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 its 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. Aly Centrifuge 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
In July 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.
By December 31, 2016, the abandonment of these operations and sell-off of the assets was completed with approximately $0.2 million of remaining liabilities assumed by the continuing operations of the Company; accordingly, there was no income or loss from discontinued operations during the year ended December 31, 2017. For the year ended December 31, 2016, the results of the discontinued operations are included in the line item “Loss from discontinued operations, net of income taxes” on the consolidated statement of operations and the cash flows from discontinued operations appear in the line items “Net cash provided by (used in) discontinued operations” on the consolidated statement of cash flows.
Basis of Presentation
Aly Centrifuge and Aly Operating Inc. (“Aly Operating”) are both wholly-owned subsidiaries of Aly Energy. Austin Chalk is a wholly-owned subsidiary of Aly Operating. 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 and each of its subsidiaries in the consolidated balance sheets as of December 31, 2017 and 2016, the related consolidated statements of operations for the years ended December 31, 2017 and 2016, consolidated statements of changes in stockholders’ equity (deficit) for the years ended December 31, 2017 and 2016, and consolidated statements of cash flows for the years ended December 31, 2017 and 2016. All significant intercompany transactions and account balances have been eliminated upon consolidation.
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”).
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, $20.1 million as of January 31, 2016, to the lender at any point during the year. 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 cost cuts already implemented in 2015. In 2016, action steps which resulted in significant cost cuts included, but are not limited to, (i) reducing headcount, (ii) ceasing operations in the northeast, (iii) modifying insurance policies, (iv) minimizing repair and maintenance activities and (v) eliminating new investments in equipment unless required by existing customers. The Company realized additional cost savings on variable costs, such as sub-rental equipment expense and trucking expense, as a direct result of the decline 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 asset 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.
Capital Restructuring
Despite our successful operational restructuring efforts, the decline in our activity levels and the decline in customer pricing outpaced the impact of our cost reductions and it became evident that a capital restructuring would 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 with Wells Fargo, 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”), who was interested in providing bridge financing and extending forbearance until such date as sufficient capital could be raised by the Shareholder Group 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, the Aly Centrifuge redeemable preferred stock, a subordinated note payable and a 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, in which Pelican was the lender, 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 where eligible receivables are defined as all receivables which have been billed to customers and are less than 90 days old. See further discussion in
“Note 3 – Recapitalization”
and
“Note 8 – Long-Term Debt – Related Party”
.
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 the 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 issued Pelican an amendment fee consisting of 1,200 shares of our Series A convertible preferred stock. See further discussion in
“Note 12 – Controlling Shareholder and Related Party Transactions”
.
|
|
·
|
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.
|
|
·
|
Amendment No. 4, effective January 22, 2018, provided for a Swing Line to be added to the Pelican Credit Facility without changing the aggregate available borrowings under the credit facility. The amendment provided for a maximum availability of $0.6 million under the new Swing Line and reduced the maximum delayed draw loan borrowings from $1.3 million to $0.7 million. Amounts drawn on the Swing Loan may be repaid and reborrowed without penalty until June 30, 2018 at which time the Swing Line matures and all outstanding amounts are immediately due and payable. Interest on the Swing Line is charged at the lower of the (i) highest lawful rate or (ii) 7.0% per annum.
|
To the extent the Company generates free cash flow, as defined in the credit agreement, during a given calendar year, principal payments of 50% of such free cash flow are due on the earlier of (i) 60 days after the end of such year or, (ii) the date on which the Company’s independent auditors have completed their audit of the financial statements for such year. Accordingly, there was no principal payment due for the year ended December 31, 2017.The maturity date of all remaining outstanding balances under the credit facility is December 31, 2019.
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, pay dividends or make other distributions, grant liens and sell assets. The Pelican Credit Facility does not include any financial covenants. We were in full compliance with the credit facility as of December 31, 2017.
Under the Pelican Credit Facility, as of December 31, 2017, we have the availability to borrow an incremental $0.6 million under the Swing Line and, if we have capital expenditures which are eligible to be financed, an incremental $75,000 under the delayed draw term loan to finance 90% of such expenditures.
NOTE 3 — RECAPITALIZATION
Summary
In September 2016, Pelican was formed with the primary objective of completing the Recapitalization. Pelican agreed to acquire the Aly Senior Obligations, provided the Company was successful in effecting the exchange of the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, a subordinated note payable and a 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 ended on January 31, 2017. 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. 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, the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, a subordinated note payable and a contingent payment liability) for approximately 10% of our common stock, or 7,111,981 common shares, on a fully diluted basis as of January 31, 2017;
|
|
·
|
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 (liquidation preference of $16.1 million or $1,000 per share) which represented approximately 80% of our common stock, or 53,628,842 common shares, on a fully diluted basis as of January 31, 2017; 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 and there was a significant dilutive effect to those shareholders who held common stock immediately before the transaction was completed.
Troubled Debt Restructuring
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 includes a “gain on the extinguishment of debt and other liabilities” from the debtors of the subordinated note payable 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 interest granted.
The impact of the TDR is as follows:
Extinguishment of Debt and Other Liabilities.
The exchange of the subordinated note payable and the contingent payment liability for common stock resulted in a gain of $2.4 million, or $0.36 per share, on the consolidated statement of operations for the year ended December 31, 2017 and was 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) for the year ended December 31, 2017. The table below summarizes stock issued and the resulting gain for each extinguishment:
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
|
|
Extinguishment of Redeemable Preferred Stock.
The exchange of the Aly Operating redeemable preferred stock and the Aly Centrifuge redeemable preferred stock for common stock resulted in a gain of $14.4 million, or $2.14 per share, which was 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) for the year ended December 31, 2017. The table below summarizes stock issued and the resulting gain for each extinguishment:
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
|
|
|
3,039,516
|
|
|
$9.8 million
|
|
|
|
|
|
|
|
|
|
Aly Operating preferred and accrued dividends of $4.0 million and $0.9 million, respectively
|
|
|
2,414,971
|
|
|
$4.6 million
|
|
On January 31, 2017, we issued 7,111,981 shares of our common stock to the former holders of the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, the subordinated note payable, and the liability for contingent payment in exchange for the above-mentioned extinguishments in connection with our TDR.
