Aly Energy Services, Inc. - Annual Report: 2017 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

Form 10-K

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

Period Ended December 31, 2017

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨

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 x No ¨

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

Indicate by check mark 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

The aggregate market value of common stock held by non-affiliates of the registrant was approximately $0.9 million as of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing sales price of the registrant’s common stock on that date.

At March 31, 2018, 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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Current Report on Form 10-K (this “Report”) contains certain statements and information that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “anticipate,” “believe,” “ensure,” “expect,” “if,” “intend,” “plan,” “estimate,” “project,” “forecasts,” “predict,” “outlook,” “aim,” “will,” “could,” “should,” “potential,” “would,” “may,” “probable,” “likely,” and similar expressions that convey the uncertainty of future events or outcomes, and the negative thereof, are intended to identify forward-looking statements. Forward-looking statements, which are not generally historical in nature, include those that express a belief, expectation or intention regarding our future activities, plans and goals and our current expectations with respect to, among other things:

Forward-looking statements are not assurances of future performance and actual results could differ materially from our historical experience and our present expectations or projections. These forward-looking statements are based on management’s current expectations and beliefs, forecasts for our existing operations, experience, expectations and perception of historical trends, current conditions, anticipated future developments and their effect on us, and other factors believed to be appropriate. Although management believes the expectations and assumptions reflected in these forward-looking statements are reasonable as and when made, no assurance can be given that these assumptions are accurate or that any of these expectations will be achieved (in full or at all). Our forward-looking statements involve significant risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Known material factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the following:

Should one or more of the factors, risks or uncertainties described above materialize (or the other consequences of such a development worsen), or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this Report.

PART I

Item 1. Business

General

Throughout this report, we refer to Aly Energy Services, Inc., together with its subsidiaries, as “we,” “our”, “us,” “Aly Energy” or the “Company.” References to financial results and operations of the Company are limited to continuing operations unless otherwise specified.

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

History

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

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

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

Recent Trends and Outlook

By January 31, 2017, we had successfully navigated through the industry downturn by implementing an operational restructuring, including severe cost cutting measures, and significantly deleveraging the business by successfully entering into a capital restructuring transaction, the “Recapitalization”. (See further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements.) As a direct result of the Recapitalization, we were well-positioned to take advantage of growth opportunities in 2017.

Such growth opportunities were created primarily from a significant increase in demand for oilfield services when compared to the two preceding years. Two of the most significant drivers of demand for our services, the price of oil and the Rig Count, increased substantially year-over-year from 2016 to 2017. The positive impact of these improved industry conditions on the Company is reflected in the increased utilization of our equipment and services and our ability to raise the prices we charge to our customers. Increased utilization and increased pricing resulted in a significant amount of incremental revenue in 2017 when compared to 2016 and a significant overall improvement in our financial results and liquidity.

Our business depends to a significant extent on the level of unconventional resource development activity and corresponding capital spending of E&P companies onshore in the U.S. These activity and spending levels are strongly influenced by the current and expected oil price. Commodity prices declined significantly between the third quarter of 2014 and the first quarter of 2016. However, oil prices have since gradually increased and this price recovery has stimulated an increase in onshore drilling and completion activity and a consequent increase in demand for our services. The average Rig Count for the year ended December 31, 2017 increased 77.4% to 864 rigs as compared to 487 for the year ended December 31, 2016. The favorable impact of the recent increase in the Rig Count on demand for our services has been magnified by an increase in the proportion of rigs drilling directional and horizontal wells. Rigs drilling directional and horizontal wells typically utilize oil-based or other sophisticated mud systems which creates demand for our specialized mud circulating tanks, pumps, containment systems, solids control and associated equipment. The proportion of rigs drilling directional and horizontal wells as a percentage of total U.S. land-based rigs has increased to 93.1% during the fourth quarter of 2017 from approximately 88.7% in the first quarter of 2016.

If the current commodity price environment holds or continues to improve, we anticipate a further increase in demand for our services. In addition, our customers are increasingly focused on efficient drilling of high intensity wells with long laterals which further enhances the demand for our services. As demand increases, we expect that utilization will increase and our ability to increase the prices for our equipment and services will improve resulting in greater margins and increased margins as a percent of revenue.

We will continue to expand our business through a low risk strategy of growing organically by replacing our sub-rented equipment with newly purchased, refurbished or fabricated equipment. We will also evaluate strategic acquisition opportunities that would provide geographic diversification, expand our products and services and introduce us to new customers.

Products and Services

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

Our Rental Products:

Centrifuges: We currently own approximately 48 centrifuges. We provide two different sizes of centrifuges to meet varying client specifications (SS1000 and SS2000). We believe our centrifuges provide a competitive advantage because the rotating assembly within each centrifuge can be removed and replaced on a customer’s well site within 45 minutes if it fails thereby minimizing downtime. Certain customers rent centrifuges with auxiliary equipment such as shakers, vertical dryers, waste removal units, and/or various tanks.

