United States
Securities and Exchange Commission
Washington,UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the
For the Period Ended September 30, 2015March 31, 2016
or
¨ Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
for the Transition Period From _____________to ________________________ to ___________
Commission File Number 33-92894
ALY ENERGY SERVICES, INC. |
Delaware | 75-2440201 | |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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3 Riverway, Suite 920 Houston, TX | 77056 | |
(Address of Principal Executive Offices) | (Zip Code) |
(713)-333-4000
(Registrant's Telephone Number, including area code.)
Not Applicable
(Former name, Former Address and Former Fiscal year, if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ | Smaller reporting company | x |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date.
Common Stock, $0.001 Par Value – 6,706,814 shares as of November 16, 2015.May 13, 2016.
INDEX
ALY ENERGY SERVICES, INC.
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PART I. FINANCIAL INFORMATION | |||||||
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Item 1. | Condensed Consolidated Financial Statements |
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Condensed Consolidated Balance Sheets as of | 3 | ||||||
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Condensed Consolidated Statements of Operations for the Three | 4 | ||||||
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Condensed Consolidated Statements of Cash Flows for the | 5 | ||||||
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Notes to Condensed Consolidated Financial Statements | 6 | ||||||
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Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 19 | |||||
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 26 |
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Item 4. | Controls and Procedures |
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| 26 | ||||||
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PART II. OTHER INFORMATION |
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Item 6. | Exhibits | 27 |
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Signatures | 28 |
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2 |
ALY ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
| September 30, |
| December 31, |
|
| March 31, 2016 |
| December 31, 2015 |
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| (Unaudited) |
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| (Unaudited) |
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Assets |
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Current Assets |
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Cash and Cash Equivalents |
| $ | 2,739 |
| $ | 2,050 |
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| $ | 512 |
| $ | 497 |
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Accounts Receivable, Net of Allowance for Doubtful Accounts of $440 and $178, as of September 30, 2015 and December 31, 2014, respectively |
| 4,816 |
| 11,053 |
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Restricted Cash |
| 276 |
| - |
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Accounts Receivable, Net of Allowance for Doubtful Accounts of $422 and $447, as of March 31, 2016 and December 31, 2015, respectively |
| 3,008 |
| 3,877 |
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Unbilled Receivables |
| 654 |
| 2,479 |
|
| 379 |
| 771 |
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Inventory |
| 294 |
| 431 |
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| 225 |
| 227 |
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Deferred Tax Assets |
| 283 |
| 57 |
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Prepaid Expenses and Other Current Assets |
|
| 313 |
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| 757 |
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| 686 |
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| 730 |
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Total Current Assets |
| 9,099 |
| 16,827 |
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| 5,086 |
| 6,102 |
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Property and Equipment, Net |
| 54,958 |
| 56,484 |
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| 52,038 |
| 53,722 |
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Goodwill |
| 264 |
| 264 |
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Intangible Assets, Net |
| 8,929 |
| 10,475 |
|
| 7,918 |
| 8,413 |
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Goodwill |
| 11,407 |
| 11,407 |
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Deferred Loan Costs, Net |
| 485 |
| 768 |
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Other Assets |
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| 34 |
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| 12 |
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| 26 |
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| 46 |
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Total Assets |
| $ | 84,912 |
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| $ | 95,973 |
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| $ | 65,332 |
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| $ | 68,547 |
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Liabilities and Stockholders' Equity |
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Current Liabilities |
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Accounts Payable |
| $ | 1,716 |
| $ | 4,628 |
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| $ | 1,633 |
| $ | 1,228 |
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Accounts Payable - Affiliates |
| - |
| 590 |
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Accrued Expenses |
| 2,112 |
| 2,453 |
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| 1,831 |
| 2,530 |
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Deferred Tax Liabilities |
| 6 |
| 58 |
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Current Portion of Long-Term Debt |
| 2,611 |
| 6,758 |
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| 20,783 |
| 20,765 |
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Current Portion of Contingent Payment Liability |
|
| 792 |
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| 876 |
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| 652 |
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| 652 |
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Total Current Liabilities |
| 7,237 |
| 15,363 |
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| 24,899 |
| 25,175 |
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Long-Term Debt, Net of Current Portion |
| 23,446 |
| 23,455 |
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Long-Term Debt, Net |
| 2,703 |
| 2,814 |
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Contingent Payment Liability, Net of Current Portion |
| 875 |
| 2,233 |
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| 551 |
| 530 |
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Deferred Tax Liabilities |
| 10,048 |
| 12,136 |
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| 7,724 |
| 8,695 |
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Other Long-Term Liabilities |
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| 35 |
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| 28 |
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| 38 |
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| 40 |
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Total Liabilities |
| 41,641 |
| 53,215 |
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| 35,915 |
| 37,254 |
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Commitments and Contingencies (See Note 5) |
| - |
| - |
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| - |
| - |
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Aly Operating Redeemable Preferred Stock, $0.01 par value, 4,000,000 shares authorized, issued and outstanding at September 30, 2015 and December 31, 2014 |
| 4,579 |
| 4,382 |
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Aly Centrifuge Redeemable Preferred Stock, $0.01 par value, 15,000 shares authorized, 9,252 shares issued and outstanding as of September 30, 2015 and December 31, 2014 |
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| 9,818 |
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| 9,584 |
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Aly Operating Redeemable Preferred Stock, $0.01 par value, 4,000,000 shares authorized, issued and outstanding at March 31, 2016 and December 31, 2015 |
| 4,715 |
| 4,647 |
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Aly Centrifuge Redeemable Preferred Stock, $0.01 par value, 15,000 shares authorized, 8,876 shares issued and outstanding as of March 31, 2016 and December 31, 2015 |
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| 9,836 |
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| 9,755 |
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| 14,397 |
| 13,966 |
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| 14,551 |
| 14,402 |
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Stockholders' Equity |
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Common Stock, $0.001 par value, 200,000,000 shares authorized, 6,707,039 shares issued, and 6,706,814 shares outstanding as of September 30, 2015 and 200,000,000 shares authorized, 5,511,341 issued and 5,511,116 outstanding as of December 31, 2014 |
| 7 |
| 6 |
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Common Stock, $0.001 par value, 100,000,000 shares authorized, 6,707,039 shares issued, and 6,706,814 shares outstanding as of March 31, 2016 and December 31, 2015 |
| 7 |
| 7 |
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Treasury Stock, 225 Shares at Cost |
| (2 | ) |
| (2 | ) |
| (2 | ) |
| (2 | ) | ||||
Preferred Stock, $0.001 par value, 25,000,000 shares authorized, 0 issued and outstanding at March 31, 2016 and December 31, 2015 |
| - |
| - |
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Additional Paid-In-Capital |
| 29,042 |
| 24,917 |
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| 28,760 |
| 28,909 |
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Retained Earnings |
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| (173 | ) |
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| 3,871 |
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Accumulated Deficit |
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| (13,899 | ) |
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| (12,023 | ) | ||||||||
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Total Stockholders' Equity |
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| 28,874 |
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| 28,792 |
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| 14,866 |
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| 16,891 |
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Total Liabilities and Stockholders' Equity |
| $ | 84,912 |
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| $ | 95,973 |
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| $ | 65,332 |
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| $ | 68,547 |
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See accompanying notes to condensed consolidated financial statements.
3 |
ALY ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share data)
(Unaudited)
|
| Three Months Ended March 31, |
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| 2016 |
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| 2015 |
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Revenues |
| $ | 4,288 |
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| $ | 8,996 |
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Expenses: |
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Operating Expenses |
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| 3,143 |
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| 6,457 |
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Depreciation and Amortization |
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| 1,613 |
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| 1,653 |
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Selling, General and Administrative Expenses |
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| 1,780 |
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| 2,432 |
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Total Expenses |
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| 6,536 |
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| 10,542 |
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Operating Loss |
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| (2,248 | ) |
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| (1,546 | ) |
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Interest Expense, Net |
|
| 588 |
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| 491 |
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Loss Before Income Tax |
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| (2,836 | ) |
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| (2,037 | ) |
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Income Tax Benefit |
|
| (960 | ) |
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| (598 | ) |
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Net Loss |
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| (1,876 | ) |
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| (1,439 | ) |
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Preferred Stock Dividends |
|
| 178 |
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| 175 |
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Accretion of Preferred Stock, Net |
|
| (29 | ) |
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| (33 | ) |
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Net Loss Attributable to Common Stockholders |
| $ | (2,025 | ) |
| $ | (1,581 | ) |
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Basic and Diluted Net Loss per Common Share |
| $ | (0.30 | ) |
| $ | (0.28 | ) |
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Basic and Diluted Average Common Shares Outstanding |
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| 6,706,814 |
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| 5,634,561 |
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See accompanying notes to condensed consolidated financial statements.
Three Months Ended September 30, Nine Months Ended September 30, 2015 2014 2015 2014 Revenues Expenses: Operating Expenses Depreciation and Amortization Selling, General and Administrative Expenses Total Expenses Operating Income/(Loss) Interest Expense, Net Income/(Loss) Before Income Tax Income Tax Expense/(Benefit) Net Income/(Loss) Preferred Stock Dividends Accretion of Preferred Stock, Net Net Income/(Loss) Available to Common Stockholders Basic Net Income/(Loss) per Common Share Diluted Net Income/(Loss) per Common Share Basic Average Common Shares Outstanding Diluted Average Common Shares Outstanding $ 6,936 $ 13,491 $ 23,080 $ 27,851 4,382 7,607 15,616 14,566 1,702 1,345 5,067 3,409 2,347 2,430 7,372 5,480 8,431 11,382 28,055 23,455 (1,495 ) 2,109 (4,975 ) 4,396 459 376 1,404 891 (1,954 ) 1,733 (6,379 ) 3,505 (921 ) 621 (2,336 ) 1,387 (1,033 ) 1,112 (4,043 ) 2,118 175 141 528 297 (32 ) (34 ) (97 ) (24 ) $ (1,176 ) $ 1,005 $ (4,474 ) $ 1,845 $ (0.21 ) $ 0.18 $ (0.79 ) $ 0.37 $ (0.21 ) $ 0.18 $ (0.79 ) $ 0.37 5,659,390 5,469,346 5,649,636 5,012,258 5,659,390 5,969,346 5,649,636 5,280,181
4 |
ALY ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
| Three Months Ended March 31, |
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| 2016 |
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| 2015 |
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Cash Flows from Operating Activities |
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Net Loss |
| $ | (1,876 | ) |
| $ | (1,439 | ) |
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities: |
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Depreciation and Amortization of Property and Equipment |
|
| 1,117 |
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| 1,138 |
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Amortization of Deferred Loan Costs |
|
| 97 |
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| 158 |
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Amortization of Intangible Assets |
|
| 496 |
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|
| 515 |
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Bad Debt Expense |
|
| 21 |
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| 15 |
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Fair Value Adjustments to Contingent Payment Liability |
|
| 21 |
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|
| (340 | ) |
Loss on Disposal of Assets |
|
| 300 |
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|
| 5 |
|
Deferred Taxes |
|
| (971 | ) |
|
| (629 | ) |
Changes in Operating Assets and Liabilities: |
|
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Accounts Receivable |
|
| 848 |
|
|
| 3,045 |
|
Unbilled Receivables |
|
| 392 |
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|
| 1,463 |
|
Inventory |
|
| 2 |
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|
| 130 |
|
Prepaid Expenses and Other Assets |
|
| 44 |
|
|
| (1,094 | ) |
Accounts Payable |
|
| 405 |
|
|
| (1,966 | ) |
Accrued Expenses and Other Liabilities |
|
| (701 | ) |
|
| (391 | ) |
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Net Cash Provided by Operating Activities |
|
| 195 |
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| 610 |
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Cash Flows from Investing Activities |
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Purchase of Property and Equipment |
|
| (234 | ) |
|
| (577 | ) |
Proceeds from Disposal of Property and Equipment |
|
| 500 |
|
|
| - |
|
Change in Restricted Cash |
|
| (276 | ) |
|
| - |
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Net Cash Used in Investing Activities |
|
| (10 | ) |
|
| (577 | ) |
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Cash Flows from Financing Activities |
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Proceeds from Issuance of Common Stock, Net of Transaction Cost |
|
| - |
|
|
| 550 |
|
Repayment of Debt |
|
| (170 | ) |
|
| (1,894 | ) |
Payment of Deferred Loan Costs |
|
| - |
|
|
| (7 | ) |
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Net Cash Used in Financing Activities |
|
| (170 | ) |
|
| (1,351 | ) |
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Net Increase/(Decrease) in Cash and Cash Equivalents |
|
| 15 |
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| (1,318 | ) |
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Cash and Cash Equivalents, Beginning of Period |
|
| 497 |
|
|
| 2,050 |
|
Cash and Cash Equivalents, End of Period |
| $ | 512 |
|
| $ | 732 |
|
See accompanying notes to condensed consolidated financial statements.
