NOTE 1 — NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Aly Energy Services, Inc., together with its subsidiaries (“Aly Energy” or “the Company”), provides oilfield services, including equipment rental and solids control services to exploration and production companies. The Company operates in select oil and natural gas basins of the contiguous United States. Throughout this report, we refer to Aly Energy and subsidiaries as “we”, “our” or “us”. References to financial results and operations of the Company in these notes to the condensed consolidated financial statements are limited to continuing operations unless otherwise specified.
On October 26, 2012, we acquired all of the stock of Austin Chalk Petroleum Services Corp. (“Austin Chalk”). Austin Chalk provides surface rental equipment as well as roustabout services which include the rig-up and rig-down of equipment and the hauling of equipment to and from the customer’s location.
On April 15, 2014, we acquired the equity interests of United Centrifuge, LLC (“United”) as well as certain assets used in United’s business that were owned by related parties of United (collectively the “United Acquisition”). In connection with the United Acquisition, United merged with and into Aly Centrifuge Inc. (“Aly Centrifuge”), a wholly-owned subsidiary of Aly Energy. United operates within the solids control and fluids management sectors of the oilfield services and rental equipment industry, offering its customers the option of renting centrifuges and auxiliary solids control equipment without personnel or the option of paying for a full-service solids control package which includes operators on-site 24 hours a day.
Discontinued Operations
In 2014, we acquired all of the issued and outstanding stock of Evolution Guidance Systems Inc. (“Evolution”), an operator of Measurement-While-Drilling (“MWD”) downhole tools. From July 2014 through October 2016, Evolution provided directional drilling and MWD services to a variety of exploration and production companies. On October 26, 2016, we abandoned these operations as a part of a restructuring transaction. The abandonment of these operations meets the criteria established for recognition as discontinued operations under generally accepted accounting principles in the United States of America (“U.S. GAAP”). Therefore, the financial results of our directional drilling and MWD services are presented as discontinued operations in the Company’s condensed consolidated financial statements. The results of the discontinued operations are included in the line item “Loss from discontinued operations, net of income taxes” on the condensed consolidated statements of operations for all periods presented. Cash flows from discontinued operations appear in the line items “Net cash provided by (used in) discontinued operations” on the condensed consolidated statements of cash flows.
Basis of Presentation
Aly Energy has three wholly-owned subsidiaries, Aly Operating Inc. (“Aly Operating”) of which Austin Chalk is a wholly-owned subsidiary, Aly Centrifuge and Evolution. We operate as one business segment which services customers within the United States.
The condensed consolidated financial statements have been prepared in conformity with U.S. GAAP and include the accounts of Aly Energy and each of its subsidiaries in the condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016 and the related condensed consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each three-month period presented. All significant intercompany transactions and account balances have been eliminated upon consolidation.
Interim Financial Information
The condensed consolidated balance sheet as of December 31, 2016 has been derived from our audited financial statements and the unaudited condensed consolidated financial statements of the Company are prepared in conformity with accounting principles generally accepted in the United States of America, or GAAP, for interim financial reporting. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these condensed consolidated financial statements should be read along with the annual audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented. Interim results for the three months ended March 31, 2017 may not be indicative of results that will be realized for the full year ending December 31, 2017.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the balance sheet date and the amounts of revenue and expenses recognized during the reporting period. Areas where critical accounting estimates are made by management include:
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Allowance for doubtful accounts,
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·
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Depreciation and amortization of property and equipment and intangible and other assets,
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·
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Impairment of property and equipment, intangible and other assets, and goodwill,
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·
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Litigation settlement accrual,
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·
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Contingent payment liability, and
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·
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Income taxes.
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The Company analyzes its estimates based on historical experience and various other indicative assumptions that it believes to be reasonable under the circumstances. Under different assumptions or conditions, the actual results could differ, possibly materially from those previously estimated. Many of the conditions impacting these assumptions are outside of the Company’s control.
Reclassifications
Certain reclassifications have been made to prior period consolidated financial statements to conform to the current period presentations. These reclassifications had no effect on our consolidated financial position, results of operations or cash flows.
Subsequent Events
We conducted our subsequent events review through the date these condensed consolidated financial statements were filed with the U.S. Securities and Exchange Commission (“SEC”).
NOTE 2 — RECENT DEVELOPMENTS
Operational Restructuring
Our activity is tied directly to the rig count and, even though we instituted significant cost cutting measures beginning in 2015, we were unable to cut costs enough to match the decline in our business. As a result, as of December 31, 2015, we were in default of our credit agreement with Wells Fargo Bank, National Association (“Wells Fargo”).
Throughout 2015, in an effort to mitigate the significant declines in pricing and utilization of our equipment, we committed to a reorganization initiative to strengthen our sales and marketing efforts, consolidate support functions, and operate more efficiently. The reorganization effort included, but was not limited to, training our salesforce to enable the cross-selling of our product lines in certain geographical markets, sharing a common support services infrastructure across all reporting units, reducing headcount and wage rates, and rebranding and launching a new web site to increase awareness of our service lines. We recognized some benefit from these measures in late 2015 resulting in increased gross margins and lower selling, general and administrative expenses when compared to the first half of 2015.
During the year ended December 31, 2016, we entered into a series of forbearance agreements with our lender. Under the forbearance agreements, among other provisions, the lenders agreed to forbear from exercising their remedies under the credit agreement. These forbearance agreements permitted us to operate within the parameters of our normal course of business despite the continuing default under the credit agreement. Without these forbearance agreements, our outstanding debt would have been immediately due and payable. Throughout 2016, we remained in default and we did not have sufficient liquidity to repay all of the outstanding debt to the lender at any point during the year ($20.1 million as of December 31, 2015). As such, we may have been forced to file for protection under Chapter 11 of the U.S. Bankruptcy Code.