Mud Circulating Tanks (“MCTs”): We currently own approximately 60 vertical 400-barrel MCTs and approximately 129 500-barrel MCTs. We developed vertical 400-barrel MCTs as an innovative solution that minimizes location size, which we believe is an attractive feature for customers. The majority of our 500-barrel MCTs are highly mobile with rounded bottoms and customized jet-lines to ensure more consistent mud and easier cleanout at the completion of a job. In addition to the 500-barrel MCTs we own, we sub-rent 500-barrel MCTs (approximately 230 sub-rented as of December 31, 2017) in order to satisfy demand for our services. MCTs are typically rented to customers with auxiliary equipment such as diesel or electric mud pumps, hoses, and wooden mats.

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

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

Our Service Offerings Which Include Personnel:

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

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

Fabricating Capabilities

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

Geographic Markets

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

Competition

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

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

Customers

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

For the years ended December 31, 2017 and 2016, our top three customers represented approximately 56.0% and 43.5% of total revenue, respectively.

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

Raw Materials

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

Safety

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

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

Employees

As of March 26, 2018, we employed approximately 65 individuals. The corporate cost center employs six individuals, including the chairman, the chief executive officer, the chief operating officer and the chief financial officer, approximately 48 individuals work primarily in the field, and the remaining employees provide selling, general, and administrative services. We believe we have good relationships with our employees.

Seasonality

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

Intangibles

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

Governmental Regulation

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

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

Environmental Matters

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

Access to Company Reports

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

Item 1A. Risk Factors

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

Risks Related to Our Business

Our business depends on domestic drilling activity and spending by the oil and natural gas industry in the United States.

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

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

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

The oilfield services industry is competitive and fragmented and includes numerous small companies capable of competing in our markets on a local basis as well as several large companies that possess substantially greater financial and other resources than us. Some of our competitors hold significant market share in the markets in which we operate, which may make it difficult for us to successfully sell competing products and services. The principal competitive factors in our markets are product and service quality and availability, responsiveness, experience, equipment quality, reputation for safety and price. The competitive environment has intensified as recent mergers among exploration and production companies have reduced the number of available customers. The fact that drilling rigs and other vehicles and oilfield services equipment are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry. Our larger competitors may have greater resources which could allow them to compete more effectively than us and they may benefit from economies of scale which enable them to offer products and services at a lower cost than us. Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics, or that better address environmental concerns, than our products and services.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We are subject to the credit risk of our customers.

We provide credit to our customers in the normal course of business and generally do not require collateral in extending such credit. This exposure, coupled with material instances of default, could have an adverse effect on our business, financial condition, results of operations and cash flows. In addition, we may need to undertake collection efforts that could cause our business from certain customers to decline, or the collection of certain receivables could become impossible, requiring us to write them off.

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

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

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

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

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

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

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

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

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

These constraints could delay our operations and materially increase our operating and capital costs.

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

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

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

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

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

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

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

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

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

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

We are subject to income and other taxes in the U.S. Changes in applicable U.S. tax laws and regulations, such as the December 2017 enactment of Federal legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”), or their interpretation and application, including the possibility of retroactive effect and changes to state tax laws that may occur in response to the Tax Act, could affect our tax expense and profitability. In addition, the final determination of any tax audits or related litigation could be materially different from our historical income tax provision and accruals. Changes in our tax provision or an increase in our tax liability, whether due to changes in applicable laws and regulation, the interpretation or application thereof, or a final determination of tax audits or litigation, could materially adversely affect our financial performance.

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

Our reporting obligations as a public company place a significant strain on our management, operational and financial resources and systems. We may experience difficulty in maintaining management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices required for us as a publicly traded and reporting company. It may be difficult to design and implement effective internal control over financial reporting for combined operations following the addition of other businesses which we may acquire in the future. In addition, differences in existing controls of acquired businesses may result in weaknesses that require remediation when internal controls over financial reporting are combined. For further details on our internal controls over financial reporting see Item 9A of this annual report.

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

We have entered into agreements with third parties for hardware, software, telecommunications and other information technology services in connection with our business. In addition, we have developed management reporting and other information which requires software licensed from third parties. It is possible we could incur interruptions from cyber security attacks, computer viruses or malware. We believe that we have positive relations with our related vendors and maintain adequate anti-virus and malware software and controls; however, any interruptions to our arrangements with third parties to our computing and communications infrastructure or our information systems could significantly disrupt our business operations. For further details on our internal controls over informational technology see Item 9A of this annual report.

Future indebtedness could restrict our operations and make us more vulnerable to adverse economic conditions.

