assets.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $1.6 million, or 19.2% of revenue, for the six months ended June 30, 2019 compared to $1.9 million, or 21.7% of revenue, for the six months ended June 30, 2018. Selling, general and administrative expenses consist of overhead costs which we generally consider to be fixed. The year-over-year decrease of $0.3 million was primarily due to a non-recurring severance charge of $0.3 million during the six months ended June 30, 2018 which did not recur in 2019.
Interest Expense, Net. Interest expense, net, consisting primarily of interest on insurance financing and other miscellaneous interest expense, was approximately $9,000 for the six months ended June 30, 2019 and 2018.
Interest Expense – Related Party. During the six months ended June 30, 2019 and 2018, we recorded approximately $179,000 and $178,000 of interest expense on borrowings under the Related Party Credit Facility with PPF, a related party.
Income Taxes. From our evaluation as of June 30, 2019 and December 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 $1.9 million is included on the condensed consolidated balance sheet as of June 30, 2019 (unaudited) and December 31, 2018. Income tax expense was approximately $21,000 and $42,000 for the six months ended June 30, 2019 and 2018, respectively, which primarily 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. 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 threesix months ended March 31,June 30, 2019 and 2018, operating activities used approximately $27,000provided $1.6 million and generated approximately $0.7$2.0 million in cash, respectively. The decrease in cash flows from operating activities is partially due to a weakening in operating results when comparing the two periods. In addition, changesChanges in operating assets and liabilities used $0.8 millionapproximately $79,000 of cash during the threesix months ended March 31,June 30, 2019 compared to using $0.2generating $0.5 million during the threesix months ended March 31,June 30, 2018. The primary driver of the increase in cash used by operating activities is the change in receivables which used $0.4 million in cash during the threesix months ended March 31,June 30, 2019 compared to generating $0.4$0.9 million in cash during the threesix months ended March 31,June 30, 2018. During the threesix months ended March 31,June 30, 2019, days of receivables outstanding increased slightly from 68 days to 7671 days resulting in a use of cash. In April 2019, we received catch-up collections and we anticipate the days of receivables outstanding to decrease significantly during the three months ended June 30, 2019. The same measure for the prior year period decreased from 102 days as of December 31, 2017 to 7261 days as of March 31,June 30, 2018 resulting in a significant source of cash during the threesix months ended March 31,June 30, 2018 as we billed and collected receivables which had been delayed during the fourth quarter of 2017. We anticipate generating positiveThe change in accounts payable and other accrued expenses generated $0.2 million in cash flow from operations during the remaindersix months ended June 30, 2019 compared to using $0.5 million in cash during the six months ended June 30, 2018. During the six months ended June 30, 2019, we generated cash from the change in accounts payable and other accrued liabilities due primarily to an increase in our accounts payable balance resulting from the inclusion of payables related to our 2019 as results from operations strengthen and we reduce our days of receivables outstanding.capital expenditure plan.
Capital Expenditures. Capital expenditures are the main component of our investing activities. Cash capitalCapital expenditures for the threesix months ended March 31,June 30, 2019 and 2018 were $1.4$2.5 million and $0.3$0.6 million, respectively. Our primary investing focus in 2019 is purchasing and fabricating equipment which could replace equipment we are currently sub-renting from third-party vendors if there is no incremental demand to be satisfied. During the threesix months ended March 31,June 30, 2019, aggregate expenditures on 500bbl MCTsround-bottom tanks were approximately $1.3$2.2 million and we placed 2555 new 500bbl MCTsround-bottom tanks in service. To date, virtually all of these tanks have been used to satisfy incremental demand and, we will seewhen comparing the full beneficial impact on operating results inthree months ended June 30, 2019 to the second quarterthree months ended March 31, 2019, the number of 2019. We believerevenue-generating days for 500bbl round-bottom tanks has increased by approximately 10.0% with the positive impact on net income will be in excessaddition of $0.3 million annually. We anticipate purchasing and placing another 25the new 500bbl MCTs into service during the second and third quarter of 2019.tanks. Our remaining 2019 capital expenditure plan also includes the fabrication of additional pumps and open top tanks. This equipment will either generate income by satisfying incremental demand or will generate cost savings by replacing sub-rented equipment. During the first half of 2019, we have recognized cost savings at an annual rate of approximately $0.4 million related to pumps and open top tanks which will be used for new work or to replace sub-rented equipment. At a minimum, the incremental tanks and pumps purchased or fabricated during the remainder of 2019 will save approximately $0.6 million per year in sub-rental expense; however, the positive impact will be much greater if the equipment is used on new jobs instead of to replace sub-rented equipment.2018.
