Aly Energy Services, Inc. - Quarter Report: 2016 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Period Ended September 30, 2016

or

¨ Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the Transition Period From ___________ to ___________

Commission File Number 33-92894

(713)-333-4000

(Registrant’s Telephone Number, including area code.)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At September 30, 2017, the registrant had 13,818,795 shares of common stock, $0.001 par value, outstanding.

Documents Incorporated by Reference: None

ALY ENERGY SERVICES, INC.

(A Delaware Corporation)

INDEX

PART I – FINANCIAL INFORMATION

ALY ENERGY SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

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 condensed consolidated financial statements are limited to continuing operations unless otherwise specified.

On October 26, 2012, we acquired all of the stock of Austin Chalk Petroleum Services Corp. (“Austin Chalk”). Austin Chalk provides surface rental equipment as well as roustabout services which include the rig-up and rig-down of equipment and the hauling of equipment to and from the customer's location.

On April 15, 2014, we acquired the equity interests of United Centrifuge, LLC (“United”) as well as certain assets used in United’s business that were owned by related parties of United (collectively the “United Acquisition”). In connection with the United Acquisition, United merged with and into Aly Centrifuge Inc. (“Aly Centrifuge”), a wholly-owned subsidiary of Aly Energy. United operates within the solids control and fluids management sectors of the oilfield services and rental equipment industry, offering its customers the option of renting centrifuges and auxiliary solids control equipment without personnel or the option of paying for a full-service solids control package which includes operators on-site 24 hours a day.

Discontinued Operations

On July 1, 2014, we acquired all of the issued and outstanding stock of Evolution Guidance Systems Inc. (“Evolution”), an operator of Measurement-While-Drilling (“MWD”) downhole tools. From July 2014 through October 2016, Evolution provided directional drilling and MWD services to a variety of exploration and production companies. On October 26, 2016, we abandoned these operations as a part of a restructuring transaction. The abandonment of these operations meets the criteria established for recognition as discontinued operations under generally accepted accounting principles in the United States of America (“U.S. GAAP”). Therefore, the financial results of our directional drilling and MWD services are presented as discontinued operations in the Company’s condensed consolidated financial statements. Assets and liabilities related to the discontinued operations are included in the line item “Assets associated with discontinued operations” and “Liabilities associated with discontinued operations”, respectively, on the condensed consolidated balance sheets for all periods presented. The results of the discontinued operations are included in the line item “Loss from discontinued operations, net of income taxes” on the condensed consolidated statements of operations for all periods presented. Cash flows from discontinued operations appear in the line items “Net cash provided by (used in) by discontinued operations” on the condensed consolidated statements of cash flows. See “Note 2 – Recent Developments and Subsequent Events” for more information.

Basis of Presentation

Aly Energy has three wholly-owned subsidiaries, Aly Operating Inc. (“Aly Operating”), of which Austin Chalk is a wholly-owned subsidiary, Aly Centrifuge and Evolution. We operate as one business segment which services customers within the United States.

The condensed 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 condensed consolidated balance sheets as of September 30, 2016 and December 31, 2015 and the related condensed consolidated statements of operations and cash flows for each of the periods presented. All significant intercompany transactions and account balances have been eliminated upon consolidation.

Interim Financial Information

The condensed consolidated balance sheet as of December 31, 2015 has been derived from our audited financial statements and the unaudited condensed consolidated financial statements of the Company are prepared in conformity with U.S. GAAP for interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, these condensed consolidated financial statements should be read along with the annual audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented. Interim results for the three and nine months ended September 30, 2016 are not indicative of results that were realized for the full year ending December 31, 2016. For more detail, please see the annual audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on September 5, 2017.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date, and the amounts of revenue and expenses recognized during the reporting period. Areas where critical accounting estimates are made by management include:

The Company analyzes its estimates based on historical experience and various other indicative assumptions 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.

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 three and nine months ended September 30, 2016 and 2015, the Company incurred losses from continuing operations; therefore, the impact of any incremental shares would be anti-dilutive.

Reclassifications

Certain reclassifications have been made to prior period consolidated financial statements to conform to the current period presentations. These reclassifications had no effect on our consolidated financial position, results of operations or cash flows.