We will likely incur future indebtedness, the terms of which could have important consequences to our stockholders. For example, agreements relating to such future indebtedness could:

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

Our ability to make payments in respect of any future indebtedness and to fund planned capital expenditures depends on our ability to generate cash flow. Due to the cyclical nature of the industry we operate in, our cash flow from operations can vary significantly from year to year. Further, our credit facility matures on December 31, 2019 and we are required to make a prepayment of principal equal to 50% of our “excess cash flow,” as defined under the credit facility, in early 2019. Consequently, our cash flow may be insufficient to service our debt and that could negatively impact our business, financial condition and results of operations. If our cash flow from operations is insufficient to service our debt in the future, we might need to sell assets, seek additional equity or change our business direction to service our debt and there can be no assurance that we could execute these actions in a timely manner sufficient to allow us to service our debt.

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

Risks Related to Ownership of our Common Stock

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The market price of our common stock may decline.

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

Factors affecting the trading price may include:

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

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

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

Item 1B: Unresolved Staff Comments

None.

Item 2. Properties

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

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

Item 3. Legal Proceedings

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

Item 4. Mine Safety Disclosures

Not Applicable.

PART II

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

Market Information

Our common stock is listed on the OTCQB under the symbol ”ALYE”. The following table indicates the quarterly high and low bid price for our common stock on the OTCQB and OTC Pink for the years ended December 31, 2017 and 2016. Such inter-dealer quotations do not necessarily represent actual transactions and do not reflect retail mark-ups, markdowns or commissions.

Holders

The number of holders of record of our common stock as of March 23, 2018 was 83. This number does not include an undetermined number of stockholders whose stock is held in “street” or “nominee” name.

Dividends

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

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

Effective April 4, 2017, the 2017 Plan was approved by the board of directors. On May 30, we granted options to purchase approximately 16.9 million common shares under the 2017 Plan which was the maximum amount authorized. The option contract term is 10 years and the exercise price is $0.10. The options vested and became exercisable immediately upon grant. The 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 the 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. As a result, we recorded stock-based compensation of $0.6 million for the full value of the grant as a component of selling, general and administrative expenses during the year ended December 31, 2017.

As of December 31, 2017, there were options to purchase 16.9 million common shares outstanding under the plan, all of which were fully vested and exercisable.

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

The 2013 Plan, a stock-based compensation plan available to grant incentive stock options, non-qualified stock options and restricted stock to employees and non-employee members of the board of directors, was approved by the board of directors on May 2, 2013. On 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.

As of December 31, 2017 and 2016, options to purchase 234,144 and 242,507 common shares, respectively, under the 2013 Plan were outstanding and there was $0.3 million of total unrecognized compensation cost related to non-vested stock option awards. Such amount will be recognized in the future upon occurrence of a Liquidity Event that results in a vesting of the options. No options were granted during the years ended December 31, 2017 and 2016 under the 2013 Plan. No options were vested as of December 31, 2017 and 2016. During the years ended December 31, 2017 and 2016, forfeited options totaled 8,363and 87,604, respectively.

Item 6. Selected Financial Data

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

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

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

Overview of Our Business

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

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

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

History

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

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

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

By January 31, 2017, we had successfully navigated through the industry downturn by implementing an operational restructuring, including severe cost cutting measures, and significantly delevered the business by successfully entering into a capital restructuring transaction, the “Recapitalization”. (See further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements.) As a direct result of the Recapitalization, we were well-positioned to take advantage of growth opportunities in 2017.

Such growth opportunities were created primarily from a significant increase in demand for oilfield services when compared to the two preceding years. Two of the most significant drivers of demand for our services, the price of oil and the Rig Count, increased substantially year-over-year from 2016 to 2017. The positive impact of these improved industry conditions on the Company is reflected in the increased utilization of our equipment and services and our ability to raise the prices we charge to our customers. Increased utilization and increased pricing resulted in a significant amount of incremental revenue in 2017 when compared to 2016 and a significant overall improvement in our financial results and liquidity.

How We Generate Revenue

We generate our revenues by providing drilling-related support services to E&P companies operating in some of the major onshore unconventional basins in the U.S. We typically enter into a Master Service Agreement (“MSA”) with each of our customers that provides a framework of general terms and conditions of our services that will govern any future transactions or jobs awarded to us. Although MSAs do not typically require a customer to use our equipment and services, we have long-standing relationships with most of our customers and we believe that they will continue to utilize our products and services in 2018 and beyond. Our largest customers, some of the most active E&P companies in the areas in which we operate, have consistently done business with us over the last three years even during the downturn experienced in 2015 and 2016.

During the year ended December 31, 2017, approximately 63.4% of our revenue was derived from the rental of equipment, 34.0% was derived from services we provide, such as the rig-up/rig-down and hauling of our equipment and, in certain cases, the operation of our equipment at the respective customer’s sites, and the remainder of our revenue was derived from reimbursable expenses charged to the customer, including charges for the sale of various items, such as chemicals.