In early 2016, we were hopeful that a successful operational restructuring would facilitate negotiations to modify the terms of our existing credit facility with Wells Fargo. Our operational restructuring in 2016 consisted of severe cost cuts which were incremental to the year-over-year cost cuts already achieved in 2015 when compared to 2014. In 2016, significant cost savings were primarily generated by:
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reductions of our employee base, both field employees and sales and administrative employees, to a headcount of approximately 50 as of December 31, 2016 from approximately 125 as of December 31, 2015,
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·
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reduction in employer contributions to employee benefits,
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·
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closures of certain operating yards and administrative facilities,
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·
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strategic decision to cease operations in the northeast which resulted in the reduction of costs related to operating in an incremental market,
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·
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modifications to insurance policies, including general liability and workers’ compensation policies, resulting in a $0.5 million or 15.5% reduction in the cost of insurance to $0.6 million for the year ended December 31, 2016 from $1.1 million for the year ended December 31, 2015,
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·
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minimization of repair and maintenance activities, resulting in a $0.4 million or 50.0% reduction of repair and maintenance expenses to $0.4 million for the year ended December 31, 2016 from $0.8 million for the year ended December 31, 2015, and
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·
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elimination of investments in equipment, unless required to service an existing customer, resulting in a reduction of capital expenditures to $0.4 million for the year ended December 31, 2016 from $2.5 million for the year ended December 31, 2015.
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We also achieved significant cost savings from the decrease in third party costs, such as sub-rental equipment and trucking, and other variable costs which declined with the decrease in activity.
In order to further support our working capital needs, we identified and sold idle and underutilized assets. During 2016, we realized aggregate proceeds from sales of approximately $0.8 million of which $0.5 million and $0.3 million was used to fund working capital needs and pay down debt, respectively.
Capital Restructuring
Despite our successful operational restructuring efforts, particularly during the first half of 2016, the decline in our activity levels and the declines in customer pricing outpaced the impact of our cost reductions and it became evident that a capital restructuring would also be necessary to continue operations and position our business for an industry turnaround.
In the second quarter of 2016, certain of the Company’s principal stockholders (“Shareholder Group”) began negotiations with Wells Fargo with the objective of consummating a recapitalization transaction (the “Recapitalization”) whereby our obligations under the credit agreement and the outstanding capital leases in favor of Wells Fargo’s equipment finance affiliate and certain other obligations of Aly Energy (collectively the “Aly Senior Obligations”) would be restructured. In August 2016, the Shareholder Group was introduced to a third party, Tiger Finance, LLC (“Tiger”), to provide bridge financing and to extend forbearance until such date as sufficient capital could be raised to complete the Recapitalization.
In September 2016, the Shareholder Group formed Permian Pelican, LLC (“Pelican”) with the objective of raising capital and executing the steps necessary to complete the restructuring, inclusive of successfully effecting the exchange of the Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, Aly Centrifuge subordinated debt and liability for a contingent payment into approximately 10% of our common stock on a fully diluted basis.
Effective January 31, 2017, the Recapitalization was completed through the execution and delivery of a Securities Exchange Agreement and a Second Amended and Restated Credit Agreement, and, as a result, the new credit facility, now with Pelican, consisted of a term loan of $5.1 million and a revolving facility of up to $1.0 million as of January 31, 2017. Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables (receivables less than 90 days old). See further discussion in “
Note 3 – Recapitalization”.
Subsequent to the Recapitalization, we entered into several further amendments to capitalize on improved market conditions and increased activity in our business:
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Amendment No. 1, effective March 1, 2017, provided for a delayed draw term loan to be added to the credit facility for the purpose of financing capital expenditures. The agreement permitted us to draw on the delayed draw term loan from time-to-time up until the maturity date of the facility in order to fund up to 80% of the cost of capital expenditures subject to a $0.5 million limit on aggregate borrowings.
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·
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Amendment No. 2, effective May 23, 2017, increased the maximum revolving credit amount from $1.0 million to $1.8 million and extended the final maturity date of the facility to December 31, 2019. In consideration of the increase in the revolving credit facility and the extension of the final maturity date, we agreed to issue to Pelican, the lender, as an amendment fee, 1,200 shares of our Series A convertible preferred stock.
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·
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Amendment No. 3, effective June 15, 2017, modified maximum potential borrowings under each of the revolving credit facility and the delayed draw term loan without changing the aggregate available borrowings under the credit facility. The amendment reduced the maximum revolving credit amount from $1.8 million to $1.0 million and increased the maximum delayed draw loan borrowings from $0.5 million to $1.3 million and the amendment also increased permitted draws on the delayed draw loan from 80% of the cost of capital expenditures being funded to 90% of the cost of capital expenditures being funded.
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To the extent there is free cash flow as defined in the credit agreement, principal payments of 50% of such free cash flow are due annually. The maturity date of all remaining outstanding balances under the credit facility is December 31, 2019.
The obligations under the credit facility are guaranteed by all of our subsidiaries and secured by substantially all of our assets. The credit agreement contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, grant liens and sell assets. The credit facility does not include any financial covenants. We are in full compliance with the credit facility as of June 30, 2017.
As of June 30, 2017, there were outstanding borrowings of $5.0 million, $0.8 million, and $0.3 million on the term loan, revolving credit facility, and delayed draw term loan, respectively. As of June 30, 2017, we have the availability to borrow an incremental $0.2 million under the revolving credit facility and, if we have capital expenditures which are eligible to be financed, an incremental $1.0 million under the delayed draw term loan to finance 90% of such expenditures.
