The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Aly Energy Services, Inc., together with its subsidiaries (“Aly Energy” or “the Company”), provides oilfield services, including equipment rental and solids control services to exploration and production companies. The Company operates in select oil and natural gas basins of the contiguous United States. Throughout this report, we refer to Aly Energy and subsidiaries as “we”, “our” or “us”. References to financial results and operations of the Company in these notes to the consolidated financial statements are limited to continuing operations unless otherwise specified.
On October 26, 2012, we acquired all of the stock of Austin Chalk Petroleum Services Corp. (“Austin Chalk”). Austin Chalk provides surface rental equipment as well as roustabout services which include the rig-up and rig-down of equipment and the hauling of equipment to and from the customer’s location.
On April 15, 2014, we acquired the equity interests of United Centrifuge, LLC (“United”) as well as certain assets used in United’s business that were owned by related parties of United (collectively the “United Acquisition”). In connection with the United Acquisition, United merged with and into Aly Centrifuge Inc. (“Aly Centrifuge”), a wholly-owned subsidiary of Aly Energy. United operates within the solids control and fluids management sectors of the oilfield services and rental equipment industry, offering its customers the option of renting centrifuges and auxiliary solids control equipment without personnel or the option of paying for a full-service solids control package which includes operators on-site 24 hours a day.
Discontinued Operations
On July 1, 2014, we acquired all of the issued and outstanding stock of Evolution Guidance Systems Inc. (“Evolution”), an operator of Measurement-While-Drilling (“MWD”) downhole tools. From July 2014 through October 2016, Evolution provided directional drilling and MWD services to a variety of exploration and production companies. On October 26, 2016, we abandoned these operations as a part of a restructuring transaction. The abandonment of these operations meets the criteria established for recognition as discontinued operations under generally accepted accounting principles in the United States of America (“U.S. GAAP”). Therefore, the financial results of our directional drilling and MWD services are presented as discontinued operations in the Company’s consolidated financial statements. Assets and liabilities related to the discontinued operations are included in the line item “Assets associated with discontinued operations” and “Liabilities associated with discontinued operations”, respectively, on the consolidated balance sheets for all periods presented. The results of the discontinued operations are included in the line item “Loss from discontinued operations, net of income taxes” on the consolidated statements of operations for all periods presented. Cash flows from discontinued operations appear in the line items “Net cash provided (used) by discontinued operations” on the consolidated statements of cash flows”. See “
Note 15 – Discontinued Operations
” for more information.
Basis of Presentation
Aly Energy has three wholly-owned subsidiaries, Aly Operating Inc. (“Aly Operating”) of which Austin Chalk is a wholly-owned subsidiary, Aly Centrifuge and Evolution. We operate as one business segment which services customers within the United States.
The consolidated financial statements have been prepared in conformity with U.S. GAAP and include the accounts of Aly Energy Services, Inc. and each of its subsidiaries in the consolidated balance sheets as of December 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years then ended. All significant intercompany transactions and account balances have been eliminated upon consolidation.
Reclassifications
Certain reclassifications, including a reclassification related to the adoption of ASU 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): 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 our consolidated results of operations or cash flows. See “
Note 6 – Long-term Debt
” for more information.
Subsequent Events
We conducted our subsequent events review through the date these consolidated financial statements were filed with the U.S. Securities and Exchange Commission (“SEC”).
NOTE 2
— RECENT DEVELOPMENTS
Operational Restructuring
Our activity is tied directly to the rig count and, even though we instituted significant cost cutting measures beginning in 2015, we were unable to cut costs enough to match the decline in our business. As a result, as of December 31, 2015, we were in default of our credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”).
Throughout 2015, in an effort to mitigate the significant declines in pricing and utilization of our equipment, we committed to a reorganization initiative to strengthen our sales and marketing efforts, consolidate support functions, and operate more efficiently. The reorganization effort included, but was not limited to, training our salesforce to enable the cross-selling of our product lines in certain geographical markets, sharing a common support services infrastructure across all reporting units, reducing headcount and wage rates, and rebranding and launching a new web site to increase awareness of our service lines. We recognized some benefit from these measures in late 2015 resulting in increased gross margins and lower selling, general and administrative expenses when compared to the first half of 2015.
During the year ended December 31, 2016, we entered into a series of forbearance agreements with our lender. Under the forbearance agreements, among other provisions, the lenders agreed to forbear from exercising their remedies under the credit agreement. These forbearance agreements permitted us to operate within the parameters of our normal course of business despite the continuing default under the credit agreement. Without these forbearance agreements, our outstanding debt would have been immediately due and payable. Throughout 2016, we remained in default and we did not have sufficient liquidity to repay all of the outstanding debt to the lender at any point during the year ($20.1 million as of December 31, 2015). As such, we may have been forced to file for protection under Chapter 11 of the U.S. Bankruptcy Code.
In early 2016, we were hopeful that a successful operational restructuring would facilitate negotiations to modify the terms of our existing credit facility with Wells Fargo. Our operational restructuring in 2016 consisted of severe cost cuts which were incremental to the year-over-year cost cuts already achieved in 2015 when compared to 2014. In 2016, significant cost savings were primarily generated by:
|
·
|
reductions of our employee base, both field employees and sales and administrative employees, to a headcount of approximately 50 as of December 31, 2016 from approximately 125 as of December 31, 2015,
|
|
·
|
reduction in employer contributions to employee benefits,
|
|
·
|
closures of certain operating yards and administrative facilities,
|
|
·
|
strategic decision to cease operations in the northeast which resulted in the reduction of costs related to operating in an incremental market,
|
|
·
|
modifications to insurance policies, including general liability and workers’ compensation policies, resulting in a $0.5 million or 15.5% reduction in the cost of insurance to $0.6 million for the year ended December 31, 2016 from $1.1 million for the year ended December 31, 2015,
|
|
·
|
minimization of repair and maintenance activities, resulting in a $0.4 million or 50.0% reduction of repair and maintenance expenses to $0.4 million for the year ended December 31, 2016 from $0.8 million for the year ended December 31, 2015, and
|
|
·
|
elimination of investments in equipment, unless required to service an existing customer, resulting in a reduction of capital expenditures to $0.4 million for the year ended December 31, 2016 from $2.5 million for the year ended December 31, 2015.
|
We also achieved significant cost savings from the decrease in third party costs, such as sub-rental equipment and trucking, and other variable costs which declined with the decrease in activity.
In order to further support our working capital needs, we identified and sold idle and underutilized assets. During 2016, we realized aggregate proceeds from sales of approximately $0.8 million of which $0.5 million and $0.3 million was used to fund working capital needs and pay down debt, respectively (see “
Note 4 – Reduction in Value of Assets and Other Charges
”).
Capital Restructuring
Despite our successful operational restructuring efforts, particularly during the first half of 2016, the decline in our activity levels and the declines in customer pricing outpaced the impact of our cost reductions and it became evident that a capital restructuring would also be necessary to continue operations and position our business for an industry turnaround.
In the second quarter of 2016, certain of the Company’s principal stockholders (“Shareholder Group”) began negotiations with Wells Fargo with the objective of consummating a recapitalization transaction (the “Recapitalization”) whereby our obligations under the credit agreement and the outstanding capital leases in favor of Wells Fargo’s equipment finance affiliate and certain other obligations of Aly Energy (collectively the “Aly Senior Obligations”) would be restructured. In August 2016, the Shareholder Group was introduced to a third party, Tiger Finance, LLC (“Tiger”), to provide bridge financing and to extend forbearance until such date as sufficient capital could be raised to complete the Recapitalization.
In September 2016, the Shareholder Group formed Permian Pelican, LLC (“Pelican”) with the objective of raising capital and executing the steps necessary to complete the restructuring, inclusive of successfully effecting the exchange of the Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, Aly Centrifuge subordinated debt and liability for a contingent payment into approximately 10% of our common stock on a fully diluted basis.
Effective January 31, 2017, the Recapitalization was completed through the execution and delivery of a Securities Exchange Agreement and a Second Amended and Restated Credit Agreement, and as a result, the new credit facility, now with Pelican, consisted of a term loan of $5.1 million and a revolving facility of up to $1.0 million as of January 31, 2017. Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables (receivables less than 90 days old).
Subsequent to the Recapitalization, we entered into several further amendments to capitalize on improved market conditions and increased activity in our business:
|
·
|
Amendment No. 1, effective March 1, 2017, provided for a delayed draw term loan to be added to the credit facility for the purpose of financing capital expenditures. The agreement permitted us to draw on the delayed draw term loan from time-to-time up until the maturity date of the facility in order to fund up to 80% of the cost of capital expenditures subject to a $0.5 million limit on aggregate borrowings.
|
|
·
|
Amendment No. 2, effective May 23, 2017, increased the maximum revolving credit amount from $1.0 million to $1.8 million and extended the final maturity date of the facility to December 31, 2019. In consideration of the increase in the revolving credit facility and the extension of the final maturity date, we agreed to issue to Pelican, the lender, as an amendment fee, 1,200 shares of our Series A Convertible Preferred Stock.
|
|
·
|
Amendment No. 3, effective June 15, 2017, modified maximum potential borrowings under each of the revolving credit facility and the delayed draw term loan without changing the aggregate available borrowings under the credit facility. The amendment reduced the maximum revolving credit amount from $1.8 million to $1.0 million and increased the maximum delayed draw loan borrowings from $0.5 million to $1.3 million and the amendment also increased permitted draws on the delayed draw loan from 80% of the cost of capital expenditures being funded to 90% of the cost of capital expenditures being funded.
|
To the extent there is free cash flow as defined in the credit agreement, principal payments of 50% of such free cash flow are due annually. The maturity date of all remaining outstanding balances under the credit facility is December 31, 2019.
The obligations under the credit facility are guaranteed by all of our subsidiaries and secured by substantially all of our assets. The credit agreement contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, grant liens and sell assets. The credit facility does not include any financial covenants. We are in full compliance with the credit facility as of June 30, 2017.
As of June 30, 2017, there were outstanding borrowings of $5.0 million, $0.8 million, and $0.3 million on the term loan, revolving credit facility, and delayed draw term loan, respectively. As of June 30, 2017, we have the availability to borrow an incremental $0.2 million under the revolving credit facility and, if we have capital expenditures which are eligible to be financed, an incremental $1.0 million under the delayed draw term loan to finance 90% of such expenditures.
Unaudited Consolidated Pro Forma Balance Sheet
The following unaudited consolidated pro forma financial information gives effect to the Recapitalization, in a transaction accounted for as both a troubled debt restructuring and extinguishment of debt and other liabilities held as of December 31, 2016. The Company’s capital structure was significantly impacted as a result of the Recapitalization which was completed on January 31, 2017.
The unaudited consolidated pro forma financial information presented herein is based on the historical consolidated financial statements of the Company after giving effect to the Recapitalization and the assumptions and adjustments as described below.
To complete the transaction, the Company’s directors and principal stockholders formed and organized Pelican. Pursuant to the Recapitalization, Pelican agreed to acquire the Company’s outstanding secured indebtedness with Wells Fargo and its equipment affiliate, provided the Company was successful in effecting the exchange of the Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, Aly Centrifuge subordinated debt and liability for a contingent payment into approximately 10% of our common stock on a fully diluted basis.