Credit Facility Restructuring
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. The exchange 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 interest granted.
The impact of the exchange and extinguishment of our Aly Senior Obligations is as follows:
Old Credit Facility.
The partial extinguishment and exchange of our Aly Senior Obligations ($16.1 million principal reduction) for shares of our Series A convertible preferred stock resulted in a gain of $9.7 million which is recorded as an “Issuance of preferred shares in exchange for the extinguishment of debt and other liabilities – related party” on the consolidated statement of changes in stockholders’ equity (deficit) for the year ended December 31, 2017. The components of the Aly Senior Obligations were as follows (in thousands):
Aly Senior Obligations as of January 31, 2017
|
Debt and Other Obligations Extinguished
|
|
Amount
|
|
|
|
|
|
Credit facility
|
|
$
|
17,772
|
|
Accrued fees and interest on credit facility
|
|
|
1,414
|
|
Capital lease obligations
|
|
|
1,930
|
|
Accrued interest on capital lease obligations
|
|
|
26
|
|
Line of credit and accrued interest - related party
|
|
|
500
|
|
Total
|
|
$
|
21,642
|
|
New Credit Facility.
On January 31, 2017, we completed the full extinguishment of our old credit facility and we entered into a new credit agreement with Pelican which consisted of a $5.1 million term loan and $1.0 million revolving credit facility ($5.1 million and $0.5 million outstanding as of January 31, 2017). See
“Note 8 – Long-Term Debt – Related Party”
for further discussion.
On January 31, 2017, we issued 16,092 shares of our Series A convertible preferred stock to Pelican in exchange for the above mentioned $16.1 million reduction of the Aly Senior Obligations.
Professional Fees - Recapitalization
During 2016, we recorded $0.2 million of expenses for professionals engaged by our former lender, 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 – related party” on our consolidated balance sheet as of December 31, 2016.
NOTE 4
— 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,
|
|
·
|
Stock-based compensation, 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 and, in connection with certain of our solids control operations, providing personnel to operate such equipment at per-day rates. In addition, we may provide equipment transportation and rig-up/rig-down services to our customers 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, 2017, the Company derived revenue from over 40 customers of which the top three customers generated approximately $8.2 million, or 56.0%, of our revenue. Amounts due from these customers included in accounts receivable and unbilled receivables as of December 31, 2017 are approximately $1.8 million.
During the year ended December 31, 2016, the Company derived revenue from over 50 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.
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. As of December 31, 2017 and 2016, we have no 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, 2017 and 2016, the allowance for doubtful accounts was approximately $73,000 and $0.6 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” on 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 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.
Management determined that there were no events or changes in circumstances during the year ended December 31, 2017 indicating that the carrying amount of long-lived assets may not have been recoverable and, accordingly, there were no impairments recorded.
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 during the year ended December 31, 2016. 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 and September 30, 2016, we recognized an impairment in connection with our discontinued operations and an impairment in connection with the Recapitalization, respectively. See “
Note 5 – Reduction in Value of Assets and Other Charges”
and “
Note 16 – Discontinued Operations”
for a further discussion of the reduction in value recorded during 2016.
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
|
10 years
|
Tradename
|
10 years
|
Non-compete
|
4 - 5 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. Management determined that there were no events or changes in circumstances during the year ended December 31, 2017 indicating that the carrying amount of intangibles may not have been recoverable and, accordingly, there were no reductions in value of intangibles recorded. See “
Note 5 – Reduction in Value of Assets and Other Charges”
and “
Note 16 – Discontinued Operations”
for a further discussion of the reduction in value recorded during the year ended December 31, 2016.
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.
As of January 1, 2016, we had no goodwill associated with continuing operations and $0.3 million of goodwill associated with discontinued operations. On October 26, 2016, in connection with the Recapitalization and the abandonment of the Evolution assets, we reduced the remaining value for the goodwill associated with these discontinued operations to zero. See “
Note 16 – Discontinued Operations”
for further discussion.
The Company did not have any goodwill recorded as of December 31, 2017 and 2016.
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, 2017 and 2016. We had no uncertain tax positions as of December 31, 2017 and 2016.
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
” and
“Note 3 – Recapitalization”
), the sellers converted both (i) the second payment obligation of $0.7 million, which was past due, and (ii) the estimated third payment 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 troubled debt restructuring (see further discussion in “
Note 3 - Recapitalization”
). There are no further payments due.
Fair Value Measurements
Prior to its conversion into common stock in connection with the Recapitalization, we measured the fair value of our contingent payment liability 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. 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 following table provides a roll forward of the fair value of our contingent payment liability which includes Level 3 measurements (in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Fair value, beginning of period
|
|
$
|
810
|
|
|
$
|
1,182
|
|
Changes in fair value
|
|
|
-
|
|
|
|
(372
|
)
|
Extinguishment of liability in connection with the Recapitalization
|
|
|
(810
|
)
|
|
|
-
|
|
Fair value, end of period
|
|
$
|
-
|
|
|
$
|
810
|
|
As of December 31, 2017, there was no contingent payment liability recorded. See
“Note 2 – Recent Developments”
and
“Note 3 – Recapitalization”
for further details on the conversion of the contingent payment liability to common stock on January 31, 2017 in connection with the Recapitalization.
As of December 31, 2016, the fair value of the contingent payment liability represents the sum of (i) the known required payments for periods which had then 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, during the year ended December 31, 2016, we recorded a decrease to the fair value of the contingent payment liability as both the actual revenue and the projected revenue on which the contingent payments were based had declined significantly. The change in fair value is included in selling, general, and administrative expenses on our consolidated statement of operations for the year ended December 31, 2016.
As of December 31, 2016, the fair value of the contingent payment liability 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.
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 is estimated using a Black-Scholes fair value model. The valuation of our stock options requires us to estimate the expected term of the 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 insignificant trading volume, 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 stock-based compensation as a component of general and administrative or direct operating expense based on the role of the applicable individual.