Subsequent Events

We conducted our subsequent events review through the date these consolidated financial statements were filed with the SEC. (See “Note 2 – Recent Developments and Subsequent Events” and “Note 5 – Long-term Debt”.)

NOTE 2 — RECENT DEVELOPMENTS AND SUBSEQUENT EVENTS

Operational Restructuring

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

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

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

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

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

In order to further support our working capital needs, we identified and sold idle and underutilized assets. During 2016, we realized aggregate proceeds from sales of such assets of approximately $0.8 million of which $0.5 million and $0.3 million was used to fund working capital needs and pay down debt, respectively (see “Note 3 – Reduction in Value of Assets and Other Charges”).

Capital Restructuring

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

In the second quarter of 2016, certain of the Company’s principal stockholders (“Shareholder Group”) began negotiations with Wells Fargo with the objective of consummating a recapitalization transaction (the “Recapitalization”) whereby our obligations under the credit agreement and the outstanding capital leases in favor of Wells Fargo’s equipment finance affiliate and certain other obligations of Aly Energy (collectively the “Aly Senior Obligations”) would be restructured. In August 2016, the Shareholder Group was introduced to a third party, Tiger Finance, LLC (“Tiger”), to provide bridge financing and to extend forbearance until such date as sufficient capital could be raised to complete the Recapitalization.

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

Effective January 31, 2017, the Recapitalization was completed through the execution and delivery of a Securities Exchange Agreement and a Second Amended and Restated Credit Agreement, and, as a result, the new credit facility, now with Pelican, consisted of a term loan of $5.1 million and a revolving facility of up to $1.0 million as of January 31, 2017. Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables (receivables less than 90 days old).

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

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

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

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

Recapitalization Summary

The Recapitalization consisted of three restructuring events which took place in the period beginning October 26, 2016 and ending 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 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 certain 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:

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. The Recapitalization has been accounted for in accordance with ASC 470, including (i) the exchange of debt and equity securities accounted for as a troubled debt restructuring and (ii) the issuance of preferred shares in exchange for the extinguishment of debt and other liabilities and for the issuance of a new credit facility.

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 Aly Centrifuge subordinated debt and the contingent payment liability and a “gain on the extinguishment of redeemable preferred stock” from the holders of Aly Operating redeemable preferred stock and Aly Centrifuge redeemable preferred stock. The share price of common stock as of January 31, 2017 of $0.12 per share was used as the basis of fair value for each equity interested granted.

The impact of the TDR is as follows:

Extinguishment of Debt and Other Liabilities. The exchange of subordinated debt and contingent payment liability for common stock resulted in a gain of $2.4 million, or $0.36 per share, on the condensed consolidated statement of operations for the three months ended March 31, 2017 and was recorded as an “Issuance of common stock in exchange for the extinguishment of debt and other liabilities” on the condensed consolidated statement of changes in stockholders’ equity (deficit) for the three months ended March 31, 2017. The table below summarizes stock issued and the resulting gain for each extinguishment:

Extinguishment of Redeemable Preferred Stock. Represents the exchange of Aly Operating redeemable preferred stock and Aly Centrifuge redeemable preferred stock for common stock resulting in a gain of $14.4 million, or $2.14 per share, and recorded as an “Issuance of common stock in exchange for the extinguishment of redeemable preferred stock” on the condensed consolidated statement of changes in stockholders’ equity (deficit) for the three months ended March 31, 2017. The table below summarizes stock issued and the resulting gain for each extinguishment:

On January 31, 2017, we issued 7,111,981 shares of our common stock to the former holders of Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, Aly Centrifuge subordinated debt, and liability for contingent payment 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 which resulted in a gain on the extinguishment of debt and other liabilities calculated as the amount above the estimated fair value of the equity interest granted. The share price of common stock as of January 31, 2017 of $0.12 per share was used as the basis of fair value for the equity interested granted.

The 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 - Pelican” on the condensed consolidated statement of changes in stockholders’ equity (deficit) for the three months ended March 31, 2017. The components of the Aly Senior Obligations are as follows (in thousands):

New Credit Facility. Our new credit agreement with Pelican consists of a $5.1 million term loan and $0.5 million outstanding under a revolving credit facility (which was subsequently amended to $5.0 million and $0.8 million, respectively, as of June 30, 2017 in addition to $0.3 million outstanding under a delayed draw term loan with Pelican) completing the full extinguishment of our old credit facility.