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

The prices we charge for our products and services depend on the relationship between the level of activity of E&P companies, or the demand of our potential and existing customers, and the supply of equipment and services available to such E&P companies from us and our competitors. When the supply exceeds the demand, the competitive environment in the areas in which we operate intensifies significantly, particularly because many of the products we supply are not differentiated from the products provided by our competitors. Our customers choose to use our equipment and services, as opposed to those offered by our competitors, primarily based on the pricing we offer and our ability to execute efficiently and safely. As competition increases, downward pressure on pricing strengthens and we are sometimes required to reduce the rates billed to both our existing and future customers. Similarly, when demand exceeds supply, our ability to increase the prices we charge improves significantly.

Due to the significant impact of the volatility of the oil and gas industry on the activity of E&P companies, both the utilization of our equipment and related services and the prices we charge have been, and may be, significantly impacted by numerous factors outside of our control, such as oil and natural gas prices, the supply of and demand for oil and natural gas, domestic and worldwide economic conditions, political instability in oil producing countries and available supply of and demand for the services we provide.

During 2017, stability in oil prices coupled with significant increases in drilling activity resulted in increases in demand for our services and began to provide us with opportunities to increase the prices of our products and services. Oil prices increased approximately 66.9% to an average of $55.37 per barrel during the fourth quarter of 2017 from an average of $33.18 per barrel during the first quarter of 2016. Similarly, the Rig Count increased to 929 as of December 29, 2017 from a low of 374 on May 29, 2016. During the year ended December 31, 2017, the number of rigs on which we operate increased by approximately 50% which was in line with the increase in the Rig Count of 46.5% during the same time period. Pricing for our MCTs, our lead surface rental product, increased by approximately 23.0% when comparing the fourth quarter of 2017 to the third quarter of 2016 when pricing was at its lowest. In 2018, we have increased pricing even further for both surface rental and solids control equipment and services.

Costs of Conducting Our Business

Our operating expenses consist primarily of variable costs, such as labor and third-party services. Labor-related expenses typically fluctuate with the utilization of our equipment and services. Holding all else constant, in periods of increased or decreased activity, we anticipate that labor-related expenses will remain flat as a percent of revenue. However, holding all else constant, in periods of increased or decreased pricing to our customers, we anticipate that labor-related expenses will decrease or increase, respectively, as a percent of revenue.

Expenses associated with services provided by third-parties typically increase with activity. Demand for our equipment has increased so dramatically that, throughout much of 2017, the majority of our available owned equipment was fully utilized and we were required to increase our available equipment fleet and to increase our available labor resources to meet the demand from our customers. We accomplished this by sub-renting equipment, primarily surface rental equipment, and by using sub-contractors to operate our solids control equipment. Because our equipment and labor force are fully utilized, incremental dollars of revenue resulting from increased activity in the future will continue to require the use of third-party equipment and services and third-party expenses will increase as a percent of revenue. In addition, with increased demand for oilfield services, the demand for sub-rental equipment and labor will also increase and we may experience increases in costs for third-party services which would further increase third-party expenses as a percent of revenue. However, as our liquidity continues to improve, we will have the ability to partially mitigate the increase in third-party expenses with investments in new rental and transportation equipment and increases in headcount thereby reducing our reliance on third-party services.

How We Evaluate Our Operations

We utilize multiple metrics to evaluate the results of our operations and efficiently allocate personnel, equipment and capital resources, including, but not limited to, the following:

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

The following table provides the detailed components of EBITDA and Adjusted EBITDA as we define that term for the years ended December 31, 2017 and 2016, respectively (in thousands):

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

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

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

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

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

General Trends and Outlook

Our business depends to a significant extent on the level of unconventional resource development activity and corresponding capital spending of E&P companies onshore in the U.S. These activity and spending levels are strongly influenced by the current and expected oil price. Commodity prices declined significantly between the third quarter of 2014 and the first quarter of 2016. However, oil prices have since gradually increased and this price recovery has stimulated an increase in onshore drilling and completion activity and a consequent increase in demand for our services. The average Rig Count for the year ended December 31, 2017 increased 77.4% to 864 rigs as compared to 487 for the year ended December 31, 2016. The favorable impact of the recent increase in the Rig Count on demand for our services has been magnified by an increase in the proportion of rigs drilling directional and horizontal wells. Rigs drilling directional and horizontal wells typically utilize oil-based or other sophisticated mud systems which creates demand for our specialized mud circulating tanks, pumps, containment systems, solids control and associated equipment. The proportion of rigs drilling directional and horizontal wells as a percentage of total U.S. land-based rigs has increased to 93.1% during the fourth quarter of 2017 from approximately 88.7% in the first quarter of 2016.