NOTE 3
— RECAPITALIZATION
Summary
To complete the transaction, the Company’s directors and principal stockholders formed and organized Pelican. Pursuant to the Recapitalization, Pelican agreed to acquire the Aly Senior Obligations, provided the Company was successful in effecting the exchange of the Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, Aly Centrifuge subordinated debt and liability for a contingent payment into approximately 10% of our common stock on a fully diluted basis.
The Recapitalization consisted of three restructuring events which took place in the period beginning October 26, 2016 and ending on January 31, 2017. The first two restructuring events occurred before January 1, 2017 and any impact is presented in the Company’s historical consolidated financial statements for the year ended December 31, 2016. Below is a description of each event:
The first restructuring event occurred on October 26, 2016 when Tiger acquired the Aly Senior Obligations from Wells Fargo and its equipment affiliate. Simultaneously, Tiger entered into an assignment agreement with Pelican whereby it agreed to sell the Aly Senior Obligations to Pelican on the conditions that (i) Pelican provide $0.5 million of unsecured working capital financing to the Company pending the closing and (ii) the Company transfer to Tiger (in consideration of Tiger’s reduction of the Aly Senior Obligations in the amount of $2.0 million) certain excess equipment and vehicles which the Company was not utilizing and considered unnecessary for its continuing operations.
As a result of the above, we transferred property and equipment with an estimated fair value of $2.6 million, inclusive of $0.4 million of assets associated with discontinued operations, to Tiger and recognized a corresponding reduction in the Aly Senior Obligations of $2.0 million and debt modification fee of $0.6 million. Property and equipment transferred had an aggregate net book value of $18.6 million resulting in our recording an impairment charge of $16.0 million, inclusive of a $0.4 million impairment associated with discontinued operations. As part of this transaction and upon satisfaction of such conditions, Tiger extended the forbearance period to December 9, 2016.
The second restructuring event occurred on December 12, 2016 when Pelican acquired the Aly Senior Obligations from Tiger. As the new holder of the Aly Senior Obligations, Pelican further extended the forbearance period for the obligations to January 31, 2017, provided the Company was successful in completing the third and final restructuring event on or before such date.
Effective January 31, 2017, the final restructuring event occurred and the Recapitalization was completed which resulted in the following:
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·
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an exchange of certain of the Company’s outstanding obligations (namely, Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, Aly Centrifuge subordinated debt and its contingent payment liability) for approximately 10% of our common stock, or 7,111,981 common shares, on a fully diluted basis;
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·
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an exchange of certain amendments to the Aly Senior Obligations (namely, a $16.1 million principal reduction, removal of restrictive covenants and extended maturity of payment obligations) for shares of our Series A convertible preferred stock which represents approximately 80% of our common stock, or 53,628,842 common shares, on a fully diluted basis (liquidation preference of $16.1 million or $1,000 per share); and
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·
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the formation of a new credit agreement with Pelican (consisting of a $5.1 million term loan and $1.0 million revolving credit facility) with an extended maturity date of December 31, 2018.
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The Recapitalization had a significant impact to our capital structure and to our consolidated financial statements and there was a significant dilutive effect to those shareholders who held common stock immediately before the transaction was completed. The Recapitalization has been accounted for in accordance with ASC 470, including (i) the exchange of debt and equity securities accounted for as a troubled debt restructuring and (ii) the issuance of preferred shares in exchange for the extinguishment of debt and other liabilities and for the issuance of a new credit facility.
Troubled Debt Restructuring
Except for the Pelican exchange, each exchange was accounted for as a troubled debt restructuring (“TDR”) since an equity interest in the Company was issued to fully satisfy each debt. A gain on TDR is recognized for the excess of the carrying amount of the debt over the fair value of each equity interest granted. The impact of the Recapitalization includes a “gain on the extinguishment of debt and other liabilities” from the debtors of Aly Centrifuge subordinated debt and the contingent payment liability and a “gain on the extinguishment of redeemable preferred stock” from the holders of Aly Operating redeemable preferred stock and Aly Centrifuge redeemable preferred stock. The share price of common stock as of January 31, 2017 of $0.12 per share was used as the basis of fair value for each equity interested granted.
The impact of the TDR is as follows:
Extinguishment of Debt and Other Liabilities.
The exchange of subordinated debt and contingent payment liability for common stock resulted in a gain of $2.4 million, or $0.36 per share, on the condensed consolidated statement of operations and was recorded as an “Issuance of common stock in exchange for the extinguishment of debt and other liabilities” on the condensed consolidated statement of changes in stockholders’ equity (deficit). The table below summarizes stock issued and the resulting gain for each extinguishment:
Gain on the Extinguishment of Debt and Other Liabilities
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Debt and Other Liabilities Extinguished
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Common Stock Issued
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Gain Included in Other Expense (Income)
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Subordinated debt and accrued interest of $1.5 million and $0.3 million, respectively
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1,200,000
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$1.6 million
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Contingent payment liability of $0.8 million
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457,494
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$0.8 million
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Extinguishment of Redeemable Preferred Stock.
Represents the exchange of Aly Operating redeemable preferred stock and Aly Centrifuge redeemable preferred stock for common stock resulting in a gain of $14.4 million, or $2.14 per share, and recorded as an “Issuance of common stock in exchange for the extinguishment of redeemable preferred stock” on the condensed consolidated statement of changes in stockholders’ equity (deficit). The table below summarizes stock issued and the resulting gain for each extinguishment:
Gain on the Extinguishment of Redeemable Preferred Stock
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Redeemable Preferred Stock and Other Obligations
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Common Stock Issued
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Gain Included in Additional Paid-in-Capital
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Aly Centifuge preferred and accrued dividends of $8.9 million and $1.2 million, respectively
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3,039,516
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$9.8 million
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Aly Operating preferred and accrued dividends of $4.0 million and $0.9 million, respectively
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2,414,971
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$4.6 million
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On January 31, 2017, we issued 7,111,981 shares of our common stock to the former holders of Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, Aly Centrifuge subordinated debt, and liability for contingent payment in exchange for the above mentioned extinguishments in connection with our TDR.