During the year ended December 31, 2017, we recorded stock-based compensation expense of $0.6 million. See further discussion in “
Note 13 – Stock-Based Compensation”
.
There was no stock-based compensation expense recorded during the year ended December 31, 2016.
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 the years ended December 31, 2017 and 2016, the Company incurred net losses; therefore, the impact of any incremental shares would have been anti-dilutive.
Accounting Standards Recently Adopted
In January 2017, the Financial Accounting Standards Board (FASB) issued accounting standards update (ASU) 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
The amendments eliminate Step 2 from the goodwill impairment test. The annual or interim goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The amendments should be applied on a prospective basis. The new standard is effective for the Company on January 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted the accounting guidance as of January 1, 2017. The newly adopted accounting principle is preferable because it reduces the cost and complexity of evaluating goodwill for impairment. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-03,
Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings (SEC Update)
. Among other things, this ASU incorporates into the FASB ASC Topic 250, SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on the financial statements of recently issued accounting standards when adopted, and specifically for ASU 2014-09, ASU 2016-02, and ASU 2016-03. If a registrant does not know or cannot reasonably estimate the impact of adoption of the above standards, the SEC staff expects the registrant to make a statement to that effect. Consistent with SAB Topic 11.M, the SEC staff also expects the registrant to provide qualitative disclosures to help users assess the significance the adoption will have on the financial statements. Other than our continued assessment of ASU 2014-09 through the date of adoption, the adoption of ASU 2017-03 did not have an impact on our financial statements.
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 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 did not have a material impact on the Company’s 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 Related to Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
, which will replace most existing revenue recognition guidance in GAAP and align GAAP more closely with International Financial Reporting Standards (IFRS). 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.
Entities must apply a five-step process to (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 also mandates disclosure of sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The disclosure requirements include qualitative and quantitative information about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. ASU 2014-09 must be adopted using either a full retrospective method or a modified retrospective method.
In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus
Net),
which clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,
which clarified the implementation guidance regarding performance obligations and licensing arrangements.
In May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606)—Narrow-Scope Improvements and Practical Expedients
, which clarified guidance on assessing collectability, presenting sales tax, measuring noncash consideration, and certain transition matters.
In December 2016, the FASB issued ASU No. 2016-20,
Revenue from Contracts with Customers (Topic 606)—Technical Corrections and Improvements
, which provided disclosure relief, and clarified the scope and application of the new revenue standard and related cost guidance. The new guidance for Topic 606 will be effective for the annual reporting period beginning after December 15, 2017, including interim periods within that reporting period. Early adoption would be permitted for annual reporting periods beginning after December 15, 2016.
The Company has completed its assessment in determining the impacts the new standard will have on its various revenue streams. The Company’s approach included performing a detailed review of key contracts representative of the different businesses and comparing historical accounting policies and practices to the new accounting guidance. The Company does not incur significant contract costs. The Company’s services and rental contracts are primarily short-term in nature, and therefore, based on management’s assessment, the Company has determined there will be no impact on its consolidated financial statements from the adoption of Topic 606, other than the additional disclosure requirements. Remaining implementation matters include establishing new policies, procedures, and controls. Any adoption date adjustments will not materially impact the financial statements. The Company adopted this standard on January 1, 2018 utilizing the modified retrospective method and has elected to apply the revenue standard only to contracts that are not completed as of the date of initial application.
Accounting Standards Not Yet Adopted
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting
. The guidance in this ASU applies to all entities that change the terms or conditions of a share-based payment award. The amendments provide clarity and reduce diversity in practice as well as cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to the modification of the terms and conditions of a share-based payment award. The amendments in ASU 2017-09 include guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The new standard is effective for the Company beginning on January 1, 2018 and should be applied prospectively to awards modified on or after the adoption date. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments provide a more robust framework to use in determining when a set of assets and activities is a business. The new standard is effective for the Company beginning on January 1, 2018. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In December 2016, the FASB issued ASU 2016-19,
Technical Corrections and Improvements
, which makes minor corrections and clarifications that affect a wide variety of topics in the Accounting Standards Codification, including an amendment to ASC Topic 820, Fair Value Measurement, which clarifies the difference between a valuation approach and a valuation technique when applying the guidance of that Topic. The amendment also requires an entity to disclose when there has been a change in either or both a valuation approach and/or a valuation technique. The transition guidance for the ASC Topic 820 amendment must be applied prospectively because it could potentially involve the use of hindsight that includes fair value measurements. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those years. Early application is permitted for any fiscal year or interim period for which the entity’s financial statements have not yet been issued. We are currently evaluating the impact this ASU will have on the financial position or financial statement disclosures.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
. The guidance in this ASU requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. The new standard is effective for the Company beginning on January 1, 2018. The Company is evaluating the effect that ASU 2016-16 will have on its consolidated financial statements and related disclosures.
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 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.
NOTE 5
— REDUCTION IN VALUE OF ASSETS AND OTHER CHARGES
During 2017 and 2016, the Company recorded approximately $58,000 and $17.7 million, respectively, in expense related to reduction in value of assets. See also “
Note 16 – 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,
|
|
|
|
2017
|
|
|
2016
|
|
Reduction in value of property and equipment:
|
|
|
|
|
|
|
Impairment in connection with Recapitalization
|
|
$
|
-
|
|
|
$
|
15,562
|
|
Loss on disposal of assets
|
|
|
58
|
|
|
|
1,087
|
|
Reduction in value of intangibles
|
|
|
-
|
|
|
|
1,087
|
|
Total reduction in value of assets
|
|
$
|
58
|
|
|
$
|
17,736
|
|
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 year ended December 31, 2017, the Company recorded a loss on the disposal of property and equipment of approximately $58,000 related primarily to the return of excess vehicles to the lessor in exchange for a release from the associated capital lease obligation and the write-off of leasehold improvements associated with the early termination of certain facility leases.
During 2016, the Company recorded a loss on the disposal of property and equipment of $1.1 million when the Company sold idle and underutilized equipment and vehicles with a net book value of $1.9 million for cash proceeds of approximately $0.8 million. Approximately $0.5 million of proceeds were used to fund working capital needs created by the significant deterioration in the industry throughout 2015 and approximately $0.3 million of proceeds were used to pay down outstanding balances owed to Wells Fargo under the terms of our credit facility. 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.
