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Operational Restructuring

Our activity is tied directlyIf the current commodity price environment holds or continues to improve, we anticipate a further increase in demand for our services. In addition, our customers are increasingly focused on efficient drilling of high intensity wells with long laterals which further enhances the rig countdemand for our services. As demand increases, we expect that utilization will increase and even though we instituted significant cost cutting measures beginning in 2015, we were unableour ability to cut costs enough to matchincrease the decline in our business. As a result, as of December 31, 2015, we were in default of our credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”).

Throughout 2015, in an effort to mitigate the significant declines in pricing and utilization ofprices for our equipment we committed to a reorganization initiative to strengthen our sales and marketing efforts, consolidate support functions, and operate more efficiently. The reorganization effort included, but was not limited to, training our salesforce to enable the cross-selling of our product lines in certain geographical markets, sharing a common support services infrastructure across all reporting units, reducing headcount and wage rates, and rebranding and launching a new web site to increase awareness of our service lines. We recognized some benefit from these measures in late 2015will improve resulting in increased grossgreater margins and lower selling, general and administrative expenses when compared to the first halfincreased margins as a percent of 2015.

During the year ended December 31, 2016, we entered into a series of forbearance agreements with our lender. Under the forbearance agreements, among other provisions, the lenders agreed to forbear from exercising their remedies under the credit agreement. These forbearance agreements permitted us to operate within the parameters of our normal course of business despite the continuing default under the credit agreement. Without these forbearance agreements, our outstanding debt would have been immediately due and payable. Throughout 2016, we remained in default and we did not have sufficient liquidity to repay all of the outstanding debt to the lender at any point during the year ($20.1 million as of December 31, 2015). As such, we may have been forced to file for protection under Chapter 11 of the U.S. Bankruptcy Code.

In early 2016, we were hopeful that a successful operational restructuring would facilitate negotiations to modify the terms of our existing credit facility with Wells Fargo. Our operational restructuring in 2016 consisted of severe cost cuts which were incremental to the year-over-year cost cuts already achieved in 2015 when compared to 2014. In 2016, significant cost savings were primarily generated by:

	·	reductions of our employee base, both field employees and sales and administrative employees, to a headcount of approximately 50 as of December 31, 2016 from approximately 125 as of December 31, 2015,
	·	reduction in employer contributions to employee benefits,
	·	closures of certain operating yards and administrative facilities,
	·	strategic decision to cease operations in the northeast which resulted in the reduction of costs related to operating in an incremental market,
	·	modifications to insurance policies, including general liability and workers’ compensation policies, resulting in a $0.5 million or 15.5% reduction in the cost of insurance to $0.6 million for the year ended December 31, 2016 from $1.1 million for the year ended December 31, 2015,
	·	minimization of repair and maintenance activities, resulting in a $0.4 million or 50.0% reduction of repair and maintenance expenses to $0.4 million for the year ended December 31, 2016 from $0.8 million for the year ended December 31, 2015, and
	·	elimination of investments in equipment, unless required to service an existing customer, resulting in a reduction of capital expenditures to $0.4 million for the year ended December 31, 2016 from $2.5 million for the year ended December 31, 2015.

revenue.

We also achieved significant cost savings from the decrease in third party costs, such as sub-rental equipment and trucking, and other variable costs which declined with the decrease in activity.

In orderwill continue to further support our working capital needs, we identified and sold idle and underutilized assets. During 2016, we realized aggregate proceeds from sales of approximately $0.8 million of which $0.5 million and $0.3 million was used to fund working capital needs and pay down debt, respectively (see “Note 4 – Reduction in Value of Assets and Other Charges” in the notes to our consolidated financial statements).

Capital Restructuring

Despite our successful operational restructuring efforts, particularly during the first half of 2016, the decline in our activity levels and the declines in customer pricing outpaced the impact of our cost reductions and it became evident that a capital restructuring would also be necessary to continue operations and positionexpand our business for an industry turnaround.

In the second quarterthrough a low risk strategy of 2016, certain of the Company’s principal stockholders (“Shareholder Group”) began negotiationsgrowing organically by replacing our sub-rented equipment with Wells Fargo with the objective of consummating a recapitalization transaction (the “Recapitalization”) wherebynewly purchased, refurbished or fabricated equipment. We will also evaluate strategic acquisition opportunities that would provide geographic diversification, expand our obligations under the credit agreementproducts and the outstanding capital leases in favor of Wells Fargo’s equipment finance affiliateservices and certain other obligations of Aly Energy (collectively the “Aly Senior Obligations”) would be restructured. In August 2016, the Shareholder Group was introducedintroduce us to a third party, Tiger Finance, LLC (“Tiger”), to provide bridge financing and to extend forbearance until such date as sufficient capital could be raised to complete the Recapitalization.

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

Effective January 31, 2017, the Recapitalization was completed through the execution and delivery of a Securities Exchange Agreement and a Second Amended and Restated Credit Agreement. As a result of the Recapitalization, the Company became a “Controlled Company” as defined under the listing standards of the principal national securities exchanges; however, since the Shareholder Group’s proportionate interest did not change significantly, a change in control did not occur and the transaction was accounted for at historical cost.

As a result of the Recapitalization, the credit facility, now with Pelican, consisted of a term loan of $5.1 million and a revolving credit facility of up to $1.0 million as of January 31, 2017. Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables (receivables less than 90 days old).

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

	·	Amendment No. 1, effective March 1, 2017, provided for a delayed draw term loan to be added to the credit facility for the purpose of financing capital expenditures. The agreement permitted us to draw on the delayed draw term loan from time-to-time up until the maturity date of the facility in order to fund up to 80% of the cost of capital expenditures subject to a $0.5 million limit on aggregate borrowings.
	·	Amendment No. 2, effective May 23, 2017, increased the maximum revolving credit amount from $1.0 million to $1.8 million and extended the final maturity date of the facility to December 31, 2019. In consideration of the increase in the revolving credit facility and the extension of the final maturity date, we agreed to issue to Pelican, the lender, as an amendment fee, 1,200 shares of our Series A Convertible Preferred Stock.
	·	Amendment No. 3, effective June 15, 2017, modified maximum potential borrowings under each of the revolving credit facility and the delayed draw term loan without changing the aggregate available borrowings under the credit facility. The amendment reduced the maximum revolving credit amount from $1.8 million to $1.0 million and increased the maximum delayed draw loan borrowings from $0.5 million to $1.3 million and the amendment also increased permitted draws on the delayed draw loan from 80% of the cost of capital expenditures being funded to 90% of the cost of capital expenditures being funded.

To the extent there is free cash flow as defined in the credit agreement, principal payments of 50% of such free cash flow are due annually. The maturity date of all remaining outstanding balances under the credit facility is December 31, 2019.

The obligations under the credit facility are guaranteed by all of our subsidiaries and secured by substantially all of our assets. The credit agreement contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, grant liens and sell assets. The credit facility does not include any financial covenants. We are in full compliance with the credit facility as of June 30, 2017.

As of June 30, 2017, there were outstanding borrowings of $5.0 million, $0.8 million, and $0.3 million on the term loan, revolving credit facility, and delayed draw term loan, respectively. As of June 30, 2017, we have the availability to borrow an incremental $0.2 million under the revolving credit facility and, if we have capital expenditures which are eligible to be financed, an incremental $1.0 million under the delayed draw term loan to finance 90% of such expenditures.

For a discussion of the accounting treatment for the Recapitalization, see “Note 2 – Recent Developments” in the notes to our consolidated financial statements included elsewhere in this document.

Strategy

Since 2012, we have made significant investments to expand operations and capitalize on organic growth opportunities in existing and expansion markets. We consistently seek opportunities to bundle product offerings and to cross sell services across markets and product lines, which we believe increases client retention and the utilization of our equipment.

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Our growth strategy focuses on pursuing organic growth and, when capital resources are available, acquiring existing businesses. The strategy consists of the following elements:

	·	increase inventory of rental products and increase capacity to provide services;
	·	add new and differentiated product and service offerings;
	·	expand into new geographic markets; and,
	·	diversify and grow our customer base.

new customers.

Products and Services

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

Our Rental Products:

Centrifuges: We currently own approximately 5448 centrifuges. We provide two different sizes of centrifuges to meet varying client specifications (i.e. SS1000(SS1000 and SS2000). We believe our centrifuges provide a competitive advantage because the rotating assembly within each centrifuge can be removed and replaced on a customer’s well site within 45 minutes if it fails thereby minimizing downtime. Certain customers rent centrifuges with auxiliary equipment such as shakers, vertical dryers, waste removal units, and/or various tanks.

Mud Circulating Tanks (“MCTs”): We currently own approximately 60 vertical 400-barrel MCTs and approximately 125129 500-barrel MCTs. We developed vertical 400-barrel MCTs as an innovative solution that minimizes location size, which we believe is an attractive feature for customers. The majority of our 500-barrel MCTs are highly mobile with rounded bottoms and customized jet-lines to ensure more consistent mud and easier cleanout at the completion of a job. In addition to the 500-barrel MCTs we own, we sub-rent 500-barrel MCTs (approximately 235230 sub-rented as of June 30,December 31, 2017) in order to satisfy demand for our services. MCTs are typically rented to customers with auxiliary equipment such as diesel or electric mud pumps, hoses, and wooden mats.

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

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

Solids control equipment rental: We provide a variety of solids control equipment used in and critical to wellsite activities including shakers, vertical dryers, waste removal units, and/or various tanks.

Our Service Offerings Which Include Personnel:

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

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

 

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Fabricating Capabilities

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

Geographic Markets

We operate in the U.S., primarily in Texas, (West TexasOklahoma, and South Texas)New Mexico. Within these states, we have a very strong footprint in the Permian Basin, one of the largest and most prolific shale plays in the U.S., Oklahoma, New Mexico, and Louisiana.