Credit Facility Restructuring
Given the nature of the related party relationship between the Company and Pelican, the extinguishment of our Aly Senior Obligations was accounted for as a capital transaction whereby we issued Series A convertible preferred stock in exchange for the extinguishment of our Aly Senior Obligations and the issuance of a new credit facility which resulted in a gain on the extinguishment of debt and other liabilities calculated as the amount above the estimated fair value of the equity interest granted. The share price of common stock as of January 31, 2017 of $0.12 per share was used as the basis of fair value for the equity interested granted.
The impact of the exchange and extinguishment of our Aly Senior Obligations is as follows:
Old Credit Facility.
The partial extinguishment and exchange of our Aly Senior Obligations ($16.1 million principal reduction) for shares of our Series A convertible preferred stock resulted in a gain of $9.7 million which is recorded as an “Issuance of preferred shares in exchange for the extinguishment of debt and other liabilities - Pelican” on the condensed consolidated statement of changes in stockholders’ equity (deficit). The components of the Aly Senior Obligations are as follows (in thousands):
Aly Senior Obligations as of January 31, 2017
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Debt and Other Liabilities Extinguished
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Amount
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Credit facility
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$
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17,772
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Accrued fees and interest on credit facility
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1,414
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Capital lease obligations
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1,930
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Accrued interest on capital lease obligations
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26
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Line of credit - Pelican
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500
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Total
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$
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21,642
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New Credit Facility.
Our new credit agreement with Pelican consists of a $5.1 million term loan and $0.5 million outstanding under a revolving credit facility (which was subsequently amended to $5.0 million and $0.8 million, respectively, as of June 30, 2017 in addition to $0.3 million outstanding under a delayed draw term loan with Pelican) completing the full extinguishment of our old credit facility.
On January 31, 2017, we issued 16,092 shares of our Series A convertible preferred stock to Pelican in exchange for the above mentioned $16.1 million reduction of the Aly Senior Obligations.
Professional Fees - Recapitalization
During 2016, we recorded $0.2 million of expenses for professionals engaged by our former lender, Wells Fargo, whom the Company was required to pay under the terms of our credit facility. On December 12, 2016, these fees were assumed by Pelican and, on January 31, 2017, included within the Aly Senior Obligations refinanced in connection with the Recapitalization. These fees are included in “Accrued interest and other – Pelican” on our consolidated balance sheet as of December 31, 2016.
NOTE 4
— LONG-LIVED ASSETS
Property and Equipment
Major classifications of property and equipment are as follows (in thousands):
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March 31,
2017
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December 31,
2016
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(unaudited)
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Machinery and equipment
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$
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31,690
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$
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31,541
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Vehicles, trucks & trailers
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4,203
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4,523
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Office furniture, fixtures and equipment
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544
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544
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Leasehold improvements
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203
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203
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Buildings
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212
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212
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36,852
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37,023
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Less: Accumulated depreciation and amortization
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(9,322
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)
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(8,807
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)
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27,530
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28,216
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Assets not yet placed in service
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10
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10
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Property and equipment, net
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$
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27,540
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$
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28,226
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Depreciation and amortization expense related to property and equipment for the three months ended March 31, 2017 and 2016 was $0.7 million and $1.1 million, respectively.
Intangible Assets
Intangible assets consist of the following (in thousands):
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Customer Relationships
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Tradename
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Non-Compete
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Total
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As of March 31, 2017:
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Cost
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$
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5,323
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$
|
2,174
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$
|
492
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$
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7,989
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Less: Accumulated amortization
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(2,033
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)
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(803
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)
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(434
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)
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(3,270
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)
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Net book value
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$
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3,290
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$
|
1,371
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$
|
58
|
|
|
$
|
4,719
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As of December 31, 2016:
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Cost
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$
|
5,323
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$
|
2,174
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$
|
492
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$
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7,989
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Less: Accumulated amortization
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(1,900
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)
|
|
|
(749
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)
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(409
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)
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(3,058
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)
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Net book value
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$
|
3,423
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|
|
$
|
1,425
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$
|
83
|
|
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$
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4,931
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|
Total amortization expense for the three months ended March 31, 2017 and 2016 was approximately $0.2 million and $0.4 million, respectively.
NOTE 5
— LONG-TERM DEBT – PELICAN
Line of Credit – Pelican
On October 26, 2016, we entered into an agreement with Tiger and Pelican, in conjunction with the Recapitalization transaction, requiring Pelican to provide a working capital line of credit of $0.5 million. As of December 31, 2016, there was $0.5 million outstanding under the line and no further availability to borrow under the line.
Borrowings under the line accrue interest at a rate of 5% per annum. The line was unsecured and had a maturity date of January 31, 2017.
On January 31, 2017, in conjunction with the Recapitalization transaction, the line matured and the balance was aggregated with the Aly Senior Obligations in the new credit facility with Pelican.
Credit Facility - Pelican: Term Loan, Delayed Draw Term Loan, and Revolving Credit Facility
Effective October 26, 2016, our credit facility with Wells Fargo was included in the Aly Senior Obligations which were acquired by Tiger, then subsequently acquired on December 12, 2016 by Pelican. During this time, interest and ticking fees continued to accrue and there were no modifications to the components of the credit facility as a result of these transactions; however, a Fourth Limited Forbearance Agreement was executed with Pelican. The agreement extended the forbearance period to January 31, 2017, conditioned upon the Company using its best efforts to consummate a recapitalization plan, satisfactory to Pelican, that would, at a minimum, result in the conversion of Aly Operating redeemable preferred stock, Aly Centrifuge redeemable preferred stock, subordinated note payable, and contingent payment liability into common stock prior to January 31, 2017.