ALY ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended September 30, 2015 2014 Cash Flows from Operating Activities Net Income/(Loss) Adjustments to Reconcile Net Income/(Loss) to Net Cash Provided by Operating Activities Depreciation and Amortization of Property and Equipment Amortization of Deferred Loan Costs Amortization of Intangible Assets Stock-Based Compensation Bad Debt Expense Fair Value Adjustments to Contingent Payment Liability Loss on Disposal of Asset Deferred Taxes Changes in Operating Assets and Liabilities Accounts Receivable Unbilled Receivables Inventory Prepaid Expenses and Other Assets Accounts Payable Accounts Payable - Affiliates Accrued Expenses and Other Liabilities Net Cash Provided by Operating Activities Cash Flows from Investing Activities Purchase of Property and Equipment Disposal of Property and Equipment Cash Paid for United Acquisition, Net of Cash Acquired Cash Acquired from Acquisition of Evolution Guidance Systems Net Cash Used in Investing Activities Cash Flows from Financing Activities Proceeds from Issuance of Common Stock, Net of Transaction Cost Proceeds from Borrowing on Debt Payment of Contingent Consideration Repayment of Debt Payment of Deferred Loan Costs Financing Costs Net Cash Provided by/(Used in) Financing Activities Net Increase/(Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Period Cash and Cash Equivalents, End of Period $ (4,043 ) $ 2,118 3,521 2,416 311 203 1,546 993 100 - 320 94 (580 ) (183 ) 209 16 (2,366 ) (31 ) 5,917 (4,636 ) 1,825 (1,741 ) 138 (198 ) 422 (990 ) (2,912 ) 1,403 - (821 ) (334 ) 2,443 4,074 1,086 (1,353 ) (10,245 ) 216 - - (15,063 ) - 167 (1,137 ) (25,141 ) 3,872 9,110 - 28,069 (862 ) - (5,223 ) (14,079 ) (35 ) - - (485 ) (2,248 ) 22,615 689 (1,440 ) 2,050 1,440 2,739 $ -
See accompanying notes to condensed consolidated financial statements.
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – NATURE OF OPERATIONS
Aly Energy Services, Inc., ("Aly Energy" or the "Company""the Company"), founded in July 2012,together with its subsidiaries, provides oilfield services, including surface equipment rental, solids control services and directional drilling services, to exploration and production companies. Throughout this report, we refer to Aly Energy and its subsidiaries as "we", "our" or "us". We operate in select oil and natural gas basins of the contiguous United States.
On October 26, 2012, Aly Operating, Inc. ("Aly Operating") acquiredNOTE 2 – LIQUIDITY
The industry in which we operate has been negatively impacted by the price of oil and natural gas and, as a result, the drilling rig count has dropped steadily since the end of 2014. Our activity is tied directly to the rig count and, even though we instituted cost cutting measures, we were unable to cut costs enough to match the decline in our business activity and we incurred losses for the year ended December 31, 2015 and for the first three months of 2016. As a result, at March 31, 2016 and at December 31, 2015, we were not in compliance with certain financial covenants set forth in our credit agreement. Therefore, on March 31, 2016, we completed the execution and delivery of a forbearance agreement and amendment to the credit agreement. We amended the forbearance agreement on May 13, 2016 in order to waive our compliance with an additional financial covenant, the fixed charge coverage ratio, for the period ended March 31, 2016.
Among other provisions, the lenders have agreed to forbear from exercising their remedies under the credit agreement until the earlier of July 10, 2016 or the date on which forbearance is terminated due to specified events, including (i) the occurrence of other defaults under the credit agreement, (ii) our failure to hire an independent financial advisor prior to April 10, 2016 or (iii) our failure to present a detailed plan for asset sales or equity capital acceptable to the lenders yielding net cash proceeds to us of at least $2.5 million by May 25, 2016. We hired an independent financial advisor and such advisor commenced the engagement prior to the deadline of April 10, 2016. In conjunction with agreeing to forbear from exercising their remedies under the credit agreement, the lenders reduced the revolving credit portion of the credit facility to zero thereby eliminating our ability to borrow additional funds under the existing credit facility.
We are currently in discussions with various stakeholders and advisors to develop and execute a plan to satisfy the requirements of the forbearance agreement. There can be no assurance that our actions will be deemed sufficient by the lender to extend the forbearance agreement and, if our actions are deemed insufficient, our outstanding debt will become immediately due and payable. If the debt becomes due and payable, we do not have sufficient liquidity to repay all of the stockoutstanding debt to the lender (approximately $20.1 million at March 31, 2016) and we might need to file for protection under Chapter 11 of Austin Chalk Petroleum Services Corp. ("Austin Chalk"). Austin Chalk provides surface rental equipment as well as roustabout services which include the rig-up and rig-down of equipment and the hauling of equipment to and from the customer's location.U.S. Bankruptcy Code.
On April 15, 2014, Aly Energy acquiredThese unaudited condensed consolidated financial statements are prepared on a going concern basis of accounting, which contemplates that we will be able to operate in the equity interestsnormal course of United Centrifuge, LLC ("United")business. The concerns around our liquidity raise substantial doubt about our ability to continue to operate as wella going concern. These unaudited condensed consolidated financial statements do not include any adjustments that may relate to the going concern uncertainty. We have classified our indebtedness under the credit agreement as certain assets used in United's business that were owned by related parties of United (collectivelya current liability as the "United Acquisition"). In connection with the United Acquisition, United merged with and into Aly Centrifuge Inc. ("Aly Centrifuge"), a wholly-owned subsidiary of Aly Energy. United operates within the solids control and fluids management sectors of the oilfield services and rental equipment industry, offering its customers the option of renting centrifuges and auxiliary solids control equipment without personnel or the option of payingforbearance agreement remedies our breach for a full-service solids control package which includes operators on-site 24 hours a day.less than one year.
On July 1, 2014, the Company acquired all of the issued and outstanding stock of Evolution Guidance Systems Inc. ("Evolution"), an operator of Measurement-While-Drilling ("MWD") downhole tools.
6 |
The Company, which has three wholly-owned subsidiaries, Aly Operating, Aly Centrifuge and Evolution, operates as one business segment which services customers within the United States.ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation: TheOur accompanying condensed consolidated financial statements of the Company have not been audited by the Company'sour independent registered public accounting firm, except the condensed consolidated balance sheet at December 31, 20142015 is derived from audited consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for fair presentation have been included.
These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America ("U.S. GAAP") for complete financial statements. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the Company'sour audited consolidated financial statements and notes thereto for the year ended December 31, 2014,2015, which are included in the Company'sour Annual Report on Form 10-K filed with the SEC on April 1, 2015.15, 2016. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.
These unaudited condensed consolidated financial statements include the accounts of Aly Energy and its subsidiaries. All significant inter-company transactions and accounts have been eliminated upon consolidation.
Reverse Stock Split:On June 19, 2015, the Company effected a 1-for-20 reverse stock split of its common stock ("Reverse Split"), as approved by its Board of Directors and stockholders. All information in this Quarterly Report on Form 10-Q relating to the number of shares, price per share and per share amounts has been retroactively restated to give effect to the Reverse Split.
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue RecognitionProperty and Equipment: The Company generates revenues primarily from renting Major classifications of property and equipment at per-day rates. In connection with certain of its solids control, skimming operations and directional drilling and MWD operations, the Company also provides personnel to operate its equipment at the customer's location at per-day or per-hour rates. In addition, the Company may provide equipment transportation and rig-up/rig-down services to the customer at flat rates per job or at an hourly rate. Revenue is recognized when it is realized or realizable and earned and when collectability is reasonably assured.their respective useful lives are as follows (in thousands):
Fair Value of Financial Instruments: Financial instruments consist of cash and cash equivalents, accounts receivable, unbilled receivables, accounts payable, accrued expenses, and a liability for contingent payments. The carrying values of cash and cash equivalents, accounts receivable, unbilled receivables, accounts payable, and accrued expenses approximate fair value due to their short-term nature.
The Company measures its liability for contingent payments at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:
Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.
Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management's best estimate of what market participants would use in valuing the asset or liability at the measurement date.
The Company's liability for contingent payments represents the fair value of estimated additional cash payments related to the United Acquisition. The payments are subject to the achievement of certain financial performance goals. As of September 30, 2015, the fair value of the liability for contingent payments is the present value of the estimated remaining payments. The present value calculation for the remaining payments due on May 31, 2016 and 2017 is considered a Level 3 measurement and is based upon the Company's internal model and projections.
The following table provides a roll forward of the fair value of the liability for contingent payments which includes Level 3 measurements (in thousands):
For the Three Months Ended For the Nine Months Ended 2015 2014 2015 2014 Fair Value, Beginning of Period Additions Changes in Fair Value Payments Fair Value, End of Period
September 30,
September 30, $ 1,937 $ 3,604 $ 3,109 $ - - - - 3,517 (270 ) (270 ) (580 ) (183 ) - - (862 ) - $ 1,667 $ 3,334 $ 1,667 $ 3,334
Changes in fair value are recognized in selling, general and administrative expenses in the condensed consolidated statement of operations during the three and nine months ended September 30, 2015 and 2014.
|
| March 31, 2016 |
|
| December 31, 2015 |
| ||
|
| (unaudited) |
|
|
|
| ||
|
|
|
|
|
|
| ||
Machinery and Equipment |
| $ | 55,707 |
|
| $ | 55,553 |
|
Vehicles, Trucks & Trailers |
|
| 4,615 |
|
|
| 5,789 |
|
Office Furniture, Fixtures and Equipment |
|
| 835 |
|
|
| 835 |
|
Lease hold Improvements |
|
| 221 |
|
|
| 217 |
|
Buildings |
|
| 212 |
|
|
| 212 |
|
|
|
|
|
|
|
|
|
|
|
|
| 61,590 |
|
|
| 62,606 |
|
Less: Accumulated Depreciation and Amortization |
|
| (9,579 | ) |
|
| (9,086 | ) |
|
|
|
|
|
|
|
|
|
|
|
| 52,011 |
|
|
| 53,520 |
|
Assets Not Yet Placed In Service |
|
| 27 |
|
|
| 202 |
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net |
| $ | 52,038 |
|
| $ | 53,722 |
|
7 |
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment: Property and equipment are recorded at cost less accumulated depreciation and amortization. Maintenance and repairs, which do not improve or extend the life of the related assets, are charged to expense when incurred. Refurbishments and renewals are capitalized when the value of the equipment is enhanced for an extended period. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operating income.
The cost of property and equipment currently in service is depreciated, on a straight-line basis, over the estimated useful lives of the related assets, which range from one to 20 years. A residual value is used for asset types deemed to have a salvage value. Major classifications of property and equipment and their respective useful lives are as follows (in thousands):
Estimated Useful Lives September 30, December 31, (unaudited) Machinery and Equipment 1-20 years Vehicles, Trucks & Trailers 5-7 years Office Furniture, Fixtures and Equipment 3-7 years Software 3-5 years Leasehold Improvements Remaining Term Buildings 20 years Less: Accumulated Depreciation and Amortization Assets Not Yet Placed In Service Property and Equipment, Net
2015
2014 $ 56,042 $ 55,353 6,147 5,243 465 266 232 100
of Lease192 180 212 - 63,290 61,142 (8,535 ) (5,615 ) 54,755 55,527 203 957 $ 54,958 $ 56,484
Depreciation and amortization of property and equipment for the three months ended September 30, 2015 and 2014 was $1.2 million and $0.8 million, respectively. Depreciation and amortization of property and equipment for the nine months ended September 30, 2015 and 2014 was $3.5 million and $2.4 million, respectively.