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we also provide services in the Scoop/Stack region and Eagle Ford shale.

Competition

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

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

Customers

We provide equipmentcultivate and services to several well-known, established operators,maintain strong relationships with our customers which include some of the largest independent oil and gas E&P companies operating in the U.S. shale basins. During 2017, we serviced over 40 customers, including leading companies such as EOG Resources, Inc., Pioneer Natural Resources, XTO Energy Inc., Sanchez Oil and Gas Corporation Encana, Continental Resources, Inc. and Devon Energy Corporation.

For the years ended December 31, 20162017 and 2015,2016, our top three customers represented approximately 43.5%56.0% and 35.4%43.5% of total revenue, respectively.

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

Raw Materials

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

Safety

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

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

 

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Employees

As of July 24, 2017,March 26, 2018, we employed approximately 5065 individuals. The corporate cost center employs foursix individuals, including the chairman, the chief executive officer, the chief operating officer and the chief financial officer, approximately 4048 individuals work primarily in the field, and the remaining employees provide selling, general, and administrative services. We believe we have good relationships with our employees.

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Seasonality

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

Intangibles

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

Governmental Regulation

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

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

Environmental Matters

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

Access to Company Reports

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

 

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Item 1A. Risk Factors

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

Risks Related to Our Business

Our business depends on domestic drilling activity and spending by the oil and natural gas industry in the United States. From late 2014 through most of 2016, our business was severely negatively affected by the significant and rapid decline in domestic drilling activity. We may be adversely affected by industry conditions that are beyond our control in 2017 and beyond.

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

	§·	domestic and worldwide economic conditions;
	§·	the supply of and demand for oil and natural gas;
	§·	the level of prices, and expectations about future prices, of oil and natural gas;
	§·	the cost of exploring for, developing, producing and delivering oil and natural gas;
	§·	the expected rates of declining current production;
	§·	the discovery rates of new oil and natural gas reserves;
	§·	available pipeline, storage and other transportation capacity;
	§·	federal, state and local regulation of exploration and drilling activities;
	§·	weather conditions, including hurricanes that can affect oil and natural gas operations over a wide area;
	§·	political instability in oil and natural gas producing countries;
	§·	technical advances affecting energy consumption;
	§·	the price and availability of alternative fuels;
	§·	the ability of oil and natural gas producers to raise equity capital and debt financing; and,
	§·	merger and divestiture activity among oil and natural gas producers.

Current and anticipated oil and natural gas prices, the related level of drilling activity, and general production spending in the areas in which we have operations are the primary drivers of demand for our services. The level of oil and natural gas exploration and production activity in the United States is volatile and this volatility could have a material adverse effect on the level of activity by our customers. A reduction by our customers of activity levels from late 2014 through most of 2016 has caused and may continue to cause a decline in the demand for our services and has adversely affected and may continue to adversely affect the prices that we can charge or collect for our services. In addition, any prolonged substantial reduction in oil and natural gas prices would likely affect oil and natural gas production levels and, therefore, affect demand for the services we provide. Moreover, a decrease in the development rate of oil and natural gas reserves in our market areas, whether due to increased governmental regulation of or limitations on exploration and drilling activity or other factors, may also have an adverse impact on our business, even in an environment of stronger oil and natural gas prices.

From the second half of 2014 through most of 2016, oil prices declined dramatically resulting in a significant reduction in the land-based drilling rig count in the United States. Our customers have sought and received significant price reductions from us and our competitors in 2014, 2015 and 2016, which has materially adversely affected our financial results. Although we believe some oil and natural gas exploration and production companies, including our customers, are beginning to increase their drilling-related capital budgets in 2017, the timing and magnitude of a beneficial impact, if any, from this increase is highly uncertain.

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

The oilfield services industry is competitive and fragmented and includes numerous small companies capable of competing in our markets on a local basis as well as several large companies that possess substantially greater financial and other resources than us. Some of our competitors hold significant market share in the markets in which we operate, which may make it difficult for us to successfully sell competing products and services. Our larger competitors may have greater resources which could allow them to compete more effectively than us and they may benefit from economies of scale which enable them to offer products and services at a lower cost than us. Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics, or that better address environmental concerns, than our products and services. Competitive pressures also may result in significant price competition that could have a material adverse effect on our results of operations and financial condition.

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We operate in a highly competitive industry, with intense price competition, which may intensify as our competitors expand their operations.

The market for oilfield services in which we operate is highly competitive and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial resources than we do. Contracts are traditionally awarded on the basis of competitive bids or direct negotiations with customers. The principal competitive factors in our markets are product and service quality and availability, responsiveness, experience, equipment quality, reputation for safety and price. The competitive environment has intensified as recent mergers among exploration and production companies have reduced the number of available customers. The fact that drilling rigs and other vehicles and oilfield services equipment are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry. WeOur larger competitors may have greater resources which could allow them to compete more effectively than us and they may benefit from economies of scale which enable them to offer products and services at a lower cost than us. Our operations may be competing for work againstadversely affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics, or that may be better able to withstand industry downturnsaddress environmental concerns, than our products and may be better suited to compete on the basis of price, retain skilled personnel and acquire new equipment and technologies, all of which could affect our revenue and profitability.services.

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

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

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

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

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

Our long-term business strategy includes growth through the acquisition of other businesses. However, we may not be able to identify attractive acquisition opportunities or successfully acquire identified targets on terms favorable to us in 2017 and beyond.us. Competition for acquisition opportunities may be substantial and may cause us to refrain from making acquisitions. In addition, we may not be successful in integrating future acquisitions into our existing operations, which may result in unforeseen operational difficulties, diminished financial performance or our inability to report financial results and may require a disproportionate amount of our management’s attention. If we fail to manage future acquisitions effectively, our results of operations could be adversely affected.

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

	§·	incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets;
	§·	failure to integrate the operations or management of any acquired operations or assets successfully and timely;
	§·	potential loss of key employees and customers of the acquired companies;
	§·	potential lack of experience operating in a geographic market or product line of the acquired business;
	§·	an increase in our expenses, particularly overhead expenses, and working capital requirements;
	§·	the possible inability to achieve the intended objectives of the business combination; and
	§·	the diversion of management’s attention from existing operations or other priorities.

  

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

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

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

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

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

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

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

We derive a significant amount of our revenue from exploration and production companies and drilling contractors that are active in our markets. For the year ended December 31, 2016,2017, our top three customers accounted for approximately 43.5%56.0% of total revenue. If we fail to retain a number of our large existing customers or if we incur significant price reductions in order to retain the business of key customers, our business and operations could be adversely affected. Moreover, if any of these customers fails to remain competitive in their respective markets, encounters financial or operational problems or consolidates with a third party, our revenue and profitability may decline.

We are subject to the credit risk of our customers.

We provide credit to our customers in the normal course of business and generally do not require collateral in extending such credit. This exposure, coupled with material instances of default, could have an adverse effect on our business, financial condition, results of operations and cash flows. In addition, we may need to undertake collection efforts that could cause our business from certain customers to decline, or the collection of certain receivables could become impossible, requiring us to write them off. The current oilfield industry conditions are resulting in an increased number of bankruptcies among companies that could use our services, which may impact the demand for our services.

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

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

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

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

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

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

We have recorded reductions in the value of our assets in the past. We periodically evaluate our long-lived assets, including our property and equipment and intangible assets and goodwill for impairment. In performing these assessments, we project future cash flows on a discounted basis for goodwill, and on an undiscounted basis for other long-lived assets, and compare these cash flows to the carrying amount of the related assets. These cash flow projections are based on our current operating plans, estimates and other judgmental assumptions. We perform the assessment of potential impairment for our property and equipment whenever facts and circumstances indicate that the carrying value of those assets may not be recoverable due to various external or internal factors. If conditions in our industry do not improve or worsen, we could record additional impairment charges in future periods, which could have a material adverse effect on our financial position and results of operations. These cash flow projections are based on our current operating plans, estimates and judgmental assumptions. During 2016 and 2015, our continuing operations recorded $17.7 million and $11.4 million respectively, in a reduction in value of assets and, if conditions in our industry worsen or doAlthough we did not improve,record any impairment charges during the year ended December 31, 2017, there is no assurance as to whether we may record additional impairment charges in future periods, which could have a material adverse effect on our financial position and results of operations. During 2016, our continuing operations recorded $17.7 million in a reduction in value of assets in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements).

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

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

	·	curtailment of services;
	·	weather-related damage to facilities and equipment, resulting in suspension of operations;
	·	inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and
	·	loss of productivity.

These constraints could delay our operations and materially increase our operating and capital costs. Unusually warm winters may also adversely affect the demand for our services by decreasing the demand for natural gas.

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

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

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

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

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

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

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

Increased regulation of hydraulic fracturing could result in reductions or delays in oil and gas production by our customers, which could adversely impact our revenue.

A significant portion of our customers’ oil and gas production is developed from unconventional sources, such as shales, that require hydraulic fracturing as part of the completion process. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into the formation to stimulate gas production. We do not engage in any hydraulic fracturing activities although many of our customers do. If additional levels of regulation and permits were required through the adoption of new laws and regulations at the federal or state level that could lead to delays, increased operating costs and prohibitions for our customers, such regulations could reduce demand for our services and materially adversely affect our results of operations.

Climate change legislation, regulatory initiatives and litigation could result in increased operating costs and reduced demand for the services we provide.

In recent years, the U.S. Congress has considered legislation to restrict or regulate emissions of greenhouse gases, or GHGs, such as carbon dioxide and methane that may be contributing to global warming. In addition, almost half of the states, either individually or through multi-state regional initiatives, have begun to address GHG emissions, primarily through the planned development of emission inventories or regional GHG cap and trade programs.

