Aly Energy Services, Inc. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

Form 10-Q

or

Commission File Number 033-92894

(713) 333-4000

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

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

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

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

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

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

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

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

At August 14, 2019, the registrant had 3,822,329 shares of common stock, $0.001 par value, outstanding.

ALY ENERGY SERVICES, INC.

(A Delaware Corporation)

INDEX

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Nature of Operations

Aly Energy Services, Inc., together with its subsidiaries (“Aly Energy” or the “Company”), is a provider of oilfield services to leading oil and gas exploration and production (“E&P”) companies operating in major basins 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 circulating systems, associated pumps, separators, gas busters, mud mix plants and ancillary equipment. We also provide environmental containment berms to safeguard against spills from mud systems on the drilling rig site. Our solids control equipment includes large centrifuges, shakers, cuttings dryers and ancillary components that can be integrated into a closed loop mud system. We operate in the U.S., primarily in Texas, Oklahoma, and New Mexico.

Throughout this report, we may also refer to Aly Energy and its subsidiaries as “we”, “our” or “us”.

Basis of Presentation

Aly Energy has two wholly-owned subsidiaries with continuing operations: Aly Operating, Inc. and Aly Centrifuge Inc. Aly Operating, Inc. has one wholly-owned subsidiary, Austin Chalk Petroleum Services Corp. We operate as one business segment which services customers within the U.S.

The unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of Aly Energy and each of its subsidiaries in the condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018, in the condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018 (restated), in the condensed consolidated statement of changes in stockholders’ equity for the three and six months ended June 30, 2019 and 2018 (restated), and in the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 (restated). All significant intercompany transactions and account balances have been eliminated upon consolidation.

Reverse Stock Split

On August 7, 2018, the Company effected a 1-for-20 reverse stock split of its common stock (“Reverse Split”), as approved by its Board of Directors and stockholders. All information in this Quarterly Report on Form 10-Q relating to the number of common shares, price per share and per share amounts, including such information related to options and the conversion feature of the Series A convertible preferred stock, have been retroactively restated to give effect to the Reverse Split. See Note 5 – Stockholders’ Equity for further detail.

Interim Financial Information

The condensed consolidated balance sheet as of December 31, 2018 has been derived from our audited financial statements and the unaudited condensed consolidated financial statements of the Company are prepared in conformity with U.S. GAAP for interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these unaudited condensed consolidated financial statements should be read along with the annual audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented. Interim results for the three and six months ended June 30, 2019 may not be indicative of results that will be realized for the full year ending December 31, 2019.

Reclassifications

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

Merger with Related Party

On January 28, 2019, we executed an Agreement and Plan of Merger (“Merger Agreement”) with Permian Pelican Inc. (“Pelican”), a related party, pursuant to which Pelican merged with and into the Company (the “Merger”). By virtue of the Merger, each issued and outstanding share of Pelican common stock, 7,429 shares in aggregate, was converted into 387.858 shares of our common stock and each share of Series A convertible preferred stock was canceled. We issued an aggregate of 2,881,411 new shares of our common stock, representing approximately 75.4% of our outstanding common stock, with a value of approximately $14.4 million in consideration for all of the shares of Pelican common stock outstanding as of the Merger on January 28, 2019. The new shares of our common stock were issued directly to the individual shareholders of Pelican and, as a result, effective January 28, 2019, we no longer had a controlling shareholder. See Note 6 – Related Party Transactions for further detail.

Use of Estimates

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

The Company analyzes its estimates based on historical experience and various other indicative assumptions it believes to be reasonable under the circumstances. Under different assumptions or conditions, the actual results could differ, possibly materially, from those previously estimated. Many of the conditions impacting these assumptions are outside of the Company’s control.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), which we adopt as of the specified effective date. Unless otherwise discussed, management believes the impact of recently issued standards, which are not yet effective, will not have a material impact on our consolidated financial statements upon adoption.

Accounting Standard Adopted in 2019

Leases. On January 1, 2019, the Company adopted accounting standards update (“ASU”) 2016-02, Leases and all the related amendments (“New Lease Standard” or “ASC 842”) and used the effective date as the date of initial application. Therefore, prior period financial information has not been adjusted and continues to be reflected in accordance with the Company’s historical accounting policy. The standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than twelve months.

The standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients,” which, among other things, allows the Company to carry forward its historical lease classification.

The adoption of this standard resulted in the recording of operating lease assets and operating lease liabilities of approximately $0.3 million as of January 1, 2019, with no material related impact on the Company’s condensed consolidated statement of equity or condensed consolidated statement of operations. Short-term leases have not been recorded on the balance sheet.

Accounting Policy for Leases

The Company determines if an arrangement is a lease with a term longer than twelve months at inception. All existing arrangements identified by the Company as leases are operating and are included in operating ROU assets, accounts payable and accrued expenses and operating lease liabilities in the unaudited condensed consolidated balance sheet as of June 30, 2019.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligations to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease.

Overview

The Company’s operating leases are primarily for real estate and office equipment. The terms and conditions for these leases vary by the type of underlying asset. Total rent expense was (in thousands):

The Company has entered into several leases with Permian Pelican Rentals, LLC (“PPR”) for the long-term rental of 500bbl round-bottom tanks at fixed day rates which are more favorable than the day rates charged by existing vendors for comparable equipment. As a part of this arrangement, any costs required to refurbish equipment will be paid by the Company and reimbursed by PPR. Aggregate refurbishment costs during the three and six months ended June 30, 2019 were approximately $91,000 of which approximately $41,000 remained in receivables as of June 30, 2019. The Company intends to continue entering into similar leases for flat-bottom tanks and diesel mud pumps, in addition to incremental round-bottom tanks, for the remainder of 2019 and beyond. PPR is a wholly-owned subsidiary of Permian Pelican Financial, LLC (“PPF”) which is the Company’s lender and a related party due to the common ownership of PPF and the Company.

Supplemental Balance Sheet Information

Operating leases were as follows (in thousands):

Supplemental Cash Flow Information

The following table summarizes the supplemental cash flow information related to leases:

Maturities of operating lease liabilities are as follows (in thousands):

Accounting Standards Adopted in 2018

Revenue recognition. On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers and all the related amendments (“New Revenue Standard” or “ASC 606”) to all contracts using the full retrospective method. Revenue is recognized when performance obligations are satisfied in accordance with contractual terms in an amount that reflects the consideration the Company expects to be entitled to in exchange for services rendered or rentals provided.  Taxes collected from customers and remitted to governmental authorities are not included in revenue in the Company’s financial statements.

Performance Obligations

A performance obligation arises under contracts with customers to render services or provide rentals and is the unit of account under ASC 606.  The Company accounts for services rendered and rentals provided separately if they are distinct and the service or rental is separately identifiable from other items provided to a customer and if a customer can benefit from the services rendered or rentals provided on its own or with other resources that are readily available to the customer.  A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.  A contract’s standalone selling prices are determined based on the prices that the Company charges for its services rendered and rentals provided.  The majority of the Company’s performance obligations are satisfied over time, generally over a period measured in days or months.  The Company’s payment terms vary by the type of products or services offered.  The term between invoicing and when the payment is due is typically 30 days. We invoice customers once our performance obligations have been satisfied, at which point payment is unconditional. Accordingly, our revenue contracts do not give rise to contract assets or liabilities under ASC 606.

Rentals revenue consists of fees charged to customers for use of the Company’s rental equipment and, in certain cases, fees charged to customers for the use of personnel supplied by the Company to operate its solids control equipment over the term of the rental period, which is generally less than twelve months. These fees are primarily charged on a per day, per hour or similar basis.

Services revenue, including transportation of equipment and rig-up/rig-down charges, primarily represents amounts charged to customers for the completion of services rendered, including labor, products and supplies necessary to perform the service.  Rates for these services vary depending on the type of services provided and can be based on a per job, per hour or per day basis.

The Company expenses sales commissions when incurred because the relevant amortization period would be one year or less.

The following table presents our revenue disaggregated by revenue source (in thousands):

Accounting Standards Issued But Not Yet Adopted

Fair Value Measurement Disclosure. In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (topic 820) – Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurement. This new guidance eliminated, modified and added certain disclosure requirements related to fair value measurements. The amended disclosure requirements are effective for all entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We are evaluating the impact of adopting this guidance. However, we currently expect that the adoption of this guidance will not have a material impact on our consolidated financial statements.