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.

Controlling Shareholder – Pelican

As mentioned above, 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:

On January 31, 2017 upon completion of the Recapitalization, Pelican had the power to vote the substantial majority of the Company’s outstanding common stock. Currently six of our board members and all four of our executive officers hold an ownership interest in Pelican.

On May 23, 2017, in consideration of the increase in the revolving credit facility and the extension of the final maturity date, the Company agreed to issue Pelican an amendment fee of 1,200 shares of our Series A convertible preferred stock.

Other Related Party Transactions

Tim Pirie, who was appointed to our board of directors on March 3, 2015, was one of the sellers of United to us in April 2014. Part of the acquisition price was payable in contingent consideration of which $0.9 million was paid in 2015. Of that amount, approximately $0.1 million was attributable to Mr. Pirie. We did not make any contingent payments during 2016. As of December 31, 2016, we estimated the fair value of future contingent payments to be $0.8 million of which approximately $0.2 million would be attributable to Mr. Pirie. On January 31, 2017, in connection with the Recapitalization, the aggregate contingent payment liability was converted into 457,494 shares of the Company’s common stock of which Mr. Pirie controls all of the voting rights to 326,834 shares.

As part of the acquisition price of United, the sellers also received Aly Centrifuge redeemable preferred stock. On January 31, 2017, the outstanding Aly Centrifuge redeemable preferred stock and accrued PIK dividends were converted into 3,039,517 shares of the Company’s common stock of which Mr. Pirie controls all of the voting rights to 593,815 shares.

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.

Discontinued Operations

On October 26, 2016, we abandoned the operations of Evolution, our directional drilling and MWD business, as a part of the Recapitalization. The abandonment of these operations meets the criteria established for recognition as discontinued operations under generally accepted accounting principles in U.S. GAAP.

The following table summarizes the components of loss from discontinued operations, net of income taxes included in the condensed consolidated statements of operations (in thousands):

In connection with the Recapitalization and the abandonment of the Evolution assets, we recorded an impairment of property and equipment totaling $1.3 million during the nine months ended September 30, 2016 which is included in the line item “Reduction in value of assets” in the above table. The value remaining for property and equipment, intangibles and goodwill associated with these discontinued operations was reduced to zero on October 26, 2016 upon the execution of the transaction with Tiger.

During the three and nine months ended September 30, 2015, we incurred a loss on sale of assets of approximately $4,000.

The following summarizes the assets and liabilities associated with discontinued operations as of September 30, 2016 and December 31, 2015 (in thousands):

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.

2017 Stock Option Plan

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

NOTE 3 — REDUCTION IN VALUE OF ASSETS AND OTHER CHARGES

During the three months and nine months ended September 30, 2016, the Company incurred a reduction in value of assets of $0.8 million and $1.6 million, respectively. During the three and nine months ended September 30, 2015, the Company incurred a reduction in value of $0.2 million.

The components of reduction in value of assets are as follows (in thousands):



Reduction in Value of Property and Equipment – Disposals

During the nine months ended September 30, 2016, the Company recorded an aggregate loss on the disposal of property and equipment of $1.1 million which consisted of a loss of $0.3 million during the first quarter and $0.8 million during the third quarter.

During the three months ended March 31, 2016, the Company recorded a loss on disposal of property and equipment of $0.3 million when the Company sold idle and underutilized equipment and vehicles with a net book value of $0.8 million for cash proceeds of approximately $0.5 million. Due to the depressed market for oilfield services, these assets were sold for proceeds significantly less than the net book value resulting in higher losses than normal. These assets were sold within the basket of permitted asset sales, as defined in our credit facility, and the Company used the proceeds to fund working capital needs created by the significant deterioration in the industry throughout 2015.

During the three months ended September 30, 2016, the Company recorded a loss on the disposal of property and equipment of $0.8 million when the Company sold idle and underutilized equipment and vehicles with a net book value of $1.1 million for cash proceeds of approximately $0.3 million. Due to the depressed market for oilfield services, these assets were sold for proceeds significantly less than the net book value resulting in higher losses than normal. Wells Fargo provided the required consent to sell the assets subject to all proceeds, net of commission, being immediately used to pay down outstanding balances owed to Wells Fargo under the terms of our credit facility.