Although it is not possible at this time to accurately estimate how potential future laws or regulations addressing GHG emissions would impact our business, either directly or indirectly, any future federal or state laws or implementing regulations that may be adopted to address GHG emissions could require us to incur increased operating costs and could adversely affect demand for the natural gas our customers extract using our services. Moreover, incentives to conserve energy or use alternative energy sources could reduce demand for oil and natural gas, resulting in a decrease in demand for our services. We cannot predict with any certainty at this time how these possibilities may affect our operations.

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

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

 

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

SubstantiveWe are subject to income and other taxes in the U.S. Changes in applicable U.S. tax laws and regulations, such as the December 2017 enactment of Federal legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”), or their interpretation and application, including the possibility of retroactive effect and changes in federal andto state tax laws that may occur in response to the Tax Act, could materially and adversely affect our results of operations.tax expense and profitability. In addition, the final determination of any tax audits or related litigation could be materially different from our historical income tax liabilities involvesprovision and accruals. Changes in our tax provision or an increase in our tax liability, whether due to changes in applicable laws and regulation, the interpretation of various federal and state laws and regulations, as well as the significant use of estimates and assumptions regarding the scope of past, current and future operations and results achieved and the timing and nature of income earned and expenditures incurred. Changes in the operating environment, including changes in or interpretationapplication thereof, or a final determination of tax law and currency/repatriation controls,audits or litigation, could materially adversely affect the determination of our income tax liabilities for a tax year.financial performance.

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

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

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, we would be required to include a report from management For further details on the effectiveness of our internal controlcontrols over financial reporting in oursee Item 9A of this annual reports once we ceased to be a “smaller reporting company” under applicable SEC rules. Although we are not required to assess internal control over financial reporting, we have included such report in this filing.report.

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

We have entered into agreements with third parties for hardware, software, telecommunications and other information technology services in connection with our reportbusiness. In addition, we have developed management reporting and other information which requires software licensed from managementthird parties. It is possible we could incur interruptions from cyber security attacks, computer viruses or malware. We believe that we have positive relations with our related vendors and maintain adequate anti-virus and malware software and controls; however, any interruptions to our arrangements with third parties to our computing and communications infrastructure or our information systems could significantly disrupt our business operations. For further details on the effectiveness of our internal controlcontrols over financial reporting, management identified certain control deficiencies that represent material weaknesses asinformational technology see Item 9A of December 31, 2016. Due to these material weaknesses, our management has concluded that our internal control over financial reporting is not effective. This conclusion could adversely impact the market price of our common stock due to a loss of investor confidence in the reliability of our reporting processes.

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this annual report.

Risks Related to Debt

OurFuture indebtedness which is currently collateralized by substantially all of our assets, could restrict our operations and make us more vulnerable to adverse economic conditions.

Our credit agreement with Pelican, and any replacement orWe will likely incur future indebtedness, the terms of which could have important consequences to our stockholders. For example, itagreements relating to such future indebtedness could:

	§·	require us to maintain compliance under various covenants which are not achievable in light of current industry conditions;covenants;
	§·	require us to raise additional capital;
	§·	impair our ability to make investments and obtain additional financing for working capital, capital expenditures, acquisitions or other general corporate purposes;
	§·	limit our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to make principal and interest payments on our indebtedness;
	§·	make us more vulnerable to a downturn in our business, our industry or the economy in general as a substantial portion of our operating cash flow will be required to make principal and interest payments on our indebtedness, making it more difficult to react to changes in our business and in industry and market conditions; or,
	§·	put us at a competitive disadvantage to competitors that have less debt.

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

Our ability to make payments on ourin respect of any future indebtedness and to fund planned capital expenditures depends on our ability to generate cash flow. Due to the cyclical nature of the industry we operate in, our cash flow from operations can vary significantly from year to year. Further, our credit facility matures on December 31, 2019 and we are required to make a prepayment of principal equal to 50% of our “excess cash flow,” as defined under the credit facility, in early 2019. Consequently, our cash flow may be insufficient to service our debt and that could negatively impact our business, financial condition and results of operations. During 2015 and 2016,If our cash flow from operations was not sufficientis insufficient to service our debt based upon how our credit agreement was structured atin the time.

During fiscal year 2016, we had negative cash flows from operations, and this trend could continue if conditions in our industry continue or worsen. If that situation were to recur,future, we might need to sell assets, seek additional equity or change our business direction to service our debt and there can be no assurance that we could execute these actions in a timely manner sufficient to allow us to service our debt.

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

Borrowings under our credit agreement with Pelican bear interest at variable rates, exposing us to interest rate risk. We have decided not to hedge against the interest rate risk associated with the borrowings under our credit facility. As such, our debt service obligations could increase significantly in the event of large increases in interest rates.

Risks Related to Ownership of our Common Stock

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

As a result of the Recapitalization, Permian Pelican, LLC (“Pelican”), a related party, owns 100% of our outstanding Series A Convertible Preferred Stock,convertible preferred stock, which represents the substantial majority of our fully diluted capitalcommon stock. Pelican further owns virtually all of our secured debt, which aggregated to $20.2 million and $6.1 million as of December 31, 2016 and June 30, 2017, respectively.debt. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, subject to certain SEC regulations and if Pelican were to convert the preferred stock, Pelican could begin selling shares of our common stock. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

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

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

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

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

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

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

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

In addition to the risks of having a controlling stockholder as described in the risk factor “The concentration of our capital stock ownership limits the ability of other stockholders to influence corporate matters,” our certificate of incorporation provides authorization to issue up to 10,000,000 shares of preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. The authorization of preferred shares empowers our board, without further stockholder approval, to issue preferred shares with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the common stock. If issued, the preferred stock could also dilute the holders of our common stock and could be used to discourage, delay or prevent a change of control.

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

	·	Before that person became an interested stockholder, our board of directors approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination;
	·	Upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding stock held by certain directors and employee stock plans; or
	·	Following the transaction in which that person became an interested stockholder, the business combination is approved by our board of directors and authorized at a meeting of stockholders by the affirmative vote of the holders of at least 66 2/3% of our outstanding voting stock not owned by the interested stockholder.

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

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

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

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

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

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

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

DueCertain provisions of our corporate documents and Delaware law, as well as change of control provisions in our debt agreements, could delay or prevent a change of control, even if that change would be beneficial to factors beyondstockholders, or could have a material negative impact on our control, our stock price may be volatile.business.

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

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

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

	·	Before that person became an interested stockholder, our board of directors approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination;
	·	Upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding stock held by certain directors and employee stock plans; or
	·	Following the transaction in which that person became an interested stockholder, the business combination is approved by our board of directors and authorized at a meeting of stockholders by the affirmative vote of the holders of at least 66.7% of our outstanding voting stock not owned by the interested stockholder.

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

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

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The market price of our common stock canmay decline.

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

Factors affecting the trading price may include:

	§ ·	actual or anticipated variationsfluctuations in our quarterly financial results or the quarterly financial results of operations; companies perceived to be similar to us;
	§ ·	changes in earnings estimates; or the market’s expectations about our operating results;
	·	success of competitors;
§	·	our operating results failing to meet the expectation of securities analysts or investors in a particular period;
	·	changes in market valuationsfinancial estimates and recommendations by securities analysts concerning us or our markets in general;
	·	operating and stock price performance of similar companies.other companies that investors deem comparable to us;
	·	changes in laws and regulations affecting our business;
	·	commencement of, or involvement in, litigation involving us;
	·	changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
	·	the volume of securities available for public sale;
	·	any major change in our board or management;
	·	sales of substantial amounts of our securities by our directors, executive officers or significant stockholders or the perception that such sales could occur; and
	·	general economic and political conditions such as recession; interest rate, fuel price, and international currency fluctuations; and acts of war or terrorism.

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

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

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

Item 1B: Unresolved Staff Comments

None.

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Item 2. Properties

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

We lease facilities and administrative offices in the various geographic areas in which we operate. We believe that our existing facilities are suitable and adequate and that we have sufficient capacity to meet our current anticipated needs. As of June 30, 2017,March 31, 2018, we leased properties in Texas and Pennsylvania as follows:

Location		Type of Facility		Size		Lease or Owned		Expiration of Lease
3 Riverway, Suite 920 Houston, TX 77056		Corporate office		2,291 sq. ft.		Leased		January 31, 2020
1080 Private Rd 7703 1885-E FM 448 Giddings, TX 78942		Administrative offices, fabrication/repair shop, equipment yard		6.5 acres, 3,6006,800 sq. ft. office space, 5,000 sq. ft. shop		Leased		DecemberOctober 31, 2017
								2020
6126 PR 902 Celina, TX 75009		Fabrication/repair shop, equipment yard		1,813 sq. ft. office space, 5,518 sq. ft. shop		Leased		July 1, 2018
792 McCollum Rd. Montrose, PA 18801		Administrative offices, equipment yard		Small acreage site		Leased		September 30, 2017
12 Free Soil Rd. Mt Morris, PA 15349		Equipment yard		Small acreage site		Month to Month		N/A
State Hwy. 85 West/CR 4715 Dilley, TX 78017		Administrative offices, fabrication/repair shop, equipment yard		5.5 acres, 400 sq. ft. building space		Month to Month		N/A
5039 North Chadbourne San Angelo, TX 76903		Administrative offices, equipment yard		2.25 acres, 1,000 sq. ft. of office space		Leased		May 31, 2018

During 2016, we abandoned a lease in connection with our operational restructuring efforts. There were no cancellation, transfer or assignment charges in the years ended December 31, 2016 and 2015.