Impairment of Long-Lived Assets: Long-lived assets, which include property and equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. The determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense. The impairment loss is determined by comparing the fair value with the carrying value of the related assets. The Company recorded no impairment for the three and nine months ended September 30, 2015 and 2014.
Goodwill:The carrying amount of goodwill is tested annually for impairment in the fourth quarter and whenever events or circumstances indicate its carrying value may not be recoverable. During the three and nine months ended September 30, 2015, there have been no events or circumstances indicating that the carrying value of goodwill may not be recoverable.
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets: Intangible assets consist of the following (in thousands):
|
| Customer Relationships |
|
| Tradename |
|
| Non-Compete |
|
| Sales Contract |
|
| Supply Agreements |
|
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Estimated Useful Lives |
| 2 - 10 years |
|
| 4 - 10 years |
|
| 4 - 5 years |
|
| 4 years |
|
| 4 years |
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
As of March 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost |
| $ | 5,441 |
|
| $ | 2,355 |
|
| $ | 2,586 |
|
| $ | 524 |
|
| $ | 1,686 |
|
| $ | 12,592 |
|
Accumulated Amortization |
|
| (1,618 | ) |
|
| (656 | ) |
|
| (1,313 | ) |
|
| (262 | ) |
|
| (825 | ) |
|
| (4,674 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value |
| $ | 3,823 |
|
| $ | 1,699 |
|
| $ | 1,273 |
|
| $ | 262 |
|
| $ | 861 |
|
| $ | 7,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
| $ | 5,441 |
|
| $ | 2,355 |
|
| $ | 2,586 |
|
| $ | 524 |
|
| $ | 1,686 |
|
| $ | 12,592 |
|
Accumulated Amortization |
|
| (1,485 | ) |
|
| (592 | ) |
|
| (1,157 | ) |
|
| (225 | ) |
|
| (720 | ) |
|
| (4,179 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value |
| $ | 3,956 |
|
| $ | 1,763 |
|
| $ | 1,429 |
|
| $ | 299 |
|
| $ | 966 |
|
| $ | 8,413 |
|
Estimated Useful Lives September 30, December 31, (unaudited) Customer Relationships 2-10 years Trade Name 4-10 years Non-Compete 4-5 years Sales Contract 4 years Supply Agreement 4 years Less: Accumulated Amortization Intangible Assets, Net
2015
2014 $ 5,441 $ 5,441 $ 2,355 2,355 $ 2,586 2,586 $ 524 524 $ 1,686 1,686 12,592 12,592 (3,663 ) (2,117 ) $ 8,929 $ 10,475
Fair Value of Financial Instruments: As of March 31, 2016 and December 31, 2015, the fair value of our liability for contingent payments based on Level 3 measurements was $1.2 million.
Total amortization expenseIncome Taxes: There were no amounts recognized relating to interest and penalties in the condensed consolidated statements of operations for the three months ended September 30, 2015March 31, 2016 and 2014 was approximately $0.5 million. Total amortization expense for the nine months ended September 30, 2015 and 2014 was approximately $1.5 million and $1.0 million, respectively.2015. We had no uncertain tax positions as of March 31, 2016 or as of December 31, 2015.
Use of Estimates: The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effectaffect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
8 |
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ReclassificationsRecent Accounting Pronouncements::Certain reclassifications have been made In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to prior period condensed consolidated financial statementsrecognize revenues when promised goods or services are transferred to conformcustomers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers which deferred the effective date of ASU 2014-09 for all entities by one year with the standard now effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. In April 2016, the FASB issued ASU No. 2016-10, "Identifying Performance Obligations and Licensing" which gives further guidance on identifying performance obligations and clarification of the licensing implementation guidance. Early application is permitted to the currentoriginal effective date of January 1, 2017. Entities are permitted to apply the amendments either retrospectively to each prior reporting period presentations. These reclassifications had nopresented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. We are still evaluating the impact, if any, from this guidance and has not yet selected a method of transition.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force). The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. We adopted this guidance as of January 1, 2016 and the adoption did not have a material impact on the consolidatedour financial position, results of operations or cash flows of the Company.flows.
Recent Accounting Pronouncements:In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which defines management's responsibility to evaluate whether there is substantial doubt about the company's ability to continue as a going concern and provides guidance on the related footnote disclosure. Management should evaluate whether there are conditions or events that raise substantial doubt about the company's ability to continue as a going concern within one year after the date the annual or interim financial statements are issued. We adopted these provisions in the first quarter of 2016 and the adoption did not have a material impact on our financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which changes the guidance with respect to the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Companies have an option of using either a full retrospective or modified retrospective adoption approach. The updated guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within those annual periods. EarlyWe adopted these provisions in the first quarter of 2016 and the adoption is permitted. The Company is currently evaluating thedid not have a material impact on our financial position, results of the new guidance on its consolidated financial statements.operations or cash flows.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.The amendments in the ASU change the balance sheet presentation requirements for debt issuance costs by requiring them to be presented as a direct reduction to the carrying amount of the related debt liability. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015,We adopted this guidance as of January 1, 2016 and interim periods within those fiscal years. Earlythe adoption is permitted. Transitioning to the new guidance requires retrospective application. The Company plans to make the required change to the presentation of its debt issuance costs in the first quarter of fiscal year 2016, but it doesdid not believe such change will have a material impact on our financial position, results of operations or cash flows. The adoption did result in a reclassification of deferred debt costs related to its consolidated financial statements.long-term debt from an asset to an offset of the related liability.
9 |
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) – Simplifying the Measurement of Inventory. The amendments in the ASU require entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost and net realizable value to more closely align the measurement of inventory in U.S. GAAP with International Financial Reporting Standards. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal. ASU 2015-11 is effective on a prospective basis for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, with earlier application permitted. The Company does not believe the adoption of ASU 2015-11 will have a material impact on its consolidated financial statements.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, a revision to Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers", which was originally issued on May 28, 2014. For public business entities, certain not-for-profit entities, and certain employee benefit plans, the effective date was for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The effective date for all other entities was for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-14 on its financial statements.
In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which adds comments from the Securities and Exchange Commission (SEC) addressing ASU 2015-03, as discussed above, and debt issuance costs related to line-of-credit arrangements. The SEC commented it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company plans to adoptWe adopted ASU 2015-15 in connection with itsour adoption of ASU 2015-03 effective January 1, 2016. The Company does not anticipate2016 and the adoption of ASU 2015-15 willdid not have a material impact on the Company'sour financial condition orposition, results of operations.operations or cash flows.
In September 2015,March 2016, the FASB issued ASU 2015-16,No. 2016-09, Business Combinations: Simplifying the Accounting for Measurement-Period AdjustmentsCompensation - Stock Compensation, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in ASU 2015-16 require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a resultmodifies several aspects of the change toaccounting for share-based payment transactions, including the provisional amounts, calculatedincome tax consequences, classification of awards as ifeither equity or liabilities, and classification on the accounting had been completed at the acquisition date.statement of cash flows. ASU 2015-162016-09 is effective for annual reporting periods beginning after December 15, 2015. The Company is2016 with early adoption permitted. We are currently inevaluating what impact this standard will have on our consolidated financial statements.
Reclassifications:Reclassifications related to the process of evaluating the impact of adoption of ASU 2015-162015-03, Simplifying the Presentation of Debt Issuance Costs, have been made to prior period consolidated financial statements to conform to the current period presentations. These reclassifications had no effect on itsour consolidated financial statements.position, results of operations or cash flows.
NOTE 4 – LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
| March 31, 2016 |
|
| December 31, 2015 |
| ||
|
| (unaudited) |
|
|
|
| ||
Credit Facility |
|
|
|
|
|
| ||
Term Loan |
| $ | 15,573 |
|
| $ | 15,573 |
|
Delayed Draw Term Loan |
|
| 4,500 |
|
|
| 4,500 |
|
Subordinated Note Payable |
|
| 1,500 |
|
|
| 1,500 |
|
Equipment Financing and Capital Leases |
|
| 2,219 |
|
|
| 2,389 |
|
|
|
|
|
|
|
|
|
|
|
|
| 23,792 |
|
|
| 23,962 |
|
Less: Debt Issuance Cost, Net of Amortization |
|
| (306 | ) |
|
| (383 | ) |
Less: Current Portion |
|
| (20,783 | ) |
|
| (20,765 | ) |
|
|
|
|
|
|
|
|
|
Long-Term Debt, Net |
| $ | 2,703 |
|
| $ | 2,814 |
|
10 |
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – BUSINESS COMBINATION
United Acquisition
On April 15, 2014, Aly Energy acquired the equity interests of United as well as certain assets used in United's business that were owned by related parties of United. The acquisition expanded Aly Energy's service offering by adding solids control services and expanded Aly Energy's geographical footprint into the Northeast. Total consideration for the United Acquisition was approximately $24.5 million, comprised of the following (in thousands):
Cash Consideration Paid, Net of Cash Acquired Fair Value of Aly Centrifuge Redeemable Preferred Stock Issued Fair Value of Contingent Consideration Accounts Payable - Affiliates Total Consideration $ 15,063 5,101 3,517 821 24,502
The cash portion of the consideration was $15.1 million, net of cash acquired of $0.6 million. Redeemable preferred stock issued as consideration in the United Acquisition ("Aly Centrifuge Redeemable Preferred Stock") consists of 5,000 shares with an estimated fair value of $5.1 million (Note 7). The contingent consideration consisted of up to three future cash payments to the sellers in an amount equal to 5% of the gross revenues of the business acquired for each of the 12 month periods ending on March 31, 2015, 2016 and 2017; provided, however, that the aggregate contingent consideration will not exceed $5.0 million. On May 31, 2015, the Company made the first cash payment in the amount of $0.9 million, or 5% of the gross revenues of the business acquired for the twelve months ended March 31, 2015.
The business combination was accounted for using the acquisition method of accounting and the purchase price was allocated to the net assets acquired at their estimated fair value. The preliminary purchase price was allocated to the net assets acquired upon their estimated fair value as follows (in thousands):
Current Assets Property and Equipment Intangible Assets Goodwill Total Assets Acquired Liabilities Assumed Deferred Tax Liabilities Total Liabilities Assumed Net Assets Acquired $ 2,981 18,170 6,105 2,309 29,565 2,401 2,662 5,063 $ 24,502
Goodwill has a total value of $2.3 million. Other intangible assets have a total value of $6.1 million with a weighted average amortization period of 7 years. Other intangible assets consist of customer relationships of $2.2 million, amortizable over 10 years, trade name of $1.1 million, amortizable over 10 years, a non-compete agreement of $1.1 million, amortizable over 4 years, and a supply agreement of $1.7 million, amortizable over 4 years. Included within liabilities assumed is $0.3 million of capital leases.
During the three months ended September 30, 2015 and 2014, the United Acquisition contributed $3.8 million and $4.6 million, respectively, in revenues to the condensed consolidated financial results of the Company. The condensed consolidated financial results of the Company during the three months ended September 30, 2015 and 2014 include a net loss available to common stockholders of $0.7 million and net income of $1.1 million, respectively, prior to any allocation of the Company's financing costs and corporate expenses, generated by the United Acquisition.
During the nine months ended September 30, 2015 and 2014, the United Acquisition contributed $11.6 million and $7.6 million, respectively, in revenues to the condensed consolidated financial results of the Company. The condensed consolidated financial results of the Company during the nine months ended September 30, 2015 and 2014 include a net loss available to common stockholders of $1.4 million and net income of $1.2 million, respectively, prior to any allocation of the Company's financing costs and corporate expenses, generated by the United Acquisition.
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Evolution Acquisition
On July 1, 2014, Aly Energy acquired all of the issued and outstanding stock of Evolution. The acquisition expanded Aly Energy's service offering by adding MWD services. Total consideration was approximately $2.0 million, comprised of the following (in thousands):
Fair Value of Common Stock Issued Accounts Payable - Affiliates Total Consideration $ 1,650 340 $ 1,990
Common Stock issued as consideration for the acquisition of Evolution consists of 150,000 shares with an estimated fair value of $1.7 million as of the date of the acquisition. As of September 30, 2015, no further cash payments are due to the sellers.