Reduction in Value of Intangibles
During 2016, the Company recorded a $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.
During the years ended December 31, 2017 and 2016, the Company incurred certain charges related to the downturn in the industry and the Recapitalization. These charges are summarized below (in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Debt modification fee - Recapitalization
|
|
$
|
-
|
|
|
$
|
629
|
|
Debt modification fee - related party
|
|
|
320
|
|
|
|
-
|
|
Professional fees - Recapitalization
|
|
|
138
|
|
|
|
472
|
|
Severance - operational restructuring
|
|
|
(221
|
)
|
|
|
456
|
|
|
|
$
|
237
|
|
|
$
|
1,557
|
|
Debt Modification Fee – Recapitalization
In October 2016, 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. See
“Note 2 – Recent Developments”
and
“Note 3 – Recapitalization”
for further details.
Debt Modification Fee – Related Party
On May 23, 2017, in consideration of the increase in the revolving credit facility and the extension of the maturity date of the credit facility with Pelican to December 31, 2019, the Company agreed to issue Pelican an amendment fee of 1,200 shares of our Series A convertible preferred stock. Given the nature of the related party relationship between the Company and Pelican, a debt modification fee – related party of $0.3 million was recorded to interest expense and was equivalent to the estimated fair value of the equity interest granted. The share price of our common stock as of May 23, 2017 of $0.08 per share was used as the basis of fair value for the equity interest granted.
Professional Fees - Recapitalization
During the years ended December 31, 2017 and 2016, the Company incurred professional fees related to the Recapitalization of $0.1 million and $0.5 million, respectively, which are included in selling, general, and administrative expenses on the consolidated statements of operations.
The fees in 2016 were incurred both in connection with forbearance agreements and other negotiations with the Company’s former lender, Wells Fargo, and in connection with the Recapitalization. The charges include $0.2 million of expenses incurred by the Company 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, these fees were included within the Aly Senior Obligations refinanced in connection with the Recapitalization. These fees are recorded in “Accrued interest and other – related party” on our consolidated balance sheet as of December 31, 2016. See
“Note 2 – Recent Developments”
and
“Note 3 – Recapitalization”
for further details.
Severance – Operational Restructuring
During the years ended December 31, 2017 and 2016, the Company recorded a benefit of $0.2 million and an expense of $0.5 million, respectively, related to severance obligations. These severance obligations were primarily a result of decisions to reduce headcount in response to the significant downturn in the industry. Due to our limited liquidity in recent years, we did not make certain required cash severance payments. During the year ended December 31, 2017, we settled certain of the obligations; however, 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 $0.4 million and $0.7 million as of December 31, 2017 and 2016, respectively, is included in other long-term liabilities on the consolidated balance sheets. The severance liability as of December 31, 2017 and 2016 includes a liability of $0.2 million assumed by Aly Energy related to discontinued operations.
NOTE 6
— LONG-LIVED ASSETS
Property and Equipment
Major classifications of property and equipment are as follows (in thousands):
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Machinery and equipment
|
|
$
|
33,024
|
|
|
$
|
31,541
|
|
Vehicles, trucks and trailers
|
|
|
4,288
|
|
|
|
4,523
|
|
Office furniture, fixtures and equipment
|
|
|
560
|
|
|
|
544
|
|
Leasehold improvements
|
|
|
105
|
|
|
|
203
|
|
Buildings
|
|
|
212
|
|
|
|
212
|
|
|
|
|
38,189
|
|
|
|
37,023
|
|
Less: Accumulated depreciation and amortization
|
|
|
(11,374
|
)
|
|
|
(8,807
|
)
|
|
|
|
26,815
|
|
|
|
28,216
|
|
Assets not yet placed in service
|
|
|
73
|
|
|
|
10
|
|
Property and equipment, net
|
|
$
|
26,888
|
|
|
$
|
28,226
|
|
Depreciation and amortization expense related to property and equipment for the years ended December 31, 2017 and 2016 was $2.9 million and $3.9 million, respectively.
See “
Note 5 – Reduction in Value of Assets and Other Charges
” for further discussion on asset disposals during the years ended December 31, 2017 and 2016.
Intangible Assets
Intangible assets consist of the following (in thousands):
|
|
Customer Relationships
|
|
|
Tradename
|
|
|
Non-Compete
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
$
|
5,323
|
|
|
$
|
2,174
|
|
|
$
|
492
|
|
|
$
|
7,989
|
|
Less: Accumulated amortization
|
|
|
(2,432
|
)
|
|
|
(966
|
)
|
|
|
(492
|
)
|
|
|
(3,890
|
)
|
Net book value
|
|
$
|
2,891
|
|
|
$
|
1,208
|
|
|
$
|
-
|
|
|
$
|
4,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Estimated amortization expense for the next five years and thereafter is as follows (in thousands):
For the Year Ending December 31,
|
|
|
|
|
|
|
|
2018
|
|
$
|
750
|
|
2019
|
|
|
750
|
|
2020
|
|
|
750
|
|
2021
|
|
|
750
|
|
2022
|
|
|
679
|
|
Thereafter
|
|
|
420
|
|
|
|
$
|
4,099
|
|
Total amortization expense for the years ended December 31, 2017 and 2016 was approximately $0.8 million and $1.4 million, respectively.
See further discussion of reduction in value of intangibles during the year ended December 31, 2016 in “
Note 5 – Reduction in Value of Assets and Other Charges”
and “
Note 16 – Discontinued Operations”
.
NOTE 7 — LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
Subordinated note payable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,500
|
|
|
$
|
-
|
|
Equipment financing and capital leases
|
|
|
3
|
|
|
|
-
|
|
|
|
93
|
|
|
|
10
|
|
Total
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
1,593
|
|
|
$
|
10
|
|
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”). Prior to the Recapitalization, payments of interest, incurred at 10% per annum, and principal were not required until the maturity date of 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 troubled debt restructuring, see further details in “
Note 2 – Recent Developments”
and
“Note 3 – Recapitalization”
. 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 2 – Recent Developments”
,
“Note 3 – Recapitalization”
and “
Note 8 – Long-term Debt – Related Party
”.