If the current commodity price environment holds or continues to improve, we anticipate a further increase in demand for our services. In addition, our customers are increasingly focused on efficient drilling of high intensity wells with long laterals which further enhances the demand for our services. As demand increases, we expect that utilization will increase and our ability to increase the prices for our equipment and services will improve resulting in greater margins and increased margins as a percent of revenue.

We will continue to expand our business through a low risk strategy of growing organically by replacing our sub-rented equipment with newly purchased, refurbished or fabricated equipment. We will also evaluate strategic acquisition opportunities that would provide geographic diversification, expand our products and services and introduce us to new customers.

Results of Operations

The following table summarizes the change in our results of operations for the year ended December 31, 2017 when compared to the year ended December 31, 2016 (in thousands):

Results for the Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

Overview. Our results of operations improved significantly when comparing the year ended December 31, 2017 to the year ended December 31, 2016. The improvement was a result of multiple factors, including, but not limited to:

Revenue. Our revenue for the year ended December 31, 2017 was $14.6 million, an increase of 33.0%, compared to $11.0 million for the year ended December 31, 2016. The key drivers of revenue are utilization and pricing. Utilization of equipment, which reflects our overall activity level, is directly tied to the drilling activity of E&P companies. The 77.4% increase in the Rig Count to an average of over 864 rigs during 2017 compared to an average of 487 rigs in 2016 is a reflection of the substantial increase in drilling activity of E&P companies. Throughout 2017, the key revenue generating rental products which we own, tanks, pumps and centrifuges, were fully utilized and our labor force was fully utilized. In order to take advantage of the increased demand for our services, we invested in additional equipment, sub-rented equipment from third parties, and used sub-contractors on certain solids control jobs. Rental Days, a key measure of our activity level, for our primary revenue generating rental products increased by more than 60.0% when comparing the year ended December 31, 2017 to the year ended December 31, 2016. A price increase of more than 10%, when comparing the year ended December 31, 2017 to the year ended December 31, 2016, on the day rates for our tanks and pumps further contributed to the increase in revenue. The favorable impact of increased utilization and increased pricing in the Permian Basin, the Scoop/Stack region, and the Eagle Ford shale was slightly offset by the elimination of revenue generated in the northeast, approximately $2.7 million during the year ended December 31, 2016, due to our decision to shut down operations in that region.

Operating Expenses. Our operating expenses for the year ended December 31, 2017 increased 19.3% to $9.9 million from $8.3 million for the year ended December 31, 2016. The increase in costs is a direct reflection of the increased activity when comparing the years ended December 31, 2017 and 2016. Although the costs in dollars increased, the rate at which operating expenses increased was less than the rate at which revenue increased resulting in a decline of operating expenses as a percent of revenue to 67.8% for the year ended December 31, 2017 from 75.7% for the year ended December 31, 2016. The decrease in operating expenses as a percent of revenue is primarily due to our discipline in maintaining the reduced cost structure achieved in 2016 despite the increase in demand, our ability to increase pricing to our customers more quickly than our costs increased, and the spread of certain fixed costs across a larger revenue base. Our primary operating expenses consist of payroll and third-party services. Payroll and related expenses decreased to $3.6 million, or 24.5% of revenue, for the year ended December 31, 2017 from $4.1 million, or 37.2% of revenue, for the year ended December 31, 2016. The decrease in payroll-related expenses and payroll-related expenses as a percent of revenue is primarily a result of closing the solids control operations in the northeast offset slightly by the increases in headcount and labor hours required to support incremental activity in Texas, Oklahoma and New Mexico. Third-party expenses, including the sub-rental of equipment, the use of third-party trucking and washout services, and the use of sub-contractors, increased to $3.9 million in 2017, or 26.4% of revenue, from $1.7 million, or 15.2% of revenue, for the year ended December 31, 2016. In early 2017, our owned equipment and our labor force was fully utilized requiring us to use third-party services to satisfy the significant increases in demand.

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

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $2.9 million, or 20.1% of revenue, for the year ended December 31, 2017 compared to $4.1 million, or 37.0% of revenue, for the year ended December 31, 2016. Selling, general and administrative expenses consist of overhead costs which we generally consider to be fixed. The year-over-year decline of $1.1 million, or 27.8%, is primarily due to the reduction in headcount of selling, general and administrative employees to 15 as of December 31, 2017 from 37 as of January 1, 2016. Our headcount reductions in 2016 were primarily due to a decline in activity and a requirement to cut costs due to the impact of the downturn in the industry. Although we have operated in a time of increasing demand throughout 2017, we have improved the productivity of our employees and successfully modified our selling, general and administrative organization to create efficiencies which allow us to operate under a leaner cost structure than we did in prior years. Selling, general and administrative expenses also include expenses that are either non-recurring or non-cash in nature with an aggregate value of $0.7 million and $0.9 million during the years ended December 31, 2017 and 2016, respectively (see further discussion in “How We Evaluate Our Operations” section above).