The business combination was accounted for using the acquisition method of accounting and the purchase price was allocated to the net assets acquired at their estimated fair value. The preliminary purchase price was allocated to the net assets acquired upon their estimated value as follows (in thousands):
Current Assets Property and Equipment Intangible Assets Goodwill Total Assets Acquired Liabilities Assumed Deferred Tax Liabilities Total Liabilities Assumed Net Assets Acquired $ 902 62 1,758 264 2,986 398 598 996 $ 1,990
Goodwill, which is not tax deductible, has a value of $0.3 million and is primarily attributable to the cross-selling opportunities that Evolution could provide to the existing Aly Energy operations. Other intangible assets have a total value of $1.8 million with a weighted average amortization period of 4 years. Other intangible assets consist of customer relationships of $0.1 million, amortizable over 1.5 years, trade name of $0.2 million, amortizable over 4.5 years, a sales contract of $0.5 million, amortizable over 3.5 years, and a non-compete agreement of $1.0 million, amortizable over 4 years.
During the three months ended September 30, 2015 and 2014, Evolution contributed $0.4 million and $1.8 million, respectively, of revenues to the condensed consolidated financial results of the Company. The condensed consolidated financial results of the Company during the three months ended September 30, 2015 and 2014 include a net loss available to common stockholders of $0.5 million and $12,000, respectively, prior to any allocation of the Company's financing costs and corporate expenses, generated by Evolution.
During the nine months ended September 30, 2015 and 2014, Evolution contributed $3.2 million and $1.8 million, respectively, in revenues to the condensed consolidated financial results of the Company. The condensed consolidated financial results of the Company during the nine months ended September 30, 2015 and 2014 include a net loss available to common stockholders of $1.7 million and $12,000, respectively, prior to any allocation of the Company's financing costs and corporate expenses, generated by Evolution.
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
September 30, December 31, (unaudited) Credit Facility Term Loan Delayed Draw Term Loan Subordinated Note Payable Equipment Financing and Capital Leases Less: Current Portion Long-Term Debt, Net of Current Portion
2015
2014 $ 17,500 21,250 4,500 5,000 1,500 2,000 2,557 1,963 $ 26,057 $ 30,213 (2,611 ) (6,758 ) $ 23,446 $ 23,455
Credit Facility: Term Loan, Delayed Draw Term Loan, and Revolving Credit Facility
On April 15, 2014, in connection with the United Acquisition, we entered into an Amended and Restated Credit Agreement with a maturity date of April 30, 2017. The new agreement increased the size of our credit facility to $30.0 million, consisting of a $25.0 million term loan and a revolving credit facility with a maximum availability of $5.0 million.
On November 26, 2014, we entered into Amendment No. 1 to the Amended and Restated Credit Agreement in order to, among other things, provide for a $5.0 million delayed draw term loan to be added to the credit facility. The delayed draw term loan was used in full to finance capital expenditures during the year ended December 31, 2014.
On October 13, 2015, we entered into Amendment No. 2 to the existing credit facility ("Amendment") which had an effective date of September 30, 2015. In connection with the execution of the Amendment, the Company used proceeds of $3.4 million from its recently closed private offering to make the regularly scheduled principal payments of $1.5 million on September 30, 2015 and to make a prepayment of $1.9 million on the term loan on October 13, 2015.
The Amendment modified multiple components of the credit facility including, but not limited to, the terms listed below. The Amendment:
(i) |
| |
defers all further principal payments on outstanding borrowings under the credit facility until March 31, 2017; | ||
| ||
reduced the size of the revolving credit facility to $1.0 million. |
AsThe obligations under the agreement are guaranteed by all of September 30,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.
Due to the significant downturn in the oilfield services industry throughout 2015, at December 31, 2015, we were not in compliance with certain financial covenants set forth in our credit agreement due to our poor financial results. We are not in compliance with such covenants for the Company hadfirst quarter ending March 31, 2016. Therefore, on March 31, 2016 we completed the execution and delivery of a borrowing capacityforbearance agreement and amendment to the credit agreement. We amended the forbearance agreement on May 13, 2016 in order to waive our compliance with an additional financial covenant, the fixed charge coverage ratio, for the period ended March 31, 2016.
Among other provisions, the lenders have agreed to forbear from exercising their remedies under the credit agreement until the earlier of upJuly 10, 2016 or the date on which forbearance is terminated due to $1.0specified events, including (i) the occurrence of other defaults under the credit agreement, (ii) our failure to hire an independent financial advisor prior to April 10, 2016 or (iii) our failure to present a detailed plan for asset sales or equity capital acceptable to the lenders yielding net cash proceeds to us of at least $2.5 million by May 25, 2016. We hired an independent financial advisor and such advisor commenced the engagement prior to the deadline of April 10, 2016. In conjunction with agreeing to forbear from exercising their remedies under the credit agreement, the lenders reduced the revolving credit facility in addition to a cash balance in excess of $0.8 million after giving effect to the prepaymentportion of the term loan on October 13, 2015.credit facility to zero thereby eliminating our ability to borrow additional funds under the existing credit facility. There were no outstanding borrowings under the revolving credit facility as of September 30,March 31, 2016 and December 31, 2015.
We are currently in discussions with various stakeholders and advisors to develop and execute a plan to satisfy the requirements of the forbearance agreement. There can be no assurance that our actions will be deemed sufficient by the lender to extend the forbearance agreement and, if our actions are deemed insufficient, our outstanding debt will become immediately due and payable. Therefore, we have classified our indebtedness under the credit agreement as a current liability.
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Subordinated Note Payable
On August 15, 2014, we completed a bulk equipment purchase (the "Saskatchewan Equipment Purchase"), consisting of centrifuges, shakers, service vehicles and other associated equipment, for total consideration of $10.3 million of which $2.0 million was in the form of a Subordinated Note Payable.
On March 18, 2015, the Subordinated Note Payable was amended to extend the final maturity date to June 30, 2017 and to increase the interest rate to 10% per annum. Subsequent to an aggregate principal and interest payment of approximately $0.6 million on March 31, 2015, additional payments of interest and principal are not required until June 30, 2017. Interest and principal payments may be paid in amounts determined by the Company'sour board of directors on any date or dates prior to June 30, 2017, subject to approval of both the Company'sour board of directors and the Company'sour lenders. The Subordinated Note Payable is generally subordinated in right of payment to the Company'sour indebtedness to its lenders.
Equipment Financing and Capital Leases
The Company financesWe finance the purchase of certain vehicles and equipment using long-term equipment loans and using non-cancelable capital leases. Repayment occurs over the term of the loan or lease, typically three to five years, in equal monthly installments which include principal and interest. Some of the leases have end of term lease provisions structured as a Terminal Rental Adjustment Clause. At September 30, 2015the expiration of the lease terms, the equipment will be sold to either us or a third party. The proceeds of the sale shall be retained by the lender until they have recovered 20% of the original equipment cost plus all costs and December 31, 2014,expenses and unpaid amounts owed by us ("Lessor's Balance"). If the net proceeds are less than the Lessor's Balance, we had $2.6 million and $2.0 million outstanding under equipment loans and capital leases, respectively.will be responsible for the shortfall as a terminal rent adjustment. If the net proceeds exceed the Lessor's Balance, we shall receive such excess as an adjustment to rent.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Litigation
The Company isWe are subject to certain claims arising in the ordinary course of business. Management does not believe that any claims will have a material adverse effect on the Company'sour financial position or results of operations.
On February 3, 2015, multiple plaintiffs filed a proposed collective action against the Companyus under the Fair Labor Standards Act, in the Western District of Texas, San Antonio Division. On February 20, 2015, a proposed collective action alleging overtime violations under the Fair Labor Standards Act and Pennsylvania law, in the Southern District of Texas, Houston Division, was amended to include the Companyus as a defendant. Both actions were consolidated within the Southern District of Texas, Houston Division. Although the Company has defenses available in this litigation, the Company is settlingWe have settled this matter for business purposes, with no admission of liability. The anticipated amount of the settlement has been accrued for in the three months ended September 30, 2015. The settlement amount is expected to bewas fully accrued at December 31, 2015 and the case was fully paid in 2015.and dismissed with prejudice, by the end of January 2016.
Contractual Commitments
The Company hasWe have numerous contractual commitments in the ordinary course of business including debt service requirements and operating leases. The Company leasesWe lease land, facilities and equipment from non-affiliates. Certain of these leases extend to 2020.
NOTE 6 – INCOME TAXES
The Company accounts for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – INCOME TAXES
The CompanyWe recognized an income tax benefit of $0.9$1.0 million and expense of $0.6 million for the three months ended September 30,March 31, 2016 and 2015, and 2014, respectively, and benefit of $2.3 million and expense of $1.4 million for the nine months ended September 30, 2015 and 2014, respectively. Effective income tax rates were 36.6%33.8% and 39.6%29.4% percent for the ninethree months ended 2015March 31, 2016 and 2014,2015, respectively. The effective tax rate is affected by recurring items such as tax rates and income in jurisdictions, which we expect to be fairly consistent in the near term.
The CompanyWe currently projectsproject a taxable loss for the year ended December 31, 2015,2016, for federal income tax purposes and in certain state income tax jurisdictions. The Company hasWe have net operating losses that can be carried forward to offset future taxable income. The Company'sOur net operating loss carryforwards begin to expire in 2033 if not utilized.
NOTE 7 – REDEEMABLE PREFERRED STOCK
Two of the Company'sour subsidiaries have redeemable preferred stock outstanding as of September 30, 2015.March 31, 2016. Aly Operating issued redeemable preferred stock in connection with the acquisition of Austin Chalk Petroleum Services Corp ("Aly Operating Redeemable Preferred Stock") and Aly Centrifuge issued redeemable preferred stock in connection with the acquisition of the equity interests of United Centrifuge, LLC ("United") as well as certain assets used in United's business that were owned by related parties of United ("Aly Centrifuge Redeemable Preferred Stock in connection with the United Acquisition.Stock").
Aly Operating Redeemable Preferred Stock
As part of the acquisition of Austin Chalk, Aly Operating agreed to issue up to 4 million shares of Aly Operating Redeemable Preferred Stock, with a par value of $0.01, to the seller, with a fair value and liquidation value of $3.8 million and $4.0 million, respectively. The preferred stock was valued as of the date of acquisition by discounting the sum of (i) the liquidation value at issuance and (ii) the future cumulative accrued dividends as of the date of optional redemption for a lack of marketability. The first tranche of 2 million shares was issued on December 31, 2012 and the second tranche of 2 million shares was issued on March 31, 2013.
The Aly Operating Redeemable Preferred Stock is entitled to a cumulative paid-in-kind dividend of 5% per year on its liquidation preference, compounded quarterly. Aly Operating is not required to pay cash dividends.
The holder of the Aly Operating Redeemable Preferred Stock and Aly Operating can, at either's option, require the other party to redeem the preferred stock for cash on the fourth anniversary of the closing date of the sale or October 26, 2016. However, there is no requirement for either party to redeem the preferred stock.
The rights of the preferred stock also include the right to exchange into shares of Company common stock or to redeem the preferred stock for cash should the Company transact a liquidity event, as defined in the agreement, or if the Company transacts an initial public offering, as defined in the agreement. The conversion ratio, determined by a calculation defined in the agreement of which the components include trailing twelve month financial performance and magnitude of investment in new equipment, is undeterminable until the Aly Operating Redeemable Preferred Stock becomes exchangeable into common shares.
The Aly Operating Redeemable Preferred Stock is classified outside of permanent equity in the Company's condensed consolidated balance sheet because the settlement provisions provide the holder the option to require Aly Operating to redeem the Aly Operating Redeemable Preferred Stock at the liquidation price plus any accrued dividends.