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 December 31, 2017, we had one remaining capital lease with a balance of approximately $3,000 which was assumed by the continuing operations of the Company in connection with our discontinued operations effective December 31, 2016.
As of December 31, 2017 and December 31, 2016, we had approximately $3,000 and $0.1 million outstanding under equipment financing and capital leases, respectively. As of December 31, 2017, no value was recorded for equipment held under capital lease as the asset under lease was transferred to Tiger in October 2016 in connection with the Recapitalization. As of December 31, 2016, the gross amount of equipment held under capital leases was approximately $0.3 million and the associated accumulated amortization was $0.2 million.
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 April 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 November 2014, we entered into an amendment to the Credit Facility, primarily to provide for a delayed draw term loan with a maximum availability of $5.0 million, and, as of December 2014, the full $5.0 million had been drawn; beginning in June 2015, this loan required principal payments each quarter of $0.3 million.
|
|
·
|
Revolving credit facility – In April 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. As such, there were no outstanding borrowings under this loan as of December 31, 2016.
|
In October 2015, in conjunction with an amendment to the Credit Facility, our interest rate was fixed at 5.25%. Beginning in July 2016, our rate increased to the default rate of 7.25% in connection with further amendments to the Credit Facility and related forbearance agreements.
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.
Due to the significant downturn in the oilfield services industry throughout 2015, as of January 1, 2016, 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. 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. See
“Note 2 – Recent Developments”
and
“Note 3 – Recapitalization”
for further detail.
Effective December 12, 2016, the Aly Senior Obligations were acquired by Pelican. See further discussion in “
Note 8 – Long-term Debt – Related Party
”.
NOTE 8 — LONG-TERM DEBT – RELATED PARTY
Long-term debt – related party consists of the following (in thousands):
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
Credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
-
|
|
|
$
|
5,027
|
|
|
$
|
13,339
|
|
|
$
|
-
|
|
Revolving credit facility
|
|
|
-
|
|
|
|
750
|
|
|
|
-
|
|
|
|
-
|
|
Delayed draw term loan
|
|
|
-
|
|
|
|
575
|
|
|
|
4,433
|
|
|
|
-
|
|
Line of credit - related party
|
|
|
-
|
|
|
|
-
|
|
|
|
494
|
|
|
|
-
|
|
Equipment financing and capital leases
|
|
|
-
|
|
|
|
-
|
|
|
|
614
|
|
|
|
1,315
|
|
Total
|
|
$
|
-
|
|
|
$
|
6,352
|
|
|
$
|
18,880
|
|
|
$
|
1,315
|
|
Line of Credit – Related Party
On October 26, 2016, we entered into an agreement with Tiger and Pelican, in conjunction with the Recapitalization, requiring Pelican to provide a working capital line of credit of $0.5 million. 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.
As of December 31, 2017, there was no outstanding balance under the line. The outstanding balance of $0.5 million as of January 31, 2017 was aggregated with the Aly Senior Obligations and subsequently exchanged into a new credit facility with Pelican in connection with the Recapitalization (see
“Note 3 – Recapitalization
for further detail). As of December 31, 2016, there was $0.5 million outstanding under the line and no further availability to borrow under the line.
Credit Facility – Related Party: 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 and 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 all outstanding Aly Operating redeemable preferred stock and associated accrued dividends, all outstanding Aly Centrifuge redeemable preferred stock and associated accrued dividends, the subordinated note payable and associated accrued interest, and the contingent payment liability into common stock on or prior to January 31, 2017.
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”). Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables where eligible receivables are defined as all receivables which have been billed to customers and are 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 the Company generates free cash flow, as defined in the credit agreement, during a given calendar year, principal payments of 50% of such free cash flow are due on the earlier of (i) 60 days after the end of such year or, (ii) the date on which the Company’s independent auditors have completed their audit of the financial statements for such year. Accordingly, there was no principal payment due for the year ended December 31, 2017.
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 the 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 issued Pelican an amendment fee consisting of 1,200 shares of our Series A convertible preferred stock. See further discussion in
“Note 12 – Controlling Shareholder and Related Party Transactions”
.
|
|
·
|
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.
|
|
·
|
Amendment No. 4, effective January 22, 2018, provided for a Swing Line to be added to the Pelican Credit Facility without changing the aggregate available borrowings under the credit facility. The amendment provided for a maximum availability of $0.6 million under the new Swing Line and reduced the maximum delayed draw term loan borrowings from $1.3 million to $0.7 million. Amounts drawn on the Swing Loan may be repaid and reborrowed without penalty until June 30, 2018 at which time the Swing Line matures and all outstanding amounts are immediately due and payable. Interest on the Swing Line is charged at the lower of the (i) highest lawful rate or (ii) 7.0% per annum.
|
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, pay dividends or make other distributions, grant liens and sell assets. The Pelican Credit Facility does not include any financial covenants. We were in full compliance with the credit facility as of December 31, 2017.
As of December 31, 2017, we had the availability to borrow an incremental $0.3 million under the revolving credit facility, and an incremental $0.7 million under the delayed draw term loan.
In January 2018, we borrowed an incremental $0.3 million under the revolving credit facility and the Pelican Credit Facility was amended to include the Swing Line. As of March 31, 2018, we have the availability to borrow an $0.6 million under the Swing Line and, if we have capital expenditures which are eligible to be financed, an incremental $75,000 under the delayed draw term loan to finance 90% of such expenditures.
Equipment Financing and Capital Leases – Related Party
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, see
“Note 2 – Recent Developments”
and
“Note 3 – Recapitalization”
. Future borrowings required for equipment financing are likely to be funded through the delayed term loan included in the Pelican Credit Facility.
Based on the impact 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 in
“Note 2 – Recent Developments”
and
“Note 3 – Recapitalization”
.