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

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

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

Interest Expense, net. Interest expense and amortization of deferred loan costs was approximately $24,000 for the year ended December 31, 2017 compared to $2.4 million for the year ended December 31, 2016. The significant decrease is primarily due to the extinguishment of our former credit facility and certain other interest-bearing obligations on January 31, 2017 in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our consolidated financial statements).

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

Gain on Extinguishment of Debt and Other Liabilities. During the year ended December 31, 2017, we recorded a gain on extinguishment of debt and other liabilities of $2.4 million due to our troubled debt restructuring in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” and “Note 3 – Recapitalization” in the notes to our condensed consolidated financial statements).

Income Taxes. From our evaluation as of December 31, 2017 and 2016, the Company has concluded that based on the weight of available evidence, it is more likely than not that the Company will not realize the benefit of its deferred tax assets. As such, a valuation allowance of $2.4 million is included on the consolidated balance sheet for the years ended December 31, 2017 and 2016. Income tax expense was approximately $59,000 for the year ended December 31, 2017 which reflects Texas Franchise Tax. Our current tax expense continues to be indicative of the impact of state taxes, due to our continued full valuation allowance on net deferred tax assets. The income tax benefit recognized for the year ended December 31, 2016 was $7.9 million, or an effective tax rate of 28.7%. During the year ended December 31, 2016, we recorded the impact of the initial full valuation allowance which had a significant impact on our effective tax rate.

Discontinued Operations. Discontinued operations include Evolution which specialized as an operator of MWD downhole tools. The operations were completely abandoned by December 31, 2016 and there was no income or loss from discontinued operations during the year ended December 31, 2017. Losses from discontinued operations, net of income taxes, were $2.5 million for the year ended December 31, 2016. (See further discussion in “Note 16 – Discontinued Operations” in the notes to our consolidated financial statements.)

Liquidity and Capital Resources

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

Capital Expenditures. Capital expenditures are the main component of our investing activities. Cash capital expenditures for the year ended December 31, 2017 increased to $1.7 million from $0.4 million for the year ended December 31, 2016. During the year ended December 31, 2017, we spent approximately $0.5 million to acquire assets, such as flare igniters and diesel mud pumps, to replace equipment which we sub-rent to meet customer demand when our owned equipment is fully utilized. In addition, we repurchased certain equipment, approximately $0.3 million, which had been sold to Tiger in connection with the Recapitalization, specifically centrifuges, in order to meet increasing demand. Every one to two years, our centrifuges require refurbishments. Due to lack of demand in 2015 and 2016, we did not refurbish any centrifuges. In 2017, we spent approximately $0.3 million to refurbish centrifuges in order to meet the increased demand for our solids control services. The remainder of our expenditures during the year ended December 31, 2017 were related to ongoing replacement capital expenditures for items such as hoses and containment liners. In 2018, in addition to capital expenditures required to support the ongoing operations, we anticipate spending at least $0.5 million to refurbish up to 24 centrifuges in order to meet the continuing increase in demand for our solids control services. We are also aggressively seeking opportunities to purchase additional tanks and diesel mud pumps at discounted prices so that we can replace equipment which we are currently sub-renting.

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

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

As of December 31, 2017, we had $1.1 million of liquidity when considering our cash on hand and our availability to borrow under our credit facility with Pelican. The table below reflects our liquidity as of December 31, 2017 (in thousands):

Subsequent to December 31, 2017, we have improved our liquidity position by entering into an amendment to our credit facility and by generating significant cash from changes in working capital. In January 2018, we entered into an amendment to the credit facility with Pelican in order to transfer $0.6 million of remaining availability on the delayed draw term loan, under which draws must be used to finance capital expenditures, to a swing line which permits draws and repayments with no restrictions on the use of proceeds. The swing line matures on June 30, 2018 at which time all remaining outstanding balances must be repaid. As of March 31, 2018, we have not drawn under the swing line. During the fourth quarter of 2017, we experienced certain delays in billing due to a lack of available personnel. We successfully caught up with all delayed billings in January 2018 and have collected over $4.8 million during the first quarter of 2018 compared to collections of only $3.7 million during the fourth quarter of 2017. As of March 24, 2018, our bank balance had increased to $1.5 million. These improvements in liquidity were slightly offset by a draw of $0.3 million under our revolving credit facility in January 2018 leaving no remaining availability under our revolving credit facility. The table below reflects our liquidity as of March 24, 2018 (in thousands):

Credit Facility. As of March 31, 2018, we have availability to borrow an incremental $0.7 million under our credit facility with Pelican. Principal payments on the outstanding balances under our credit facility are based solely on excess free cash flows, which are calculated annually each calendar year. Accordingly, there was no principal payment due for the year ended December 31, 2017. We have no borrowings under our swing line as of March 31, 2018; however, to the extent we make a draw on the line, the full amount of any outstanding balances on June 30, 2018 will be immediately due and payable. (See further discussion in “Note 2 – Recent Developments”, “Note 3 – Recapitalization”, and “Note 8 – Long-Term Debt – Related Party” in the notes to our consolidated financial statements.)