Effective January 31, 2017, the Recapitalization was completed and the credit facility was amended in its entirety. The amended facility consisted of a term loan of $5.1 million and a revolving credit facility of up to $1.0 million (“Pelican Credit Facility”, as amended).
Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables (less than 90 days old). Borrowings under the Pelican Credit Facility are subject to monthly interest payments at an annual base rate of the six-month LIBOR rate on the last day of the calendar month plus a margin of 3.0%. To the extent there is free cash flow, as defined in the credit agreement, principal payments of 50% of such free cash flow are due annually.
Subsequent to the Recapitalization, we entered into several further amendments to capitalize on improved market conditions and increased activity in our business:
|
·
|
Amendment No. 1, effective March 1, 2017, provided for a delayed draw term loan to be added to the Pelican Credit Facility for the purpose of financing capital expenditures. The amendment permitted us to draw on an added delayed draw term loan from time-to-time up until December 31, 2018 in order to fund up to 80% of the cost of capital expenditures subject to a $0.5 million limit on aggregate borrowings.
|
|
·
|
Amendment No. 2, effective May 23, 2017, increased the maximum revolving credit amount from $1.0 million to $1.8 million and extended the final maturity date of the facility to December 31, 2019. In consideration of the increase in the revolving credit facility and the extension of the final maturity date, we agreed to issue to Pelican an amendment fee of 1,200 shares of our Series A convertible preferred stock.
|
|
·
|
Amendment No. 3, effective June 15, 2017, modified maximum potential borrowings under each of the revolving credit facility and the delayed draw term loan without changing the aggregate available borrowings under the credit facility. The amendment reduced the maximum revolving credit amount from $1.8 million to $1.0 million and increased the maximum delayed draw loan borrowings from $0.5 million to $1.3 million and the amendment also increased permitted draws on the delayed draw loan from 80% of the cost of capital expenditures being funded to 90% of the cost of capital expenditures being funded.
|
The obligations under the Pelican Credit Facility are guaranteed by all of our subsidiaries and secured by substantially all of our assets. The Pelican Credit Facility contains customary events of default and covenants including restrictions on our ability to incur additional indebtedness, pay dividends or make other distributions, grant liens and sell assets. The Pelican Credit Facility does not include any financial covenants. We are in full compliance with the credit facility as of June 30, 2017.
Under the Pelican Credit Facility, as of June 30, 2017, we have the availability to borrow an incremental $0.2 million under the revolving credit facility and, if we have capital expenditures which are eligible to be financed, an incremental $1.0 million under the delayed draw term loan to finance 90% of such expenditures.
Equipment Financing and Capital Leases - Pelican
Effective December 12, 2016, Pelican acquired the Aly Senior Obligations which included $1.9 million of outstanding equipment financing and capital leases plus associated accrued interest.
On January 31, 2017, in connection with the Recapitalization, the Aly Senior Obligations, including the equipment financing and capital leases, were refinanced under the Pelican Credit Facility. Future borrowings required for equipment financing are likely to be funded through the delayed term loan included in the Pelican Credit Facility.
Long-term debt – Pelican consists of the following (in thousands):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
-
|
|
|
$
|
5,027
|
|
|
$
|
13,339
|
|
|
$
|
-
|
|
Revolving credit facility
|
|
|
-
|
|
|
|
750
|
|
|
|
-
|
|
|
|
-
|
|
Delayed draw term loan
|
|
|
-
|
|
|
|
-
|
|
|
|
4,433
|
|
|
|
-
|
|
Line of credit - Pelican
|
|
|
-
|
|
|
|
-
|
|
|
|
494
|
|
|
|
-
|
|
Equipment financing and capital leases
|
|
|
-
|
|
|
|
-
|
|
|
|
614
|
|
|
|
1,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
5,777
|
|
|
$
|
18,880
|
|
|
$
|
1,315
|
|
Based on the beneficial impact of the Recapitalization on January 31, 2017, coupled with the Company’s current forecasts, cash-on-hand, cash flow from operations and borrowing capacity under the Pelican Credit Facility, the Company expects to have sufficient liquidity and capital resources to meet its obligations for at least the next twelve months; however, our forecasts are based on many factors outside the Company’s control. See further details at “
Note 2 – Recent Developments”
and
“Note 3 – Recapitalization”
.
NOTE 6
— REDEEMABLE PREFERRED STOCK
Two of our subsidiaries had redeemable preferred stock outstanding as of December 31, 2016. Aly Operating issued redeemable preferred stock in connection with the acquisition of Austin Chalk (“Aly Operating Redeemable Preferred Stock”) and Aly Centrifuge issued redeemable preferred stock in connection with the United Acquisition (“Aly Centrifuge Redeemable Preferred Stock”).
On January 31, 2017, in connection with the Recapitalization, the Aly Operating Redeemable Preferred Stock, the Aly Centrifuge Redeemable Preferred Stock and all accrued dividends on such stock were converted into 5,454,487 shares of common stock.
Aly Operating Redeemable Preferred Stock
As part of the acquisition of Austin Chalk, Aly Operating agreed to issue up to 4 million shares of Aly Operating Redeemable Preferred Stock, with a par value of $0.01, to the seller, with a fair value and liquidation value of $3.8 million and $4.0 million, respectively. The preferred stock was valued as of the date of acquisition by discounting the sum of (i) the liquidation value at issuance and (ii) the future cumulative accrued dividends as of the date of optional redemption for a lack of marketability.