NOTE 9 — INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act (“U.S. Tax Reform”) was enacted by the U.S. federal government. The legislation significantly changed U.S. income tax law, by, among other things, lowering the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. In addition, there are many new provisions, including changes to expensing of qualified tangible property and the deductions for executive compensation and interest expense. The Company’s consolidated financial statements for the year ended December 31, 2017 were not impacted by the corporate income tax rate reduction going from 35% to 21% due to our full valuation allowance on net deferred tax assets. This rate reduction required the revaluation of the Company’s deferred tax assets and liabilities as of the U.S. Tax Reform enactment date. The revaluation reflects an assumption that the new federal corporate income tax rate will remain in place for the years in which temporary differences are expected to reverse. The Company estimates that the reduction in the federal tax rate applicable to deferred tax balances will reduce the net deferred tax asset balance, before valuation allowance, by approximately $0.8 million, with a corresponding reduction in the recorded valuation allowance.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”). SAB 118 provides the registrant with up to a one-year period to finalize the accounting for the impacts of U.S. Tax Reform. During the one-year period in which the initial accounting for U.S. Tax Reform impacts is incomplete, a registrant may include a provisional amount when reasonable estimates can be made or continue to apply the prior tax law if a reasonable estimate cannot be made. As discussed above, the Company has estimated the tax provision impacts related to the corporate income tax rate reduction and the impact on its deferred tax assets and liabilities, after corresponding adjustments to the reported valuation allowance. The deferred tax assets and liabilities table below include the adjustments from the revaluation of deferred tax balances to reflect the rate reduction for the year ended December 31, 2017. Before U.S. Tax Reform adjustments, the ending net deferred tax asset would have been $3.2 million compared to the reflected ending net deferred tax asset of $2.4 million as of December 31, 2017. The ultimate impact of remeasuring the deferred tax assets and liabilities may differ from the provisional amounts due to gathering additional information to more precisely compute the amount of tax, changes in interpretations and assumptions, additional regulatory guidance that may be issued, and actions the Company may take. The Company expects to finalize accounting for the impacts of U.S. Tax Reform when the 2017 U.S. corporate income tax return is filed in 2018.
The provision for income taxes consists of the following (in thousands):
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Current provision:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
59
|
|
|
|
33
|
|
Total current provision
|
|
|
59
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
Deferred benefit:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
(7,298
|
)
|
State
|
|
|
-
|
|
|
|
(639
|
)
|
Total deferred benefit
|
|
|
-
|
|
|
|
(7,937
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
59
|
|
|
$
|
(7,904
|
)
|
The following table reconciles the statutory tax rates to our effective tax rate:
|
|
For the Years Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State taxes, net of federal benefit
|
|
|
-5.56
|
%
|
|
|
1.85
|
%
|
Deferred income taxes - Tax Reform Rate Change
|
|
|
-77.90
|
%
|
|
|
0.00
|
%
|
Valuation allowance - Tax Reform Rate Change
|
|
|
77.90
|
%
|
|
|
0.00
|
%
|
Valuation allowance - other
|
|
|
-178.02
|
%
|
|
|
-8.60
|
%
|
Gain on cancellation of debt income - Restructuring
|
|
|
163.55
|
%
|
|
|
0.00
|
%
|
Accrued interest on equity - Restructuring
|
|
|
-25.70
|
%
|
|
|
0.00
|
%
|
Other miscellaneous
|
|
|
-4.61
|
%
|
|
|
1.46
|
%
|
Effective income tax rate
|
|
|
-16.34
|
%
|
|
|
28.71
|
%
|
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 are as follows (in thousands):
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
15
|
|
|
$
|
191
|
|
Net operating loss
|
|
|
6,622
|
|
|
|
10,024
|
|
Start-up costs
|
|
|
9
|
|
|
|
17
|
|
State net operating loss, net of federal benefit
|
|
|
980
|
|
|
|
604
|
|
Accrued compensation
|
|
|
84
|
|
|
|
220
|
|
Charitable contributions and other
|
|
|
9
|
|
|
|
26
|
|
Total deferred tax assets
|
|
|
7,719
|
|
|
|
11,082
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid assets
|
|
|
82
|
|
|
|
32
|
|
Property and equipment
|
|
|
4,496
|
|
|
|
7,334
|
|
Intangibles
|
|
|
595
|
|
|
|
1,208
|
|
State deferreds, net of federal benefit
|
|
|
160
|
|
|
|
139
|
|
Total deferred tax liabilities
|
|
|
5,333
|
|
|
|
8,713
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities) before valuation allowance
|
|
|
2,386
|
|
|
|
2,369
|
|
Valuation allowance
|
|
|
(2,386
|
)
|
|
|
(2,369
|
)
|
Net deferred tax liabilities after valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
We have a loss for the year ended December 31, 2017, for federal income tax purposes and in certain state income tax jurisdictions. As of December 31, 2017, we had a gross net operating loss (“NOL”) carryforward for U.S. federal income tax purposes of approximately $31.5 million. This NOL will begin to expire in 2033 if not utilized. We will carryforward the net federal NOL of approximately $6.6 million. We also have state NOL carryforwards that will affect state taxes of approximately $1.2 million as of December 31, 2017. 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.
The Company’s ability to utilize its NOL carryforwards to offset future taxable income and to reduce U.S. federal income tax liability is subject to certain requirements and restrictions. In general, under Section 382 of the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOLs to offset future taxable income. An ownership change generally occurs if one or more shareholders (or groups of shareholders) who are each deemed to own at least 5% of the Company’s stock have aggregate increases in their ownership of such stock of more than 50 percentage points over such stockholders’ lowest ownership percentage during the testing period (generally a rolling three-year period). The Company believes it has not experienced an ownership change in January 2017 as a result of the Recapitalization; however, the Company remains subject to ongoing testing for future ownership changes based on shareholder ownership that may create a restrictive Section 382 limitation on the NOLs in subsequent reporting periods.
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 had a valuation allowance of $2.4 million for as of December 31, 2017 and 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.