The Recapitalization consisted of three restructuring events which took place in the period beginning October 26, 2016 and ending on January 31, 2017. The first two restructuring events occurred before December 31, 2016 and any impact is presented in the Company’s historical consolidated financial statements. Below is a description of each event:
The first restructuring event occurred on October 26, 2016 when Tiger acquired the Aly Senior Obligations from Wells Fargo and its equipment affiliate. Simultaneously, Tiger entered into an assignment agreement with Pelican whereby it agreed to sell the Aly Senior Obligations to Pelican on the conditions that (i) Pelican provide $0.5 million of unsecured working capital financing to the Company pending the closing and (ii) the Company transfer to Tiger (in consideration of Tiger’s reduction of the Aly Senior Obligations in the amount of $2.0 million) certain excess equipment and vehicles which the Company was not utilizing and considered unnecessary for its continuing operations.
As a result of the above, we transferred property and equipment with an estimated fair value of $2.6 million, inclusive of $0.4 million of assets associated with discontinued operations, to Tiger and recognized a corresponding reduction in the Aly Senior Obligations of $2.0 million and debt modification fee of $0.6 million. Property and equipment transferred had an aggregate net book value of $18.6 million resulting in our recording an impairment charge of $16.0 million, inclusive of a $0.4 million impairment associated with discontinued operations (see further discussion in
“Note 4 – Reduction in Value of Assets and Other Charges”
and
“Note 15 – Discontinued Operations”
). As part of this transaction and upon satisfaction of such conditions, Tiger extended the forbearance period to December 9, 2016.
The second restructuring event occurred on December 12, 2016 when Pelican acquired the Aly Senior Obligations from Tiger. As the new holder of the Aly Senior Obligations, Pelican further extended the forbearance period for the obligations to January 31, 2017, provided the Company was successful in completing the third and final restructuring event on or before such date.
Effective January 31, 2017, the final restructuring event occurred and the Recapitalization was completed which resulted in the following:
|
·
|
an exchange of certain of the Company’s outstanding obligations (namely, Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, Aly Centrifuge subordinated debt and its contingent payment liability) for approximately 10% of our common stock, or 7,111,981 common shares, on a fully diluted basis;
|
|
·
|
an exchange of certain amendments to the Aly Senior Obligations (namely, a $16.1 million principal reduction, removal of restrictive covenants and extended maturity of payment obligations) for shares of our Series A Convertible Preferred Stock which represented approximately 80% of our common stock, or 53,628,842 common shares, on a fully diluted basis as of January 31, 2017 (liquidation preference of $16.1 million, or $1,000 per share); and
|
|
·
|
the formation of a new credit agreement with Pelican (consisting of a $5.1 million term loan and $1.0 million revolving credit facility) with an extended maturity date of December 31, 2018.
|
The Recapitalization had a significant impact to our capital structure and to our consolidated financial statements, including a significant dilutive effect to those shareholders who held common stock immediately before the transaction was completed. The unaudited consolidated pro forma balance sheet as of December 31, 2016 gives effect to the Recapitalization impact on the capital structure as if it occurred on December 31, 2016.
The unaudited consolidated pro forma balance sheet was prepared in accordance with the regulations of the SEC. The pro forma adjustments reflecting the Recapitalization are based upon troubled debt restructuring (“TDR”) and debt extinguishment accounting in accordance with GAAP and upon the assumptions set forth below.
The historical consolidated financial information has been adjusted to give pro forma effect to events that are (i) directly attributable to the Recapitalization and (ii) factually supportable. The pro forma adjustments are based on management’s estimates of the fair value of equity exchanged and have been prepared to illustrate the estimated effect of the Recapitalization and certain other adjustments.
The unaudited consolidated pro forma balance sheet does not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the Recapitalization. The unaudited consolidated pro forma balance sheet has been prepared for illustrative purposes only and is not necessarily indicative of the financial position in future periods or the financial position that would have been realized had the Company completed the Recapitalization during the specified period.
The following unaudited consolidated pro forma balance sheet presents the completion of the Recapitalization as of December 31, 2016. Adjustments have been recorded within the unaudited consolidated pro forma balance sheet to reflect the effects of the Recapitalization in accordance with ASC 470, including (i) the exchange of debt and equity securities accounted for as a troubled debt restructuring and (ii) the issuance of preferred shares in exchange for the extinguishment of long-term debt and other obligations and for the issuance of a new credit facility (in thousands):
|
|
|
|
|
Recapitalization Adjustments
|
|
|
|
|
|
As of
|
|
|
TDR Pro
|
|
|
|
|
Credit Facility
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Forma
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
2016
|
|
|
Adjustments (i)
|
|
|
Notes
|
|
Adjustments (ii)
|
|
|
Notes
|
|
Pro Forma
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
681
|
|
|
$
|
-
|
|
|
|
|
$
|
-
|
|
|
|
|
$
|
681
|
|
Restricted cash
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Receivables, net
|
|
|
1,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,448
|
|
Prepaid expenses and other current assets
|
|
|
496
|
|
|
|
(31
|
)
|
|
(b)
|
|
|
|
|
|
|
|
|
465
|
|
Total current assets
|
|
|
2,655
|
|
|
|
(31
|
)
|
|
|
|
|
-
|
|
|
|
|
|
2,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
28,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,226
|
|
Intangible assets, net
|
|
|
4,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,931
|
|
Other assets
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
35,826
|
|
|
$
|
(31
|
)
|
|
|
|
$
|
-
|
|
|
|
|
$
|
35,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
912
|
|
|
$
|
-
|
|
|
|
|
$
|
-
|
|
|
|
|
$
|
912
|
|
Accrued expenses
|
|
|
1,163
|
|
|
|
(263
|
)
|
|
(a)
|
|
|
|
|
|
|
|
|
900
|
|
Accrued interest and other - Pelican
|
|
|
1,277
|
|
|
|
|
|
|
|
|
|
(1,277
|
)
|
|
(c)
|
|
|
-
|
|
Current portion of long-term debt
|
|
|
1,593
|
|
|
|
(1,500
|
)
|
|
(a)
|
|
|
|
|
|
(c)
|
|
|
93
|
|
Current portion of long-term debt - Pelican
|
|
|
18,880
|
|
|
|
|
|
|
|
|
|
(18,880
|
)
|
|
(c) (d)
|
|
|
-
|
|
Current portion of contingent payment liability
|
|
|
810
|
|
|
|
(810
|
)
|
|
(a)
|
|
|
|
|
|
|
|
|
-
|
|
Total current liabilities
|
|
|
24,635
|
|
|
|
(2,573
|
)
|
|
|
|
|
(20,157
|
)
|
|
|
|
|
1,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Long-term debt, net - Pelican
|
|
|
1,315
|
|
|
|
|
|
|
|
|
|
4,235
|
|
|
(c) (d)
|
|
|
5,550
|
|
Other long-term liabilities
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
708
|
|
Total liabilities
|
|
|
26,668
|
|
|
|
(2,573
|
)
|
|
|
|
|
(15,922
|
)
|
|
|
|
|
8,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aly Operating redeemable preferred stock
|
|
|
4,924
|
|
|
|
(4,924
|
)
|
|
(b)
|
|
|
|
|
|
|
|
|
-
|
|
Aly Centrifuge redeemable preferred stock
|
|
|
10,080
|
|
|
|
(10,080
|
)
|
|
(b)
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
15,004
|
|
|
|
(15,004
|
)
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock
|
|
|
-
|
|
|
|
|
|
|
|
|
|
6,435
|
|
|
(c)
|
|
|
6,435
|
|
Common stock of $0.001 par value
|
|
|
7
|
|
|
|
7
|
|
|
(a)(b)
|
|
|
|
|
|
|
|
|
14
|
|
Additional paid-in-capital
|
|
|
28,307
|
|
|
|
15,164
|
|
|
(a)(b)
|
|
|
9,487
|
|
|
(c)
|
|
|
52,958
|
|
Accumulated deficit
|
|
|
(34,158
|
)
|
|
|
2,375
|
|
|
(a)(b)
|
|
|
|
|
|
|
|
|
(31,783
|
)
|
Treasury stock, 225 shares at cost
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Total stockholders' equity (deficit)
|
|
|
(5,846
|
)
|
|
|
17,546
|
|
|
|
|
|
15,922
|
|
|
|
|
|
27,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
35,826
|
|
|
$
|
(31
|
)
|
|
|
|
$
|
-
|
|
|
|
|
$
|
35,795
|
|
Except for the Pelican exchange, each exchange was accounted for as a troubled debt restructuring (“TDR”) since an equity interest in the Company was issued to fully satisfy each debt. A gain on TDR is recognized for the excess of the carrying amount of the debt over the fair value of each equity interest granted. The impact of the Recapitalization occurring subsequent to December 31, 2016 includes a “gain on the extinguishment of debt and other liabilities” from the debtors of Aly Centrifuge subordinated debt and the contingent payment liability and a “gain on the extinguishment of redeemable preferred stock” from the holders of Aly Operating redeemable preferred stock and Aly Centrifuge redeemable preferred stock. The share price of common stock as of January 31, 2017 of $0.12 per share was used as the basis of fair value for each equity interested granted.
The TDR pro forma adjustments in column (i) and in the below table are as follows:
|
(a)
|
Represents the exchange of subordinated debt and contingent payment liability for common stock resulting in a gain of $2.4 million, or $0.36 per share, on the consolidated statement of operations and recorded as an “Issuance of common stock in exchange for the extinguishment of debt and other liabilities” on the consolidated statement of changes in stockholders’ equity (deficit).
|
Gain on the Extinguishment of Debt and Other Liabilities
|
|
|
|
|
|
|
|
|
Debt and Other Obligations Extinguished
|
|
Common Stock Issued
|
|
|
Gain
Included in
Other Expense(Income)
|
|
|
|
|
|
|
|
|
Subordinated Debt and accrued interest of $1.5 million and $0.3 million, respectively
|
|
|
1,200,000
|
|
|
$1.6 million
|
|
|
|
|
|
|
|
|
|
Contingent payment liability of $0.8 million
|
|
|
457,494
|
|
|
$0.8 million
|
|
|
(b)
|
Represents the exchange of Aly Operating redeemable preferred stock and Aly Centrifuge redeemable preferred stock for common stock resulting in a gain of $14.4 million, or $2.14 per share, and recorded as an “Issuance of common stock in exchange for the extinguishment of redeemable preferred stock” on the consolidated statement of changes in stockholders’ equity (deficit).
|
Gain on the Extinguishment of Redeemable Preferred Stock
|
|
|
|
|
|
|
|
|
Redeemable Preferred Stock and Other Obligations
|
|
Common Stock Issued
|
|
|
Gain
Included in
Additional
Paid-in Capital
|
|
|
|
|
|
|
|
|
Aly Centifuge preferred and accrued dividends of $8.9 million and $1.2 million, respectively
|
|
|
3,039,517
|
|
|
$9.8 million
|
|
|
|
|
|
|
|
|
|
Aly Operating preferred and accrued dividends of $4.0 million and $0.9 million, respectively
|
|
|
2,414,971
|
|
|
$4.6 million
|
|
Given the nature of the related party relationship between the Company and Pelican, the extinguishment of our Aly Senior Obligations was accounted for as a capital transaction whereby we issued Series A Convertible Preferred Stock in exchange for the extinguishment of our Aly Senior Obligations and the issuance of a new credit facility; which resulted in a gain on the extinguishment of debt and other liabilities calculated as the amount above the estimated fair value of the equity interest granted. The share price of common stock as of January 31, 2017 of $0.12 per share was used as the basis of fair value for the equity interested granted.