The Aly Operating Redeemable Preferred Stock was entitled to a cumulative paid-in-kind dividend of 5% per year on its liquidation preference, compounded quarterly. Aly Operating was not required to pay cash dividends.
The following table describes the changes in Aly Operating Redeemable Preferred Stock (in thousands, except for shares) for the three months ended March 31, 2017:
|
|
Carrying Value of Aly Operating Redeemable Preferred Stock
|
|
|
Number of Outstanding Aly Operating Redeemable Preferred Shares
|
|
|
Liquidation Value of Aly Operating Redeemable Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2017
|
|
$
|
4,924
|
|
|
|
4,000,000
|
|
|
$
|
4,924
|
|
Accrued dividends
|
|
|
21
|
|
|
|
-
|
|
|
|
21
|
|
Exchange for common stock in connection with Recapitalization
|
|
|
(4,945
|
)
|
|
|
(4,000,000
|
)
|
|
|
(4,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The Aly Operating Redeemable Preferred Stock was classified outside of permanent equity in our condensed consolidated balance sheet because the settlement provisions provided the holder the option to require Aly Operating to redeem the Aly Operating Redeemable Preferred Stock at the liquidation price plus any accrued dividends upon a liquidity event, as defined in the agreement, or upon an initial public offering, as defined in the agreement.
On January 31, 2017, the Aly Operating Redeemable Preferred Stock and all accrued dividends were converted into 2,414,971 shares of common stock in connection with the Recapitalization. This conversion was accounted for as a trouble debt restructuring, see further details in “
Note 3 – Recapitalization”
.
Aly Centrifuge Redeemable Preferred Stock
On April 15, 2014, as part of the United Acquisition, Aly Centrifuge issued 5,000 shares of Aly Centrifuge Redeemable Preferred Stock, with a par value of $0.01, to the sellers in the transaction, with a fair value and liquidation value of $5.1 million and $5.0 million, respectively. The preferred stock was valued as of the date of acquisition by discounting the sum of (i) the value of the preferred stock without a conversion option using the option pricing method and (ii) the value of the conversion option using the Black-Scholes option pricing model for a lack of marketability. In 2015, Aly Centrifuge asserted an indemnification claim of 124 shares against shares that were subject to an eighteen-month holdback for general indemnification purposes pursuant to the purchase agreement.
On August 15, 2014, in connection with a bulk equipment purchase, Aly Centrifuge issued an additional 4,000 shares of Aly Centrifuge Redeemable Preferred Stock, with a par value of $0.01, to the sellers in the transaction, with a fair value and liquidation value of $4.3 million and $4.0 million, respectively. The preferred stock was valued as of the date of the equipment purchase by discounting the sum of (i) the value of the preferred stock without a conversion option using the option pricing method and (ii) the value of the conversion option using the Black-Scholes option pricing model for a lack of marketability.
The Aly Centrifuge Redeemable Preferred Stock was entitled to a cumulative paid-in-kind dividend of 5% per year on its liquidation preference, compounded quarterly. Aly Centrifuge was not required to pay cash dividends.
The following table describes the changes in the Aly Centrifuge Redeemable Preferred Stock (in thousands, except for shares) for the three months ended March 31, 2017:
|
|
Carrying Value of Aly Centrifuge Redeemable Preferred Stock
|
|
|
Number of Outstanding Aly Centrifuge Redeemable Preferred Shares
|
|
|
Liquidation Value of Aly Centrifuge Redeemable Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2017
|
|
|
10,080
|
|
|
|
8,876
|
|
|
|
10,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued dividends
|
|
|
42
|
|
|
|
-
|
|
|
|
42
|
|
Exchange for common stock in connection with Recapitalization
|
|
|
(10,122
|
)
|
|
|
(8,876
|
)
|
|
|
(10,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The Aly Centrifuge Redeemable Preferred Stock was classified outside of permanent equity in our condensed consolidated balance sheet because the settlement provisions provided the holder the option to require Aly Centrifuge to redeem the Aly Centrifuge Redeemable Preferred Stock at the liquidation price plus any accrued dividends.
Aly Centrifuge Redeemable Preferred Stock also included a conversion feature; specifically, the right to exchange into shares of our common stock on any date, from time-to-time, at the option of the holder, into the number of shares equal to the quotient of (i) the sum of (A) the liquidation preference plus (B) an amount per share equal to accrued but unpaid dividends not previously added to the liquidation preference on such share of preferred stock, divided by (ii) 1,000, and (iii) multiplied by the exchange rate in effect at such time (“Conversion Feature”). The exchange rate in effect as of December 31, 2016 was 71.4285 or $14.00 per share of our common stock.
On January 31, 2017, the Aly Centrifuge Redeemable Preferred Stock and all accrued dividends were converted into 3,039,516 shares of common stock in connection with the Recapitalization; however, the shares were not converted according to the terms of the Conversion Feature but instead the conversion rate was negotiated independently as a part of the Recapitalization. This conversion was accounted for as a trouble debt restructuring, see further details in “
Note 3 – Recapitalization”
.
NOTE 7 —
CONTROLLING SHAREHOLDER AND
RELATED PARTY TRANSACTIONS
From time-to-time, the Company engages in business transactions with its controlling shareholder, Pelican, and other related parties.