Financial Instruments—Credit Losses. In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326), which introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. It requires an entity to estimate credit losses expected over the life of an exposure based on historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. This guidance will take effect for public companies with fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact of adopting this guidance.

NOTE 3 — DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

Property and Equipment

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

Depreciation and amortization expense related to property and equipment for the three months ended June 30, 2019 and 2018 (restated) was $0.7 million. Depreciation and amortization expense related to property and equipment for the six months ended June 30, 2019 and 2018 (restated) was $1.3 million and $1.4 million, respectively.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consists of the following (in thousands):

NOTE 4 — LONG-TERM DEBT – RELATED PARTY

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

On June 30, 2018, the Company entered into the Third Amended and Restated Credit Agreement with Pelican (“Related Party Credit Facility”) which, among other things, (i) combined the outstanding balances on the delayed draw term loan and the term loan and initiated a required monthly principal payment of approximately $83,000 on the aggregate outstanding balance of the term loan, (ii) expanded availability on the revolving credit facility by $0.7 million while simultaneously reducing the aggregate availability under the other lines of the facility by the same amount, and (iii) extended the maturity date of the facility to June 30, 2021. Borrowings under the Related Party Credit Facility are subject to monthly interest payments at an annual base rate of the six-month LIBOR rate on the last day of the calendar month plus a margin of 3.0%. The obligations under the Related Party Credit Facility are guaranteed by all our subsidiaries and secured by substantially all our assets. The Related Party Credit Facility contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, pay dividends or make other distributions, grant liens and sell assets. The Related Party Credit Facility does not include any financial covenants.

Effective June 30, 2018, Pelican assigned and transferred its rights under the Related Party Credit Facility to an affiliated entity, PPF. Due to the common ownership interests of PPF and the Company, PPF is a related party.

Under the revolving credit facility, the Company has the ability to borrow the lesser of 80% of eligible receivables, as defined in the credit agreement, and $1.7 million. As of June 30, 2019, the Company had $1.7 million of borrowings outstanding and had no further borrowing availability under the facility.

NOTE 5 – STOCKHOLDERS’ EQUITY

Common Shares

On August 7, 2018, the Company effected the Reverse Split, a 1-for-20 reverse stock split of its common stock, as approved by its Board of Directors and stockholders. Under the terms of the Reverse Split, each 20 shares of common stock issued and outstanding as of such effective date was automatically reclassified and changed into one share of common stock without further action by the stockholder. In lieu of issuing fractional shares in connection with the Reverse Split, holders received the proportionate fraction of $7.00 per share in cash. The aggregate payment for all fractional shares was $231.35. Shares of common stock previously issued and held as treasury shares were escheated to applicable governmental authorities and, in connection with the Reverse Split, were reinstated as outstanding shares of common stock. All share and per share amounts in these unaudited condensed consolidated financial statements, including such amounts related to options and the conversion feature of the Series A convertible preferred stock, have been retroactively restated to reflect the Reverse Split.

On August 7, 2018, we filed an amendment to our certificate of formation reducing our authorized common shares from 25,000,000 to 15,000,000.

On August 20, 2018, our former Chief Executive Officer, Shauvik Kundagrami, exercised options to purchase 250,000 shares of common stock for an exercise price of $2.00 per share, or $500,000 in aggregate.

On January 28, 2019, in connection with the Merger, we issued an aggregate of 2,881,411 new shares of our common stock, representing approximately 75.4% of our outstanding common stock, in consideration for all of the shares of Pelican common stock outstanding as of the effective date of the Merger. Please see Note 1 – Nature of Operations and Basis of Presentation and Note 6 – Related Party Transactions for additional detail.

Preferred Shares

On August 7, 2018, we filed an amendment to our certificate of formation reducing our aggregate authorized preferred stock from 10,000,000 to 5,000,000 shares. Previously, the Company allocated 20,000 of the authorized preferred shares to be authorized Series A convertible preferred shares. Authorized preferred shares, with a par value of $0.001 per share, total 4,980,000 as of June 30, 2019 and December 31, 2018, respectively, of which, none were issued and outstanding as of June 30, 2019 and December 31, 2018.