The credit facility pro forma adjustments in column (ii) and in the below table are as follows:
|
(c)
|
Represents the partial extinguishment and exchange of our Aly Senior Obligations ($16.1 million principal reduction) for shares of our Series A Convertible Preferred Stock resulting in a gain of $9.5 million recorded as an “Issuance of preferred shares in exchange for the extinguishment of debt and other liabilities - Pelican” on the consolidated statement of changes in stockholders’ equity (deficit). The components of Aly Senior Obligations are as follows (in thousands):
|
Aly Senior Obligations as of December 31, 2016 (c)
|
|
|
|
|
Debt and Other Obligations Extinguished
|
|
Amount
|
|
|
|
|
|
Credit facility
|
|
$
|
17,772
|
|
Accrued fees and interest on credit facility
|
|
|
1,254
|
|
Capital lease obligations
|
|
|
1,930
|
|
Accrued interest on capital lease obligations
|
|
|
19
|
|
Line of credit - Pelican
|
|
|
498
|
|
|
|
|
|
|
Total
|
|
$
|
21,473
|
|
|
(d)
|
Represents the recording of our new credit agreement with Pelican consisting of a $5.1 million term loan and $0.5 million outstanding under a revolving credit facility (which was $5.0 million and $0.8 million, respectively, as of June 30, 2017 in addition to $0.3 million outstanding under a delayed draw term loan with Pelican) upon the full extinguishment of our old credit facility.
|
NOTE 3
— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the amounts of revenue and expenses recognized during the reporting period. Areas where critical accounting estimates are made by management include:
|
·
|
Allowance for doubtful accounts,
|
|
·
|
Depreciation and amortization of property and equipment and intangible and other assets,
|
|
·
|
Impairment of property and equipment, intangible and other assets, and goodwill,
|
|
·
|
Litigation settlement accrual,
|
|
·
|
Contingent payment liability, and
|
|
·
|
Income taxes.
|
The Company analyzes its estimates based on historical experience and various other indicative assumptions that it believes to be reasonable under the circumstances. Under different assumptions or conditions, the actual results could differ, possibly materially from those previously estimated. Many of the conditions impacting these assumptions are outside of the Company’s control.
Revenue Recognition
We generate revenue primarily from renting equipment at per-day rates. In connection with certain of our solids control operations, we also provide personnel to operate our equipment at the customer’s location at per-day or per-hour rates. In addition, we 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.
We present our revenue net of any sales tax charged to our customers which is required to be remitted to local or state governmental taxing authorities. Reimbursements for the purchase of supplies, equipment, personnel services, shipping and other services provided at the request of our customers are recorded as revenue when incurred. The related costs are recorded as operating expenses when incurred.
Major Customers and Concentration of Credit Risk
The Company’s assets that are potentially exposed to concentrations of credit risk consist primarily of cash and trade receivables.
The financial institutions in which the Company transacts business are large, investment grade financial institutions which are “well capitalized” under applicable regulatory capital adequacy guidelines, thereby minimizing its exposure to credit risks for deposits in excess of federally insured amounts.
The majority of the Company’s trade receivables are due from major and independent oil and gas companies operating within the U.S. land-based oil and gas industry. The industry has been, and will likely continue to be, characterized by significant volatility which may negatively impact our customers from time-to-time. The Company evaluates the financial strength of its customers quarterly and provides allowances for probable credit losses when deemed necessary.
During the year ended December 31, 2016, the Company derived revenue from over 50 unique customers of which the top three customers generated approximately $4.8 million, or 43.5%, of our revenue. Amounts due from these customers included in accounts receivable and unbilled receivables as of December 31, 2016 are approximately $0.6 million.
During the year ended December 31, 2015, approximately $9.0 million or 35.4% of our revenue were derived from three customers. One of those customers accounted for 16.2% of our revenue. Amounts due from these customers included in accounts receivable and unbilled receivables as of December 31, 2015 are approximately $1.0 million.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash is defined as cash on-hand and balances in operating bank accounts. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash serves as collateral for the Company’s corporate credit card program.
Accounts Receivable, Unbilled Receivables and Allowance for Doubtful Accounts
Accounts receivable and unbilled receivables are stated at the amount which has been or will be billed to customers. Once billed, customer payments are typically due within 30 days. We provide an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information, existing economic conditions and specific identification. Provisions for doubtful accounts are recorded when it is deemed probable that the customer will not make the required payments. As of December 31, 2016 and 2015, the allowance for doubtful accounts was approximately $0.6 million and $0.4 million, respectively.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. The cost of property and equipment currently in service less its residual value is depreciated, including property and equipment financed by capital leases, on a straight-line basis over the estimated useful lives of the related assets. A residual value of 20% is used for asset types deemed to have a salvage value. Typically, these assets contain a large amount of iron in their construction. Leasehold improvements are amortized on a straight-line basis over the shorter of their economic lives or the lease term.
Estimated useful lives of property and equipment are as follows:
Machinery and equipment
|
1 - 20 years
|
Vehicles, trucks and trailers
|
5 - 7 years
|
Office furniture, fixtures and equipment
|
3 - 7 years
|
Leasehold improvements
|
Remaining lease term
|
Buildings
|
20 years
|
When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and the impact of any resulting gain or loss is recognized within “Reduction in value of assets” in the consolidated statement of operations for the period. 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.
Reduction in Value of Long-Lived Assets
Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of such assets to their fair value calculated, in part, by the estimated undiscounted future cash flows expected to be generated by the assets. Cash flow estimates are based upon, among other things, historical results adjusted to reflect the best estimate of future market rates, utilization levels, and operating performance. Estimates of cash flows may differ from actual cash flows due to, among other things, changes in economic conditions or changes in an asset’s operating performance. The Company’s assets are grouped by reporting unit for the impairment testing, which represents the lowest level of identifiable cash flows. If the asset grouping’s fair value is less than the carrying amount of those items, impairment losses are recorded in the amount by which the carrying amount of such assets exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less estimated costs to sell. The net carrying value of assets not fully recoverable is reduced to fair value. The estimate of fair value represents the Company’s best estimate based on industry trends and reference to market transactions and is subject to variability. The oil and gas industry is cyclical and estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows, can have a significant impact on the carrying values of these assets and, in periods of prolonged down cycles, may result in impairment charges. Due to the steep downturn in the oilfield services industry which began in late 2014 and continued throughout much of 2016, we evaluated recoverability quarterly. For each quarter, our estimated undiscounted net cash flow exceeded the carrying amount of the assets, and, as such, no impairment losses were recognized; however, in the quarters ended June 30, 2016 and September 30, 2016, we recognized an impairment in connection with the Recapitalization and an impairment in connection with our discontinued operations. See “
Note 4 – Reduction in Value of Assets and Other Charges”
and “
Note 15 – Discontinued Operations“
for a further discussion of the reduction in value recorded during 2016 and 2015.
Intangible Assets
The Company’s intangible assets with finite lives include customer relationships, trade names, non-compete agreements, and various other contractual agreements. The value of customer relationships is estimated using the income approach, specifically the excess earnings method. The excess earnings method consists of discounting to present value the projected cash flows attributable to the customer relationships, with consideration given to customer contract renewals, the importance or lack thereof of existing customer relationships to the Company’s business plan, income taxes and required rates of return. The value of trade names is estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty in order to exploit the related benefits of this intangible asset. For contractual agreements, the specific terms of the agreements were utilized to determine the fair value attributable to the arrangement.
The Company amortizes intangible assets based upon a straight-line basis because the pattern of economic benefits consumption cannot otherwise be reliably estimated. Estimated useful lives of intangible assets are as follows:
Customer relationships
|
2 - 10 years
|
Tradename
|
4 - 10 years
|
Non-compete
|
4 - 5 years
|
Supply agreements
|
4 years
|
Intangible assets subject to amortization are reviewed for impairment and are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For instance, a significant change in business climate or a loss of a significant customer, among other things, may trigger the need for an impairment test of intangible assets. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. See “
Note 4 – Reduction in Value of Assets and Other Charges”
and “
Note 15 – Discontinued Operations“
for a further discussion of the reduction in value recorded during 2016 and 2015.
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. Impairment testing is conducted at the reporting unit level.
Our detailed impairment testing involves comparing the fair value of our reporting units to their respective carrying values, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale. If the fair value exceeds carrying value, then it is concluded that no goodwill impairment has occurred. If the carrying value exceeds the fair value, a second step is required to measure possible goodwill impairment loss. The second step includes valuing our tangible and intangible assets and liabilities as if we had been acquired in a business combination. Then, the implied fair value of our goodwill is compared to the carrying value of that goodwill. If the carrying value of our goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value.
Our detailed impairment analysis employs the use of discounted cash flow models. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes on our business. Critical assumptions include projected revenue growth, gross profit margins, selling, general and administrative expenses, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. We use the capital asset pricing model to estimate the discount rates used in the discounted cash flow models.
During the fourth quarter of 2015, we completed goodwill impairment testing. A severe industry downturn in 2015 due to sustained price depression for oil and natural gas, among other macroeconomic factors, negatively impacted utilization of our equipment and pricing for our products and services throughout the year. The cash flow model utilized in our detailed impairment analysis reflected our belief that we would continue to face significant challenges over the next twelve to eighteen months. The resulting carrying value was in excess of our fair value and we determined that all of the goodwill associated with the acquisition of Austin Chalk and the United Acquisition in the amount of $11.1 million was fully impaired. As of December 31, 2016, there was no goodwill recorded. See also “
Note 15 – Discontinued Operations“
for discussion of goodwill associated with discontinued operations.
Income Taxes
We account for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In assessing the likelihood and extent that deferred tax assets will be realized, consideration is given to projected future taxable income and tax planning strategies. A valuation allowance is recorded when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.
We recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. Previously recognized tax positions are reversed in the first period in which it is no longer more-likely-than-not that the tax position would be sustained upon examination.
Income tax related interest and penalties, if applicable, are recorded as a component of the provision for income tax expense. However, there were no amounts recognized relating to interest and penalties in the consolidated statements of operations for the years ended December 31, 2016 and 2015. We had no uncertain tax positions as of December 31, 2016 and 2015.