Controlling Shareholder – Pelican
On December 12, 2016, Pelican purchased our Aly Senior Obligations from Tiger for $5.1 million as a part of the Recapitalization. Effective January 31, 2017, the Recapitalization was completed and resulted in the following:
|
·
|
Pelican’s contribution of approximately $16.1 million of the Aly Senior Obligations into shares of Series A convertible preferred stock that represents approximately 80% of our common stock, or 53,628,842 common shares, on a fully diluted basis. The preferred shares carry a liquidation preference of $1,000 per share or $16.1 million upon issuance.
|
|
·
|
Amendment of the Company’s credit agreement acquired by Pelican into a new credit agreement (consisting of a $5.1 million term loan and $1.0 million revolving credit arrangement) with an extended maturity date of December 31, 2018.
|
On January 31, 2017 upon completion of the Recapitalization, Pelican had the power to vote the substantial majority of the Company’s outstanding common stock. Currently six of our board members and all four of our executive officers hold an ownership interest in Pelican.
On May 23, 2017 and in consideration of the increase in the revolving credit facility and the extension of the maturity date of December 31, 2019, the Company agreed to issue Pelican an amendment fee of 1,200 shares of our Series A convertible preferred stock.
See further details at “
Note 2 – Recent Developments”
and
“Note 3 – Recapitalization”
.
Other Related Party Transactions
One of our directors, Tim Pirie, appointed March 3, 2015, was one of the sellers of United to us in April 2014. Part of the acquisition price was payable in contingent consideration of which $0.9 million was paid in 2015. Of that amount, approximately $0.1 million was allocable to Mr. Pirie. We did not make any contingent payments during 2016. As of December 31, 2016, we estimated the fair value of future payments to be $0.8 million. On January 31, 2017, in connection with the Recapitalization, the aggregate contingent payment liability was converted into 457,494 shares of the Company’s common stock, of which Mr. Pirie controls all of the voting rights to 326,834 shares. See further discussion in “
Note 2 – Recent Developments”
and
“Note 3 – Recapitalization”.
As part of the acquisition price of United, the sellers also received Aly Centrifuge Redeemable Preferred Stock. On January 31, 2017, the outstanding Aly Centrifuge Redeemable Preferred Stock and accrued dividends were converted into 3,039,516 shares of the Company’s common stock of which Mr. Pirie controls all of the voting rights to 593,815 shares. See further discussion in “
Note 2 – Recent Developments”
,
“Note 3 – Recapitalization”
and “
Note 6 –
Redeemable Preferred Stock (Aly Centrifuge Redeemable Preferred Stock)”.
NOTE 8
— 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.
For the three months ended March 31, 2016, 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 March 31, 2017 is shown below (in thousands, except for shares):
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
Numerator:
|
|
|
|
Net income from continuing operations
|
|
$
|
1,558
|
|
Less: Aly Operating Redeemable Preferred Stock dividends
|
|
|
(21
|
)
|
Less: Aly Operating Redeemable Preferred Stock accretion
|
|
|
-
|
|
|
|
|
|
|
Numerator for diluted earnings per share - continuing operations
|
|
|
1,537
|
|
Less: Loss from discontinued operations, net of income taxes
|
|
|
-
|
|
|
|
|
|
|
Numerator for diluted earnings per share
|
|
|
1,537
|
|
|
|
|
|
|
Numerator for diluted earnings per share - continuing operations
|
|
|
1,537
|
|
Less: Aly Centrifuge Redeemable Preferred Stock dividends
|
|
|
(42
|
)
|
Less: Aly Centrifuge Redeemable Preferred Stock amortization
|
|
|
-
|
|
|
|
|
|
|
Numerator for basic earnings per share - continuing operations
|
|
|
1,495
|
|
Less: Loss from discontinued operations, net of income taxes
|
|
|
-
|
|
|
|
|
|
|
Numerator for basic earnings per share
|
|
$
|
1,495
|
|
|
|
|
|
|
Denominator:
(1)
|
|
|
|
|
Weighted average shares used in basic earnings per share
|
|
|
11,369,113
|
|
Effect of dilutive shares:
|
|
|
|
|
Aly Centrifuge Redeemable Preferred Stock
(2)
|
|
|
218,378
|
|
Series A Convertible Preferred Stock
|
|
|
35,156,686
|
|
|
|
|
|
|
Weighted average shares used in diluted earnings per share
|
|
|
46,744,176
|
|
|
|
|
|
|
Basic earnings per share - continuing operations
|
|
$
|
0.13
|
|
|
|
|
|
|
Basic earnings per share - discontinued operations
|
|
$
|
-
|
|
|
|
|
|
|
Diluted earnings per share - continuing operations
|
|
$
|
0.03
|
|
|
|
|
|
|
Diluted earnings per share - discontinued operations
|
|
$
|
-
|
|
_________________
(1)
The exchange of Aly Operating Redeemable Preferred Stock into common shares is not considered within the calculation of the numerator or denominator of diluted earnings per share because, during the month ended January 31, 2017, the Aly Operating Redeemable Preferred Stock was not exchangeable into common shares. In connection with the Recapitalization, the Aly Operating Preferred Stock was converted into common shares and is included in our weighted average shares used for basic earnings per share effective February 1, 2017. Unvested stock options are not considered within the calculation of the denominator of diluted earnings per share because the vest upon the occurrence of certain events which may or may not occur.
(2)
During the month ended January 31, 2017, the Aly Centrifuge Redeemable Preferred Stock was convertible into 634,000 shares. In connection with the Recapitalization, the Aly Centrifuge Preferred Stock was converted into common shares and is included in our weighted average shares used for basic earnings per share effective February 1, 2017. See further discussion in “Note 3 – Recapitalization” and “Note 6 – Redeemable Preferred Stock (Aly Centrifuge Redeemable Preferred Stock)”.
Securities excluded from the computation of basic and diluted earnings per share are shown below:
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
|
|
|
Unvested stock options
(1)
|
|
|
236,932
|
|
|
|
|
|
|
Exchange of Aly Operating Redeemable Preferred Stock
(2)
|
|
|
-
|
|
_________________
(1)
The stock options vest upon the occurrence of certain events as defined in the Omnibus Incentive Plan. As of March 31, 2017, the stock options were unvested.