On January 28, 2019, by virtue of the Merger, each issued and outstanding share of our Series A convertible preferred stock was canceled. Please see Note 1 – Nature of Operations and Basis of Presentation and Note 6 – Related Party Transactions for additional detail.

NOTE 6 — RELATED PARTY TRANSACTIONS

Former Controlling Shareholder – Pelican

Beginning on January 31, 2017, Pelican had the power to vote the substantial majority of the Company’s outstanding common stock. Five of our seven board members, including two of our executive officers, and our chief financial officer held an ownership interest in Pelican.

As of December 31, 2018, Pelican owned 17,292 shares of Series A convertible preferred stock which was convertible into 2,881,400 common shares. On an as-if-converted basis, Pelican owned approximately 75.4% of our common stock (excluding the impact of options) as of December 31, 2018.  The shares of Series A convertible preferred stock carried a liquidation preference of $1,000 per share or $17.3 million.

On January 28, 2019, we executed the Merger with Pelican pursuant to which Pelican merged with and into the Company and, as a result, effective January 28, 2019, we no longer have a controlling shareholder. See Note 1 – Nature of Operations and Basis of Presentation for further detail.

Related Party Lender – PPF

In January 2017, we entered into the Related Party Credit Facility with Pelican. Effective June 30, 2018, Pelican assigned and transferred its rights under the Related Party Credit Facility to PPF. Due to the common ownership interests of PPF and the Company, PPF is a related party. See Note 4 – Long-Term Debt – Related Party for further detail on the Related Party Credit Facility.

In connection with our Related Party Credit Facility, during the three months ended June 30, 2019, we recorded principal payments and interest expense of $0.3 million and approximately $88,000, respectively. During the three months ended June 30, 2018, we did not make any principal payments and we recorded interest expense of approximately $92,000.

In connection with our Related Party Credit Facility, during the six months ended June 30, 2019, we recorded principal payments and interest expense of $0.5 million and $0.2 million, respectively, and we borrowed an additional $0.7 million under the revolving credit facility thereby reducing availability under the facility to zero. During the six months ended June 30, 2018, we did not make any principal payments and we recorded interest expense of approximately $0.2 million.

Our consolidated balance sheet includes accrued interest under the Related Party Credit Facility of approximately $27,000 and $31,000 as of June 30, 2019 and December 31, 2018, respectively.

Related Party Vendor – Permian Pelican Rentals, LLC

PPR is a wholly-owned subsidiary of PPF, a related party. On April 30, 2019, PPR executed a bill of sale to purchase 40 tanks with the intent to sub-rent the tanks to Aly Energy. As a part of this arrangement, any costs required to refurbish equipment will be paid by the Company and reimbursed by PPR. Aggregate refurbishment costs during the three and six months ended June 30, 2019 were approximately $91,000 of which approximately $41,000 remained in receivables as of June 30, 2019. See Note 2 – Recent Accounting Pronouncements for further detail on the leases.

NOTE 7 – EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed in the same manner as basic earnings per share except that the denominator is increased to include the number of additional shares of common stock that could have been outstanding assuming the exercise of outstanding stock options and restricted stock or other convertible instruments, as appropriate.

Due to the net loss incurred by the Company for the three months ended June 30, 2018 and the six months ended June 30, 2019 and 2018, the effect of incremental shares is antidilutive so the diluted earnings per share will be the same as the basic earnings per share. The calculations of basic and diluted earnings per share for the three months ended June 30, 2019 are shown below (unaudited and in thousands, except for shares and per share data):

Unvested stock options under the 2013 Plan are excluded from the computation of basic and diluted earnings per share because they vest upon the occurrence of certain events as defined in the 2013 Plan. As of June 30, 2019, there were 11,706 stock options outstanding and unvested under the 2013 Plan.

Please see our Annual Report on Form 10-K for the year ended December 31, 2018 for additional detail on the options issued under the 2013 Plan and for detail on options issued under the 2017 Plan.

NOTE 8 – RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS

Prior to the issuance of the Company’s consolidated financial statements for the year ended December 31, 2018, the Company concluded that its previously issued consolidated financial statements for the years ended December 31, 2017 and 2016 and for the quarters ending March 31, 2018 and 2017, June 30, 2018 and 2017 and September 30, 2018 and 2017 should be restated due to accounting errors discovered in conjunction with certain remediation activities for our internal controls over financial reporting.