During 2017, our lease for the office and shop space utilized by our discontinued operations was assumed by a third party. During the third quarter of 2017, we will cease leasing properties in Celina, Texas, Montrose, Pennsylvania, and Mt. Morris, Pennsylvania. The idle equipment previously stored at these facilities will be transported to Texas to satisfy increasing customer demand. We do not anticipate any cancellation, transfer or assignment charges will be incurred.

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Item 3. Legal Proceedings

In 2015, we ceased compensating our employees on a day rate basis in order to ensure full compliance with the Fair Labor Standards Act (“FLSA”). Certain former employees of Aly Centrifuge, Inc. who were paid a day rate for their work prior to February 2015 alleged that we failed to pay overtime when they worked over 40 hours per week. During the years ended December 31, 2016 and 2015, certain of these employees pursued legal action against us based on such allegations:

	·	In February 2015, multiple plaintiffs filed a proposed collective action against us alleging overtime violations under the FLSA. We settled this matter for business purposes with no admission of liability. The settlement amount was fully accrued as of December 31, 2015 and the case was fully paid and dismissed with prejudice, by the end of January 2016.
	·	In August 2016, several former employees filed a lawsuit against us alleging overtime violations of the FLSA. In May 2017, we settled the matter for business purposes with no admission of liability. The settlement amount was fully accrued as of December 31, 2016 and, as of June 30, 2017, the settlement was fully paid and the case had been dismissed with prejudice.
	·	We are currently in the early stages of arbitration with five prior employees who allege overtime violations of the FLSA. We are exploring settlement options to resolve this matter as well as preparing to defend the arbitration should settlement not be feasible. An estimated settlement amount was fully accrued as of December 31, 2016.

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

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

Item 4. Mine Safety Disclosures

Not Applicable.

 

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PART II

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

Market Information

Commencing May 23, 2013, ourOur common stock wasis listed on the OTCQB under the symbol “ALYE.” We became delinquent in our filings with the SEC in August 2016. Due to the lack of publicly available financial information, OTCQB subsequently moved the listing of our common stock to OTC Pink and, as of May 1, 2017, ceased to list our common stock.

”ALYE”. The following table indicates the quarterly high and low bid price for our common stock on the OTCQB and OTC Pink for the years ended December 31, 20162017 and 2015 and for the period from January 1, 2017 to May 1, 2017.2016. Such inter-dealer quotations do not necessarily represent actual transactions and do not reflect retail mark-ups, markdowns or commissions.

Fiscal Year 2017		High				Low
2nd Quarter (April 1 - May 1, 2017)		$	0.08			$	0.03
1st Quarter (January 1 - March 31, 2017)		$	0.12			$	0.01
Fiscal Year 2016		High				Low
4th Quarter (October 1 - December 31, 2016)		$	0.08			$	0.01
3rd Quarter (July 1 - September 30, 2016)		$	0.11			$	0.08
2nd Quarter (April 1 - June 30, 2016)		$	0.20			$	0.09
1st Quarter (January 1 - March 31, 2016)		$	1.00			$	1.00
Fiscal Year 2015		High				Low
4th Quarter (October 1 - December 31, 2015)		$	2.00			$	0.80
3rd Quarter (July 1 - September 30, 2015)		$	4.80			$	2.00
2nd Quarter (April 1 - June 30, 2015)		$	6.40			$	4.80
1st Quarter (January 1 - March 31, 2015)		$	14.60			$	5.60

The last reported sales price of our common stock on the OTC Pink was on May 1, 2017 for $0.08 per share.

Our peer group includes, but is not limited to, the following companies: Basic Energy Services Inc., ENSERVCO Corporation, Flotek Industries, Inc., Key Energy Services, Inc., Oil States International, Inc., and Superior Energy Services, Inc.

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

Holders

The number of holders of record of our common stock as of July 24, 2017March 23, 2018 was 89.83. This number does not include an undetermined number of stockholders whose stock is held in “street” or “nominee” name.

Dividends

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

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

As of December 31, 2016 and 2015, we had a stock-based compensation plan available to grant incentive stock options, non-qualified stock options and restricted stock to employees and non-employee members of the board of directors.

As of December 31, 2016 and 2015, options to purchase 242,507 and 330,111 common shares under the Plan were outstanding and $0.3 million and $0.5 million of total unrecognized compensation cost related to non-vested stock option awards, respectively. Such amount will be recognized in the future upon occurrence of a Liquidity Event that results in a vesting of the options. No options were granted during the years ended December 31, 2016 and 2015. No options were vested as of December 31, 2016 and 2015. During the year ended December 31, 2016 forfeited options totaled 87,604. There were no forfeited options during the year ended December 31, 2015.

Effective April 4, 2017, the 2017 Stock Option Plan (the “2017 Plan”) was approved by the board of directors. On May 30, we granted options to purchase approximately 16.9 million common shares under the 2017 Plan which was the maximum amount authorized. The option contract term is 10 years and the exercise price is $0.10. The options vested and became exercisable immediately upon grant. The Company is in the process of determining thefair value of these options.

Recent Salesthe award was estimated using a Black-Scholes fair value model. The valuation of Unregistered Securities

On May 23, 2017 and in considerationstock options requires us to estimate the expected term of the increase inaward, which was estimated using the revolving credit facility andsimplified method, as the extensionCompany does not have sufficient historical exercise information. Additionally, the valuation of stock option awards is also dependent on historical stock price volatility. In view of our limited trading volume, volatility was calculated based on historical stock price volatility of the final maturity date,Company’s peer group. As a result, we recorded stock-based compensation of $0.6 million for the Company agreed to issue Pelican an amendment fee of 1,200 shares of our Series A Convertible Preferred Stock.

On January 31, 2017, we completed the Recapitalization which resulted in the issuance of 7,111,981 shares of our common stock to the former holders of Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, Aly Centrifuge subordinated debt, and liability for contingent payment (an aggregate of six individual entities and persons).

On January 31, 2017, we issued 16,092 shares of our Series A Convertible Preferred Stock to Pelican in exchange for a $16.1 million reductionfull value of the Aly Senior Obligations which Pelican acquired on December 12, 2016 in connection with the Recapitalization.

We issued 82,649 sharesgrant as a component of our common stockselling, general and administrative expenses during the year ended December 31, 2015, to one of our directors in respect of his arrangement of certain issuances of common stock.

On September 30, 2015, we closed a private offering and issued 1,047,424 shares of our common stock to multiple accredited investors at a price of $3.20 per share.

On January 12, 2015, we issued 50,000 shares of our common stock in a private placement at a price of $11.00 per share for gross proceeds of approximately $0.6 million. The proceeds were used for general working capital requirements.

Equity Repurchases

We have not repurchased any of our equity securities during the past two years; however, as of December 31, 2016 and 2015, we held 225 shares of treasury stock.

Authorized Shares2017.

As of AugustDecember 31, 2017, we have approximately 13.8there were options to purchase 16.9 million shares of common stock outstanding.

On May 18, 2016, we filed an amendment to our certificate of formation reducing our authorized common stock from 100 million to 25 million shares and also reducing our authorized preferred stock from 25 million shares to 10 million shares.

On December 21, 2015, we filed an amendment to our certificate of formation reducing our authorized common stock from 200 million to 100 million shares and also authorizing 25 million shares of preferred stock to be issued in one or more series.

Common Authorized Shares. Authorized common shares total 25,000,000 with a par value of $0.001 per share,outstanding under the plan, all of which 6,707,039were fully vested and 6,706,814 were issued and outstanding, respectively as of December 31, 2016 and 6,707,039 and 6,706,814 were issued and outstanding, respectively as of December 31, 2015. Common stock held in treasury as of December 31, 2016 and 2015 were 225 shares.exercisable.

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

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

As of December 31, 2017 we completedand 2016, options to purchase 234,144 and 242,507 common shares, respectively, under the Recapitalization which resulted2013 Plan were outstanding and there was $0.3 million of total unrecognized compensation cost related to non-vested stock option awards. Such amount will be recognized in the issuancefuture upon occurrence of 7,111,981 sharesa Liquidity Event that results in a vesting of our common stock to the former holders of Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, Aly Centrifuge subordinated debt,options. No options were granted during the years ended December 31, 2017 and liability for contingent payment (an aggregate of six individual entities and persons).

Preferred Authorized Shares. Authorized preferred shares total 10,000,000 with a par value of $0.001 per share, of which, none2016 under the 2013 Plan. No options were issued and outstandingvested as of December 31, 2016 and 2015.

As a result of the Recapitalization, the Company allocated 20,000 of its authorized shares from available authorized preferred shares to Series A Convertible Preferred Stock and issued 16,092 shares on January 31, 2017. The Series A Convertible Preferred Stock have a par value of $0.001 per share, a face value of $16.1 million, which have no determinable market value as of January 31, 2017. The conversion feature provides that each Series A Convertible Preferred share shall be convertible into 3332.64 common shares at the option of the shareholder and retains a liquidation preference equal to $1,000 per share. All shares vote on an as if converted basis, whereby Pelican, who owns 100% of the Series A Convertible Preferred Stock controls the substantial majority of votes of Aly Energy. (See further discussion in “Note 11 – Controlling Shareholder and Other Related Party Transactions” in the notes to our consolidated financial statements.)

On May 23, 2017 and in consideration of2016. During the increase in the revolving credit facilityyears ended December 31, 2017 and the extension of the final maturity date, the Company agreed to issue Pelican an amendment fee of 1,200 shares of our Series A Convertible Preferred Stock.2016, forfeited options totaled 8,363and 87,604, respectively.