Contingent Payment Liability
The aggregate consideration for the United Acquisition of $24.5 million included contingent consideration of an estimated fair value on the acquisition date of $3.5 million. The contingent consideration consisted of up to three future cash payments to the sellers in an amount equal to 5% of the gross revenue of the business acquired for each of the twelve-month periods ending on March 31, 2015, 2016, and 2017; provided, however, that the aggregate consideration would not exceed $5.0 million.
On May 31, 2015, we made the first cash payment of $0.9 million, or 5% of the gross revenue of the business acquired for the twelve-month period ended March 31, 2015. We did not make the second cash payment of $0.7 million, or 5% of gross revenue of the business acquired for the twelve-month period ended March 31, 2016, which was due on May 31, 2016.
On January 31, 2017, in connection with the Recapitalization (see further discussion in “
Note 2 – Recent Developments
”), the sellers converted both the second payment obligation of $0.7 million, which was past due, and the estimated future obligation of $0.1 million, or 5% of estimated gross revenue of the business for the twelve-month period ended March 31, 2017, into 457,494 shares of common stock. This conversion was accounted for as a trouble debt restructuring, see further details in “
Note 2 – Recent Developments”
.
Fair Value Measurements
We measure the fair value of our liability for contingent payments 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, we are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three distinct 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 fair value of the liability for contingent payments represents the sum of (i) the known required payments for periods which have ended and (ii) the present value of projected required payments for future periods based upon our internal model and projections. Due to the industry downturn which began in late 2014 and continued through much of 2016, both actual and projected utilization levels and pricing were significantly lower than the peaks experienced in 2014. Consequently, both the actual revenue and the projected revenue on which the payments are based declined significantly during the years ended December 31, 2016 and 2015 resulting in decreases to the fair value of the liability being recorded in both years.
As of December 31, 2016, the fair value of the liability for contingent payments included (i) the past due payment for the year ended March 31, 2016, (ii) the calculated payment for the nine months ended December 31, 2016, and (iii) the fair value of the liability for the estimated additional cash payment due for the three months ended March 31, 2017.
The following table provides a roll forward of the fair value of our liability for contingent payments which includes Level 3 measurements (in thousands):
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Fair value, beginning of period
|
|
$
|
1,182
|
|
|
$
|
3,109
|
|
Changes in fair value
|
|
|
(372
|
)
|
|
|
(1,065
|
)
|
Payments
|
|
|
-
|
|
|
|
(862
|
)
|
Fair value, end of period
|
|
$
|
810
|
|
|
$
|
1,182
|
|
Stock-Based Compensation
From time-to-time, we issue time-based vesting and performance-based vesting stock options, time-based vesting and performance-based vesting restricted stock units, and restricted stock awards to our employees as part of those employees’ compensation and as a retention tool for non-employee directors. We calculate the fair value of the awards on the grant date and amortize that fair value to compensation expense ratably over the vesting period of the award, net of estimated and actual forfeitures. The grant date fair value of our restricted stock awards and restricted stock units is determined using our stock price on the grant date. The fair value of our stock option awards are estimated using a Black-Scholes fair value model. The valuation of our stock options requires us to estimate the expected term of award, which we estimate using the simplified method, as we do not have sufficient historical exercise information. Additionally, the valuation of our stock option awards is also dependent on historical stock price volatility. In view of our being listed on the Over-the-Counter Bulletin Board, volatility is calculated based on historical stock price volatility of our peer group with a lookback period equivalent to the expected term of the award. Fair value of performance based stock options and restricted stock units is estimated in the same manner as our time-based awards and assumes that performance goals will be achieved and the awards will vest. If the performance based awards do not vest, any previously recognized compensation costs will be reversed. We record share-based compensation as a component of general and administrative or direct operating expense based on the role of the applicable individual. Historically we have not recognized any compensation expense for share-based compensation; however, under our new plan, we anticipate compensation costs for any issued awards. See further discussion in “
Note 12 – Stock-Based Compensation”
.
Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that could have been outstanding assuming the exercise of outstanding stock options and restricted stock or other convertible instruments, as appropriate.
During 2016 and 2015, the Company incurred losses from continuing operations; therefore, the impact of any incremental shares would be anti-dilutive.
Accounting Standards Recently Adopted
In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. Other than the revised statement of cash flows presentation of restricted cash, the adoption of ASU 2016-18 did not have an impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes: Balance Sheet Classification of Deferred Taxes
, which eliminates the existing requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet and now requires that all deferred tax assets and liabilities be classified as noncurrent. The ASU is effective for annual periods beginning after December 15, 2016, with early application permitted. We elected to early adopt the provisions of this ASU and classified our deferred tax balances as a non-current liability as of December 31, 2016 and 2015. The adoption has no effect on net income or cash flows.
In September 2015, the FASB issued ASU 2015-16,
Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments
, 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 the ASU 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 result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments are effective for annual reporting periods beginning after December 15, 2015. The adoption of ASU 2015-16 did not have an impact on our financial condition or results of operations.
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. We adopted ASU 2015-15 in connection with our adoption of ASU 2015-03 effective January 1, 2016. The adoption of ASU 2015-15 did not have an impact on our financial condition or results of operations.
In April 2015, the FASB issued ASU 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.
The amendments in the ASU change the balance sheet presentation requirements for debt issuance costs by requiring them to be presented as a direct reduction to the carrying amount of the related debt liability. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. Transitioning to the new guidance requires retrospective application. We implemented the required change to the presentation of our debt issuance costs in the first quarter of fiscal year 2016, as expected such change did not have a material impact to our consolidated financial statements.
In November 2014, the FASB issued ASU 2014-16,
Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
, which clarifies how to evaluate the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the ASU requires that an entity consider all relevant terms and features in evaluating the nature of the host contract and clarifies that the nature of the host contract depends upon the economic characteristics and the risks of the entire hybrid financial instrument. An entity should assess the substance of the relevant terms and features, including the relative strength of the debt-like or equity-like terms and features given the facts and circumstances, when considering how to weight those terms and features. The adoption of ASU 2014-16 did not have an impact on our financial condition or results of operations.
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 will provide such disclosures as required if there are conditions and events that raise substantial doubt about our ability to continue as a going concern, as expected such change did not have a material impact to our consolidated financial statements.
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. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. The adoption of ASU 2014-12 did not have an impact on our financial condition or results of operations.
Accounting Standards Not Yet Adopted
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-15)”, that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the effect of ASU 2016-15 on its consolidated financial statements.
In March 2016, the FASB Issued ASU 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company will adopt the accounting guidance as of January 1, 2017. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which will replace the existing lease guidance. The standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Additional disclosure requirements include qualitative disclosures along with specific quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for the Company for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.
ASU 2014-09. In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The objective of this ASU is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 must be adopted using either a full retrospective method or a modified retrospective method. During a July 2015 meeting, the FASB affirmed a proposal to defer the effective date of the new revenue standard for all entities by one year. As a result, ASU 2014-09 is effective for the Company for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements, however, management believes that the impact to the financial statements will not be material.
NOTE 4
— REDUCTION IN VALUE OF ASSETS AND OTHER CHARGES
During 2016 and 2015, the Company recorded $17.7 million and $11.4 million in expense related to reduction in value of assets, respectively. See also “
Note 15 – Discontinued Operations
” for a discussion of the reduction in value of assets associated with discontinued operations.
The components of reduction in value of assets are as follows (in thousands):
|
|
For the Years
Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Reduction in value of property and equipment:
|
|
|
|
|
|
|
Impairment in connection with Recapitalization
|
|
$
|
15,562
|
|
|
$
|
-
|
|
Loss on disposal of assets
|
|
|
1,087
|
|
|
|
262
|
|
Reduction in value of intangibles
|
|
|
1,087
|
|
|
|
-
|
|
Impairment of goodwill
|
|
|
-
|
|
|
|
11,143
|
|
|
|
|
|
|
|
|
|
|
Total reduction in value of assets
|
|
$
|
17,736
|
|
|
$
|
11,405
|
|
Impairment of Property and Equipment – Recapitalization
During 2016, the Company recorded an impairment charge of $15.6 million as part of the Recapitalization in which idle and underutilized equipment with a net book value of $18.2 million was transferred to Tiger as an inducement to provide bridge financing. Among other things, the Company received an extended forbearance agreement and a reduction in debt of $2.0 million as consideration for the sale of these assets (see below
“Debt Modification Fee – Recapitalization”
for further discussion).
Loss on Disposal of Assets
During the first quarter of 2016, the Company recorded a loss on the disposal of property and equipment of $0.3 million when the Company sold idle and underutilized equipment and vehicles with a net book value of $0.8 million for cash proceeds of approximately $0.5 million. Due to the depressed market for oilfield services, these assets were sold for proceeds significantly less than the net book value resulting in higher losses than normal. These assets were sold within the basket of permitted asset sales, as defined in our credit facility, and the Company used the proceeds to fund working capital needs created by the significant deterioration in the industry throughout 2015.
During the third quarter of 2016, the Company recorded a loss on the disposal of property and equipment of $0.8 million when the Company sold idle and underutilized equipment and vehicles with a net book value of $1.1 million for cash proceeds of approximately $0.3 million. Due to the depressed market for oilfield services, these assets were sold for proceeds significantly less than the net book value resulting in higher losses than normal. Wells Fargo provided the required consent to sell the assets subject to all proceeds, net of commission, being immediately used to pay down outstanding balances owed to Wells Fargo under the terms of our credit facility.
During 2015, the Company recorded a loss on the disposal of property and equipment of $0.3 million when the Company sold idle and underutilized equipment and vehicles with a net book value of $0.6 million for cash proceeds of approximately $0.3 million. Due to the depressed market for oilfield services, these assets were sold for proceeds significantly less than the net book value resulting in higher losses than normal. These assets were sold within the basket of permitted asset sales, as defined in our credit facility, and the Company used the proceeds to fund working capital needs created by the significant deterioration in the industry.
Impairment of Goodwill
During 2015, the Company determined that the implied fair value of the goodwill for its surface rental and solids control reporting units was less than its carrying value and the Company recorded an aggregate $11.1 million impairment charge. The reduction in value of goodwill in these reporting units was primarily driven by the significant deterioration of market conditions during 2015 combined with a forecast as of December 31, 2015 which did not indicate a timely recovery sufficient to support the carrying values of goodwill. As of December 31, 2016 and 2015, there was no goodwill remaining on the consolidated balance sheets.
Reduction in Value of Intangibles
During 2016, the Company recorded $1.1 million reduction in value of intangibles which consisted of a $0.5 million reduction in an intangible associated with a non-compete which management determined was non-enforceable and a $0.6 million reduction in an intangible associated with a supply agreement which had no value subsequent to the liquidation of the supplier under bankruptcy proceedings. As of December 31, 2016, these intangibles were recorded with no value on the consolidated balance sheet. As of December 31, 2015, the non-compete and the supply agreement were recorded at $0.7 million and $1.0 million, respectively, on the consolidated balance sheet.
Debt Modification Fee – Recapitalization
In connection with our transfer of property and equipment to Tiger, we received certain modifications to our credit facility, including a $2.0 million reduction in our principal outstanding on the Aly Senior Obligations and an extension of the forbearance period to December 9, 2016. We recorded a debt modification fee of $0.6 million as the property and equipment transferred to Tiger had a fair value exceeding the reduction of our obligations.