During the nine months ended September 30, 2015, the Company recorded a loss on the disposal of property and equipment of $0.3 million when the Company sold idle and underutilized equipment and vehicles. These assets were sold within the basket of permitted asset sales, as defined in our credit facility, and the Company used the proceeds to fund working capital needs created by the significant deterioration in the industry.

Reduction in Value of Intangibles

During the nine months ended September 30, 2016, the Company recorded a $0.5 million reduction in an intangible associated with a non-compete which management determined was non-enforceable. As of September 30, 2016, this intangible was recorded with no value on the condensed consolidated balance sheet. As of December 31, 2015, the non-compete was recorded at $0.7 million on the consolidated balance sheet.

Professional Fees – Recapitalization

During the three and nine months ended September 30, 2016, in connection with forbearance agreements and other negotiations with its former lender, Wells Fargo, and in connection with the Recapitalization, the Company recorded an aggregate of approximately $0.3 million and $0.4 million in charges, primarily for professional fees, which are included in selling, general and administrative expenses on the condensed consolidated statements of operations.

Severance Expense – Operational Restructuring

During the nine months ended September 30, 2016 and 2015, the Company recorded $0.5 million and approximately $95,000 in charges relating to severance due to the significant downturn in the industry. In 2016, we ceased making cash severance payments due to our limited liquidity and we do not know when or if we will be able to satisfy the remaining outstanding severance claims. As such, there was an accrued severance liability balance of $0.5 million as of September 30, 2016 which is included in accounts payable and accrued expenses on the condensed consolidated balance sheet. As of December 31, 2015, an accrued severance liability of $0.1 is included in accrued expenses on the consolidated balance sheet.

NOTE 4 — LONG-LIVED ASSETS

Property and Equipment

Major classifications of property and equipment are as follows (in thousands):

See “Note 3 – Reduction in Value of Assets and Other Charges” for further discussion on asset disposals during the three and nine months ended September 30, 2016 and 2015.

Depreciation and amortization expense related to property and equipment for the three months ended September 30, 2016 and 2015 was $1.0 million and $1.1 million, respectively. Depreciation and amortization expense related to property and equipment for the nine months ended September 30, 2016 and 2015 was $3.1 million and $3.3 million, respectively.

Intangible Assets

Intangible assets consist of the following (in thousands):

Amortization expense in each of the three-month periods ended September 30, 2016 and 2015 was approximately $0.3 million and $0.4 million. Amortization expense during the nine months ended September 30, 2016 and 2015 was approximately $1.1 million and $1.2 million, respectively.

See further discussion of reduction in value of intangibles during the three and nine months ended September 30, 2016 and 2015 in “Note 3 – Reduction in Value of Assets and Other Charges” and “Note 2 –Recent Developments and Subsequent Events” within the Discontinued Operations heading.

NOTE 5 — LONG-TERM DEBT

Credit Facility: Term Loan, Delayed Draw Term Loan, and Revolving Credit Facility

Our primary credit facility with Wells Fargo consisted of a term loan, a delayed draw term loan, and a revolving credit facility (“Credit Facility”, as amended). Obligations under the Credit Facility were as follows:

Borrowings under the Credit Facility were subject to interest at the annual base rate at the greater of:

Beginning in July 2016, our rate increased to the default rate of 7.25% in connection with the subsequent amendments and 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.

Effective September 30, 2015, we entered into an amendment to the Credit Facility ("Amendment"). In connection with the execution of the Amendment, we used the proceeds of $3.4 million from a private offering to make the regularly scheduled principal payment of $1.5 million due on September 30, 2015 and to make a prepayment of $1.9 million on the term loan.

The Amendment modified multiple components of the Credit Facility including, but not limited to, the terms listed below. The Amendment:

Due to the significant downturn in the oilfield services industry throughout 2015, as of December 31, 2015, we were not in compliance with certain financial covenants set forth in our Credit Facility due to our poor financial results.