Item 6. Selected Financial Data

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

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

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

Overview of Our Business

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

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

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

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History of Our Business

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

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

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

	·	Austin Chalk Petroleum Services Corp. (“Austin Chalk”) - In October 2012, we acquired Austin Chalk a providerBy January 31, 2017, we had successfully navigated through the industry downturn by implementing an operational restructuring, including severe cost cutting measures, and significantly delevered the business by successfully entering into a capital restructuring transaction, the “Recapitalization”. (See further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements.) As a direct result of the Recapitalization, we were well-positioned to take advantage of high performance, explosion-resistant rental equipment used primarily in land-based horizontal drilling. Austin Chalk currently offers a robust inventory of surface rental equipment as well as roustabout services, including the rig-up and rig-down of equipment and the hauling of equipment to and from the customer’s location;
	·	United Centrifuge LLC and the leased fixed assets associated with that business (collectively “United”) - United, acquired in April 2014, operates within the solids control sector of the oilfield services industry, offering its customers the option of renting centrifuges and auxiliary solids control equipment without personnel or the option of paying for a full-service solids control package which includes operators on-site 24 hours a day. United owns centrifuges which are differentiated from the competition due to the ability to remove the rotating assembly from a centrifuge within 45 minutes while on the rig site thereby minimizing customer down time; and
	·	Evolution Guidance Systems Inc. (“Evolution”) - In July 2014, we acquired Evolution which specialized as an operator of Measurement-While-Drilling (“MWD”) downhole tools. Effective October 26, 2016, we abandoned these operations as a part of a restructuring event (see “Note 2 – Recent Developments” in the notes to our consolidated financial statements for further detail).

Subsequent to the acquisition of each of these businesses, we have made significant investments to expand their operations and capitalize on organic growth opportunities in existing2017.

Such growth opportunities were created primarily from a significant increase in demand for oilfield services when compared to the two preceding years. Two of the most significant drivers of demand for our services, the price of oil and expansion markets. We consistently seek opportunitiesthe Rig Count, increased substantially year-over-year from 2016 to bundle product offerings and to cross sell services across markets and product lines, which we believe improves client retention and increases2017. The positive impact of these improved industry conditions on the Company is reflected in the increased utilization of our equipment.equipment and services and our ability to raise the prices we charge to our customers. Increased utilization and increased pricing resulted in a significant amount of incremental revenue in 2017 when compared to 2016 and a significant overall improvement in our financial results and liquidity.

Overview of Our BusinessHow We Generate Revenue

We aregenerate our revenues by providing drilling-related support services to E&P companies operating in some of the major onshore unconventional basins in the U.S. We typically enter into a providerMaster Service Agreement (“MSA”) with each of solids control systemsour customers that provides a framework of general terms and surface rental equipment. Ourconditions of our services that will govern any future transactions or jobs awarded to us. Although MSAs do not typically require a customer to use our equipment and services, are primarily designed forwe have long-standing relationships with most of our customers and usedwe believe that they will continue to utilize our products and services in land-based horizontal drilling.2018 and beyond. Our equipment includes centrifugeslargest customers, some of the most active E&P companies in the areas in which we operate, have consistently done business with us over the last three years even during the downturn experienced in 2015 and auxiliary solids control equipment, mud circulating tanks (400 and 500 barrel capacity) and auxiliary surface rental equipment, portable mud mixing plants and containment systems. In conjunction with2016.

During the year ended December 31, 2017, approximately 63.4% of our revenue was derived from the rental of someequipment, 34.0% was derived from services we provide, such as the rig-up/rig-down and hauling of our solids control packages, we provide personnelequipment and, in certain cases, the operation of our equipment at the respective customer’s well site to operate our equipment. We also provide personnel to rig-up/rig-downsites, and haul our equipment to and from the customer’s location. We operate primarily in Texas (West Texas and South Texas), Oklahoma, New Mexico, and Louisiana. Our primary operating yards, shop and repair facilities, and division management are located in Giddings, Texas, San Angelo, Texas, and Houston, Texas.

We derive the majorityremainder of our revenue was derived from day rates or hourly ratesreimbursable expenses charged to the customer, including charges for the sale of various items, such as chemicals.

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

The priceprices we charge for our products and services dependsdepend on boththe relationship between the level of activity withinof E&P companies, or the geographic areademand of our potential and existing customers, and the supply of equipment and services available to such E&P companies from us and our competitors. When the supply exceeds the demand, the competitive environment in the areas in which we operate and alsointensifies significantly, particularly because many of the competitive environment.

Our operating costs doproducts we supply are not fluctuate in direct proportion to changes in revenue. Our operating expenses consist of both fixed and variable costs. Although most variable costs are highly correlated with revenue and activity, certain variable costs, such as sub-rental equipment expenses and third-party trucking expenses, can be reduced as a percentage of revenuedifferentiated from the products provided by our investment in new rentalcompetitors. Our customers choose to use our equipment and transportation equipment.services, as opposed to those offered by our competitors, primarily based on the pricing we offer and our ability to execute efficiently and safely. As competition increases, downward pressure on pricing strengthens and we are sometimes required to reduce the rates billed to both our existing and future customers. Similarly, when demand exceeds supply, our ability to increase the prices we charge improves significantly.

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Industry Trends

We operate inDue to the commodity-driven, cyclicalsignificant impact of the volatility of the oil and gas industry. From 2011 through mid-2014,industry on the industry operated in an environment where crudeactivity of E&P companies, both the utilization of our equipment and related services and the prices we charge have been, and may be, significantly impacted by numerous factors outside of our control, such as oil and natural gas prices, were relatively stablethe supply of and except for comparatively short intervals, generally traded at prices at or in excess of $100 per barrel. However, subsequent to the third quarter of 2014, crude oil prices declined significantly due to a variety of factors, including, but not limited to, continued growth in U.S. oil production, weakened outlooks for the global economy and continued strong international crude oil supply resulting in part from OPEC’s unexpected decision to maintain oil production levels. As a result of the weaker crude oil price environment, many crude oil development prospects became less economical for exploration and production operators, leading to a dramatic reduction in U.S. land-based rig count and weaker demand for oilfield services, such asoil and natural gas, domestic and worldwide economic conditions, political instability in oil producing countries and available supply of and demand for the services we provide.

The declineDuring 2017, stability in both oil prices and the U.S. land-based rig count continued during the first half of 2016. Barring a few brief rallies, the price of oil bottomed outcoupled with significant increases in February 2016 at less than $30 per barrel and the U.S. land-based rig count reached its low of less than 400 rigsdrilling activity resulted in July 2016. After reaching its low point, the price of oil then increased steadily for several months and has hovered between $45 per barrel and $50 per barrel since June 2016. With the price of oil fairly constant for the past twelve months at a level which is economical for exploration and production operators, the U.S. land-based rig count has increased steadily and,increases in July 2017, the count had increased to over 900 rigs, an increase of greater than 100% compared to its low of less than 400 rigs in July 2016.

The favorable impact of the recent increase in the U.S. land-based rig count on demand for our services has been magnified byand began to provide us with opportunities to increase the prices of our products and services. Oil prices increased approximately 66.9% to an increase inaverage of $55.37 per barrel during the proportionfourth quarter of rigs drilling directional and horizontal wells. As illustrated in the graph below, the proportion2017 from an average of rigs drilling directional and horizontal wells as a percentage of total U.S. land-based rigs has increased from approximately 80% in$33.18 per barrel during the first quarter of 20142016. Similarly, the Rig Count increased to 92%929 as of December 29, 2017 from a low of 374 on May 29, 2016. During the year ended December 31, 2017, the number of rigs on which we operate increased by approximately 50% which was in line with the increase in the secondRig Count of 46.5% during the same time period. Pricing for our MCTs, our lead surface rental product, increased by approximately 23.0% when comparing the fourth quarter of 2017. Rigs drilling directional2017 to the third quarter of 2016 when pricing was at its lowest. In 2018, we have increased pricing even further for both surface rental and horizontal wells typically utilize oil-based or other sophisticated mud systems which creates demand for Aly’s specialized mud circulating tanks, pumps, containment systems, solids control equipment and associated equipment.services.

Costs of Conducting Our Business

Our financial performance is significantly affected byoperating expenses consist primarily of variable costs, such as labor and third-party services. Labor-related expenses typically fluctuate with the priceutilization of oilour equipment and the U.S. land-based rig count, specifically the countservices. Holding all else constant, in periods of rigs drilling directional and horizontal wells. The graph below illustrates the trendsincreased or decreased activity, we anticipate that labor-related expenses will remain flat as a percent of revenue. However, holding all else constant, in these key drivers from 2014 through mid-2017:periods of increased or decreased pricing to our customers, we anticipate that labor-related expenses will decrease or increase, respectively, as a percent of revenue.

Source: Baker Hughes (Rig Counts)Expenses associated with services provided by third-parties typically increase with activity. Demand for our equipment has increased so dramatically that, throughout much of 2017, the majority of our available owned equipment was fully utilized and Bloomberg (Price Per Barrelwe were required to increase our available equipment fleet and to increase our available labor resources to meet the demand from our customers. We accomplished this by sub-renting equipment, primarily surface rental equipment, and by using sub-contractors to operate our solids control equipment. Because our equipment and labor force are fully utilized, incremental dollars of WTI Crude)

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revenue resulting from increased activity in the future will continue to require the use of third-party equipment and services and third-party expenses will increase as a percent of revenue. In addition, with increased demand for oilfield services, the demand for sub-rental equipment and labor will also increase and we may experience increases in costs for third-party services which would further increase third-party expenses as a percent of revenue. However, as our liquidity continues to improve, we will have the ability to partially mitigate the increase in third-party expenses with investments in new rental and transportation equipment and increases in headcount thereby reducing our reliance on third-party services.