Professional Fees - Recapitalization
During 2016, in connection with forbearance agreements and other negotiations with its former lender, Wells Fargo, and in connection with the Recapitalization, the Company recorded an aggregate of $0.5 million of charges, primarily for professional fees, which are included in selling, general and administrative expenses on the consolidated statement of operations. The charges include $0.2 million of expenses the Company incurred for financial advisors that Wells Fargo required the Company to retain and $0.1 million of legal and other professional fees. In addition, the charges in 2016 include $0.2 million of expenses the Company incurred for professionals engaged by Wells Fargo whom the Company was required to pay under the terms of our credit facility. On December 12, 2016, these fees were assumed by Pelican and, on January 31, 2017, included within the Aly Senior Obligations refinanced in connection with the Recapitalization. These fees are included in “Accrued interest and other – Pelican” on our consolidated balance sheet as of December 31, 2016.
Severance Expense – Operational Restructuring
During 2016 and 2015, the Company recorded $0.5 million and $0.3 million, respectively, in charges relating to severance due to the significant downturn in the industry. In 2016, we ceased making cash severance payments due to our limited liquidity and we do not know when or if we will be able to satisfy the remaining outstanding severance claims. As such, the accrued severance liability balance of $0.7 million as of December 31, 2016, which includes a liability of $0.2 million assumed by Aly Energy related to discontinued operations, is included in other long-term liabilities on the consolidated balance sheet. As of December 31, 2015, an accrued severance liability of $0.1 is included in accrued expenses on the consolidated balance sheet.
NOTE 5
— LONG-LIVED ASSETS
Property and Equipment
Major classifications of property and equipment are as follows (in thousands):
|
|
As of December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
31,541
|
|
|
$
|
53,677
|
|
Vehicles, trucks & trailers
|
|
|
4,523
|
|
|
|
5,699
|
|
Office furniture, fixtures and equipment
|
|
|
544
|
|
|
|
544
|
|
Leasehold improvements
|
|
|
203
|
|
|
|
213
|
|
Buildings
|
|
|
212
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,023
|
|
|
|
60,345
|
|
Less: Accumulated depreciation and amortization
|
|
|
(8,807
|
)
|
|
|
(8,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
28,216
|
|
|
|
51,587
|
|
Assets not yet placed in service
|
|
|
10
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
28,226
|
|
|
$
|
51,789
|
|
See “
Note 4 – Reduction in Value of Assets and Other Charges
” for further discussion on asset disposals during the years ended December 31, 2016 and 2015.
Depreciation and amortization expense related to property and equipment for the years ended December 31, 2016 and 2015 was $3.9 million and $4.4 million, respectively.
Intangible Assets
Intangible assets consist of the following (in thousands):
|
|
Customer Relationships
|
|
|
Tradename
|
|
|
Non-Compete
|
|
|
Supply Agreements
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
5,323
|
|
|
$
|
2,174
|
|
|
$
|
492
|
|
|
$
|
-
|
|
|
$
|
7,989
|
|
Less: Accumulated amortization
|
|
|
(1,900
|
)
|
|
|
(749
|
)
|
|
|
(409
|
)
|
|
|
-
|
|
|
|
(3,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
3,423
|
|
|
$
|
1,425
|
|
|
$
|
83
|
|
|
$
|
-
|
|
|
$
|
4,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
5,322
|
|
|
$
|
2,174
|
|
|
$
|
1,651
|
|
|
$
|
1,686
|
|
|
$
|
10,833
|
|
Less: Accumulated amortization
|
|
|
(1,367
|
)
|
|
|
(531
|
)
|
|
|
(806
|
)
|
|
|
(720
|
)
|
|
|
(3,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
3,955
|
|
|
$
|
1,643
|
|
|
$
|
845
|
|
|
$
|
966
|
|
|
$
|
7,409
|
|
Estimated amortization expense for the next five years and thereafter is as follows (in thousands):
For the Year Ending December 31,
|
|
|
|
2017
|
|
$
|
831
|
|
2018
|
|
|
750
|
|
2019
|
|
|
750
|
|
2020
|
|
|
750
|
|
2021
|
|
|
750
|
|
Thereafter
|
|
|
1,100
|
|
|
|
|
|
|
|
|
$
|
4,931
|
|
Total amortization expense for the years ended December 31, 2016 and 2015 was approximately $1.4 million and $1.6 million, respectively.
See further discussion of reduction in value of intangibles during the years ended December 31, 2016 and 2015 in “
Note 4 – Reduction in Value of Assets and Other Charges”
and “
Note 15 – Discontinued Operations”
.
NOTE 6 — LONG-TERM DEBT
Credit Facility: Term Loan, Delayed Draw Term Loan, and Revolving Credit Facility
Our primary credit facility with Wells Fargo consisted of a term loan, a delayed draw term loan, and a revolving credit facility (“Credit Facility”, as amended). Obligations under the Credit Facility were as follows:
|
·
|
Term loan – In 2014, our original principal balance on the term loan was $25.0 million; this loan required principal payments each quarter of $1.3 million.
|
|
·
|
Delayed draw term loan – In 2014, our original availability under the delayed draw term loan was $5.0 million; the full availability of the loan was reached in May 2015 and beginning in June 2015 the principal balance of $5.0 required scheduled principal payments each quarter of $0.3 million.
|
|
·
|
Revolving credit facility – In 2014, our original availability under the revolving credit facility was $5.0 million; however, after subsequent amendments, our availability was reduced to $1.0 million as of December 31, 2015 and then to zero as of December 31, 2016. There were no outstanding borrowings under the revolving credit facility as of December 31, 2016 and 2015.
|
Borrowings under the Credit Facility were subject to interest at the annual base rate at the greater of:
|
(i)
|
the Wells Fargo’s Prime Rate, plus a margin of 1.75%,
|
|
(ii)
|
the Federal Funds Rate plus 0.5%, plus a margin of 1.75% or
|
|
(iii)
|
the one-month LIBOR rate on such day plus 1.00%, plus a margin of 1.75%.
|
Beginning in July 2016, our rate increased to the default rate of 7.25% in connection with the subsequent amendments and forbearance agreements. For the years ended December 31, 2016 and 2015, interest rates on our borrowings under the Credit Facility ranged from 5.25% to 7.25% and 4.24% to 5.25%, respectively.
The obligations under the Credit Facility were guaranteed by all of our subsidiaries and secured by substantially all of our assets. The credit agreement contained 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.
Effective September 30, 2015, we entered into an amendment to the Credit Facility (“Amendment”). In connection with the execution of the Amendment, we used the proceeds of $3.4 million from a private offering to make the regularly scheduled principal payment of $1.5 million due on September 30, 2015 and to make a prepayment of $1.9 million on the term loan.
The Amendment modified multiple components of the Credit Facility including, but not limited to, the terms listed below. The Amendment:
|
(i)
|
waived our covenant default as of June 30, 2015;
|
|
(ii)
|
deferred all further principal payments on outstanding borrowings under the Credit Facility until March 31, 2017;
|
|
(iii)
|
revised certain financial covenants to facilitate our compliance with such covenants during the downturn in the oilfield services industry; and,
|
|
(iv)
|
reduced the size of the revolving credit facility to $1.0 million.
|
Due to the significant downturn in the oilfield services industry throughout 2015, as of December 31, 2015, we were not in compliance with certain financial covenants set forth in our Credit Facility due to our poor financial results.
On March 31, 2016, we completed the execution and delivery of a forbearance agreement and amendment to the Credit Facility. Among other provisions, the lenders agreed to forbear from exercising their remedies under the Credit Facility until the earlier of July 10, 2016 or the date on which forbearance was terminated due to specified events, including (i) the occurrence of other defaults under the Credit Facility, (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 Facility, the lenders reduced the revolving credit portion of the Credit Facility to zero thereby eliminating our ability to borrow additional funds under the Credit Facility.
On May 13, 2016, we further amended the Credit Facility and the forbearance agreement related to such facility to increase our basket of permitted asset sales to $0.6 million in any calendar year provided that any proceeds from permitted asset sales be deposited in a blocked deposit account with Wells Fargo. We also acknowledged that we were unable to comply with certain financial covenants as of March 31, 2016.
On August 5, 2016, we entered into a new agreement with Wells Fargo, the Limited Forbearance Agreement, in which Wells Fargo agreed to forbear from exercising their remedies under the credit agreement until August 31, 2016, conditioned upon the following, among other items: (i) hiring a Chief Restructuring Officer (“CRO”) on terms acceptable to the lender; (ii) having the CRO provide an initial cash forecast budget prior to August 10, 2016 and weekly updates thereafter; (iii) not incurring a variance of more than 10% from the cash flow budgets; and, (iv) paying accrued interest monthly effective July 21, 2016 at the default rate specified in the Credit Facility. As mandated, effective August 5, 2016, our board selected Chris Quinn to serve as CRO of the Company. On October 5, 2016, Wells Fargo extended the forbearance period until October 19, 2016.
On October 26, 2016, in connection with the Recapitalization, the Aly Senior Obligations, which included the Credit Facility and the outstanding equipment financing and capital leases in favor of Wells Fargo and Well Fargo Equipment Finance, respectively, were acquired by Tiger. Simultaneously, we entered into the Third Limited Forbearance Agreement which extended the forbearance period to December 9, 2016 and reduced the Aly Senior Obligations in the amount of $2.0 million, conditioned upon the following, among other items: (i) Tiger entering into an assignment agreement with Pelican; (ii) Pelican providing $500,000 of unsecured working capital financing to the Company pending the closing; and, (iii) the Company transferring to Tiger certain excess equipment and vehicles which the Company was not utilizing and did not consider as necessary for its operations. The Company recorded a debt modification fee of $0.6 million in connection with the execution of the Third Limited Forbearance Agreement.
Effective December 12, 2016, the Aly Senior Obligations were acquired by Pelican. See further discussion in “
Note 7 – Long-term Debt – Pelican
”.
Subordinated Note Payable
On August 15, 2014, we completed a bulk equipment purchase for total consideration of $10.3 million of which $2.0 million was in the form of a subordinated note payable (“Subordinated Note Payable”).
On March 18, 2015, the outstanding 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 were not required until June 30, 2017. The Subordinated Note Payable was generally subordinated in right of payment to our indebtedness to its lenders.
In connection with the Recapitalization, the Subordinated Note Payable was converted into 1,200,000 common shares of the Company. This conversion was accounted for as a trouble debt restructuring, see further details in “
Note 2 – Recent Developments”
. As of January 31, 2017, there were no further obligations due under the Subordinated Note Payable.
Equipment Financing and Capital Leases
We 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.
Effective June 30, 2016, the Company entered into an amendment for each capital lease outstanding with Wells Fargo Equipment Finance, aggregating $1.9 million, whereby the maturity date was extended by six months and principal payments suspended for a period of six months.