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 10
— 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 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. 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 continue to explore settlement options with five prior employees who allege overtime violations of the FLSA. If a settlement is not feasible, we may be required to proceed to arbitration. An estimated settlement amount was fully accrued as of December 31, 2017 and 2016.
|
The Company entered into certain employment agreements in connection with the acquisition of United and Evolution in 2014 which provided for specified severance obligations of the Company in the event of a termination of employment of the subject employees. The Company also entered into a similar employment agreement in 2014 in connection with the recruitment of an additional employee for the solids control operations. During 2015 and 2016, the employment of these individuals was 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.” During the year ended December 31, 2017, we settled certain of these obligations reducing the recorded liability. As of December 31, 2017 and 2016, the aggregate unpaid severance obligation under these agreements was approximately $0.4 million and $0.7 million, respectively.
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 non-cancelable operating leases totaled approximately $0.2 million and $0.4 million for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, the future minimum lease payments under non-cancelable operating leases were as follows (in thousands):
Year Ending December 31,
|
|
|
|
2018
|
|
$
|
118
|
|
2019
|
|
|
83
|
|
2020
|
|
|
25
|
|
|
|
$
|
226
|
|
NOTE 11
— REDEEMABLE PREFERRED STOCK
As of December 31, 2017, the Company did not have any redeemable preferred stock outstanding; however, as of December 31, 2016, two of our subsidiaries had redeemable preferred stock outstanding. 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 United Acquisition (“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, 2017 and 2016:
|
|
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, 2016
|
|
$
|
4,647
|
|
|
|
4,000,000
|
|
|
$
|
4,685
|
|
Accrued dividends
|
|
|
239
|
|
|
|
-
|
|
|
|
239
|
|
Accretion
|
|
|
38
|
|
|
|
-
|
|
|
|
-
|
|
December 31, 2016
|
|
|
4,924
|
|
|
|
4,000,000
|
|
|
|
4,924
|
|
Accrued dividends
|
|
|
21
|
|
|
|
-
|
|
|
|
21
|
|
Exchange for common stock in connection with the Recapitalization
|
|
|
(4,945
|
)
|
|
|
(4,000,000
|
)
|
|
|
(4,945
|
)
|
December 31, 2017
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The Aly Operating Redeemable Preferred Stock was 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 troubled debt restructuring, see further details in
“Note 3 – Recapitalization”
.
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, 2017 and 2016:
|
|
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, 2016
|
|
$
|
9,755
|
|
|
|
8,876
|
|
|
$
|
9,591
|
|
Accrued dividends
|
|
|
489
|
|
|
|
-
|
|
|
|
489
|
|
Accretion
|
|
|
(164
|
)
|
|
|
-
|
|
|
|
-
|
|
December 31, 2016
|
|
|
10,080
|
|
|
|
8,876
|
|
|
|
10,080
|
|
Accrued dividends
|
|
|
42
|
|
|
|
-
|
|
|
|
42
|
|
Exchange for common stock in connection with the Recapitalization
|
|
|
(10,122
|
)
|
|
|
(8,876
|
)
|
|
|
(10,122
|
)
|
December 31, 2017
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The Aly Centrifuge Redeemable Preferred Stock was classified outside of permanent equity on 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 3,039,516 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 troubled debt restructuring, see further details in
“Note 3 – Recapitalization”
.
NOTE 12 —
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 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 Series A convertible preferred stock that represented approximately 80% of our common stock as of January 31, 2017, or 53,628,842 common shares, on a fully diluted basis. 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. As of March 31, 2018, seven of our eight board members, including two of our executive officers, and our chief financial officer hold an ownership interest in Pelican.
On May 23, 2017, in consideration of the increase in the revolving credit facility and the extension of the maturity date of the Pelican Credit Facility to December 31, 2019, the Company agreed to issue Pelican an amendment fee of 1,200 shares of our Series A convertible preferred stock. Given the nature of the related party relationship between the Company and Pelican, a debt modification fee – related party of $0.3 million was recorded to interest expense and was equivalent to the estimated fair value of the equity interest granted. The share price of our common stock as of May 23, 2017 of $0.08 per share was used as the basis of fair value for the equity interest granted. The debt modification fee – related party is recorded on the consolidated statement of operations and is recorded as an “Issuance of preferred shares in exchange for the amendment to credit facility – related party” on the consolidated statement of changes in stockholders’ equity (deficit). See further details in
“Note 2 – Recent Developments”
and
“Note 3 – Recapitalization”
.
During the years ended December 31, 2017 and 2016, we recorded interest expense due to Pelican of $0.4 million and $0.1 million, respectively. As of December 31, 2017 and 2016, our consolidated balance sheet includes accrued expenses and interest due to Pelican of approximately $26,000 and $1.3 million, respectively.
Other Related Party Transactions
One of our directors, Tim Pirie, appointed March 3, 2015, was one of the sellers involved with the United Acquisition in April 2014. Although part of the acquisition price was payable in contingent consideration, we did not make any contingent payments during the years ended December 31, 2017 and 2016.
As of December 31, 2016, we estimated the fair value of future contingent payments to be $0.8 million. 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 – Recapitalization”
.
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 dividends were converted into 3,039,516 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”
,
“Note 3 – Recapitalization”
and
“Note 11 – Redeemable Preferred Stock (Aly Centrifuge Redeemable Preferred Stock)”
.
NOTE 13
— STOCK-BASED COMPENSATION
As of December 31, 2017 and 2016, we had two stock-based compensation plans with outstanding options. Only one of our plans is currently available to grant incentive stock options, non-qualified stock options and restricted stock to employees and non-employee members of the board of directors.
2017 Stock Option Plan
Effective April 4, 2017, the 2017 Stock Option Plan (the “2017 Plan”) was approved by the board of directors. On May 30, we granted options to purchase approximately 16.9 million shares of common stock 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 fair value of the award was estimated using a Black-Scholes fair value model. The valuation of stock options requires us to estimate the expected term of award, which was estimated using the simplified method, as the Company does not have sufficient historical exercise information. Additionally, the valuation of stock option awards is also dependent on historical stock price volatility. In view of our limited trading volume, volatility was calculated based on historical stock price volatility of the Company’s peer group.