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table describes the changes in Aly Operating Redeemable Preferred Stock (in thousands, except for shares):
Carrying Number of Outstanding Aly Operating Redeemable Preferred Shares Liquidation Value of Aly Operating Redeemable Preferred Stock December 31, 2014 Accrued Dividends Accretion September 30, 2015
Value of Aly Operating Redeemable Preferred Stock $ 4,382 4,000,000 $ 4,458 169 - 169 28 - - $ 4,579 4,000,000 $ 4,627
Aly Centrifuge Redeemable Preferred Stock
On April 15, 2014, as part of the United Acquisition, Aly Centrifuge issued 5,000 shares of Aly Centrifuge Redeemable Preferred Stock, with a par value of $0.01, to the sellers in the transaction, with a fair value and liquidation value of $5.1 million and $5.0 million, respectively. The preferred stock was valued as of the date of acquisition by discounting the sum of (i) the value of the preferred stock without a conversion option using the option pricing method and (ii) the value of the conversion option using the Black-Scholes option pricing model for a lack of marketability. As of September 30, 2015, 497 shares of Aly Centrifuge Redeemable Preferred Stock remain subject to an 18-month holdback for general indemnification purposes pursuant to the purchase agreement. Aly Centrifuge has advised the holders of the preferred stock that it has reserved its right to assert an indemnification claim as to 102 of such shares.
On August 15, 2014, in connection with the Saskatchewan Equipment Purchase, Aly Centrifuge issued an additional 4,000 shares of Aly Centrifuge Redeemable Preferred Stock, with a par value of $0.01, to the sellers in the transaction, with a fair value and liquidation value of $4.3 million and $4.0 million, respectively. The preferred stock was valued as of the date of the equipment purchase by discounting the sum of (i) the value of the preferred stock without a conversion option using the option pricing method and (ii) the value of the conversion option using the Black-Scholes option pricing model for a lack of marketability.
The Aly Centrifuge Redeemable Preferred Stock is entitled to a cumulative paid-in-kind dividend of 5% per year on its liquidation preference, compounded quarterly. Aly Centrifuge is not required to pay cash dividends.
The holder of the Aly Centrifuge Redeemable Preferred Stock and Aly Centrifuge can, at either's option, require the other party to redeem the preferred stock for cash on or after December 31, 2016. However, there is no requirement for either party to redeem the preferred stock.
Aly Centrifuge Redeemable Preferred Stock also includes the right to exchange into shares of Company common stock on any date, from time to time, at the option of the holder, into the number of shares equal to the quotient of (i) the sum of (A) the liquidation preference plus (B) an amount per share equal to accrued but unpaid dividends not previously added to the liquidation preference on such share of preferred stock, divided by (ii) 1,000, and (iii) multiplied by the exchange rate in effect at such time. The exchange rate currently in effect is 71.4285 or $14.00 per share of Company common stock.
The Aly Centrifuge Redeemable Preferred Stock is classified outside of permanent equity in the Company's condensed consolidated balance sheet because the settlement provisions provide the holder the option to require Aly Centrifuge to redeem the Aly Centrifuge Redeemable Preferred Stock at the liquidation price plus any accrued dividends.
|
| Carrying Value of Aly Operating Redeemable Preferred Stock |
|
| Number of Outstanding Aly Operating Redeemable Preferred Shares |
|
| Liquidation Value of Aly Operating Redeemable Preferred Stock |
| |||
|
|
|
|
|
|
|
|
|
| |||
December 31, 2015 |
| $ | 4,647 |
|
|
| 4,000,000 |
|
| $ | 4,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Dividends |
|
| 58 |
|
|
| - |
|
|
| 58 |
|
Accretion |
|
| 10 |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016 |
| $ | 4,715 |
|
|
| 4,000,000 |
|
| $ | 4,743 |
|
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table describes the changes in the Aly Centrifuge Redeemable Preferred Stock (in thousands, except for shares, and per share amounts):
| Carrying |
| Number of Outstanding Aly Centrifuge Redeemable Preferred Shares |
| Liquidation |
|
| Carrying Value of Aly Centrifuge Redeemable Preferred Stock |
| Number of Outstanding Aly Centrifuge Redeemable Preferred Shares |
| Liquidation Value of Aly Centrifuge Redeemable Preferred Stock |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
December 31, 2014 |
| $ | 9,584 |
| 9,252 |
| $ | 9,254 |
| |||||||||||||||
December 31, 2015 |
| $ | 9,755 |
| 8,876 |
| $ | 9,590 |
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|
|
|
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|
|
|
|
|
|
|
|
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| |||||||||||
Accrued Dividends |
| 359 |
| - |
| 359 |
|
| 120 |
| - |
| 120 |
| ||||||||||
Amortization |
|
| (125 | ) |
|
| - |
|
|
| - |
|
|
| (39 | ) |
|
| - |
|
|
| - |
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|
|
|
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September 30, 2015 |
| $ | 9,818 |
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| 9,252 |
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| $ | 9,613 |
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March 31, 2016 |
| $ | 9,836 |
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| 8,876 |
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| $ | 9,710 |
|
NOTE 8 – EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of shares of common stock ("Common Shares") outstanding during the applicable period. Diluted earnings per share is computed based on the weighted average number of Common Shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to outstanding stock options and restricted stock or other convertible instruments, as appropriate.
The calculations of basic and diluted earnings per share are shown below:
For the Three Months Ended For the Nine Months Ended 2015 2014 2015 2014 Numerator: Net Income Less: Aly Operating Redeemable Preferred Stock Dividends Less: Aly Operating Redeemable Preferred Stock Accretion Numerator for Diluted Earnings per Share Less: Aly Centrifuge Redeemable Preferred Stock Dividends Less: Aly Centrifuge Redeemable Preferred Stock Amortization Numerator for Basic Earnings per Share Denominator: Weighted Average Shares Used in Basic Earnings per Share Effect of Dilutive Shares: Aly Centrifuge Redeemable Preferred Stock Weighted Average Shares Used in Diluted Earnings per Share Basic Earnings per Share Diluted Earnings per Share
September 30,
September 30, $ (1,033 ) $ 1,112 $ (4,043 ) $ 2,118 (57 ) (53 ) (169 ) (157 ) (9 ) (9 ) (28 ) (28 ) (1,099 ) 1,050 (4,240 ) 1,933 (118 ) (88 ) (359 ) (140 ) 41 43 125 52 $ (1,176 ) $ 1,005 $ (4,474 ) $ 1,845 5,659,390 5,469,346 5,649,636 5,012,258 - 500,000 - 267,923 5,659,390 5,969,346 5,649,636 5,280,181 $ (0.21 ) $ 0.18 $ (0.79 ) $ 0.37 $ (0.21 ) $ 0.18 $ (0.79 ) $ 0.37
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2016 and 2015, the effect of incremental shares is antidilutive so the diluted earnings per share will be equivalent to basic earnings per share. Securities excluded from the computation of diluted earnings per share for the three and nine months ended September 30,March 31, 2016 and 2015 are shown below:
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| For the Three Months Ended March 31, |
| |||||
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| 2016 |
|
| 2015 |
| ||
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Unvested Stock Options (1) |
|
| 338,474 |
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| 338,474 |
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Exchange of Aly Centrifuge Redeemable Preferred Stock |
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| 633,999 |
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| 642,857 |
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Exchange of Aly Operating Redeemable Preferred Stock (2) |
|
| (2) |
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| (2) |
For the Three Months Ended For the Nine Months Ended 2015 2014 2015 2014 Basic Earnings per Share: Unvested Stock Options (1) Exchange of Aly Operating Redeemable Preferred Stock (2)
September 30,
September 30, 338,474 338,474 338,474 338,474 (2) (2) (2) (2)
________________________ ____________
(1) | The stock options vest upon the occurrence of certain events as defined in the Omnibus Incentive Plan. |
(2) | The Aly Operating Redeemable Preferred Stock becomes exchangeable upon the occurrence of certain events, as defined in the Aly Operating Redeemable Preferred Stock Agreement. Upon occurrence of such events, the Aly Operating Redeemable Preferred Stock may, at the holder's option, be converted into Common Shares. The conversion ratio, determined by a calculation defined in the agreement of which the components include trailing twelve month financial performance and magnitude of investment in new equipment, is undeterminable until the Aly Operating Redeemable Preferred Stock becomes exchangeable into Common Shares. |
NOTE 9 – STOCK-BASED COMPENSATION
Stock-Based Compensation Expense
The Company issued 15,625 shares of company stock during the three months ended June 30, 2015 as part of compensation to a former employee of the Company in accordance with his employment agreement. The Company recognized share-based compensation expense of $100,000 for the three months ended June 30, 2015 in connection with this issuance.
Stock Options
The Company has a stock-based compensation plan availableAt March 31, 2016 and December 31, 2015, options to grant incentive stock options, non-qualified stock options and restricted stock to employees and non-employee members of the Board of Directors.
The Omnibus Incentive Plan (the "Plan") was approved by the Board of Directors on May 2, 2013. On May 2, 2013, the Company grantedpurchase 338,474 Common Sharescommon shares under the Plan which was the maximum number authorized at that date.
At September 30, 2015,were outstanding and there is approximately $0.5 million of total unrecognized compensation cost related to the non-vested stock option awards. Such amount will be recognized in the future upon occurrence of a Liquidity Event that results in a vesting of the options.
On June 5, 2015, a majority of stockholders approved an amendment to our Plan which increased the maximum authorized shares to 750,000 Common Shares.
NOTE 10 – STOCKHOLDERS' EQUITY
On June 19, 2015, the Company effected the Reverse Split, a 1-for-20 reverse stock split of its common stock, as approved by its Board of Directors and stockholders. Under the terms of the Reverse Split, each 20 shares of common stock, issued and outstanding as of such effective date, was automatically reclassified and changed into one share of common stock without any further action by the stockholder. Fractional shares No options were rounded up to the nearest whole share. All share and per share amounts in this Quarterly Report on Form 10-Q have been retroactively restated to reflect the Reverse Split.
In January 2015, we issued an aggregate of 50,000 shares of our common stock in a private placement at a price of $11.00 per share for gross proceeds of approximately $0.6 million.
We agreed to issue 79,215 and 3,434 shares of our common stock during the year ended December 31, 2014 and the six months ended June 30, 2015, respectively, to one of our directors in respect of his arrangement of certain issuances of common stock in 2014 and 2015. These shares were issuedgranted during the three months ended June 30,March 31, 2016 and 2015.
On June 24, 2015, the Company initiated a private offering to accredited investors. On September 30, 2015, the Company closed the offering No options were vested at March 31, 2016 and issued 1,047,424 shares of its common stock to multiple accredited investors at a price of $3.20 per share.December 31, 2015.
ALY ENERGY SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1110 – SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flows and non-cash investing and financing activities are as follows (in thousands):
Nine Months Ended September 30, 2015 2014 Supplemental Disclosure of Cash Flow Information Cash Paid for Interest Cash Paid for State and Federal Income Taxes Non-Cash Investing Activities in Connection with United Acquisition Issuance of Aly Centrifuge Preferred Stock Issuance of Liability for Contingent Payment Accounts Payable - Affiliates Non-Cash Investing Activities in Connection with Acquisition of Evolution Guidance Systems Issuance of Common Stock Accounts Payable - Affiliates Non-Cash Investing Activities in Connection with Saskatchewan Equipment Purchase Issuance of Aly Centrifuge Preferred Stock Issuance of Subordinated Note Payable Non-Cash Investing and Financing Activities Purchase of Equipment through Capital Lease Obligations Accretion (Amortization) of Preferred Stock Liquidation Preference, Net Paid-in-Kind Dividends on Preferred Stock Liability for Transaction Cost of Equity Raise Common Shares Issued for Transaction Cost of Equity Raise $ 1,101 $ 512 109 130 $ - $ 5,101 - 3,517 - 821 $ - $ 1,650 - 340 $ - $ 4,323 - 2,000 $ 1,067 $ 681 (97 ) (24 ) 529 297 26 - 618 590
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| Three Months Ended March 31, |
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| 2016 |
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| 2015 |
| ||
Supplemental Disclosure of Cash Flow Information |
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|
|
|
|
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Cash Paid for Interest |
| $ | 303 |
|
| $ | 703 |
|
Cash Paid for State and Federal Income Taxes |
|
| 5 |
|
|
| 600 |
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
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Non-Cash Investing and Financing Activities |
|
|
|
|
|
|
|
|
Purchase of Equipment through Capital Lease Obligations |
| $ | - |
|
| $ | 1,068 |
|
Accretion of Preferred Stock Liquidation Preference, Net |
|
| (29 | ) |
|
| (33 | ) |
Paid-in-Kind Dividends on Preferred Stock |
|
| 178 |
|
|
| 175 |
|
Liability for Transaction Cost of Equity Raise |
|
| - |
|
|
| 26 |
|
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Form 10-Q") includes certain statements and information that may constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The words "anticipate," "believe," "ensure," "expect," "if," "intend," "plan," "estimate," "project," "forecasts," "predict," "outlook," "aim," "will," "could," "should," "potential," "would," "may," "probable," "likely," and similar expressions that convey the uncertainty of future events or outcomes, and the negative thereof, are intended to identify forward-looking statements. Forward-looking statements, which are not generally historical in nature, include those that express a belief, expectation or intention regarding our future activities, plans and goals and our current expectations with respect to, among other things:
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· | the current economic conditions and expected trends in the industry we serve; | |
· | the amount, nature and timing of capital expenditures and availability of capital | |
· | future financial condition or results of operations and future revenues and expenses; and | |
· | business strategy and other plans and objectives for future operations. |
17 |
Forward-looking statements are not assurances of future performance and actual results could differ materially from our historical experience and our present expectations or projections. These forward-looking statements are based on management's current expectations and beliefs, forecasts for our existing operations, experience, expectations and perception of historical trends, current conditions, anticipated future developments and their effect on us, and other factors believed to be appropriate. Although management believes the expectations and assumptions reflected in these forward-looking statements are reasonable as and when made, no assurance can be given that these assumptions are accurate or that any of these expectations will be achieved (in full or at all). Our forward-looking statements involve significant risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Known material factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following:
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For additional information regarding known material factors that could affect our operating results and performance, please read (1) "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 20142015 and (2) "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part I, Item 2 of this Form 10-Q and in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.2015. Should one or more of these known material risks occur, or should the underlying assumptions prove incorrect, our actual results, performance, achievements or plans could differ materially from those expressed or implied in any forward-looking statement.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise, except as required by law.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q, together with the audited consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2014.2015.