On March 31, 2016, we completed the execution and delivery of a forbearance agreement and amendment to the Credit Facility. Among other provisions, the lenders agreed to forbear from exercising their remedies under the Credit Facility until the earlier of July 10, 2016 or the date on which forbearance was terminated due to specified events, including (i) the occurrence of other defaults under the Credit Facility, (ii) our failure to hire an independent financial advisor prior to April 10, 2016 or (iii) our failure to present a detailed plan for asset sales or equity capital acceptable to the lenders yielding net cash proceeds to us of at least $2.5 million by May 25, 2016. We hired an independent financial advisor and such advisor commenced the engagement prior to the deadline of April 10, 2016. In conjunction with agreeing to forbear from exercising their remedies under the Credit Facility, the lenders reduced the revolving credit portion of the Credit Facility to zero thereby eliminating our ability to borrow additional funds under the Credit Facility.

On May 13, 2016, we further amended the Credit Facility and the forbearance agreement related to such facility to increase our basket of permitted asset sales to $0.6 million in any calendar year provided that any proceeds from permitted asset sales be deposited in a blocked deposit account with Wells Fargo. We also acknowledged that we were unable to comply with certain financial covenants as of March 31, 2016.

On August 5, 2016, we entered into a new agreement with Wells Fargo, the Limited Forbearance Agreement, in which Wells Fargo agreed to forbear from exercising their remedies under the credit agreement until August 31, 2016, conditioned upon the following, among other items: (i) hiring a Chief Restructuring Officer (“CRO”) on terms acceptable to the lender; (ii) having the CRO provide an initial cash forecast budget prior to August 10, 2016 and weekly updates thereafter; (iii) not incurring a variance of more than 10% from the cash flow budgets; and, (iv) paying accrued interest monthly effective July 21, 2016 at the default rate specified in the Credit Facility. As mandated, effective August 5, 2016, our board selected Chris Quinn to serve as CRO of the Company. On October 5, 2016, Wells Fargo extended the forbearance period until October 19, 2016.

On October 26, 2016, in connection with the Recapitalization, the Aly Senior Obligations, which included the Credit Facility and the outstanding equipment financing and capital leases in favor of Wells Fargo and Well Fargo Equipment Finance, respectively, were acquired by Tiger. Simultaneously, we entered into the Third Limited Forbearance Agreement which extended the forbearance period to December 9, 2016 and reduced the Aly Senior Obligations in the amount of $2.0 million, conditioned upon the following, among other items: (i) Tiger entering into an assignment agreement with Pelican; (ii) Pelican providing $500,000 of unsecured working capital financing to the Company pending the closing; and, (iii) the Company transferring to Tiger certain excess equipment and vehicles which the Company was not utilizing and did not consider as necessary for its operations. The Company recorded a debt modification fee of $0.6 million in connection with the execution of the Third Limited Forbearance Agreement.

Effective December 12, 2016, the Aly Senior Obligations were acquired by Pelican. See further discussion in “Note 2 – Recent Developments and Subsequent Events”.

Subordinated Note Payable

On August 15, 2014, we completed a bulk equipment purchase for total consideration of $10.3 million of which $2.0 million was in the form of a subordinated note payable (“Subordinated Note Payable”).

On March 18, 2015, the outstanding Subordinated Note Payable was amended to extend the final maturity date to June 30, 2017 and to increase the interest rate to 10% per annum. Subsequent to an aggregate principal and interest payment of approximately $0.6 million on March 31, 2015, additional payments of interest and principal were not required until June 30, 2017. The Subordinated Note Payable was generally subordinated in right of payment to our indebtedness to its lenders.

In connection with the Recapitalization, the Subordinated Note Payable was converted into 1,200,000 common shares of the Company. This conversion was accounted for as a trouble debt restructuring, see further details in “Note 2 – Recent Developments and Subsequent Events”. 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 and Subsequent Events”.

In January 2017, in order to reduce our debt service obligations, we returned certain underutilized and idle vehicles under capital leases with a net book value of $0.1 million to the lessor in exchange for the release of all outstanding obligations, aggregating to approximately $0.1 million, resulting in a reduction in value of assets of approximately $38,000.

As of January 31, 2017, we had one remaining capital lease with a balance of approximately $9,000 which was assumed by the continuing operations of the Company in connection with our discontinued operations effective December 31, 2016.