During the first quarter of 2019, we reviewed our existing fixed asset inventory, our current and historical fixed asset records, and the accounting for a significant transaction in 2016 in which we sold assets with a net book value of $18.6 million to Tiger Finance, LLC (“Tiger”). As a result of this review, we (i) identified certain assets which were included in the asset purchase agreement with Tiger and had not been written off in connection with the sale, and (ii) identified certain other assets which had been disposed of on or prior to December 31, 2016 which had not been written off at the time of disposal.

We determined it would be necessary to restate the financial statements for the years ended December 31, 2017 and 2016 and the quarters ended March 31, 2018 and 2017, June 30, 2018 and 2017 and September 30, 2018 and 2017. The adjustments to the consolidated statements of operations consist of an increased impairment and increased loss on disposal of assets in 2016 and a reduction in depreciation expense during all periods from November 1, 2016 through September 30, 2018. The adjustments to the consolidated balance sheets consist of a reduction of property and equipment, net in all periods to reflect the write-off of certain assets in 2016. The Company’s consolidated statements of cash flows had no changes to net cash flows from operating, investing or financing activities as a result of the restatement. The impact of the restatement to the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2018 was as follows (in thousands, except per share data):

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations is intended to assist you in understanding our business and results of operations together with our present financial condition. This section should be read in conjunction with the condensed consolidated financial statements and the related notes thereto included elsewhere in “Item 1. Unaudited Condensed Consolidated Financial Statements” in this Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements which are not historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” “may,” “project,” “plan” or “continue,” and similar expressions are intended to identify forward-looking statements.

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. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us, that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. These forward-looking statements are based on our current plans and expectations and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations, and our future financial condition and results. Known material factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, volatility in the price of oil, fluctuations in the domestic rig count, intense competition in our industry and the other risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2018.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur. We qualify any and all of our forward-looking statements entirely by these cautionary factors. You are cautioned not to place undue reliance on these statements which speak only as of the date of this Quarterly Report on Form 10-Q.

Overview of Our Business

Aly Energy Services, Inc., together with its subsidiaries (“Aly Energy” or the “Company”), is a provider of oilfield services to leading oil and gas exploration and production (“E&P”) companies operating in the major basins 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 circulating systems, associated pumps, separators, gas busters, mud mix plants and ancillary equipment. We also provide environmental containment berms to safeguard against spills from mud systems on the drilling rig site. Our solids control equipment includes large centrifuges, shakers, cuttings dryers and ancillary components that can be integrated into a closed loop mud system. We operate in the U.S., primarily in Texas, Oklahoma, and New Mexico.

How We Generate Revenue and the Costs of Conducting Our Business

We generate our revenue by providing drilling-related support services to E&P companies operating in some of the major onshore basins in the U.S. Our revenue streams include: (i) rental services - revenue derived from the rental of equipment and on-site operators of such equipment, (ii) rig-up/rig down services – revenue derived from the rig-up/rig-down of our equipment at the customer site, (iii) transportation services – revenue derived from the hauling of our equipment to and from the customer site, and (iv) other - revenue derived from the sale of consumable items, including chemicals. Fluctuations in the mix of services are driven primarily by the timing of and frequency with which our respective customers move their rigs from well to well and by the number of mobilizations and demobilizations of our equipment. The contribution of each revenue stream to total revenue is shown in the table below:

Our total revenue fluctuates with the utilization of and the prices we charge for our equipment and services. Utilization of our equipment is generally determined by the U.S. land-based drilling rig count (“Rig Count”) as it is typically representative of the level of activity of E&P companies. 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.

Our operating expenses consist primarily of variable costs, such as labor and third-party expenses. Labor-related expenses typically fluctuate with the utilization of our equipment and services. Expenses associated with services provided by third-parties typically increase with activity as well.

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are 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.

We disclose and discuss EBITDA as a non-GAAP financial measure in our filings with the Securities and Exchange Commission. We define EBITDA as earnings (net income) before interest, income taxes, and depreciation and amortization. Our measure of EBITDA may not be comparable to similarly titled measures presented by other companies, which may limit its usefulness as a comparative measure.