This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in any forward-looking statement because of various factors, including those described in the section titled "Cautionary Note Regarding Forward-Looking Statements" of this Form 10-Q.
Overview of Our Business
We are a provider of solids control systems, surface rental equipment, solids control systems, and directional drilling services, includingand MWD services. 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), mud pumps (diesel and electric), live oil skimming systems with mud gas separators, flare lines with flare stacks, containment systems with stairs,auxiliary surface rental equipment, portable mud mixing plants, centrifuges, shakers/vertical dryers,containment systems, and MWD kits. We alsoIn conjunction with the rental of some of our solids control packages and MWD kits, we provide personnel at the customer's well site to operate certain pieces of our equipment, such as skimming systems, centrifuges, downhole drilling motors and MWD kits, when requested by the customer and, in certain cases, weequipment. We also provide personnel to rig-up/rig-down and haul our equipment to and from the customer's location. We service the Permian Basin (in Texas and New Mexico), Eagle Ford Shale, Utica Shale, Marcellus Shale, Woodford Shale, Granite Wash, Mississippian Lime, and Tuscaloosa Marine Shale. Our primary operating yards, shop and repair facilities, and division management offices are located at various locations in Texas, including Giddings, Texas; San Angelo, Texas; Prosper, Texas; and Houston.Houston, Texas.
We derive the majority of our operating revenues from day rates or hourly rates charged for the rental of our equipment and for the services provided by our personnel. The price we charge for our services depends on both the level of activity within the geographic area in which we operate and also the competitive environment.
Our operating costs do not fluctuate in direct proportion to changes in revenues. Our operating expenses consist of both fixed and variable costs. Although most variable costs are highly correlated with revenues and activity, certain variable costs, such as sub-rental equipment expenses and third party trucking expenses, can be reduced as a percentage of revenues by our investment in new rental and transportation equipment.
Industry Trends and Outlook
We operate in the commodity-driven, cyclical oil and gas industry. From 2011 and through mid-2014, the industry operated in an environment where crude oil prices were relatively stable 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 have 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 have become less economical for exploration and production operators, leading to a dramatic reduction in North AmericanU.S. land drilling rig counts and weaker demand for oilfield services, such as the services we provide.
In April 2015, we committed to a reorganization initiative to strengthen our sales This trend has continued into 2016, with further commodity price decreases and marketing efforts, consolidate support functions, and operate more efficiently in order to partially mitigate the significant declines in pricingU.S. land rig counts from 2015 levels. Until there is a sustained recovery in the price of oil and utilization of our equipment. The reorganization effort includes, but is 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.
In May 2015, we moved forward aggressively with the first step of the reorganization plan, including significant reductions in headcount, field wage rates, and salaries of the management team and support personnel. We have experienced the impact of these cost cutting measures during the third quarter of 2015 when we decreased operating expenses as a percentage of revenue to 63.2% compared to 69.6% for the first half of 2015 and decreased the monthly run rate for selling, general and administrative expenses, excluding non-cash and non-recurring transactions, by over 20% when comparing the third quarter of 2015 to the first half of 2015.
As we enter the fourth quarter of 2015, oil prices remain low andnatural gas, we expect further reductions inthat our equipment utilization levels and pricing will remain depressed. If the U.S. land rig count. Although it is customary to experience declines in activity in the fourth quarter due to the holidayscount does not improve, our business, financial condition, cash flows and the exhaustionresults of our customers' annual spending budgets, we believe the declines this year may be even more pronounced as operators extend holiday breaks and aggressively cut end-of-year spending. We started to seeoperations will suffer a decline in our monthly revenue run rate towards the end of the third quarter, due primarily to rig attrition and continued pressure to implement further price reductions, and we anticipate our monthly revenue run rate may decline by as much as 15% by the end of 2015 when compared to the monthly revenue run rate early in the third quarter. Although wematerial adverse impact.
19 |
We believe we willmay begin to see increases in activity next year,in late 2016 and early 2017, but we do not anticipate any significant increases in rig count to occur until the second half of 2016.
In October 2015, in response to the recent revenue declines, we instituted another round of cost cutting measures, including further headcount and wage rate reductions. We believe that the impact of these initiatives, which are expected to be fully recognized in the first quarter of 2016, will allow us to maintain operating margins similar to the third quarter of 2015 despite a reduced revenue base.
2018. Although we have beenwere successful at improving the efficacy of our sales organization, operating more efficiently, and implementing multiple rounds of cost cuts in 2015, the industry has declined further during the first three months of 2016. We are working with multiple advisors on additional cost cutting initiatives and we hope to have most of those initiatives in place during the next three to six months. Even after these new initiatives are implemented, we believe we will continue to face significant challenges over the next twelve to eighteen months due to depressed and uncertain market conditions. These challenges may haveThe downturn in the industry has resulted in a significant negative impact on our operations, financial results and ability to access capital and we anticipate our results will continue to be negatively impacted in 2015 and beyond.2016.
Results for the Three Months Ended September 30, 2015March 31, 2016 Compared to the Three Months Ended September 30, 2014March 31, 2015
The following table summarizes the change in theour results of operations of the Company for the three months ended September 30, 2015March 31, 2016 when compared to the three months ended September 30, 2014March 31, 2015 (in thousands):
Three Months Ended September 30, 2015 2014 Revenues Expenses: Operating Expenses Depreciation and Amortization Selling, General and Administrative Expenses Total Expenses Operating Income/(Loss) Interest Expense, Net Income/(Loss) Before Income Taxes Income Tax Expense/(Benefit) Net Income/(Loss) Preferred Stock Dividends Accretion of Preferred Stock, Net Net Income/(Loss) Available to Common Stockholders $ 6,936 $ 13,491 4,382 7,607 1,702 1,345 2,347 2,430 8,431 11,382 (1,495 ) 2,109 459 376 (1,954 ) 1,733 (921 ) 621 (1,033 ) 1,112 175 141 (32 ) (34 ) $ (1,176 ) $ 1,005
|
| Three Months Ended March 31, |
| |||||
|
| 2016 |
|
| 2015 |
| ||
|
|
|
|
|
|
| ||
Revenues |
| $ | 4,288 |
|
| $ | 8,996 |
|
Expenses: |
|
|
|
|
|
|
|
|
Operating Expenses |
|
| 3,143 |
|
|
| 6,457 |
|
Depreciation and Amortization |
|
| 1,613 |
|
|
| 1,653 |
|
Selling, General and Administrative Expenses |
|
| 1,780 |
|
|
| 2,432 |
|
|
|
|
|
|
|
|
|
|
Total Expenses |
|
| 6,536 |
|
|
| 10,542 |
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
| (2,248 | ) |
|
| (1,546 | ) |
|
|
|
|
|
|
|
|
|
Interest Expense, Net |
|
| 588 |
|
|
| 491 |
|
|
|
|
|
|
|
|
|
|
Loss Before Income Taxes |
|
| (2,836 | ) |
|
| (2,037 | ) |
|
|
|
|
|
|
|
|
|
Income Tax Benefit |
|
| (960 | ) |
|
| (598 | ) |
|
|
|
|
|
|
|
|
|
Net Loss |
|
| (1,876 | ) |
|
| (1,439 | ) |
|
|
|
|
|
|
|
|
|
Preferred Stock Dividends |
|
| 178 |
|
|
| 175 |
|
Accretion of Preferred Stock, Net |
|
| (29 | ) |
|
| (33 | ) |
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Common Stockholders |
| $ | (2,025 | ) |
| $ | (1,581 | ) |
20 |
Our revenues for the three months ended September 30, 2015March 31, 2016 were $6.9$4.3 million, a decrease of $6.6$4.7 million, or 52%, from revenues for the three months ended September 30, 2014March 31, 2015 of $13.5$9.0 million. TheOur activity is directly tied to drilling activity and the average U.S. land drilling rig count for three months ended March 31, 2016 dropped by approximately 60% from the count for the same period of time in the previous year. This decrease is due primarily toin rig count and the sharp declineassociated drilling activity resulted in oil prices and activity withinintense competition in the oilfield services industry subsequentsector, which, in turn, required us to Septemberreduce pricing significantly in order to retain existing customers and attract new customers. Our solids control product line has suffered the most in this downturn with its activity decreasing approximately 30 2014. During 2015, we have experienced significant reductions in both pricing and utilization. Day rates andto 35% for the number of revenue generating days, which is a reflection of the utilization of our equipment, for our core products each declined approximately 20-30% during the three monthsquarter ended September 30, 2015March 31, 2016 compared to the three monthsquarter ended September 30, 2014 resulting in a decline in revenue of 48.6% period over period. SignificantMarch 31, 2015. Over that same time frame, we realized pricing declines in demand for our surface rental equipment and directional drilling and MWD services were partially offset by slight increases in demand for our solids control equipment.product line of 35 to 40% on rental products and 25 to 30% on personnel charges. Our surface rentals product line was also hit hard, experiencing pricing declines of approximately 25 to 30% and activity declines of 5 to 10% for the quarter ended March 31, 2016 compared to the quarter ended March 31, 2015.
Our operating expenses for the three months ended September 30, 2015March 31, 2016 decreased 51% to $4.4$3.1 million compared to $7.6$6.5 million for the three months ended September 30, 2014. During 2015, weMarch 31, 2015. We decreased the direct and indirect labor headcount, particularly non-revenue generating employees, and we reduced direct and indirect wage rates by approximately 5-10%.between the two periods. In addition, third party expenses, such as sub-rental equipment and transportation services, decreased significantly as our owned inventory of equipment was sufficient to meet the demand for our services. Despite significant cost reductions, operatingOperating expenses increased slightly as a percentage of revenue by 6.8% to 63.2%73.3% for the three months ended September 30, 2015March 31, 2016 from 56.4%71.8% for the three months ended September 30, 2014.March 31, 2015. The increase was due primarily to thenegative impact of significant pricing decreases, which result in every dollar of cost increasing as a percentage of revenue, and the need, in order to retain existing customers and attract new customers, to decrease customer pricing more quickly than we were capablewas significantly mitigated by multiple cost cutting initiatives across every aspect of implementing cost reductions.our business. We continue to implement cost reduction initiatives, including demanding cost concessions from our vendors, in order to further reduce operating expenses as a percentage of revenue.
Depreciation and amortization expense for the three months ended September 30, 2015 increased to $1.7 millionMarch 31, 2016 was flat compared to $1.3 million for the three months ended September 30, 2014. The increase is primarily due to the additions from a bulk equipment purchase of solids control equipment in August 2014.March 31, 2015.