Deferred Loan Costs

Costs incurred to obtain financing are capitalized and amortized on a straight-line basis over the term of the loan, which approximates the effective interest method. The amortization of these costs is classified within interest expense on the accompanying condensed consolidated statements of operations and was approximately $0.1 million in each of the three-month periods ended September 30, 2016 and 2015 and approximately $0.2 million and $0.3 million during the nine months ended September 30, 2016 and 2015, respectively.

During the fourth quarter of 2016, in connection with various amendments to our credit facility and in connection with the Recapitalization, we incurred an aggregate charge of $0.1 million, classified within interest expense, to write-off all remaining unamortized deferred loan costs. There were no new deferred loan costs recorded in connection with the Recapitalization.

As a result of the adoption of Accounting Standards Update ("ASU") 2015-03, “Simplifying the Presentation of Debt Issuance Costs” on January 1, 2016, the Company reclassified debt issuance costs of $0.2 million and retrospectively reclassified debt issuance costs of $0.4 million as a reduction in the carrying amount of the related Credit Facility as of September 30, 2016 and December 31, 2015, respectively.

Deferred loan costs and accumulated amortization were $1.0 million and $0.8 million, respectively, as of September 30, 2016. Deferred loan costs and accumulated amortization were $1.0 million and $0.6 million, respectively, as of December 31, 2015.

Long-term debt consists of the following (in thousands):

As of September 30, 2016 and December 31, 2015, we had approximately $2.1 million and $2.4 million outstanding under equipment financing and capital leases, respectively. The gross amount of equipment held under capital leases and accumulated amortization of that same equipment was approximately $3.5 million and $1.0 million, respectively, as of December 31, 2015. There were no additions or disposals of equipment held under capital lease during the nine months ended September 30, 2016.

NOTE 6 — REDEEMABLE PREFERRED STOCK

Two of our subsidiaries had redeemable preferred stock outstanding as of September 30, 2016. Aly Operating issued redeemable preferred stock in connection with the acquisition of Austin Chalk (“Aly Operating Redeemable Preferred Stock”) and Aly Centrifuge issued redeemable preferred stock in connection with the 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 5,454,488 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 for the nine months ended September 30, 2016 (in thousands, except for shares):

The Aly Operating Redeemable Preferred Stock is classified outside of permanent equity in our consolidated balance sheet because the settlement provisions provided the holder the option to require Aly Operating to redeem the Aly Operating Redeemable Preferred Stock at the liquidation price plus any accrued dividends upon a liquidity event, as defined in the agreement, or upon an initial public offering, as defined in the agreement.

On January 31, 2017, the Aly Operating Redeemable Preferred Stock and all accrued dividends were converted into 2,414,971 shares of common stock in connection with the Recapitalization. This conversion was accounted for as a trouble debt restructuring, see further details in “Note 2 – Recent Developments and Subsequent Events”.

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 for the nine months ended September 30, 2016 (in thousands, except for shares):

The Aly Centrifuge Redeemable Preferred Stock is classified outside of permanent equity in our consolidated balance sheet because the settlement provisions provided the holder the option to require Aly Centrifuge to redeem the Aly Centrifuge Redeemable Preferred Stock at the liquidation price plus any accrued dividends.

Aly Centrifuge Redeemable Preferred Stock also included a conversion feature; specifically, the right to exchange into shares of our common stock on any date, from time-to-time, at the option of the holder, into the number of shares equal to the quotient of (i) the sum of (A) the liquidation preference plus (B) an amount per share equal to accrued but unpaid dividends not previously added to the liquidation preference on such share of preferred stock, divided by (ii) 1,000, and (iii) multiplied by the exchange rate in effect at such time (“Conversion Feature”). The exchange rate in effect as of December 31, 2016 was 71.4285 or $14.00 per share of our common stock.

On January 31, 2017, the Aly Centrifuge Redeemable Preferred Stock and all accrued dividends were converted into 3,039,517 shares of common stock in connection with the Recapitalization; however, the shares were not converted according to the terms of the Conversion Feature but instead the conversion rate was negotiated independently as a part of the Recapitalization. This conversion was accounted for as a trouble debt restructuring, see further details in “Note 2 – Recent Developments and Subsequent Events”.