How We Evaluate Our Operations

We discloseutilize multiple metrics to evaluate the results of our operations and discuss EBITDA as a non-GAAP financial measure in our public releases,efficiently allocate personnel, equipment and capital resources, including, quarterly earnings releases, investor conference calls and other filings withbut not limited to, the Securities and Exchange Commission.following:

·	Revenue: We monitor our revenue monthly to analyze trends in the business as it relates to historical revenue drivers and prevailing market metrics. We are particularly interested in understanding the underlying utilization and pricing metrics that drive the positive or negative revenue trends each month.
·	Gross profit: Gross profit is a key metric that we use to evaluate our profitability and determine allocation of equipment and personnel resources. We define gross profit as our revenues less operating expenses. Operating expenses include direct and indirect labor costs, the cost of third-party services, including the sub-rental of equipment and the use of sub-contractors, costs for repairs and maintenance of our equipment and other miscellaneous costs. We continually evaluate our gross profit margin to assist us in making decisions regarding bidding new jobs, allocating resources among various jobs and managing our overall cost structure.
·	EBITDA and Adjusted EBITDA: We disclose and discuss EBITDA as a non-GAAP financial measure in our public releases, including quarterly earnings releases, investor conference calls and other filings with the Securities and Exchange Commission. We define EBITDA as earnings (net income) before interest, income taxes, depreciation and amortization. Our measure of EBITDA may not be comparable to similarly titled measures presented by other companies, which may limit its usefulness as a comparative measure.

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

 

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The following table provides the detailed components of EBITDA and Adjusted EBITDA as we define that term for the years ended December 31, 20162017 and 2015,2016, respectively (in thousands):

		For the Years Ended December 31,
		2016				2015
		(unaudited)
Components of EBITDA:
Net loss		$	(22,135	)		$	(15,894	)
Less: Loss from discontinued operations, net of income taxes			2,491				1,950
Net loss from continuing operations			(19,644	)			(13,944	)
Non-GAAP adjustments:
Depreciation and amortization			5,299				5,950
Interest expense, net			2,378				1,961
Debt modification fee			629				-
Interest expense - Pelican			111				-
Income tax benefit			(7,904	)			(3,372	)
EBITDA		$	(19,131	)		$	(9,405	)
Adjustments to EBITDA:
Reduction in value of assets			17,736				11,405
Expenses in connection with lender negotiations and Recapitalization			472				14
Employee-related reorganization expenses, including severance			456				385
Bad debt expense			193				364
Settlements and other losses			127				590
Fair value adjustments to contingent payment liability			(372	)			(1,065	)
Stock-based compensation			-				100
Gain on indemnification-preferred shares holdback			-				(124	)
Transaction costs			-				221
Adjusted EBITDA		$	(519	)		$	2,485

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

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

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

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

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

	·	EBITDA and Adjusted EBITDA do not reflect growth and maintenance capital expenditures,
	·	EBITDA and Adjusted EBITDA do not reflect the interest, principal payments and other financing-related charges necessary to service the debt that we have incurred to finance acquisitions and invest in our fixed asset base,
	·	EBITDA and Adjusted EBITDA do not reflect the payment of income taxes, and
	·	EBITDA and Adjusted EBITDA do not reflect changes in our net working capital position.

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

Business Outlook

Our core businesses depend on our customers’ willingness to make expenditures to produce, develop and explore for oil and natural gas. Industry conditions are influenced by numerous factors, such as oil and natural gas prices, the supply of and demand for oil and natural gas, domestic and worldwide economic conditions, political instability in oil producing countries and available supply of and demand for the services we provide. Oil and natural gas prices began a rapid and substantial decline in the fourth quarter of 2014. Depressed commodity price conditions persisted and worsened during 2015 and that trend continued into 2016. As a result, the rig count and demand for our products and services declined substantially, and the prices we are able to charge our customers for our products and services have also declined substantially. While we have reshaped our organizational and cost structure to mitigate the negative impact of these declines and to improve our ability to react to future declines, we continued to experience negative operating results and cash flows from operations through 2016.

Oil prices have improved off the low point of 2016 with the November 2016 decision by OPEC to curtail the cartel’s oil production, the Baker Hughes U.S. land drilling rig count has increased significantly from its low point in mid-2016, and our revenue has improved substantially during the first six months of 2017. We believe that stability in oil prices at an attractive price to our customers coupled with the increases in drilling activity during the first half of 2017 will result in further increases in demand for our services and will provide us opportunities to increase the price of our products and services, particularly in 2018. However, with increased demand for oilfield services broadly, the demand for qualified employees and the demand for the sub-rental equipment we require to increase our activity will increase and we may experience increases in costs which we cannot completely offset with price increases to our customers. As of June 30, 2017, based on our expectations of improved activity levels and pricing throughout the remainder of 2017 and 2018, we believe that we will be able to service our debt obligations and ongoing operations through operating cash flow and, if necessary, availability under our credit facility.

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Operational RestructuringGeneral Trends and Outlook

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

Throughout 2015, in an effort to mitigate the significant declines in pricing and utilization of our equipment, we committedbusiness depends to a reorganization initiative to strengthen our salessignificant extent on the level of unconventional resource development activity and marketing efforts, consolidate support functions,corresponding capital spending of E&P companies onshore in the U.S. These activity and operate more efficiently. The reorganization effort included, but was not limited to, training our salesforce to enablespending levels are strongly influenced by the cross-sellingcurrent and expected oil price. Commodity prices declined significantly between the third quarter of our product lines in certain geographical markets, sharing a common support services infrastructure across all reporting units, reducing headcount2014 and wage rates, and rebranding and launching a new web site to increase awareness of our service lines. We recognized some benefit from these measures in late 2015 resulting in increased gross margins and lower selling, general and administrative expenses when compared to the first halfquarter of 2015.

During2016. However, oil prices have since gradually increased and this price recovery has stimulated an increase in onshore drilling and completion activity and a consequent increase in demand for our services. The average Rig Count for the year ended December 31, 2016, we entered into a series of forbearance agreements with our lender. Under2017 increased 77.4% to 864 rigs as compared to 487 for the forbearance agreements, among other provisions, the lenders agreed to forbear from exercising their remedies under the credit agreement. These forbearance agreements permitted us to operate within the parameters of our normal course of business despite the continuing default under the credit agreement. Without these forbearance agreements, our outstanding debt would have been immediately due and payable. Throughout 2016, we remained in default and we did not have sufficient liquidity to repay allyear ended December 31, 2016. The favorable impact of the outstanding debtrecent increase in the Rig Count on demand for our services has been magnified by an increase in the proportion of rigs drilling directional and horizontal wells. Rigs drilling directional and horizontal wells typically utilize oil-based or other sophisticated mud systems which creates demand for our specialized mud circulating tanks, pumps, containment systems, solids control and associated equipment. The proportion of rigs drilling directional and horizontal wells as a percentage of total U.S. land-based rigs has increased to the lender at any point93.1% during the year ($20.1 million asfourth quarter of December 31, 2015). As such, we may have been forced to file for protection under Chapter 112017 from approximately 88.7% in the first quarter of the U.S. Bankruptcy Code.2016.

If the current commodity price environment holds or continues to improve, we anticipate a further increase in demand for our services. In early 2016,addition, our customers are increasingly focused on efficient drilling of high intensity wells with long laterals which further enhances the demand for our services. As demand increases, we were hopefulexpect that utilization will increase and our ability to increase the prices for our equipment and services will improve resulting in greater margins and increased margins as a successful operational restructuring would facilitate negotiations to modify the termspercent of our existing credit facility with Wells Fargo. Our operational restructuring in 2016 consisted of severe cost cuts which were incremental to the year-over-year cost cuts already achieved in 2015 when compared to 2014. In 2016, significant cost savings were primarily generated by:

	·	reductions of our employee base, both field employees and sales and administrative employees, to a headcount of approximately 50 as of December 31, 2016 from approximately 125 as of December 31, 2015,
	·	reduction in employer contributions to employee benefits,
	·	closures of certain operating yards and administrative facilities,
	·	strategic decision to cease operations in the northeast which resulted in the reduction of costs related to operating in an incremental market,
	·	modifications to insurance policies, including general liability and workers’ compensation policies, resulting in a $0.5 million or 15.5% reduction in the cost of insurance to $0.6 million for the year ended December 31, 2016 from $1.1 million for the year ended December 31, 2015,
	·	minimization of repair and maintenance activities, resulting in a $0.4 million or 50.0% reduction of repair and maintenance expenses to $0.4 million for the year ended December 31, 2016 from $0.8 million for the year ended December 31, 2015, and
	·	elimination of investments in equipment, unless required to service an existing customer, resulting in a reduction of capital expenditures to $0.4 million for the year ended December 31, 2016 from $2.5 million for the year ended December 31, 2015.

revenue.

We also achieved significant cost savings from the decrease in third party costs, such as sub-rental equipment and trucking, and other variable costs which declined with the decrease in activity.

In orderwill continue to further support our working capital needs, we identified and sold idle and underutilized assets. During 2016, we realized aggregate proceeds from sales of approximately $0.8 million of which $0.5 million and $0.3 million was used to fund working capital needs and pay down debt, respectively (see “Note 4 – Reduction in Value of Assets and Other Charges” in the notes to our consolidated financial statements for further details).

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Capital Restructuring

Despite our successful operational restructuring efforts, particularly during the first half of 2016, the decline in our activity levels and the declines in customer pricing outpaced the impact of our cost reductions and it became evident that a capital restructuring would also be necessary to continue operations and positionexpand our business for an industry turnaround.