We believe that our cash flow from operations combined with access to capital through our lender and controlling shareholder, Pelican, will be sufficient to fund our working capital needs, contractual obligations and maintenance capital expenditures for the next twelve months.

Contractual Obligations

The table below indicates our contractual obligations as of December 31, 2017 (in thousands):

⁽¹⁾ Maturity date is December 31, 2019 unless such debt is refinanced.

⁽²⁾ Interest payments on Pelican credit facility calculated at 5.2% per annum.

⁽³⁾ See "Note 10 - Commitments and Contingencies" for further detail.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, other than normal operating leases and employee contracts, that have or are likely to have a current or future material effect on our financial condition, changes in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures, or capital resources.

Net Operating Losses

As of December 31, 2017 and 2016, we had approximately $31.5 million and $29.5 million, respectively, of federal net operating loss carryforwards. Based on the weight of all available evidence including the future reversal of existing U.S. taxable temporary differences as of December 31, 2017 and 2016, we believe that it is more likely than not that the benefit from certain federal and state net operating loss carryforwards and other deductible temporary differences will not be realized. In recognition of this risk, we have a valuation allowance of approximately $2.4 million as of December 31, 2017 and 2016 on the net deferred tax asset as a result of the Company being in a cumulative three-year pre-tax book loss position and absence of other objectively verifiable positive evidence including reversal of existing taxable temporary differences in these certain state tax jurisdictions.

Critical Accounting Policies and Estimates

The accounting policies described below are considered critical in obtaining an understanding of our consolidated financial statements because their application requires significant estimates and judgments by management in preparing our consolidated financial statements. Management’s estimates and judgments are inherently uncertain and may differ significantly from actual results achieved. Management considers an accounting estimate to be critical if the following conditions apply:

It is management’s view that the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, actual results can differ significantly from those estimates under different assumptions and conditions.

We have identified the following critical accounting policies that require a significant amount of estimation or judgment to accurately present our financial position, results of operations and cash flows after the Recapitalization:

For a detailed discussion on the application of these, relevant critical accounting policies before the Recapitalization, and other accounting policies, see “Note 4 – Summary of Significant Accounting Policies” in the notes to our consolidated financial statements included elsewhere in this document.

Revenue Recognition: We generate revenue primarily from renting equipment at per-day rates. In connection with certain of our solids control operations, we also provide personnel to operate our equipment at the customer’s location at per-day or per-hour rates. In addition, we may provide equipment transportation and rig-up/rig-down services to the customer at flat rates per job or at an hourly rate. Our services are generally sold based upon purchase orders or contracts with customers that include fixed or determinable prices. We recognize revenue when services or equipment are provided, and collectability is reasonably assured. We contract for a majority of our services on a day rate basis. We rent products on a day rate basis, and revenue from the sale of equipment is recognized when the title to the equipment has transferred to the customer.

Allowance for Doubtful Accounts: We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of some of our customers to make required payments. These estimated allowances are periodically reviewed on a case by case basis, analyzing the customer’s payment history and information regarding the customer’s creditworthiness known to us. In addition, we provide an allowance for doubtful accounts which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Provisions for doubtful accounts are recorded when it is deemed probable that the customer will not make the required payments. If the financial condition of our customers deteriorates, resulting in their inability to make payments, additional allowances may be required.

Estimates of Depreciable Lives: We use the estimated depreciable lives of our long-lived assets to compute depreciation expense, to estimate future asset retirement obligations and to conduct impairment tests. We base the estimates of our depreciable lives on a number of factors, such as the environment in which the assets operate, industry factors including forecasted prices and competition, and the assumption that we provide the appropriate amount of capital expenditures while the asset is in operation to maintain economical operation of the asset and prevent untimely demise to scrap. The useful lives of our intangible assets are determined by the years over which we expect the assets to generate a benefit based on legal, contractual or other expectations.

We depreciate our operational assets over their depreciable lives to their salvage value, which is generally 20% of the acquisition cost. Typically, these assets contain a large amount of iron in their construction. We recognize a gain or loss upon ultimate disposal of the asset based on the difference between the carrying value of the asset on the disposal date and any proceeds we receive in connection with the disposal. Maintenance and repairs, which do not improve or extend the life of the related assets, are charged to expense when incurred. Refurbishments and renewals are capitalized when the value of the equipment is enhanced for an extended period.