We also make certain adjustments to EBITDA for (i) non-cash charges 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.

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 and performance from quarter-to-quarter and year-to-year.

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.

The following table provides the detailed components of EBITDA and Adjusted EBITDA as we define that term for the three and six months ended June 30, 2019 and 2018 (unaudited and in thousands):

Adjusted EBITDA for the three months ended June 30, 2019 and 2018 was approximately $1.0 million and $1.1 million, respectively, and adjusted EBITDA for the six months ended June 30, 2019 and 2018 was $1.9 million and $2.1 million, respectively. The decline in year-over-year Adjusted EBITDA was due primarily to a decrease in utilization of our solids control equipment which was only partially offset by increases in pricing and utilization of our lead surface rental products.

General Trends and Outlook

Our business depends to a significant extent on the level of 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. Oil prices have been and will continue to be volatile as major drivers determining the price of oil, including the rate of GDP growth in consuming nations and the political stability of oil-producing countries, are unpredictable.

Despite a rebound in oil prices of more than 20.0% during the first six months of 2019, the Rig Count has declined by more than 10.0% during the same period and we anticipate that it may decline further as E&P companies continue to cut back on capital expenditures for drilling programs.

Given the declining Rig Count and the uncertainty regarding the current market environment, we have implemented a low-risk growth strategy. We will focus on (i) maintaining current pricing levels and increasing activity and utilization of our equipment, particularly with existing customers who are not reducing the number of rigs they operate and (ii) replacing sub-rented equipment if our purchased or owned equipment is not needed for new jobs. We believe there is significant growth potential for our solids control product line as we currently have the capacity to more than double our existing solids control job count without incremental capital expenditures. In order to accelerate the addition of solids control jobs, we have expanded our sales team to include individuals with extensive experience in selling solids control products. As new jobs are added, the income from such jobs will have a significant positive impact on financial performance as the variable costs associated with the rental of our solids control products are minimal. Variable costs associated with the rental of surface rental equipment are also minimal and we will seek to increase our surface rental activity; however, growth of our surface rental product line is more limited than growth of our solids control product line as our lead surface rental products, consisting primarily of tanks and pumps, are fully utilized and we are reluctant to increase our dependence on high cost sub-rental vendors. In an effort to alleviate the impact of this limitation, we have invested, and continue to invest, in purchasing equipment which can either generate incremental rental income at a high margin by satisfying additional demand or generate cost savings by replacing equipment which is currently being sub-rented. In addition, beginning in the third quarter, we will have access to incremental tanks and pumps from Permian Pelican Rentals, LLC (“PPR”), a related party, which has committed to providing equipment to us at day rates which are significantly more favorable than the rates charged by our existing sub-rental vendors. We believe the combination of (i) increased contribution from our solids control product line as we improve utilization of our existing equipment fleet, (ii) increased surface rental activity using owned or less costly equipment, and (iii) decreased costs as sub-rented equipment is returned will result in increased margins during the remainder of the year.

Results for the Three Months Ended June 30, 2019 Compared to the Three Months Ended June 30, 2018

The condensed consolidated financial statements for the three months ended June 30, 2018 have been restated due to an accounting error in connection with certain assets sold in 2016.  (See further discussion in “Note 8 – Restatement of Prior Year Financial Statements” in the notes to our unaudited condensed consolidated financial statements included elsewhere in this document).

The following table summarizes the change in our results of operations for the three months ended June 30, 2019 when compared to the three months ended June 30, 2018 (unaudited and in thousands).

Overview. Excluding a non-recurring severance charge of $0.3 million in May 2018, the financial performance during the three months ended June 30, 2019 and 2018 was very similar as the positive year-over-year impact of increased pricing and utilization of our surface rental products and services was offset by the negative year-over-year impact of decreased utilization of our solids control products and services.