In the second quarterthrough a low risk strategy of 2016, certain of the Company’s principal stockholders (“Shareholder Group”) began negotiationsgrowing organically by replacing our sub-rented equipment with Wells Fargo with the objective of consummating a recapitalization transaction (the “Recapitalization”) wherebynewly purchased, refurbished or fabricated equipment. We will also evaluate strategic acquisition opportunities that would provide geographic diversification, expand our obligations under the credit agreementproducts and the outstanding capital leases in favor of Wells Fargo’s equipment finance affiliateservices and certain other obligations of Aly Energy (collectively the “Aly Senior Obligations”) would be restructured. In August 2016, the Shareholder Group approached a third party, Tiger Finance, LLC (“Tiger”),introduce us to provide bridge financing and to extend forbearance until such date as sufficient capital could be raised to complete the Recapitalization.

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

Effective January 31, 2017, the Recapitalization was completed through the execution and delivery of a Securities Exchange Agreement and a Second Amended and Restated Credit Agreement. As a result of the Recapitalization, the Company became a “Controlled Company” as defined under the listing standards of the principal national securities exchanges; however, since the Shareholder Group’s proportionate interest did not change significantly, a change in control did not occur and the transaction was accounted for at historical cost.

As a result of the Recapitalization, the credit facility, now with Pelican, consisted of a term loan of $5.1 million and a revolving facility of up to $1.0 million as of January 31, 2017. Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables (receivables less than 90 days old).

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

	·	Amendment No. 1, effective March 1, 2017, provided for a delayed draw term loan to be added to the credit facility for the purpose of financing capital expenditures. The agreement permitted us to draw on the delayed draw term loan from time-to-time up until the maturity date of the facility in order to fund up to 80% of the cost of capital expenditures subject to a $0.5 million limit on aggregate borrowings.
	·	Amendment No. 2, effective May 23, 2017, increased the maximum revolving credit amount from $1.0 million to $1.8 million and extended the final maturity date of the facility to December 31, 2019. In consideration of the increase in the revolving credit facility and the extension of the final maturity date, we agreed to issue to Pelican, the lender, as an amendment fee, 1,200 shares of our Series A Convertible Preferred Stock.
	·	Amendment No. 3, effective June 15, 2017, modified maximum potential borrowings under each of the revolving credit facility and the delayed draw term loan without changing the aggregate available borrowings under the credit facility. The amendment reduced the maximum revolving credit amount from $1.8 million to $1.0 million and increased the maximum delayed draw loan borrowings from $0.5 million to $1.3 million and the amendment also increased permitted draws on the delayed draw loan from 80% of the cost of capital expenditures being funded to 90% of the cost of capital expenditures being funded.

To the extent there is free cash flow as defined in the credit agreement, principal payments of 50% of such free cash flow are due annually. The maturity date of all remaining outstanding balances under the credit facility is December 31, 2019.

The obligations under the credit facility are guaranteed by all of our subsidiaries and secured by substantially all  of our assets. The credit agreement contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, grant liens and sell assets. The credit facility does not include any financial covenants. We are in full compliance with the credit facility as of June 30, 2017.

As of June 30, 2017, there were outstanding borrowings of $5.0 million, $0.8 million, and $0.3 million on the term loan, revolving credit facility, and delayed draw term loan, respectively. As of June 30, 2017, we have the availability to borrow an incremental $0.2 million under the revolving credit facility and, if we have capital expenditures which are eligible to be financed, an incremental $1.0 million under the delayed draw term loan to finance 90% of such expenditures.

For a discussion of the accounting treatment for the Recapitalization, see “Note 2 – Recent Developments” in the notes to our consolidated financial statements included elsewhere in this document.

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new customers.

Results of Operations

The following table summarizes the change in our results of operations for the year ended December 31, 20162017 when compared to the year ended December 31, 20152016 (in thousands):

Results for the Year Ended December 31, 20162017 Compared to the Year Ended December 31, 20152016

Overview. Our results of operations depend onimproved significantly when comparing the demand for our services and our abilityyear ended December 31, 2017 to provide high quality equipment and service to satisfy that demand while maintaining an efficient cost structure. During the fourth quarter of 2016, our total revenue was $2.2 million, which was a decline of 76.0% when compared to revenue of $9.0 million during the first quarter of 2015.year ended December 31, 2016. The steady decline in revenue throughout 2015 and 2016improvement was a result of decreased activity, decreased pricing of our core products and services of approximately 40% to 50% when comparing the fourth quarter of 2016 to the first quarter of 2015 and the wind-down of our solids control operations in the northeast due to decreased demand in the area combined with high overhead costs. Despite significant declines in activity and pricing, by the end of 2016, after implementing significant cost cutting measures, we successfully achieved a more efficient cost structure in which operating expenses as a percentage of revenue decreased to 66.6% in the fourth quarter of 2016 from 71.8% in the first quarter of 2015 and in which our selling, general and administrative expenses decreased by 76.8% to $0.6 million from $2.4 million when comparing the fourth quarter of 2016 to the first quarter of 2015.multiple factors, including, but not limited to:

	·	Increased demand for our services: We experienced a significant increase in demand for our services when comparing 2017 to 2016 due to an increase in the activity of our customers which consist of E&P companies operating in the Permian Basin, the Eagle Ford shale, and the Scoop/Stack shale;
	·	Our ability to provide high quality equipment and services to satisfy demand: We successfully satisfied the increase in demand through investments in equipment and through outsourcing certain equipment and personnel needs; and,
	·	Our ability to maintain an efficient cost structure: We monitored our costs and imposed sufficient financial discipline in order to maintain an efficient cost structure in a period of rapidly increasing demand.

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Revenue. Our revenue for the year ended December 31, 20162017 was $11.0$14.6 million, a decreasean increase of 56.8%33.0%, compared to $25.5$11.0 million for the year ended December 31, 2015. Our2016. The key drivers of revenue are utilization and pricing. Utilization of equipment, which reflects our overall activity level, is directly tied to the drilling activity and, as discussedof E&P companies. The 77.4% increase in the industry trends section above,Rig Count to an average of over 864 rigs during 2017 compared to an average of 487 rigs in 2016 is a reflection of the average U.S. land-based rig count for 2016 dropped almost 100% to approximately 485 rigs fromsubstantial increase in drilling activity of E&P companies. Throughout 2017, the average in 2015 of approximately 940 rigs. This decrease in activity resulted in intense competition in the oilfield services sector,key revenue generating rental products which in turn, required us to reduce pricing significantly inwe own, tanks, pumps and centrifuges, were fully utilized and our labor force was fully utilized. In order to retain existing customerstake advantage of the increased demand for our services, we invested in additional equipment, sub-rented equipment from third parties, and attract new customers. Pricingused sub-contractors on certain solids control jobs. Rental Days, a key measure of our activity level, for our primary revenue generating rental products decreased approximately 25%increased by more than 60.0% when comparing the year ended December 31, 20162017 to the year ended December 31, 2015. In addition, demand2016. A price increase of more than 10%, when comparing the year ended December 31, 2017 to the year ended December 31, 2016, on the day rates for our services declined throughout 2015tanks and through most of 2016 resulting in reduced utilization of equipment andpumps further contributingcontributed to our declinethe increase in revenue. During the fourth quarterThe favorable impact of 2016, we ceased all operating activity in the northeast due to a significant decline in demand in the area. The resulting declines in revenue were minimally offset by increases in demand for our equipment in Texas, particularlyincreased utilization and increased pricing in the Permian Basin, the Scoop/Stack region, and the Eagle Ford shale was slightly offset by the elimination of revenue generated in the fourth quarter of 2016.northeast, approximately $2.7 million during the year ended December 31, 2016, due to our decision to shut down operations in that region.

Operating Expenses. Our operating expenses for the year ended December 31, 2017 increased 19.3% to $9.9 million from $8.3 million for the year ended December 31, 2016. The increase in costs is a direct reflection of the increased activity when comparing the years ended December 31, 2017 and 2016. Although the costs in dollars increased, the rate at which operating expenses increased was less than the rate at which revenue increased resulting in a decline of operating expenses as a percent of revenue to 67.8% for the year ended December 31, 2017 from 75.7% for the year ended December 31, 2016. The decrease in operating expenses as a percent of revenue is primarily due to our discipline in maintaining the reduced cost structure achieved in 2016 despite the increase in demand, our ability to increase pricing to our customers more quickly than our costs increased, and the spread of certain fixed costs across a larger revenue base. Our primary operating expenses consist of payroll and third-party services. Payroll and related expenses decreased to $8.3$3.6 million, or 75.7% of revenue, from $16.2 million, or 63.5%24.5% of revenue, for the year ended December 31, 2015. The decrease2017 from $4.1 million, or 37.2% of $7.9 million fromrevenue, for the year ended December 31, 20152016. The decrease in payroll-related expenses and payroll-related expenses as a percent of revenue is primarily due toa result of closing the declinesolids control operations in activity described above, specifically the resulting decline in payroll and other variable expenses, combined with a decrease of our reliance on third party sub-rental and trucking services. During 2016, payroll decreased due to both a declinenortheast offset slightly by the increases in headcount 50 asand labor hours required to support incremental activity in Texas, Oklahoma and New Mexico. Third-party expenses, including the sub-rental of equipment, the use of third-party trucking and washout services, and the use of sub-contractors, increased to $3.9 million in 2017, or 26.4% of revenue, from $1.7 million, or 15.2% of revenue, for the year ended December 31, 2016 compared2016. In early 2017, our owned equipment and our labor force was fully utilized requiring us to 125 as of December 31, 2015, and decreases in average wage rates. The increase in the percentage of operating expensesuse third-party services to revenue between the years is primarily due tosatisfy the significant declineincreases in pricing and the inability to reduce our costs to mirror the timing and magnitude of the reduction in customer pricing (see further discussion of cost cuts in “Operational Restructuring” section above).demand.

Depreciation and Amortization. Depreciation and amortization expense decreased 10.9%30.2% to $3.7 million for the year ended December 31, 2017 compared to $5.3 million for the year ended December 31, 2016 compared to $6.0 million for the year ended December 31, 2015.2016. The decrease is due primarily to the disposition of assets to Tiger in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments”and “Note 3 – Recapitalization” in the notes to our consolidated financial statements).