Options to purchase 16.9 million common shares under the 2017 Plan were outstanding as of December 31, 2017. These options were granted, vested and became exercisable during the year ended December 31, 2017. As a result, we recorded stock-based compensation of $0.6 million, the full value of the grant of options to purchase common stock, as a component of selling, general and administrative expenses during the year ended December 31, 2017.
Omnibus Incentive Plan
The Omnibus Incentive Plan (the “2013 Plan”) was approved by the board of directors on May 2, 2013. On May 2, 2013, we granted 338,474 common shares under the 2013 Plan, which was the maximum number authorized. On June 5, 2015, a majority of our stockholders approved an amendment to our 2013 Plan to increase the maximum authorized shares to 750,000 common shares.
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 2013 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.
Options to purchase 234,144 and 242,507 common shares under the Plan were outstanding as of December 31, 2017 and 2016, respectively. The aggregate unrecognized compensation cost related to these non-vested stock option awards was approximately $0.3 million as of December 31, 2017 and 2016. 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 under the Plan during the years ended December 31, 2017 and 2016. No options were vested as of December 31, 2017 and 2016. During the years ended December 31, 2017 and 2016, forfeited options totaled 8,363 and 87,604, respectively.
NOTE 14 — STOCKHOLDERS’ EQUITY (DEFICIT)
Common Shares
Authorized common shares total 25,000,000 with a par value of $0.001 per share, of which, 13,819,020 and 13,818,795 were issued and outstanding, respectively, as of December 31, 2017 and 6,707,039 and 6,706,814 were issued and outstanding, respectively, as of December 31, 2016. Common stock held in treasury as of December 31, 2017 and 2016 were 225 shares.
On January 31, 2017, we issued 7,111,981 shares of our common stock to the former holders of the Aly Operating redeemable preferred stock, the Aly Centrifuge redeemable preferred stock, a subordinated note payable, and a contingent payment liability (an aggregate of six individual entities and persons) in connection with the Recapitalization.
Preferred Shares
Authorized preferred shares, with a par value of $0.001 per share, total 9,980,000 and 10,000,000 as of December 31, 2017 and 2016, respectively, of which, none were issued and outstanding as of December 31, 2017 and 2016.
As a result of the Recapitalization, the Company allocated 20,000 of its authorized shares from available authorized preferred shares to authorized Series A convertible preferred stock. The Series A convertible preferred stock has a par value of $0.001 per share and retains a liquidation preference equal to $1,000 per share. The conversion feature provides that each Series A convertible preferred share shall be convertible into 3,332.64 common shares at any time at the option of the shareholder.
On January 31, 2017, we issued 16,092 shares of Series A convertible preferred stock to Pelican in connection with the Recapitalization. On May 23, 2017, in consideration of the increase in the revolving credit facility and the extension of the final maturity date of the Pelican Credit Facility, the Company issued Pelican an amendment fee of 1,200 shares of our Series A convertible preferred stock. See further discussion in
Note 2 – Recent Developments
and
Note 3 – Recapitalization.
All shares of the Series A convertible preferred stock vote on an “as if converted” basis. As such, 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 12 – Controlling Shareholder and Related Party Transactions”
.)
NOTE 15
— 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,
|
|
|
|
2017
|
|
|
2016
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest - related party
|
|
$
|
222
|
|
|
$
|
-
|
|
Cash paid for interest
|
|
|
12
|
|
|
|
973
|
|
Cash paid for interest - discontinued operations
|
|
|
-
|
|
|
|
1
|
|
Cash paid for income taxes, net
|
|
|
50
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Extinguishment of debt and other liabilities - related party
|
|
$
|
16,092
|
|
|
$
|
-
|
|
in exchange for Series A convertible preferred stock in connection with the Recapitalization
|
|
|
|
|
|
|
|
|
Extinguishment of redeemable preferred stock
|
|
|
15,036
|
|
|
|
-
|
|
in exchange for common stock in connection with the Recapitalization
|
|
|
|
|
|
|
|
|
Returned equipment to lessor in exchange for release from capital lease obligation
|
|
|
91
|
|
|
|
-
|
|
Paid-in-kind dividends on preferred stock
|
|
|
63
|
|
|
|
728
|
|
Principal payments financed through disposition of assets
|
|
|
23
|
|
|
|
301
|
|
Assumption of Aly Senior Obligations by Pelican in connection with the Recapitalization
|
|
|
-
|
|
|
|
20,867
|
|
Exchange of property and equipment for reduction in debt in connection with Recapitalization
|
|
|
-
|
|
|
|
2,000
|
|
Accretion of preferred stock, net
|
|
|
-
|
|
|
|
126
|
|
NOTE 16 — 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” and “Note 3 – Recapitalization”).
The abandonment of these operations meets the criteria established for recognition as discontinued operations under generally accepted accounting principles in U.S. GAAP.
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. As such, there is no contribution from discontinued operations on our consolidated financial statements for the year ended December 31, 2017.
The following table summarizes the components of loss from discontinued operations, net of income taxes included in the consolidated statement of operations for the year ended December 31, 2016 (in thousands):
Revenue
|
|
$
|
250
|
|
Expenses:
|
|
|
|
|
Operating expenses
|
|
|
124
|
|
Depreciation and amortization
|
|
|
572
|
|
Selling, general and administrative expenses
|
|
|
222
|
|
Reduction in value of assets
|
|
|
2,591
|
|
Total expenses
|
|
|
3,509
|
|
Loss from discontinued operations
|
|
|
(3,259
|
)
|
Interest expense, net
|
|
|
1
|
|
Loss from discontinued operations before income taxes
|
|
|
(3,260
|
)
|
Income tax benefit
|
|
|
(769
|
)
|
Loss from discontinued operations, net of income taxes
|
|
$
|
(2,491
|
)
|
The reduction in value of assets included in the loss from discontinued operations for the year ended December 31, 2016 consisted of the following (in thousands):
Reduction in value of property and equipment:
|
|
|
|
Impairment in connection with Recapitalization
|
|
$
|
1,676
|
|
Reduction in value of intangibles
|
|
|
651
|
|
Impairment of goodwill
|
|
|
264
|
|
Total reduction in value of assets
|
|
$
|
2,591
|
|
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.