NOTE 7 — STOCK-BASED COMPENSATION

Stock-Based Payments

We issued 15,625 shares of our stock during the three months ended September 30, 2015 as part of compensation to one of our former employees in accordance with his employment agreement. In connection with this issuance, we recognized stock-based compensation expense of $0.1 million for the three and nine months ended September 30, 2015.

Stock Options

As of September 30, 2016 and 2015, we had a stock-based compensation plan available to grant incentive stock options, non-qualified stock options and restricted stock to employees and non-employee members of the board of directors.

The Omnibus Incentive Plan (the “Plan”) was approved by the board of directors on May 2, 2013. On May 2, 2013, we granted 338,474 common shares under the Plan, which was the maximum number authorized. On June 5, 2015, a majority of our stockholders approved an amendment to our Plan to increase the maximum authorized shares to 750,000 common shares.

The option contract term is 10 years and the exercise price is $4.00. The options vest and are exercisable if a “Liquidity Event” occurs and certain conditions are met. A Liquidity Event is defined as an IPO or a change of control, as defined in the plan. Pursuant to the plan, an IPO is defined as an underwritten public offering of shares. If the first Liquidity Event is an IPO, then the options vest and are exercisable immediately if the IPO is effected at a price of $8.00 per share or greater. If the IPO is effected at a price less than $8.00 per share, but the stock price post-IPO reaches $8.00 per share during the six-month period immediately following the IPO, then the options vest and are exercisable. If the IPO is effected at a price less than $8.00 per share and the share price does not reach $8.00 per share prior to the sixth month anniversary of the IPO, the options do not vest and expire. If the first Liquidity Event to occur is a change of control, then the options vest if the change of control takes place at a price of at least $8.00 per share. If such change in control occurs at a price less than $8.00 per share, the options do not vest and expire.

The fair value of each option award granted under the Plan is estimated on the date of grant using the Monte Carlo simulation method. The same Monte Carlo simulation method is used to determine the derived service period of five years. In addition, expected volatilities have been based on comparable public company data, with consideration given to our limited historical data. We make estimates with respect to employee termination and forfeiture rates of the options within the valuation model. The risk-free rate is based on the approximate U.S. Treasury yield rate in effect at the time of grant. For options granted prior to the Share Exchange, the calculation of our stock price involved the use of different valuation techniques, including a combination of an income and/or market approach. Determination of the fair value was a matter of judgment and often involved the use of significant estimates and assumptions.

As of September 30, 2016 and December 31, 2015, options to purchase 330,111 common shares under the Plan were outstanding and there was $0.5 million of total unrecognized compensation cost related to non-vested stock option awards. Such amount will be recognized in the future upon occurrence of a Liquidity Event that results in a vesting of the options. No options were granted during the three months ended September 30, 2016 and 2015 or the nine months ended September 30, 2016 and 2015. No forfeitures during the three and nine months ended September 30, 2016 and 2015.

NOTE 8 — SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flows and non-cash investing and financing activities are as follows (in thousands): 

NOTE 9 — NEW ACCOUNTING STANDARDS

Accounting Standards Recently Adopted

In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. Other than the revised statement of cash flows presentation of restricted cash, the adoption of ASU 2016-18 did not have an impact on our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which eliminates the existing requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet and now requires that all deferred tax assets and liabilities be classified as noncurrent. The ASU is effective for annual periods beginning after December 15, 2016, with early application permitted. We elected to early adopt the provisions of this ASU and classified our deferred tax balances as a non-current liability as of December 31, 2016 and 2015. The adoption has no effect on net income or cash flows.

In September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in the ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments are effective for annual reporting periods beginning after December 15, 2015. The adoption of ASU 2015-16 did not have an impact on our financial condition or results of operations.

In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which adds comments from the Securities and Exchange Commission (SEC) addressing ASU 2015-03, as discussed above, and debt issuance costs related to line-of-credit arrangements. The SEC commented it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We adopted ASU 2015-15 in connection with our adoption of ASU 2015-03 effective January 1, 2016. The adoption of ASU 2015-15 did not have an impact on our financial condition or results of operations.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in the ASU change the balance sheet presentation requirements for debt issuance costs by requiring them to be presented as a direct reduction to the carrying amount of the related debt liability. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. Transitioning to the new guidance requires retrospective application. We implemented the required change to the presentation of our debt issuance costs in the first quarter of fiscal year 2016, as expected such change did not have a material impact to our consolidated financial statements.