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 transactions. We would anticipate requiring additional debt and/or equity financing in order to complete some of the transactions being evaluated.
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Liquidity and Credit Facility. As of March 31,June 30, 2019, we had a cash balance of approximately $0.6$1.0 million (excluding restricted cash) and aggregate related party debt of $6.6$6.4 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.
In February 2019, we borrowed the remaining $0.7 million available under theour revolving credit facility to partially fund the purchase of new 500bbl MCTs.round-bottom tanks. 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 quarterhalf 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,July 31, 2019, we have purchased 37 new 500bbl MCTs for which theaggregate remaining payments aggregate tofor 500bbl round-bottom tanks are approximately $0.6$0.5 million. Expenditures planned for the remainder of the year will be committed to and funded as we generate cash flow from operations.
As of April 30,July 31, 2019, we had approximately $0.8$1.1 million of cash on hand. We believe that this cash combined with our cash flow from operations will be sufficient to fund our working capital needs, the 2019 capital expenditure plan, principal and interest payments, and other contractual obligations for the next twelve months.
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.Merger on January 28, 2019. 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 March 31,June 30, 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, revenuesrevenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and procedures during the six months ended June 30, 2019. For a detailed discussion of our critical accounting policies and estimates, refer to our 2018 Annual Report on Form 10-K.
Net Operating Losses
As of December 31, 2018, we had approximately $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 March 31,June 30, 2019 and December 31, 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 a valuation allowance of approximately $2.0. and $1.9 million as of March 31,June 30, 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 absence of other objectively verifiable positive evidence including reversal of existing taxable temporary differences in 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.
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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, 2018, as a result of the conditions that led to the restatement of prior year financial statements, a material weakness in our internal controls over financial reporting (“ICFR”) existed and our disclosure controls and procedures were not 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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate 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 our assessment of the effectiveness of our ICFR as of March 31,June 30, 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. We determined that we did not maintain effective internal controls over financial reporting. Specifically, we identified material weaknesses over management’s review controls over significant accounting estimates and review controls over accounting for non-routine and complex accounting transactions.
A material weakness was identified relating to the write-off of assets that were disposed of during the year ended December 31, 2016 as part of the Recapitalization. We have identified certain deficiencies associated with the design, implementation and operating effectiveness of internal controls related to the disposition of fixed assets and we did not effectively operate controls over management’s review over the non-routine and complex transactions due to the lack of segregation of duties over these types of transactions. We have an ongoing remediation plan that includes our continuing use of an accounting consultant with expertise in U.S. GAAP as well as implementing full equipment inventory procedures on an annual basis and implementing additional internal controls related to the disposition of fixed assets. Our annualWe conducted a comprehensive fixed asset count will take place during the second quarter of 2019 and we expectwill complete another count during the second half of the year to further assess the strength of our material weakness to be remediated in conjunction with such count and the further implementation of internal controls specifically surrounding the disposition of fixed assets and non-routine or complex accounting transactions.to implement further improvements to our internal controls as needed. Based on our ongoing remediation activities, we anticipate that the material weakness reported as of December 31, 2018 will be remediated as of December 31, 2019.
Based on our evaluation, we believe thisthat the reported material weakness did not have a significant effect on our financial results for the three and six months ended March 31,June 30, 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.
Changes in Internal Control over Financial Reporting
During the period covered by this report, there were no changes to our ICFR 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.
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Exhibit Number |
| Exhibit Description |
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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 |
_____________
** 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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| Table of Contents |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ALY ENERGY SERVICES, INC. | |||
Date: August 14, 2019 | /s/ Munawar H. Hidayatallah | ||
| Munawar H. Hidayatallah | |||
| Chairman and Chief Executive Officer | |||
| (Principal Executive Officer) | |||
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