Revenue. Our revenue for the three months ended June 30, 2019 was $4.3 million, a decrease of 1.9%, compared to $4.4 million for the three months ended June 30, 2018. When comparing the two periods, pricing and utilization of our tanks, our lead surface rental product, increased by approximately 10.0% and 20.0%, respectively, year-over-year while utilization of our centrifuges, our lead solids control product, decreased by approximately 50.0% and revenue generated from the rental of auxiliary equipment, both surface rental and solids control products, decreased by more than 40.0%. Although the net impact of these changes was a decline in revenue from rental services of 15.0% when comparing the three months ended June 30, 2019 to the three months ended June 30, 2018, aggregate revenue from rig-up/rig-down and trucking services increased by more than 35.0% when comparing the two periods. Revenue generated from rig-up/rig-down and trucking services is tied closely to utilization of our tanks and other core surface rental products which increased period-over-period. In addition, we implemented certain pricing increases for rig-up/rig-down and trucking services and changes in the customer and product mix resulted in more demand for these services at an increased frequency. Although the market outlook is uncertain for the remainder of the year, we believe revenue generated from surface rental equipment and services will remain steady or increase slightly as a result of strong demand from our existing customers and we believe revenue generated by our solids control equipment and services will increase as a result of our intensified focus on improving utilization and our expanded sales team.

Operating Expenses. Our operating expenses for the three months ended June 30, 2019 and 2018 were $2.5 million, or 58.2% of revenue for the three months ended June 30, 2019 and 57.6% of revenue for the three months ended June 30, 2018. Operating expenses include primarily variable costs, such as payroll and related costs, including sub-contractors, third-party expenses, such as hauling and washout of equipment, and sub-rental expenses. A significant decline in sub-contractor expenses due to the decrease in utilization of our solids control equipment and services was offset by an increase in washout and trucking expenses related to the increase in rig-up/rig-down and trucking revenue. Third-party sub-rental expenses remained relatively flat as vendor day rate increases of more than 60.0% effective January 1, 2019 were mostly offset by the decline in the quantity of sub-rented equipment as equipment purchased during the second half of 2018 went into service and replaced equipment which was previously sub-rented. We anticipate a further decrease in sub-rental expense during the remainder of the year as certain equipment rented on a day rate basis is replaced with either equipment under long-term lease with a low-cost related party provider or equipment purchased by the Company.

Depreciation and Amortization. Depreciation and amortization decreased slightly to $0.8 million for the three months ended June 30, 2019 from $0.9 million for the three months ended June 30, 2018 due primarily to the impact of certain assets becoming fully depreciated and amortized partially offset by the purchase and fabrication of new assets.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $0.8 million, or 18.5% of revenue, for the three months ended June 30, 2019 from $1.2 million, or 26.3% of revenue, for the three months ended June 30, 2018. Selling, general and administrative expenses consist of overhead costs which we generally consider to be fixed. The year-over-year decrease of approximately $0.4 million is primarily due to a severance charge of $0.3 million during the three months ended June 30, 2018 which did not recur in 2019.

Interest Expense, Net. Interest expense, net, consisting primarily of interest on insurance financing and other miscellaneous interest expense, was approximately $4,000 and $3,000 for the three months ended June 30, 2019 and 2018, respectively.

Interest Expense – Related Party. During the three months ended June 30, 2019 and 2018, we recorded approximately $88,000 and $92,000 of interest expense on borrowings under the credit facility (“Related Party Credit Facility”) with Permian Pelican Financial, LLC (“PPF”), a related party.

Income Taxes. From our evaluation as of June 30, 2019 and December 31, 2018, 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 $1.9 million is included on the condensed consolidated balance sheet as of June 30, 2019 (unaudited) and December 31, 2018. Income tax expense was approximately $11,000 and $21,000 for the three months ended June 30, 2019 and 2018, respectively, which primarily reflects Texas Franchise Tax. The difference in the effective tax rate from the statutory rate is due to our continued full valuation allowance on net deferred tax assets. The Company has sufficient NOL carryforwards to offset federal income tax and other state income taxes.

Results for the Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018

The condensed consolidated financial statements for the six months ended June 30, 2018 have been restated due to an accounting error in connection with certain assets sold in 2016.  (See further discussion in “Note 8 – Restatement of Prior Year Financial Statements” in the notes to our unaudited condensed consolidated financial statements included elsewhere in this document.)

The following table summarizes the change in our results of operations for the six months ended June 30, 2019 when compared to the six months ended June 30, 2018 (unaudited and in thousands).