Effective October 26, 2016, our equipment financing and capital leases with Wells Fargo Equipment Finance were included in the Aly Senior Obligations which were acquired by Tiger, then subsequently acquired on December 12, 2016 by Pelican. See further discussion in “
Note 7 – Long-term Debt – Pelican
”.
In January 2017, in order to reduce our debt service obligations, we returned certain underutilized and idle vehicles under capital leases with a net book value of $0.1 million to the lessor in exchange for the release of all outstanding obligations, aggregating to approximately $0.1 million, resulting in a reduction in value of assets of approximately $38,000.
As of January 31, 2017, we had one remaining capital lease with a balance of approximately $9,000 which was assumed by the continuing operations of the Company in connection with our discontinued operations effective December 31, 2016.
Deferred Loan Costs
Costs incurred to obtain financing are capitalized and amortized on a straight-line basis over the term of the loan, which approximates the effective interest method. The amortization of these costs is classified within interest expense on the accompanying consolidated statements of operations and was approximately $0.3 million and $0.4 million for the years ended December 31, 2016 and 2015, respectively. During 2016, in connection with various amendments to our credit facility and in connection with the Recapitalization, we incurred an aggregate charge of $0.1 million, classified within interest expense, to write-off all remaining unamortized deferred loan costs. There were no new deferred loan costs recorded in connection with the Recapitalization.
As a result of the adoption of Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs” on January 1, 2016, the Company reclassified debt issuance costs of $0.8 million and retrospectively reclassified debt issuance costs of $0.4 million as a reduction in the carrying amount of the related Credit Facility as of December 31, 2016 and December 31, 2015, respectively.
There were no deferred loan costs recorded on the consolidated balance sheet as of December 31, 2016. Deferred loan costs and accumulated amortization were $1.0 million and $0.6 million, respectively, as of December 31, 2015.
Long-term debt consists of the following (in thousands):
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,573
|
|
|
$
|
-
|
|
Delayed draw term loan
|
|
|
-
|
|
|
|
-
|
|
|
|
4,500
|
|
|
|
-
|
|
Subordinated note payable
|
|
|
1,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,500
|
|
Equipment financing and capital leases
|
|
|
93
|
|
|
|
10
|
|
|
|
683
|
|
|
|
1,685
|
|
|
|
|
1,593
|
|
|
|
10
|
|
|
|
20,756
|
|
|
|
3,185
|
|
Less: Deferred loan costs, net
|
|
|
-
|
|
|
|
-
|
|
|
|
(403
|
)
|
|
|
-
|
|
Total
|
|
$
|
1,593
|
|
|
$
|
10
|
|
|
$
|
20,353
|
|
|
$
|
3,185
|
|
As of December 31, 2016 and December 31, 2015, we had approximately $0.1 million and $2.4 million outstanding under equipment financing and capital leases, respectively. The gross amount of equipment held under capital leases was approximately $0.3 million and $3.5 million as of December 31, 2016 and 2015, respectively. Accumulated amortization of that same equipment was $0.2 million and $1.0 million as of December 31, 2016 and 2015, respectively.
NOTE 7
— LONG-TERM DEBT – PELICAN
Line of Credit – Pelican
On October 26, 2016, we entered into an agreement with Tiger and Pelican, in conjunction with the Recapitalization transaction, requiring Pelican to provide a working capital line of credit of $0.5 million. As of December 31, 2016, there was $0.5 million outstanding under the line and no further availability to borrow under the line.
Borrowings under the line accrued interest at a rate of 5% per annum. The line was unsecured and had a maturity date of January 31, 2017.
On January 31, 2017, in conjunction with the Recapitalization transaction, the line matured and the balance was aggregated with the Aly Senior Obligations in the new credit facility with Pelican.
Credit Facility - Pelican: Term Loan, Delayed Draw Term Loan, and Revolving Credit Facility
Effective October 26, 2016, our Credit Facility with Wells Fargo was included in the Aly Senior Obligations which were acquired by Tiger, then subsequently acquired on December 12, 2016 by Pelican. During this time, interest and ticking fees continued to accrue and there were no modifications to the components of the Credit Facility as a result of these transactions; however, a Fourth Limited Forbearance Agreement was executed with Pelican. The agreement extended the forbearance period to January 31, 2017, conditioned upon the Company using its best efforts to consummate a recapitalization plan, satisfactory to Pelican, that would, at a minimum, result in the conversion of Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, subordinated note payable, and contingent payment liability into common stock prior to January 31, 2017. The agreement also waived the requirement, previously imposed by wells Fargo, to continue retaining the CRO.
Effective January 31, 2017, the Recapitalization was completed and the Credit Facility was amended in its entirety. The amended facility consisted of a term loan of $5.1 million and a revolving credit facility of up to $1.0 million (“Pelican Credit Facility”, as amended).
Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables (less than 90 days old). Borrowings under the Pelican Credit Facility are subject to monthly interest payments at an annual base rate of the six-month LIBOR rate on the last day of the calendar month plus a margin of 3.0%. To the extent there is free cash flow, as defined in the credit agreement, principal payments of 50% of such free cash flow are due annually.
Subsequent to the Recapitalization, we entered into several further amendments to capitalize on improved market conditions and increased activity in our business:
|
·
|
Amendment No. 1, effective March 1, 2017, provided for a delayed draw term loan to be added to the Pelican Credit Facility for the purpose of financing capital expenditures. The amendment permitted us to draw on an added delayed draw term loan from time-to-time up until December 31, 2018 in order to fund up to 80% of the cost of capital expenditures subject to a $0.5 million limit on aggregate borrowings.
|
|
·
|
Amendment No. 2, effective May 23, 2017, increased the maximum revolving credit amount from $1.0 million to $1.8 million and extended the final maturity date of the facility to December 31, 2019. In consideration of the increase in the revolving credit facility and the extension of the final maturity date, we agreed to issue to Pelican an amendment fee of 1,200 shares of our Series A Convertible Preferred Stock.
|
|
·
|
Amendment No. 3, effective June 15, 2017, modified maximum potential borrowings under each of the revolving credit facility and the delayed draw term loan without changing the aggregate available borrowings under the credit facility. The amendment reduced the maximum revolving credit amount from $1.8 million to $1.0 million and increased the maximum delayed draw loan borrowings from $0.5 million to $1.3 million and the amendment also increased permitted draws on the delayed draw loan from 80% of the cost of capital expenditures being funded to 90% of the cost of capital expenditures being funded.
|
The obligations under the Pelican Credit Facility are guaranteed by all of our subsidiaries and secured by substantially all of our assets. The Pelican Credit Facility contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, grant liens and sell assets. The Pelican Credit Facility does not include any financial covenants. We are in full compliance with the credit facility as of June 30, 2017.
Under the Pelican Credit Facility, as of June 30, 2017, we have the availability to borrow an incremental $0.2 million under the revolving credit facility and, if we have capital expenditures which are eligible to be financed, an incremental $1.0 million under the delayed draw term loan to finance 90% of such expenditures.
Equipment Financing and Capital Leases - Pelican
Effective December 12, 2016, Pelican acquired the Aly Senior Obligations which included $1.9 million of outstanding equipment financing and capital leases plus associated accrued interest.
On January 31, 2017, in connection with the Recapitalization, the Aly Senior Obligations, including the equipment financing and capital leases, were refinanced under the Pelican Credit Facility. Future borrowings required for equipment financing are likely to be funded through the delayed term loan included in the Pelican Credit Facility.
Long-term debt – Pelican consists of the following (in thousands):
|
|
December 31, 2016
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
|
|
|
|
|
|
Credit facility
|
|
|
|
|
|
|
Term loan
|
|
$
|
13,339
|
|
|
$
|
-
|
|
Delayed draw term loan
|
|
|
4,433
|
|
|
|
-
|
|
Line of credit - Pelican
|
|
|
494
|
|
|
|
-
|
|
Equipment financing and capital leases
|
|
|
614
|
|
|
|
1,315
|
|
|
|
|
18,880
|
|
|
|
1,315
|
|
Less: Deferred loan costs, net
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
18,880
|
|
|
$
|
1,315
|
|
As of December 31, 2016, we had $1.9 million outstanding under equipment financing and capital leases with Pelican. The gross amount of equipment held under such equipment financing and capital leases and related accumulated amortization was $3.3 million and $1.6 million, respectively, as of December 31, 2016. There were no borrowings outstanding under equipment financing and capital leases with Pelican during 2015.
The completion of the Recapitalization on January 31, 2017, coupled with the Company’s current forecasts, cash-on-hand, cash flow from operations and borrowing capacity under the Pelican Credit Facility, the Company expects to have sufficient liquidity and capital resources to meet its obligations for at least the next twelve months; however, our forecasts are based on many factors outside the Company’s control. See further details at “
Note 2 – Recent Developments”
in the Recapitalization and Unaudited Consolidated Pro Forma Balance Sheet sections.
NOTE 8 — INCOME TAXES
The provision for income taxes consists of the following (in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current provision:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
33
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
33
|
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
Deferred benefit:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(7,298
|
)
|
|
|
(2,857
|
)
|
State
|
|
|
(639
|
)
|
|
|
(416
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred benefit
|
|
|
(7,937
|
)
|
|
|
(3,273
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
(7,904
|
)
|
|
$
|
(3,372
|
)
|
The following table reconciles the statutory tax rates to our effective tax rate:
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State taxes, net of federal benefit
|
|
|
1.85
|
%
|
|
|
1.35
|
%
|
Goodwill impairment
|
|
|
-0.33
|
%
|
|
|
-21.88
|
%
|
Change in valuation allowance
|
|
|
-8.60
|
%
|
|
|
0.00
|
%
|
Other
|
|
|
1.79
|
%
|
|
|
6.01
|
%
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
28.71
|
%
|
|
|
19.48
|
%
|
We currently project a loss for the year ended December 31, 2016, for federal income tax purposes and in certain state income tax jurisdictions. As of December 31, 2016, we had a gross net operating loss (“NOL”) carryforward for U.S. federal income tax purposes of approximately $29.5 million. This NOL will begin to expire in 2033 if not utilized. We will carryforward the net federal NOL of approximately $10.0 million. We also have state NOL carryforwards that will affect state taxes of approximately $0.9 million as of December 31, 2016. State NOLs begin to expire in 2034. Carryback provisions are not allowed by all states, accordingly the state NOLs also give rise to a deferred tax asset.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has evaluated the available evidence and the likelihood of realizing the benefit of its net deferred tax assets. Management considers cumulative losses and other negative evidence as well as positive evidence such as the scheduled reversal of deferred tax liabilities, future profitability, and tax planning strategies in making this assessment. From its evaluation, the Company has concluded that based on the weight of available evidence, it is not more likely than not to realize the benefit of its deferred tax assets. Therefore, the Company established a valuation allowance of $2.4 million for the year ended December 31, 2016. Should the factors underlying management’s analysis change, future valuation adjustments to net deferred tax assets may be necessary. The benefit from any reversal of the valuation allowance will be charged directly to income tax expense. As of December 31, 2015, no valuation allowance was necessary.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income taxes. Components of our deferred income taxes as of December 31, 2016 and 2015 are as follows (in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
191
|
|
|
$
|
148
|
|
Net operating loss
|
|
|
10,024
|
|
|
|
5,514
|
|
Start-up costs
|
|
|
17
|
|
|
|
18
|
|
State net operating loss, net of federal benefit
|
|
|
604
|
|
|
|
344
|
|
Accrued compensation
|
|
|
220
|
|
|
|
42
|
|
Charitable contributions and other
|
|
|
26
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
11,082
|
|
|
|
6,085
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid assets
|
|
|
32
|
|
|
|
28
|
|
Property and equipment
|
|
|
7,334
|
|
|
|
11,539
|
|
Intangibles
|
|
|
1,208
|
|
|
|
2,013
|
|
State deferreds, net of federal benefit
|
|
|
139
|
|
|
|
446
|
|
Total deferred tax liabilities
|
|
|
8,713
|
|
|
|
14,026
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities) before valuation allowance
|
|
|
2,369
|
|
|
|
(7,941
|
)
|
Valuation allowance
|
|
|
(2,369
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities after valuation allowance
|
|
$
|
-
|
|
|
$
|
(7,941
|
)
|
We follow accounting guidance under ASC 740-10
Income Taxes
related to uncertainty in income tax positions, which clarifies the accounting and disclosure requirements for uncertainty in tax positions. We assessed our filing positions in all significant jurisdictions where we are required to file income tax returns for all open tax years and determined no liability existed or there was no liability for uncertain positions. Our major taxing jurisdictions include the U.S. federal income taxes and the Texas franchise tax. Our federal tax returns remain open for tax years 2012 forward and our state tax returns remain open for tax years 2011 forward. None of our federal or state income tax returns are currently under examination by the Internal Revenue Service or state authorities.