(2)
Prior to January 31, 2017, the Aly Operating Redeemable Preferred Stock was exchangeable only upon the occurrence of certain events, as defined in the Aly Operating Redeemable Preferred Stock Agreement. Upon occurrence of such events, the Aly Operating Redeemable Preferred Stock could have been, at the holder’s option, converted into common shares. The conversion ratio, determined by a calculation defined in the agreement of which the components included trailing twelve-month financial performance and magnitude of investment in new equipment, remained undeterminable until an event would cause the Aly Operating Redeemable Preferred Stock to become exchangeable. In connection with the Recapitalization, the Aly Operating Redeemable Preferred Stock was converted into common shares and is included in our weighted average shares used for basic earnings per share effective February 1, 2017.
NOTE 9
— SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flows and non-cash investing and financing activities are as follows (in thousands):
|
|
For the Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
21
|
|
|
$
|
302
|
|
Cash paid for interest - discontinued operations
|
|
|
-
|
|
|
|
1
|
|
Cash paid for income taxes, net
|
|
|
-
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Accretion of preferred stock liquidation preference, net
|
|
$
|
-
|
|
|
$
|
29
|
|
Paid-in-kind dividends on preferred stock
|
|
|
63
|
|
|
|
178
|
|
Returned equipment to lessor in exchange for release from capital lease obligation
|
|
|
91
|
|
|
|
-
|
|
Principal payments financed through disposition of assets
|
|
|
23
|
|
|
|
-
|
|
Extinguishment of debt and other liabilities in exchange for common stock in connection with Recapitalization
|
|
|
2,586
|
|
|
|
-
|
|
Extinguishment of redeemable preferred stock in exchange for common stock in connection with Recapitalization
|
|
|
15,036
|
|
|
|
-
|
|
Extinguishment of debt and other liabilities - Pelican in exchange for Series A convertible preferred stock
|
|
|
16,092
|
|
|
|
-
|
|
NOTE 10
— NEW ACCOUNTING STANDARDS
Accounting Standards Recently Adopted
In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017, with early adoption permitted. Other than the revised statement of cash flows presentation of restricted cash, the adoption of ASU 2016-18 did not have an impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes: Balance Sheet Classification of Deferred Taxes
, which eliminates the existing requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet and now requires that all deferred tax assets and liabilities be classified as noncurrent. The ASU is effective for annual periods beginning after December 15, 2016, with early application permitted. We elected to early adopt the provisions of this ASU and classified our deferred tax balances as a non-current liability as of December 31, 2016 and 2015. The adoption has no effect on net income or cash flows.
In September 2015, the FASB issued ASU 2015-16,
Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments
, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in the ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments are effective for annual reporting periods beginning after December 15, 2015. The adoption of ASU 2015-16 did not have an impact on our financial condition or results of operations.
In August 2015, the FASB issued ASU 2015-15,
Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
, which adds comments from the Securities and Exchange Commission (SEC) addressing ASU 2015-03, as discussed above, and debt issuance costs related to line-of-credit arrangements. The SEC commented it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We adopted ASU 2015-15 in connection with our adoption of ASU 2015-03 effective January 1, 2016. The adoption of ASU 2015-15 did not have an impact on our financial condition or results of operations.
In April 2015, the FASB issued ASU 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.
The amendments in the ASU change the balance sheet presentation requirements for debt issuance costs by requiring them to be presented as a direct reduction to the carrying amount of the related debt liability. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. Transitioning to the new guidance requires retrospective application. We implemented the required change to the presentation of our debt issuance costs in the first quarter of fiscal year 2016, as expected such change did not have a material impact to our consolidated financial statements.
In November 2014, the FASB issued ASU 2014-16,
Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
, which clarifies how to evaluate the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the ASU requires that an entity consider all relevant terms and features in evaluating the nature of the host contract and clarifies that the nature of the host contract depends upon the economic characteristics and the risks of the entire hybrid financial instrument. An entity should assess the substance of the relevant terms and features, including the relative strength of the debt-like or equity-like terms and features given the facts and circumstances, when considering how to weight those terms and features. The adoption of ASU 2014-16 did not have an impact on our financial condition or results of operations.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
, which defines management’s responsibility to evaluate whether there is substantial doubt about the company’s ability to continue as a going concern and provides guidance on the related footnote disclosure. Management should evaluate whether there are conditions or events that raise substantial doubt about the company’s ability to continue as a going concern within one year after the date the annual or interim financial statements are issued. We adopted these provisions in the first quarter of 2016 and will provide such disclosures as required if there are conditions and events that raise substantial doubt about our ability to continue as a going concern, as expected such change did not have a material impact to our consolidated financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12,
Compensation — Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force)
. The guidance applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. The adoption of ASU 2014-12 did not have an impact on our financial condition or results of operations.
Accounting Standards Not Yet Adopted
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-15)”, that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the effect of ASU 2016-15 on its consolidated financial statements.
In March 2016, the FASB Issued ASU 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. The updated guidance changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company will adopt the accounting guidance as of January 1, 2017. The adoption of this ASU will not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which will replace the existing lease guidance. The standard is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. Additional disclosure requirements include qualitative disclosures along with specific quantitative disclosures with the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for the Company for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements.
ASU 2014-09. In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
. The objective of this ASU is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers. The core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 must be adopted using either a full retrospective method or a modified retrospective method. During a July 2015 meeting, the FASB affirmed a proposal to defer the effective date of the new revenue standard for all entities by one year. As a result, ASU 2014-09 is effective for the Company for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the standard to determine the impact of its adoption on the consolidated financial statements, however, management believes that the impact to the financial statements will not be material.