Selling, general and administrative expenses decreased to $2.3$1.8 million for the three months ended September 30, 2015March 31, 2016 compared to $2.4 million for the three months ended September 30, 2014.March 31, 2015. Selling, general and administrative expenses include expenses that were either non-recurring or non-cash expenses with an aggregate value of non-recurring and non-cash expenses of $0.6$0.4 million and income of $0.2 million duringfor the three months ended September 30,March 31, 2016 while the three months ended March 31, 2015 included $0.3 million of income from expenses that were either non-recurring or non-cash. For the three months ended March 31, 2016, the non-recurring expenses were primarily related to professional fees for activities outside our ordinary course of business and 2014, respectively.non-cash expenses were primarily from the loss on the sale of assets. For the three months ended March 31, 2015, the non-recurring expenses were primarily related to professional fees for activities outside our ordinary course of business and the non-cash income was primarily related to the decrease in the fair value of our contingent payments liability. Excluding the impact of expenses that are either non-recurring andor non-cash, transactions, selling, general and administrative expenses decreased to $1.7by $1.3 million for the three months ended September 30, 2015 from $2.6 million forMarch 31, 2016 compared to the three months ended September 30, 2014. The $0.9 million decreasesame period in selling, general and administrative expenses reflects the success of our cost2015. Cost cutting initiatives in 2015, such as headcount and wage rate reductions, in response to the downturn in the industry.industry, included headcount and wage rate decreases, the elimination of executive management bonuses, reductions in executive management salaries and significant reductions in travel, entertainment and office expense.
Interest expense increased to approximately $0.6 million for the three months ended March 31, 2016 from approximately $0.5 million for the three months ended September 30, 2015 from approximately $0.4March 31, 2015. The $0.1 million for the three months ended September 30, 2014. Interestincrease in interest expense increasedis primarily due to the issuancedebt modification in September 2015, which resulted in the accrual of a subordinated note payable in August 2014 in connection with a bulk equipment purchase. Interest expense includes non-cash amortization of deferred loan costs of approximately $77,000 for the three months ended September 30, 2015 and 2014.quarterly ticking fee.
For the three months ended September 30, 2015,March 31, 2016, we recorded an income tax benefit of $0.9$1.0 million compared to income tax expensebenefit of approximately $0.6 million for the three months ended September 30, 2014.March 31, 2015. The income tax benefit recorded was primarily the result of our pre-tax net loss of $2.0$2.8 million incurred for the three months ended September 30, 2015March 31, 2016 compared to pre-tax net incomeloss of $1.7$2.0 million for the three months ended September 30, 2014.March 31, 2015.
Results for the Nine Months Ended September 30, 2015 Compared to the Nine Months Ended September 30, 2014
The following table summarizes the change in the results of operations of the Company for the nine months ended September 30, 2015 when compared to the nine months ended September 30, 2014. The results of operations for the nine months ended September 30, 2014 include the financial results of United beginning on April 16, 2014. The results of operations for the nine months ended September 30, 2014 include financial results of Evolution beginning on July 1, 2014 (in thousands):
Nine Months Ended September 30, 2015 2014 Revenues Expenses: Operating Expenses Depreciation and Amortization Selling, General and Administrative Expenses Total Expenses Operating Income/(Loss) Interest Expense, Net Income/(Loss) Before Income Taxes Income Tax Expense/(Benefit) Net Income/(Loss) Preferred Stock Dividends Accretion of Preferred Stock, Net Net Income/(Loss) Available to Common Stockholders $ 23,080 $ 27,851 15,616 14,566 5,067 3,409 7,372 5,480 28,055 23,455 (4,975 ) 4,396 1,404 891 (6,379 ) 3,505 (2,336 ) 1,387 (4,043 ) 2,118 528 297 (97 ) (24 ) $ (4,474 ) $ 1,845
Our revenues for the nine months ended September 30, 2015 were $23.1 million, a decrease of $4.8 million from revenues for the nine months ended September 30, 2014 of $27.9 million. The inclusion of the financial results related to the United acquisition and the Evolution acquisition for 273 days during the nine months ended September 30, 2015 compared to 168 days and 92 days, respectively, during the nine months ended September 30, 2014 partially offset a significant decline in revenues resulting from the downturn in the oilfield services industry which began in late 2014. During the nine months ended September 30, 2015, we experienced significant declines in pricing of approximately 20-30% across the majority of our core products. In addition, the number of revenue generating days, which reflects utilization of our equipment, decreased significantly due to reduced demand, particularly for our surface rental equipment and directional drilling and MWD services.
Our operating expenses for the nine months ended September 30, 2015 increased to $15.6 million compared to $14.6 million for the nine months ended September 30, 2014 as the impact of aggressive cost cutting measures were offset by the inclusion of the financial results related to the United acquisition and the Evolution acquisition for 273 days during the nine months ended September 30, 2015 compared to 168 days and 92 days, respectively, during the nine months ended September 30, 2014. Operating expenses as a percentage of revenue were 67.7% and 52.3% for the nine months ended September 30, 2015 and 2014, respectively. The increase was due primarily to the impact of significant pricing decreases, which result in every dollar of cost increasing as a percentage of revenue and the need, in order to retain existing customers and attract new customers, to decrease customer pricing more quickly than we were capable of implementing cost reductions. We continue to implement cost reduction initiatives, including demanding cost concessions from our vendors, in order to further reduce operating expenses as a percentage of revenue.
Depreciation and amortization expense for the nine months ended September 30, 2015 increased to $5.1 million compared to $3.4 million for the nine months ended September 30, 2014. The increase is primarily attributable to the inclusion of the financial results related to the United acquisition and the Evolution acquisition for 273 days during the nine months ended September 30, 2015 compared to 168 days and 92 days, respectively, during the nine months ended September 30, 2014 and a bulk equipment purchase in August 2014.
Selling, general and administrative expenses increased to $7.4 million for the nine months ended September 30, 2015 compared to $5.5 million for the nine months ended September 30, 2014. During the nine months ended September 30, 2015, we reduced wage rates for nearly all employees by 5-10% and reduced the headcount of selling, general and administrative employees. In addition, we significantly reduced other selling, general, and administrative expenses, such as entertainment, marketing and travel. The impact of these cost reductions during the nine months ended September 30, 2015 is completely offset by the inclusion of the financial results related to the United acquisition and the Evolution acquisition for 273 days during the nine months ended September 30, 2015 compared to 168 days and 92 days, respectively, during the nine months ended September 30, 2014. Selling, general and administrative expenses include an aggregate of non-recurring and non-cash expenses of $0.9 million and approximately $65,000 during the nine months ended September 30, 2015 and 2014, respectively.
Interest expense increased to approximately $1.4 million for the nine months ended September 30, 2015 from approximately $0.9 million for the nine months ended September 30, 2014 primarily due to additional debt financing incurred subsequent to September 30, 2014, including a $5.0 million delayed draw term loan, a $2.0 million subordinated note payable and various equipment financing. Interest expense includes non-cash amortization of deferred loan costs of $0.3 million and $0.2 million during the nine months ended September 30, 2015 and 2014, respectively.
For the nine months ended September 30, 2015, we recorded an income tax benefit of $2.3 million compared to income tax expense of approximately $1.4 million for the nine months ended September 30, 2014. The income tax benefit recorded was primarily the result of our pre-tax net loss of $6.4 million incurred for the nine months ended September 30, 2015 compared to pre-tax net income of $3.5 million for the nine months ended September 30, 2014.
Non-GAAP Financial Measures
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 bad debt expense, share-based compensation expense, changes in fair value of our liability for contingent payments, and gains and losses on the disposal of assets, and (ii) non-recurring expenses, such as severance and professional fees and other expenses related to transactions outside the ordinary course of business, to derive a normalized EBITDA run-rate ("Adjusted EBITDA"), which we believe is a useful measure of operating results and the underlying cash generating capability of our business.
Because EBITDA and Adjusted EBITDA are not measures of financial performance calculated in accordance with GAAP, these metrics should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financing activities, or other income or cash flow statement data prepared in accordance with GAAP.
EBITDA and Adjusted EBITDA are widely used by investors and other users of our financial statements as supplemental financial measures that, when viewed with our GAAP results and the accompanying reconciliation, we believe provide additional information that is useful to gain an understanding of our ability to service debt, pay deferred taxes and fund growth and maintenance capital expenditures. We also believe the disclosure of EBITDA and Adjusted EBITDA helps investors meaningfully evaluate and compare our cash flow generating capacity from quarter-to-quarter and year-to-year.
EBITDA and Adjusted EBITDA are also financial metrics used by management as (i) supplemental internal measures for planning and forecasting and for evaluating actual results against such expectations; (ii) significant criteria for incentive compensation paid to our executive officers and management; (iii) reference points to compare to the EBITDA and Adjusted EBITDA of other companies when evaluating potential acquisitions; and (iv) assessments of our ability to service existing fixed charges and incur additional indebtedness.
The following table provides the detailed components of EBITDA and Adjusted EBITDA as we define that term for the three months ended September 30,March 31, 2016 and 2015 and 2014 and for the nine months ended September 30, 2015 and 2014 (in thousands):
|
| Three Months Ended March 31, |
| |||||
|
| 2016 |
|
| 2015 |
| ||
Components of EBITDA: |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Net Loss |
| $ | (1,876 | ) |
| $ | (1,439 | ) |
|
|
|
|
|
|
|
|
|
Non-GAAP Adjustments: |
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
| 1,613 |
|
|
| 1,653 |
|
Interest Expense, Net |
|
| 588 |
|
|
| 491 |
|
Income Tax Benefit |
|
| (960 | ) |
|
| (598 | ) |
|
|
|
|
|
|
|
|
|
EBITDA |
|
| (635 | ) |
|
| 107 |
|
|
|
|
|
|
|
|
|
|
Adjustments to EBITDA: |
|
|
|
|
|
|
|
|
Bad Debt Expense |
|
| 21 |
|
|
| 15 |
|
Fair Value Adjustments to Contingent Payment Liability |
|
| 21 |
|
|
| (340 | ) |
Loss on Disposal |
|
| 300 |
|
|
| 5 |
|
Non-Recurring Expenses |
|
| 63 |
|
|
| 78 |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | (230 | ) |
| $ | (135 | ) |
Three Months Ended September 30, Nine Months Ended September 30, 2015 2014 2015 2014 Components of EBITDA: Net Income/(Loss) Non-GAAP Adjustments: Depreciation and Amortization Interest Expense, Net Income Tax Expense/(Benefit) EBITDA Adjustments to EBITDA: Stock-Based Compensation Expense Bad Debt Expense Fair Value Adjustments to Contingent Payment Liability (Gain)/Loss on Disposal Non-Recurring Expenses Adjusted EBITDA $ (1,033 ) $ 1,112 $ (4,043 ) $ 2,118 1,702 1,345 5,067 3,409 459 376 1,404 891 (921 ) 621 (2,336 ) 1,387 $ 207 $ 3,454 $ 92 $ 7,805 - - 100 - 176 37 320 94 (270 ) (270 ) (580 ) (183 ) 213 16 209 16 460 19 815 138 $ 786 $ 3,256 $ 956 $ 7,870
22 |
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 deferred income taxes, and | |
· | EBITDA and Adjusted EBITDA do not reflect changes in our net working capital position. |
Management compensates for the above-described limitations in using EBITDA and Adjusted EBITDA as non-GAAP financial measures by only using EBITDA and Adjusted EBITDA to supplement our GAAP results.
Liquidity and Capital Resources
The Company'sHistorically, our primary sources of liquidity and capital resources arehave been cash flows from operating activities, borrowings under our credit facility, equipment financings and the issuance of equity securities. We anticipate that continued volatility in oil and gas prices during 2015 and 2016 will negatively impact our overall financial results and our ability to generate cash from operations. Effective March 31, 2016, we no longer have access to borrow under our credit facility and we believe that continued low oil and natural gas prices will likely adversely affect our ability to incur additional indebtedness and/or access the capital markets in 2016 and beyond. Should our projected cash flow combined with our credit facilitiesfrom operations not be sufficient, we may reduce capital expenditures and future investments and/or considerinvestments; however, there is no guarantee that we will be able to service our debt and our working capital needs and we may need to file for protection under Chapter 11 of the issuance of debt and/or additional equity securities; however, continued low oil and natural gas prices, or further declines in such prices, could also adversely affect the Company's ability to incur additional indebtedness or access the capital markets.U.S. Bankruptcy Code.