NOTE 9
— COMMITMENTS AND CONTINGENCIES
Litigation
We 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 our financial position or results of operations.
In 2015, we ceased compensating our employees on a day rate basis in order to ensure full compliance with the Fair Labor Standards Act (“FLSA”). Certain former employees of Aly Centrifuge, Inc. who were paid a day rate for their work prior to February 2015 alleged that we failed to pay overtime when they worked over 40 hours per week. During the years ended December 31, 2016 and 2015, certain of these employees pursued legal action against us based on such allegations:
|
·
|
In February 2015, multiple plaintiffs filed a proposed collective action against us alleging overtime violations under the FLSA. We settled this matter for business purposes with no admission of liability. The settlement amount was fully accrued as of December 31, 2015 and the case was fully paid and dismissed with prejudice, by the end of January 2016.
|
|
·
|
In August 2016, several former employees filed a lawsuit against us alleging overtime violations of the FLSA. In May 2017, we settled the matter for business purposes with no admission of liability. The settlement amount was fully accrued as of December 31, 2016 and, as of June 30, 2017, the settlement was fully paid and the case had been dismissed with prejudice.
|
|
·
|
We are currently in the early stages of arbitration with five prior employees who allege overtime violations of the FLSA. We are exploring settlement options to resolve this matter as well as preparing to defend the arbitration should settlement not be feasible. An estimated settlement amount was fully accrued as of December 31, 2016.
|
The Company entered into certain employment agreements in connection with the acquisition of United and Evolution in 2014 which provided for specified severance obligations of the Company in the event of a termination of employment of the subject employees. The Company also entered into a similar employment agreement in 2015 in connection with the recruitment of an additional employee for the solids control operations. During 2015 and 2016, the employment of these individuals terminated, and the Company did not pay the severance obligations that were contemplated by the employment agreements in the event that the cessation of employment would be determined to have been a termination by the Company “without cause.” As of December 31, 2016, the aggregate unpaid severance obligation under these agreements was approximately $0.7 million.
Contractual Commitments
We have numerous contractual commitments in the ordinary course of business including debt service requirements and operating leases. We lease land, facilities and equipment from non-affiliates. Certain of these leases extend to 2020.
Operating Leases
We lease certain property and equipment under non-cancelable operating leases. The terms of our operating leases generally range from one to five years. Lease expense under all operating leases totaled approximately $0.4 million and $0.5 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, the future minimum lease payments under non-cancelable operating leases were as follows (in thousands):
Year Ending December 31,
|
|
|
|
2017
|
|
$
|
190
|
|
2018
|
|
|
73
|
|
2019
|
|
|
55
|
|
2020
|
|
|
5
|
|
|
|
$
|
323
|
|
NOTE 10
— REDEEMABLE PREFERRED STOCK
Two of our subsidiaries have redeemable preferred stock outstanding as of December 31, 2016. Aly Operating issued redeemable preferred stock in connection with the acquisition of Austin Chalk (“Aly Operating Redeemable Preferred Stock”) and Aly Centrifuge issued redeemable preferred stock in connection with the acquisition of United (“Aly Centrifuge Redeemable Preferred Stock”).
On January 31, 2017, in connection with the Recapitalization, the Aly Operating Redeemable Preferred Stock, the Aly Centrifuge Redeemable Preferred Stock and all accrued dividends on such stock were converted into 5,454,487 shares of common 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 Aly Operating Redeemable Preferred Stock was entitled to a cumulative paid-in-kind dividend of 5% per year on its liquidation preference, compounded quarterly. Aly Operating was not required to pay cash dividends.
The following table describes the changes in Aly Operating Redeemable Preferred Stock (in thousands, except for shares) for the years ended December 31, 2016 and 2015:
|
|
Carrying Value of Aly Operating Redeemable Preferred Stock
|
|
|
Number of Outstanding Aly Operating Redeemable Preferred Shares
|
|
|
Liquidation Value of Aly Operating Redeemable Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2015
|
|
$
|
4,382
|
|
|
|
4,000,000
|
|
|
$
|
4,458
|
|
Accrued dividends
|
|
|
227
|
|
|
|
-
|
|
|
|
227
|
|
Accretion
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
4,647
|
|
|
|
4,000,000
|
|
|
|
4,685
|
|
Accrued dividends
|
|
|
239
|
|
|
|
-
|
|
|
|
239
|
|
Accretion
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
$
|
4,924
|
|
|
|
4,000,000
|
|
|
$
|
4,924
|
|
The Aly Operating Redeemable Preferred Stock is classified outside of permanent equity in our consolidated balance sheet because the settlement provisions provided the holder the option to require Aly Operating to redeem the Aly Operating Redeemable Preferred Stock at the liquidation price plus any accrued dividends upon a liquidity event, as defined in the agreement, or upon an initial public offering, as defined in the agreement.
On January 31, 2017, the Aly Operating Redeemable Preferred Stock and all accrued dividends were converted into 2,414,971 shares of common stock in connection with the Recapitalization. This conversion was accounted for as a trouble debt restructuring, see further details in “
Note 2 – Recent Developments”
.
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. In 2015, Aly Centrifuge asserted an indemnification claim of 124 shares against shares that were subject to an eighteen-month holdback for general indemnification purposes pursuant to the purchase agreement.
On August 15, 2014, in connection with a bulk 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 was entitled to a cumulative paid-in-kind dividend of 5% per year on its liquidation preference, compounded quarterly. Aly Centrifuge was not required to pay cash dividends.
The following table describes the changes in the Aly Centrifuge Redeemable Preferred Stock (in thousands, except for shares) for the years ended December 31, 2016 and 2015:
|
|
Carrying Value of Aly Centrifuge Redeemable Preferred Stock
|
|
|
Number of Outstanding Aly Centrifuge Redeemable Preferred Shares
|
|
|
Liquidation Value of Aly Centrifuge Redeemable Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2015
|
|
$
|
9,584
|
|
|
|
9,000
|
|
|
$
|
9,254
|
|
Holdback adjustment
|
|
|
(124
|
)
|
|
|
(124
|
)
|
|
|
(124
|
)
|
Accrued dividends
|
|
|
460
|
|
|
|
-
|
|
|
|
460
|
|
Amortization
|
|
|
(165
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
9,755
|
|
|
|
8,876
|
|
|
|
9,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued dividends
|
|
|
489
|
|
|
|
-
|
|
|
|
489
|
|
Amortization
|
|
|
(164
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
$
|
10,080
|
|
|
|
8,876
|
|
|
$
|
10,079
|
|
The Aly Centrifuge Redeemable Preferred Stock is classified outside of permanent equity in our consolidated balance sheet because the settlement provisions provided the holder the option to require Aly Centrifuge to redeem the Aly Centrifuge Redeemable Preferred Stock at the liquidation price plus any accrued dividends.
Aly Centrifuge Redeemable Preferred Stock also included a conversion feature; specifically, the right to exchange into shares of our 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 (“Conversion Feature”). The exchange rate in effect as of December 31, 2016 was 71.4285 or $14.00 per share of our common stock.
On January 31, 2017, the Aly Centrifuge Redeemable Preferred Stock and all accrued dividends were converted into 3,039,517 shares of common stock in connection with the Recapitalization; however, the shares were not converted according to the terms of the Conversion Feature but instead the conversion rate was negotiated independently as a part of the Recapitalization. This conversion was accounted for as a trouble debt restructuring, see further details in “
Note 2 – Recent Developments”
.
NOTE 11 —
CONTROLLING SHAREHOLDER AND
RELATED PARTY TRANSACTIONS
From time-to-time, the Company engages in business transactions with its controlling shareholder, Pelican, and other related parties.
Controlling Shareholder – Pelican
On December 12, 2016, Pelican purchased our Aly Senior Obligations, which aggregated $21.5 million as of December 31, 2016 from Tiger for $5.1 million as a part of the Recapitalization. Effective January 31, 2017, the Recapitalization was completed and resulted in the following:
|
·
|
Pelican’s contribution of approximately $16.1 million of the Aly Senior Obligations into shares of Aly Energy Convertible Preferred Stock that represented approximately 80% of our common stock, or 53,628,842 common shares, on a fully diluted basis as of January 31, 2017. The preferred shares carry a liquidation preference of $1,000 per share or $16.1 million upon issuance.
|
|
·
|
Amendment of the Company’s credit agreement acquired by Pelican into a new credit agreement (consisting of a $5.1 million term loan and $1.0 million revolving credit arrangement) with an extended maturity date of December 31, 2018.
|
On January 31, 2017 upon completion of the Recapitalization, Pelican had the power to vote the substantial majority of the Company’s outstanding common stock. Currently six of our board members and all four of our executive officers hold an ownership interest in Pelican.
On May 23, 2017 and in consideration of the increase in the revolving credit facility and the extension of the final maturity date, the Company agreed to issue Pelican an amendment fee of 1,200 shares of our Series A Convertible Preferred Stock.
See “
Note 7 – Long-term Debt – Pelican”
and “
Note 2 – Recent Developments”
for details of the Aly Senior Obligations, Recapitalization and Unaudited Consolidated Pro Forma Balance Sheet.