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $2.9 million, or 20.1% of revenue, for the year ended December 31, 2017 compared to $4.1 million, or 37.0% of revenue, for the year ended December 31, 2016 compared to $7.3 million, or 28.6% of revenue, for the year ended December 31, 2015.2016. Selling, general and administrative expenses consist primarily of overhead costs which we generally consider to be fixed. The year-over-year decline of $3.2$1.1 million, or 44.2%27.8%, reflects the severe cost cutting initiatives started in 2015 which continued in 2016. These initiatives, implemented in responseis primarily due to the massivereduction in headcount of selling, general and administrative employees to 15 as of December 31, 2017 from 37 as of January 1, 2016. Our headcount reductions in 2016 were primarily due to a decline in activity and a requirement to cut costs due to the impact of the downturn in the industry, included headcountindustry. Although we have operated in a time of increasing demand throughout 2017, we have improved the productivity of our employees and wage rate decreases, the reduction of executive management salariessuccessfully modified our selling, general and elimination of bonuses, and significant reductionsadministrative organization to create efficiencies which allow us to operate under a leaner cost structure than we did in travel, entertainment and office expense.prior years. Selling, general and administrative expenses also include expenses that are either non-recurring or non-cash in nature with an aggregate value of $0.9$0.7 million and $0.5$0.9 million during the years ended December 31, 20162017 and 2015,2016, respectively (see further discussion in “How We Evaluate Our Operations” section above).

Reduction in Value of Assets. In the years ended December 31, 20162017 and 2015,2016, we recorded a reduction in value of assets of approximately $58,000 and $17.7 million, respectively. The reduction in value recorded during the year ended December 31, 2017 resulted from the disposal of vehicles and $11.4 million, respectively.the closure of facilities in connection with ceasing operations in the northeast in late 2016. The primary component of the reduction in value during 2016 was a $15.6 million impairment charge on the transfer of equipment to Tiger in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments”and “Note 3 – Recapitalization” in the notes to our consolidated financial statements). In addition, in 2016, we recorded a reduction in value of intangibles of $1.1 million and a reduction in value of property and equipment of $1.1 million. The reduction in the value of intangibles consisted of a $0.5 million reduction in an intangible associated with a non-compete which management determined was non-enforceable and a $0.6 million reduction in an intangible associated with a supply agreement which had no value subsequent to the liquidation of the supplier under bankruptcy proceedings. The $1.1 million reduction in value of property and equipment was in connection with asset sales and disposals completed during the year to fund working capital needs and repay debt. In 2015, we recorded a $11.1 million reduction in value of goodwill in connection with our annual impairment testing (see Critical Accounting Policies and Estimates – Valuation of Indefinite-Lived Intangible Assets) and a $0.3 million reduction in property and equipment.

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

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

Interest Expense, net. Interest expense and amortization of deferred loan costs was approximately $24,000 for the year ended December 31, 2017 compared to $2.4 million for the year ended December 31, 2016 compared to $2.0 million for the year ended December 31, 2015.2016. The $0.4 million increasesignificant decrease is primarily due primarily to the quarterly ticking fee being accrued for a full yearextinguishment of our former credit facility and certain other interest-bearing obligations on January 31, 2017 in 2016 compared to one quarter in 2015, the write-off of deferred loan costs related toconnection with the Recapitalization (see further discussion in “Note 2 – Recent Developments”and an increased interest rate on“Note 3 – Recapitalization” in the notes to our primary credit facility. These increases were partially offset by interest being charged on a reduced outstanding debt balance subsequent to the debt modification effective in September 2015.consolidated financial statements).

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

Gain on Extinguishment of Debt and Other Liabilities. During the year ended December 31, 2016,2017, we recorded $0.1a gain on extinguishment of debt and other liabilities of $2.4 million of interest expense due to Pelican, a related party,our troubled debt restructuring in connection with the Recapitalization.

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Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our condensed consolidated financial statements).

Income Taxes. Income taxes increased to a benefit of $7.9 million, or an effective tax rate of 28.7%, for the year ended December 31, 2016 from a benefit of $3.4 million, or an effective tax rate of 19.5%, for the year ended December 31, 2015. The effective tax rate increased by 9.2% when comparing the year ended December 31, 2016 to the year ended December 31, 2015 due to goodwill impairment in 2015 which did not recur in 2016 offset by a valuation allowance taken in 2016. Management assesses the realizability of deferred tax assets on a quarterly basis. From itsour evaluation as of December 31, 2017 and 2016, the Company has concluded that based on the weight of available evidence, it is not more likely than not tothat the Company will not realize the benefit of its deferred tax assets. Therefore, the Company establishedAs such, a valuation allowance of $2.4 million is included on the consolidated balance sheet for the years ended December 31, 2017 and 2016. Income tax expense was approximately $59,000 for the year ended December 31, 2016. There was no2017 which reflects Texas Franchise Tax. Our current tax expense continues to be indicative of the impact of state taxes, due to our continued full valuation allowance recorded duringon net deferred tax assets. The income tax benefit recognized for the year ended December 31, 2015.2016 was $7.9 million, or an effective tax rate of 28.7%. During the year ended December 31, 2016, we recorded the impact of the initial full valuation allowance which had a significant impact on our effective tax rate.

Discontinued Operations. Discontinued operations include Evolution which specialized as an operator of MWD downhole tools. The operations were completely abandoned by December 31, 2016 and there was no income or loss from discontinued operations during the year ended December 31, 2017. Losses from discontinued operations, net of income taxes, were $2.5 million during 2016, as compared to $2.0 million during 2015. The increasefor the year ended December 31, 2016. (See further discussion in the loss from discontinued operations in 2016 is primarily due to a $2.6 million reduction in value of assets and a $3.3 million decrease in revenue partially offset by a corresponding decrease in operating expenses. See “Note 1516 – Discontinued Operations” in the notes to our consolidated financial statements for additional detail.statements.)

Liquidity and Capital Resources

Net Cash Provided by Operating Activities. Cash flow usedDuring the years ended December 31, 2017 and 2016, cash flows from operating activities were $0.4 million and approximately $9,000, respectively. The increase in cash flows from operating activities is primarily due to the significant improvement in operating results year-over-year, partially offset by requirements to fund changes in working capital. Our working capital needs in 2017 were primarily related to the substantial increase in activity year-over-year as compared to the significant decline in activity in 2016 when compared to 2015. In addition, we had an unusually high balance of unbilled receivables as of December 31, 2017 due to an increased lag time between the end of jobs and invoicing. During the first quarter of 2018, we have addressed this issue and the lag time between the end of jobs and the invoice creation date has decreased substantially when compared to 2017. With projected improved operating results and a shorter billing cycle, we believe we will generate positive cash flows from operating activities was less than $0.1 million forduring the year ended December 31, 2016 as compared to cash provided by operations of $3.9 million for the year ended December 31, 2015. The decrease in 2016 was due primarily to a decrease in operating cash flow generated by discontinued operations and due to the recording of a valuation allowance, partially offset by a decrease in working capital.2018.

Liquidity. As a result of the industry downturn, many customers have experienced a significant reduction in their liquidity and have faced challenges accessing the capital markets. Several energy service and equipment companies have declared bankruptcy, or have had to exchange equity for the forgiveness of debt, while others have been forced to sell assets in an effort to preserve liquidity. We faced similar challenges requiring us to undergo a capital restructuring. For a discussion of the Recapitalization and its restructuring of our credit facility, see “Note 2 – Recent Developments” in the notes to our consolidated financial statements included elsewhere in this document.

While as of December 31, 2016, our liquidity was limited solely to cash and cash equivalents of $0.7 million, the Recapitalization increased our liquidity. The table below reflects our liquidity as of June 30, 2017 (in thousands):

Cash and cash equivalents		$	573
Revolving facility availability (1), (3)			250
Delayed draw term loan availability (2), (3)			975
Total liquidity		$	1,798

____________

(1)	Based on eligible receivables as of June 30, 2017.
(2)	Available to finance 90% of purchase price for capital expenditures, including 90% of purchase commitments in table below.26
(3)
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Capital Expenditures. Capital expenditures are the main component of our investing activities. Cash capital expenditures for the year ended December 31, 2016 decreased2017 increased to $0.4$1.7 million from $1.4$0.4 million for the year ended December 31, 2015 due2016. During the year ended December 31, 2017, we spent approximately $0.5 million to a significant decrease in expansionary capital expendituresacquire assets, such as flare igniters and the minimization of maintenance capital expenditures. In 2017, our cash flows for capital expenditures are limited to maintenance capital expenditures and acquiring assetsdiesel mud pumps, to replace equipment which we sub-rent to meet customer demand when our owned equipment is fully utilized. In addition, we repurchased certain equipment, approximately $0.3 million, which had been sold to Tiger in connection with the Recapitalization, specifically centrifuges, in order to meet increasing demand. Every one to two years, our centrifuges require refurbishments. Due to lack of demand in 2015 and 2016, we did not refurbish any centrifuges. In 2017, we spent approximately $0.3 million to refurbish centrifuges in order to meet the increased demand for our solids control services. The remainder of our expenditures during the year ended December 31, 2017 were related to ongoing replacement capital expenditures for items such as hoses and containment liners. In 2018, in addition to capital expenditures required to support the ongoing operations, we anticipate spending at least $0.5 million to refurbish up to 24 centrifuges in order to meet the continuing increase in demand for our solids control services. We are also aggressively seeking opportunities to purchase additional tanks and diesel mud pumps at discounted prices so that we can replace equipment which we are currently sub-renting.

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

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