The Company'sOur uses of capital are expenditures that arise primarily from our need to service our debt, to fund our working capital requirements, and to maintain and expand our rental fleet and service offerings. On October 13, 2015,At March 31, 2016, we entered into an amendment tohad $0.8 million of cash of which $75,000 secures our credit cards and $0.2 million requires the lender's approval for us to access. Our credit facility which, among other things, defers allhas no principal payments on the outstanding borrowingsdue until March 31, 2017 decreasingand our previous aggregatesubordinated note is not due until June 30, 2017. At March 31, 2016, we owed principal of $20.1 million under our credit facility and $1.5 million of principal on the subordinated note. Our debt service requirements for interest and equipment financing approximates $0.4 million per quarter.
Due to the next eighteen monthsnegative impact of the significant downturn in the oilfield services industry on our operating results throughout 2015 and into 2016, we were not in compliance with certain financial covenants set forth in our credit agreement at March 31, 2016 and at December 31, 2015. Therefore, on March 31, 2016 we completed the execution and delivery of a forbearance agreement and amendment to the credit agreement. We amended the forbearance agreement on May 13, 2016 in order to waive our compliance with an additional financial covenant, the fixed charge coverage ratio, for the period ended March 31, 2016.
23 |
We are currently in discussions with various stakeholders and advisors to develop and execute a plan to satisfy the requirements of the forbearance agreement. There can be no assurance that our actions will be deemed sufficient by the lender to extend the forbearance agreement and, if our actions are deemed insufficient, our outstanding debt will become immediately due and payable. Therefore, we have classified our indebtedness under the credit agreement as a current liability. If the debt becomes due and payable, we do not have sufficient liquidity to repay all of the outstanding debt to the lender and we might need to file for our operating needs, including our working capital requirements and planned capital expenditures in 2015 and 2016, through projected operating cash flow and borrowingsprotection under our revolving credit facility.Chapter 11 of the U.S. Bankruptcy Code.
The net cash provided by or used in our operating, investing and financing activities during the ninethree months ended September 30,March 31, 2016 and 2015 and 2014 is summarized below (in thousands):
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, |
| |||||||||||
| 2015 |
|
| 2014 |
|
| 2016 |
|
| 2015 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||||
Cash Provided By/(Used In): |
|
|
|
|
|
|
|
|
|
| ||||||
Operating Activities |
| $ | 4,074 |
| $ | 1,086 |
|
| $ | 195 |
| $ | 610 |
| ||
Investing Activities |
| (1,137 | ) |
| (25,141 | ) |
| (10 | ) |
| (577 | ) | ||||
Financing Activities |
|
| (2,248 | ) |
|
| 22,615 |
|
|
| (170 | ) |
|
| (1,351 | ) |
|
|
|
|
|
|
|
|
|
| |||||||
Increase/(Decrease) in Cash and Cash Equivalents |
| $ | 689 |
|
| $ | (1,440 | ) |
| $ | 15 |
|
| $ | (1,318 | ) |
Operating Activities
For the ninethree months ended September 30, 2015,March 31, 2016, we generated $4.1$0.2 million of cash from operating activities. Our net loss for the period was $4.0$1.9 million. Non-cash additions to net income totaled $3.1$1.1 million consisting primarily of an aggregate of $5.4$1.7 million in depreciation, amortization of intangibles and amortization of deferred loan costs, an aggregate of $0.6$0.3 million related to stock-based compensation, bad debt expense, and a loss on disposal of assets, andoffset by a $2.3$1.0 million increase in deferred tax assets partially offset by an $0.6 million fair value adjustment to a contingent payment liability.
benefit. During the ninethree months ended September 30, 2015,March 31, 2016, changes in working capital generated $5.1$1.0 million in cash. Cash was provided by a significant decrease in accounts receivable and unbilled receivables of $7.7$1.2 million and an aggregate decrease of $0.6 million in other current assets offset by a decrease in payables and accrued expenses of $3.2$0.3 million. The changes in working capital were primarily driven by the significant decreases in activity during the ninethree months ended September 30, 2015.March 31, 2016.
For the ninethree months ended September 30, 2014,March 31, 2015, we generated $1.1$0.6 million of cash from operating activities. Our net incomeloss for the period was $2.1$1.4 million. Non-cash additions to net income totaled $3.5$0.9 million consisting primarily of an aggregate of $3.6$1.8 million in depreciation, amortization of intangibles and amortization of deferred loan costs and an aggregate $0.1 million related to bad debt expense and a loss on disposal of assets, partially offset by an aggregate of $0.2a $0.3 million fair value adjustment to a contingent payment liability and change ina $0.6 million deferred taxes.
tax benefit. During the ninethree months ended September 30, 2014,March 31, 2015, changes in working capital used $4.5generated $1.2 million in cash. Cash was provided by aan aggregate net increasedecrease of $4.6 million in payablesaccounts receivable, unbilled receivables, and inventory offset by an aggregate decrease in accounts payable and accrued expenses of $3.0$2.4 million offset byand an increase in accounts receivableprepaid expenses and unbilled receivables of approximately $6.4 million, due to an increase in length of time between the issuance of invoices and collecting payment and, to a lesser extent, due to an increase in revenues. Changes in other current assets resulted in an additional use of cash of $1.1 million.
Investing Activities
During the ninethree months ended September 30, 2015,March 31, 2016, we used $1.1 millionapproximately $10,000 in cash which consisted of proceeds of $0.5 million from the disposal of underutilized assets offset by investment in machinery and equipment of $1.4$0.2 million offset byand a $0.3 million increase in restricted cash created from the proceeds of $0.2 million from the disposal of underutilized assets.asset sales.
During the ninethree months ended September 30, 2014,March 31, 2015, we used $25.1$0.6 million in investing activities of which $15.1 million was the cashto purchase price, net of cash acquired, associated with the United Acquisition. We used $10.2 million of cash to invest in machinery and equipment during the period, including $4.0 million for the cash portion of consideration for the Saskatchewan Equipment Purchase and approximately $1.8 million for the fabrication of 5 new MWD kits. Cash acquired in the acquisition of Evolution of $0.2 million slightly offset our investments during the period.or fabricate capital assets.
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Financing Activities
During the ninethree months ended September 30, 2015,March 31, 2016, we used $2.2$0.2 million in cash for financing activities. Cash was used primarily to repay debt in an aggregate amountdue under equipment financing and capital leases.
During the three months ended March 31, 2015, financing activities used $1.4 million of $5.2cash. Principal payments of $1.9 million and to make the first payment of contingent consideration related to the United Acquisition of $0.9 million. Payment of deferred financing costs used approximately $35,000 of cash during the period. Our cash outlays were partially offset withby an aggregateequity raise of $3.9 million in proceeds, net of transaction costs, from equity issuance during the period.
During the nine months ended September 30, 2014, financing activities generated $22.6 million of cash. Net borrowings of $14.0 million during the period resulted from the expansion of our credit facility to finance the United Acquisition. We also issued common equity during the period raising $9.1 million in net proceeds through a private placement of our Common Stock. Payment of deferred financing costs used $0.5 million of cash during the period.million.
On October 13, 2015, we entered into Amendment No. 2 to our existing credit facility ("Amendment") which had an effective date of September 30, 2015. In connection with the execution of the Amendment, the Company used proceeds of $3.4 million from its recently closed private offering of common stock to make the regularly scheduled principal payments of $1.5 million on September 30, 2015 and to make a prepayment of $1.9 million on the term loan on October 13, 2015.
Among other things, the Amendment defers all previously scheduled principal payments on outstanding borrowings under the facility until March 31, 2017 and modifiesmodified financial covenants to facilitate the Company'sour compliance with such covenants during the current downturn in the oilfield services industry.
AsAt March 31, 2016 and at December 31, 2015, we were not in compliance with certain financial covenants set forth in our credit agreement. Therefore, on March 31, 2016 we completed the execution and delivery of September 30, 2015,a forbearance agreement and amendment to the Company had a borrowing capacity of upcredit agreement.
Among other provisions, the lenders have agreed to $1.0 millionforbear from exercising their remedies under the amended revolving credit facility in additionagreement until the earlier of July 10, 2016 or the date on which forbearance is terminated due to specified events, including (i) the occurrence of other defaults under the credit agreement, (ii) our failure to hire an independent financial advisor prior to April 10, 2016 or (iii) our failure to present a cash balance in excess of $0.8 million after giving effectdetailed plan for asset sales or equity capital acceptable to the prepaymentlenders yielding net cash proceeds to us of at least $2.5 million by May 25, 2016. We hired an independent financial advisor and such advisor commenced the term loan on October 13, 2015. There were no outstanding borrowingsengagement prior to the deadline of April 10, 2016. In conjunction with agreeing to forbear from exercising their remedies under the credit agreement, the lenders reduced the revolving credit portion of the credit facility asto zero thereby eliminating our ability to borrow additional funds under the existing credit facility.
We are currently in discussions with various stakeholders and advisors to develop and execute a plan to satisfy the requirements of September 30, 2015.the forbearance agreement. There can be no assurance that our actions will be deemed sufficient by the lender to extend the forbearance agreement and, if our actions are deemed insufficient, our outstanding debt will become immediately due and payable. If the debt becomes due and payable, we do not have sufficient liquidity to repay all of the outstanding debt to the lender and we might need to file for protection under Chapter 11 of the U.S. Bankruptcy Code.
On August 15, 2014, we completed a bulk equipment purchase, consisting of centrifuges, shakers, service vehicles and other associated equipment, for total consideration of $10.3 million of which $2.0 million was in the form of a Subordinated Note Payable. ThereOn March 18, 2015, the Subordinated Note Payable was amended to extend the final maturity date to June 30, 2017 and to increase the interest rate to 10% per annum. Subsequent to an aggregate principal and interest payment of approximately $0.6 million on March 31, 2015, additional payments of interest and principal are nonot required interest oruntil June 30, 2017. Interest and principal payments related to the notemay be paid in amounts determined by our board of directors on any date or dates prior to June 30, 2017.2017, subject to approval of both our board of directors and our lenders. The Subordinated Note Payable is generally subordinated in right of payment to our indebtedness to our lenders.
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The Company finances
We finance the purchase of certain vehicles and equipment using long-term equipment loans and using non-cancelable capital leases. Some of the leases have end of term lease provisions structured as a Terminal Rental Adjustment Clause. At the expiration of the lease terms, the equipment will be sold to either us or a third party. The proceeds of the sale shall be retained by the lender until they have recovered 20% of the original equipment cost plus all costs and expenses and unpaid amounts owed by us ("Lessor's Balance"). If the net proceeds are less than the Lessor's Balance, we will be responsible for the shortfall as a terminal rent adjustment. If the net proceeds exceed the Lessor's Balance, we shall receive such excess as an adjustment to rent. Repayment occurs over the term of the loan or lease, typically three to five years, in equal monthly installments which include principal and interest. At September 30, 2015,March 31, 2016 we had $2.6$2.2 million outstanding under equipment loans and capital leases.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required by smaller reporting companies.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. TheOur Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of the Company'sour disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, theour Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Company'sour disclosure controls and procedures as of the end of the quarter covered by this Quarterly Report on Form 10-Q are effective as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act.
Changes in internal controls. There were no changes in our internal controls over financial reporting identified in connection with our evaluation that occurred during our last fiscal quarter ended September 30, 2015March 31, 2016 that materially affected, or was reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits
Exhibit | ||
Number |
| Exhibit Description |
| ||
31.1 |
| Certification of Chief Executive Officer |
31.2 |
| Certification of Chief Financial Officer |
32.1 |
| Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 |
| Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS ** | XBRL Instance Document | |
101.SCH ** | XBRL Taxonomy Extension Schema Document | |
101.CAL ** | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF ** | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB ** | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE ** | XBRL Taxonomy Extension Presentation Linkbase Document |
_____________
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** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ALY ENERGY SERVICES, INC. |
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Date: | By: | /s/ Munawar H. Hidayatallah |
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| Munawar H. Hidayatallah |
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| Chairman and Chief Executive Officer |
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| (Principal Executive Officer) |
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