Other Related Party Transactions
One of our directors, Tim Pirie, who was appointed March 3, 2015, was one of the sellers of United to us in April 2014. Part of the acquisition price was payable in contingent consideration of which $0.9 million was paid in 2015. Of that amount, approximately $0.1 million was allocable to Mr. Pirie. We did not make any contingent payments during 2016. As of December 31, 2016, we estimated the fair value of future payments to be $0.8 million of which approximately $0.2 million would be allocable to Mr. Pirie. On January 31, 2017, in connection with the Recapitalization, the aggregate contingent payment liability was converted into 457,494 shares of the Company’s common stock of which Mr. Pirie controls all of the voting rights to 326,834 shares. See further discussion in “
Note 2 – Recent Developments”
and “
Note 3 – Summary of Significant Accounting Principles (Contingent Payment Liability)”.
As part of the acquisition price of United, the sellers also received Aly Centrifuge redeemable preferred stock. On January 31, 2017, the outstanding Aly Centrifuge redeemable preferred stock and accrued PIK dividends were converted into 3,039,517 shares of the Company’s common stock of which Mr. Pirie controls all of the voting rights to 593,815 shares. See further discussion in “
Note 2 – Recent Developments”
and “
Note 10 –
Redeemable Preferred Stock (Aly Centrifuge Redeemable Preferred Stock)”.
We issued 82,649 shares of our common stock during the year ended December 31, 2015, to one of our directors in respect of his arrangement of certain issuances of common stock to non-U.S. investors.
NOTE 12
— STOCK-BASED COMPENSATION
Stock-Based Payments
We issued 15,625 shares of our stock during the year ended December 31, 2015 as part of compensation to one of our former employees in accordance with his employment agreement. In connection with this issuance, we recognized stock-based compensation expense of $0.1 million for the year ended December 31, 2015.
Stock Options
As of December 31, 2016 and 2015, we had a stock-based compensation plan available to grant incentive stock options, non-qualified stock options and restricted stock to employees and non-employee members of the board of directors.
The Omnibus Incentive Plan (the “Plan”) was approved by the board of directors on May 2, 2013. On May 2, 2013, we granted 338,474 common shares under the Plan, which was the maximum number authorized. On June 5, 2015, a majority of our stockholders approved an amendment to our Plan to increase the maximum authorized shares to 750,000 common shares.
The option contract term is 10 years and the exercise price is $4.00. The options vest and are exercisable if a “Liquidity Event” occurs and certain conditions are met. A Liquidity Event is defined as an IPO or a change of control, as defined in the plan. Pursuant to the plan, an IPO is defined as an underwritten public offering of shares. If the first Liquidity Event is an IPO, then the options vest and are exercisable immediately if the IPO is effected at a price of $8.00 per share or greater. If the IPO is effected at a price less than $8.00 per share, but the stock price post-IPO reaches $8.00 per share during the six-month period immediately following the IPO, then the options vest and are exercisable. If the IPO is effected at a price less than $8.00 per share and the share price does not reach $8.00 per share prior to the sixth month anniversary of the IPO, the options do not vest and expire. If the first Liquidity Event to occur is a change of control, then the options vest if the change of control takes place at a price of at least $8.00 per share. If such change in control occurs at a price less than $8.00 per share, the options do not vest and expire.
The fair value of each option award granted under the Plan is estimated on the date of grant using the Monte Carlo simulation method. The same Monte Carlo simulation method is used to determine the derived service period of five years. In addition, expected volatilities have been based on comparable public company data, with consideration given to our limited historical data. We make estimates with respect to employee termination and forfeiture rates of the options within the valuation model. The risk-free rate is based on the approximate U.S. Treasury yield rate in effect at the time of grant. For options granted prior to the Share Exchange, the calculation of our stock price involved the use of different valuation techniques, including a combination of an income and/or market approach. Determination of the fair value was a matter of judgment and often involved the use of significant estimates and assumptions.
As of December 31, 2016 and 2015, options to purchase 242,507 and 330,111 common shares under the Plan were outstanding and $0.3 million and $0.5 million of total unrecognized compensation cost related to non-vested stock option awards, respectively. Such amount will be recognized in the future upon occurrence of a Liquidity Event that results in a vesting of the options. No options were granted during the years ended December 31, 2016 and 2015. No options were vested as of December 31, 2016 and 2015. During the year ended December 31, 2016, forfeited options totaled 87,604. No forfeitures occurred in the year ended December 31, 2015.
Effective April 4, 2017, the 2017 Stock Option Plan (the “2017 Plan”) was approved by the board of directors. On May 30, we granted approximately 16.9 million common shares under the 2017 Plan which was the maximum amount authorized. The option contract term is 10 years and the exercise price is $0.10. The options vested and became exercisable immediately upon grant. The Company is in the process of determining the value of these options.
NOTE 13 — STOCKHOLDERS’ EQUITY (DEFICIT)
Common Shares
Authorized common shares total 25,000,000 with a par value of $0.001 per share, of which, 6,707,039 and 6,706,814 were issued and outstanding, respectively, as of December 31, 2016 and 6,707,039 and 6,706,814 were issued and outstanding, respectively, as of December 31, 2015. Common stock held in treasury as of December 31, 2016 and 2015 were 225 shares.
On January 12, 2015, we issued 50,000 shares of our common stock in a private placement at a price of $11.00 per share for gross proceeds of approximately $0.6 million. In connection with the private placement we incurred approximately $37,000 in issuance costs which have been netted against proceeds in the consolidated statement of changes in stockholders’ equity (deficit).
On June 24, 2015, we initiated a private offering to accredited investors. On September 30, 2015, we closed the offering and issued 1,047,424 shares of common stock to multiple accredited investors at a price of $3.20 per share.
We issued 82,649 shares of our common stock during the year ended December 31, 2015, to one of our directors in respect of his arrangement of certain issuances of common stock to non-U.S. investors.
On January 31, 2017, we completed the Recapitalization which resulted in the issuance of 7,111,981 shares of our common stock to the former holders of Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, Aly Centrifuge subordinated debt, and liability for contingent payment (an aggregate of six individual entities and persons).
Preferred Shares
Authorized preferred shares total 10,000,000 with a par value of $0.001 per share, of which, none were issued and outstanding as of December 31, 2016 and 2015.
As a result of the Recapitalization, the Company allocated 20,000 of its authorized shares from available authorized preferred shares to Series A Convertible Preferred Stock and issued 16,092 shares on January 31, 2017. The Series A Convertible Preferred Stock have a par value of $0.001 per share, a face value of $16.1 million, which has no determinable market value as of January 31, 2017. The conversion feature provides that each Series A Preferred share shall be convertible into 3332.64 common shares at the option of the shareholder and retains a liquidation preference equal to $1,000 per share. All shares vote on an as if converted basis, whereby Pelican, who owns 100% of the Series A Convertible Preferred Stock, controls the substantial majority of votes of Aly Energy (See further discussion in “
Note 11 – Controlling Shareholder and Other Related Party Transactions”).
On May 23, 2017 and in consideration of the increase in the revolving credit facility and the extension of the final maturity date, the Company agreed to issue Pelican an amendment fee of 1,200 shares of our Series A Convertible Preferred Stock.
NOTE 14
— SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flows and non-cash investing and financing activities are as follows (in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
973
|
|
|
$
|
1,590
|
|
Cash paid for interest - discontinued operations
|
|
|
1
|
|
|
|
1
|
|
Cash paid for income taxes, net
|
|
|
2
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Purchase of equipment through a capital lease obligation
|
|
$
|
-
|
|
|
$
|
1,068
|
|
Accretion of preferred stock liquidation preference, net
|
|
|
126
|
|
|
|
127
|
|
Paid-in-kind dividends on preferred stock
|
|
|
728
|
|
|
|
687
|
|
Common shares issued for transaction cost of equity raise
|
|
|
-
|
|
|
|
590
|
|
Exchange of property and equipment for reduction in debt in connection with Recapitalization
|
|
|
2,000
|
|
|
|
-
|
|
Principal payments financed through disposition of assets
|
|
|
301
|
|
|
|
-
|
|
Assumption of Aly Senior Obligations by Pelican in connection with the Recapitalization
|
|
|
20,867
|
|
|
|
-
|
|
NOTE 15 — DISCONTINUED OPERATIONS
On October 26, 2016, we abandoned the operations of Evolution, our directional drilling and MWD business, as a part of the Recapitalization (See further discussion in “
Note 2 – Recent Developments”).
The abandonment of these operations meets the criteria established for recognition as discontinued operations under generally accepted accounting principles in U.S. GAAP.
The following table summarizes the components of loss from discontinued operations, net of income taxes included in the consolidated statements of operations (in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
250
|
|
|
$
|
3,618
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
124
|
|
|
|
3,239
|
|
Depreciation and amortization
|
|
|
572
|
|
|
|
780
|
|
Selling, general and administrative expenses
|
|
|
222
|
|
|
|
1,713
|
|
Reduction in value of assets
|
|
|
2,591
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,509
|
|
|
|
5,735
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(3,259
|
)
|
|
|
(2,117
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations before income taxes
|
|
|
(3,260
|
)
|
|
|
(2,119
|
)
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
|
(769
|
)
|
|
|
(169
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income taxes
|
|
$
|
(2,491
|
)
|
|
$
|
(1,950
|
)
|
The reduction in value of assets included in the loss from discontinued operations consisted of the following (in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Reduction in value of property and equipment:
|
|
|
|
|
|
|
Impairment in connection with Recapitalization
|
|
$
|
1,676
|
|
|
$
|
-
|
|
Loss on disposal of assets
|
|
|
-
|
|
|
|
3
|
|
Reduction in value of intangibles
|
|
|
651
|
|
|
|
-
|
|
Impairment of goodwill
|
|
|
264
|
|
|
|
-
|
|
Total reduction in value of assets
|
|
$
|
2,591
|
|
|
$
|
3
|
|
On October 26, 2016, in connection with the Recapitalization and the abandonment of the Evolution assets, we recorded an impairment of property and equipment. The value remaining for intangibles and goodwill associated with these discontinued operations was reduced to zero.
For the year ended December 31, 2015, the loss from discontinued operations includes $0.3 million in charges relating to severance. As of December 31, 2015, the remaining unpaid severance liability of $0.2 million is included in liabilities associated with discontinued operations on the consolidated balance sheet. The liability was assumed by Aly Energy on December 31, 2016 and is included in other long-term liabilities on the consolidated balance sheet as of December 31, 2016.
The following summarizes the assets and liabilities associated with discontinued operations as of December 31, 2015 (in thousands):
|
|
As of
December 31,
|
|
|
|
2015
|
|
|
|
|
|
Current assets
|
|
$
|
222
|
|
Property and equipment, net
|
|
|
1,933
|
|
Intangible assets, net
|
|
|
1,004
|
|
Goodwill
|
|
|
264
|
|
Other assets
|
|
|
5
|
|
|
|
|
|
|
Total assets
|
|
|
3,428
|
|
|
|
|
|
|
Current liabilities
|
|
|
436
|
|
Deferred tax liabilities
|
|
|
754
|
|
Other liabilities
|
|
|
21
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,211
|
|
|
|
|
|
|
Net assets
|
|
$
|
2,217
|
|
By December 31, 2016, the abandonment of these operations and sell-off of the remaining assets was completed with approximately $0.2 million of remaining liabilities assumed by the continuing operations of the Company.