We periodically analyze our estimates of the depreciable lives of our fixed assets to determine if the depreciable periods and salvage value continue to be appropriate. We also analyze useful lives and salvage value when events or conditions occur that could shorten the remaining depreciable life of the asset. We review the depreciable periods and salvage values for reasonableness, given current conditions. As a result, our depreciation expense is based upon estimates of depreciable lives of the fixed assets, the salvage value and economic factors, all of which require management to make significant judgments and estimates. If we determine that the depreciable lives should be different than originally estimated, depreciation expense may increase or decrease and impairments in the carrying values of our fixed assets may result, which could negatively impact our earnings.

Valuation of Long-lived Assets: Our property and equipment and intangibles are tested for potential impairment when circumstances or events indicate a possible impairment may exist. These circumstances or events are referred to as “trigger events” and examples of such trigger events include, but are not limited to, an adverse change in market conditions, a significant decrease in benefits being derived from an acquired business, a change in the use of an asset, or a significant disposal of a particular asset or asset class.

If a trigger event occurs, an impairment test is performed based on an undiscounted cash flow analysis. To perform an impairment test, we make judgments, estimates and assumptions regarding long-term forecasts of revenue and expenses relating to the assets subject to review. Market conditions, energy prices, estimated depreciable lives of the assets, discount rate assumptions and legal factors impact our operations and have a significant effect on the estimates we use to determine whether our assets are impaired. If the results of the undiscounted cash flow analysis indicate that the carrying value of the assets being tested for impairment are not recoverable, then we record an impairment charge to write the carrying value of the assets down to their fair value. Using different judgments, assumptions or estimates, we could potentially arrive at a materially different fair value for the assets being tested for impairment, which may result in an impairment charge.

Contingencies: We are periodically required to record other loss contingencies, which relate to lawsuits, claims, proceedings and tax-related audits in the normal course of our operations, on our consolidated balance sheet. We record a loss contingency for these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We periodically review our loss contingencies to ensure that we have recorded appropriate liabilities on the balance sheet. We adjust these liabilities based on estimates and judgments made by management with respect to the likely outcome of these matters, including the effect of any applicable insurance coverage for litigation matters. Our estimates and judgments could change based on new information, changes in laws or regulations, changes in management’s plans or intentions, the outcome of legal proceedings, settlements or other factors. Actual results could vary materially from these reserves.

Income Taxes: We account for deferred income taxes using the asset and liability method and provide income taxes for all significant temporary differences. Management determines our current tax liability as well as taxes incurred as a result of current operations yet deferred until future periods. Current taxes payable represents our liability related to our income tax returns for the current year, while net deferred tax expense or benefit represents the change in the balance of deferred tax assets and liabilities reported on our consolidated balance sheets. 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. Our deferred tax calculation requires us to make certain estimates about our future operations. Changes in state, federal and foreign tax laws, as well as changes in our financial condition or the carrying value of existing assets and liabilities, could affect these estimates. The effect of a change in tax rates is recognized as income or expense in the period that the rate is enacted. Further, management makes certain assumptions about the timing of temporary tax differences for the differing treatment of certain items for tax and accounting purposes or whether such differences are permanent. The final determination of our tax liability involves the interpretation of local tax laws, tax treaties, and related authorities in each jurisdiction as well as the significant use of estimates and assumptions regarding the scope of future operations and results achieved and the timing and nature of income earned, and expenditures incurred.

We record valuation allowances to reduce deferred tax assets if we determine that it is more likely than not (e.g., a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized in future periods. To assess the likelihood, we use estimates and judgment regarding our future taxable income, as well as the jurisdiction in which this taxable income is generated, to determine whether a valuation allowance is required. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the related jurisdiction in the future. Evidence supporting this ability can include our current financial position, our results of operations, both actual and forecasted results, the reversal of deferred tax liabilities, and tax planning strategies as well as the current and forecasted business economics of our industry. Additionally, we record uncertain tax positions in the financial statements at their net recognizable amount, based on the amount that management deems is more likely than not to be sustained upon ultimate settlement with the tax authorities in the domestic and international tax jurisdictions in which we operate.

If our estimates or assumptions regarding our current and deferred tax items are inaccurate or are modified, these changes could have potentially material negative impacts on our earnings.

Cash Flow Estimates: Our estimates of future cash flow are based on the most recent available market and operating data for the applicable asset base at the time we made the estimate. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes on us. 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. Our cash flow estimates are used for all our valuation-based estimates detailed above.

Recently Issued Accounting Standards

For a discussion of new accounting standards, see “Note 4 – Summary of Significant Accounting Policies” in the notes to our consolidated financial statements included elsewhere in this document.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Aly Energy Services, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Aly Energy Services, Inc. and its subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2015.

/S/ RSM US LLP

Houston, Texas

April 2, 2018

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.