In November 2014, the FASB issued ASU 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity, which clarifies how to evaluate the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the ASU requires that an entity consider all relevant terms and features in evaluating the nature of the host contract and clarifies that the nature of the host contract depends upon the economic characteristics and the risks of the entire hybrid financial instrument. An entity should assess the substance of the relevant terms and features, including the relative strength of the debt-like or equity-like terms and features given the facts and circumstances, when considering how to weight those terms and features. The adoption of ASU 2014-16 did not have an impact on our financial condition or results of operations.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which defines management’s responsibility to evaluate whether there is substantial doubt about the company’s ability to continue as a going concern and provides guidance on the related footnote disclosure. Management should evaluate whether there are conditions or events that raise substantial doubt about the company’s ability to continue as a going concern within one year after the date the annual or interim financial statements are issued. We adopted these provisions in the first quarter of 2016 and will provide such disclosures as required if there are conditions and events that raise substantial doubt about our ability to continue as a going concern, as expected such change did not have a material impact to our consolidated financial statements.

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force). The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. The adoption of ASU 2014-12 did not have an impact on our financial condition or results of operations.

Accounting Standards Not Yet Adopted

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-15)”, that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the effect of ASU 2016-15 on its consolidated financial statements.

In March 2016, the FASB Issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company will adopt the accounting guidance as of January 1, 2017. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will replace the existing lease guidance. The standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Additional disclosure requirements include qualitative disclosures along with specific quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for the Company for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.

ASU 2014-09. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The objective of this ASU is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 must be adopted using either a full retrospective method or a modified retrospective method. During a July 2015 meeting, the FASB affirmed a proposal to defer the effective date of the new revenue standard for all entities by one year. As a result, ASU 2014-09 is effective for the Company for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements, however, management believes that the impact to the financial statements will not be material.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

The following unaudited pro forma consolidated balance sheet gives effect to the capital restructuring of Aly Energy Services, Inc. (“the Company”), in a transaction accounted for as both a troubled debt restructuring and extinguishment of debt and other liabilities held as of December 31, 2016 (“Recapitalization”). The Company’s capital structure was significantly impacted as a result of the Recapitalization which was completed on January 31, 2017.

The unaudited consolidated pro forma balance sheet presented herein is based on the historical consolidated balance sheet of the Company after giving effect to the Recapitalization and the assumptions and adjustments described in the accompanying notes to this unaudited pro forma financial statement.

The unaudited consolidated pro forma balance sheet was prepared in accordance with the regulations of the Securities Exchange Commission. The pro forma adjustments reflecting the Recapitalization are based upon troubled debt restructuring (“TDR”) and debt extinguishment accounting in accordance with GAAP and upon the assumptions set forth in the accompanying notes to this unaudited pro forma financial statement.

The historical consolidated balance sheet has been adjusted to give pro forma effect to events that are (i) directly attributable to the Recapitalization and (ii) factually supportable. The pro forma adjustments are based on management's estimates of the fair value of equity exchanged and have been prepared to illustrate the estimated effect of the Recapitalization and certain other adjustments.

The Company’s balance sheet as of December 31, 2016 was derived from its audited financial statements included in the Company’s 10-K, as filed with the Securities and Exchange Commission on September 5, 2017.

The unaudited consolidated pro forma balance sheet does not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the Recapitalization. The unaudited consolidated pro forma balance sheet has been prepared for illustrative purposes only and is not necessarily indicative of the financial position in future periods or the financial position that would have been realized had the Company completed the Recapitalization during the specified period. The unaudited pro forma consolidated balance sheet, including the notes thereto, should be read in conjunction with the Company’s historical audited financial statements included in the Company’s 10-K, as filed with the Securities and Exchange Commission on September 5, 2017, and its historical consolidated condensed financial statements included in the Company’s 10Q for the three months ended March 31, 2017, as filed with the Securities and Exchange Commission on September 5, 2017.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2016

(in thousands, except share and per share data)